IDEXX Laboratories, Inc. (IDXX)

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IDEXX Laboratories (IDXX)

Q1 2013 Earnings Call

April 23, 2013 9:00 am ET


Merilee Raines - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Jonathan W. Ayers - Chairman, Chief Executive Officer and President


Ryan Daniels - William Blair & Company L.L.C., Research Division

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

David C. Clair - Piper Jaffray Companies, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Jeffrey Frelick - Canaccord Genuity, Research Division

Ross Taylor - CL King & Associates, Inc., Research Division



Good morning, everyone, and welcome to the IDEXX Laboratories First Quarter 2013 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, 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 IDEXX's future expectations, plans and 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 financial results for future periods. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences are described in IDEXX's annual report on Form 10-K for the year ended December 31, 2012, in the section captioned Risk Factors, which is on file with the SEC and also available on IDEXX's website,

In addition, any forward-looking statements represent IDEXX's expectations only as of today and should not be relied upon as representing the company's expectations as of any subsequent date. The company specifically disclaims any obligation to update or revise any forward-looking statements in the future even if its 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 reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which can be found on our website,

Finally, we plan to end today's call by 10:00 a.m. Eastern. [Operator Instructions] I would now like to turn the conference over to Merilee Raines. Please go ahead.

Merilee Raines

Good morning, and thank you for joining our call today. As you've seen from our press release, our first quarter revenues of $332.1 million grew on a reported basis and organically by 3%, and fully diluted earnings per share of $0.81 grew 12%. There are a couple of discrete items in earnings noted in our press release. First, the benefit of the reinstatement in early January of the federal R&D tax credit for 2012 is recognized in full in the first quarter and contributes $0.05 to earnings per share. This benefit was anticipated and reflected in our 2013 guidance at the time of our fourth quarter earnings call in January.

The second item relates to the recording of a loss reserve of $4.1 million or a $0.05 reduction to earnings per share due to a misappropriation of funds leading to a bankruptcy filing by Trendset, a vendor providing audits and payment services for our North American freight invoices. We became aware of this issue all relating to payment activity in the first quarter in late March. Earnings per share, as adjusted for this item, were $0.85.

First quarter organic growth was a couple of points below our thinking in January. At that time, we called for mid-single-digit growth in the first quarter due to difficult year-to-year comparisons for both our Companion Animal offerings due to the unseasonably mild weather in the first quarter last year and result in high patient visits, and our Livestock, Poultry and Dairy business due to episodic testing related to a milk contamination outbreak in China. The lower-than-anticipated growth comes primarily from revenues associated with our placements of capital equipment and to a lesser extent, our reference lab services. And I will provide further details momentarily.

Overall, our assessment is that our core diagnostic offerings for in-clinic and send-out testing are healthy, and our steady rollout of innovations in diagnostics and information technology drive differentiation that supports our forecast for accelerating growth.

Despite lower-than-anticipated revenues, earnings per share, exclusive of the Trendset loss provision, were $0.01 to $0.02 better than our expectation in January. This is largely due to favorability in our gross margin from product mix, price realization and efficiencies in both our product manufacturing and lab operations. Currency had an immaterial impact on earnings per share versus our expectations.

Let me provide a word or 2 on the Companion Animal veterinary market and our international performance. There have been several surveys of the U.S. veterinary market indicating low year-to-year growth in patient visits and practice revenues in the first quarter. Our own cornerstone data with a sample set of approximately 600 customers is consistent with these reports. Patient visits were essentially flat as compared to 3% growth in the fourth quarter of last year and practice revenues grew just under 4% as compared to 5% in the fourth quarter. Recall as well that we estimated Hurricane Sandy muted fourth quarter patient visit growth by about 0.5 point. While low growth was anticipated, given the tough comparison created by the mild weather in the first quarter last year, growth decelerated over the course of the quarter. This may be in part a reflection of the harsh weather experienced across much of the country in February and March this year.

In addition, less optimistic views on economic recovery as reflected in recent reports for March may also have been a factor.

In Europe overall, our Companion Animal businesses grew organically by just over 6.5%, very strong performance given the still turbulent economic and fiscal environment. As anticipated, we saw a strong growth in the Nordics given our change in commercial strategy to serve our customers directly. In addition, we've been making good headway in emerging markets in Eastern Europe, and France posted low double-digit growth. The strong growth in these areas was supported by single -- by solid mid-single-digit growth in our core markets in Germany, the U.K. and Italy.

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