愛德士 (IDXX) 2014 Q3 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories third-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 of Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX Management may make on this call regarding IDEXX's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by the use of words such as expects, may, anticipate, intend, 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.

In reviewing our quarterly results please note that growth rates refer to Q3 2014 performance compared to Q3 2013 performance unless otherwise noted. Also when we refer to normalized organic growth in addition to adjusting for exchange in acquisitions we have adjusted for changes in distributer inventory levels.

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 call over to Brian McKeon.

Good morning and thanks, everybody, for joining us today on our call. I'm pleased to take you through our Q3 results and the strong momentum we continue to drive in our business.

In terms of highlights from today's review, we drove 13% reported revenue growth in Q3 with strong global gains across our business lines, including 12% normalized organic growth in CAG recurring organic revenues. Instrument placements were outstanding with over 30% year-on-year gains in catalyst and hematology placements in both US and international markets.

Adjusted EPS came in at $1.05 per share, up 24% benefiting from high revenue growth, strong profit flow through, and benefits from reduced shares outstanding. In the quarter we repurchased nearly 2.2 million shares for $272 million, bringing year-to-date repurchases to over 3.7 million shares, or about 7% of shares outstanding at the beginning of 2014.

Our excellent business momentum is positioning us to deliver strong 2014 and 2015 financial performance. Today we're updating our financial guidance.

We're increasing our strong underlying 2014 outlook reflecting organic revenue growth trending at the high end of our previously raised guidance range, as well as benefits from a lower effective tax rate and reduced shares outstanding. We're also updating our preliminary outlook for 2015 top line and EPS guidance with expectations for 13% to 14% organic revenue growth, including incremental revenue from distributer margin capture and strong operating profit and EPS gains.

Our outlook for 2014 and 2015 absorbs the headwinds associated with the significant recent strengthening of the US dollar which we will discuss in more detail. Let's go through a breakdown of our quarterly performance starting with a brief overview of our regional performance.

Our results reflect strong growth across regions in our CAG business as well as continued solid momentum in Water revenues and better than expected LPD performance. US revenues were $225 million in Q3 with normalized organic growth of nearly 10%.

US gains were driven by 11% normalized gains in CAG diagnostic recurring levels reflecting 14% gains in reference lab and consulting service revenues, 13% gains in instrument consumable revenues, and 3% growth in revenues from rapid assay kits. We continue to outpace solid underlying US market growth. Analysis of US clinical level data for practices that we track showed patient visits were up 0.8% and practice revenue grew 4.9% in Q3.

Our international growth momentum continues as well. International revenues increased 15% to $158 million in the quarter, or 41% of total revenues, reflecting nearly 14% organic growth.

International CAG diagnostic recurring revenues increased 15% normalized with strong double digit organic gains in Europe, Asia, Australia, and Latin America. Strong momentum in instrument placements in both US and international markets sets the stage for continued high growth in durable CAG recurring diagnostic revenue.

Global catalyst placements increased 32% year-on-year in Q3, and hematology placements also increased 32%. Year-to-date we placed over 2,100 catalysts and over 2,100 premium hematology analyzers globally, representing year-on-year growth of 34% and 22% respectively.

While we do expect some moderation in this high growth rate in Q4 as we lap strong prior year placement levels, we're tracking well ahead of our goals for 10% to 15% placement growth this year. In the US we placed over 340 catalysts, up 30% year-on-year with 60% going to competitive accounts.

At the same time we placed 352 hematology analyzers, up 31% year-on-year, demonstrating continued high customer interest in benefiting from the integration of IDEXX's in-house solution. Our placement results also demonstrate clear benefits from our integrated US sales force structure, which is being expanded significantly in support of our go direct sales approach.

We look forward to building on this momentum with the first shipment of Catalyst One in November, which will expand the accessible market for our highly differentiated catalyst technology. Catalysts now drives over 91% of our instrument consumable revenues in the US with consistent 99% retention rates.

The continued expansion of our catalyst base and uplift in testing that occurs when customers switch to catalyst, supports our outlook for strong, sustained growth in US recurring CAG revenues. We also continue to see high demand for our SNAP Pro Mobile Device.

We placed 3,200 SNAP Pros in the quarter bringing our install base to 6,100 in just seven months since our launch in the US. Internationally we also achieved impressive results, with 35% and 33% gains in catalyst and hematology placements respectively.

As a reminder, in international markets we're placing only Catalyst Dx currently ahead of future plans for global rollout of Catalyst One in 2015. Global instrument revenue of $18 million was down about 5% organically in Q3, reflecting $2.5 million of revenue deferrals associated with the Catalyst One introductory offer as well as expansion in international markets where we're placing relatively lower AUP instruments.

We continue to expect that instrument revenue growth will lag placement growth this year reflecting high placements of relatively lower priced analyzers such as Catalyst One, and mix impacts from expansion in international markets. CAG recurring diagnostic revenues, or revenues associated with instrument consumables and service, rapid assay test kits, and lab services were $278 million in the third quarter, representing 72% of overall IDEXX revenues.

As noted normalized organic revenue growth was 12% in Q3. Year-to-date gains are now over 11% supported by 10% year-to-date growth in the US and 14% growth in international.

An increase in US distributer inventories to 3.6 weeks at the end of Q3 from 2.8 weeks at the end of Q2 combined with a decrease in distributer inventory in the prior-year period, increased reported growth in CAG recurring diagnostic revenues by about 2% in the quarter. The continued rapid expansion of our CAG recurring annuity in the quarter reflects robust global gains across our three modalities.

Our Q3 results were supported by very strong growth in reference lab sales. Our reference lab and consulting services revenues grew 14% organically to $126 million in Q3.

High growth continued in all our regions around the world in part aided by an additional business day in the quarter which added about 1% to lab growth. In the US we achieved volume-driven 14% organic revenue gains reflecting the benefit of our integrated sales force model, test innovation, and continued adoption and increased utilization of VetConnect PLUS.

Instrument consumable revenues were $91 million with normalized organic growth of 15%. Growth continues to be driven by our steadily expanding install base of over 14,000 catalysts and nearly 19,000 premium hematology analyzers, and increased testing as customers upgrade to our premium instruments.

Revenues for rapid assay kits were $47 million in Q3. This reflects normalized organic growth of 5%. We continue to drive solid gains through increased test utilization and very high customer retention, both of which will benefit from our rapidly expanding SNAP Pro install base.

As we look forward to the balance of the year, while we expect continued strong volume growth in rapid assay, rapid assay revenue growth in Q4 will be moderated by a delay in timing from our normal annual price increases as well as timing related to our enhanced SNAP Up The Savings program. Our practice management and digital imaging systems business, with revenue of $25 million in Q3, grew organically by 10% supported by continued expansion of our Pet Health Network Pro business.

Our Livestock, Poultry, and Dairy revenues grew 18% in Q3, excluding exchange impacts, to $30 million, reflecting organic growth of 14% and benefits from the acquisition of our Brazil distributer last year. Organic revenue growth was aided in part by accelerated timing of orders in Europe, which will impact Q4 LPD results.

Overall LPD continues to grow ahead of our expectations supported by increased sales in China and high levels of testing in New Zealand related to livestock exports. We also continue to benefit from a slower than expected ramp down in bovine programs in Western Europe which will moderate future growth.

Our Water business grew 11% in Q3 to $26 million including benefits from the acquisition of our South African distributor. Organic revenue growth for the quarter was 9% supported by solid gains across North America, Europe, and Asia Pacific primarily reflecting benefits from new customer acquisitions.

High revenue growth in Q3 and strong flow through drove 17% year-on-year growth in operating profit, excluding transitional impacts associated with implementing the all-direct sales strategy in the US, and 24% growth in adjusted EPS. In Q3, we incurred about $500,000 in costs associated with the ramp up of our sales and operating resources ahead of the expanded 2015 sales model.

We also incurred about $4.3 million in non-recurring project management and other one-time costs required to implement the strategy. The commentary that follows on Q3 profit drivers excludes these transitional impacts.

Gross profit was up 15% slightly ahead of revenue growth. We saw benefits from reduced product and service costs reflecting volume leverage and modest increases in selling price.

These positive impacts were partially offset by comparisons to higher prior-year foreign exchange contract gains. Operating expenses, excluding transition impacts, grew 13% driven by increases in global commercial spending and support of accelerated revenue growth.

Adjusted EPS was $1.05 for the quarter, up 24% year-on-year, and $3.04 year-to-date, up 16%. Reported EPS benefited by about $0.04 per share from a non-recurring income tax benefit related to prior years. Including this benefit and transitional impacts associated with implementing the all-direct US sales strategy, reported EPS was $1.03 in Q3 and $3.03 year-to-date.

Free cash flow was $176 million year-to-date, or 113% of net income. Our strong cash flows have enabled continued allocation of capital toward share repurchases.

As noted we repurchased nearly 2.2 million shares for about $272 million during the quarter. Year-to-date we repurchased over 3.7 million shares for $469 million.

In the quarter we strengthened our balance sheet through the addition of $200 million in low fixed rate term debt through private placements of 7-, 10- and 12-year senior notes with interest rates range from 3.3% to 3.8%. We ended the quarter with $725 million in debt outstanding.

We have significant liquidity, reflecting $325 million of borrowing capacity available under our recently expanded $700 million revolving credit facility and $293 million in cash balances. Our leverage ratios as a multiple of EBITDA were 2.0 times gross and 1.2 times net of cash balances at the end of Q3.

That concludes a review of our quarterly performance. Let's now turn to our outlook for full year 2014 and 2015.

We'd like to point out that our updated outlook incorporates recent changes in FX rates. In Q3 we saw substantial strengthening of the US dollar relative to other currencies.

This has the effect of lowering reported US dollar revenues and profits. Given the substantial change in rates, we estimate that this will have the effect of lowering our 2014 outlook by about $10 million in revenues, $3 million in operating profit, and $0.04 per share compared to rates that were used in developing prior guidance.

For 2015 at current rates and given established hedge positions, FX will lower reported revenues by about $20 million, operating profit by $7 million, and EPS by about $0.09 per share incrementally. Despite these headwinds we're well positioned to deliver strong a financial performance consistent with our business goals.

We'll begin with our baseline outlook for 2014 before transitional impacts associated with the US all-direct sales strategy. We're updating our revenue outlook before expected impacts of inventory drawdown in the channel to $1.505 billion to $1.510 billion.

This reflects expectations for full-year organic growth of about 9.5% at the high end of our previous guidance range of 9% to 9.5%. Our revenue outlook also incorporates the $10 million of negative impact from recent FX changes.

We're raising our adjusted 2014 EPS outlook while covering the $0.04 negative share impact -- the $0.04 per share negative impact related to the current FX rate changes. Our updated adjusted EPS outlook is now $3.85 to $3.90, which reflects expectations for full-year operating margins of about 19.5% consistent with our prior outlook and goals.

Net interest expense for 2014 is now expected to be about $14 million reflecting recent borrowings. We now expect that one-time transitional impacts related to the drawdown of inventories related to the transition to the all-direct sales strategy in the US will result in a slightly lower one-time reduction in revenue and operating profit of approximately $18 million to $23 million and $15 million to $19 million respectively in the fourth quarter.

The higher end of the estimated impact range corresponds with the full estimated impact of the inventory drawdown impact. We're also refining our expectation for transition sales and operating ramp up costs to be approximately $6 million this year, reflecting the timing of new hires -- reflecting the timing of new hires and continue to expect to incur $10 million to $12 million in total of other one-time costs this year with the balance of the spending expected in Q4.

Incorporating these transitional impacts we expect reported revenues of $1.482 billion to $1.492 billion and reported EPS of $3.42 to $3.54. Our outlook includes expectations for a tax rate of 29.0% excluding benefits from the non-recurring income tax item noted earlier.

The lower tax rate in part reflects benefits from transition costs and drawdown impacts being recorded at relatively higher US tax rates. We now expect free cash flow to be about 100% to 110% of reported net income and capital investments to be about $75 million.

The higher cash flow outlook as a percent of net income reflects a relatively lower capital spending projection as well as working capital benefits in 2014 from our accelerated transition to the all-direct model. Our growth momentum and strength in commercial capability is positioning us well for continued strong financial performance in 2015.

Our 2015 outlook is for revenue of $1.690 billion to $1.710 billion. This reflects expectations for normalized organic growth of 13% to 14%, including expected distributor margin revenue capture of $50 million to $55 million.

This outlook incorporates expectations for 9.5% to 10.5% organic growth before margin capture, including about 50 basis points of year-on-year growth benefit related to the deferred revenue changes associated with the Catalyst One launch. As noted FX will be a material headwind in 2015 given significant recent strengthening of the US dollar.

At current rates FX will reduce reported revenue growth rate about 1.5%. We're on track to deliver strong profit performance reflected in projected EPS of $4.38 to $4.48, or growth of 13% to 16% compared to our mid-point 2014 adjusted EPS guidance.

Note that projected EPS absorbs a negative 2% EPS growth impact from FX changes. This outlook reflects expectations for double-digit revenue gains, sustained operating margins despite negative FX impacts, and $5 million to $8 million of incremental operating profit benefit from the all-direct US sales strategy after funding a substantial expansion of our commercial capability.

Our outlook is supported by benefits from share repurchases. Given share repurchase activity to-date and expectations for continued future capital allocations towards share repurchases, we expect year-on-year weighted average share count reductions of 7% to 7.5% in 2015.

We've increased debt moderately in this context and anticipate additional longer term financing in early 2015 which we project will increase interest costs in 2015 to about $28 million to $30 million. The net effect of these changes will continue to be highly accretive to IDEXX.

Our 2015 outlook also reflects an expected effective tax rate of 30.5%. Please note that our outlook excludes potential impacts from carryover inventory in the distributor channel in 2015.

There is a potential for up to $5 million of revenue and $4 million of operating profit, or about $0.05 per share EPS impact in early 2015. We aim to minimize the 2015 impact to our efforts in Q4 and will update our success in this regard and our outlook here following year end.

Thanks and I'll now turn the call over to Jon for his comments.

Brian, thanks. It was a phenomenal quarter that had broad-based growth in our global revenues. Close to 90% I might mention are our recurring revenue business model.

The strong growth in recurring revenues delivered strong profit growth. This performance reflects the effective combination of three key elements of our Company's strategy.

First, a sustained focus on innovation and new product launches. Second, our transformations in the commercial model. And third, a highly functioning global organization.

Let me provide updates and comments on each of these elements starting with innovation. IDEXX has a long history of building and growing veterinary practice diagnostic utilization through innovative and complementary product and services.

This generates long lasting revenue as customers increasingly value the complementary nature of our offerings. This makes our offerings increasingly attractive to customers, resulting in increasing customer loyalty and has a multiplier effect as it grows customers' use of our entire portfolio.

Developing unique tests to better diagnose disease and manage pet health is a core element of our innovation strategy. As an example, in the reference lab segment of our diagnostics business we introduced the Whipworm Antigen Test in early 2014.

This specialized test, along with our entire portfolio of unique tests that we have introduced in the reference lab, is helping to generate strong volume growth particularly in the US. Note that almost all of the 14% US reference lab growth in Q3 is volume, and much of that is coming from our existing customer as they increase their adoption of our unique specialized testing solutions.

In addition we are a leader in using information technology to revolutionize veterinary medicine and change the standard of care. Our VetConnect PLUS service is both an example of technology and business model innovation in this area.

VetConnect PLUS, a cloud-based service which we provide for free for our diagnostic customers, delivers actual insights from the diagnostic data generated by both our in clinic diagnostics and reference labs, including baseline levels, changes, and trends in graphical form. This delivers not only more meaningful clinical information, but also helpful communication tools to highly valued by pet owners.

Use and adoption of VetConnect PLUS increased customer loyalty to the entire IDEXX portfolio of diagnostic solutions, and actually increases pet owner loyalty to the veterinary practice, which in turn helps sustain their growth and our growth in recurring diagnostic revenue. We are increasing adoption in uses of VetConnect PLUS by expanding geographically and by continuing to add new features.

Vet connect plus is being offered in 14 countries today and will be at 16 by the end of the year. In addition popular mobile notifications and lab results are now available on both iPhones and the Android Mobile Devices.

Globally we have over 16,000 VetConnect PLUS activations of which 12,500 are in the US. We also continue to advance our in-house lab integrated with our diagnostic ecosystem.

Earlier this year we launched SNAP Pro, our mobile device that automates the running of the test kit and adds the results instantly to Vet Connect PLUS in the cloud of all of our rapid assay family. While we knew from early on that SNAP Pro brought intuitive and obvious value to the hospital operations and work flow, we now see that practice staff is routinely bringing the SNAP Pro into the exam room to show the client the results of the snap test on SNAP Pro screen.

The SNAP Pro screen clearly shows any positive results and also all of the negative results from our multi-analyte SNAP test, including our flagship canine product SNAP 4Dx which tests for six common mosquito and tick born diseases. SNAP Pro provides a powerful way for the practice to show the pet owner the value of running our multi-analyte SNAP test on their beloved pet.

By showing value to the pet owner we increase practice loyalty, compliance, visits, hospital revenue, and IDEXX revenues. We have now placed over 6,700 SNAP Pros year-to-date with customers, including 600 quarter-to-date in Q4. This product has huge continued momentum.

Speaking of the rapid assay business, we have been extraordinarily successful in the last month with our annual SNAP Up The Savings membership program, a marketing program which we have run annually for over a decade and is well known by our customers. We have now over 9,000 practices enrolled in the 2015 program, way ahead of any prior year at this time, which gives certain discounts on purchases of all of our SNAP kits as the program has done in prior years.

We expect that by the end of the year, 85% of our rapid assay customers will be 2015 SNAP enrollees, SNAP Pro, or SNAPshot Dx customers, corporate accounts, or some combination of the above. So in addition to the unique value that our family of SNAP tests bring to the practices, these elements strengthen the customer value and thus retention in this segment of our recurring diagnostic revenue.

Of course we won't be done placing SNAP Pro in 2014. We project significant further placements in 2015. But no product more clearly defines IDEXX instrument innovation than Catalyst One, our next generation chemistry analyzer that we are launching this quarter.

Catalyst One will prove in time to be the most successful and widely used point of care instrument globally. We will begin shipping Catalyst One to our new customers in North America on November 3 now that we've completed development and an extensive lab and field testing program.

As such we have begun taking orders for customers delivery this quarter, an announcement that has been highly anticipated by our North American sales organization. Catalyst One brings unique value of the catalyst platform to our customers with simplicity and at a very competitive entry cost.

The analyzer's lease cost can be fully funded with IDEXX rebates by running as few as one patient profile per day. This addresses the vast majority of the market, particularly when measured by recurring consumable revenues.

Catalyst One functionality and clinical value is completely unique in relation to competitive offerings. Let me just briefly mention four of the dimensions of uniqueness.

First is test menu. Catalyst has test breadth and complete flexibility.

The instrument can run a complete chemistry profile of 22 tests using whole blood in eight minutes, similar to a profile that you would send to the reference lab. The largest panel of competitive offering is only 14 tests, but it can also run 17, 15, 14, 10, or 6 test profile as well as single individual tests.

Customers appreciate this flexibility as some cases require only a single test or two and others a complete Chem 22. Catalyst One is also unique in the ability to run several highly important tests for thyroid disease, kidney disease, diabetes, and therapeutic drug monitoring.

Each of these tests can be run either alone or together with a profile. Without Catalyst, customers would have to send the sample to the reference lab at greater cost and longer turnaround time.

Second is speed. Catalyst One is unique in being able to reliably generate chemistry results using whole blood within eight minutes. With Catalyst One results can easily be generated during the exam in what we call real-time care.

Third is two-way integration with all major practice management software systems; a huge benefit to staff productivity and engagement, electronic medical records and automatic charge capture, as the patient information never needs to be put into the analyzers. The auto charge capture and invoicing feature alone can augment a practice's EBITDA by 2% or more.

This economic value is large in relation to the cost of the analyzer and itself can pay for all of the equipment within months. I would note that this capability does take years to develop, including the requisite collaboration of development by third party software providers.

And fourth is of course VetConnect PLUS. The cloud-based service provided at no incremental charge with instant results on your smartphone the moment the analyzer is complete.

Test menu, speed, elegant integration of VetConnect PLUS: four unique elements of Catalyst all at competitive costs. However, the chemistry analyzer is only part of the in-house lab which almost always includes an analyzer for hematology.

A simple biology review provides useful context here. Blood is made up of plasma and cells. The chemistry analyzer gives critical data on the contents of the plasma and our hematology analyzer provides 25 parameters on the cells, red blood cells and white blood cells as well as platelets.

Clinically chemistry and hematology needs to be run together, and this is exactly what veterinary practices do. The evidence: over 95% of the profile sent to the reference lab that include chemistry also include hematology. And 96% of our Catalyst Dx customers in the US also have one of our two advanced hematology analyzers.

Customers buy our chemistry and hematology together with IDEXX VetLab Station because they work in delivering results on a patient sample. Just as you would want only one app to give you a stock's price and volume, our veterinary customers want an in-house lab that gives a patients chemistry and hematology results in one report or mobile app.

Customers also want an in-house lab where patient information is entered only once for all the analyzers or better yet has realtime two way integration with the practice management software. And that is the role of IDEXX VetLab Station, the information hub for the in-house lab that integrates all the instruments and connects in realtime with customer practice management software.

IDEXX is unique in being able to do this, and IDEXX VetLab Station also connects to the internet for smart service as well as VetConnect Plus instant results. So while Catalyst One is truly unique, innovative, and cost effective in comparison to today's competitive offering, all these advantages that I just described for Catalyst One are also enjoyed by our Catalyst Dx customers today.

As Brian stated our Catalyst Dx installed base of customers account for 91% of our consumable -- chemistry consumable revenues in the US, when certain corporate accounts which we had historically served direct are excluded. The unique value that Catalyst brings plus IDEXX hematology to the veterinary practice explains why we have maintained consistent 99% customer retention.

Okay, moving to the commercial transformation. In the veterinary market a sustained rate of innovation must be matched by strong field sales and support organizations that can bring these benefits to the practice and support their adoption and thus growth of the diagnostic category.

In the US we have transformed our sales organization in 2013 to an account manager model, where our customers are supported by a single veterinary diagnostic consultant representing all three diagnostic modalities that make up our recurring diagnostic revenues. Territories have become small enough that our sales professionals can establish regular customer calling cycles.

In 2013 we demonstrated a 60% increase in customer visits in this new model with just a 15% increase in sales staff. With this model gaining maturity in 2014, we have seen consistently strong growth over the course of the year in diagnostic recurring revenue in the US, with Q3 coming in at 11% normalized growth.

One of the key reasons for this growth is that as we regularly call on our customers we create awareness and education of the unique new testing capabilities and work flow innovations that we offer, both with our in-house instruments and our reference labs. This is one of the reasons why customers have consistently asked that we visit them more often.

The result is that when we visit at subject matter experts, customers grow their use of IDEXX diagnostics faster, contributing to the growth of our recurring diagnostic revenue. This is another reason why, for example, we are seeing 14% reference lab and consulting services modality growth in Q3 in the US.

And so with this insight we are embarking on a further expansion of direct sales and support model as we go to our fully direct sales strategy in the US. This allows us to shrink territories even further, with each sales professional having smaller, more concentrated geographies and thus able to visit more customers more regularly.

In fact in this new model, a VDC can visit accounts that make up 60% of his or her revenues in a week and 95% in four weeks. We have made exceptional progress in Q3 in moving to our new fully direct sales strategy in the US.

Some milestones of note. We've hired 96% of our expanded sales and field support positions and expect to be virtually complete by November 3, including our 174 veterinary diagnostic consultants, 22 veterinary diagnostic specialists and 23 regional managers.

Second, this staffing success also includes an expanded team of 73 field support representatives for diagnostics, which we have now 100% filled. These folks, which are made up of highly experienced veterinary practice professionals, train existing customers on our steady stream of new innovation, such as our in-house lab, the advanced menu, and VetConnect PLUS. And they are highly appreciated by our customer.

Third, we are now live with a fully staffed inside sales center consisting of 75 regionally assigned professionals. This group both receives inbound and makes outbound customer calls, helps customers with orders as product line experts, and has tremendous customer region frequency.

Fourth, we are live with our nationwide logistics capability, now providing free shipping and next-day delivery to the entire continental US, leveraging our partnerships with UPS and FedEx. And fifth, we have introduced several other elements of our direct sales and marketing strategy, such as credits for expired products and special promotions when ordering direct.

Our teams involved in all these elements of the plan have done a truly phenomenal job, and we are ahead of an ambitious schedule laid out just a few months ago. We are now in the position to begin to transition our customers to our fully direct sales model through the balance of Q4 and leading into 2015.

The growth in our commercial capability extends beyond the US companion animal diagnostics part of the business, as we are now operating as a highly effective global organization. As Brian enumerated we've achieved strong growth globally in the companion animal market.

In the quarter Europe as a whole had 15% organic growth in recurring diagnostic revenue, Asia Pacific 18%, and Latin America 43%, where we've benefited from our direct presence in Brazil. This momentum in our global diagnostic recurring revenue is the result of significant country and region leadership additions we have made, along with additional field-based resources.

I was in Europe last week and our international teams are highly engaged doing a great job accelerating the growth of IDEXX and leveraging the unique value of our diagnostic offering. Also, important to note that this CAG international momentum does not yet even benefit from the launch of Catalyst One slated for Q1 in major European markets.

Catalyst One with its low entry costs and unique capability is going to be a significant driver of recurring revenue growth globally for years to come. Practices are generally smaller internationally, so Catalyst One's lower price point is better suited for these markets than Catalyst Dx. Our international teams can't wait to get their hands on the new analyzer and its integration with VetConnect PLUS.

Our Water business with 43% operating margin year to date and is almost 100% recurring revenue from a highly loyal customer base, also is effectively investing commercial resources for accelerated growth, achieving 9% organic growth in Q3 building on 7% in Q2 and 2.5% in Q1. It's really amazing to see what this team is able to do with a little investment and by taking a fresh perspective on driving growth in this highly profitable business.

Our Livestock, Poultry, and Dairy business is a mix of recurring and multi-year campaign revenue. Both sides of the business did incredibly well, achieving 13% organic revenue growth in the quarter with contributions from all regions in this global business model.

Again, this team is really engaged and focused on global growth, particularly the recurring revenue portion of the business. In this call as we traditionally do, we're giving top line to bottom line guidance for the next calendar year 2015 that incorporates 13% to 14% normalized organic growth.

This outlook reflects the continued output of investment, R&D, and innovation projected at over $100 million in 2014 and growing, a level we believe represents greater than 80% of the identifiable industry's investment and diagnostics information technology R&D for companion animal health. Note much of this R&D is devoted to products, services, and software advancements that we have yet to announce with some exciting additions to our line slated for 2015 introduction.

But 2015 also reflects our investment in the US and global commercial expansion and the full roll-out of our all-direct sales strategy in the US. Note that it also incorporates contingency, appropriate for the risks in our business including the all-direct sales strategy.

Finally our outlook accounts for promotional strategies to take advantage of our direct approach to drive diagnostic customers' diagnostic volumes and thus sustainable profitable recurring revenue growth and bottom line performance. So before I open up the call to questions I just really want to thank the 6,000 IDEXX who helped make this such an amazing quarter performance, one of the best in my 12 years at IDEXX.

And so with these opening remarks, Brian and I are ready to take your questions. Cynthia?

Thank you.

(Operator Instructions)

Our first question will come from the line of Ryan Daniels with William Blair.

Yes, good morning, guys, thanks for taking the questions. Brian, maybe I'll start for one with you, before my follow-up. If I go back and look at July and then your October update and then today, it seems like the impact you're anticipating from the all-direct sales shift has lessened over those periods, both in regards to the sales investment required and some of the revenue and operating profit hit to the inventory drawdown. Can you just go into a little bit more detail -- how you've honed in that range, and why it looks to be less than anticipated?

Sure. Why don't we break it down into two components. One would be the cost estimates that we had. They've -- the major change there was on the -- we obviously were making some preliminary estimates back in July on how this would roll out on the ramp costs, so the costs -- the ongoing costs that were put in plus, sales resources, operating resources that we expect to continue. We took that estimate down for 2014 from $8 million to $6 million, and that's basically just timing of when the costs actually flow through. As Jon noted, we're fully on track to be fully staffed, and just relative to our earlier estimates, which were a bit conservative, we came in a bit better on that front.

The second change was related to the impact of the distributor drawdown. And we had higher estimates. When we first came out with our outlook there, we hadn't had the opportunity to speak to others about how to manage this, and so we estimated that the impact would largely take place in early 2015. We've been very effective at working together to move this forward so we can have a clean transition on January 1.

We did reduce the impact of the revenue and profit, in part because the impacts that we estimated in 2015 would have been grossed up for the additional margin capture. So, you reduce that by the 15% of margin capture by moving it into 2014 as less of a revenue offset. And it just -- versus our last outlook, we moved it a couple million more, again, just based on refinements as we're getting closer to the date.

So, taking a step back, it was more that we had more limited information when we put out the original estimates that were a bit conservative; and as we're refining this, we're able to tighten that range up a bit.

Okay, that's perfect; very helpful color.

And then, as for my follow-up, I guess one for you, Jon. You talked a little bit about your rapid assay initiatives, both in regards to making that more of an instrument consumable with the strong placements there, but also the SNAP Up The Savings program and your corporate accounts.

So, can you maybe -- the one thing I'm not as familiar with is the SNAP Up The Savings. Does that actually lock consumers in for some kind of minimum purchase, or is it just a very high-retention vehicle because they incur more savings the more products they use? Just some more color on that and the retention aspects of it. Thank you.

Yes, it gives them a discount -- when they are enrolled in the program, it gives them discounts up front, and it gives them discounts based on the volume of their purchases in the back, too. So, it doesn't lock customers into anything, but it's a very well-appreciated program, and it does give some attractive volume discounts as they use the SNAP products over the course of the year.

Okay. Thanks a lot for the color, and congrats on the strong performance.

Thank you.

Our next question comes from the line of Erin Wilson with Bank of America Merrill Lynch.

Great, thanks so much for taking my questions. Instrument placements were very strong, as were consumables, but was there any meaningful promotional activity that was new or just implemented in the latest quarter, as opposed to what occurred in the first half of the year, that had a significant impact on Catalyst One?

As well, are you seeing the initial traction or feedback that you had hoped to see ahead of that launch? Where do orders stand, and how big is the market opportunity there?

Yes, there's nothing indifferent about Q3 from -- in terms of the types of programs that we use versus the prior programs. They were all continuing focus on the Catalyst introductory offer, and everything was basically business as usual. This program has been very effective of the first of the year.

With regard to the anticipation of Catalyst One, we only began taking orders this quarter. I do know that we actually entered with a little higher backlog of Catalyst coming into the quarter than we normally do. So, obviously we are in good shape. It's not a big backlog business, but more units in the backlog is helpful for Q4.

But I think Catalyst One really -- we had a number of customers who said: I love what you're talking about with Catalyst, but I really want to wait for the analyzer; I don't want to go through the introductory offer. And now we can serve those customers, and they can take their Catalyst One delivery in Q4, get the tax write-off and start enjoying the benefits of Catalyst technology. So, we do have customers who have been waiting for Catalyst One.

And then, of course, Catalyst One is going to be very effective at both upgrading the remaining VetTest customers that we have out there, of which we have thousands, of course. And also, it's a wonderful tool to upgrade customers who are in decade-old technology and want to move to the unique value of IDEXX's diagnostic solution that have competitive offering. And that's a very attractive base of customers to go after. I think Brian noted that, even in Q3, 60% of our placements were to new and competitive accounts, and that just shows that there are a lot of customers who are not using IDEXX today who want to move to the new capability that we bring.

Okay, great. And on the direct transition, you mentioned previously that 60% of your Business, or roughly that, is direct already. Has that moved at all ahead of the full direct initiatives or your full direct effort? Where is the metric now, and has it surprised you, based on customer responses following recent changes from Patterson and Schein?

No, that -- in Q3, our business model was the same as Q2, so the 60% roughly holds. I think we are now, of course, in the market and we're close to our 365 field and phone base representatives who are representing for the diagnostic line, between the veterinary diagnostic consultants and the specialists and our inside folks and our field service folks.

And when we have conversations with customers, we're easily able to ease any concerns that they have and build enthusiasm as they become aware of the change. So, I think we're well facilitized to do that, and it's just a matter of going out there and talking to customers, and I think we're fully staffed and in the position to be able to do so, and in fact, are doing so quite effectively.

Okay, great. Thanks so much.

Thank you. Our next question comes from the line of Jon Block with Stifel.

Great, thanks, and good morning, guys. Maybe the first one, Brian, for you, and there was a lot of moving parts and a lot of helpful numbers, but just when I look at sort of the 3Q, 4Q cadence and what's implied for fourth quarter, you beat by roughly something like $0.17, you raised by $0.05 for the year. I know you called out, I believe, roughly a nickel in FX headwind, but maybe if you can talk to the cadence of the 3Q, 4Q? Did we just all have it wrong because of a lot of OpEx coming on from the hiring towards the tail end? That would be on the bottom line.

And then on the top line, you steadily increase the organic growth throughout 2014. Fourth quarter is an implied step down, obviously a tougher comp. But maybe if you can talk to that as well, and then I'll go ahead with my follow-up, thanks.

Sure. And why don't I, as you know, Jon, we provide full-year guidance, not quarterly guidance. So, why don't we focus on kind of what our outlook was and what our outlook is.

We -- as you noted, we had a very good Q3, and that is giving us confidence in taking up our organic revenue growth rate to the high end of the range and -- from where we were currently. And our revenue numbers align with that, excluding the FX adjustment.

In terms of the fourth quarter, we expect that our growth is going to be in line with our full-year outlook, adjusting for a couple of factors. We're delaying the rapid assay price increase just to align it with our other practices to January 1, and we have this expanded SNAP Up The Savings program. Combined, those are probably going to reduce our organic growth rate by about 1 point in the fourth quarter. And we do expect some moderating growth in LPD; it was extremely strong in Q3 as well.

But basically, the underlying growth is consistent with our full-year outlook, adjusting for those factors, and we're expecting the same kind of flow through -- the same kind of flow through on the operating profit margin. As you noted, we had some FX headwinds and had some things like benefits from the accelerated share repurchases, which helped to mitigate that.

I think relative to where the street may have been, I do believe our revenue number was a healthy beat to what people were expecting for us. And I think that was probably the key driver in the quarter.

Okay, great. Very helpful.

And then, Jon, for you: You had I guess one competitor report in front of you. In a way, you have three competitors reporting behind you. Can you just talk to what you're seeing in the field?

You gave a lot of specifics on Catalyst, but I guess where I'm going with this is I'm anticipating that we're going to hear from others their success in moving share and how they are being impactful out in the field. And do you want to speak to VetTest retention at all? In other words, do you think if they're citing success, it's more just a function of them placing the boxes instead of a [backsys]? Or are you seeing any higher levels of churn within VetTest, even though it is only 9% of consumables ex-corporates? Thanks.

Thank you. So, I think that's a good question. Obviously, 91% of our consumable volumes comes from our 9,000-plus Catalyst customers, where we've consistently maintained 99% loyalty. That really didn't change in Q3; all those trends hold steady.

By the way, the trends with VetTest, which are typically low-90%s retention are -- those trends haven't changed, other than maybe 30-basis-points impact on the [Chem Circle to equal] value of the move of one of our corporate accounts to a competitive analyzer. But that was a pretty low-volume account.

So, clearly, Catalyst technology is very unique. A lot of VetTest customers that we have been trying to convince to upgrade for a long number of years with our partners that haven't upgraded typically are smaller accounts obviously. I think we have 6,000 of them. Some of them may have another analyzer in their practice, too, so that's why they're lower volume.

Now we have Catalyst One. And Catalyst One looks and feels like an instrument that is worth upgrading to, that is an easier decision both economically in terms of how it looks and footprint than Catalyst Dx is. But clearly it's where we see the lower loyalty is in the low-volume VetTest install base at 9% of our consumable revenue. So, I think that's -- you probably understand that that's an important factor.

Thanks for your time, guys.

Thank you. Next we'll go to the line of Nicholas Jansen with Raymond James.

Hi, guys, two quick ones for me. First, on the inventory in the channel in the quarter, it looked like obviously you had a couple more -- a full week more this quarter relative to last quarter. And I would have thought that the distributors would have want to draw that down in anticipation of the change. So, any comments of why you thought the acceleration in 3Q relative to normal trends?

No, three-and-a-half weeks is totally business as usual. Our inventories in the field, for the last -- as long as I've been at IDEXX, 12 years -- have ranged between three to four weeks. That's right smack in the middle.

I think the 2.8 was just a low number -- happened to be how the days fell at the end of the quarter. I think that's what distributors typically need in order to fill their warehouses across the country and serve customers.

Okay, that's helpful. And then secondly, on the international growth, another very strong quarter there. I'm just trying to get a sense of how you've thought about Catalyst One internationally, and what that could do from maybe a top-line perspective over the coming years as you better penetrate the much bigger international opportunity versus the US. Thanks.

Yes, Catalyst One was as much designed for the international market as it was the US market because it's really got all the functionality of Catalyst Dx, but it's 40% less cost and a smaller footprint. Actually, it has incremental functionality if you consider VetConnect PLUS and the addition of the T4 Test.

So, our international teams -- we are very, very excited about Catalyst One -- but they've been gearing up. That's why we've increased our investments in our international operations. We are now direct in most European countries and in South Africa and Brazil. And we've geared up capability in some of the Asia Pacific country.

And we're going to be launching a Catalyst One in virtually every market in 2015, with the exception of Japan where there's a regulatory approval required that takes a little longer in Japan. But we've got a great offering in Japan with Catalyst Dx. And the Japanese really appreciate ProCyte as a hematology analyzer.

So, I think we're in just a phenomenal position to grow the recurring diagnostic revenues internationally for years to come. Obviously we've got a lot more VetTest upgrade and a lot of greenfield accounts. We have a much more fragmented competitive scenario; it's kind of country by country.

And we're growing the lab business. I didn't mention it, but our lab operations in Europe did very well in the third quarter. The Leipzig lab is really becoming a very effective tool -- a twin lab business because we're able to provide far superior turnaround time; the next morning, which is really unheard of in the markets that we're serving with that lab previous to its introduction. And that works in conjunction with Catalyst One. These work together to build an integrated diagnostic offering, much in the same way that we've done in the US.

So, we're very excited about the global market, and it's not really dependent on economies. Obviously with 15% organic growth in Q3 in Europe, we didn't get any help from the economy in that regard, but these are attractive markets for us.

Thanks for all the color. Nice job, guys.

Thank you.

(Operator Instructions)

We'll go to the line of Kevin Ellich with Piper Jaffray.

Good morning. Thanks for taking the questions. I guess just starting off, wanted to ask about the delay in the price increases. Brian, I think you made a comment about that. Could you give us a little bit more clarity why you decided to delay that price increase? And I've got a follow-up on that.

Thanks for that question. We actually made that decision about a year ago. Our price increase -- last price increase was September of 2013.

But the industry standard is January. And what happens is all the suppliers increase their prices to veterinary practices in January. And what practices do is they go update all of their systems, one.

And so, when you have a price increase that is not timed with that, it's an inconvenience to the customer. So, what we decided about a year ago is that we would go 15 months without a price increase, so we could move it to January, which is an industry norm and also the norm for where we had already moved the VetLab consumables. So, we would be consistent with ourselves and with industry norm.

That makes sense; thanks, Jon. And then, could you give us a little bit of color as to what type of increases you typically push through? And with this move to the direct sales model and a maybe more competitive landscape, do you think that changes the pricing power in the industry overall?

Yes, these are typically a very standard, normal price increases of, in some cases 3% to 4%, and in some cases less, but not more. And they are just normal, ordinary.

As we're taking customers through the change to direct model, I think they are totally comfortable. We're able to address any concerns that they might have with regard to pricing. And we're well facilitized and plan to have those conversations, and the conversations that we have been having to date are universally successful.

Great. That's helpful, thanks.

Thank you. Our next question comes from the line of Mark Massaro with Canaccord Genuity.

Hi, guys, thanks for taking the questions. Maybe, could you provide a little bit of color around the strong growth in Europe? It looks like probably your strongest quarter I've ever seen. And if you could comment on the trajectory of that growth as we pace out into 2015 and beyond? Thanks.

Yes, thank you. It really was a great quarter. I think we have a great management team there. Michael Williams moved over there two years ago with really broad understanding of the diagnostic business. And we actually have very long-tenured country managers, but I think we added some supporting personnel.

We actually hired the Head of Abbott Diagnostics European business who is now running that business. And she joined in June, and she's been just a phenomenal addition. And we've added other capability.

But I think the other thing is that the products and services have gotten better. Both our hematology and our chemistry offering -- they know how to sell them.

Of course, our lab business is really starting to grow nicely across the major countries. We have -- that 15% growth obviously is a portfolio of countries, some of which are growing higher than that. We had obviously higher growth in the Nordics, by the way. We already lapped going direct there, which we did at the beginning of 2013. So, that's positive.

But we had in excess of 15% growth in Germany and Italy, and Spain of all places. So, it's a broad-based capability. People love their pets in Europe, and I think we're particularly well positioned both commercially in terms of our product line.

I'd just add, Mark, I think that 15% growth is certainly what we hope we can achieve on a sustainable basis in Europe over time, which I think is incredible given the economic backdrop. I would highlight: There were some things in Q3 that benefited us. The prior year was floods in Germany, and there was some softer performance that benefited the growth a bit.

Yes, there are always things like -- when does Easter fall, or weather good or weather bad in Europe that can affect it. But as Brian said, that's a good number to go for going forward.

Great. And just as a follow-up, you commented on the reference lab, but I think that probably beat most of street models. So, can you comment on -- for example, you didn't provide revenue guidance by segment. So, at what level do you think the reference labs can grow? And if you could comment on the variability through the quarters, that would be helpful.

Yes, you know, we don't run it by segment. That's why we don't comment and give guidance.

We're talking about -- we believe in growing recurring diagnostic revenues. And when we do that, we actually free ourselves to think about all the opportunities that can grow the whole. So, that's why we don't actually give guidance by segment because that's not the way we think about the Business anymore. It's an integrated offering.

But clearly, the lab modality is doing well. I think it's doing well because of our specialty test portfolio in North America, which is -- and combined with the fact that we're calling on our existing customer. This is the change in the business model last year. Prior to last year, we had laboratory diagnostic consultants basically were only calling on potential customers, not existing customers.

Now we're routinely calling on our existing customers. And when we call on them, they are actually adopting that long list of specialty portfolio that we've launched over several years, but which we didn't have broad adoption because we just didn't have that commercial channel.

So, that, and then we're investing in labs all around the world and improving the service level. And I think that's what's driving the global side.

Mark, I would point out: We did provide guidance on recurring CAG diagnostic revenue growth this year of 9% to 11%. And we're trending slightly above the high end of that. And that's giving us the confidence throughout the year to raise our guidance ranges through revenue growth, and as well going into 2015, given that's a very durable revenue stream giving us confidence for the high growth rates we're projecting next year.

Great.

Of which, lab is a significant contributing factor, as you know.

Thanks, and nice quarter.

Thank you.

Thank you. Our next question comes from the line of Ben Haynor with Feltl & Company.

Good morning, gentlemen. Thanks for taking the questions. I was just wondering how many pent-up Catalyst One placements are there to go out in the next week and a half when you start placing those things? Are most of those accounts that have committed to it already having the Catalyst Dx in the practice already? Or are there some that have committed to it?

No, Catalyst One is not -- all of our placements of Catalyst One in Q4 will be to new customers. They won't be (inaudible) upgrading the introductory-offer customers who -- that will happen in 2015.

And just as background here, we went to the introductory offer at the beginning of 2014 and we said we'll sell you Catalyst One, but we'll loan you Catalyst Dx for a year until you get to Catalyst One. So, the year doesn't start until 2015. So, those Catalyst Ones are to customers who have VetTest or competitive analyzers. And it's hard to quantify it because we weren't really taking orders for Catalyst One direct placements until this quarter.

Okay, that's helpful. And then, one other thing is: We're hearing in our survey that about a quarter of practices are concerned about the volume discounts that they receive from their distributor, now that IDEXX has gone direct. Is there a plan to address that, whether it's discounts on consumables or some other promotion? Or do you just not worry about those people, and think they'll get over their concern?

We're not surprised that you're hearing that. We absolutely have a plan, and it's in all regards that you say. And the conversations we had with customers when we take them through it -- they are absolutely fine.

And so, we just need to take customers through it. We have 365 people who can do that. And we're very confident that we had different, creative ways, including some standard promotions that we're introducing in our direct model for the business; the SUTS program, as well as on the VetLabs side, which are proving to be quite satisfactory to customers, as we have those conversations.

That's all factored in our financial outlook.

All of those promotions and everything are factored into our financial outlook, as well as contingency. We recognize that, perhaps on the VetTest installed base that we'll have some customers that we don't reach with Catalyst One, and we'll make that unfortunate decision to invest in a decade-old technology that doesn't have that capability. And so, we really -- we factored all of that into our guidance.

We're running a bit over, so we'll take one more question.

That will come from the line of Erin Wilson with Bank of America Merrill Lynch.

Great, thanks so much. Apologies if I missed this, but as far as the incremental invested capital associated with the direct transition goes, the original guidance was $15 million to $20 million. Has that number changed at all, and is it all in 2014 or 2015?

And, Jon, you continue to mention innovation on the IT front going into 2015. Can you give us a sense of what's the next step there? Is it focused more broadly on expanding Cornerstone utilization or some other sort of capability? Any sort of detail there would be great. Thank you.

On your first question, it's the same estimate, Erin, and it will be in 2015.

On the IT innovation, obviously we're continuing to add capability to the ecosystem, whether it's VetConnect PLUS or Pet Health Network Pro, Cornerstone you have mentioned, or -- that's not our only practice management software. But certainly practice management software is our core to that ecosystem.

Plus we have other areas that we're investing in that are all really generated to help grow the practice and increase their relevance to pet owners. We find, as practices invest in particularly our cloud-based technology, newer cloud-based technology such as VetConnect Plus and Pet Health Network Pro, combined with their practice management software -- in many cases it's IDEXX, but not always -- they can grow their practice.

They're reaching out to customers before, during and after the visit. They [are earning] into new kinds of business models. And this really is a road map I think for the profession. A road map that not only we espouse, but in conjunction with the American Animal Hospital Association and AVMA, the American Veterinary Medical Association, really is how practices can effectively operate in the future and have strong growth in the current environment.

Thank you. With that, I'd like to turn it back over to you for any closing comments.

We just want to thank everybody for being on the call. And again, a huge note of thanks and gratitude to the IDEXX customers who have really worked hard in many ways, including, of course, the IDEXX all-direct strategy in the US, but around the world, to achieve just a phenomenal Q3. I'm so proud of everybody, and we look forward to updating investors on our results for the full year in January. Thank you.

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