愛德士 (IDXX) 2012 Q2 法說會逐字稿

Good morning everyone and welcome to the IDEXX Laboratories second-quarter 2012 earnings conference call. As a reminder today's conference is being recorded.

Participating in the call this morning are Jon Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer; and Pete Levine, Director of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding management's future expectations and plans and IDEXX' future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should and similar words and expressions. Such statements include but are not limited to statements regarding management's expectations for the financial results for future periods.

Listeners are reminded that actual results could differ materially from management's expectations. Factors that could cause or contribute to such differences are described in IDEXX' quarterly report on Form 10-Q for the quarter ended March 31, 2012 in the section captioned, Risk Factors, which are on file with the SEC and also available on IDEXX' website, idexx.com.

In addition, any forward-looking statements represent IDEXX' estimates only as of today and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future even if its estimates or expectations change.

Also, during this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A definition of these non-GAAP financial measures is provided in our earnings release, which can be found on our website, idexx.com.

Finally, we plan to end today's call by 10 AM Eastern. In order to allow broad participation in the Q&A we ask that each participant limit his or her questions to one with one follow-up as necessary. We do appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits we will be more than happy to take your additional questions.

I would now like to turn the conference over to Merilee Raines. Please go ahead.

Good morning and thank you for joining our call today. As we reported in our press release this morning our second-quarter revenues were $335.6 million, yielding organic growth of 7%, and diluted earnings per share were $0.91, a year-to-year increase of 10%.

Revenues were slightly below our thinking at the time of our April call, the result of a few factors. First, unfavorable changes in currency rates relative to our thinking in April resulted in about $2 million of lower revenues; post-currency impact; somewhat lower growth in Reference Lab revenues, partly offset by stronger growth in instrument consumables revenue in North America, were the primary factors netting to organic revenue growth that was about 1% lower than our expectations.

Earnings per share for the second quarter were in line with our thinking in April. The impact of lower revenues was offset by lower than anticipated spending on operating expenses, in part due to discretionary spend and in part due to timing.

While actual currency rates versus expectations yielded a modest unfavorable impact on revenues for the quarter, the impact to EPS was immaterial.

As a backdrop to a discussion of our second-quarter performance in our Companion Animal Group the following is what we are seeing in the US veterinary market based on a subset of roughly 500 practices using our Cornerstone Practice Management System.

In the second quarter patient business visits grew by 4% and practice revenues grew by just over 5.5%. While both metrics continue to be favorable to the growth rate seen in 2011, when patient visits were flat and practice revenues were up 2.5%, they were slightly lower than the first-quarter metrics of 5% patient visit growth and 7% practice revenue growth.

Further, the growth rates for both metrics decelerated somewhat over the course of the second quarter. We believe this trend indicates that some of the strong pick-up in the first quarter was due to the mild weather experienced over much of the US.

In Europe overall we saw stabilization of organic growth for our Companion Animal Group segment at 5%. This is consistent with the growth in the first quarter, which had seen a step-down from 8% in the fourth quarter of 2011.

As was the case last quarter, the growth rates for this region vary by product and service line and by country. All in all these data reaffirm our thinking that, given the continued challenges to consumer confidence in both the US and Europe, we will see only a modest benefit from the macro environment to volume growth in 2012 over 2011, and the pace of improvement may not necessarily be steady.

Let me now give some further detail on the topline performance of our Companion Animal Group. Overall Companion Animal Group revenues grew organically 8% in the second quarter or 9% when further normalized for changes in distributor inventories. VetLab instrument and consumable revenue of $104 million grew 9% organically. Sales of instruments were $23.3 million to yield organic growth of 15%. As for placements, our worldwide Catalyst placements were up 7% and VetTest placements were flat.

An important placement metric for us as we think about follow-on consumable growth is the percentage of placements into accounts new to IDEXX. And in the second quarter about 40% of the Catalyst placements were in that category.

Given first-half combined chemistry placement growth of 12%, and the more difficult comparisons in the second half, due to the placement success generated by our protocol-based rebate program introduced in the third quarter of last year, we project total year combined chemistry placement growth of about 5%.

We saw strong performance in our hematology placements with a combined placement growth of 19%. ProCyte remains an attractive choice for our larger customers and sales of new and recertified LaserCytes are continuing to do well in accounts with lower volumes. If you will recall, we launched ProCyte in Japan in the first quarter. As anticipated, the market interest is very high, and nearly 15% of the second-quarter placements of ProCyte were in Japan.

Roughly one-third of placements of ProCytes in the second quarter were into accounts new to IDEXX, which we believe is a solid metric given its relatively recent launch. We expect combined ProCyte and LaserCyte hematology placement growth to be 15% to 20% for the full year.

Consumable revenues of $68.9 million grew organically 7% or 10% when further normalized for changes in distributor inventory levels. This is a modest acceleration from the 9% growth that we experienced in 2011 and the first quarter of this year, a function of our growing installed base, increased testing in the neighborhood of 15% to 20% as current IDEXX customers upgrade their in-clinic Lab with Catalyst and ProCyte, and increased same-store testing as a result of improving patient visit metrics.

We now expect full-year 2012 normalized organic growth for instrument consumables to be 9% to 10% based on the momentum of each of the growth drivers just noted.

Our second-quarter Rapid Assay sales of $45.6 million, grew organically 4%. When normalized for changes in distributor inventory levels revenues grew by 5%. This growth, though down from the 10% normalized organic growth we saw in the first quarter, is largely consistent with our thinking at the time of our April call.

We expected the favorable impact on growth from price to be lower sequentially due to the benefit experienced in the first quarter from changes to seasonal marketing programs that resulted in lower discounts.

We continue to project 4% to 6% normalized organic growth for the year as we anniversary the list price increase we took in the latter part of 2011.

US distributor inventories for instrument consumables and Rapid Assays averaged four weeks at the end of the second quarter based on forward-looking demand, which is within their normal and customary range.

Our Reference Laboratory and Consulting Services business with revenues of $106.4 million grew organically 7% in the second quarter. The majority of our organic growth came from higher test volumes due to the addition of new customers.

As mentioned up front, the overall growth in the quarter fell somewhat below our expectations driven in roughly equal parts by lower realized pricing and lower than anticipated volume growth, primarily in Europe as European performance continued to be affected by economic headwinds. Volume growth in North America and Asia Pacific was solid and relatively on on par with volume growth rates in 2011.

Lower realized pricing was primarily due to the increasing success we have had over time selling our lab services in conjunction with our in-clinic diagnostic offerings. In such situations discounts on laboratory services are used by our customers to purchase our capital equipment -- Digital, VetLab and computer systems.

This is a positive for us in that the discounts are invested back into IDEXX. It is also a positive for our customers as when they use our in-house equipment in conjunction with our Reference Labs, they achieve the benefits that come from an integrated approach to diagnostic testing, test results at the time of the patient visit, and deeper insights with follow-on testing at the Reference Lab.

These benefits are now further enhanced via the consolidation and management of diagnostic information from both venues, in-clinic and outside lab sources with our launch of VetConnect PLUS this month in the US.

As for footprint expansion, we opened a new day lab in Connecticut during the quarter, bringing our total global network to 58 labs. We have plans to open a couple of additional labs over the remainder of the year, including a lab in Germany in the fourth quarter. This new German lab will serve as a centralized hub for testing samples picked up by our European logistics partner from customers outside of major metropolitan areas.

The lab and direct ship service through our logistics partner will open up new markets for us in areas of Europe where we do not have lab presence today. It will also allow us to consolidate evening testing for from our existing European labs to take advantage of scale economies.

This replicates the successful strategy we have employed in the US through our methods lab, and will greatly enhance our reach and service levels across Europe and including the Nordic countries.

For full year 2012 we now expect organic growth for Labs and Consulting Services of 8% to 9%. This change from our previous guidance of 10% is due to the expected continuation of the factors that we mentioned in both our first-quarter call and today -- lower price realization due to marketing programs that benefit our total CAG business, combined with lower testing volume in Europe due to the economic environment.

That having been said, we do expect the impact of marketing program lab discounts to abate somewhat over ensuing quarters as the number of bundled deals per quarter is now leveling off after ramping through 2011 and early 2012.

Our practice management and Digital Imaging Systems with revenues of $22.1 million grew organically by 24% in the second quarter. Implicit in the full-year organic growth guidance of high-single to low-double-digits that we provided in April were second-quarter growth in the high-teens, given a relatively weak year-to-year compare.

The better than anticipated second-quarter performance reflects both product lines benefiting from market momentum driven by our steady rollout of enhancements to the offerings. Customers continue to appreciate ongoing software innovations that support practice efficiency, better medicine and client communications. We now expect low- to mid-teen double-digit organic revenue growth for this line for 2012.

Our Livestock and Poultry Diagnostics revenues declined 4% organically to $23.1 million in the second quarter. This decrease was in line with our expectations, driven largely by the events we have mentioned previously, including a decline in BSE revenues due to the change in the EU testing regulation and the step-down in testing from an eradication program in Germany.

We project relatively flat organic growth for the year for Livestock and Poultry Diagnostics. This implies the second-half growth of 6% to 7% driven by a couple of factors. First, BSE, which was a significant drag on growth in the first half should have a negligible impact on second-half growth as we anniversary in the third quarter the change in the EU testing regulations.

Second, we anticipate a moderate pick-up in growth from new products and certain government programs from their levels in the first half.

Our Water business grew 5% organically to $22 million, reflecting contributions from new accounts in North America, and gains in our core Colilert testing business in Europe. This growth was in line with our thinking and is consistent with our expectations for full-year organic growth.

Turning to the rest of the P&L. Gross margin of 55% was in line with our expectation that gross margin in the second quarter would be about 100 basis points higher than in the first quarter due to some seasonality in our vector-borne disease testing franchise.

Operating expenses at 32% of revenue, as mentioned, were modestly below our thinking in April, reflecting somewhat lower discretionary spending and timing between quarters.

Our revenue profile, with relatively higher parasitic disease testing in the second quarter, combined with our operating expense profile with certain commercial activities, such as trade shows and sales meetings more prevalent in the first quarter, tends to result in operating expenses as a percentage of revenue lower in the second quarter relative to the first quarter.

Our effective tax rate of 31.9% and our share count were roughly in line with our expectations.

As for the balance sheet and cash flow, we ended the quarter with $202 million of cash and $247 million of debt for a net debt position of $45 million.

Our inventory balance of $144 million was up by about $3 million from our expectation and from the level at the end of March. This was due to receivership of ProCyte from our OEM supplier in the second-quarter that was originally anticipated to occur in the third quarter. As we indicated in April, we expect inventory levels to come down over the next couple of quarters and to end the year at approximately $140 million.

DSO at 42 days remained stable and in good shape. Our free cash flow was $50 million or 98% of net income, a bit lower than our expectations due to the somewhat higher inventory balance as just mentioned and the timing of payables (inaudible).

Looking forward, we project full-year revenues of $1.3 billion to $1.31 billion, a decrease of about $10 million to the low and high ends of our range relative to the guidance provided during our April call. And this is a result of the unfavorable impact of currency.

Reported revenue growth is now projected to be 7% to 8% as a 2% unfavorable impact from currency more than offset a 1% favorable impact from acquisitions. Our organic growth of 8% to 9% remains consistent with our previous guidance.

The components of growth have evolved as we expect somewhat stronger growth from our instrument consumables and Practice Information Management and Digital Imaging System businesses, and somewhat lower growth in our Reference Laboratory and Diagnostic Consulting Services business.

Consistent with our thinking in April, we project a somewhat improved economic environment to benefit volume growth by about 1% to 2% for the full year.

We continue to project margin to be about 54% for the year, about 100 basis points above the full-year 2011 percent, and operating expenses to be between 34% and 35% of revenues for the year.

We expect operating expenses as a percent of revenue to be modestly higher in the second half of the year relative to the first half of the year. This is a reflection of investments we're making to continue to bring innovative products and services to our served markets.

A notable example is the introduction of Pet Health Network Pro, a web-based client communication and education service for veterinarians and their support staff. VetConnect PLUS, which we described in our first-quarter call, is also having its full commercial launch this month.

Our expectation for gross margin and operating expenses yields a projected operating margin between 19% and 20% for the year, which represents an improvement of roughly 50 basis points relative to last year when 2011 is adjusted for the favorable impact of discrete pharma payments we received that totaled about $4 million.

We expect the tax rate to be between 31.5% to 32% for the full year, which is unchanged from our previous guidance. As a reminder, our projected tax rate is approximately 50 to 100 basis points higher than in 2011 due to the fact that we have not incorporated the benefit of the federal R&D tax credit in our 2012 rate.

All of this leads to updated full-year EPS guidance of $3.05 to $3.10. The unfavorable impact of currency relative to rates assumed during our April call accounts exclusively for the decrease of $0.02 to the low and high ends of our range relative to our previous guidance. Our overall financial outlook related to business performance is consistent with our thinking at the time of our April call.

Details on currency rates implicit in our guidance and our currency rate change sensitivity analysis is included in our earnings press release. We project free cash flow to be approximately 105% to 110% of net income for the full year.

And now I would like to turn it over to Jon for some further comments.

Thanks, Merilee. Overall we had a solid quarter and are tracking to our goal of achieving 8% to 9% organic growth; that is at constant currency. Like all companies that do business internationally, we are impacted by the strong dollar and our guidance reflects the current foreign exchange rates accordingly.

Regarding the economy, after the early part of the year that benefited from favorable weather compares in North America, we see the resumption of a more continued slow improvement in our markets. Success comes at the individual customer level in the companion animal market. It is this segment of our customers -- it is the segment of our customers that are effectively responding to the needs of the pet-owning clients that are seeing strong growth in their practice. And our strategy is to provide the tools to help drive that growth and get more customers to adopt those tools.

In the area of new products we have been particularly productive in 2012 within our Companion Animal Group, which makes up 82% of the Company's sales. So far this year we have introduced, or plan to introduce shortly, an impressive list of a new tests, services and software solutions. Let me list a few.

In April, and as investors know, we started shipping SNAP 4Dx Plus, an upgrade to our highly successful SNAP Vector-borne Disease Test that added two new tick-borne diseases to a single kit, bringing the total number of diseases detected in one SNAP to six. That response to that has been very, very favorable.

In April we introduced a pet wellness plan service in partnership with PurinaCare. In April we began shipping phenobarbital for our Catalyst Dx chemistry analyzer, a new test that is receiving rave reviews for the value it brings to a patient that is prescribed phenobarbital for therapeutic treatment and the ability to test right on site for that level. We are saving and improving lives with this new test according to the feedback we are receiving from practices that started using it on Catalyst Dx.

Fourth, in May we introduced allergy testing in our Reference Labs in conjunction with GREER. This is a whole new category of testing that addresses a common condition in dogs, and continues to build upon our strategy of specialized testing capability that sets IDEXX Reference labs apart.

Fifth, in June we introduced a new version of our digital radiography PACS software, version 3.6, that adds Image Coach, which guides the technician through the process of taking a high-quality digital image, a very helpful feature that ensures first-shot quality.

Sixth, just this week we formally launched VetConnect PLUS after our beta phase, a capability I introduced on the April call. VetConnect PLUS is a cloud-based service that allows the veterinarian to see a patient's entire blood work history from IDEXX, both in-clinic and at the Reference Lab in one interactive screen. The history allows for trend analysis, which adds a whole new dimension to the value of blood work for the practitioner and the pet owner.

The customers sign-up for this new service has been amazing, and we are close to 500 customer activations between our beta customers and a couple of hundred that have signed up so far this week.

Seven. Also this week we introduced, as Merilee mentioned, Pet Health Network Pro, a new cloud-based service that will support the practice's ongoing relationship with their clients between appointments. By improving communication and increasing client understanding of pet health and the value of veterinary care, Pet Health Network Pro helps practices promote the importance and the relevance of a veterinarian, which increases both visits and revenues per visit at the practice level.

And, eight, in August we will be providing a new set of capabilities that will upgrade our franchise hematology analyzers, both LaserCyte and ProCyte. First, they will both be able to run body fluids other than blood, a sought-after capability that is unique to IDEXX. Second, we will be adding several new species.

And, third, in particular with ProCyte we will be adding the capability to detect the presence of banded neutrophils and nucleated red blood cell count, huge additions to the existing CDC parameters that help determine conditions such as inflammation and other significant abnormalities.

Again, these capabilities are totally new to any veterinary hematology analyzer. And previously these parameters can only be determined by looking at the blood sample under a microscope.

That is eight new important significant products and service launches in five months. And each adds value to the whole Companion Animal Group offering, continuing to build upon the strong foundation of instruments, test kits, lab services, digital imaging and information technology offerings that we have today in the market in which we think are unique to the veterinary market.

These products and services expand the practice of veterinary medicine. With these product launches we are truly achieving our mission of enhancing the health and well-being of pets, people and livestock.

As to the matter of our US distribution strategy we discussed in April, there is not much to report other than our process is moving forward in discussions with our distributors, and that no decisions have been made. At this time we anticipate that we will have identified a general distributor and agree, at least preliminarily, on the terms of generalist agreement by Labor Day.

It is still our assumption that the effective date of any changes to our distribution agreement will be January 1, 2013. In terms of how we are reaching a decision on what changes to make, we're looking at all the relevant factors, including the degree of each distributor's interest in becoming a generalist, the historical performance of each distributor in selling IDEXX products, and any unique strategic attributes that each distributor might bring to a value-added relationship going forward.

As expected, we continue to keep the FTC informed, and they are monitoring the process closely and are also in regular communications with our distributors.

As you have seen in our press release, we are very pleased to announce the promotion of several of our executives to Executive Vice President, with two filling new operating roles -- Michael Williams and Johnny Powers. Michael and Johnny have each made significant contributions to the success of IDEXX to date, and I am delighted they are taking on expanded portfolios.

In addition, we have filled a third operating Executive Vice President role with Jay Mazelsky, who comes to us from Philips Healthcare, where he was General Manager and Senior Vice President of Computed Tomography, Nuclear Medicine and Radiation Therapy Planning. In that role he led a business that is well over $1 billion in scale.

One of Jay's accomplishments was to lead the revitalization of Philips' computed tomography business. Over the last seven years quote, end quote, our results have improved innovation in the product line. And through better delivery of customer service his business saw several points of North American market share gains in the world's biggest and most competitive diagnostic imaging region.

He has got a great track record. He is a seasoned executive, and we think he will be a great addition to our senior team. He will be an effective leader in innovation and growth and help us take the Company to a new level of scale and profitability.

In addition to the three operating EVPs that I just mentioned, we are elevating Merilee Raines, whom you know, and Bill Brown, our Chief Scientific Officer, to the Executive Vice President level in recognition of their contributions and the importance of both finance and technology to the ongoing success of IDEXX.

We were also pleased to announce the addition of Anne Szostak to our Board of Directors effective earlier this month. Anne brings extensive executive and Board experience to IDEXX, and we're delighted to have someone of her caliber in this important capacity.

In summary, we had a solid quarter. We have a strong new product momentum, an augmented management team and Board of Directors, and a good outlook for the remainder of the year. So at this point I would like to open it up to Q&A.

(Operator Instructions). Ryan Daniels, William Blair.

I have got one macro and then one Company specific follow-up. On the macro you mentioned in your prepared comments that the end market slowed a bit in the second quarter, which is not surprising, but also that you saw some deterioration throughout the period. And I am curious, first off, if you can talk about the magnitude of that slowdown through the second quarter.

And then, number two, is there any ability to perhaps determine how much of that was weather-related? Maybe it was more flea and tick weakness throughout the quarter. Is there anything you can help segment between macro weakness and pull forward weakness would be helpful.

It is certainly a question of great interest to us all. To answer the first part of the question, I think the growth was a couple of points less in the third month than it was in the first two months. But I do caution that monthly data can be quite noisy, because you really got a very small amount of time that you're measuring that year-over-year compare.

It is hard for us -- we don't really have direct visibility to the flea and tick piece and pull forward and such, so it is just really -- it is really hard to speculate. Certainly there was a favorable weather compare in the first quarter, which we mentioned in April. And I think it is not any secret to anyone that consumer confidence and general economic trends seemed to deteriorate a little bit over the second quarter, and that was consistent with, I think, what we saw in our markets, again, subject to a caveat of a volatility in monthly data.

Okay, that is helpful. And then the Company specific, just on the resolution with a distribution agreement, it sounds like it now may be in place by Labor Day. Does that mean in the fourth quarter you will start to make some changes? And is that contemplated in your guidance related to things like maybe ramping up your direct sales force or will that really mostly take place in fiscal 2013? Thanks, guys.

Yes, thanks. Of course, I remind investors that our distributor contracts to go through the end of the year. And it is our anticipation in discussion with our distributors, and although anything can happen, that they would like us to honor those contracts through the end of the year. So any actual changes that will take place in that contemplated scenario would be at the beginning of a new contract year of January 2013.

And so our guidance really incorporates all the different moving parts of the Company. And there is -- we would see that transition is something that we would manage within our numbers.

Okay, thanks a lot.

David Clair, Piper Jaffray.

Good morning, Jon, and congratulations, Merilee. The first question I have just if you could maybe give us an update on Europe. It sounds like on the Reference Lab side we might've seemed a little weakness there. Do you think this is stabilized or are you expecting some additional deterioration throughout the year?

David, as I mentioned, even though the overall Companion Animal Group growth in Europe was constant at 5% in the second quarter as with the first quarter, it did vary by product line. It varied by country. It is really hard for us to predict where that will go.

I think implicit in our guidance is we presume that what we have seen will just continue, and obviously we are closely monitoring the situation, but it is -- that was just a little bit tough to call.

In the meantime, of course, we will be starting that new significant lab during the fourth quarter, and we will get a little benefit from that as it starts up.

Okay. And then -- you know, I'm not asking for any 2013 guidance here, but just as we think about the impact from the distributor change, any kind of initial thoughts as how -- should we assume there is a little bump up in sales and marketing or any kind of color there?

Well, we anticipate that the impact on the changes -- the modest refinements in the composition of our marketing and sales and channel costs where we have -- you know, whatever we will have difference in efficacy at the distributor level we will replace with direct costs. I don't think the bottom line will be different or the trends will be different, although, of course, the composition might be a little bit different. So we really see, as we mentioned in the April call, that any shifts will offset each other.

Okay, thank you.

Erin Wilson, Bank of America Merrill Lynch.

On the consumables side of the business, could you break that down by volume and maybe how it was trending in the US in particular?

As far as instrument consumables, almost all that growth -- and virtually all the growth is due to the volume. There is very, very minimal price.

And as I mentioned, the growth was particularly strong in North America. As you might expect, it was a little bit less so -- though actually up a bit in Europe from the first quarter to the second quarter. And it increased strong -- it continues to be strong in Asia Pacific. So it was good, solid growth across regions.

Okay. And then on the Reference Laboratory side of the business that obviously was a slight deviation from that 10% trajectory you have seen, I guess, over the last several quarters. You mentioned some of the marketing changes before, but was some of this more competitive pressure involved, particularly in the US?

I don't think there is really any change in the competitive environment. That has always been pretty intense, as we have said. And I really do think that what we have found is that our ability with our strong offerings, and the fact that they are increasingly becoming more integrated in the way that they work together, that there is just a real opportunity for us to drive growth in all areas by selling these products and services together.

And it is just the way it that accounting works that the expense of these programs is largely borne by Labs, but the benefit accrues acquires our Companion Animal Group business.

Okay, great. Thanks so much.

Ross Taylor, CL King.

Hi, this is my first question. I just wondered if you could give any color on what the role or function of the new executive that you hired from Philips was going to be.

We are -- between the three, they will take large responsibility collectively for the lines of business and the regions of the Company. Michael Williams is going to move to run our international business, and also the Water, Livestock and Poultry Diagnostics, Dairy and retain responsibility for OPTI Medical Systems. All four of those businesses are majority international.

We really see a very significant opportunity around the world to grow our businesses, and we really delighted to have Michael do that. So that leaves the instrument business where Jay Mazelsky will take leadership, in addition to the software businesses of the Companion Animal Group and our North American commercial region.

And then Johnny Powers will continue to run the lab services business, but will have an expanded portfolio that includes also what we call the Rapid Assay or the immunoassay business, really specialized test development that goes both into test kits and Reference Labs as well as our worldwide operations and our bioresearch strategy. As you know, we made an acquisition in November, which is -- we are very excited about that. It is not a big opportunity, but we are excited about the growth opportunity in bioresearch. So that will be his portfolio.

They're going to work very closely together. They will work very closely to me, because really everything is connected to everything else at IDEXX. And so very, very pleased with this new team.

Okay, that is helpful. And my second question is I just wondered if you could help me understand the lower price realization on the Lab side compared to, I think, your early expectations. Is that typically a function of you are just selling a lot more product through these bundled deals and that is where the impact is coming from or is it just something else?

Yes, that is the case. It really is -- the change there is largely a result of these marketing programs. And, again, just the way that the accounting works for those the cost is borne primarily by the Reference Labs.

I do want to just emphasize though that we are getting price realization. There is price growth in the Lab business. It is just that, as we talked about a year ago at this time, maybe one-third of our growth was coming from price realizations. Now that price realization is a good 2 to 2.5 points less than that, but there is still growth there.

Okay, thanks very much.

(Operator Instructions). Nicholas Jansen, Raymond James & Associates.

Just a quick question on the distribution changes. I wasn't sure if you guys were anticipating any impact on inventories in the fourth quarter, as you would anticipate the generalists to perhaps cut back on inventories ahead of the change? .

Well, one of our anticipated elements of this is that the generalists would continue to carry our product line. So I don't really see -- they are going to -- we would fully anticipate they would continue to carry the product line as generalists into 2013, and so I'm not sure that would impact much of a change.

Okay. And then back on the Reference Lab side of things, I know you guys have been successfully capturing share over the last three or four years relative to your largest peer. Are you starting to see maybe the easier share gain starting to subside and maybe that is what is contributing a little bit to the slower growth, or is it more just on the European side and you are continuing to have success on the North American side? Thanks.

I would just reiterate that the volume growth that we are seeing in North America is very consistent with what we saw last year. So I think that this -- really as far as volume goes the primary contributor was Europe. And then, as I said, in equal part though a contributor is this impact of price.

Exactly. And in addition we continue to be excited about the Reference Lab opportunity and to just make investments in the Reference Lab. I mentioned in my opening comments the allergy testing, which I think is a major category. Dogs get really -- they get itches and skin rashes and it is really a real problem. And we have not -- have really not been a large commercial lab that offered a comprehensive allergy testing and therapy business, and so we are excited about that.

And the other thing I want to reiterate is VetConnect PLUS and the ability to see the historical data on a patien, whether that data came from IDEXX Reference Labs or the in-house, it is really exciting. And I think it is adding a new dimension, a new level of excitement to our customers. You could see it by close to 500 practices have already started using -- not only just signed up, but they are actively using this capability. They are saying -- just as you see, it is a lot more interesting to look at several years of a company's financial history than it is to look at a one-year snapshot.

They are really valuing it. And it has given a lot of energy to our sales force for -- you know, to sell -- to continue to sell the IDEXX innovation in the market. So the nice thing is we have got some nice new -- I mean, we are taking it to a new level in the Reference Lab as we will -- as we are within the in-house side of our diagnostics offering.

Thanks, that is helpful. Maybe if I can just squeeze one more in terms of Companion Animal Group gross margin. It was down a little bit year-over-year. And is it more just on the Reference Lab side of things, not getting the price realization? I would have assumed with the pretty strong consumable growth that we would have saw a little bit of leverage there. Thanks, and that is it for me.

It really is not a result of Reference Lab pricing. And when you look year-over-year, again, there are price realization so that was not a drag.

We did -- there is however some mix impact. Just as you, again, are looking year-to-year and the relative growth rate to the business, some of our relatively lower gross margin businesses have been growing at a faster rate than the relatively higher businesses, and so that mix impact was really about 1 point of unfavorability year-on-year.

Counterbalancing that is really a couple of different things. We had some favorable impact from currency, and that is a function of the hedging gains that we have this year versus having hedged losses last year. And also the price realization that we've been getting in our Rapid Assay business.

So a few puts and takes going on there, but that all in all led things to be relatively on par year-to-year. But mix is the primary unfavorable impact.

All right, thanks very much guys.

(Operator Instructions). Ben Haynor, Feltl and Company.

On VetConnect PLUS is there a revenue component associated with that or does it just help to solidify your positioning within the practice?

There is a nonrevenue component today. We are offering this as a service at no charge associated with using IDEXX diagnostics, whether they be in-house or Reference Labs. It is a cloud-based service. It can be accessed via a browser. That would be on a PC or laptop. It can be accessed inside of Cornerstone, if you're managing your medical records with Cornerstone, and we have 6,000 Cornerstone customers. And it can be accessed on a tablet such as in iPad.

So you run the diagnostics in the back on the in-house lab for example and within seconds you have got it on the tablet. You can show it to the pet owner. It just really supports real-time care in addition to that whole integrated view of the patient with the history.

So it is a differentiator for our core diagnostics line. And really it brings the context that whether the diagnostics are run in-house or in Reference Lab, they are important parameters and it doesn't matter, and what is really important is monitoring the health of the patient.

That sounds like a very nice product. And then on the distribution side of things, have multiple distributors expressed interest in taking on the generalist role, or do you plan on choosing a single distributor to be the generalist come next year?

Well, in our conversations I think the first preference of all three distributors was to be value-added. I think they did value the IDEXX relationship over the long time period they have been associated with those, and our level of innovation.

And so -- but we are in discussions with all three of them with regard to that value-added role going forward versus what a generalist role would be going forward.

We want to have a relationship with a generalist that is strong. And we need to be able to compensate them at as low a level with maintaining an acceptable level of services that we receive from them. And our goal is to provide the best result for both our business and the business of our distributors, while being attentive to the issues of the FTC's concerns. And as I said, we believe -- while we can't guarantee, we believe that moving this would address the FTC's concerns.

And so we are in discussions with distributors and flexible as to how we might get there in the context of -- two value-added and one generalist.

Okay, great, that is helpful. Thank you very much.

Mitra Ramgopal, Sidoti & Company.

just a quick question as it relates to Europe. I believe you said you added another lab there. Are you seeing some opportunities in terms of just being able to grow and expand as a result of the weakness there?

I would say, just to be clear, we are going to be opening another central lab in Continental Europe in the fourth quarter, but we have been opening labs there over time. I would say that our growth is despite the economic, but not as a consequence. But there clearly is an opportunity to provide superior Reference Lab services across the geographies of Europe. That is a growth opportunity and that is a growth opportunity that is there, somewhat independent of the economy.

Certainly the economy impacts our business, but not to the extent that we aren't generating good, solid, continued mid-single-digit growth in our labs in Europe, which I think is a pretty impressive accomplishment given all that we have heard that Europe is dealing with at this point in time.

Thanks. And if I could just add -- have a quick question as it relates to the medical device tax for next year. I just want to be sure, does that impact you in any way?

Not in the Veterinary business. And I guess it's -- I would put this in the area of very, very immaterial. Our OPTI Medical Systems sales in the human market, but the vast majority of those revenues, or a good majority of those revenues, are outside the US. To the extent there inside the US, I think they are -- I'm not entirely sure -- but I believe they would be subject to that tax. But that is a very -- that is well less than 1% of IDEXX' revenues.

Okay, thank you very much.

Erin Wilson, Bank of America Merrill Lynch.

I guess, there seems to be some varying views out there on the market opportunity associated with the anticipated distribution changes. And I guess it seems to be different than maybe what you have articulated, and where is the disconnect here, or how should we think about this disconnect amongst the industry constituents?

I don't -- I would say, I can really only speak from our perspective. First and foremost our strategy is providing great innovative products and services that help the practice deliver a higher standard of care, be more efficient, provide more client value. That is the hallmark of IDEXX. It is the hallmark of our strategy.

Our sales and marketing, of which distribution is a piece -- but of course we have a very significant direct sales force in the US -- is a way of bringing those innovations to the market. But really it starts with the innovations, and then we have some marketing and channel strategies to do so.

So we remain excited. And as you could see by just in the last -- in this five-month period the level of additional innovations that we are bringing to the market that build upon real-time care and a deeper insight of our highly differentiated Reference Labs, and the unique capabilities of our SNAP test kits, the vast majority of that is unique and proprietary incapability. Not to mention the information technology offering, which saw really nice growth in the second quarter.

We really think that is the hallmark of IDEXX. And so these changes in our distribution strategy are a refinement to a piece of our go to market strategy in one -- albeit an important country US, that is the executional component of that innovation strategy.

So I think you start from that perspective, you really see that this is a refinement as opposed to thinking that distribution is everything, I mean, it is just different in this market.

That is great, thanks.

David Clair, Piper Jaffray.

The question that I have, I just want to get an update. Has FTC actually signed off on this as a strategy to resolve their concerns?

We can't ever guarantee what the FCC might or might not do. And there is always the risk of regulatory action. I mean, that is just the nature of, I think, the environment that we are in. And that doesn't really go away until we have a consent decree in place.

But as we have said in April, we have gone down this path of identifying a generalist distributor, because we felt it was an acceptable solution from a business perspective and because we believed it would satisfy the FTC's concerns. Of course, those beliefs came from our discussions with the FTC.

As you can imagine, we wouldn't have undertaken this very public process if we didn't have confidence in the prospect of avoiding litigation based on our discussions.

And I just might note that since April we have communicated regularly with the FTC regarding the status of the process. And we noted we are also in regular communications with our distributors. And to our knowledge, the FTC is still putting their process on hold of proceeding to litigation as we pursue this solution.

Okay, thank you.

Ben Haynor, Feltl and Company.

Do you plan on any increased incentives or rebate offerings in the second half of this year prior to the distribution agreements or one of them changing?

No, not anything in the context of the evolving the nature of our distributor relationships.

Great, thank you very much.

With that, speakers, I would like to turn it back over to you for any closing comments.

All right. I would like to thank everybody for attending the call. I want to congratulate, also, all the IDEXX employees that have been involved in bringing the second quarter to a conclusion and bringing these innovations to the market. We really have a -- there is really a lot of excitement at IDEXX on this.

And so I do appreciate investors' interest in IDEXX. And we look forward to continuing to update you as the year progresses to its conclusion. That completes the call. Thank you.

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.