愛德士 (IDXX) 2015 Q3 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories third quarter 2015 earnings conference call. As a reminder today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Office; Brian McKeon, Chief Financial Officer; and Ed Garber, Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding IDEXX's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as, expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions. Such statements include but are not limited to, statements regarding management's expectations for financial results for future periods. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Also during this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles, or GAAP. A reconciliation of these non- GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release which can be found on our website, IDEXX.com. In reviewing our third quarter 2015 results, please note all reference to growth and organic growth refer to growth compared to the equivalent period in 2014, 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 feel free to go back in the queue and if time permits we will be happy to take your additional questions. I would now like to turn the call over to Brian McKeon.

Good morning and thanks everyone for joining us in our call. Today I will take you through our Q3 results and outlook for the full-year and I will also provide an overview of our preliminary guidance for 2016. Jon will follow with his comments.

In terms of highlights, we delivered 12% normalized organic revenue growth in the third quarter supported by very strong instrument placements and continued strong growth in CAG diagnostic recurring revenues. Our profit results were solid in Q3. Adjusted EPS was $0.54 per share up 9% on a comparable constant currency basis.

Please note that our adjusted EPS results exclude impacts from a capitalized software impairment charge. As part of our evolved information management strategy we decided to refine our approach to developing our Practice intelligent business and our IDEXX Neo-cloud base information management software offering. Re-prioritization of efforts in this area resulted in a non-cash charge of $8 million or about $0.06 per share in Q3. We will talk more about the evolution of our information management approach, which is supporting strong revenue gains, later in the call.

As we look forward we are updating our full-year 2015 revenue and adjusted EPS guidance today to reflect our current growth trends as well as some select impacts from foreign exchange changes and updated effective tax rate estimates. From an operating perspective while our growth remains strong we are tracking towards the lower end of our earlier revenue guidance range for 2015, which had targeted a greater acceleration of growth in the second half. This outlook has been impacted recently by moderated market growth in Europe and effects for more challenging macro economic trends including currency changes constrained targeted emerging market gains.

Consistent with this revenue outlook we are refining our adjusted EPS guidance range for 2015 to $2.04 to $2.07 per share including approximately $0.03 per share of headwind combined related to recent current foreign currency rate change in emerging markets as well as a 50 basis point higher estimate for our 2015 effective tax rate, reflecting updated regional profit mix projections also impacted by currency effects. Our 2015 reported EPS outlook will also incorporate the $0.06 per share impact from the software impairment charge.

As noted we will be reviewing our preliminary guidance for 2016 today which reflects targets revenue of $1.715 billion to $1.735 billion and EPS of $2.09 to $2.16 per share. This outlook reflects expectations for continued solid operating performance including normalized organic revenue growth of 8% to 9% and constant operating dollar margin improvement of 50 basis point supporting the 13% to 16% constant currency adjusted EPS growth. As noted in earlier reviews, meaningful FX headwinds will constrain reported financial gains in 2016.

2016 foreign exchange impacts include the lapping of $20 million in 2015 hedge gains, year on year effects from the strengthening of the US dollar on revenue and profit growth, and an additional 50 basis point increase in our effective tax rate driven by unfavorable profit mix impacts related to currency changes. Combined these currency related effects will lower reported operating margins and reduce 2016 EPS by about $0.21 per share. We will discuss these impacts in more detail as we review our 2016 preliminary guidance.

Let's begin with the review of our Q3 performance by segment and region. Organic growth in Q3 continued to be driven by strong global CAG gains. Global CAG revenues were $344 million reflecting 14% normalized organic growth. Our water business also continued its solid revenue gains increasing 7% organically to $26 million, reflecting solid existing and new business growth across major regions.

Our livestock, poultry and dairy business revenue was $30 million up 6% supported by gains in bovine, poultry and swine testing in Europe and emerging markets, including benefits from our new dairy pregnancy products. Overall US revenues were $252 million in the quarter up 13% organically. US gains were supported by very strong instrument revenues and 12% normalized CAG Diagnostic recurring revenue growth, reflecting continued strong growth in reference labs and instrument consumable sales as well as improved growth in rapid assay.

IDEXX's performance continues to outpace solid US veterinary practice market growth as reflected in our data set from approximately 5,200 clinics. In Q3 this market level data showed patient visits increased 2% and clinic revenues increased 5.2%, each down about 1.5% from strong H1 market growth trends.

International revenues in the third quarter were $154 million up 13% on a constant currency basis, driven by strong CAG growth including the benefits of recent acquisitions. International CAG normalized organic growth was 14% supported by very strong instrument placements and 9% normalized organic growth in CAG Diagnostic recurring revenues. Recurring CAG growth in Europe moderated in Q3 reflecting relatively softer patient traffic trends impacted by the economy and unusually hot weather trends this summer.

As noted global instrument revenues were outstanding again this quarter driving 54% organic growth in instrument revenues to $26 million. When the approximately $3 million benefit from recognition of deferred revenue related to Catalyst One introductory offers is excluded, instrument revenues had Q3 organic growth of 37%. Strong premium instrument placement trends, including sustained high placement levels at competitive accounts in the US, are supporting continued growth of our instrument base globally.

Of note, our US premium instrument base continued to expand solidly this quarter, supporting 18% growth in our Catalyst install base net of estimated customer defections in the US over the last year. Jon will review our strong momentum in expanding our instrument base in more detail in his comments.

Strong global placement gains set a foundation for continued solid gains in CAG Diagnostic recurring revenues. In Q3 global CAG Diagnostic recurring revenues were $290 million up 11% organically. Instrument consumable revenues of $99 million grew 16% normalized in Q3, supported by strong global volume gains and net benefits from US margin capture.

Consumer growth moderated somewhat from Q2 impacted by relatively lower growth in Europe compared to very strong Q2 levels. We also saw relatively moderated consumer growth in Q3 reflecting carryover impacts from heightened competitor placement activity in our US customer base in Q4 of 2014 and the first half of 2015. Which partially offset benefits from strong new customer placement gains and consistently solid same store growth trends.

While these effects from earlier competitor instrument placements will carry over and constrain consumer growth somewhat in Q4, our progress in driving continued strong competitive chemistry placements, while improving retention rates at existing Catalyst accounts, will allow us to continue to expand our install base and position us for improved reported consumable growth dynamics through 2016. Our reference laboratory and consulting services modality with revenues of $130 million, grew organically 10% in the second quarter supported by 13% growth in the US, which offset moderated lab growth in Europe impacted by unfavorable weather trends, which constrained patient visits. We are targeting continued strong growth in lab revenues going forward, benefiting from a recently introduced SDMA test in fecal antigen panels.

Rapid assay revenues increased 7% normalized in Q3 to $48 million, reflecting volume gains in SNAP 4Dx kits in the US, stabilized trends in first-generation products, and benefit from US margin capture. Jon will talk more about dynamics in this area in his comments.

Combined information management and digital imaging system revenues increased 13% on a constant currency basis, supported by 9% organic gains and benefits from recent acquisitions. Our digital business posted modest reported gains despite solid growth in new placements reflecting increased deferred revenues associated with bundled business commitments. We achieved 19% constant currency growth in information system revenues, reflecting benefits from our recent cloud-based PIMS acquisitions, as well as strong organic growth supported by increased services being adopted by cornerstone customers, including the expansion of Pet Health Network Pro, as well as new business gains in our Practice Intelligence business.

Looking to build on this strong momentum, we refined elements of our information management strategy to support our enhanced cloud-based offerings and to streamline our approach in expanding our Practice Intelligence business. We are prioritizing investments in our strategy with the greatest return and have decided to discontinue certain development efforts for future commercialization, which were capitalized but not yet amortizes in our P&L. This resulted in an $8 million pretax write down of capitalized software assets.

The prioritization we've advanced in our strategy will position us for accelerated revenue and profit in our information management business. In terms of P&L performance, we delivered solid results in the quarter despite continued FX headwinds reflecting benefits from strong organic revenue growth and operating expense controls.

Operating profit was $80 million excluding the asset impairment. On a comparable basis excluding this charge currency, changes and prior year transition impacts associated with the implementation of the US All Direct strategy, operating profits increased 10%. Operating margins were 19.7%, excluding the impairment charge better than expected, reflecting benefits from cost management in the quarter.

By segment reported operating profit gains were driven by our CAG and Water businesses. Our unallocated segment benefited from lower than budgeted spending in our corporate functions, consistent with our cost management focus, as well as benefits from previously capitalized favorable variances, which reflected lower production costs.

Gross profit was $224 million in Q3, up 5% on a reported basis. Gross profit margins were down modestly primarily reflecting business mix impacts from very strong instrument sales, which offset benefits from lower product costs. Foreign exchange hedge gains recorded in gross profit were $5 million or $0.04 per share in Q3.

Operating expenses increased 6% in Q3 excluding the software impairment charge, reflecting increases in global commercial capabilities including resources added in support of the US All Direct sales model. Reported operating expense growth was moderated by impacts from foreign exchange.

As noted adjusted EPS, which excludes 2016 impairment charges of $0.06 per share, was $0.54 per share up 2% from prior-year adjusted EPS or 9% adjusting for currency impacts. Prior-year adjusted EPS reflected adjustments for All Direct nonrecurring transition costs of $0.03 per share and a $0.02 per share nonrecurring income tax benefit. Adjusted EPS growth benefited from share repurchases advanced over last year, which reduced average share count year on year by about 8%.

In Q3 we repurchased 1.2 million shares for $86 million. We ended the quarter with $1.14 billion in debt outstanding. Our leverage ratio's as a multiple of EBITDA, adjusted to exclude transition impacts associated with the All Direct change and the impairment charge, were 2.92 times gross and 2.03 times net of $350 million in cash and investment balances at quarter end. In line with our long-term target range.

Looking ahead, we're refining our full-year 2015 revenue adjusted EPS outlook as noted to reflect revenue trends at the lower end of our targeted guidance range, as well as to incorporate updated estimates for currency impacts and our 2015 effective tax rate. Our revised 2015 revenue guidance range is $1.595 billion to $1.605 billion reflecting an outlook for approximately 11% normalized organic revenue growth.

We expect continued solid organic revenue growth in Q4 supported by benefits from recent new test introductions, including our recently launched SDMA and fecal antigen test in reference labs. At the exchange rates noted in our press release, we estimate the effects from the strengthening of the US dollar will reduce 2015 revenue growth by approximately 6% and adjusted EPS by approximately $0.16 per share. The projected negative impact from FX changes in 2015 is relatively higher than our previous outlook, reflecting recent erosion in emerging market currencies relative to the dollar.

Our 2015 profit outlook benefits from approximately $20 million in pretax foreign currency hedge gains from previously established contracts, which mitigate the 2015 profit impacts from the stronger dollar. This equates to approximately $0.15 per share in after tax EPS benefit. Our refined 2015 adjusted EPS outlook is $2.04 to $2.07 including a combined $0.03 per share impact from additional FX headwinds since the Q2 call and a higher estimated tax rate of approximately 30.5% for 2015.

On a constant-currency basis the 2015 adjusted EPS outlook equates to 11% to 12% growth above 2014 adjusted EPS levels which included approximately $0.03 per share benefit from the 2014 extension of the R&D tax credit. Reported EPS is expected to be in the range of $1.98 to $2.01, including the $8 million software impairment charge recorded in Q3. Aside from our updated effective tax rate estimate other elements of our full-year profit outlook for 2015 are basically consistent with our prior guidance.

Please note that our 2015 tax rate and EPS outlook does not assume the further extension of the R&D tax credit, which has been renewed every year since 1997. Assuming renewal we would expect an incremental EPS benefit of approximately $0.04 per share this year. We are maintaining our free cash flow outlook at 80% to 90% of net income, incorporating higher working capital levels associated with the US All Direct transition in expectation for capital spending levels of approximately $100 million this year.

As we finish 2015, we have solid growth momentum and a strong innovation pipeline that position us well to deliver continued strong operating performance as we move forward. Today we are providing preliminary financial guidance for 2016. Our preliminary outlook is for revenue of $1.715 billion to $1.735 billion, reflecting targeted normalized organic revenue growth of 8% to 9%.

Consistent with our strategic plan outlook we are targeting 50 basis points of operating margin improvement on a constant currency basis in 2016 driven primarily by operating expense leverage. Please note that this outlook adjusts 2015 for the impairment charge.

Strong cash flow generation will support continued capital allocation towards share repurchases, resulting in an estimated reduction of approximately 3.5% in our shares outstanding in 2016. We expect to maintain gross leverage levels of approximately three times EBITDA gross and expect annual interest expense in the range of $31.5 million to $32.5 million in 2016. These drivers are reflected in our 2016 EPS outlook of $2.09 to $2.16 per share, which equates to 13% to 16% growth in adjusted EPS on a constant currency basis.

Foreign exchange impacts related to the significant strengthening of the US dollar will be a key variable impacting our financial outlook in 2016 given that 25% of IDEXX revenues are related to products manufactured in the US for export. At the exchange rates outlined in our press release, foreign exchange rate changed will reduce reported year on year revenue growth in 2016 by approximately 1% and EPS by approximately $0.04 per share. As noted, the expiration of previously established hedging contracts, which benefited 2015 results due to the recognition of hedge gains that mitigated near-term profit impacts, will have the effect of increasing reported cost of goods sold in 2016 by approximately $20 million or about $0.15 per share.

These FX impacts combined create approximately 150 basis points at operating margin pressure, which will offset our targeted 50 basis points in targeted constant currency operating margin improvement in 2016, resulting in a reported reduction in operating margins of approximately 100 basis points next year. Please note that these comparisons exclude margin impacts related to the impairment recorded in Q3.

FX changes will also contribute to an increase in our effective tax rate to approximately 31%, net of benefits from ongoing tax planning initiatives, reflecting relatively lower profit mix in international regions with lower effective tax rates. Combined we estimate that FX impacts will create approximately $0.21 of EPS headwind in 2016 reducing benefits from our targeted 13% to 16% constant currency growth and adjusted EPS next year.

That concludes our financial review. I will now turn the discussion over to Jon for his comments.

Okay, thank you Brian. Little color commentary. We are pleased with 12% normalized organic revenue growth recorded in Q3. The commercial teams around the world just did a stellar job with instrument placements. Total premium instrument placement globally were up 54% compared to Q3 2014 driven by 98% growth in Catalyst platform placements.

In total, we placed 2,424 chemistry and hematology instruments comprised of 1,325 Catalyst chemistry analyzers, 234 of VetTest chemistry units, and 865 premium hematology placements. The premium hematology placement growth of 15% was driven entirely by the higher end ProCyte analyzer up 36% year over year. This past quarter was the highest premium instrument placement quarter for IDEXX globally on record, notably exceeding any prior fourth quarter typically the strongest of the year.

North America had an exceptional placement quarter of 1,026 chemistry and hematology units. Accelerating 28% year over year and up 11% over Q2, which itself was up 15% over Q1. Of the 569 Catalyst placements in North America, 268 were to new or competitive accounts, up 16% year over year.

Our placement numbers were supported by customers augmenting their in-house lab capacity with a second Catalyst as well as our continuing upgrades of our VetTest customers. International placements of Catalyst and hematology analyzers continue to set record numbers, supported by highly successful launches in several Asian markets. International Catalyst placements at 756 instruments were up an amazing 169% over Q3 last year.

Globally, competitive and new customer Catalyst placements were up 53% year over year versus Q3 2014. Obviously it was an exceptional quarter for Catalyst One around the world.

Our rapid assay performance was also very solid in Q3 with normalized revenue growth of 7%, including 6% in the US. We saw good growth in our all important US canine vector-borne disease category in Q3 during the fall tick season, as US SNAP 4Dx kit volume growth, that's for in-clinic use, was 6% above last year's third quarter, bringing the volume growth to SNAP 4Dx kits positive year to date. Obviously the revenues were much higher because the price realization.

Our 4Dx offering in the reference lab has also been growing, actually much faster, but on a smaller base. Our first generation SNAP volume decline stabilized in Q2 and held steady in Q3 and continued to meet our expectations. We are now winning back as many feline SNAP customers as we are losing, attribute to our superior accuracy in detecting infectious diseases. And our US commercial organizations ability to spread this important message and compete aggressively in the 2015 environment.

We also continue to benefit from higher retention of rapid assay customers with SNAP Pro and SNAPshot Dx instruments. These customers contribute 61% of our US rapid assay revenue base.

Our US lab business also continues to expand at a strong 13% even though up against a tougher compare in Q3 of 2014 supported by our launch of SDMA. We now have three months of experience with the vertical adoption curve of SDMA in North America. In US alone we've provided results on about 1 million patient samples from over 12,000 accounts. This includes 1,600 accounts in the month of September that do not use IDEXX as their primary reference lab. With North American labs online with SDMA, we are proceeding with the rollout in our international labs, have begun to offer the test with full rollout of the automatic inclusion of SDMA in all chemistry panels to occur in early 2016 in most non-North American labs.

As Brian mentioned we achieved 19% constant currency growth in information management revenues. The revenue profile has now grown to 64% recurring revenues, up from 56% a year ago. These recurring revenues, which have high gross margin drop through, include software as a service subscriptions, software maintenance fees, and other recurring service and product revenues sold into the information management customer base.

Profitability in the information management business is improving over time as a result. We continue to advance our Cornerstone Practice Information Management Software offering, which has a growing install base of roughly 6,000 practice. A new version of Cornerstone, fully launched in September and under development for more than a year, provides further advances in usability, functionality, and integration with IDEXX Diagnostic solutions.

Our portfolio of cloud-based software offerings continues to expand with the launch in September of Neo for the US. Neo is a highly innovative practice management system that follows a SaaS or software as a service, business model. We have been advancing Neo for a year built off a cloud-based offering we acquired in Q4 of 2014.

Neo has a claim, ease-of-use, and core functionality, all at an attractive monthly subscription price and little to no upfront cost to the customer. As a result, Neo becomes a highly effective, cost effective option for new and smaller practices looking to moved to current cloud technology software and not needing the more advanced workflow functionality of Cornerstone.

As to cloud-based technology note that we have a clear lead in experience and scale, as we have over 3,000 paying customers subscriptions of one of our five software as a service offerings. A number that has more than doubled over the past year. And we continue to expect robust growth in customer subscription supported by the US expansion of Neo and growing customer base and all of our cloud-based offerings.

As to the product pipeline we continue to launch of SEDIVUE, our novel urine sediment analyzer in early 2016. This instrument and single use consumable system provides an entirely new, automated and highly accurate way to automate the in-house process of examining urine under a microscope. We expect an average unit price for the instrument in North America around the high teens in thousands of dollars and to place over 1,000 analyzers in this market in 2016, although some placements will come through deferred revenue deals.

Each instrument is expected to generate a new stream of consumable revenues averaging $3000 to $6000 per year for IDEXX. We also expect the novel SEDIVUE instrument to attract customers with competitive in-house lab equipment to IDEXX's integrated in-house lab, including Catalyst One chemistry analyzer. Our Fecal SNAP product development continues to track nicely on schedule for a second half of 2017 product launch.

So really in summary, we have solid business trends and we are now in the position to fully leverage our significantly enhanced US and international direct sales capability and strong innovation pipeline to deliver continued strong performance. Including the solid 8% to 9% normalized organic revenue growth in 2016 that Brian laid out.

With this we will open the call for questions.

(Operator Instructions)

Ryan Daniels, William Blair.

Good morning guys and thanks for taking the question. Let me start with one on the 2016 growth outlook as it relates to your organic revenue growth. I guess I'm curious, number one, it looks like your competitive position is clearly improving, but maybe macro headwinds are increasing a bit more and offsetting some of that. So anyway that you can talk about growth expectations in the US and OUS as we look at 2016?

I'd say Ryan thank you for the question. Our outlook is probably similar to where we are right now. We saw 2% clinic patient-visit growth in the US. We saw moderating patient-clinic growth in Europe in Q3, some of that was weather some of that was economy. So that's kind of nothing special, but steady-as-you-go macro market trends.

I think Ryan a couple of factors heading into next year to keep in mind. The trends that we are seeing in areas like rapid assay and [cad peta] replacements we feel great about. We will still be working through some anniversarying of effects of earlier inroads that will carry a bit into next year in the US. And I think that combined with some of the moderated trends that we have seen in international some of that is currency driven oil-based economy driven.

I think combined lead us to have an outlook that is more consistent with our current growth rate knowing that we will be working through that. But I think our underlying operational foundation we feel very good about the trajectory and the progress that we're making and particularly some of the innovation that we will be bringing to market next year. We will be looking to build on those growth rates.

That's helpful. I guess the follow-up would be, Brian to your comment right there and you mention it in the prepared comments, I think you said your premium placement on a net basis are up 18%. But you are also indicating that the competitive displacements earlier are hitting you.

Can you go into a little bit more on that dynamic? Is a just a timing issue where the gains have been more recent so you got to lap through that? Still with a 18% improvement in the net base it seems like a pretty strong growth outlook?

Just to clarify that. That is the estimated install base for Catalyst in the US net of changes. And so we've actually -- I know there have been a lot of questions around this, but we have year over year expanded the Catalyst base by 18%. And in fact quarter to quarter we had a solid growth rate consistent with that trend.

That's been an upward trajectory. I think the net effect and Jon can enhance on this, is if you think about the growth rate in the business things like consumables, we still have great new placements. And we are growing the base and we have good same-store sales, but obviously there were earlier impacts for some competitor inroads that are slowing.

The net impact of that is, in an annuity business that kind of plays in and kind of constrains your growth rate for a period of time until you work through the anniversarying effect. So net, net we're expanding, we're growing at very good rates. Some of those impacts constrained our growth. We will work through that, anniversary that, and we will be positioned for improving growth as we move forward.

Ryan, as you know the consumable growth in any quarter is the cumulative impact of your acquisitions and that of any customer losses for the prior four quarters. We have had obviously very strong impact improving customer acquisitions as we laid out in the US in this call. And we believe we've seen a [modering] rate of defections but that's on a quarterly sequential basis.

I think what's really happened here from IDEXX's perspective is that our new US commercial organization, which is about 300 professionals, when you include the different types of field base reps that are responsible for supporting the customer with diagnostics. That has really been in seed now, in territory, they've gained those relationships. They've gained the experience.

We expected that productivity of that group to improve over time. And I think you are seeing it with a growing number of instrument placements, really an extraordinary third quarter. And improving customer retention levels as those relationships deepen in territory.

Sure. That's very helpful. Thank you guys.

Jon Block, Stifel.

Great. Thanks guys. I want this question to be sort of polite. I feel like I'm listening to a little bit of a different call then where we were a couple months ago. And I understand at the Analysts Day there was a bigger emphasis on long term than near term, but still you look at where we are today you are bringing down numbers, you are bringing down numbers for maybe the second time in six or nine months.

So can you just take a step back and maybe walk us through Jon have 2015 has progressed? And maybe what has changed versus internal expectations where we were a couple quarters ago? And then even more specifically to August, what's changed over those past eight weeks where there was a lot of go, go, go, we're on offense, if not defensive, and that seems to have taken a step back as a this morning? Thank you.

Thank you. I think operationally, operational performance is consistent with were we believe we were. I don't think there is really any change. I think what's happened in the last couple of months has been further deterioration of currencies, particularly in emerging markets. And in those, are markets where we don't hedge. It's not practical to hedge.

There's been a little of a macroeconomic slowdown as we have mentioned with visits in Europe. But it's really the currency and the tax impact of the currency which are the adjustments that we are talking about in 2015. And Jon as you know, but I would remind everyone else, this call, the third-quarter call in October of the year, is when we typically provide guidance for 2016 for the first time.

So our guidance for the 2016 operation is entirely consistent with the long-term goals that we set. But I think now what we are providing to investors is an understanding of how currency and tax rate translates into the bottom line.

Okay. And maybe just a follow up a little bit there. Can you talk to the lab, I know the 10.5% organic was off of a difficult comp, but it is the weakest number we have seen in seven quarters. That's on the heels of SDMA, which you have laid out as the biggest launch in the Company's history. We have done a lot of work there. I get it. Nothing changes overnight.

But can you talk to, was is in line with your expectations? And then to tie that back to the 2016 revenue growth. Is the 200 -- the midpoint of 8.5% is 250 bps below the midpoint of your long-term guidance. I'm a little surprised by the magnitude of that delta considering SDMA going into 2016. Thanks guys.

Thank you. Now the lab growth in the US market was a very solid 13% off of even a strong compare of 2014. That was a very solid number. And of course it's really US and Canada we've launched SDMA in July. We haven't yet launch SDMA internationally. And the number, our global-lab numbers was brought down by the labs outside the US. And the labs were affected by the slower patient traffic and the weather trends in Europe, which brings that number down.

But we continue to be -- get absolutely positive feedback. I think the people, the customers who are using the SDMA are finding that it is extraordinarily valuable in the management and the diagnosis and management of their patients. And we have strong key opinion leader support globally for that so we continue to believe that's going to be a significant differentiator and driver for growth for us as we go forward. Of course we have to launch it in the international markets and as I said that won't happen until early 2016.

Thanks guys.

(Operator Instructions)

Kevin Ellich, Piper Jaffray

Good morning. Thanks for taking the questions. Jon I guess just going back to SDMA, you cited in your prepared remarks I think 15,000 customers in September that don't use IDEXX.

1,600.

1,600, sorry. Thanks for the clarification. Are you seeing any of these guys switching over and do you believe you are gaining some market share in the reference-lab market?

I believe the 13% organic growth in the third quarter is indicative of the cumulative success that we are having in the reference-lab modality. I think that's higher than the market growth. And if you're growth is higher than the market growth for lab modality than by definition you are gaining share.

Can you break that 13% out between volume and price?

It's primarily volume.

Volume. Thanks, Brian.

As it has been. The vast majority of it is volume and that's been consistent with the trends throughout the year.

Sure and then just going to your competitive placements for Catalyst I think you said it was 268 new competitive accounts. Just wondering how that's tracking relative to your internal expectations and can you talk a little bit and give us color on the overall competitive environment? Are vet practices more willing to swap out to Catalyst One and of your placements how many were Cat One versus other instruments? And I guess what's your general outlook and feel for the market at this point?

It's always been and will always be a very competitive market. I think our Catalyst One has demonstrated by its success around the world is a -- it's a blockbuster product. It's a very cost effective way to gain chemistry and it has really it has capability that no competitive analyzer has in terms of menu, speed, and of course supported by information management integration uniquely two way into the Practice Management Software and Vet Connect PLUS.

Really what we are seeing is our sales organization is improving in their ability to tell that story to competitive accounts. And that's why we've seen a tick up every quarter over the course of these quarters of 2015 with the new sales organization in place and competitive placements. And an extraordinary number of total placements in the North America market. In addition, I think the retention rates that we are seeing in our Catalyst-install base are also improving.

I will also note Kevin that we entered Q4 with a very good backlog, larger than average and excellent order momentum early in the quarter, which are all generally I think it's generally continuing to show signs that our sales organization and our innovation together is coming together nicely as per plan.

I will also mention that as we launch SEDIVUE, the level of excitement in the customer base on SEDIVUE is off the charts. Because it really addresses a need that customers have and we believe that SEDIVUE will help us continue with not only provide a nice revenue stream in and of itself, but can help us continue to inspire customers to upgrade to more advanced technology that we offer with the Catalyst One and the in-house lab. And that would of course happen in 2016 starting in early 2016 with the launch of SEDIVUE.

Great. Thanks.

Nicholas Jansen, Raymond James.

Hey guys thanks for the questions. First on organic growth guidance for 2016, the 8% to 9%, I just want to get what you view normalized 2015 levels? I know there's a lot of puts and takes in 2015 with the margin recapture in the IDEXX deferral, excuse me Catalyst One deferral adding about 50 bps.

So if you look at your 11% normalized organic growth in 2015, is that when you adjust for all those moving parts is the 8% to 9% for 2016 and acceleration, in line, a deceleration? Just want to get better views of how you're looking at the end market for next year. Thanks.

That's a great question. We stopped the margin capture effects got so integrated with our Business, Nick we stopped breaking that out. Roughly it's probably about a 3% benefit this year a bit below. I think we originally had about 3.5% and I think that reflects the rapid assay grew a little bit slower this year than we originally planned.

I think 3% if you reduce the 11%, that gets you to 8% and then we got a 0.5% benefit from the deferral this year so that would equate to roughly 7.5%. And so this would be an acceleration, modest acceleration. And I think that's reflective of some of the improving trends that we are seeing, as well as the benefits from innovation that we outlined at Analyst Day.

And I just want to reinforce that we are going to be working through some of the anniversarying of some earlier impacts. And I think as we get through that we will see the benefit of that in terms of improved retention and how that helps our overall growth rate. So we remain confident in our ability to drive towards higher growth and feel like we will be on that trajectory as we work through next year.

Very helpful, Brian. And then secondly on emerging markets I know you guys have had some exposure in Brazil I think you got some stuff in Asia Pacific, maybe just if you wanted to call out one or two or three markets where you are seeing maybe more volatility than what you had anticipated?

You mentioned Brazil. Actually, our Brazilian team is doing a great job, but the real has just fallen out of bed and we don't hedge that. That's a case in point. We're also strong in certain Asian markets that had some currency. Russia is an example.

On the margin these are just areas that were -- that had some changes over the last three months that constrain our outlook for the year although we actually did pretty well. In Q3 at top line and bottom line considering.

Okay. That's it for me. Thanks guys.

(Operator Instructions)

Mark Massaro, Canaccord Genuity.

Hey guys thank you for taking the question. So the first one is on the Catalyst placement to new accounts. I think the number in Q1 was 59% of Catalyst went to new accounts. I think in Q2 it was 61% -- excuse me Q1, 59%, Q2, 61% and if I'm doing the simple math correctly, I think the number is 47% to new accounts for Catalyst in Q3.

At face value if you can just confirm those numbers are right, it would suggest to me that something might have changed competitively in North America this quarter. Could you walk me through if my math is right and what might have changed?

I believe the 47% is right but I will also note that the number of competitive placements in Q3 over Q2 grew 15%. The absolute number. You asked how could the absolute number grow and the percentage went down, it's because we did a great job placing Catalyst in addition to the 15% growth in new and competitive accounts, we placed Catalyst with our remaining VetTest install base, although that's certainly getting smaller and smaller.

We also had customers desire a second Catalyst, many of our larger customers who are growing their in-clinic volumes. And the nice thing about when we place a second Catalyst we re-up that customer for a new five-year lease, which supports our retention. So I think it's a good-news story all the way around on an absolute basis growth and competitive placements and on an absolute basis an extraordinary growth in total placements.

Meanwhile the hematology platform continues to tick along with really good growth too. As I said it was an extraordinary instrument placement quarter. And those are just the US numbers. The international numbers with that 168% growth in Catalyst placements is really quite a strong number in terms of placement growth.

Great. And your competitor last night talked about two contracts in particular being up for contract, one in the US, one outside the US consisting of multiple hundreds of units of analyzers. I assume that those are your accounts today. Can you just comment perhaps on some of the moving parts that would go into a deal like this? And could you help us frame what type of impact we might see in out quarters?

We are very close to our major accounts. We are not aware of any accounts being in jeopardy, of where we have the accounts and where we have the business. I think that's what's important from an investors point view. We have solid relationships with the corporate accounts that are embedded in our install base.

Last question for me. On the new products clearly some of my checks came back positive on the contribution from new products with veterinarians in 2016 and I appreciate some of the color you provided on SEDIVUE.

Is there any way you could help us frame maybe a dollar impact? Some of my initial thoughts were maybe up to $40 million for SDMA and $20 million for SEDIVUE, but can you maybe help us think about how the dollar amounts might trickle in and what you've embedded internally and in your guidance for 2016?

A couple things on the instrument side. Obviously we are going to be anniversarying very, very strong placements with Catalyst in 2016. So Catalyst growth won't be contributing to instrument revenue growth in the same way in 2016 as it has in -- particularly this quarter.

But on the other hand, we'll be selling new a instrument, SEDIVUE. And just to give you a little flavor we expect to place certainly over 1,000 analyzers in the North American market in 2016 and the average-unit price we expect to be in the high teens of thousands of dollars. And then as those instruments are placed, each instrument over time, once they are placed we expect to generate $3,000 to $5000 a year in consumable revenue. You can run the numbers on that. So that's in North America.

Internationally the launch will be a little later in the year and we will update you in January when we've got a better feel for it. Obviously the material number is the North America launch. As your research I think validated similar to ours the response to SEDIVUE, it's really quite strong. Every single customer is a Greenfield customer for SEDIVUE because we are replacing a manual method.

On SDMA, again the SDMA is a differentiator, a strong differentiator for the reference lab over time. As you know, but to remind others, we don't charge incrementally for SDMA in and of itself unless they're just getting it as an individual assay. We have automatically included it in the reference-lab panel. So what we expect SDMA to do will, to contribute to even stronger retention in our reference-lab business and new-customer acquisition.

As well as some modest growth in utilization, because many customers are now telling us they have a much stronger case to run preventative-care chemistry on their senior pets because kidney disease is highly prevalent, in time one in three cats and one in ten dogs succumb to chronic kidney disease. We've actually demonstrated that with our data over one million data points now.

If you look at by age it's tracking, it's very, very interesting data about how the prevalence of chronic kidney disease progresses with age. That's very compelling information. Any growth in utilization in the veterinary profession takes time. It's a slow, but long-term growth factor for us.

Thank you.

I will turn the conference back to Mr. Ayers for closing remarks.

I want to thank everybody for joining the call. I know we have a number of employees on the call too. I just want to congratulate everybody on the advancements in our Business that the team has delivered. The extraordinary rate of innovation that we are bringing, plus what is also in the pipeline.

And big kudos. I don't know who to congratulate more our US commercial organization or our international commercial teams. They both had really, really strong performance. I think we are really seeing these teams seeded in territory now and really strengthening their relationships. When you are direct, and we are direct not only in North America but in most developed international countries, there are things that you can do.

You've got more control over your destiny and more opportunity to drive growth than when you don't have that advantage. We are really seeing that mature now in the performance in Q3. And we look forward to continuing -- have a dialogue with investors about how that will translate into financials, which will translate into continuous growth and shareholder value creation. I'm concluding the call, thank you.

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