愛德士 (IDXX) 2013 Q1 法說會逐字稿

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 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 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 statements 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, IDEXX.com. 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, 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 you have 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 audit 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 results in high patient visits, and our livestock, poultry and dairy business, due to a episodic testing related to a milk contamination outbreak in China. The lower than anticipated growth comes from 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 and 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 two on the companion animal veterinary market, and our international performance. There have been several surveys of the US 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 points. 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 the economic recovery, as reflected in recent reports from 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 strong growth in the Nordics, given our change in commercial strategy to serve our customers directly. In addition, we have been making good headway in emerging markets in Eastern Europe, and France posted low double-digit growth. This strong growth in these areas was supported by single -- by solid mid-single-digit growth in our core markets in Germany, the UK, and Italy. Organic growth in Asia-Pacific across our entire portfolio was roughly flat versus the first quarter of last year performance, in large part due to transitory items such as the timing of some distributor orders, changes in the structure of marketing programs from 2012 to 2013 for the canine parasitic disease testing season, and the enhanced testing last year in China related to an episode of milk contamination. We expect mid-teen organic growth for Asia-Pacific for the balance of the balance of the year.

And now for some revenue highlights for our businesses. VetLab instrument and consumable revenue of $103.7 million grew 3% organically. Instrument revenue at $15.8 million declined to 22% organically year-to-year. Similar to what we saw in the fourth quarter, our newly offered volume commitment reagent rental program negatively impacted our instrument revenue growth by roughly 10 points and total IDEXX growth by just over 0.5 points for the first quarter. Our worldwide chemistry placements declined 9% year over year, primarily as a result of fewer VetTest placements outside of North America, most notably in Asia, where we largely sell through distributors, and so are more subject to timing issues between quarters.

To a lesser extent, we saw similar a occurrence in Europe, where we had very strong placements in the fourth quarter, and first-quarter commercial activities focused on some rebuilding of the order pipeline. In fact, lower placements of VetTest in Asia and Europe accounted for more than 70% of the chemistry placement decline year over year. Placements in North America were slightly favorable to our expectations. We continue to be pleased with the quality of our placements. We saw 45% of our North American placements and more than 40% of our worldwide placements for Catalyst go to customers new to IDEXX. Further, as in the fourth quarter, we saw our reagent rental program resonating with larger, higher consumable-usage clinics. For the full-year 2013, we maintain our projection for chemistry placement growth to be low-single-digit, similar to our growth in 2012.

Our worldwide hematology placements also declined 9% in the first quarter. This was off from our expectation of mid-single-digit growth for the quarter, largely due to lower placements in North America. We believe that the structure of marketing programs contributed to less focus on placing hematology with chemistry analyzers in the first quarter, and this is something we can address going forward. Similar to Catalyst, we are seeing that the percentage of ProCyte placements to customers new to IDEXX continues to grow, reaching nearly 50% in the first quarter. We expect the momentum for our full hematology portfolio to build throughout the year, aided by the full commercial launch of LaserCyte Dx in January of this year, and strong growth internationally. This expectation, combined with our first-quarter performance, translates to our updated projection for hematology placement growth for the year in the mid-single digits, as compared to low-teen guidance in January.

Instrument consumables revenue of $75.5 million grew organically 9%, or 10% when further normalized for changes in distributor inventory levels. While this result is consistent with our full-year 2012 growth, we estimate that first-quarter growth was negatively impacted by about 1 point by a [marked] acceleration of purchases in 2012 in anticipation of our price increase at the beginning of 2013. We are maintaining our expectation for full-year normalized organic growth of 11% to 13% for instrument consumables, driven fundamentally by unit volume growth that has consistently been in the low double digits for the last several quarters. In 2013, we expect this unit volume growth will be further augmented by enhanced price realization. The drivers for price, as noted in our January call, include changes in our sales channels, both with a higher selling price to MWI and from the move from distribution to a direct sales model in Scandinavia, as well as a lower unfavorable price impact from consumable utilization-based marketing rebate programs that have reached more of a steady state.

Our first-quarter rapid assay sales of $44.1 million grew organically 2%. When we further normalize for changes in distributor inventory levels, and the estimated impact of changes in seasonal marketing programs year-to-year, first-quarter growth is approximately 5%. This growth is in line with our full-year expectation of 4% to 6% for the rapid assay business for 2013. US distributor inventory levels for instrument consumables and rapid assays averaged four weeks at the end of the first quarter based on forward-looking demand, a very consistent and healthy metric.

Our reference laboratory and consulting services business, with revenues of $107.6 million, grew organically 6% in the first quarter. We estimate that our growth was negatively impacted by about 2%, due to two factors. First, the leap day in 2012, and second, the difficult weather comparison year-to-year for North America as mentioned up front. When we adjust for these factors, the business grew at 8%, consistent with the fourth quarter. While we expected Q1 to be the lowest growth quarter for 2013, the performance we achieved for the quarter was about 1 point below our expectations at the time of our January call. This is primarily the result of somewhat lower growth in our bio research business, and open sales positions in North America in the fourth quarter of last year, yielding lower new accounts exiting the year with their attended business in the first quarter.

We are fully staffed now, and geared up for increased coverage and effectiveness. For 2013, we now expect our reference lab and consulting services organic revenue growth to be 8% to 9%, a modest adjustment to the high end of our range of 8% to 10% provided in January, reflecting first-quarter performance, and we expect that we will see growth in the remaining quarters of the year accelerate, with contributions from both volume and price. Our core strategies of expanding coverage, leveraging our specialty test menu, and providing enhanced information and connectivity through VetConnect PLUS, will continue to provide opportunities to gain -- to both gain new customers, enhance -- and enhance the loyalty and testing volume of our existing customer base. Our practice management and digital imaging systems business, with revenues of $21.5 million, grew 2% organically in the first quarter. Performance was below our expectation for both product lines.

The healthy order book entering the first quarter gave us a strong start in January, but order rates dropped off in the latter half of the quarter. New sales resources were added in the fourth quarter, and in the first quarter of this year, and the learning curve for these businesses is six to nine months, given the relative complexity. Accordingly, we expect to see increased productivity in ensuing quarters. We continue to remain confident about the strong differentiation of our offerings. Pet Health Network Pro, our complete suite of client communication services, together with our cornerstone practice management system, were very positively received during the American Animal Hospital Association's annual event in Phoenix in March.

As a reminder, these offerings received the Association's endorsement in the fourth quarter last year as the first fully-integrated client and practice management system. Pet Health Network Pro continues to show rapid acceptance in the marketplace, with orders up by more than 30% sequentially, and the subscriber base growing by roughly two-thirds from year-end to the end of March. In our digital line, in the first quarter we launched the I-Vision DR, the next generation of our flat-panel direct radiography system. We also provided a software release which deepens the integration advantages between IDEXX digital and practice information management systems. With our continued focus in the second quarter on strengthening the commercial execution of these modalities, we now project low double-digit organic growth for this business in 2013, down from mid-teens forecasted in January.

Our newly combined livestock, poultry and dairy business generated revenues of $28 million, a 3% decline in organic growth year-to-year. Though this performance was a bit better than our expectation in January, we believe the favorability was largely due to timing between quarters. Accordingly, we continue to expect revenues for the combined livestock, poultry and dairy business to decline organically in the low to mid-single digits for the full year. Over the remainder of 2013, we anticipate further declines in European government testing programs for livestock, and that will be partially offset by higher growth from new products as they continue their adoption ramp. Though still in the early days, we are pleased to see that the market and operational synergies we anticipated from combining the management of our livestock, poultry and dairy businesses are playing out. In line with our thinking, our water business grew 6% organically to $20.7 million in the first quarter, reflecting contributions from our core Colilert testing business, particularly in the Americas and Europe, and we reaffirmed full-year organic growth expectations for this line in the mid-single-digit range.

Turning to the rest of the P&L, gross margin at 55% was roughly 100 basis points above our expectations. As mentioned, this was due to favorable revenue mix, with lower margin instruments comprising a smaller share of first-quarter revenues than anticipated. Also price realization and efficiencies in product manufacturing and lab operations helped us achieve the gross margin favorability. Operating expenses were in line with expectations in January, excluding the Trendset loss reserve, which was recorded in G&A expense. Our effective tax rate of 26.2% was a bit favorable to our expectations, largely the result of the Trendset reserve which was recorded in the US, a relatively high tax rate jurisdiction. As mentioned up front, the first quarter tax rate reflects the full effect of the 2012 Federal R&D tax credit approved earlier this year, while the 2013 benefit is recognized ratably over the year.

Turning to the balance sheet and cash flow, we ended the quarter with $228 million of cash and $262 million of debt, for a net debt position of $34 million. Our inventory balance of $148 million was $7 million higher than at the end of the fourth quarter. This was due primarily to the timing of purchases of hematology instruments. We project inventory levels will come down 2% to 3% from first quarter levels, particularly in the second half of the year.

DSO was consistent with our experience, at 41 days. Our free cash flow was $6 million, or 14% of net income, which was in line with our expectations. As noted in the past, free cash flow tends to be lowest in the first quarter, due to the payout of annual performance-based compensation and increases in receivables related to the ramp of some of our more seasonal product lines. Additionally, first-quarter free cash flow was a bit lower than our experience historically, due to spending on our new administrative facility on our main campus that will be completed in the third quarter of this year.

Looking forward, we project full-year revenues of $1.38 billion to $1.39 billion, which yields organic growth of 7.5% to 8%. This organic growth is down from our previous guidance in January of 8% to 9%, reflecting primarily our latest thinking on revenue associated with capital placements. Further, we expect that sequentially accelerating organic revenue growth over the course of 2013 will result in second half growth roughly double the growth rate in the first half of the year. The acceleration will be driven by increasing contributions from recent investments and innovations such as Pet Health Network Pro, VetConnect PLUS, and our core lab in Germany, as well as easing year over year comparisons for several of our businesses, and enhanced commercial effectiveness in our North American Companion Animal Group.

Changes in currency rates since our January guidance have also created about a 1% headwind to growth, and so reported growth is now projected to be 7% to 7.5%, as compared to 8.5% to 9% previously. We expect full-year gross margin to be about 54.5%, or 50 basis points higher than our previous guidance, reflecting our latest thinking about revenue mix for 2013 as well as our first-quarter performance, which as noted was favorable to our expectations. Also, we expect gross margin in the first half of the year to be roughly 50 basis points higher than for the full-year average, the result of the first-quarter performance and the seasonality of our vector-borne disease testing business. We expect operating expenses to be approximately 35% of revenue for the year, an increase of about 100 basis points compared to our previous thinking, primarily the result of our lower revenue outlook. While we will manage discretionary spend and drive for operational efficiency, we will also continue to make investments in innovation, our commercial organizations, and international infrastructure that we feel are appropriate to drive topline growth.

We expect the operating margin to be about 19.5%, which would represent a 10 to 15 basis point expansion year-to-year when normalized for currency, and discrete items consisting of the pharma milestone payment in 2012 and the Trendset reserve in 2013. We expect the tax rate to be 29.5% to 30% for the year, which is about 50 basis points lower than our previous guidance. In addition to the Trendset loss reserve impact on our effective rate, we are projecting a slight increase in the benefit from the R&D tax credit related to 2013 activities. Net interest expense is expected to be $2.5 million to $3 million, and weighted average share count is expected to be down 2.5% to 3% from full-year 2012 levels. All of this leads to updated 2013 earnings per share guidance of $3.40 to $3.46 for the year, both on a reported basis and when normalized for the offsetting discrete items recorded in the first quarter associated with the 2012 R&D tax credit and the Trendset reserve. This compares to guidance in January of $3.42 to $3.52, when also normalized to exclude the 2012 R&D tax credit benefit.

Unfavorable movements in currency lower both ends of the range by $0.04. Additionally, we are tightening our range by $0.04 to reflect our latest thinking about business performance. The reconciliation of the change our earnings per share guidance from January to today is detailed in our earnings press release. Earnings per share growth for 2013 is projected to be 10% to 12%, when normalized for currency and the discrete items in both years as enumerated. And so now, as I hand it over to John for the 45th and final time, I just want to say how grateful I am to have had the opportunity to work with such an exceptional team of colleagues over the last 28 years, and to express my confidence in their collective ability to continue to bring significant value to our markets, and to our shareholders going forward.

Thank you, Merilee. Thank you for that, and another fine job in describing the quarter. There is a lot of detail there, and we're going to go through some of it in the Q&A. Certainly, we're pleased with our profit performance, ex-items, was better than our expectations by $0.01 to $0.02, and we really remain fundamentally very enthusiastic about the strategic outlook for the Company. Let me make some comments in that regard.

The diagnostic portion of the Companion Animal Group, and we have referred to this historically as VetLab instruments and consumables, the rapid assay and the reference labs lines of business, it's the single largest single line at IDEXX, you put them all together, what we call the CAG diagnostics, and it contributes about 75% of the Company's revenue. Our product offering provides real and unique medical and economic value to our customers. Within this group, we are doing well internationally, with particularly good growth in Europe despite the economy in that region. Instrument consumable growth globally, which is the most important part of the instrument modality, is right on track, with 10% underlying revenue growth in the quarter and a solid forecast to accelerate to 11% to 13% for the full year. This growth is in large part as a result of the quality of our instrument placements, and the strong loyalty of our customer base. While the instrument revenues are pulling our growth down for the quarter for various reasons, the objective behind the lower margin instrument revenues is being achieved; that is, placements that drive consumable growth.

Rapid assays growth is taking right at our expectations. Reference lab offering is 1 point or so in growth below our expectations; however, we believe the market opportunity for lab services is quite significant, and our global service offering is both broad and highly differentiated. This quarter, we are introducing a significant innovation with our commercial activities in the North American Companion Animal Group diagnostics, a regional segment that contributes 50% of the Company's total revenue in -- contributed in 2012. That is, we are transforming the structure of our field sales organization. We are very excited about this change, and what it will do to support the growth in the veterinary practice, and thus accelerate our Companion Animal Group diagnostic group revenue growth. But first, let me provide some strategic background before I describe the change, because the change is very in line with the strategy.

As investors know, we are transforming diagnostics in the veterinary practice with the introduction of VetConnect PLUS, our integrated cloud-based platform for presentation and analysis of a patient's in-house and reference lab diagnostic information. VetConnect PLUS adds significant value to the diagnostic information provided by our products and services, including the ability to have instant mobile access to new results, including those from in-house instrumentation, trend a patient's results over time for far greater medical insight, and generate pet owner-friendly reports that can easily be shared both on paper and electronically. We have now reached 6,700 practice activations in the US, up from 4,500 three months ago, and utilization of the system to view, analyze and share diagnostic results grows by the day. Looking at diagnostic results within VetConnect PLUS, versus the old way of a single point in time on paper, is like moving from snapshots to YouTube, or from film to digital radiography. Once the customer experiences the multiple benefits of VetConnect PLUS, they don't want to go back to paper-based results to view, analyze and share.

What VetConnect PLUS demonstrates is the value we provide to customers is that of highly relevant medical information. This information provides medical insight to the doctors and a vehicle to convey this insight, and indeed the value of diagnostics and medical care to the pet owner who, as investors know, is the payor in our business. Interestingly, almost the entire menu of diagnostic results that is generated by our in-house equipment can and is also generated by our reference labs, that being chemistry and hematology, and the majority of testing run in reference labs is also that same chemistry and hematology that can be and is run with our in-house lab. In addition, almost all customers use some combination of in-house and reference lab service to produce this routine baseline diagnostic information for their patients. When historical diagnostic data can be combined and trended across the two modalities, medical insights are greatly magnified.

What is really interesting is that if you look at IDEXX customers for our in-house instruments and our reference labs in North America, far more customers use one or the other offering from IDEXX than use IDEXX for both testing modalities. In fact, of those that use either, only a little more than one-third use us for both. While it is counterintuitive that we have so little customer overlap between these two modalities, perhaps we should not be all that surprised when we recognize that we have used specialized sales roles for each for our entire history. And yet, the cross-selling opportunity is obviously significant, even more so when we recognize they generate common -- in large part, common information on the patient that [feeds] VetConnect PLUS.

Strategy dictates structure, and as I mentioned this quarter we have launched a significant innovation in the structure of the North American diagnostic field sales organization, again accounting for 50% of our total revenues. In this new sales model, we move to one IDEXX sales consultant who is a single point of contact with customers for all IDEXX diagnostics. This sales professional will be able to best represent what we call the IDEXX diagnostic advantage, the highly differentiated value of our comprehensive in-house and reference lab diagnostic offering and our complementary access tool, VetConnect PLUS. As you can imagine, this is a very significant change that has required that we create a new set of territory maps for the entire North American geography, as we merge the two role types into one, a veterinary diagnostic consultant. We have been in the planning stages of this transformation for almost a year. We announced the new approach to our sales organization in February, and have now completed the design, announced the territories, and implemented the new sales structure in about 20% of North America starting at the beginning of April this month. The remaining 80% of the reps in North America will make the conversion to their new roles in their new territories in July.

I'm delighted to report that the response by our sales organization and customers so far has been very enthusiastic. It just makes sense. This new approach is customer and sales force-centric, and is a logical outbreak -- outgrowth of our innovations in providing highly relevant medical information across multiple modalities through VetConnect PLUS. We expect that the change will allow us to be far more effective in promoting and supporting our full IDEXX diagnostic line, and the key elements that are unique to the IDEXX diagnostic advantage. In the new full diagnostic line sales structure, each sales professional has a much smaller geography to cover, and the total number of accounts that can be covered is -- are those that can be covered in a four-week call cycle, which allows our teams to develop a deep relationship with our customers far different from our prior, more transactional approach to sales, with separate specialized roles for in-house and reference testing. It will also greatly reduce nonproductive travel time that comes from covering much larger geographic territories, and increases the frequency of customer calls.

The goal of our new veterinary diagnostic consultants is to grow their accounts' usage of IDEXX-generated diagnostic information, either by cross-selling the modalities of IDEXX diagnostics customers are not yet using, adding entirely new customers who are inspired by our IDEXX diagnostic advantage, and supporting existing accounts that are already full IDEXX diagnostic advantage partners, because they already use our in-house equipment, rapid assays, and our reference lab diagnostics, by helping them grow the diagnostic services of their hospital in accordance with the practice of best medicine, and thus their purchase volumes of IDEXX diagnostics. With smaller territories and a regular call cycle, the number of field sales calls per rep will increase, we think, 60% for any given period. Obviously, that is a very big increase.

A second benefit is that we expect lower field turnover as a result of more manageable territory sizes, more productive customer relationships, and clearer sales -- field sales objectives and career paths. Lower turnover leads to greater tenure, deeper relationships and greater product knowledge. All this leads to higher customer satisfaction, and IDEXX sales productivity. A third benefit comes from the opportunity presented by the territory re-mapping. With our knowledge of the customer base and the opportunity, we are able to re-balance our coverage to more closely align the opportunity in every territory. Think of this as a kind of re-districting, if you will. So big benefits -- a regular call cycle, increased tenure and re-balancing. Even if a fraction of these changes leads to sales productivity, we could see a significant boost to revenue growth from our strong product and service portfolio.

On top of this, as part of this realignment, we are growing our field sales headcount for diagnostics in North America by 13% in the second half of the year. In other words, more feet on the street. These additions augment the growth that comes from per-rep productivity. Of course we recognize that any change of this magnitude requires intense focus to manage transition risk. We are training our sales organization to represent all diagnostic modalities -- reference labs, in-house equipment, and our rapid assay test kits.

While our diagnostic sales professionals had partial knowledge that came from their specialized roles, the new full-line role requires more comprehensive knowledge, if they did not already have prior experience. But in actuality, many reps do have requisite knowledge. Early indications from the first wave of transition that has already taken place are that field reps -- field professionals feel well supported in this training, and indeed many of them have already been informally supporting the sales of the full line as a result of our strategy of bundling products and services. Even though all the professionals will have changes to their territory, including some who require relocation, the enthusiasm is so high that we expect the risk of turnover associated with the change to be very low, less than 5%, and entirely due to relocations that come from the re-mapping. We will backfill with experienced sales professionals quickly.

The enthusiastic response by our sales organization is matched by the initial response to customers in sales calls from reps in the new role. Customers resonate with the message that they will have one IDEXX rep to support their practice with all their diagnostic needs from IDEXX. We are also getting good reaction from our distributors, who see IDEXX now as a stronger partner in supporting the customer and growing IDEXX diagnostic usage. Along with the change in the field sales organization, we have also implemented a change in our CAG diagnostic marketing group. Our marketing focus is to grow the usage of all diagnostics -- IDEXX diagnostics, regardless of modality. This group has been assembled from some of our best marketers that previously resided within each diagnostic line of business.

Before I open it up to Q&A, I just want to turn briefly to a couple of comments on Europe, which had great performance in the quarter. In Germany, this was our first full quarter with our new core lab in Leipzig, and we are pleased with the market acceptance of our service. Though early days and small numbers, we achieved twice our anticipated incremental revenue, attributable to new lab and the [courier network] in Q1. The lab is now servicing customers in Germany, Italy, Sweden, Finland, Denmark, Norway and Belgium. We will continue to put logistics in place to expand services throughout Europe, providing further opportunity for growth across the region.

Second, our go-to-market change in Nordic countries, where we replaced our distributor with a direct sales organization in January, has gone better than planned. In this set of countries, our Companion Animal Group sales are up more than 35% year over year in the quarter, which is a great start, obviously. This is the benefit of a year of advanced planning and setting up the go-direct strategy. In summary, we have a great product line that is leading to transformation with our customers. We are now aligning our commercial organization in North America, and have already good commercial performance internationally. This will lead to sustained organic revenue growth in years to come, as we execute this strategy. So with this, I am happy to open the call to Q&A.

(Operator instructions)

Ryan Daniels, William Blair.

Good morning, guys. Thank you for taking my questions; and Merilee, best wishes going forward.

The first question -- let me focus on some of the changes you're making the field sales force. It appears that is something that could be a big long-term positive. But in the near term, are you actually pulling some of your reps out of service for a while to do the training on the areas that they were not representing before? And if so, is that accounted for in your growth outlook going forward?

Oh yes, but it is a week of intensive training; and, for example, we accomplished it in the first week of April for our reps, so it's really nothing out of the norm and it is fully accounted for in our numbers.

Okay, and then if we think of your organic growth guidance, how much of that is driven at this point by increased quotas or expectations that the sales force will drive a ramp in the second half, versus some the other innovations that you've made in some of your other product launch objectives? Just trying to get a feel for how dependent you are on this working for your growth.

Again, Ryan, that's a great question.

It really isn't -- there isn't any increased quotas. We are assuming a continued productivity of the sales force, but the upside -- and of course, it will take time to determine exactly when that upside is going to happen. And a lot of that upside will be having customers add other diagnostic modalities from what they already use at IDEXX, given that -- you know, it's interesting, a majority of our customers actually don't use all our diagnostic modalities; they only use some of them.

So the answer to your question is -- we don't have any upside associated with this change in the forecast. Clearly, that is a possibility. It's hard to predict when that will happen. We are confident it will happen, and it will be sustained long-term, but will it start happening in Q3 or Q4, or will that really drive 2014 growth? None of that is in our guidance for the year.

Okay, and then one quick follow-up, and I'll hop off.

Just as you think about the realignment in the field sales force, is it really moving more towards a consulting-type role, where you're working less to just push your product sales, versus showing the value of integration and how to drive overall practice revenues and how that can manifest by using more of your diagnostics?

That is exactly what is happening, and one of the benefits. What is interesting is, instead of coming with a point of view, which the specialized reps came with, we are coming with what is the customer's need, and how do they want to grow their practice, and what do they want to achieve, and what role do the in-house modalities of instruments and consumables and rapid assay kits? And what role does the reference lab play in helping them grow that?

Obviously, we believe there are some best practices out there, like real-time care; but there are other best practices, like using the broad menu that is available, both on the in-house, and even more particularly in the reference lab, to gain deeper insight. And then there are best practices associated, looking at all of the diagnostic history on a patient over time. This organization allows us to have those far deeper conversations, and including things like integration, than previously.

In part, because the reps will be able to establish a deeper relationship. They will be calling on these customers on average once every four or five weeks, which is far different than what we had historically. And with customers who are already full IDEXX diagnostic advantage customers -- meaning that they are already using all the parts, and therefore we are full partners with them -- we can have a conversation about how to grow their practice. We have got a lot of different tools already that have been fully in the portfolio to help them do so, and that -- customers are really resonating with that conversation.

Very helpful, thank you.

Jon Block, Stifel Nicolaus.

Great, thanks. Good morning, guys.

Jon and Merilee, you gave many reasons for the re-acceleration of revenue growth throughout 2013, which was very helpful. But can you talk to what, if any, expectations there are for share losses due to this -- call it the altered distribution, either in chemistry or rapid, as we enter the back part of the year? What are you guys building into internal plans over the next several quarters?

Yes, thank you.

We have been carefully monitoring the situation with the new distribution arrangement that we have with one of our national distributors; and we're very pleased, by the way, with the performance of all of our distributors in 2013. In particular, we are pleased with our non-exclusive distributor, which actually had growth of IDEXX diagnostics that was higher than average for all distributors, which really shows that I think that we have retained the engagement of all of our distributors, and supporting our customers in adopting our innovations.

And so, as we monitor this very carefully, we don't see any share loss, and, quite frankly, we don't expect any share loss. The reason is because we have got historically great loyalty with our customer base. We have executed very well, and we just look at the numbers for the instrument consumables and the rapid assay growth. And even without the change in our sales structure, we expect that to continue. But one of the big benefits, we believe, of this transformation and being much more customer-centric, is that we will have even higher loyalty of our customer base because we will be calling on them every five weeks and supporting them, including our existing customer base.

So we haven't seen any evidence, and I think it is because -- what is the real thing here? Distributors are valued partners, but they are really supplemental. The primary role here is for IDEXX to grow the business, and the distributors play a helpful secondary role. But they are not a primary driver of new instrument replacements or the medical message, or things like that, that we do. So really don't see this as a very big change, and of course it does also give us the opportunity to take some of the savings with the change in margin to reinvest in our sales organization and grow the number of feet on the street, as I mentioned in the opening comments.

Great, thanks. That's very helpful.

Maybe just a follow-up on that sales change. The timing is interesting. In other words, can you phrase it for us whether you view it as offensive? You've got Pet Health Pro, you've got VetConnect PLUS, you've got stuff that maybe if you are pushing can really lead to better utilization, if you highlight those benefits to your customer base. Or again, just the timing? One quarter into an altered distribution agreement, it is somewhat defensive in nature that you've got to spend more time in front of your customers, you've got to increase the times that you are calling on them because you've now got a nationwide distributor that is non-exclusive from exclusive? Thanks.

Yes, you know, I see it as really a way to step up our presence in customers -- I guess if I had to pick between the two, in an offensive way. But I think it is a natural outgrowth of our strategy now in the diagnostic lines, that what we're providing is highly relevant medical information that is really in large degree common across the in-house and reference lab modalities. And it is so apparent, when all of that information is fed into VetConnect PLUS. And so we really see this sales transformation is -- we are in a perfect position to be able to do this, because it is aligned with our overall strategy, and so we are quite enthusiastic.

This is in no way, I think, related to the change in distribution. It made sense as the evolution of our product line became more and more integrated. And it is just coincident that it happens to happen with this change in distribution, which we really see as a pretty small factor as we look at our commercial and channel strategy in the US. Recognizing, by the way, we're making the same change in Canada; and that has no change in -- there's nothing changed in the distribution side in Canada, and yet we see the same opportunity.

In fact, we have already made this change in some of our countries outside the US, which helped us inform both the benefits of the change and how to make the change. And so it's really been an evolution of IDEXX that is independent and coincident with the large focus investors have had on the changes in US distribution.

Thank you. One last quick one, if for no other reason to point it at Merilee and say, Merilee, thanks for all your help throughout the years, but just a quick one.

Lower revenues -- I think you talked about gross margins up 50 bps; OpEx will be hit by 100 bps. I wasn't clear if that was a function of the bankruptcy? In other words, you're netting out largely the same on EPS after all the adjustments. Can you talk to how that is possible with what I just laid out? Are you accelerating the share repo, or does that OpEx up 100 bps factor in the bankruptcy? Thanks, guys.

Well, first, thanks for your well wishes.

I would say that with the operating expenses, that really -- the increase of 100 basis points versus January is largely due to the fact of lower revenues, and spending staying relatively on par. And Trendset has an impact in the first quarter, but over the full year it is a very minimal impact to the OpEx percentage. And so what we do see going on are a couple of things -- in the $0.02 that we have related to business performance, that we have reduced the high end of our range by about $0.02 related to business performance. So as you had indicated --

And increased the low end.

And we've raise the low end by $0.02. But with regard to the $0.02 at the high end, that is really the netting of -- we have some favorability, higher favorability, than previous anticipated, due to a lower share count and a somewhat lower tax rate. And then that is offset by a reduction in operating profits, due to the lower organic revenue growth guidance that we provided.

Thank you.

David Clair, Piper Jaffray.

Good morning, everybody.

First one for me -- I was just curious, given the commentary on decelerating vet market growth, vet patient growth in the quarter -- I was just hoping you could maybe give us some details on what your expectations are from a macro perspective for North America and Europe included in the guidance?

Yes, really our expectation going into the year was that there wouldn't be much improvement in the economy over the trends we had seen in 2012. Every quarter can have its own story. I think first quarter was particularly impacted by weather, but I think that is not a fundamental secular issue, I think that was an issue within the quarter. So our outlook is modest growth in the profession, similar to what we had in 2012. But of course we did want to give commentary on the quarter.

Okay, and then --

And then, just to answer your question on Europe -- Europe is a lot of different economies, as it turns out. But overall, we are not counting on much going on economically in Europe. And yet, Europe is also for us -- Eastern Europe and the Middle East, Africa -- we have a number of emerging markets in there. And so, overall, we are actually pretty optimistic about our opportunity in Europe. Don't ask me about Italy, for example, but that is just one country in a whole portfolio of countries there. So we're -- we had some core successes in big countries and in emerging markets.

Okay. And then you mentioned expectations for less than 5% sales force turnover as a result of the changes that you are implementing. Just curious -- was there any turnover following the first 20% conversion that you did?

Well, the 5% is the total. What we did, to be clear, is, as a result of all of this planning, we told the sales force about all the new territories, okay? So everybody knows how they are affected, whether they're in the new territory in April, or they're in their new territory in July, or they have to move to be in a new territory. So we have already had all the conversations with all of our sales reps, and we know for those that have -- it's basically those that have to move, for those that have to move, which ones are willing to move to a new territory, and which ones is that not going to be possible. And when we sorted all that out in entirety, we believe that it is less than 5%. Pretty good metrics on that.

Good. And on the hematology business, what is the strategy to reaccelerate growth there? And I'm sorry I missed it -- what were the chemistry placements up in North America in the quarter?

Let me just -- while Merilee gets the chemistry. The hematology -- we really have the unique hematology line, between ProCyte and LaserCyte, with -- particularly with the new LaserCyte Dx. So really, this is not a product issue, it's a -- in the US, I think, we really focused on chemistry placements in Q1, and we really exceeded our expectations in the quantity and the quality of placements as measured by the size of the accounts, and the number -- the new accounts to IDEXX and all of that.

I think with this new IDEXX diagnostics sales structure, hematology -- we will have the ability to talk to customers about the importance of hematology, in-house hematology, as part of having a full diagnostic portfolio. Let's recognize that, while chemistry is -- always been for quite some time highly penetrated in veterinary practices, it is not the same for hematology. There is not the same -- it is well penetrated, but it is not by any means fully penetrated. So there is greenfield opportunity in hematology, and I think this new structure, we are going to have a better chance to be able to talk to customers about the role that will play in growing the practice.

And David, I just wanted to get back on your question about chemistry placements in North America in the first quarter. They were -- the total placements were down about 5%. This was actually below what we had projected for a decline. We projected it to be closer to 10%. And the reason we were projecting a decline is that the protocol-based rebate programs that we had launched in the back half of 2011 -- so, really in Q3 2011 -- we saw very strong placement growth for those, not only in the back half of 2011, but also into the first quarter of 2012. And then the programs -- the impact started to tail off. So we did anticipate somewhat of a difficult compare for chemistry placements in the first quarter of this year for North America.

Okay. Then just one quick last one. Before I ask this, thanks for all of your help over the years, Merilee, but can you give us an update on how the new CFO search is going?

Yes, let me cover that. We are actively recruiting. I think we are going -- we're recruiting primarily outside candidates. And although Merilee does leave a very strong second-level team of finance within IDEXX, which will serve us well as we continue the recruitment, we have talked to a number of very strong candidates. And yet, with any recruitment it is not over until someone is signed and ready to come. So it's a very active process, and we are confident we are going to have a great addition to fill that role, just as we achieved in the recruitment of our General Counsel, which we announced a couple of weeks ago -- Jeffrey Fiarman, who will be joining us next week. So we're excited about his arrival.

Okay, thank you.

Erin Wilson, Bank of America Merrill Lynch.

Thanks for taking my questions.

Can you quantify or comment anecdotally how much price realization the new lab in Germany, and going direct to Nordic countries, is actually contributing to your new organic growth guidance range? And what sort of underlying fundamental utilization trends you are assuming?

Let me just comment on Nordic.

Nordic has two factors which are driving that greater than 35% growth. One is go-direct, but we are also seeing good volumes, and we are seeing a pick-up in volumes. Remember, that number includes the portion that we have previously gone through a distributor, as well as the lab services, which had always been direct. So that was Companion Animal Group diagnostic numbers that -- included a mix. And despite the fact that only part of that went from distributive direct, and the other part was direct all along, we've seen that good growth. And it is because of both the price and the volume, and the response to customers by having our direct sales organization there.

Erin, I would say, with those initiatives, and remembering that they're going to continue to gain momentum over a number of quarters, those are contributing probably somewhere in the neighborhood of $5 million to $10 million in total growth for the year. So they're a small portion of the many different contributors we have to growth for the year.

Okay. That's helpful.

And then as it relates to the sales force transformation, I know you have spoken to a lot of the questions there, but how should we think about the quarterly possession of incremental cost associated with that? And has this sales force change been in development or in your thought process over several years? Or has this been something that is more new?

I would say that we have thought about this type of change for a long time, and have evaluated it versus our prior, more specialized strategies. So this is something that we have thought about for a long time. I think what we realized, though, was with the introduction of VetConnect PLUS, it became so apparent that we had -- to the customer and to ourselves, and to our sales force, to everybody -- that it really is a common diagnostic offering supported by multiple modalities. That really tipped the scale to the benefits of this structure versus the benefits of the prior structure.

In addition, as we talked to our customers and we talked to our sales organization, and we considered the change, this was something that they were very positive on. In large part, it really came from the field. And so -- of course, you don't undertake a change like this without a lot of consideration and then a lot of planning. And so we have been in the planning stage on this for almost a year, and have been in very detailed implementation of it for the last six months.

It is like a product launch, if you will. And I would tell you, I am just extremely pleased by the role that Jay Mazelsky, our Executive Vice President, supported by Johnny Powers and our entire North American commercial organization, they have worked really hard to make this a success, because they all know that it is the right thing to do. So I hope that answers your question.

Yes, it does, and thanks. That's really all of my questions. And thanks, Merilee, for all of your help, and I wish you the best.

Thank you very much, Erin.

Jeff Frelick, Canaccord Genuity.

Great. Jon, just so I'm clear on the changes with the sales force. Just really curious on how you are going to measure and manage this -- is this really looking at each territory and what the growth is? Are you looking at, are the reps adding new customers? Just curious how that ties into the sales comp. And if you could share anything on the comp plan that would be helpful, as well. Thanks.

Yes, ultimately -- and that is a great question, Jeff, thank you for that.

The great thing about this new structure is that I think we will have real ownership by our sales professionals in their territory for the growth of IDEXX diagnostics. And that is going to help in, really, the three drivers of growth, which is adding modality -- having a customer add a modality that they did not have before. So moving to our reference lab, maybe they had it already in-house, but they did not have a reference lab. Or maybe they had a reference lab and they didn't have the in-house. That is a big driver of growth. Ensuring customer loyalty by supporting them; and then driving growth in utilization of their diagnostics from IDEXX by things like preventive care and other protocols that really help advance the standard of care that the hospital is practicing, and achieving their mission. So adding modalities, ensuring high loyalty, and growth utilization. This rep is going to be able to drive growth through all three of those.

Obviously, there are specific elements of that, and what is not going to change is that we fully expect -- in fact, we see opportunity that we did not -- we are not fully taking advantage of before, in that the majority of our customers, when you just take the in-house instruments and the reference labs -- it is pretty surprising that the majority of our customers use one but not both. You would think that it would be more difficult to get them to use the first than it would be to fill out the portfolio with the full IDEXX diagnostic advantage, and yet, that is in fact what we have done.

We have done, with our specialized sales force, the work of getting a lot of customers to use one of those two modalities -- and of course most of our customers use our rapid assays in some fashion. And now with this new structure, we have the opportunity to fill that out. And so that is going to, I think, be a significant long-term opportunity for growth, very aligned with our strategy of providing highly relevant medical information through our diagnostic modalities.

Great, thank you.

Ross Taylor, CL King.

You all have answered a lot already, but I will just list two or three very quick questions, if I could, and you'll answer as time permits.

But I wonder if you could review again some of the reasons that your expectations for hematology placements have come down over the course of this year? And closely related to that, I just wondered if you could comment on how ProCyte placements have been developing compared to your expectations? And the final question I had was VetConnect PLUS. Now that it has been out there for a few more months, and in more accounts, just whether you could give any incremental color as to how that might be having an impact on customer retention and maybe even new customer wins as well?

Good. Thank you. Those are great questions.

With regard to hematology -- I think one of the things that hematology does for us is, it helps us gain or grow an account that is using our in-house instrument modality. And one of the things that ProCyte has done for us is allow us to bring accounts for both hematology and chemistry, because they see the highly differentiated value of ProCyte, both medically and in terms of workflow. There is really just nothing like it.

But the issue with hematology, and indeed all instrument placements, is there is an upfront cost. And there is a lot more consumable volume that comes with a chemistry placement four or five times than there is a hematology placement; so we have rightly focused on the chemistry side. But we see hematology as an important supplementary element to the growth strategy. So I think it is reflective of that.

Merilee, do you have any more comments on hematology before I turn to the VetConnect PLUS question?

Yes, again, part of the bringing the growth down, Ross, is obviously a function of that the growth in the first quarter was off from what we had expected. So we had expected kind of a mid-single digit placement growth, and so with the number that we reported, that is a piece of it. We also see and project that we are going to have some very nice acceleration in growth internationally, and we think there's just a lot of opportunity there. But I think we just wanted to be a little bit more conservative about that growth prospect outside the US as well.

Okay.

And then to your question -- and again, thank you for the question on VetConnect PLUS. We were pleased to see continued very significant growth in the number of customers who have activated a VetConnect PLUS, up to 6,700 from 4,500 at our last call -- continuing at the same pace that it did in the first two quarters of its introduction.

But I think what is even really now more profound is that our customers, the key opinion leaders, our sales organization, our medical professional service veterinarians -- they're all -- the introduction of Pet Health Network Pro and the benefit of sharing medical information and diagnostic information with pet owners; the trend toward preventative care that has been a big theme of independent groups such as the American Animal Hospital Association, is that we are beginning to see the realization about how profound a change it is when you have access to a patient's diagnostic information in a value-added electronic way through VetConnect PLUS; and the ability to analyze, to share with the pet owner electronically and directly in the exam, and also through e-mail or other ways of electronically sharing. So much easier to do that.

And then, the insight about really what is this doing to profoundly change the standard of care that can be practiced in veterinary medicine. That is a much larger kind of thing, and that does not happen overnight. What we have seen is, over this quarter, for example, in particular, our sales organization really got how to have that conversation with customers; and how that helps the customers meet the needs they see in their practice to provide client value, and to continue to help their practice be relevant in this world that we live in, where you have online pharmacies and a lot of other things that are challenging the veterinary practice. And so that is a much larger trend that I think will -- like anything in veterinary medicine, it will take time to really penetrate the consciousness of practicing veterinarians around the country, and indeed around the world, because we would expect to continue to roll this out globally over the next 18 months or so. And so I feel very good about what we are seeing, about the penetration in the consciousness of that change.

But we are early days; we are very early days. If somebody asked me what inning -- since the baseball season already started, what inning are we in -- we are still in the first inning here, although we've changed the game. We were previously playing a different game. Now we are playing a game of value of diagnostic information as opposed to selling a box or a courier service. And so I think we have a long runway ahead of us, and we're early days.

But clearly it is impacting the ability to win a customer's -- a modality not previously been using IDEXX. And it is improving our retention for customers who are operationalizing VetConnect inside their practice and are seeing the benefits. And so we believe it will be very supportive of the three key elements of growth in our annuity business model, of additional modalities, retention, and growth in utilization.

Okay, that's terrific color. Thanks very much.

Okay, I think that is all the calls.

I want to thank everybody, and I also want to take this opportunity to give my deep appreciation for Merilee. Merilee has been at the Company for, I think it's -- I am probably going to get this off by a year, but 25 years. And she has been our Chief Financial Officer over a decade, and that is a long time for anyone in today's world.

And we have just had a tremendous period of growing the Company and bringing value to our customers, and bringing value to our shareholders in the process, over that period of time. And I'm deeply grateful for the partnership that we have had. And I wish her luck in her retirement, and we are confident that even though she has big shoes to fill, that we will be able to find somebody who will bring -- maybe not Merilee's unique set of skills, because really no one can replace Merilee -- but a new set of skills that will take us to the next phase of our growth.

So with that, thanks to Merilee, and thanks to our investors, and thanks to our organization for our accomplishments. We will close the call.

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