愛德士 (IDXX) 2014 Q1 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories first-quarter 2014 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Ed Garber, 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.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements, and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and, except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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 9:30 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'll be more than happy to take your additional questions.

I would now like to turn the conference over to Brian McKeon.

Good morning, and thanks, everyone, for joining us today in our call. I'm pleased to take you through our Q1 results and the strong momentum we're building in our Business. In today's review of our Q1 2014 results, I'll be referring to growth rates in the quarter. Unless otherwise noted, these growth rates refer to Q1-2014 performance compared to Q1-2013 performance.

In terms of key themes you should take way from today's review, we continue to accelerate our revenue growth, driven by global expansion of our CAG franchise. Organic revenue growth was 8% in Q1, at the high end of our expectations, driven by 10.4% growth in global CAG diagnostic recurring revenue, normalized for changes in distributor inventory levels.

Our focus on innovation, and clear benefits from our investments in our commercial capability globally, is driving very strong instrument placements. Worldwide catalyst and hematology placements increased 36% and 22%, respectively, year on year in Q1, and we sold over 1,200 SNAP Pros in the quarter, positioning us well for strong, continued CAG annuity growth.

Our results reflect solid growth across regions, as we continue to expand our international presence. Overall, our international revenues increased 13% in Q1, including a 1% benefit from acquisitions. Growth was driven by 13% organic gains in CAG recurring diagnostic revenues, and solid growth in our LPD business.

Finally, we're delivering solid profit results, reflected in our Q1 EPS growth of 10% to $0.89 per share. This performance is on track with our full-year goals, as we support investment towards our long-term growth potential.

Based on our solid start to the year, and the growth trends we've established in our recurring revenue streams, we're increasing our full-year outlook for organic revenue growth for 2014 to 8% to 9% versus our prior guidance of 7% to 8%. As a reminder, this is effectively an 8.5% to 9.5% organic growth rate when adjusted for estimated deferred revenue impacts associated with the Catalyst One launch. I'll walk you through our outlook in more detail later in the call.

Let me begin by breaking down our quarterly performance, starting with an overview of growth by region. We continue to post strong growth across our major regions supported by strong momentum in our CAG business. As noted, our international expansion continues on a strong track, reflecting a 13% revenue growth in Q1 to $153 million, or 42% of overall revenues.

This momentum was supported by strong growth in our CAG business across regions. We drove 14% organic growth in Europe CAG this quarter, supported by double-digit gains in recurring diagnostic revenues across all three modalities. We drove strong reference lab growth in Germany and other key markets served by our Leipzig facility, as well as in the UK. Favorable weather in these markets reinforced strong business execution.

We also benefited from excellent momentum we're building in our Nordic business through our [go-direct] strategy. Our Asia CAG revenues grew 28% organically in Q1, reflecting strong growth across the region. Instrument placements were up significantly across Europe and Asia compared to a softer start in Q1 of 2013.

In the US, we also posted solid gains in the quarter. Q1 revenues were $208 million, reflecting 6% organic growth. US results were driven by CAG diagnostic recurring revenue gains of 8%, normalized for distributor inventory changes. Note that Q1 revenues excluded $2 million of deferred revenues associated with the Catalyst One introductory offer.

This solid performance was achieved against a soft market backdrop, impacted by unfavorable weather conditions. These effects can be seen in results of the over 4,000 veterinary practices we track through our clinic-level data. For the first quarter in the US, patient visits were down 1.2% versus Q1 2013, and practice revenues were up 2.1%. This compares to the relatively steady growth of 2.1% in patient visits and 5.5% in practice revenue growth we saw for the full year in 2013.

Our analysis of regional data shows that practice-level growth was clearly impacted by unusually harsh Winter weather in the east coast, midwest, and southeast. Base on this regional data, we feel the Q1 practice-visit decline is transitory and doesn't reflect longer-term trends for growth in pet healthcare spending. We continue to plan for moderate overall market growth at the veterinary-practice level for the balance of this year.

Our solid global revenue performance was driven by 9% organic growth in our companion animal group. We're positioning ourselves for strong continued growth through excellent placement in instrument placements. Worldwide Catalyst placements grew 36% year over year, with double-digit growth in all major regions. While the high growth rate was helped in part by a relatively easier comparison to the prior-year Q1, we're off to a very strong start with the Catalyst One introductory offer placements in the US, and we continue to drive strong momentum across our chemistry platform in international.

We achieved these strong results while also maintaining a very high quality of placements on a global basis, with over 50% going to customers new to IDEXX. As expected, the improved economics and footprint of the Catalyst One is broadening access to Catalyst technology, as evidenced by our strong penetration in greenfield and competitive accounts, as well as accounts upgrading from VetTest. Given the substantial uplift we've seen in diagnostic testing after a catalyst is placed, we believe this will support accelerated recurring IDEXX consumable growth.

Worldwide hematology placements also grew robustly in Q1. Overall placements were up 22% year on year, with strong growth across all regions. We continue to be pleased with our success in placing ProCyte Dx into accounts new to IDEXX, and saw this metric increase to 50% in Q1, our best performance on record. Consistent with our expectations, we're seeing some shift in hematology placements towards LaserCyte Dx, especially when we're selling a full instrument suite with Catalyst One. This is logical, as the price point of LaserCyte Dx is an excellent match to Catalyst One, while still offering a superior menu compared to any competitive hematology analyzer.

Strong placements drove [16%] organic growth in global instrument revenue in the quarter to nearly $19 million. Instrument revenues include the benefits from the sale of over 1,200 SNAP Pro units, which Jon will speak to more in his comments.

As noted, we estimated that deferred revenue associated with our Catalyst One introductory offer was about $2 million in the quarter. As expected, our instrument revenue growth is below our placement growth, reflecting the relatively lower price point of Catalyst One, as well as mix impacts associated with higher international sales of lower-cost analyzers. These effects have limited economic impact, as margins are similar across our product line, and instrument margin is a less significant driver of our financial performance.

The key driver of our financial performance, CAG recurring diagnostic revenues, or revenues associated with instrument consumables and service, rapid assay test kits, and lab services, were $259 million in the first quarter, representing about 72% of overall revenues. This highly durable annuity grew 10.4% organically year on year in Q1, normalized for changes in distributor inventory levels.

As noted, these results were supported by strong gains across regions, with overall growth trending at the high end of our full-year goal of 9% to 11%. Changes in distributor inventories dampened reported growth in recurring CAG diagnostic revenues by about 2% in the quarter, as US distributor inventories finished at 3.4 weeks at the end of Q1, down from over 4 weeks at year end, a decline that didn't occur in Q1 of 2013.

[By modality], instrument consumable revenues of $84 million in Q1 grew organically 12% versus the prior-year period, or 15% when normalized for changes in distributor inventory levels. Growth continues to be driven by a number of factors, including our steadily growing install base that comes from customers new to IDEXX; increased testing, as current IDEXX customers upgrade their in-house labs with Catalyst and ProCyte; and enhanced loyalty from our customer base. Note that Catalyst customers now account for nearly 90% of our US chemistry consumable revenue, exclusive of corporate accounts, with the remaining 10% coming from VetTest customers.

Revenues for our rapid assay kit component of the CAG recurring diagnostic revenue, which excludes SNAP Pro device revenue, were $43 million in Q1. These revenues increased 3%, normalized for changes in distributor inventory levels, in part reflecting pressure from US weather impact. We expect benefits from the strong launch of SNAP Pro will support solid continued growth in the rapid assay modality.

Our reference lab and consulting services modality grew 10% organically to $118 million in Q1. We saw strong growth in all of our regions around the world. In North America, the diagnostic sales force model and utilization of VetConnect PLUS has helped to generate an increase in the level of diagnostics being run by our customers, while also improving on our already strong customer retention rates. As noted, our international regions also delivered strong volume growth aided by well-executed initiatives, such as our new Leipzig IDEXX direct reference lab and our go-direct strategy in the Nordics.

Our practice management and digital imaging systems business, with revenues at $24 million in Q1, grew organically by 13%. We benefited from our growing base of Pet Health Network Pro customers, larger than typical practice management installations, and growth in the service components of both the practice management and digital imaging businesses, tied to our loyal install base.

Our livestock, poultry, and dairy business also grew solidly in Q1, up 5% organically. Overall revenues adjusted for foreign exchange grew 10% to $31 million, reflecting benefits from our acquisition of our Brazil distributor last Fall. Solid organic growth was supported by continued expansion of our dairy business in China, and progress in expanding our LPD business in eastern Europe.

Results were better than expected in the quarter due to a relatively slower-than-expected ramp down in bovine programs in western Europe. As noted in our last call, changes in disease eradication programs could add to volatility in this business. We expect these impacts will contribute to moderate organic revenue declines in our LPD business for the balance of the year.

Our water business grew 4% in Q1 to $21 million, including benefits from the acquisition of our South African distributor. Organic growth was 2%, reflecting gains in our Americas and Asia-Pacific regions, offset by some tougher year-on-year comparisons in Europe in Q1. Business growth continues to be driven by our core Colilert franchise, as we build an increasing contribution from newer products. We expect benefits from our new products will keep us on track for our mid-single-digit growth goal this year.

Solid revenue gains across our Business helped to drive continued strong profit and cash flow performance. Gross profit in Q1 increased 10% year on year, supported by a 70-basis-point year-over-year improvement in gross margin to 56%. Gross margin benefited from product cost efficiencies, moderate price gains, and a reduction in royalty expense for one of our products that also included a non-recurring benefit of about $1 million. This was offset a bit by some unfavorable product mix from higher proportional instrument sales.

Operating expenses were 37% of revenue in Q1, down slightly from last year as a percentage of revenue. As mentioned upfront, Q1 of 2013 included a $4-million charge to G&A related to the bankruptcy of a vendor. Adjusting for that, operating expense as a percent of revenue increased 90 basis points. This increase is primarily driven by the investments we're making worldwide in sales and marketing that's helping to drive our accelerated revenue growth.

Strong revenue growth supported margins that were in line with expectations, leading to delivery of fully diluted EPS at $0.89 per share. EPS growth was 10%, and currency changes had no material impact. Our effective tax rate, at 31.2%, was as expected, and does not include any benefit for the R&D tax credit for 2014, as it has expired and hasn't been renewed.

As a reminder in regards to the R&D tax credit, Q1 of last year included both an adjustment for all of 2012, plus the normal credit for the 2013 quarter. Adjusting Q1 of 2013 to exclude the R&D tax credit recorded in the quarter, and a reserve associated with the vendor bankruptcy, EPS grew 12%.

Free cash flow was $29 million, or 62% of net income in Q1. Free cash flow for the quarter was as expected, reflecting the typical timing that we see in Q1 related to things like bonus payments, and accounts receivable and inventory increases in advance of the heartworm season. We remain on track towards our full-year outlook for free cash flow in the range of 95% to 100% of net income.

Our strong cash flow enabled continued support of share repurchases in Q1. We repurchased 576,000 shares for about $70 million during the quarter.

Turning to our outlook: Given our strong start to the year, we're increasing our full-year revenue guidance. We now expect full-year 2014 revenues to be in the range of $1.495 billion to $1.51 billion. This reflects an expectation for full-year organic growth in the range of 8% to 9%. The increase in our outlook reflects current trends towards the higher end of our full-year goals of 9% to 11% growth in CAG recurring diagnostic revenues, as well as upsides from stronger-than-expected LPD performance in Q1.

Our outlook continues to assume an expected $5 million to $10 million of deferred revenue associated with the Catalyst One introductory offer. Adjusting for the impact of this revenue deferral, organic growth would be about 8.5% to 9.5% in 2014.

We remain on track towards delivery of our full-year goal of $3.76 to $3.86 EPS, or adjusted growth of 11% to 14%. This reflects expectations for relatively consistent operating margins for the full year compared to 2013. We intend to leverage upsides from our improved revenue outlook to support increased investment towards key, long-term growth initiatives, which Jon will speak to in his comments.

For Q2, we'd highlight that we expect organic growth consistent with our full-year outlook of 8% to 9%. We also expect operating margins will be about 100 basis points below prior-year levels in Q2, reflecting increased commercial investments, and impacts from targeted organizational changes in our European organization, aligned with our growth strategy.

With that, I'll turn it over to Jon.

Okay. Thank you, Brian. As Brian elucidated, we had strong performance in the quarter in revenues, earnings, and the key metrics such as instrument placements and the percent that go to accounts that are either competitive or new to IDEXX, and thus expand our install base. All these indicate, I think, the health of the Business and the sustainability of our model for growing our markets. This growth and success were in virtually all regions of the world.

The results of our companion animal group in North America reflected the success of our sales transformation completed in Q3 of last year. This is the second full quarter of strong performance since having come through the learning period, validating the new sales model. The key metrics are consistent with Q4 2013 for our veterinary diagnostic consultants, a 98% territory occupancy rate, and a 60% increase in the number of in-person customer visits over Q1 of 2013, the last quarter we were still fully in the old sales model. Customer acquisition, retention, and utilization were also strong.

Our new compensation plan implemented this Q1 that, in part, reward sales professionals for growing recurring diagnostic revenue in their territory, as well as instrument placements, was also a great success. We believe we have now created a strong foundation for our North American CAG sales and marketing organizations that we can readily scale as our revenues grow.

Internationally, we also had strong performance in all of our major country markets. In many markets where we have a direct sales organization, we were able to make investments that generate sustained revenue growth through instrument placements, new lab business, and growth in veterinary-practice uses of our diagnostics.

For illustration purposes, let me give you some Q1 year-over-year organic growth of our CAG business in some selected country markets. We had over 30% organic growth in the Nordics, Austria, South Africa, Australia and China. We had over 20% in Japan; and in Germany, Holland and Switzerland, it was 15% to 20% organic growth. In fact, CAG international organic growth was 15% overall.

These growth numbers are the result of a strategy of augmenting international and in-country leadership, supported by augmented infrastructure, and of course, the global rollout of our innovative diagnostic offerings. This growth also shows that pet owners everywhere have a strong bond with their pets, and are willing consumers of veterinary healthcare when they understand the benefit to their beloved companions.

Speaking advances in our diagnostic offering, our announcement this past January of our newest in-house chemistry platform, Catalyst One, was a significant success, as measured by the success of our introductory offer for this instrument, where customers buy Catalyst One and are loaned a Catalyst Dx until that unit is available. In this way, customers immediately see the benefits of the pickup in testing that Catalyst enables, and of course, add to our instrument consumable revenue growth.

The Catalyst One price point fits practices that run as few as one sample a day, which is pretty low, considering a single-doc practice may be seeing 13 to 15 patients a day. Really, it should be more than one sample, but that's where the industry is. We're seeing that Catalyst One is the right instrument with the right footprint and the right price point for the vast majority of practices that don't already enjoy the benefit of Catalyst technology with a Catalyst Dx. ¶ We continue to see strong growth in in-house testing when customers upgrade to Catalyst in our hematology offering for their in-house testing. This growth in utilization does not generally come at the expense of our reference lab testing, showing that testing begets testing. Our in-house instruments and their unique ability to allow customers to generate results easily during the client visit, something we call real-time care, expands the market for diagnostic testing.

We're also very pleased with the launch of SNAP Pro mobile device in March. With sales of over 1,200 units, we were able to validate the instrument performs extremely well in the practice environment, and provides tremendous value to our customers of rapid assay test kits by significantly improving workflow and staff efficiency, while at the same time automatically, instantly adding the result to the patient's diagnostic history in VetConnect PLUS. We expect to build upon this install base of customers throughout the year from our very large base of North American customers who regularly use our SNAP rapid assay test kits. We expect that the value that SNAP Pro provides our customers of the SNAP family of test kits will reinforce their loyalty to IDEXX, the in-house test kit modality, and indeed all of IDEXX's diagnostics.

Turning to our strategy of advancing diagnostic insight and value through information technology, we continue to redefine diagnostics through our cloud-based VetConnect PLUS, which changes the focus as the patients' results from, what does this one sample tell us, to how does the most recent result fit into the patients' evolution and metrics over time; thus providing greater medical insight. We continue to grow the number of customer activation, which now stands at over 13,300, and have launched the service in Australia in late March, adding to the US, Canada and the UK launches previously.

In addition, we continue to add functionality, including a mobile app version for iPhones and iPads that notifies customers when new results are ready and shows these results. As I mentioned, the customers who adopt VetConnect PLUS increase their loyalty to IDEXX diagnostics because of the unique value they can only receive when they use our ecosystem, including the results from our in-house lab, SNAP Pro, and our reference lab services.

As a result of the combination of our new customer-centric sales model in North America, and the VetConnect PLUS adoption, we continue to see steadily increasing customer loyalty levels across our three diagnostic modalities, even as they today stand at what I would consider world-class levels of 96% to almost 99%, depending on the modality. Our increase in organic revenue growth guidance today for 2014 of 8% to 9% that Brian mentioned, reflects our confidence in the success we are seeing in our global markets, and the sustained growth of the enduring recurring revenue of our three diagnostic modalities: reference labs, in-house instrument consumables, and rapid assay test kits supported now with the launch of SNAP Pro.

The advances of our diagnostic technology offering over the past few years, which we have discussed regularly and in detail in these calls, provides for an offering that is quite unique and differentiated on key dimensions important to the veterinarian and their staff. Notably, our diagnostic ecosystem works in a seamless way to help veterinarians advance the standard of medical care, and strengthen the bonds they have with pet owners. This accelerates the growth of their business, and thus, in turn, our recurring revenue.

With this success, we have decided to invest in incremental margin that comes from this revenue acceleration in 2014 in further resources that will both assure we achieve revenue in 2014, and propel IDEXX growth in years to come. Specifically, we expect to increase the number of field sales service marketing and customer education resources in the North American market, scaling our now proven sales model. Scaling is a far easier task than the one we undertook last year to transform that sales model.

Second, we expect to do the same in key international markets where we believe we can augment demand for our diagnostic offerings. Third, we'll be adding international, regional, and country leadership to support markets where we are direct, including those markets where we've recently chosen to go direct.

Fourth, we'll be adding international infrastructure to support long-term growth in these markets. Note that as excited as we are today about the potential for growth in North America, we believe the growth opportunity internationally is even bigger. Finally, we'll be augmenting our investment in cloud-based IT solutions, including the continued global rollout of VetConnect PLUS and the expansion of its capability along several dimensions.

In conclusion, our goal over time is to build the momentum in our Business to sustain double-digit organic revenue growth. We very much believe this is achievable, given the strong bonds between pets and owners globally, and the medical value of the diagnostic category, not to mention the state of our innovative diagnostic and IT ecosystem. Yet we have to apply augmented commercial resources around the world to bring this to our customers, and this goal to fruition. We think this investment will provide an outstanding return, and create significant incremental shareholder value.

With those comments, Cynthia, I will turn the call over to Q&A.

(Operator Instructions)

Ryan Daniels, William Blair.

Good morning; thanks for taking my questions.

Jon, a first one for you on the sales force, given the transformation and then the changing compensation. I'm curious if you can offer any color on perhaps any surprises you've seen. Meaning: Are you seeing customers show a proclivity to be more receptive to growth in one modality versus another? Or are you seeing cross-selling opportunities to gain share easier in the point of care versus reference lab? Just anything there that's noteworthy?

Sure. Of course, we do believe we have a significant cross-selling opportunity. I'll remind investors that if you look at our customers for our in-house chemistry and our customers for the reference lab, there's only actually 40% overlap. So, there's very, very significant cross-selling opportunity. We felt that was one of the key reasons for the transformation and that single point of contact with customers. Of course, we're able to better achieve that with a 60% growth in the number of visits.

I would say the one thing that is continually reinforced to us is the value of real-time care. As you know, Ryan, our offering, in its ability to generate results in 8 minutes easily, full comprehensive chemistry and hematology profile -- T4, of course, will be added with Catalyst One and Catalyst Dx in coming quarters -- that customers are now more and more realizing that they get greater compliance when they have the results in front of them and they're able to speak face-to-face in the moment, in context with the pet owner. And greater compliance not only to -- whatever the treatment plan may be, but it's also greater compliance with any suggested follow-on testing, which may go to the reference lab, which is why we say testing begets testing.

We believe, and I think if you look at the general trends, we're seeing a growth in the in-house modality, which is growing overall a diagnostics modality that we're driving because of real-time care. And more and more customers are -- when I speak to customers at conferences, they readily say: Gee, it's just really working for us. Our reps are very, very good at bringing that insight to customers, now that they're really representing the customer and all of our diagnostic modalities.

Okay, very helpful color.

As my follow up, Jon, I know you choose your words carefully, and I think a minute ago you just mentioned an ability to sustain double-digit organic growth. As you think about your growth blueprint, I know you're not far from that in your guidance this year, but is that a few years out? Is it a three- to five-year goal? Just any more color, as that's a pretty important change in tone.

I don't think we're putting a time frame on that goal. Our organic revenue growth goal this year is 8% to 9%. Obviously, we're higher organic growth in the companion animal business, which I believe is on the order of 85% of our revenues. Our overall organic growth for the Company is brought down a little bit by the other 15% of the revenues that are just generally a little bit lower organic growth.

Of course, we've got the LPD, which actually had a good quarter, but generally flat to slightly down as we work through some of these eradication programs. But we are seeing the trajectory to acceleration, and our goal is to accelerate that organic growth to the double-digit level. And at 8% to 9%, we're not that far away from it.

Sure. Okay, thanks. Nice start to the year.

Nicholas Jansen, Raymond James.

Thinking about the international expansion that you're announcing right now, what changed relative to your view maybe 6 months ago, 12 months ago, surrounding your expectations to make this bigger investment here? I was just wondering what happened this quarter that made you comfortable enough to make the switch?

I think a number of things that came together. We put in some excellent leadership with Michael Williams. We've got really strong country management leadership. That, combined with the fact that our modalities and our offerings are improving.

As Brian mentioned, the IDEXX Direct with the Leipzig lab is really starting to penetrate the continental European market. Obviously, we have the prospects of Catalyst One. If we think Catalyst One is a successful product in North America, our European guys say: Well, we thought you developed Catalyst One for us because it's so perfect for our markets. And of course, that will be a 2015 opportunity as we roll that out.

Of course, we're rolling out the diagnostic IT ecosystem with VetConnect PLUS. We just see the confluence of both -- and the markets are responding. I wouldn't say Europe is doing particularly well economy-wise, although it did have a better weather quarter than the US did. But look at the growth we're achieving. But not only in Europe -- look at the growth we're achieving in Asia. We just, of course, went direct in Brazil with the acquisition of one of our distributors, Madasa.

We just see the opportunity there. We're seeing it come to fruition. We have confidence. We have the leadership. We have the portfolio. And so, we think it's time to accelerate that investment.

Nick, I'd just add: When you add good leadership, it tends to identify more opportunities, and the momentum builds on itself. I think it's reinforcing what a great Business we have globally. We're seeing more opportunity, and we want to invest behind that because we think it is going to add to our accelerated growth trend, and will be a great return for us.

Great. Maybe on the mobile Pro -- the 1,200 sign-ups that you had so far in the first quarter -- can you give a flavor in terms of -- are those existing customers on SNAP? Maybe just walk me through some of the characteristics of the customers you've added thus far?

Yes, it's hard not to be existing customers with SNAP because the vast majority of the North American veterinary practices are customers of our SNAP line. It is fairly ubiquitous. I tell you what we're seeing is: They really appreciate that basically load and walk away. I think SNAP -- the workflow is just very, very beneficial for practices that are busy, and they need their techs every second. It's like the same kind of benefit and work flows we brought with the in-house instruments on Catalyst and LaserCyte and ProCyte on the hematology side.

Now, it is a big improvement in workflow for the test kits modality in general. In fact, what we're seeing is -- the average practice is buying two, not just one, but two because they need them for that kind of volume. Obviously, that's a mix: Some practices are buying more, and other practices are buying one.

But we are just seeing really, really positive customer response. Obviously, we're very early, but it is nice to see. That's 1,200 as of end of March. The feedback from the customers has just been universally very, very excited.

Great, guys, nice quarter.

Thank you.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions.

First off, you've mentioned weather a couple times, and also in the US it seems like seasonality -- we're getting off to a later flea and tick, and heartworm, season. What sort of impact do you think that had on testing?

I think you mentioned patient visits were off 1.2% in Q1. Have you seen any improvement since then?

Yes, thank you for the question. Just give you a little context: That's a pretty big drop. As we look at what patient visits will do quarter over quarter, over the last five or six years, even during the great recession, 1.2% -- that decline -- this is a fairly robust market. So, we've seen that in one or two other quarters in the last five or six years. And clearly it was regional as we look at the regional thing with 4,000 practices, you can get some fairly good granularity on the regionality of that. That just gives us some indication.

I don't think, in diagnostic testing, that in general you make it up. Those visits are lost. I don't know about other categories. I can only speak about our categories.

And so, we expect there to be good demand. We think that decline is transitory. The 2% we saw in patient visits and the 5.5% we saw in revenue growth at the clinic level for pet-care services with our base of 4,000 customers we saw in 2013, we think is more the sustainable rate. I don't think we'll make up any of the -- beyond that -- we'll make up any of the loss on the diagnostic category in the second quarter.

Got it. With the informatics you have, did you notice any delay or drop in diagnostic testing, especially in the south, since I think heartworm season got off to a late start?

Brian mentioned that rapid assay was a little bit down. Again, we think that's a weather, transitory issue. A chunk of our rapid assay testing is parasitic disease, which includes heartworm testing. The purpose there is: Obviously, you want to test before you put them on a preventative; a co-indicator, if you will. I guess that's the only thing I would say on that.

Hard to parse, but I'd say the bigger impact, as Jon highlighted, was a consistent weather impact in the areas that you would expect to see it, just given the unusual conditions this Winter. I think this was definitely more of a transitory thing, and we would anticipate getting back to the solid growth rates we saw last year.

I just want to remind people: We're really talking about the transitory impact on the patient-visit data that we are reporting. Obviously, we are very, very pleased with our performance. I think it was a very strong performance for the quarter when you factor everything in, and I'm not taking any weather component there.

Got it. My second question is on Catalyst One. In your prepared comments, you mentioned it's the right product for customers who don't use Catalyst now. Could you give us an idea of how big that addressable market is, and what sort of penetration we should expect over time?

There are more customers in the US who don't use Catalyst today than use it, by probably a factor of 50%. It's a pretty big addressable market. And that is the US or North American number, and that doesn't even include international.

Obviously, we have very, very significant Catalyst Dx placement performance internationally. We don't have an introductory offer for Catalyst One internationally. We haven't really brought Catalyst One outside North America yet. That addressable market is even bigger -- far bigger. Generally speaking, practices are smaller outside North America than they are in North America.

Right.

Obviously, it depends a lot by country, but generally speaking, you don't have these big practices. (multiple speakers)

I guess I was trying to figure out: How quickly should we see that ramp in -- it's obviously a gigantic market, both in the US and outside.

We've given an outlook for the 10% to 15% growth this year in Catalyst placements and hematology placements. We're obviously off to a solid start on that. So, this is something that will occur over time, but that's the pace of ramp that we're projecting. We feel good about how we're executing on that opportunity.

Okay. Thanks.

Erin Wilson, Bank of America Merrill Lynch.

Great, thanks for taking my questions.

So, [staying] with the global initiatives here, where is the focus specifically internationally by geography? Will you be adding an international capacity on the lab side of the Business, like a new lab hub similar to what you've done in Germany, to better support that global demand? Or will you be entering entirely new markets here?

Thank you, Erin, for that question. The neat thing is that we really already have a base in almost every market. I would say the one market that we really didn't feel like we had a strong base in was Brazil. Now, with the acquisition of a wonderful distribution organization -- it's very IDEXX-aligned and very consistent with our culture of entrepreneurialism -- we have a strong base in Brazil.

We've been in Europe since the early 1990s. We have been in China, for example, since 2002. It is really broad based. Any market where people have pets, they generally -- if they have pets, they value their pets, and they value them more and more. Whether it's Europe, including eastern Europe, or, for example, South Africa -- we've now gone direct in South Africa.

Asia: We are doing very well. I think I may have mentioned on the call: Japan is a very strong market for us. The combination of Catalyst and ProCyte is -- Japan is an in-house market. The large majority of the testing is done in-house. They like to run in-house. We've got a very, very competitive portfolio there, and our Japan organization really kicked into gear starting in Q4 and continued in Q1. It's really across the board.

With regard to labs, we continue to look carefully about how to build out and optimize the lab infrastructure to provide world-class service levels. Just to give a little context here: In the US, for the majority of the market, we take twice-a-day service level for granted, but that's an innovation outside the US. To be able to pick up results in the evening, and provide results the next morning, wasn't something that was really being done in continental Europe until we launched the Leipzig lab with its great logistic network. That was a totally innovative thing.

We think that combination of the Leipzig lab and our core lab in Ludwigsburg, Germany, really makes a very powerful platform for European growth -- continental European growth. And of course, we have a strong lab organization in the UK.

Okay. Great. That's helpful.

Broadly speaking, how would you characterize the profitability of the overseas business, relative to the North American business in companion animal?

It's the same fundamental economics, in terms of the contribution that we get from recurring CAG diagnostics across modalities. We're at a relatively earlier stage in investment in the infrastructure, given the size of some of the businesses that we've built to date. The US is obviously further along, and so I think it is relatively lower, but it is not driven by fundamentally different economic drivers. It's more our choice in growth markets to be investing behind the infrastructure to build the Business for the long term. As Jon said, I think we see opportunities to do that -- invest behind that broadly, and over time, expect it will yield similar type returns to what we see in the US.

I would say: Take the instrument and consumable business. The economics are very attractive around the world. They can vary a little bit by country, but overall they're very, very attractive.

Reference labs, where we have a mature organization, like we have in North America, are very attractive. Obviously, they're places where we're just getting -- when we invest in a new lab, or we're starting up a lab organization, just as when we start a lab anywhere, there's an investment period. I would reinforce what Brian is saying: The core economics are quite attractive, and equally attractive around the world.

Okay, great. Thanks so much.

Jon Block, Stifel.

This is actually Ethan Roth on for Jon Block. Thanks for taking my questions.

Just the first follow-up on Catalyst One -- I know it's still early in the launch, but I was wondering if you could give any commentary on Catalyst One's contribution to the 36% growth in Catalyst placements? Also, are you seeing these Catalyst One placement -- I know it's not being placed yet, but are you seeing the customer ordering Catalyst One more on new accounts, or is it upgrades from VetTest? Thanks.

Yes, I would say a large majority of what we sold in North America were Catalyst Ones. And Catalyst One introductory offer, where we're placing Catalyst Dx, and we have the deferred revenue component that Brian mentioned of $2 million.

Our percent placement to what I want to call accounts that grow our installed base -- that would be competitive displacements or greenfield accounts, or just generally accounts that are new to IDEXX -- Brian mentioned the greater-than-50% metric. In North America, it was even higher than that. I think it was 58% or 59%. That's actually a high point for us, in terms of competitive placements.

Again, one of the metrics that I mentioned I think really speaks to the core health of the Business and the opportunity for growth that we have: Obviously, we still have VetTest. We don't have -- as many VetTests as we used to have, only 10% -- a little bit more than 10% of our consumables, excluding corporate accounts, and the units are coming from VetTest accounts.

One of the things that we see when we upgrade a VetTest is they grow. They grow their in-house testing by 45%. We don't fully realize that 45% because we give them some rebates to expand the profile to include hematology and electrolytes. We only achieve 25% -- still pretty good.

They're seeing this big uptick in growth, and that helps their practice. This is a growth agenda. They see that uptick whether they're upgrading from a VetTest or they're upgrading from a competitive analyzer because of the unique nature that our in-house lab -- this ability to turn results around easily and quickly, 8 minutes within the 20- or 30-minute exam. They see that nice uptick.

We really are, by placing our analyzers, we're expanding the market. We get growth on both types of placements. Obviously, when it's a customer new to IDEXX, we get 100% of that is added to our consumable growth.

Okay, great. A follow-up question on the reference lab: You put up a really strong number, even with some challenging weather conditions. Could you share any details on how the Business in North America performed relative to international?

We had, as I mentioned, strong growth across regions. Europe, interesting, we had questions on the weather dynamic, and actually we had good weather in Europe. I think that helped a bit. But it was relatively stronger growth international, but quite solid growth in the US as well. The bulk of that growth was driven by volume gains. We feel very good about the health of the Business across regions, and particularly with some of the headwinds we saw in the US.

Okay. One last housekeeping question here: On the full-year EPS guidance, how are you thinking about the FX impact? It seems as if you were expecting maybe a $0.06 drag the last time you reported. Now, is it just a $0.03 drag from FX?

We changed the methodology there. I'm glad you pointed that out. We, in the past, had adjusted how we normalized for FX was -- we had adjusted the current year to prior-year rates. We've got a new methodology that leaves our current year numbers as is, and adjusts the prior year, so you see a little change in the table.

There really isn't much of a change in terms of the impact of FX. If you look at the normalized EPS growth rate, it's very similar [to 2011 and 2014] -- or it's the same, excuse me. That's really just the change you see in the $0.06 to the $0.03. It's just related to that methodology change. There was some slight improvement in FX, but it wasn't a material impact.

Okay, great. Thanks.

You're welcome.

(Operator Instructions)

Ross Taylor, CL King.

I had a question related to your comment about potentially getting to double-digit organic growth. If you are able to accelerate to that pace, how much of that would be dependent on increasing your installed base of customers versus just higher utilization of your existing customer base?

Both, is the answer; and the third is greater retention. With some modest price realizations -- as Brian said, it is not a big factor. It's a small factor. But it's mostly volume. That's mostly volume, both on in-house. As Brian said, the bulk of our growth that we're exhibiting in the first quarter is volume. We think volume is a very healthy -- we think when we see revenue growth that's driven by volume growth of testing, that's a very healthy dynamic.

But it's going to be some of both. If you look at, as I mentioned, our new comp plan, which we rolled out in Q1 -- great success with the North American Veterinary Diagnostic Consultants. We are incentivizing them to grow recurring diagnostic revenue. Guess what? There are lots of ways to grow it. They were quite successful in doing it.

There's just a lot there in that opportunity that we see is on tap. And that's going to be utilization. It's going to be new customer acquisition. It's going to be customer retention.

I would highlight: We talk about overall growth. But obviously, the key driver for our Business is this recurring CAG diagnostic annuity, which grew 10% in the quarter. And our outlook's 9% to 11% for the year.

What percentage of our total revenue is that?

That is 70% of our total revenues. This is a 72% in Q1, and that's -- from what we're trying to drive as a business model at the end of the day, that's what's going to drive cash flow and our success economically. We're feeling very good about the progress we're making accelerating growth in that revenue stream.

Okay, good. Thanks.

Just one final question, and maybe I missed this in some of your prepared remarks, but I guess revenues were a little better than you expected in the first quarter. Can you give any comment as to whether there were certain regions or product areas that really outperformed versus your expectations, or whether it was more just across the board?

I would say two themes to highlight. One is just strong execution, and very pleased with how the Company executed in Q1; a great start to the year. LPD was better than we expected in Q1.

We expected a ramp down in some of the bovine testing programs in Europe. We do expect that to happen, and we expect pressure the balance of the year on that, but it was delayed a bit in Q1. I'd highlight at that as a factor on the margin.

The only one on the margin is, as Brian mentioned briefly, while we had unfavorable weather in the US, we had favorable revenue in Europe, and that probably added a little bit to the European performance, although the execution fundamentally was very, very strong, underlying that. It just really made for a great European quarter when you put the two together. And by the way, I don't think the favorable weather in -- Europe, unfortunately is not as big as the US. But probably -- we're really getting down to fine points here, to answer your question.

Okay. All right, I appreciate it. Thank you.

Jeff Frelick, Canaccord Genuity.

Thanks, good morning. This is Mark in for Jeff.

Wanted to just maybe ask: Jon, if you could maybe add some color on the increase in the field sales organization outside of North America? Can you walk us through, or would you be able to quantify the number of direct reps you're targeting for 2014, whether it is by region or even by continent?

I'm not really in the position to do that. It's really very country-specific, and there are a lot of different countries. One interesting thing about the companion animal business is: Each country's a little different. The core economics are [interesting]. The opportunity's the same, but the way we execute in each country is a little bit different.

Part of it is because of the way veterinary medicine is taught. It's different by country, so we really take a country-specific approach. I think that's one of the strengths of our international organization is we have strong country management -- strong entrepreneurial country management. They understand and take advantage of the market opportunity in front of them. They're able to adapt these core strategies to the markets.

In general, as we've mentioned, we've gone direct in the Nordics. We've gone direct in South Africa. We've gone direct in Brazil, with an acquisition. Other markets -- some markets we've been direct for 20 years, and other markets we have very strong distribution that works well for us. It's very specific, so it's hard to give numbers there. Thanks for the question.

Great, thanks.

As a follow-up, obviously weather was an impact in Q1. Could you maybe discuss what your expectations are for vet growth, both at the practice volume and practice revenue bucket?

For the balance of year, we really expect the same that we saw for the full year of 2013, which was 2%, roughly, practice visit growth, and 5.5%, I think, in terms of revenue for the balance of the year.

Great. Thank you very much.

That's a US number. Obviously, outside the US, we don't have the same kind of metrics, but generally they're very good growth markets.

Thank you. We have no further questions at this time. With that, we'll go to Mr. Ayers for closing comments.

I want to thank everybody for joining the call. I also really want to thank all the employees of IDEXX around the world for just a great quarter. I think we're doing great things to bring support and technology to our customers. In the companion animal business, we're helping strengthen the bonds that matter, including the pet-human bond, and the bond between the pet owners and the practice.

We're bringing great things to the world in terms of our water and our livestock, poultry, dairy business, and just really phenomenal success. I really want to take this opportunity to thank all of our employees.

And we look forward to continuing to update investors with our progress throughout the year in our future calls. That concludes our call.

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