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IDEXX Laboratories, Inc. (NASDAQ:IDXX)

Q1 2008 Earnings Call

April 25, 2008 9:00 am ET

Executives

Jim Moraldi – Director Investor Relations

Jonathan Ayers - CEO

Merilee Raines - CFO

Analysts

Ryan Daniels – William Blair

Dawn Brock - JP Morgan

Ross Taylor - CL King & Associates

Operator

Good day everyone and welcome to the IDEXX Laboratories first quarter 2008 earnings conference call. Just as a reminder today's conference is being recorded. Participating in the call this morning are Jonathan Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and Jim Moraldi, Director of Investor Relations.

IDEXX would like to preface the discussion 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's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements include but are not limited to, statements regarding management's expectations for financial results for future periods and the timing of new product introductions.

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 Form 10-K for the year ending December 31, 2007 in the section captioned Risk Factors, which are on filed with the SEC and also available on IDEXX'S website www.Idexx.com. In addition, any forward-looking statements represent IDEXX'S estimates only as of today and should not be relied upon as representing the company's estimates 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.

Now at this time I would like to turn the conference over to Merilee Raines; please go ahead.

Merilee Raines

Good morning and thank you for joining us today. I will start off with a review of financials for the first quarter and our thoughts for the year. Jonathan Ayers will share with you an update on the business and we will then welcome your questions.

As you have seen in our earnings press release today revenues for the quarter were $249.1 million; a year-to-year increase of 18% and diluted earnings per share were $0.43. Revenues though essentially in line with the street were slightly below our thinking at the time of our fourth quarter call in January. Earnings per share were favorably impacted $0.02 by a tax-related discrete item this quarter and negatively impacted $0.01 by acquisition-related discrete items in the first quarter of 2007. Adjusting for both of these impacts, earnings per share growth was 21%.

Earnings excluding a discrete item were essentially on par with our thinking due to lower operating expenses and a somewhat more favorable growth margin as a percentage of revenues and a couple of pennies above street consensus. Before I provide further financial highlights I would like to let you know that we will be filing our 10-Q today; the first time we have done this filing concurrent with our earnings call. This accomplishment is the result of a focused coordinated effort between our finance team and businesses and we hope that providing more timely detailed and financial and business information will be of greater relevance and value to our investors.

Now on to the first quarter P&L. The first quarter revenue growth of 18% included just under 5% from currency and just over 3.5% from acquisitions; so organic growth was 10%. The top compare created as a result of last year’s pet food recall negatively impacted year-to-year growth by about a point so the organic growth adjusted for that event is 11%. This adjusted growth is a couple of points lower than the 13% organic growth we experienced for the full year 2007 when normalizing for the estimated impact of the pet food recall.

As the US economy shows continuing signs of weakness we believe that we are seeing some tangential impact in a couple of our companion animal group product lines and that is a contributor to the modest decline in our overall organic growth rate as adjusted for the pet food recall. Nonetheless our companion animal segment overall experienced 12% growth adjusted for currency, acquisitions and the estimated impact of the pet food recall. Our IDEXX VetLab instrument revenues were $14.6 million and unit placements were up 12% year-over-year despite a very strong first quarter 2007 comparison and seasonal high fourth quarter placements.

As we announced we successfully launched our chemistry platform Catalyst Dx and amnio assay reader SNAPshot Dx in the last days of the quarter. We placed literally a handful of each type of instrument so there was very little revenue impact from these launches in the first quarter. The careful launch planning and execution across our entire organization has yielded the kind of customer experience we were striving to achieve and our first sites are pleased with the performance of the instruments. We will continue with our controlled rollout, ramping placements gradually over the remaining quarters and we feel that we are on track to place 1,000 to 1,200 of each instrument type in 2008. We have leaned much from the launches of several instruments over the last few years and we are successfully incorporating those learnings into the introductions of these two major instruments.

Our instrument consumable sales, up $53.1 million grew organically 5% for the quarter or 10% when adjusted additionally for changes in distributor inventories and the estimated first quarter 2007 impact of the pet food recall. Our point-of-care rapid assays with revenues of $38.2 million had organic growth of 20% or 18% when adjusted for changes in distributor inventories. As noted in previous quarters, price including price realized from the movement of customers to our canine parasitic disease panels from heartworm-only tests is a significant contributor along with unit volume to overall revenue growth. We expect this price impact will decline over time as the rate of conversion slows. In the first quarter of 2008 SNAP 4DX accounted for nearly 50% of the unit volumes of our multi analyde panels, this is up about 10 points from the first quarter of 2007.

US distributor inventory levels for rapid assay and instrument consumables remained in the three to four week range based on forward-looking demand. This is consistent where they have been for some time.

Our laboratory and consulting services have reported growth in the first quarter of 21% with currency contributing 5% and acquisitions contributing 8% to yield organic growth of 8%. As with instrument consumables this business was impacted by the pet food recall in the first and second quarters of 2007 and we estimate that the pet food recall reduced year-to-year growth by about 1% so organic growth as adjusted for this factor would be 9%. At the time of fourth quarter call in January we had indicated that the near-term lab services growth rate could be a couple of points below the low end of our longer term 13% to 15% growth rate projection due to the top compare with the first half of 2007. It appears as though this area may have experienced a slight drag from the US economic situation.

While we continue to feel very positive about the fundamental growth drivers for lab services yielding low teens revenue increases over the longer term, we expect that lab services organic growth will average out more in the 10% to 11% range for the full year 2008 with growth rates lower in the first half due to the tough 2007 compare and rebounding by three to four points in the second half. We have reaffirmed the longer term growth of 9% to 11% for instrument consumables and 8% to 10% for rapid assays.

Our practice information management and digital radiography systems had organic growth of 18% for the quarter. The digital business in particular is gaining momentum as a result of product and service enhancements and a stronger commercial team. We ended the quarter with a healthy backlog to carry into the second quarter. The 4% decline in our pharmaceutical revenues is the result of the timing of a couple of large orders falling in the fourth quarter as we noted at the time of our January call.

This is a good time to update you on the status of PZI VET our treatment for feline diabetes. We have indicated for some time now in our public filings that we had a finite inventory or raw materials for this product and once the raw materials are depleted we will no longer be able to supply the product. We are currently seeking FDA approval for another feline diabetes therapeutic using different raw materials. Earlier this month we informed our PZI VET customers about the limited supply in order to allow them to plan for an orderly transition of their patients to another therapy. Regulating diabetic cats on a new treatment regimen can be difficult so veterinarians need to determine how to best utilize the remaining product over their patient base.

Given the customer response to this information, we project the vast majority of our year’s estimate of sales will accelerate into the second quarter. Our financial plans had anticipated sales of this current product essentially ceasing by the end of 2008 so there is no impact to our full year guidance from this event. However we will see a spike in revenues from this product in the second quarter.

Our production animal services line with greater than 80% of its revenues in 2007 derived from international sources benefited strongly from currency in the first quarter. Additionally we still had acquired growth benefit from Institut Pourquier in the first quarter. Hence the reported growth of 26% translates to organic growth of 2%. The main driver for this slow growth is continued price erosion in the BSE market where most of the revenue is derived from competitive bidding processes. We project the price impact will be smaller in future quarters and that we will continue to see growth in testing volumes. We estimate the reported growth rate of PAS, for our production animal services, to be approximately 15% for 2008 with organic growth in the mid single-digits.

Water sales grew organically by 12% in the first quarter with our new collaboration with Invitrogen contributing 6%.

Looking at the rest of the P&L gross margin at 52% of revenues was nearly a half a point better than our expectations driven by some process efficiencies in instrument service and in part by the strong revenue performance in our relatively higher margin rapid assay and water businesses. Operating expenses including R&D and SG&A were 36.6% of revenues. This is 20 to 30 basis points lower than our expectations and given the somewhat lower than expected revenue a couple of percentage points or so lower in absolute spending. We give a lot of credit to our worldwide organization for their proactive management of expenses. In light of the economic uncertainty in the US people work to ensure they keep priorities such as new product launches, receive the appropriate focus and investment and yet at the same time spending was controlled so that expense growth was in check with revenue growth.

Our effective tax rate at 27.9% was a couple of points below our guidance in January, the net effect of two offsetting factors. First we received a non-cash benefit of approximately $1.5 million due to a reduction in deferred tax liabilities as a result of lower international tax rates. This benefit was discrete in nature and produced the $0.02 benefit in our first quarter earnings per share that I mentioned upfront. Second our January projection had assumed the extension of the Federal Research and Development credit into 2008 as has been the case in past years. This credit was not extended in the first quarter and therefore not reflected in our tax rate. Our effective tax rate for the quarter excluding the discrete benefit was 31.8%.

As for the balance sheet and cash flow we entered the quarter with $60 million of cash and $140 million of debt for a net debt position of $80 million. Free cash flow as we define in our press release was a negative $18 million. As has been the case in previous years the first quarter tends to show a use of working capital for regularly occurring events such as tax and annual compensation payments and increases in receivables due to the ramp in some of our more seasonal businesses.

With regard to our latest outlook for the full year 2008 we now project revenues of $1.06 billion to $1.075 billion, an increase from our previous guidance of $1.05 billion to $1.07 billion. This would represent a reported growth of 15% to 17% with acquisitions estimated to contribute 1% and currency to contribute 3% so organic growth of 11% to 13%. Given the anticipated concentration of pharmaceutical sales in the second quarter we expect revenue growth of about 20% in the second quarter and growth in the second half of the year to be lower than the first half by about five points.

We continue to project gross margin as a percentage of revenue to be 51% to 52% for the full year with the highest gross margin in the second quarter perhaps a couple of points above the full year percentage. This is due to the seasonality of our rapid assay products and the anticipated timing of pharmaceutical sales; both product lines have relative high gross margins. Operating expenses are projected to be about 36% of revenues for the year consistent with our thinking in January. We will continue to closely monitor spending in the context of revenue growth as we did in the first quarter. Our thinking about gross margin and operating expenses leads to a projected operating margin for the year of 16% with a first half margin one to two points above the full year percentage and margins in the second half a point or so below the full year.

Of course we will be watching the cost to manufacture and support Catalyst and SNAPshot as unit sales ramp up over the year. Ensuring a good customer experience remains a key priority and the launch learning curve is one of the reasons we are not expecting operating margin expansion in 2008 over 2007 as it was adjusted for discrete items. We continue to feel confident about the achievability expansion over the next several years from improving cost profiles on our instrument platform, scale economies and operating efficiencies in our labs, and revenue mix shift toward increasingly profitable instrument consumables.

We now project the effective tax rate in ensuing quarters to be approximately 32% to produce a full year rate of about 31%. As noted previously our January rate projection assumed the extension of the Federal Research and Development credit into 2008 and we are no longer assuming this to be the most likely case.

We project the weighted average share count for the year to be about .50 million shares lower than first quarter levels.

All of the aforementioned factors lead us to a full year earnings per share projection of $1.84 to $1.87 on a reported basis or $1.82 to $1.85 as adjusted for the first quarter discrete tax items. Our previous guidance was $1.83 to $1.87 exclusive of discrete items. In looking at the components driving the change in forecast net of discrete items the $0.02 to $0.03 favorability that we expect from higher operating profit is more than offset by a $0.04 to $0.05 negative impact from the higher tax rate.

Our updated projection translates to a year-to-year growth of 15% to 17% from 2007 earnings per share as both years are adjusted for discrete items.

With regard to the balance sheet the only change in thinking of significance from our January call is that we now project capital expenditures of approximately $100 million down from the $120 million to $130 million we had previously cited. The decrease relates to reduced spending on our primary facility in Maine. While we are on track with the initial phase for expanded improved R&D and manufacturing space, we have put on hold development plans for expanded administrative space as we work through zoning issues. We anticipate that free cash flow will be approximately 60% of net income below historical levels of 80% to 100% of net income given that the projected capital spend remains high relative to previous periods.

And now to Jonathan.

Jonathan Ayers

Okay thank you Merilee. We are very pleased with the first quarter as revenue finished close to our expectations clocking in at 18% year-over-year growth. In addition we achieved an impressive earnings per share growth of 21% on a non-GAAP adjusted basis resulting from careful management of the rest of the P&L and declining share count. As investors who follow us know we are first and foremost a company focused on driving growth and shareholder value by investing in and bringing innovation to our markets including our largest market, the veterinarian who provides health care to our canine and feline family members.

Our historical investments in R&D which for example totaled $67 million last year have allowed us to launch a steady stream of new products and services. And in the first quarter of 2008 was not exception. The most important innovation achievement was the release and the first customer shipments of Catalyst Dx and SNAPshot Dx instruments. We are on schedule with a disciplined ramp for placements of these instruments over the year. Early customer feedback has been excellent and Catalyst Dx has the potential to create a paradigm shift in how lab work is performed in the veterinary practice.

Catalyst Dx is so easy to run that it not only saves time versus other existing in-clinic chemistry platforms, it also provides a tech productivity advantage when compared to the time required to prepare the same for sending to the outside lab. And of course the lab work is available in eight minutes. The reference lab is able to conduct many tests that cannot be conducted in practice such as pathology and molecular diagnostics. And yet for core chemistry work nothing beats the convenience, speed and tech productivity of Catalyst Dx as part of the IDEXX VetLab in-house suite.

Catalyst Dx will be an important addition to the veterinary practice and will generate an incremental stream of instrument revenue for IDEXX as the average unit price will be similar to LaserCyte hematology analyzer. And while our long-term plan does not incorporate any increased utilization of consumables by Catalyst Dx customers who upgrade from VetTest, its ease of use might provide upside on consumables as the installed base of Catalyst customers expands over the next few years.

In other instrument news from the quarter we ramped sales of our Coag Dx as we expected. We launched a faster, easier thyroid test for our IDEXX VetLab suite and we rolled out a new release of software for the IDEXX VetLab Station that provides advanced laboratory information management capabilities. Each of these advancements continues the steady improvement to the functionality, efficiency and speed of our point-of-care diagnostic offering, the IDEXX VetLab suite.

In our rapid assay line of business we are all set to introduce an important product advancement for feline patients. This spring we will begin shipping on a limited basis, an upgrade to our SNAP Feline Combo test kit which we call Feline Triple. Where Feline Combo tests for two important infectious diseases and that would be feline immunodeficiency virus or FIV, and feline leukemia virus or FELV, Feline Triple adds a heartworm spot to this SNAP test kit. Heartworm is an under-appreciated and under-diagnosed parasitic disease in cats as our industry colleagues in the heartworm preventatives business will tell you. Our full launch of Feline Triple will begin this summer. Feline Triple will provide expanded value to our Feline Combo customers and for no increase in price. And so for this reason we will simply be replacing the Combo offering with Triple for most market segments.

Speaking of the rapid assay business we continue also to be on track with the introduction of expanded capability of SNAPshot Dx which we’ve just launched out later this year. We anticipate that by the end of 2008 subject to USDA regulatory approval timelines SNAPshot Dx will have the ability to read, interpret and log the result of all SNAP devices including Feline Triple, Canine SNAP 4Dx and our other rapid assay SNAP test kits. This increased capability significantly broadens the ability of the IDEXX VetLab instrument suite to capture in the electronic medical record and report out critical diagnostic information on the patient. That also further drives technician productivity.

Even with these important product launches happening in the first half of this year, and the ones that I have discussed for the second half of the year, our product pipeline remains full with other launches scheduled for later this year and in the out years.

It seems these days we frequently get asked the question, “What impact is the US economy having on our business?” We have looked at this for Q1 and we think the net impact is that it took off about 1% from our revenue growth; so not that appreciable. To understand why I might comment a bit on the composition of our business portfolio.

First several of our businesses have growth drivers unrelated to the US consumer including of course the international markets for all of our products and services as well as our business segments outside the companion animal group, principally the water and production animal segments. In addition several of our companion animal business lines, such as the canine rapid assay and digital radiography offerings, are in a favorable technology adoption cycle that comes in part as a result of our innovations and thus are not affected by clinic traffic. When you add these elements of our revenue profile together they make up over 60% of our total revenue. Even the remaining 40% has a heavy emphasis on innovation and expansion that is driving our growth.

As Merilee has mentioned IDEXX’s overall revenue growth was driven in part by 10% organic growth. Adjusting for the tough compare created by last year’s pet food recall that we pointed out in the first quarter our organic growth in Q1 for all of IDEXX was a strong 11% and our companion animal growth led the way with an adjusted 12% organic growth; which I consider solid performance. Our bottom line results reflected solid cost management and margin realization while keeping a focus on key investment initiatives. We quickly and affectively adjusted our cost structure on operating expenses to the changing US economic environment and will continue to keep a close eye on costs in this economic environment going forward.

So in summary a combination of continued double-digit organic growth from a diversified portfolio of technology-based businesses and important new product cycle in our instrument business with Catalyst Dx and SNAPshot Dx, and a strong future new product pipeline all give us really good confidence in our updated financial guidance for the full year 2008. And for the same year we remain quite confident with our longer term financial objectives; low double-digit revenue growth, and mid teens earnings per share growth.

So before I open it up to questions, I’d like to take this opportunity to congratulate our employees on the strong operating performance and the innovation achievements that we achieved this quarter. Our results are a testament to our team’s capability and the robustness of the IDEXX business model.

We would now like to open it up for question and answer.

Question-and-Answer Session

Operator

Your first questions comes from Ryan Daniels - William Blair

Ryan Daniels – William Blair

Congratulations on the great quarter. Merilee I wanted to ask you a quick guidance just to make sure I understand everything. First off on the revenue guidance, I know you took it up a little bit both on the low and high end, I’m just trying to figure out what was the primary driver there. I know you indicated that while within your range it was maybe towards the lower end in Q1 yet you’re still taking up your annual outlook. Is there anything specifically driving that?

Merilee Raines

Yes, the primary driver there is really I think the strength we’re seeing from currency. If you look at that and kind of [harken] back of what I had projected in January was that the impact of currency would be about 2% and now we’re thinking its going to be about 3% for the year.

Ryan Daniels – William Blair

Okay and then on the EPS side if we kind of adjust for the tax change, it also looks like you’re taking up your earnings guidance a bit net net on an operating basis and you mentioned that the margins are going to be a little stronger there but it seems pretty similar to the margin profile you gave us in Q4, again is there anything in the works there that’s kind of taking up that operating EPS guidance or was it just a better start to the year?

Merilee Raines

Well the start of the year was pretty much in accordance with our thinking in terms of bottom line as I mentioned that we did have some upside from our thinking on gross margin and the operating expenses were a little bit lower and I think what we just are feeling Ryan is that we’ve got a pretty good handle on the ability to really monitor our costs and keep those in check and so think we’re just feeling like the business is solid and strong and all of that just is contributing $0.02 to $0.03 of upside for the rest of the year from operating performance. Offsetting that is the impact of the change in our thinking about the tax rate.

Ryan Daniels – William Blair

Okay and then during the quarter you obviously, it looks like you expanded your revolver pretty significantly especially if we consider the accordion feature and I know you took up the share repurchase by another 2 million shares, are those two in tandem or maybe you’re getting more aggressive on the share repurchase or other uses of cash, are you seeing a little more activity in the M&A pipeline going forward that you might want to capitalize on, any color there would be helpful?

Jonathan Ayers

I think it was just normal prudence with regard to the balance sheet and financial capacity, the M&A pipeline and typically our business model is very modest. The bigger use of cash is the share repurchase program, we were looking at this and we’ve actually brought down the share count by about 3% per year since 2003 and if you look at the annual share price appreciation since the inception of the program in 1999 its been pretty good. I think it’s been a good investment and we continue to think that to be the case today.

Ryan Daniels – William Blair

Okay and then any early commentary Jon from Catalyst in the field, it sounds like from all our channel checks demand and as you indicated remains very strong but I’m curious for the people you’ve placed it at, what the feedback has been early on about ease of use or service levels, any issues in the field et cetera, if you can give us more color on that that would be great.

Jonathan Ayers

As we expected we’ve been focused on every last feature, but just the thing that hits a customer is just how easy it is to run combined with the fact that there is absolutely no compromise in the capability of the instrument either in terms of menu or flexibility or accuracy. It’s just incredibly easy and of course it has additional capacity so if you’ve got a busy practice in the morning you don’t have to wait to add the second patient while the first one’s processing and if it’s a pre-anesthetic profile it could be just process both of them at the same time with no expanded time. So the ease of use really has been the paradigm shift I think for people. As with any instrument launch and totally expected in this case, you’ve always got early feedback with regard to software improvements that could be made and such and everything is really – and that kind of feedback is consistent with what we expected and part of disciplined ramp process.

Ryan Daniels – William Blair

Okay great thanks a lot for all the color and congratulations again.

Operator

Your next question comes from Dawn Brock - JP Morgan

Dawn Brock - JP Morgan

You saw some considerable strength in the rapid assays is there anything outside of the SNAP 4Dx test that’s driving some of that?

Jonathan Ayers

That’s certainly the largest offering product line in our SNAP offering but we have, I don’t know maybe close to eight or so other products in the companion animal business and one of them for example is the SNAP cPL which is a product that we launched last year for pancreatitis that’s getting a nice pickup and adoption. Its not a big factor in the overall because its just not – the 4Dx is such a big product for us and we have – it was good strength across the whole portfolio but the movement to full parasitic disease screening, I think that appreciation for the fact that tick borne diseases are prevalent. I know even the cover of one of the recent veterinary medical journals pictured ticks and anaplasmosis which is of course the fourth spot on SNAP 4Dx and it’s just in a good technology adoption cycle as I’ve mentioned.

Dawn Brock - JP Morgan

Let me ask you this Jon are you seeing any sort of shift between maybe higher utilization of point-of-care tests against the diagnostic tests?

Jonathan Ayers

You mean point-of-care versus lab tests?

Dawn Brock - JP Morgan

Exactly.

Jonathan Ayers

I think -- you know people have asked that question over time, I don’t see any particular shift one way or the other. In general parasitic disease screening is much more prevalently a point-of-care test. I think there’s value to providing that result to the client at the time of the wellness visit. But I don’t think there’s any particular shift one way or the other.

Dawn Brock - JP Morgan

Okay I guess maybe sticking with the labs, the growth rate was definitely lower than what your annual guidance as you went through that, can you give us an idea of how much of the growth was associated with the new corporate contracts that came online in the fourth quarter?

Jonathan Ayers

We have an international lab business. I think it was a little over $250 million last year in total and I will tell you there are a lot of puts and takes. We have – offer lab services actually in 15 different countries around the world. Some are doing great and others a little disappointment. We have over 11,000 customers in North America and so I think it’s just there’s a lot of moving parts and I think it would be inappropriate to pick out any one part without looking at the other parts. So we really looked at the lab business as a whole and felt it was a good quarter.

Dawn Brock - JP Morgan

Okay and just on the instrument side, you said that there were a handful in the first quarter and kind of gave us a little bit of an idea of how its going this quarter, let me ask you this. Are you seeing or how are you seeing the translation of previous VetLab Station placements, are you seeing any correlation between those prior placements and the ordering of Catalyst machines?

Jonathan Ayers

We actually had another very successful quarter in terms of placement of the IDEXX VetLab Station both to new customers of the IDEXX VetLab and to existing customers around the world who are upgrading to more information management and reporting capabilities that leverage their existing investment in IDEXX in-house instruments. That has just been a very, very successful program and it gives more value to the customer and therefore gives us very, very strong retention of our existing customers in the installed base and is a nice driver for growth. With regard to impact on Catalyst, we are very, very early days so I think – we have a ready base of customers who are very anxious to upgrade to Catalyst Dx who already have the VetLab Station. There will be probably customers who don’t have the IDEXX VetLab Station or don’t even have any IDEXX equipment that will be upgrading to IDEXX over the course of this year and future years and we really don’t believe that we are going to be demand-constrained in 2008 during our disciplined launch ramp process.

Dawn Brock - JP Morgan

Okay and then Merilee accounts receivable was up a bit this quarter can you just elaborate on that. It looked like DSOs were up obviously as well. Can you just comment a little bit on that?

Merilee Raines

This is something that we typically see and I think if you were to look back at last year you would have seen receivables actually went up by an even greater amount. What we start to see here is that as we ramp into the tick season and start to see sales there that they’re tending to come later in the quarter and so you have the impact of the receivables are still there because they’re later in the quarter sales and so it just tends to drive the metric up. Overall I think that the receivables and DSO are really on track. I really don’t see anything out of line and anything and we aren’t seeing any weakness or having any concerns about the balances and any reflection on economy or customers’ ability to pay.

Dawn Brock - JP Morgan

Okay that’s great and then just on working capital, that was up significantly as a use of cash in the quarter, anything that we should be aware of there?

Merilee Raines

Again, this is a very typical pattern for us. If you would look back over several first quarters what we tend to see is in addition to receivables going up, you’ll see payables coming down and that relates to things like tax payments, compensation payments from year-end, and so its just all very normal stuff for us and I think its something that we expect that working capital will – that piece will improve over the course of the year.

Dawn Brock - JP Morgan

Okay just wanted to make sure we weren’t missing anything, thank you.

Operator

Your next question comes from Ross Taylor - CL King & Associates

Ross Taylor - CL King & Associates

I have a couple of questions; the first one is as you all change to a new feline insulin product does that cause any challenges in terms of customer retention once you have the new product introduced?

Jonathan Ayers

The feline insulin product that we are working on, that we are seeking FDA approval on is specifically designed for cats and the clinical data would suggest that the transition from what has been a very highly popular existing product that we had on the market is quite smooth.

Ross Taylor - CL King & Associates

Okay and can you say roughly when you anticipate the FDA approval for that product?

Jonathan Ayers

First half of next year.

Ross Taylor - CL King & Associates

Okay, and second question Jonathan you mentioned during your remarks that you thought that even with the new Feline Triple test you’d keep the price on that unit constant and I just wondered what was the strategy behind that because I thought usually as you added more tests to the SNAP kits that you’ll raise the price a little bit and I just wondered what your thoughts were there?

Jonathan Ayers

Yes I think is a little bit different strategy Ross, and the strategy here is if you looked at what we did when we introduced actually 2Dx, that was a long time ago, and then we introduced 3Dx and then we introduced 4Dx, but particularly as we introduced 3Dx and 4Dx we kept the heartworm product on the market and when we introduced 4Dx we kept 3Dx on the market because it was a little bit different to these instruments and different geographies and then we went through a process of the significant amount of marketing investment to convince people to pay a little bit more to upgrade to the next product. In this case we’re taking a slightly different approach. Instead of taking additional marketing dollars to try to upgrade them, we’re saying we’re just going to keep the price the same. It is at the retail level, meaning at the level that the veterinary practice purchases from the distributor – about a $16.00 average unit price, and we want to give more value and because we’re able to give more value and because we are giving more value at the same price as I said for most market segments we’re just going to offer the Triple instead of the Combo.

Ross Taylor - CL King & Associates

Okay and is there any chance that units could go up because of the addition of the heartworm onto the feline product?

Jonathan Ayers

That’s a great question, I think what we are going to find as people start snapping with Triple instead of Combo, which they will because that’s what they’ll get when they order it, and they are going to find heartworm. And we call it a tip of the iceberg philosophy which suggests is they realize that heartworm is more prevalent in the cat then they had any appreciation for that maybe they’ll start thinking a little more about heartworm management in the cat which would include maybe preventatives or more regular testing. It is not in our number. We don’t have any of that in our number but some people have speculated that that could change the protocol.

Ross Taylor - CL King & Associates

Okay and Merilee Raines I missed some of the numbers that you gave out, could you go over again for me what you expect the tax rate to be for the balance of this year and also I think you gave out some numbers for the consumable component of the instrument and consumable line, I just wondered if you could give those again.

Merilee Raines

Sure, first of all with regard to the tax rate I said 31% for the full year and what we will see in the second through the fourth quarter is a rate of about 32%. And then for instrument consumables the organic growth rate was 5% and then when we adjust for changes in distributor inventories and for the impact of the pet food recall it was about 10% in the quarter.

Ross Taylor - CL King & Associates

Okay and then did you give out an absolute dollar figure there or not?

Merilee Raines

Yes I did. It was $53.1 million.

Ross Taylor - CL King & Associates

Okay, thank you.

Operator

Mr. Ayers there are no further questions; please go ahead with any closing remarks sir.

Jonathan Ayers

Thanks everybody for joining our call and again thank our employees for delivering a great quarter for us and we look forward to having our conversation with you all as our second quarter results come in, in July.

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Source: IDEXX Laboratories, Inc. F1Q08 (Qtr End 03/31/08) Earnings Call Transcript
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