愛德士 (IDXX) 2014 Q2 法說會逐字稿

Good morning everyone, and welcome to the IDEXX Laboratories' second-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 statement 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 statement 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.

(Operator Instructions)

I would now like to turn the call over to Jon Ayers.

Okay. Thank you, Bonnie. Welcome to our second-quarter earnings call. As you can see from the press release, we reported a very strong quarter, driven by our Companion Animal businesses globally with continuing double-digit recurring diagnostic revenue growth and a particular strong quarter in instrument placements, which bodes well for the future of recurring diagnostic revenues. Other segments of our business also did quite well in growth, including our Livestock, Poultry, and Dairy business and the Water business.

Our strategy investing in innovative products, coupled with investments in our go-to-market organization worldwide, is working. In that context, today we are announcing exciting plans to take another big step in our commercial capability by moving from a hybrid to an all-direct product distribution in the US for our Companion Animal business in 2015.

We have much to cover on the call today, so the overview of the structure of the call is as follows. Brian McKeon, our CFO, will start with a brief review of quarter's results. I will then talk about the move to a fully direct strategy in the US. Brian will then review the financial benefits and one-time impacts associated with the change, and conclude with opening remarks with the review of our financial outlook in business context. Then we will open the call your questions. So with that info, I will turn it over to Brian.

Thanks Jon, and good morning everyone. As Jon noted, I will be walking through a highlights our second quarter performance, and will come back and discuss our updated 2014 guidance and our preliminary 2015 outlook later in the call. In reviewing our quarterly results, please note that growth rates refer to Q2 2014 performance compared to Q2 2013 performance, unless otherwise noted. Also, when we refer to normalized organic growth in addition to adjusting for exchange and acquisitions, we've adjusted for changes in distributor inventory levels.

In terms of highlights for the quarter, Q2 was another strong quarter for revenue growth, driven by global momentum in CAG, recurring diagnostic revenues, and better-than-expected performance in LPD. Total Company organic growth of 9% was driven by normalized CAG Diagnostics recurring revenue growth of 12%, with strong gains across regions.

We also delivered solid EPS results while strengthening our cash flows and capital structure. Operating margins were as expected, which supported delivery of $1.10 in EPS in Q2, an 11% year-on-year increase.

We continue to drive very strong cash flow as a business, and took advantage of favorable market conditions to advance financings that will term out $200 million of our debt structure at very attractive interest rates. We're actually treating very well against our growth strategy, which has raised our confidence in our financial outlook, which we will discuss in more detail later in the call.

Let's go through a breakdown of our quarterly performance, starting with a brief overview of our regional performance. We continue to drive strong growth across regions supported by strong momentum in our CAG business. We had an excellent quarter in the US. Revenues were $225 million with total normalized organic growth of 11%, reflecting solid gains across business segments, including 12% growth in CAG recurring diagnostic revenues.

Underlying demand in the US improved from the tough weather impacts we saw in Q1. Our analysis of US clinic-level data for practices that we track showed that patient visits were up 0.6% and practice revenue grew 4.3% in Q2.

Our international business also posted another excellent quarter. International revenues increased 12% to $165 million, or 42% of total revenues, reflecting 9% organic growth. International CAG recurring diagnostic revenues increased 11% normalized, supported by strong growth in instrument consumables and reference lab services in Europe and continued double-digit gains in Asia-Pacific. Globally high levels of instrument placements set the stage for continued expansion of durable CAG revenues.

Catalyst placements increased 34% year on year to nearly 800. We placed nearly 500 Catalysts in North America in the quarter, with over 60% going to customers new to IDEXX in-house chemistry. The new sales force structure is executing very well, and we're seeing benefits from the Catalyst One introductory offer.

Catalyst placements were also very strong in international markets, with about 30% placement gains in both Europe and Asia. As a reminder, international markets were placing only Catalyst Dx ahead of future plans for a global rollout of Catalyst One, which will further expand the market for Catalyst technology.

Worldwide hematology placements grew 13% in the quarter. Results were supported by strong growth in North America where we are having success both in bundling LaserCyte as part of the Catalyst One introductory offer and in placing ProCytes, which account for 60% of total placements. International hematology placement gains in the quarter were moderated by timing issues, in part reflecting early shipments of orders in market like Japan this year in Q1 ahead of sales tax changes.

We also continue to see rapid customer adoption of our SNAP Pro mobile device. We placed 1,700 SNAP Pros in the quarter, bringing our install base to 2,900 and setting the foundation for continued expansion of our rapid assay modality. Global instrument revenue of $19 million was down 10% organically in Q2, reflecting about $3 million of revenue deferrals associated with the Catalyst One introductory offer. We expect that instrument revenue growth will lag placement growth this year, reflecting high placements of relatively lower price analyzers, such as Catalyst One, and the overall expansion in international markets.

CAG recurring diagnostic revenues, or revenues associated with instrument consumables and service, rapid assay test kits, and lab services were $282 million in the second quarter, representing 72% of overall revenues. Normalized organic revenue growth was 12%. A decline in US distributor inventories to 2.8 weeks at the end of Q2 from 3.4 weeks at the end of Q1 reduced reported growth in CAG recurring diagnostic revenues by about 1% in the quarter. Continued expansion of the CAG recurring annuity in the quarter reflects robust global gains across our three modalities.

Instrument consumable revenues were $89 million, with normalized organic growth of 13%. Growth continues to be driven by our steadily expanding and increasingly loyal install base, and increased testing as customers upgrade to our premium instruments. Of note, Catalyst customers now account for 90% of our US chemistry consumable revenue, excluding corporate accounts, and we see greater than 99% retention on our Catalyst slide purchases.

Revenues for rapid assay kits were $49 million in Q2. This reflects normalized organic growth of 11%, benefiting in part from a rebound in testing post the weather-related impacts experienced in North America in Q1. We expect benefits from the strong launch of SNAP Pro will support solid continued growth from the contribution of rapid assay to recurring diagnostic revenues.

Our reference lab and consulting services grew 11% organically to $129 million in Q2. High growth continued in all of our regions around the world, driven almost entirely by volume. In North America, the diagnostic sales force model and continued option of VetConnect PLUS continues to helps generate an increase in the level of diagnostics being run by our customers, while also improving on our already strong customer retention rates.

Our practice management and digital imaging systems business, with revenues of $26 million in Q2, grew organically by 20%. Our more tenured sales force is growing our base of Pet Health Network Pro customers and is helping to drive system and instrument placements. We're also seeing strong growth in the service components of this business.

Our Livestock, Poultry, and Dairy revenues grew 14% in Q2, excluding exchange impacts, to $33 million, reflecting organic growth of 6% and benefits from the acquisition of our Brazil distributor last year. Organic revenue growth was supported by increased sales in China couple with increased testing in New Zealand related to the livestock exports. We continue to benefit from a slower-than-expected ramp-down in bovine programs in Western Europe, although we do anticipate these impacts will moderate gains in LPD in the second half of 2014.

Our Water business grew 9% in Q2 to $24 million, including benefits from the acquisition of our South African distributor. Organic revenue growth for the quarter were 7%, reflecting gains in our North America and Asia-Pacific regions. The growth continues to be driven primarily from our core total coliform E. coli testing products, primarily due to new customer acquisitions.

Solid profit results in Q2 were driven by strong revenue growth, with operating margins and cash flow tracking as expected. Gross profit was up 11%, in line with revenue growth, as gross margins were flat year on year. Pricing gains were offset by comparisons to prior-year foreign-exchange contract gains, and relatively higher freight and distribution costs, in part due to the success of the Catalyst One introductory offer.

Operating expenses as a percent of revenue were up 100 basis points as expected, mainly due to the worldwide investment in sales and marketing that are driving our accelerated revenue growth. Fully diluted EPS was $1.10 for the quarter, up 11% your on year, and $1.99 year to date, also what 11%. Free cash flow $98 million year to date, or 94% of net income.

Our strong cash flows have enabled continued allocation of capital towards share repurchases. We repurchased 973,000 shares (sic - see Press Release "975,000") for about $126 million during the quarter, and our Board recently authorized the repurchase of 5 million additional shares, which is on top of the 1.4 million remaining from our previous authorization.

We also continue to strengthen our balance sheet. We expanded our revolver in June to $700 million, reflecting growth in our business. We also advanced steps to add $200 million in low fixed-rate term debt through a $125 million private placement of 7- and 10-year senior notes that close in July, and execution of an agreement for an additional $75 million of 12-year senior notes with funding anticipated in September.

Interest rates on the senior notes range from 3.3% to 3.8%. We'll use the proceeds from these offerings to pay down our revolver, resulting in structure with substantial flexibility and low overall financing costs.

That concludes our review of the quarter. I will now turn the call back to Jon to discuss our plans to move to all-direct product distribution approach in the US.

Thank you, Brian. We believe the move to an all-direct US distribution model will be a strong enabler of long-term growth for our Companion Animal business in the US. We are confident in our plans to enable this change. But first, a bit of background. Our strategy, focused on an integrated diagnostic solution for both reference labs and point-of cure diagnostics, is highly successful and gaining momentum in the US veterinary market. The sales transformation undertaken in 2013 to a Veterinary Diagnostic Consultant sales role, or VDC, a VDC that represents IDEXX and serves the customer with our integrated offering, has also been highly effective.

The Q2 results show that our growth momentum continues to accelerate. We are seeing the significant benefits of smaller territories, a single customer contact for diagnostics, and greater call frequency by IDEXX. To this point, we analyzed the growth in IDEXX revenues from customers called on at least once by us in the first of 2014 versus those that we did not call on.

The good news is that while both customer groups grew, the customers that we visited grew at least 9% faster. Interesting, with this new structure we reached most of the market, but we didn't reach it all. We still don't have the resources to call frequently enough to adequately serve all of the customers and maximize growth.

So here are the key elements of our plan to fully grow direct in the US. First, this change affects how we distribute our rapid assay test kits and the instrument consumables, or kits and consumables, which comprise a minority of our US CAG revenues. The majority of our Companion Animal Group revenues we derive from US customers are already derived direct, as are a majority of our CAG revenues internationally.

Second, the change to an all-direct distribution will be effective on January 1, 2015 after the expiration of our current annual contracts with our US distribution partners for kits and consumables. Until then, we will continue to work with our distributors under the current contract terms.

Third, under the new direct approach, IDEXX will provide all the elements of the value chain for kits and consumables. As a result, we will recognize revenue at the practice level on this set of products instead of at distribution, capturing about $50 million to $55 million in pro forma annual CAG recurring revenue in 2015.

Fourth, as we won't be using US third-party distribution starting in 2015, at that time distributors that are currently exclusive to us will now be free to carry competitive diagnostic products at that time.

In anticipation of going fully direct in 2015, we will significantly enhance and expand our US commercial organization in the latter half of 2014. So a couple of points on this. First, we will be expanding from 125 to 174 Veterinary Diagnostic Consultants, VDCs, and corresponding territories, a nearly 40% increase in feet on the street. Note this expansion is relatively straightforward, as the sales model's already been implemented and scaled across the US and no field reps are being displaced as part of this expansion.

We are decreasing territory size, allowing for a greater density of coverage, recruiting sales personnel through a proven recruiting model, and we are expanding sales coverage to geographies previously covered only through telephone sales. We've already announced this change for our US sales organization, and the reaction has been very positive, as you can imagine.

Second, with more dense territories, Veterinary Diagnostic Consults are able to increase their calls per week by another 15%. So together with the expansion, this increase or equates to a 60% increase in total calls with customers as compared to where we are today.

Third, we're also adding 25 more Field Service Representatives, or FSRs, to our force of 48, a 52% expansion. Field Service Reps, who typically have extensive prior experience in practices as a veterinary technician and extensive training from IDEXX, play a highly valued role in supporting our customers' use of diagnostics, including growing the adoption of Vet Connect Plus.

Fourth we're increasing our inside sales and order-taking representatives from 24 to 68. And fifth, we are adding a cadre of regionally-based professionally service veterinarians to support our customers with the medicine beyond our advanced -- behind our advanced diagnostic offering, including the clinical support for our test technologies and the appropriate use of our ever-growing specialized test portfolio, which even today, quite frankly, is vastly underpenetrated in the customer base.

So those are the details of what we are doing. Let me comment on the strategic benefits. First, our field sales and support expansion that I just went through will be valued by customers and support our long-term growth goals. As we have seen, when we call on customers they accelerate their growth of IDEXX.

We have also determined through our data analytics that customers who use the full IDEXX diagnostic solution grow their practice's diagnostics faster than those who don't. And thus diagnostics becoming a larger part of their practice, to the betterment of their patients' health. This makes sense, as we have brought a series of new innovations to the market. In 2015 we will have substantially more resources to provide the consulting support that customer need to better promote diagnostics to pet owners as part of the pet care plan, growing IDEXX recurring revenues with these customers, what some may refer to as same-store sales.

In addition, calling on customers more regularly, even more regularly, also increases customer retention and also helps us expose a greater part of the market to the benefits of IDEXX's innovative integrated approach to the three diagnostic modalities. So second, this also leverages integration.

In the context of our integrated diagnostic solution offering paired with an integrated diagnostic sales role; the VDC, we found that our current hybrid model of distributing some elements of the diagnostic solution direct: reference labs; point-of-care instrumentation; telemedicine, for example, and other elements through third-party distribution: rapid assay test kits and instrument consumables, creates complexity that doesn't add value for our customers.

It's kind of crazy when you think about it. A practice who's patient needs a diagnostic profile where some of the tests in that profile are run immediately on the IDEXX in-house lab and some of the elements in that profile are sent to the IDEXX reference lab. One patient, one profile, one integrated solution supported by one IDEXX field sales and service team. In this context, it creates greater value and efficiencies for customers when all the components of this profile come directly from IDEXX.

We are confident we can manage this expansion effectively through the balance of the year and into 2015, so a couple points on that. First, as mentioned, the majority of our US CAG revenues are already direct: reference labs, instruments, software, digital radiography, telemedicine. We also serve certain corporate accounts with a direct model today. Thus, we have the underlying systems, processes, and infrastructures to support a fully direct approach in the US.

Second, we know our customers. In fact, we believe we already have interfaced with over 99% of US veterinary practices. Through our data analytics capability, we believe we know the US veterinary market and our customers -- and all the customers better than anyone else in the industry. As part of this capability, we know in detail our customer's histories and buying habits for our kits and consumables.

Third, IDEXX's customer retention in the US is very high for kits and consumables, as we've mentioned on prior calls, and has been increasing. Today we stand, it's 97% to 99% in kits and consumables, up 2% roughly in the past 18 months. High retention is the result of a couple of things that have been going on.

First, a highly loyal install base of the instrument customers, including a rapidly growing install base of SNAP Pro customers to our rapid assay test kits. Second, a unique and expansive proprietary test menu, tests that they can only get from IDEXX. Third, increasing usage of Vet Connect Plus, a valued way to access patient -- a pet's diagnostic results and history real-time and with mobile, again a solution that's unique to IDEXX.

And fourth, our new VDC sales model where we are far more frequently calling on and thus supporting our existing customers of IDEXX diagnostics. So more evidence on why we can do this effectively. We have a fully direct and go-to-market model in most major international countries today. So this approach is not new to us. In fact, the US is behind IDEXX Europe in that regard.

Fifth, we've demonstrated successful change management capability through the North American sales transformation in 2013. In addition, we've completed several successful go-direct initiatives internationally recently. This includes the four Nordic countries, where we have seen accelerating organic revenue growth beyond the one-time margin capture as a result of going direct. And so while we have work to do to bring out the change in the US, we're fully confident in our ability to execute. And we have the track record to prove it.

In summary, I think you'll see that the transition to a fully direct approach in the US is a natural evolution of our strategy. We believe the benefits will be profound and historic for IDEXX, and the impact we will have on the growth and relevance of the veterinary profession in the US. The change will help us accelerate the appropriate use of diagnostics for the care of the pet, growing our market, our revenues, and our profitability while serving the practices, pet owners, and pets like. So let me now turn it over to Brian to discuss in detail the financial element of the change.

Thanks, Jon. Implementing an all-direct product distribution strategy in the US will provide meaningful incremental ongoing benefits to revenues and operating profits. As Jon noted, through this approach we estimate our revenues will increase by $50 million to $55 million in 2015 as we recognize full revenue on consumable and rapid assay sales and capture current distributor margins. This will provide a 5% increase to our CAG Diagnostics recurring revenues that will grow as we continue to expand our franchise.

The change also be accretive. We estimate annual operating profit benefits beginning in 2015 of $5 million to $8 million annually that will scale over time. This benefit is net of the incremental ongoing costs to substantial enhance our sales capability and to provide full order to performance services for our customers.

Moving to a fully direct approach will involve transitional impacts associated with sales and operational cost ramp in 2014 and one-time effects associated with project implementation and the draw-down of distributor inventories. As we move forward, we will highlight these transitional impacts discreetly as they don't affect our underlying business fundamentals. In 2014, this will result in $18 million to 20 million in transition costs, or an estimated $0.23 to $0.25 per share EPS impact.

In the second half of 2014 we estimate that we will incur $8 million of increment cost as we ramp sales and operating resources ahead of the planned January 2015 change to the all-direct model. Beginning in 2015, these costs will be covered by the benefits from distributor margin capture and are included in our estimate for net accretive operating profit benefit from the change.

We also expect to incur $10 million to $12 million in one-time costs in the second half of 2014 associated with the implementation. This includes internal and external project management costs and one-time transition cost related to enabling the new sales organization.

In 2015 we also expect to incur one-time impacts primarily associated with the draw-down of distributor inventories. At year-end 2014 we estimate that there will be approximately 3.5 weeks of inventories on hand with distributors. Our direct sales in 2015 will need to reflect that these inventories will also be sold through to customers by our distributors in early 2015. This will have the effect of a one-time offset of our projected revenues of $30 million to $35 million and $23 million to $27 million in operating profit. We also anticipate that we'll have $2 million to $3 million of remaining one-time project management costs in early 2015.

Let's now review our financial outlook in the context of these changes. We will begin with our baseline outlook for 2014 before transitional impacts associated with the US all-direct product distribution approach. Today we're raising this outlook, reflecting strong underlying momentum in our business. We're raising our full-year organic revenue growth outlook for 2014 to 9% to 9.5%, or $1.51 billion to $1.52 billion in projected revenue, reflecting strong global momentum in CAG and better-than-expected year-to-date performance in LPD. Please note that this outlook assumes that distributor inventory levels end the year at about 3.5 weeks, within our normal 3 to 4 week range.

We're also tightening our 2014 guidance range for EPS as adjusted, which excludes transitional impacts associated with the distribution change, to $3.79 to $3.86, or 11% to 14% adjusted growth. Benefits from higher revenue growth are partially offset by about $0.02 in higher interest expense associated with the new term debt. This reflects expectations for about $14 million of interest expense this year. Our outlook assumes relatively flat year-on-your operating margins for the full year and tax rate of around 31% for the second half of the year.

As noted, transitional impacts associated with the move to the all-direct product distribution model in the US will reduce 2014 operating profits by about $18 million to $20 million, or $0.23 to $0.25 per share. We expect these impacts in total will be balance relatively evenly across Q3 and Q4. Incorporating these impacts, our new reported EPS guidance for 2014 is $3.54 to $3.63.

Today we're providing a preliminary view on 2015 as well. Given strong momentum in our business, our outlook is for 9% to 10% baseline organic growth -- revenue growth and relatively flat operating margins before transitional impacts related to the new distribution approach.

As noted, we expect that the all-direct distribution approach will add $50 million to a $55 million to CAG recurring revenues and $5 million to $8 million to operating profits in 2015. This is on top of the baseline outlook. These benefits will be offset by one-time reductions of $30 million to $35 million to projected revenues and $25 million to $30 million to operating profits associated with distributor inventory draw-downs and one-time transition costs.

As noted, we will track these one-time impacts discreetly so our underlying business fundamentals are clear. We'll also provide an update on our preliminary 2015 guidance on our Q3 call. That concludes our review. Jon and I would now be happy to take your questions.

Operator, we'd be happy to take questions now.

(Operator Instructions)

Erin Wilson, BofA Merrill Lynch

Great. Thanks for taking my questions.

As it relates to the direct sales effort, it doesn't look like you're gaining much in the way of economics here. How do you justify the stuffed up expense and CapEx, working capital requirements, and strategic risks associated with this sort of transition?

And what's the next move here? How is this platform -- how is this a platform for that next strategic move?

Well, I guess Erin, we believe that we will be gaining a pretty significant strategic benefit. Of course, we have, as Brian noted, the distribution margin capture of $50 million, $55 million with $5 million to $8 million incremental profit drop-through that comes on top of our baseline guidance.

But more importantly what I went through is a fairly significant expansion in our direct model. The point is that we believe we're more effective in representing our diagnostics when we can represent it altogether. And we're more effective directly representing it than through distribution.

Just to give an example. With SNAP Pro placements in Q2, the vast majority of this placements were done by IDEXX. While we worked really hard with our distributors to help, they really just weren't much of a factor.

We know how to talk directly with our customers, whether with our field sales Force, with our phone sales force. We just think we're more effective at doing it. So that's a pretty significant increase in field resources on an already proven and successful model. So we believe this really positions us well for long-term double-digit organic revenue growth in the Companion Animal market in North America.

I'd just add to Jon's comment about the strategic benefits that from a financial point of view. The benefits that we highlighted on an ongoing basis are an incremental recurring annuity benefit that will grow and scale over time. So I think the financial benefits beyond the strategic benefits are meaningful as well.

And also the impact on the balance sheet is really de minimus. The impact on inventory and working capital, that's just -- it's de minimus. So that's really a necessary element of the expansion

Okay. And you spoke to this a little bit, but what sort of fluctuations are you expecting as these distribution relationships kind of wind down here with potential channel stuffing in the second half?

Well, we do not expect any -- we expect steady-as-you-go. And I believe that's what customers want. Customers want steady-as-you-go. I think that's a customer-centric approach.

They want to buy product when they need it. And we expect to manage our distributor inventory accordingly.

Okay. Just one last quick one, VetConnect PLUS. It's obviously key to implementing this strategy. Are you seeing the improved retention rates that you initially anticipated? And what percent of your adjustable customer base is currently active now?

We have around 14,600 VetConnect PLUS activations. That has just continued to expand its presence in our customer base in the US, and of course internationally too because we are in several international markets. I think the relevant question here is the US.

As I've mentioned, the retention that we have on kits, instruments -- consumables and kits is 97% to 99%. I think that's in part as a result of how people are valuing VetConnect PLUS. And not only the historical trending, but the mobile app is very successful. It really helps with real-time care when the results pop up on the vet or the tech's iPhone when they're in the exam room.

And so an expansion of our field service reps, who have been very helpful to us in teaching customers how to use VetConnect PLUS in practice, is going to help us to continue to really finish out the growth and the adoption of VetConnect PLUS in the market place.

Great. Thanks so much.

Ryan Daniels, William Blair and Company

Yes. Thanks for taking the questions.

Jon or Brian, the $50 million to $55 million you've talked about capturing in 2015, is that purely the margin that you'll capture from not giving that to the distributors? Or does that incorporate enhanced sales to the end market from this distribution change?

That's -- it's the former. It's purely the margin capture for -- on a pro forma basis for what we see to be the growth, our expected revenues in 2015 for kits and consumables. It doesn't reflect any additional.

Okay. And the $5 million to $8 million, just to be very clear, before transition cost, that incorporates both the investments you'll make in the sales force expansion as well as all your distribution cost and capabilities?

Correct.

That's correct. The way this is phasing in is we will obviously have -- that will be ramping in 2014 before we get the revenue benefit. So we are highlighting that there is an incremental expense that wasn't in our outlook before. But as we get into 2015, that's embedded in the $50 million to $55 million and the $5 million to 8 million

Yes, that's the difference between the $50 million and the $55 million and the $5 million to $8 million is, of course, the cost of physical distribution and the ramp of that rather significant and effective direct presence

Okay, great. And then maybe a broader question. As you look at this change over the long term, do you think the bigger opportunity is to increase utilization within your existing accounts, which is already quite robust in the United States, or share gains? I know you probably want to accomplish both, but do you see a bigger opportunity to increase that $50 million to $55 million from one of those two avenues?

Yes. Simple to answer that is both. We've see that when we've gone direct, and we've gone direct in seven international markets in the last two years. And when we have a direct presence, we're just more effective.

And a lot of those international markets, it's not as much about share gain, it is about expanding the market. And we believe the same opportunity is here in the US. As I mentioned in my upfront call -- in my upfront comments, we have a very, very good understanding of our customers' use of diagnostics in the context of their total practice revenues.

And we know that there a lot of things that customers want to do to grow their practices. And the key driver to growing their practices is diagnostics. In fact, diagnostics grows 2% to 2.5% -- historically grows 2% to 2.5% higher than overall practice revenues.

We believe we could actually accelerate that, and that's why we've got to have these Veterinary Diagnostic Consultants in a fairly, what I would consider a fairly intense presence. We're now at the scale in the US to be able to have that kind of presence. Interesting fact here, Ryan, is that other category leaders in the veterinary market are also direct.

And so really all we are doing is we're taking the full category leader, in fact an industry leadership position. We believe this will actually be beneficial to the entire profession because we will help practices respond to the challenges and opportunities they have to increase the relevance of pet care with pet owners. We know pet owners want more pet care when they're well informed, and it's up to us to help veterinarians achieve that objective of informing pet owners. And through this direct we're going to far more effective in doing it than with our hybrid approach of some direct and some distribution.

And Ryan, I would highlight the $50 million to $55 million from a financial point of view of course is just the margin capture related to rapid assay kits and consumables. At 40% increase in feet-on-the-street, 60% increase in call frequency will benefit all of our revenues, not just those two modalities

Right

Great, thanks for all the color.

Jon Block, Stifel.

Great. Thanks and good morning, guys.

Jon, maybe you could you speak high level, why now? Certainly you've rolled out a lot of an innovation over the past couple of years, and people have already mentioned VetConnect PLUS and a couple other things. But can you speak to why now?

Did you initiate this, or was there something from the distributors that may have wanted better economics? If you could talk to that, that would be very helpful.

Yes, this was completely our initiative. And the answer to that question is, we saw the pretty dramatic effectiveness of the veterinary diagnostic consultant sales model. We went into that model in the third quarter last year, and every quarter since then it's gotten better and better.

And when we call on customers, their revenues go up with IDEXX. And their practice success goes up. And then as we looked at it, we simply felt we needed to be fully direct to really leverage the benefit of that change.

The other thing that became more and more clear to us, we've been talking about this but it's really happening in practice. It's not about a lab business or an instrument business or even a rapid assay business. Now we've launched SNAP Pro and we're turning the rapid assay business through a value-added step of the SNAP Pro into install base business.

All these things coming together through VetConnect PLUS, it is very clear that it is an integrated diagnostic solution. So what we were finding was that we were kind of wrapping ourselves around in a pretzel to be go part direct and part distribution. It was adding a lot of cost. It was adding a lot of complexity. And we felt that by now, we're fully -- we have the veterinary diagnostic channel.

It just became clear that this was the right move to make. That's not to say that we don't value the relationships with had with our distributors over the many years that we worked with them, and we respect them and we value them. It just turns out we believe we're going to be a lot more effective by using that $50 million to $55 million, or a good chunk of it, some of it obviously drops to the bottom line, by enhancing our direct capability. We know how to have a conversation with a customer about the diagnostic category that someone who's representing 1,000 different products is simply not able to do. T hey simply can't do it in the way that we can do it

Okay. That was very helpful. And then maybe just part two of that question, if I could.

How about any relationships internationally? Clearly, I think you've got a big one with Henry Schein in international markets. So can you speak to, does that completely remain intact, and do you think there's any ramifications with Schein in international markets?

I would just say that internationally, every country is unique. We had, wasn't a Schein distributor, we had a distributor. We had a distributor that we felt really wasn't representing us well in the Nordics.

We went direct. We got not only the margin capture, but we've had accelerating revenue growth, organic revenue growth beyond the margin capture in the Nordic countries. a set of markets that we think is very appropriate for our diagnostic innovations.

We've gone direct in South Africa. It's kind of a different situation, but we felt that was right.

So every market is a little bit different, but I think we've been very successful. I think it's seven different markets in the last two years we've moved. In some markets we're hybrid, some markets we're fully distribution. In some markets we've been direct.

The Continental European markets and the UK, we've been direct in those markets for a long time. I'm talking decades. This is not new to us. We know how to do this.

And so as we look at that, we realized that in some markets where we didn't have distributors that was as strong as we'd like, and they were not more of emerging market situation, that moving direct helps us grow. Then I think that has been a contributor to what Brian has laid out as pretty strong first-half international growth, over 30% increase in Catalyst Dx placements.

I mean, we haven't even mentioned Catalyst One in the international market yet. And we are getting very, very strong growth in instrument placements. I think that's because we're really developing and we're rolling out our direct capability in some of these markets and improve our capability in others where we're already direct

Okay. And last question, and you guided this a little bit, but maybe just a bit more clarity. You gave a lot of figures, exact figures on where you're going with field reps and service reps here in the US to go direct.

Just how do you know that's the right size? I mean, is it a function Jon, of been there/done that internationally and therefore you feel very comfortable that the infrastructure that you alluded to in detail in the US is going to get the job done from a service standpoint?

I think that's right. We know our market in the US. We know our reach and frequency today in the VDC model. We know our presence in these customers. We know our customers' buying habits very well.

I don't think there is anyone who understands not only their own market, but the entire market our data analytic capability and the numbers that we typically present with regard to visit and revenue growth. I mean, there is no one who has that kind of data that we have. So we know the market very well.

We've spent a fair amount of time in the last couple of months mapping this out. And quite frankly, Jon, what we did is we mapped it out, we said this what we need, and then we said let's add 20%. Let's just totally nail it as an insurance policy. That's how we approach it.

Okay. Thanks very much, guys.

(Operator Instructions)

Kevin Ellich, Piper Jaffray.

Thanks for taking my questions. Jon, I guess a few more follow-up questions here. I can understand shifting the strategy if you have bad distribution partners like you mentioned in the Nordic region. But I guess, what does this message send to Butler, Schein, Patterson, NWI in the US? Do you think that's going to cause some near-term disruptions with the distributors?

Thank you. I really don't want to speak for them. They been valued distributor partners. And they have been good partners.

I think what we concluded was in the context of already being direct with part of our diagnostic solution, and by the way, the majority of US revenues are already direct today with IDEXX. That the model of going through distribution was a model we need to move from because it lived its useful life. I don't think this is a comment on our distributors and the great work with other manufacturers. I think it's a situation that -- I can't comment on the rest of the market, but very specific to us, we feel this was the right change. I just would leave it at that, thanks

Got it. And then you might have mentioned this and I might have missed it, I'm sorry. Have you guys reached out to the vet practice customers, and I guess what sort of reaction do you think they will have? Are you expecting much turnover, if any?

No. I tell you what, vet practices, when we do our surveys with vet practices, the number one thing they say? We'd like you to call on us more frequently. We would like more support from you. We'd like to have maybe a professional service vet show up and tell us a little about the clinical efficacy of some of your specialized tests.

When we look at our specialized tests, while they've grown very meaningfully, they're a small fraction. We believe the specialized test penetration in the US, when we look at the number of customers who are using it versus the number of customers that should be using, whether it's our cardiac or our molecular diagnostics, the list goes on. It's like 10% penetration. It should be 10 times what it is.

And customers want to do it, but they need time to be -- they need people to help them in practice to educate them. So we're adding this cadre of a dozen professional service vets as part of this expansion.

We're expanding, obviously the whole infrastructure to have more time in front of customers. And this is really responding to what customers are saying. They are saying, we like to see more of you. We don't see enough of you.

We know you have really good technology. We're here in practice. It's a challenging situation. We need your help. And with this new VDC model now, we're able to call on existing significant customers that are already using all three of our modalities, what we call IDEXX Diagnostic Advantage customers, and are already doing well.

But in fact we can accelerate the same-store sales growth of those by them adopting some of the additional specialized tests and other innovations that we bring. But we need to call on them in order to do that.

And so this new model that we launched last year, the Veterinary Diagnostic Consultant model, and at that time the 60% increase in calls allowed us to do it. Now we're going to do another 60%. So that's 60% growth on top of 60% growth. I don't know if it gets around to 250% growth. We're going to be in front of customers now enough to really help them expand their appropriate use of diagnostics

Sure. And just lastly on the reference lab business, do you think you're gaining share? Again, I might miss that if you talk about it in the prepared remarks.

We mentioned that we grew globally 11% and the -- that was basically all volumes. So I think from a volume point of view, we're doing quite well in terms of how we're growing our business relative to the market.

(Multiple speakers) and that contribution's from all regions

Would you say 11% is comparable to the US market as well?

Very strong growth, the US and internationally. We don't break that up specifically, but --.

As you know, we give the total growth in recurring diagnostic revenues for the US.

Got it. Thanks, guys.

Ross Taylor, CL King and Associates.

Hi. I'm trying to look beyond 2015 a little bit. The increment profit of $5 million to $8 million that you talk about gaining in 2015, do you see that growing beyond 2015 because you are able to leverage some of these incremental costs you're going to add? Can you leverage them substantially, or is the incremental growth that's going to come beyond 2015 really just going to result from revenue growth?

We would expect benefits from revenue growth, of course. And we do expect that we can scale this structure as we grow. We're making a meaningful upfront investment here to enhance our customer coverage, as Jon's talked about in detail.

And we think we're going to have the right kind infrastructure in place. So as we continue to grow and build off of this, we should be able to get additional scale benefits over time.

Yes. Just to -- I think we will see the revenue growth, but your point on leverage and scale. We designed this really to be the optimal VDC territory alignment for 2016, right? So as we grow, whatever weight we're grow between 2015 and 2016, we would expect to see some operating leverage on the sale structure

Okay. That's good, thank you.

And second question I have is I would imagine that your distributors are pretty disappointed about this from the top level of managements all the way down to the distributor reps. And do you anticipate that they're going to work a lot harder to make up for losing your revenues by working harder to grow your competition? And I wonder, does the direct sales model, is it maybe more efficient, or more effective with larger clinics as opposed to smaller clinics? So do you maybe end up giving up some of those smaller clinics?

Yea. No, we're going to call on all the clinics. When we talk about reaching frequency, it's really talking about calling on everybody in the territory, as well as a very capable inbound and outbound call center. We know how to do this.

And so I think the bottom line is we have very differentiated products in what goes us through distribution. Let's remind ourselves what goes through distribution today and will, by the way, through the end of the year 2014.

It is instrument consumables, okay? So that's based on having bought the instrument. Obviously in Q2 we're doing pretty good with continued instrument placements. And then you've got the rapid assay test kits, which by the way, is now becoming an instrument business model with SNAP Pro, but also very differentiated test. Really a unique and proprietary test portfolios.

So this is not something -- a distributor rep, if I could speak for them, they want to manage -- they want to have a good relationship with a customer. They're more customer-focused than they are product-focused. I mean, that's their role.

So when you've got really -- when things are really working, they're not going to go and try to upset the apple cart for a very tiny, what ends up being a very, very small product category for them when they've got 1,000 different products. So I think the strength of our product portfolio is really the -- combined with all the differentiators that we've added, whether it's VetConnect PLUS or SNAP Pro is -- and the customers' high degree of satisfaction, we have very, very high customer satisfaction rates in our instruments and our rapid assay test kits. This stuff is working for them. In many cases, they can't replace it with a like-for-like product.

Okay. That's helpful.

If I can maybe sneak in one other question. Just related to labs. You said that the growth was primarily volume. Is that statement kind of applicable across all the geographies as well, including the US?

Yes

Okay. All right. Thanks very much

Nick Jansen, Raymond James.

Yes. Thanks for taking a question.

Regarding your preliminary 2015 outlook prior to all this changes, it looks like you're expecting operating margins to be flat in 2015. I was just wondering, better understanding some of the investments were making maybe outside the US to kind of explain that because I would have thought with the recurring revenue piece growing in the double digits that you would have at least gotten some level of leverage next year, irrespective of this news? Thanks.

One comment we will also make is, along with that comment on margins, is the organic revenue growth guidance of 9% to 10%. So that's a nice, I think that's a nice goal. We've had a long-term goal to get to double-digit organic revenue growth. It takes operating investment to make that happen. I'll turn it to Brian.

Yes, we're obviously early. We wanted to provide a baseline for everyone to help them understand how these impacts would add to a baseline outlook for the Company. I think that we are very much committed to driving strong profit growth and faster EPS growth on top of the strong revenue gains.

I think in terms of the momentum that you're seeing in the business right now, it is reflective of the growth investments that we're making. And our anticipation right now is we're in a period of accelerating growth. We want to ensure that we're investing appropriately behind it.

These are investments that yield annuity returns, very high returns for us. And we are anticipating we're going to continue to invest against things like international commercial capability and infrastructure and R&D, and that all factors into our flat operating margins a little.

Yes. S o I want to highlight also one, a reinforcement point that Brian made. We're giving guidance for 2015 here in July, okay? We typically do it in October, but we have the confidence to do this time in July.

We wanted to provide a baseline so you understood the pro forma impacts of going direct. But the fact is, how many companies are providing 2015 guidance right now? We have a very enduring predictable recurring revenue consistently growing market that allows us to be able to do this with the confidence you need to in order to give this kind of guidance.

So it's relatively early for us. It's vastly early for most companies. But we're in the position to do it and we thought it would be helpful to you as you analyze the changes that we're talking about today.

Thanks guys. I'll leave it at that.

Ben Haynor, Feltl and Company

Good morning, gentlemen. Thanks for taking the questions. Just a quick point of clarification.

On the $50 million to $55 million in annual revenue due to the distribution model change, is that inclusive of the $30 million to $35 million one-time inventory draw-down impact? Or I guess in other words, for 2016 would you expect that to be $50 million plus, or $80 million plus?

Thank you for asking the question so we can clarify this. The $50 million to $55 million is the pro forma increase that comes from the margin capture.

In early 2015 there will be an offset to that of $30 million to $35 million. So approximately the net number would be approximately $20 million, right? That is a one-time offset as the distributors are in the market and winding down their product sales.

So as you go to 2016, the benefit would be $50 million to $55 million plus the growth that we'd anticipate delivering in -- excuse me. In 2016 it will be the $50 million to $55 million plus the growth that we would be driving in 2016

The organic growth in that, right. So also that obviously that draw-down will be relatively concentrated. It's 3.5 weeks. So it's going be a relatively concentrated impact.

Okay. Perfect, that's helpful. Then for my second question.

You mentioned that customers that you called on in the first half grew 9% faster than those that you did not call on. I would assume that you're typically calling on customers that represent higher volumes of testing.

Could you kind of give an estimate of what type of volumes that you -- of the customers that you did touch? Is it 60% of the volume that you generate, 90% of the volume? Where does that kind of fall?

Yes. First of all, that was -- the number, it was a broad number and we had to make at least one call in the half-year. That's not enough to really have an impact on that, a big impact on the customer, but that was just the way that we measured it.

It was obviously the vast majority of the volume, but we were more likely to be calling on customers, all customers on the average of once or twice a quarter. And of course with customers that are -- have opportunities, significant opportunities to grow, more frequently than that.

So there's really a spectrum all of the map of the call intensity, but I just wanted to give a -- I thought that was a pretty striking statistic. When we are in front of the customers, they grow faster. And so just want to give a ballpark on that with that number.

And as I mentioned, even with our current sales model, which by the way is going to have 60% more calls in the new model, we were able to get the vast majority of customers in the first half of the year. By the way, those our direct calls. Those don't include our inside increase sales people calling on customers.

So that group can also be very effective in highlighting to customers new product opportunities and such. And of course that group is growing to be growing substantially as part of this expansion.

Great. That's very helpful. Thanks for taking the questions.

Mark Massaro, Canaccord Genuity

Hi. Thank for taking the question.

In your prepared remarks you commented that the Catalyst One placements in global geographies trended well. Could you comment on how they did in the United States? Maybe try to frame what percentage of Catalyst placements for next year might be Catalyst Ones?

So thank you very much. Just to clarify, we have two products. We have a Catalyst Dx and we have the Catalyst One introductory offer, which we've only offered in the US. And that introductory offer is in anticipation of the launch in Catalyst One, a lower cost but fully functional analyzer, In October.

So obviously very good growth internationally with the premium analyzer, or the Catalyst Dx. But the vast majority of the revenues, very strong growth in the US. Up, I want to say up 37%, Brian can correct me if I'm off by a couple percent, but in the US. And also very strong growth in hematology.

Our Veterinary Diagnostic Consultant sales model did very, very well in the second quarter. I think it's a combination of the maturation of that model combined with Catalyst One, it is really resonating with customers.

And let's recognize, we don't even have the analyzer yet and we're selling it. This is amazing. We don't even have the analyzer. We're giving them the Dx in the interim until they get the Catalyst One.

So we see the opportunity for Catalyst One in the North American market as a pretty significant opportunity going forward. I suspect we will move to virtually all of our placement being Catalyst One. We will have a small number of Catalyst Dx, but all of our placements, Catalyst One.

Then in 2015 when we launch Catalyst One internationally, that's going to be, I can tell you our international teams, we have all in here a couple of weeks ago. They are so excited about Catalyst One. Imagine how well they could do with Catalyst One and compare -- just based on what on what they're doing with Catalyst Dx right now, an analyzer that's got a 40% lower entry cost, and yet all the capability.

And then we're going to be launching Catalyst One internationally like we have in the US now, mobily enabled. In other words, in most markets we will be able to sell a Catalyst One, will be a low-cost analyzer, and they'll be getting the results on the smart phone. This is very, very innovative and totally unique to IDEXX, and part of the package of going with IDEXX in-house equipment

Thanks. And just a quick follow-up. Do you think there will be any changes to the compensation structure of your sales force? And can you kind of frame your confidence of hiring the new reps, and maybe comment where they will be coming out of?

The good news is I think we've really refined the whole sales model, including the composition model. In the first half of this year with the Veterinary Diagnostic Consultants we moved to a territory growth sales model so their major element of their variable compensation is the growth in the recurring revenue in their territory of diagnostics.

And that's turned out to be a very successful change. Our reps like it, and we're not -- we don't -- all of those systems and processes are in place. As we do this expansion, we're expanding a proven model. And so we have the success of that behind us. Remind me the other part of your question?

Yes, maybe just the confidence you have in attracting tracking the new direct reps?

I'm going to tell you what. This is an exciting industry. IDEXX is an exciting area. How many companies do you have where you can actually call on really nice people, called veterinarians, with a series of new product launches and an innovative product portfolio?

We were very successful last year with the sales transformation where we were hiring into the role that was brand-new. We think this year this is going to be a relatively straightforward exercise to get very tenured reps into IDEXX.

And they come from a variety of areas. Typically they come from outside animal health, although occasionally they come from inside animal health. They come from serving optometrists, or sometimes it's dental or sometimes human medical device.

They come from a variety of areas where they understand a solution orientation. They understand a consultative approach. And they are familiar with medical technology. And this is -- we've been very successful with that. So we really think we're just building on the track record here in our recruiting expansion implied in what we've talked about today

Great, thank you

Thanks. We're running a bit over here. We will leave time for a couple of questions, just ask that people can keep them focused.

(Operator Instructions)

Erin Wilson, BofA Merrill Lynch

I think it's Robert Willoughby sitting in for Erin Wilson. Jon, I guess a question for you.

You mentioned the distributors not as effective in their sales efforts as your own team would be. I guess that's understandable, but you look at the disclosure out by the distributors today. The economics that you were giving them on the sales of their products, maybe not so high.

So I guess my question would be, could you have accomplished the same types of pick-ups that you're looking for from a sales standpoint if you'd given a bit more economics to those suppliers, if you incentivized the kind of behavior you're looking at? And then you could forego some of these expenditures, CapEx things that you're doing? I mean, how do you balance that?

Yes. We've been analyzing our US distribution structure for quite some time. It's something that I think you do as a good business person.

And if you look at what a distributor rep does, they are not -- we are a solutions oriented company. A distributor has a product of thousands -- a basket of 1,000 of products, thousands of products that are one-off products. It is very hard for them to represent any kind of detail in any of those products.

And as our technology portfolio has evolved and as we've -- the reference lab pieces integrate, which is already direct, has integrated with the -- and by the way, we sell the instruments direct. So we're selling the instruments direct and then our distributors sell the consumables, right? So it's like we've been working with our distributors and trying to have them assist us in selling instruments for a long time. What we found as we moved to this new Veterinary Diagnostic Consultant, we were more and more just doing it on our own.

And so again, this is a relatively unique to IDEXX. But we felt that this was the right direction to move. I will mention there's relatively little -- the investments that we have here, to acquire a business that's growing at 9% to 10%, $55 million, with a good margin, what kind of multiple in today's environment would you put on that? You'd probably put a pretty high multiple to sales on that. And yet the transition cost there we're putting here are de minimis.

If you think about this in the context of an acquisition, this is like the best deal you could ever have, because it's a fraction of the value of what we're acquiring. But we're not doing it for that. We're doing it for the strategic reason, we believe this the right move to support the growth of the industry

I guess I viewed it you had the best of all worlds here. You had some distributor relationships on pretty good terms for you. Maybe they're not the most effective, but they certainly kept a competitor at bay here. I guess to an earlier question, it just seems to me you open the door and you create incentive for that competitor to drive more sales.

I think the core, and we've been working with distribution for a long time, Robert. Very simply, distributors do not move OEM share. Manufacturers move their shares.

Distributors can move distributors' share back and forth. Who's going to serve that customer, supplying them the thousand different products they buy through distribution? They don't move OEM share. This has been proven.

In fact, I would say that the change that we've had in the last two years where we went to one non-exclusive distributor proved the point here. That distributors do not move OEM share. Even when we moved away from -- when we moved from three exclusive distributors to two exclusive and one non-exclusive, our revenues accelerated. I think that's prima facie evidence that distributors don't move OEM share in diagnostics, manufacturers do

Okay. Interesting.

Thanks

Ryan Daniels, William Blair.

Yes, guys. I wanted to ask one totally unrelated question to the distribution changes regarding the NAD announcement related to your SNAP 4Dx. Can you give a bit more color on that? I came across it and wasn't quite sure what that related to. Thank you

Yes, thank you very much. The NAD stands for the National Advertising Division of the Better Business Bureau.

We brought a challenge to the NAD with regard to the claims that were being made by VCA on their AccuPlex product because we felt that confused, there were confused comparisons. We appreciated that the NAD reviewed and recommended that VCA discontinue its claims that compare AccuPlex to our SNAP 4Dx product. And that in particular its claims, and there were several claims to be discontinued, but that one of them is their test can distinguish between early Lyme exposure infection between exposure and vaccination.

We believe that VCA overstated the benefits of the test as it compares to the 4Dx. I think that the bottom line here is we take a very robust approach to product development. We involve inside people. We involve outside people. We have a number of -- we do peer reviewed studies.

In fact, Ryan, I'd point you to a recently published peer-reviewed article in the International Journal of Applied Research in Veterinary Medicine that compares 4Dx Plus to AccuPlex, and I think there were over 400 observations in this study. The study concluded that there were clinically significant differences between SNAP4Dx Plus and AccuPlex. The 4Dx Plus had significantly better sensitivity and specificity with fewer false positives and a better test-to-test reproducibility.

We have a -- I think the bottom line is we put a tremendous amount of science to ensure critical efficacy. If you can't -- this is so important to the franchise. And so we back that up. We don't ask customers just to believe us.

We back that up with third-party peer-reviewed studies, including the one that we just mentioned here. We can send you the link line, Ryan, if you want. But we are certainly pleased that the NAD ruled that VCA needed to change their advertising. And my understanding is that they're going to be doing that.

Okay. Thank you for color. I appreciate it.

Thanks, Ryan.

At this time, I'll turn the call back to Jon.

Thank you all for the call, for the interest in IDEXX. Again, it was a really strong quarter. We've seen accelerating growth across the Company over the last several quarters.

And then we're announcing, I think is a very exciting clear next step in our strategy to bring -- to increase the relevance of veterinary medicine to pet owners through the diagnostic category, which is such a central category. We have a very strong innovative portfolio, and bringing new effective resources, direct resources, to the market that we're dealing with this go-direct in 2015, we think will serve us well for long-term growth as we've detailed in this call, long-term growth, organic growth and revenues, and attractive profitability.

Just come back to the point that I think one of you all asked about, do we see operating leverage in future years with this model on the direct piece? And very much we do. We talked about the 2015 and 2016, but we see operating leverage being achieved over time. But I think the key thing is what we'll do to help us achieve our goal of sustained double-digit revenue, our long-term goal of sustained double-digit revenue growth.

With that, we really appreciate everybody else. I want a huge thanks to all the IDEXX employees that help make the quarter. We had a lot of people working on a lot of different initiatives.

We've been working for the last couple of months on this go-direct. And that was extra time that people spent. Obviously, the sales organizations around the world, the R&D organizations and the work that they are doing to bring things like Catalyst One and SNAP Pro to market. It takes a village, and really my huge thanks to all the employees who make this such a great Company. So that, we're going to conclude the call

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