愛德士 (IDXX) 2014 Q4 法說會逐字稿

Welcome to the IDEXX Laboratories fourth-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 IDEXX Management may make on this call regarding IDEXX's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions.

Such statements include, but are not limited to, statements regarding Management's expectations for financial results for future periods. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today, and except as required by law, the Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise.

Also during this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliations 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 fourth-quarter and full-year 2014 results, please note all references to growth and organic growth refer to growth compared to the equivalent period in 2013 unless otherwise noted. Also, when we refer to normalized organic growth, in addition to adjusting for exchange and acquisitions, we have adjusted for changes in distributor 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. Pleased to take you through the solid progress we achieved in the fourth quarter and for the full year 2014 that has us well positioned for continued strong performance in 2015.

In reviewing our financial results today, we'll focus on our underlying operating trends, excluding transitional impacts in Q3 and Q4 2014 related to the move towards the all-direct sales and distribution model in the US. These impacts reduced full-year revenues by $25 million, operating profit by $35 million, and EPS by $0.45, consistent with our prior guidance range, with the majority of these effects reflected in the fourth-quarter performance.

We had a solid finish to 2014. Highlights included 9% normalized organic growth in Q4, supported by 11.5% normalized CAG recurring growth. We saw continued robust trends in recurring revenue growth globally, driven by strong double-digit growth in instrument consumables and Reference Lab volume.

We finished the year with 10% normalized organic growth, supported by over 11% full-year in CAG diagnostic recurring revenues. Reported revenue growth was negatively impacted by about 3% in Q4 related to the strengthening of the US dollar. Despite these impacts we delivered strong profit performance.

We achieved full-year adjusted EPS of $3.99, including $0.065 per share benefit from the extension of US federal R&D tax credit. This represents growth of 15%, or 18% adjusted for currency impacts. EPS gains reflected accelerated revenue growth, modest operating margin gains, and benefits from our accelerated capital allocation toward share repurchases, which resulted in the 6% year-on-year reduction in average share count.

Finally, we effectively managed our transition to an all-direct model in the US, reducing channel inventory to immaterial levels at year end.

Today, we'll take you through our 2015 outlook. Of note, we're raising our normalized organic growth guidance to 13.5% to 14.5%, reflecting strong continued momentum in our business. This benefit will mitigate the significant recent strengthening of the US dollar. The net result is a change to our 2015 EPS guidance to $4.33 to $4.43 per share.

As we provide guidance today, consistent with our approach last year, we'll focus on our outlook for combined recurring CAG diagnostic revenue growth, with more directional information provided for growth by CAG modality. This is aligned with the significant steps we've taken to integrate our go-to-markets approach across modalities to support veterinary care and customer development.

Let's begin with a review of our fourth-quarter and full-year 2014 results, beginning with an overview of regional performance. We achieved strong organic growth across regions for the fourth quarter, driven by CAG, as well as solid continued gains in LPD and Water. This is positioning us well for continued strong growth across global markets in 2015.

US revenues were $191 million in the quarter, driven by normalized CAG diagnostic recurring revenue growth of 10%, supported by 13% volume-driven growth in Reference Lab revenues and 14% growth in VetLab consumables. Approximately 1% of recurring CAG diagnostic growth benefit came from accelerated go-direct margin capture, which offset expected effects from the later timing of the annual rapid assay price increases in our enhanced SNAP Up The Savings program.

Increases in deferred revenues associated with new instrument sales, including the final two months of our Catalyst One introductory offer, constrained overall US normalized organic revenue growth for the quarter to 7%. These placements in associated deferred revenues will benefit future IDEXX financial performs as these revenues are realized.

IDEXX's performance continues to outpace continued solid US market growth. In Q4, patient visits increased 2% and clinic revenues increased 6.1% compared to the prior-year period. Our data is from a broadened data set of 5,100 clinics. A comparable customer data set in Q3 show patient visit and clinic revenue growth of 1.8% at 5.8% respectively.

For the full year, US revenues were $849 million. We achieved accelerate US CAG normalized organic growth of 9% in 2014, driven by 10% normalized CAG diagnostic recurring revenue gains.

International revenues in the fourth quarter were $161 million, supported by 12% normalized organic growth. Normalized CAG diagnostic recurring revenue growth was 14% in international markets in Q4, reflecting continued strong gains across regions. Full-year international revenues reached $637 million, up 11% organically.

For 2014, international normalized CAG diagnostics recurring revenues increased 14%, reflecting 13% gains in Europe, 19% gains in Asia Pacific, and 24% gains in Latin America. We achieved accelerated growth in both the US and international in 2014, and we're well-positioned to build on our strong global momentum this year.

Strong momentum in instrument placements in both US international markets sets the stage for continued high growth in CAG recurring diagnostic revenues. Global Catalyst placements increased 19% year on year in Q4, and premium hematology placements increased 23%. For the full year, we placed over 3,100 Catalysts and over 3,200 premium Hematology Analyzers globally, representing growth of 29% and 22% respectively, well ahead of our goals.

Global instrument revenue of $24 million was down 9% organically year on year in Q4. Lower reported revenues reflected mix impacts from high growth and relatively lower average unit price instruments globally and higher levels of deferred revenue deals.

In the US, we placed 460 Catalysts, up 9% year on year, with an estimated 54% going to competitive and new accounts. This caps a full-year effort where we placed over 1,600 Catalysts in the US, up 20%, increasing our overall install base to nearly 10,000. At the same time, we placed 489 premium Hematology Analyzers, up 18% year on year in Q4 and 23% for the full year, demonstrating continued high customer interest in benefiting from the integration of IDEXX in-house solutions.

We also continued to achieve impressive placement results in the international markets. Total Catalyst and premium hematology placements were up 28% in Q4 and 30% for the full year, with total international premium placements exceeding US levels. We're building on this momentum with the launch of Catalyst One in Europe this month and rollout to Asia-Pacific and Latin America in Q2. Gains in international markets augmented strong US momentum, resulting in a 20% increase in our total Catalyst and premium Hematology Analyzer install base in 2014.

Strong instrument placements are driving continued high growth in CAG diagnostic recurring revenues. Revenues associated with instrument consumables and service, rapid assay test kits, and lab services were $235 million in the fourth quarter. The transition to the all-direct model resulted in a one-time impact to CAG diagnostic recurring revenues of $25 million related to the elimination of channel inventory.

As noted, organic growth normalized for these impacts was 11.5% in Q4, bringing full-year gains to over 11%. Overall CAG diagnostic recurring revenues reached $1.05 billion in 2014, or 71% of total IDEXX revenue.

Looking ahead to 2015, we're targeting global growth in Catalyst placements of 20% to 25%, supported by the international launch of Catalyst One, and premium hematology placement growth of 10%, compared to very strong placement levels in 2014. The continued expansion of our global instrument base and uplift in testing that occurs in customers switch to Catalyst supports our outlook for 15.5% to 16.5% normalized organic growth in global CAG diagnostic recurring revenues in 2015, including about 5% of growth benefit from US margin capture.

Our CAG recurring annuity growth reflects continued strong gains in Reference Lab services and instrument consumables. Our Reference Laboratory and consulting services modality, with revenues of $119 million, grew organically 13% in the fourth quarter. High growth continued across all our major regions.

In the US, we achieved volume-driven 13% organic revenue growth, reflecting the benefits of our integrated sales force model, test innovation, and continued adoption and increased utilization of VetConnect PLUS. For the full year, global Reference Lab laboratory and consulting services grew 12% organically. For 2015, we expect to sustain double-digit volume-driven organic growth for Lab revenues globally as we leverage our expanded commercial capability and benefits from our test menu expansion, including SDMA.

Instrument consumable revenues of $77 million in Q4 grew 15% organically when normalized for changes US distributor inventory levels, including less than 2% growth benefit from accelerated US margin capture. Including one-time distributor inventory reduction associated with the US go-direct implementation, organic revenues declined 3%.

Full-year normalized organic consumable growth was 15%, including less than 1% benefit from accelerated margin capture. Strong continued growth reflects our expanding base of premium instrument placements in US and international markets and continued high retention rates.

Global growth in our active Catalyst customer base, which reached over 15,000 analyzers this year, is a key driver of our growth momentum. Catalyst customers now account for about 92% of our US chemistry consumable revenue, exclusive of corporate accounts. For 2015, we're planning for continued strong double-digit volume-driven base growth in consumable revenues with an additional $30 million, or about 9% of growth benefit, from US margin capture.

We also drove solid momentum in our rapid assay modality this year. For the year, rapid assay revenues grew organically 6%, adjusted for changes in distributor inventory levels. Our fourth-quarter rapid assay revenues, at $26 million, reflected normalized organic growth of 2%, including about 1% of growth benefit associated with accelerating margin capture.

As expected, Q4 growth was relatively lower, reflecting the delayed timing of our annual price increase to align with the January industry norm and impacts from our enhanced SNAP Up The Savings loyalty program. For 2015, we're targeting low to mid single-digits normalized organic revenue growth in rapid assay, with an additional $20 million, or about 13%, growth benefit projected from US margin capture.

Our customer information management and digital imaging systems business, with revenues of $29 million in Q4, grew organically by 5% in the quarter to year full-year growth of 12%. Fourth-quarter organic growth was supported by solid growth in practice management revenues and benefits from the continued ramp of Pet Health Network Pro, which reached over 1,400 users, a 50%-plus increase this year.

Strong digital instrument placement growth Q4 contributed to 13% overall placement growth for 2014. A higher percentage of our digital placements were integrated with multi-year diagnostic volume commitments, resulting in higher levels of deferred instrument revenue, which constrained Q4 reported revenue gains.

We're entering 2015 with a healthy backlog and good commercial momentum, and we're projecting about 15%-plus organic revenue growth next year for practice management and digital imaging systems.

Our Livestock, Poultry and Dairy business revenue grew nearly 10% organically in Q4 to $34 million. Quarterly results benefit from the stronger volumes of bovine products globally, as well as solid gains across dairy, swine, and poultry diagnostics. For the full year, our LPD revenues grew 9% organically and 12% overall, to $127 million.

For 2015, we're planning for relatively flat growth in LPD. We continue to anticipate a reduction in BSE and other bovine testing related to the success of eradication programs in Europe. These impacts will be offset by global growth in new products, including worldwide growth in dairy pregnancy testing and swine testing in Asia and Eastern Europe.

Our Water business revenue also grew nearly 10% organically in the fourth quarter, to $23 million, driven by new business gains across the US, Europe, Asia, and Latin America. For the full year 2014, the Water business grew 7% organically. We're targeting mid to high single-digit revenue growth for Water in 2015, supported by our expanded commercial capability. Solid Q4 growth and flow through supported the delivery full-year EPS results at the high end of our guidance range, with additional EPS benefits from a lower effective tax rate, including extension of the US federal R&D tax credit for 2014.

In Q4, we were pleased to have reduced US channel inventory to immaterial levels in advance of transition to an all-direct sales and distribution model. This resulted in a one-time revenue reduction of $25 million, with an associate negative one-time operating profit impact of $21 million. We incurred $4.6 million in net operating profit impact in Q4, and $5 million in 2014, associated with the ramp up of sales and operating resources ahead of the expanded 2015 all-direct sales and product distribution model in the US.

We also incurred about $5 million in nonrecurring project management and other one-time cost in Q4 and $9.5 million in 2014 required to implement the transition to the all-direct sales and product distribution strategy in the US. These impacts combined reduce Q4 EPS by $0.41 per share and 2014 EPS by $0.45, in line with our expectations. The commentary that follow focuses on Q4 and full-year profit drivers that exclude these transitional impacts.

Gross profit was $182 million in Q4, down 3% on a reported basis. Adjusted for transitional impacts associated with the US all-direct transition, we estimate gross margins increase moderately year over year, reflecting lower product costs and modest net price increases. Operating expenses increased 16% in Q4, or 8% excluding about $10 million in transition impacts, driven by increases in global commercial spending in support of accelerated revenue growth.

Reported operating profit for Q4 was $35 million, net of about $31 million of transitional impacts. For the full year 2014, operating profit was $260 million. Adjusting for transitional impacts of about $35 million, we estimate that full-year 2014 operating margins were about 19.6%, up about 20 basis points versus the prior year.

Adjusted EPS was $0.95 for the quarter, up 16% year on year, in $3.99 for 2014, up 15%. Results benefited in part from favorable impacts on our tax rate, including $0.065 per share benefit from the extension of US R&D tax credit, all which was inflected in Q4 adjusted EPS.

Reported EPS in 2014 benefited by about $0.04 per share from a nonrecurring 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 $0.54 in Q4 and $3.58 for 2014.

Free cash flow was $191 million for 2014, or 105% of net income. Our strong cash flows have enabled continued allocation of capital toward share repurchases. We repurchased over 1.1 million shares for about $149 million during the quarter, or an average price of $132 per share. In 2014, we repurchased almost 4.9 million shares, or over 9% of our diluted shares outstanding at the beginning of 2014, for $618 million.

We ended 2014 with about $900 million in debt outstanding. At year end, we had $323 million in cash balances and about $150 million of borrowing capacity available under our expanded $700-million revolving credit facility, prior to benefits from our planned $150 million of new term debt issuance to be funded in February.

Our leverage ratios as a multiple EBITDA, adjusted to exclude transition impacts associated with the all-direct change, were 2.43 times gross and 1.56 times net of cash balances at year end. That concludes our review of 2014 financial performance.

As we look forward to 2015, we need to adjust our outlook to reflect a significant continuing strengthening of the US dollar we've seen over the last three months. Since we provided preliminary guidance on our October earnings call, the US dollar has appreciated about 10% against our major currencies.

At the exchange rates shown in our press release, we now estimate that effects of the strengthening of the US dollar will reduce year-on-year revenue growth by about 5% and adjusted EPS by an estimated $0.22 per share. This has the effect of reducing our 2015 revenue outlook by about $55 million and EPS by $0.13 per share, more than we had estimated we provided culinary guidance last October.

Please note that our 2015 profit outlook benefits from about $21 million in pretax foreign currency hedge gains from previously established contracts, which will mitigate the 2015 profit impacts from the stronger dollar. At current rates and timing of hedge contracts, we will lap these benefits in 2016. As a sensitivity, of 1% change in the dollar from rates assumed in our press release would impact 2015 revenues by about $5.3 million, and 2015 operating profit by about $900,000, net of hedge positions currently in place.

Adjusting for current FX rates, we're now projecting 2015 revenues of $1.64 billion to $1.66 billion, or reported revenue growth of 10% to 12%. Our revenue growth outlook reflects raised expectations for 13.5% to 14.5% normalized organic revenue growth, including about 3.5% of growth benefit from US margin capture. Our higher revenue growth outlook mitigates the negative impacts from FX changes, resulting in a net $0.05 reduction in our 2015 outlook, to $4.33 to $4.43 per share.

A key driver of our growth plan is our expectation for 15.5% to 16.5% normalized growth in CAG diagnostic recurring revenues, including about 5% growth benefit from margin capture. For 2015, we estimated that CAG diagnostic recurring revenues will grow to about 72% for the Company's total revenues. We expect that recurring revenue gains will continue to be primarily volume driven, with expectations for a continued modest 1% net price increase in the US, consistent with general levels of inflation.

We continue to target flat comparable operating margins in 2015, despite headwinds from foreign currency changes. Moderate gains in gross margins will offset operating expense increases associated with expanded commercial capability, including resources added to support the US all-direct sales strategy.

Our EPS outlook is supported by benefits share repurchases. Given share repurchase activities to date and expectations for continued future capital allocation toward share repurchases, we expect year-on-year weighted average share count reductions about 6.5% to 7% in 2015. This is slightly lower than our earlier estimates, reflecting recent increases in our stock price. In support of higher share repurchases, we've increased debt moderately and will fund $150 million of term debt in Q1.

We now project interest costs in 2015 to be about $27 million to $28 million, reflecting low rates achieved on our most recent financing.

Our 2015 outlook reflects an expected effective tax rate of about 30%. Please note that our 2015 tax rate outlook does not assume the further extension of the US federal R&D tax credit. While US federal policy for 2015 is an unknown, as an aside, I'd note that the R&D tax credit has been extended for 18 years in a row historically.

Free cash flow is projected at 90% to 100% of net income for 2015, net of effects related to the addition of about $15 million to $20 million of working capital to support the US all-direct strategy. Capital expenditures are estimated and $85 million, up from $65 million in 2014, primarily due to anticipated investments in manufacturing the Reference Lab operations, as well as information technology products to enhance infrastructure and business processes.

In terms of our entry rate heading into 2014, (sic - 2015), we expect Q1 normalized organic growth to be in line with our targeted full-year growth range. Year-on-year foreign exchange effects will be significant in Q1, resulting in a 6% reduction in reported growth and over $4 million of headwinds to operating profits. These impacts, combined with the year-on-year effects from the ramping of incremental commercial resources globally in 2014, will result in operating margins of about 100 to 150 basis points below prior-year Q1 levels, and limited year-on-year reported operating profit growth in the quarter.

That concludes the financial review. Let me turn the call over to Jon for his comments on our business performance and our areas of focus heading into 2015

Thank you, Brian. We finished the year with strong momentum in our business. Our business models nearly 90% recurring revenue, including the contribution of over 70% from CAT diagnostics. These revenues form an enduring profitable growth vector, and we are pleased to be able to raise our organic revenue growth guidance adjusted in 2015 building on our success and accelerating growth in 2014.

Our performance reflects the key elements of our Company's strategy. First, a sustained focus on innovation which transforms the capabilities of our customers. Second, our new, greatly-expanded commercial model in the US, now fully in operation. And third, a strengthened global presence supported by key investments, driving strong growth in virtually all the regions and lines of business. Let me provide an update on these operating strategies, starting with innovation.

During Q4, we started shipping our next-generation flagship Catalyst One point of care chemistry analyzer to the North America market. We have over 350 of these instruments operating in the field, and the customer feedback has been extremely positive. Catalyst One combines the unique capabilities of Catalyst Dx with a smaller and even simpler instrument, and at a 40% lower cost.

We are excited to offer a very competitive Catalyst One solution in 2015 to the market of well over 10,000 US veterinary practices that are not yet IDEXX in-house customers. The majority of this market consists of practices using outdated competitive instruments that lack the menu, turnaround time, and advanced software integration that are capable with Catalyst One, not to mention VetConnect PLUS results on the smartphone, all at the lowest price per test.

The international market opportunity for Catalyst One is even more than twice as large as the US. With the launch of Catalyst One this month in Europe, we expect to build further on the tremendous momentum achieved in 2014 with Catalyst Dx placements in our international markets. Catalyst One appeals to a far broader segment of practices in these markets.

We are also innovating in a big way with test menu. By this summer, we'll be offering SDMA a novel kidney function test in our Reference Lab chemistry panels. This new biomarker provides an early indication of progressive and irreversible loss of kidney function. Current diagnostic methods, including creatinine, included in most all chemistry panels, identify kidney function loss very late in the process, limiting treatment options.

Even today, with suboptimal test parameters, screening for chronic kidney disease, or CKD, is well adopted by veterinarians in practice. And many pet owners also know about CKD due to the fact that 1 in 3 cats and 1 in 10 dogs will, in time, develop this deadly disease.

While SDMA can generally be run on expensive equipment, such as mass spectrometry, IDEXX's proprietary innovation has been to develop low-cost creations that run on standard, high-throughput, clinical chemistry analyzers that we use in our Reference Lab with the same fast turnaround time as the rest of the chemistry panel. This proprietary innovation is what enables us to include SDMA automatically and cost effectively in every chemistry panel.

Our veterinary customers are thrilled to hear that we will automatically include SDMA in all IDEXX Reference Lab chemistry panels at no incremental charge starting this summer. We will also divide in Reference Lab SDMA result without incremental charge for all of our in-house customers when they run a patient sample on their Catalyst, as long as they use IDEXX as their primary outside lab provider. Our ability to offer our proprietary and innovative tests as part of a comprehensive chemistry profile, whether performance in practice or at the Reference Lab, creates a compelling and differentiated value proposition.

SDMA is one of the most important new diagnostic and test innovations to come the veterinary medicine and half a century. Of all the reasons to run preventive care or wellness chemistry and hematology testing, veterinarians routinely put screening for chronic kidney disease at the top of the list. With SDMA, will now enable practitioners to diagnose CKD early enough to do something to slow the progression, through a therapeutic diet, a drug regimen, or both, keeping pets critically healthy and adding months or years to their lives.

As such, we believe the adoption of SDMA will be promoted by many industry players who sell therapeutic diets and drugs for CKD, as SDMA will be a huge boost to the volumes in this already important category. We believe our strategy of automatic inclusion in the chemistry panel, a move applauded by our customers at last week's North American Veterinary Conference, will also accelerate SDMA's broad recognition as the standard of care.

Note the importance of chemistry testing in the Reference Lab modality. More than half the requisitions that come IDEXX Reference Labs in North America include a chemistry panel, and virtually all customers who use IDEXX as their primary Reference Lab routinely request chemistry panels.

We have yet another important IDEXX Reference Lab menu introduction to discuss today. IDEXX will introduce this spring two more exciting and proprietary innovations in intestinal parasitic screening for dogs and cats. We will be introducing new hookworm and roundworm antigen tests to all fecal panels that already include whipworm antigen test.

Like whipworm antigen testing, these novel tests will find a presence of intestinal worms that current methods miss, and find them earlier in the infection cycle, enabling earlier disease diagnosis and treatment intervention. We expect to begin field trials in February for these new tests and to rollout this offering across the US in the first part of Q2.

Screening for intestinal parasites, including whip, round, and hookworm, is a well-established part of routine preventive care, and with an addition of a low-cost fecal antigen test, we will have a unique offering for customers. Parasite screening with fecal testing is commonly conducted manually within the veterinary practice today, using difficult and less accurate sample prep procedures, combined with microscopy.

We estimate that 80% of the 40 million tests conducted in the US are conducted with a microscope in practice. Assuming we can convert a quarter of the 40 million to these novel and competitively priced fecal offering over time, we can grow our Reference Lab fecal testing business over fourfold to 100 million annually.

We're also continuing to innovate in information technology. We continue to advance the capability and the utilization of VetConnect PLUS globally. With the Catalyst One launch internationally, we have recently introduced VetConnect PLUS in 13 countries in Europe beyond the UK. We now stand at 17,500 activations globally, with 13,200 in the US.

Speaking of information technology, we were pleased last quarter to have added through acquisition a leading SaaS-based practice management software solution in Europe called on Animana. Now, like the US with Cornerstone, we can offer a PIM solution to our European customers, and on an advanced SaaS platform.

We are also introducing in the US a SaaS-based software solution called Petly Plans that enables practices to more easily adopt monthly preventive care plans. Preventive care plans have proven to be a client-centric way to expand diagnostic testing adoption with pet owners. Between VetConnect PLUS, Anamana, Petly Plans, and Pet Health Network Pro, our client communications offering, we now have four advanced SaaS offerings for customers to manage and grow their practice.

Other than VetConnect PLUS, all of these offerings are subscription based. You will see over the course of 2015 a continued buildout of a highly capable and uniquely integrated SaaS ecosystem, leveraging the already broad adoption of VetConnect PLUS. This IT ecosystem is designed to grow the profession, and in turn, our recurring revenue streams in the companion animal business.

Let me provide an update on our fully-direct commercial model now in operation in the US. We exited 2014 with full capabilities, including the launch of our e-commerce site in December that is already receiving over 30% of our customer order value, a testament to its instant success.

We have hired and trained our expanded organization serving customers in174 veterinary diagnostic consultants, or VDC, territories. We believe that by expanding the number of territories serving US companion animal market and by shrinking the size of each territory, will be able to grow our presence in veterinary practices from 25,000 sales visits realized in Q4 to at least 45,000 visits quarterly in 2015, and 84% sequential quarterly increase.

We know that when we call on customers, they grow faster. In fact, customers we called on 2014 grew 13% faster than customers we did not reach with at least one in-percent visit. Overall, our field-based front-line professionals and phone-base sales serving the US companion animal market is the largest in the profession at over 400.

Let me give you an example of how we expand the market with our direct customer presence. Our US Reference Lab modality grew 13% in Q4 of 2014. Almost all of that was volume growth, as price contributed less than 1%.

Same customer volume -- that is buying from customers who use IDEXX Reference Labs in both current quarter and same quarter prior-year -- generated almost 8% of the overall volume of growth for the quarter. This same customer volume growth occurred in part through the customer adoption of our advanced testing portfolio. Same customer volume growth has accelerated every quarter over the last two years since the transition of our account management model in 2013. And at the beginning, it was basically nothing, so it's gone from 0% to 8% acceleration.

Also during the fourth quarter, we had a strong number of Catalyst placements to new and competitive accounts in the US. At 54% total placement, this amounted to 250 of our 460 placements, and these were to generally higher volume accounts. The rest were VetTest upgrade placements, where we typically achieve a 25% uplift in consumable revenue.

We also achieved an unprecedented level of hematology placements that build customer loyalty and diagnostics utilization. So even with the more limited 125 US VDC territories in Q4, we grew the active install base of Catalyst customers. The growth in the instrument install base is what helped drive 14% growth in our VetLab consumables in Q4, net of distributor margin capture.

As to our rapid assay business, we have successfully placed 8,400 SNAP Pro mobile instruments with 6,100 customers in 2014. These customers, along with SNAPshot Dx instrument customers, now account for a little over 50% of our rapid assay volume in North America. Thus, we have transformed a little more than half of that rapid assay business to an install base instrument business model, and with only 10 months of SNAP Pro placements.

In addition, since October of last year, we have enrolled in record 13,700 customers in the 2015 SNAP Up The Savings program, or SUTS, a dramatic increase of 6,700 accounts over the prior-year program. SUTS is a membership discount program which we have offered with variations in design every year for over a decade and is a recognized brand with customers. The 2015 program design provides both upfront and end-of-the year discounts off list price, the latter of which are earned when customers achieve a minimum purchase volume of canine, and separately, feline kits.

Moving to our international business, it is notable that the veterinary market in developed countries have a standard of diagnostic usage that is approximately one-third of the US, even know pet owners love their pets just as much. Thus, we believe the growth potential internationally is even stronger than the US, which is why we've been rapidly expanding our commercial capability in virtually all global markets.

As we move into 2015, we are supported internationally by the launch of Catalyst One and VetConnect PLUS and an expanding Reference Lab network in SDMA in. In addition to the investments we made to advance service levels and improve cost structures of our Reference Labs internationally, we have also completed three lab acquisitions in Europe in 2014 to expand our geographic presence, including Switzerland, Spain, and Finland.

The combination of innovation and opportunities for growth globally is showing in the numbers. In 2014, both our US and international CAG diagnostic recurring growth normalized accelerated by a little over 2%, to 14% internationally and 10% in the US. We see doubling the international CAG diagnostic recurring revenues over the next five years.

In summary, we enter 2015 with strong momentum and an ever-expanding set of product innovation, which benefits from roughly 85% of identifiable industry investment in R&D and new products in the diagnostic category and a transformed commercial ability to bring these innovations to the veterinary practice. Underlying our outlook for strong, enduring growth of our recurring revenue streams is insight that the pet owner is still today significantly underserved by the profession.

Pet healthcare could expand by as much as three- to four-fold in the US alone, based on standard of care and compliance levels that the best-in-class practices are achieving with the pet loving population. And of course, our menu innovations in 2015 including SDMA and fecal antigen, are bringing powerful new tools to empower the veterinarians to be heroes in diagnosing disease early and providing effective treatment plans that allow pets to live longer, happier lives.

As we conclude this report of our 2014 results, I want to express my deep appreciation for our over 6,000 IDEXXers for the continued passion. I cannot think of a better way to have celebrated our 30-year anniversary than with such a great year. With that, we will open the call for questions.

Thank you.

(Operator Instructions)

Ryan Daniels, William Blair.

Yes. Good morning, thanks for taking the questions. I guess, my first one, the one number that really stands out is the reference lab same-client volume growth and how rapidly that has accelerated. Do you guys have anymore details or color on what's driving that, if it's clients moving more their test you, more overall testing? Are they doing more of your proprietary testing? Just kind of what is that, and how sustainable do you think that big organic uplift is?

Yes. Thank you for the question. We believe the primary driver for that is the adoption of our unique advanced test menu that we've launched over the last, virtually a decade, combined with the new customer account model where our sales reps are calling on existing reference lab customers. We believe that is a clearly sustainable, has the opportunity for upside because we actually expanded, not only the number of specialized tests in our reference lab. Of course, with the big launch of SDMA, and now the new fecal antigen test but of course, we are expanding the number of calls that we're going to be making on our reference lab customers. I will note, it is an important observation, because the reference lab modality is the number one contributor to our recurring diagnostic revenues.

Okay, I appreciate that. And then, maybe just a follow-up there as well. If we think about your R&D pipeline, what its yield is specifically on the reference lab with SDMA on the way, with the expanded fecal test, as those become I think as you mentioned industry standards, do you think vets will start to kind of [need] IDEXX laboratories from a reference lab standpoint? Because there will be demand from patients or within the community for these, and effectively you are the only one they can get them from?

We believe absolutely that it is important to expand the standard of care. Let's just take as SDMA. The reason why we're offering it at no additional charge in all of our reference panels, is because you really shouldn't be running chemistry with creatinine and without SDMA, and creatinine is in virtually every chemistry panel. So we believe this will create an uplift in standard of care that will be well-appreciated by pet owners. If you talk to any multi cat owner, they probably had a cat who has passed away of chronic kidney disease. So it is well-appreciated, and we would expect that that over time pet owners will demand high standard of care.

Erin Wilson, Bank of America Merrill Lynch

Great. Thanks for taking my questions. Have you seen I guess, any meaningful shift in the overall kind of retention rates across consumables and equipment, showing there were some customers that would be loyal to distributers, but could you talk -- speak to some of the dynamics and the feedback you are getting on the go-direct strategy so far?

Yes. We have seen no meaningful shift. We were pleased to have, continue to expand our Catalyst install base, active install base in Q4. We measure the active install base. Of course, the record number of hematology placements also continues to expand. And now we're really moving into the 2015 with Catalyst One, which is a very competitively priced and highly capable, really uniquely capable instrument. And so, I think as we move to an 84% sequential growth in the number of calls that we are making on customers from Q4 to Q1 in 2015, we will see the continued business benefits of the direct model play out

Okay, great. And then thinking about VCA, how much I guess of an impact was that over the past year, and I guess we will be lapping that to some extent. But I guess this brings up an important point on like the quality of customers, and thinking about the way you look at your book of business, and your book of customers here. Do you have metrics like around quality of customer in terms of consumable utilization? That might be an interesting metric to sort of track in light of all these shifts.

We do track that. We find that the larger customer, more they appreciated our technology, and all of the benefits that it brings. With regard to your question on VCA, that was really an immaterial impact. And the reason is that VCA is primarily, drives their diagnostic volume to the reference lab as you can imagine. And thus each VCA practice is, we have found a very small user of the in-house chemistry analyzer

Okay, great. Thanks so much.

Jonathan Block, Stifel

Sorry, excuse me. Thanks, and good morning. Two questions. First one, just Jon, we have done some work, that seems like you are your increasing utilization with your current customers by your go-direct strategy, seems to be resonating. But maybe if you can help tease out for us, where your guys having the most impact? Are you seeing the biggest lift on explaining these specialty tests at the reference lab? Is it a lift in clinical consumables. Is it VetConnect PLUS? Where are you seeing that approach resonate across your different modalities?

Well, thank you for the question Jon. Of course, we have been a direct with the reference lab modality from the beginning. I think when we moved to the account manager model where we are calling on existing reference lab customers, we began to see the acceleration in the same-store utilization that I referenced. We have now only moved to a direct model, calling on our customers directly for the in-house consumables.

So we are really beginning of that utilization trend in 2015. And we have a number of tests, whether there are menu on the in-house instrument suite such as [fructosamine] or phenobarbital or coming shortly [T4], or for a SNAP test that are not well adopted yet by customers, that have the same adoption and utilization potential that we have seen in the reference lab. And so, we really do see that as one of the avenues same-store utilization growth, and expanding the market and expanding the standard of care that will be driven by this model.

As I have mentioned, the pet owner is really not well-served yet, and I think veterinarians want to learn how to better close that gap of 3 to 4 times. That's what our diagnostic subject matter experts, the only ones in the profession who are regularly calling on veterinary practices can help them with, since diagnostics is such a key component of the practice care equation.

Okay, very helpful. And the other question, maybe the biggest is, I am really not trying to start a war of words here, but there were very big numbers from your primary competitor last night. I guess, I have two questions to that. You also had big chemistry numbers, but why are there so many chemistry boxes going out the door, in what is largely saturated chemistry market where 88% or 89% or 90% according to our work, of the clinic out there do have an in-clinic analyzer. That is our question number one.

And question number two is, based on some of those numbers last night, they actually placed more chemistry analyzers to end users, than you guys did in the fourth quarter. So what are you seeing within your customer base? In other words, are you seeing some of the guys who had a VetTest, and just never ran volume on it, or very little volume on it over the past 6 or 12 or 18 months? Are you conceding those accounts, and you are willing to do that just because they might be your reference lab customer, and they were never committed to in-clinic? Could you parse through some of that, Jon? Thank you.

Well, we believe that there are well over 10,000 accounts that are really using technology that was launched a decade ago. If you think about what has happened with IDEXX over the last decade, we've launched Catalyst One. We've launched ProCyte, we've launched the Catalyst Dx. We've launched VetConnect PLUS. We've expanded the menu on the Catalyst platform. And so, we see a great opportunity to upgrade those accounts that have outdated technology, and of course, to continue to upgrade our VetTest install base. But as Brian mentioned, 92% of our chemistry volumes exclusive corporate accounts is coming from the Catalyst install base already. So it's only 8%. That does represent many thousand VetTest customers. So it's a very large number of customers, but a very small amount of our volume.

What we see as the greater opportunity is the 10,000 customers out there that do not have the real-time care, the advanced menu, the flexibility and the lowest cost per test, let alone the connection into a full diagnostic solution that is at the current standard of care that we will have established in 2015 that includes SDMA. I will mention that for accounts that use Catalyst and use us as a primary reference lab, we will be ensuring that they can practice the current standard of care that includes SDMA, even when they're running their chemistry panels in-house, because they will be able to that reference lab SDMA at no incremental charge. So we see a very significant opportunity, and that's our framework. That's our outlook for the market. We're pleased with the 14% growth that we had, adjusted even for margin capture in the instrument consumable modality, and we think that's a very good number, and we expect to continue to grow the instrument modality.

Thanks for your time, guys.

Kevin Ellich, Piper Jaffray.

Good morning. Thanks for taking the questions. Jon, just following up on SDMA, could you give us some color as to kind of the work you guys did, to see what type of adoption you should see out of the vet clinics in the market? I guess, where is the demand? And then, combined with your new fecal test that you talked about that will be out later, how much do you think that will boost your reference lab growth?

Well, we expect that both menu items will be beneficial to all of our recurring revenues, even though they're both reference lab modalities, because they are part of an integrated diagnostic solution. Just to give you a little background, basically the current way that you screen for chronic kidney disease is that -- the primary parameter is creatinine. The problem is that when creatinine goes up, that basically means the kidney ran out of capacity, and its being overwhelmed by the body secretion of creatinine, which is a metabolic waste product. So basically it's too late, 75% of kidney is gone.

So what SDMA does is catches this progression of this disease far earlier, 40% or even 25%, when the pet is clinically totally healthy. You can donate one of your kidneys if you're healthy, and still live on one kidney. So 50% loss of kidney function isn't a problem, but it is a problem if it's progresses to 75%. And then there's a number of treatments. This is a big category in therapeutic diet area for kidney diets, that preserve kidney function. So we suspect that there are going to be others that are going to be jumping on board and promoting SDMA, because it will be a marker which will demonstrate the need for their diets, or in other cases for therapies, for drug therapies.

Chronic kidney disease, there isn't any ambiguity about chronic kidney disease in the practice. You talk to any veterinarian, they are going to say, I see it all the time in my practice. This is a major category. We expect this will be the standard of care. That is why we decided to include SDMA automatically in the chemistry panel. Of course, we can do so with our innovation, because we felt that running a panel without SDMA was really incomplete. And this is been extraordinarily well-accepted, immediately instantaneously as we inform customers of what we're doing here. There is just no -- it's all good. (Multiple Speakers). It actually expands the reason to do preventive care testing, because they can get to it earlier. Now they are more -- they have got higher energy to recommend preventative care testing to pet owners.

Thanks. And then, my follow-up is, with the changes in the competitive landscape as John was talking about, how should we think about your Catalyst retention rate? Can you guys break out the mix between Cat One and Dx, and then, how will this impact your consumable revenue stream and margins going forward? Thanks.

Yes. So if a practice owns a Catalyst Dx, they have all the capabilities of Catalyst One. So Catalyst One is really targeted at any practice that doesn't currently enjoy the benefits of Catalyst technology. And so, we see Catalyst One as a very competitive way to grow the Catalyst install base, and as we've mentioned we have really seen an immaterial impact on our Catalyst retention rates, which is what gives us confidence that continued double-digit growth in this modality

Yes, I just want to reinforce that. Today, we raised our outlook for CAG recurring diagnostic revenue growth, and made clear that we are expecting continued strong double-digit growth in consumable revenues in 2015. So we're maintaining the very strong momentum, the accelerated momentum that we achieved this year

Great. Thanks, guys

(Operator Instructions)

Mark Massaro, Canaccord Genuity

Hey, guys. Thanks very much for taking the question. Your customer retention rates have always been quite good, in the high 90%s. Overall, has there been any change to the -- I think it's the 96% and 99% retention rate that you have cited?

No.

Okay, great. And then, with respect to US Catalyst placements, perhaps to competitive accounts, can you maybe walk us through where you see that metric going in the next couple of quarters? I know, I think you have been reporting roughly 60% going to competitive accounts. And the number came in, I think at around 54% this quarter, so how should we think about that metric going forward? Thank you

I think if you look at the last four quarters, we had between a 50% and 60% in competitive placements. I saw -- obviously, we saw a big jump in the absolute number of placements in Q4, and 54% is pretty solid. And no, there are --obviously as the number of VetTest accounts diminishes that are out there, and you got the well over 10,000 competitive accounts, we are going to see that as a attractive opportunity for the continued placement of Catalyst One, and its unique capabilities and price point.

Great, thank you.

Ben Haynor, Feltl and Company

Good morning, gentlemen. Thanks for taking the question. Just a couple of numbers question for you. On the tax rate, I did see the $0.065 called out in the press release, but was wondering what else altered the tax rate there? I recall the guidance on the Q3 call being for 29% tax rate for 2014, excluding the $0.04 benefit in Q3. I think that would have implied 28%, 29% in Q4. So how would you categorize the remainder of the benefit relative to the 13% rate that you reported?

We literally had five things, that are all smaller in nature, all moving in the right direction in the quarter, and it's not one specific thing that created a little bit of an upside there. And the benefits of some of those were related to planning initiatives, and that is one of the reasons we lowered our outlook for the 2015 tax rate to 30%. The prior guidance had been 30.5%

Okay, thanks for that. And then with your plans for share repurchases and the financial outlook, it seems here you are going to continue to take on debt to repurchase shares. By my math, kind of back of the envelope, that would put your book value at maybe negative $5 a share exiting 2015, which would be a pretty similar decline to the [$7.50] a share we saw during 2014. Am I in the ballpark here? And I guess, at what point would you consider slowing down taking on debt to conduct share buybacks?

Well, we are very comfortable with the path we have been on in terms of our capital structure as I mentioned. We're ending the year at a little over 2.4 times EBITDA, in terms of our leverage ratios adjusted for the transitional impacts. We are very comfortable with the leverage range in the 2.5 to 3 range. We have said that consistently. And in terms of our capital allocation strategy, we want to ensure that we're maximizing value for shareholders. And as long as we are comfortable with the our business outlook which today we reinforced, raised our operating outlook, our confidence will help us to assess how we look at allocating capital to share repurchases. And we would anticipate continuing to allocate capital, because we feel great about our strategic plan and the positive momentum we are driving.

And I would also just might mention, of course, that we have pretty strong cash flow coming out of the operations of the business. And it's one of the benefits of our business model, which allows us to have capital to allocate to share repurchase

All right. Thanks for taking the question, gentlemen

Kevin Ellich, Piper Jaffray

Thanks for the follow-up. Hey, Brian, just a quick question. I know there's a number of moving parts, but free cash flow was only 20% of GAAP net income or $9 million this quarter. Just wondering, what's going on there, and I guess what your outlook for free cash flow 2015? Thanks.

I would have to go look at it more closely. I would assume that is related to the transitional impacts. So I wouldn't look at the quarter at as indicative. It can be related to timing of capital, spending and things like that. We did share that our outlook for free cash flow in 2015 was 90% to 100% of net income. And keep in mind, that we've got -- and we had signaled this earlier, we are going to add about $15 million to $20 million of working capital, primarily receivables related to go-direct change, which is 7% to 10% or so of net income. So it's effectively the same range that we've been in, around 100% of net income or better, normalized for those impacts.

Great, thanks.

Okay. Thank you very much for the calls, and for joining the conference call. I just want to wrap up again by really express my appreciation to IDEXXers. We celebrated our 30th anniversary over the last 12 months, 30 years of innovation. And I just am extraordinarily grateful for what we've accomplished, both on the innovation front and on the global commercial front, which positions us so well for the next many years to serve our customers, and to continue to transform their capabilities to achieve their objectives. And in the case, of course, the companion animal business to serve the pet owner.

We believe there is just very significant opportunity to both grow their capabilities to provide high standard of care, and to expand the level of standard of care that is provided both in the US, and even more so in the international market. And the accomplishments that we've achieved in the 2014 have just positioned us very, very well to do that, and therefore to continue to see sustained growth in the attractive and profitable growth vector of our recurring revenue. And with that, we will conclude the call. Thank you

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