愛德士 (IDXX) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the IDEXX Laboratories first-quarter 2016 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Ed Garber, Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding IDEXX's future expectations, plans and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions. Such statements include but are not limited to statements regarding management's expectations for financial results for future periods.

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

Also during this call we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures is provided in our earnings release, which can be found on our website, IDEXX.com. In reviewing our first-quarter 2016 results, please note all references to growth and organic growth refer to growth compared to the equivalent period in 2015, unless otherwise noted.

(Operator Instructions)

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

Good morning. IDEXX had a strong start to 2016 in Q1. Based on our solid performance trends and more favorable projections for foreign exchange rates, we are increasing our full-year financial outlook today.

In terms of first-quarter highlights, we achieved organic revenue growth of 11%, supported by 10% organic growth in the US and 12% organic revenue gains in international markets. Recurring CAG diagnostic revenues increased 11% organically, as benefits from our innovation pipeline and strength in commercial capability supported 15% gains in reference lab revenues and 12% consumable revenue growth globally. We had another strong quarter in terms of expanding our instrument base with nearly 2000 premium analyzers placed globally, up 18% from strong prior-year levels.

Strong top-line growth and better than expected operating margin performance supported Q1 EPS of $0.51. On a constant dollar basis, Q1 EPS increased 14%. As expected foreign exchange was a headwind to reported results, lowering reported revenue growth by 2% and EPS by $0.05 per share, including the impacts from the lapping of 2015 hedge gains.

Foreign currency rates strengthened relative to the US dollar during Q1. Compared to our earlier estimates of exchange rates shared on our January earnings call, this changed added about $5 million to Q1 revenue and about $0.01 to EPS. For the full year 2016 at new exchange rate assumptions shown in our press release, the recent strengthening of foreign currency rates relative to the dollar will add approximately $27 million to 2016 revenue and $0.05 to EPS. Along with our stronger than expected operational performance, this supported an increase in our full-year revenue and EPS guidance of $40 million and $0.08 per share, respectively. We'll review our updated 2006 outlook later in my comments.

Let's begin with a review of our Q1 performance by segment and region. Q1 results were supported by strong CAG results and accelerated growth in our Water business. Global CAG revenues were $358 million, reflecting 11% organic growth. CAG gains were supported by strong recurring diagnostic gains across the US, Canada, Europe, Asia Pacific and Latin America. As expected we saw approximately 1% of growth benefit from extra days in the quarter. Favorable US weather comparisons also supported strong CAG performance.

Our Water business grew 11% organically to $24 million supported by double-digit gains in the US and benefits from global commercial investments. Water results also benefited from the extra leap year day and warmer US weather. Our Livestock, Poultry and Dairy business grew 4% organically to $31 million benefiting from new product gains, porcine and poultry testing in China, and livestock services testing offsetting expected declines in Western Europe bovine testing associated with successful disease eradication programs.

Overall US revenues were $259 million in the quarter, up 10%. US CAG recurring diagnostic revenues grew 9% organically supported by high single-digit consumable volume gains and high teen revenue growth in our US lab business. Recurring CAG revenue gains continue to be primarily volume driven. Consistent with trends in Q4 of 2015, we saw -- continued to see a moderation of growth in net customer acquisition costs, reflecting our success in differentiating IDEXX's diagnostic technologies from competitive offerings, which should provide benefits to realized net pricing levels moving forward. US market growth reflected in our data set of 5200 clinics continues to trend solidly. In Q1 patient visits normalized for equivalent days increased 6% and clinic revenues increased 9.2% overall supported by double-digit gains in February.

International revenues in the first quarter were $159 million reflecting 12% organic growth. CAG diagnostics recurring revenue growth was 13% in international markets in Q1. These strong results reflect accelerating consumable revenue growth supported by high levels of instrument placements, as well as improved lab revenue gains. Global instrument revenues for IDEXX were $23 million, up 16% organically supported by continued strong growth in premium instrument placements globally, particularly Catalyst One. Globally we placed 1157 Catalyst and 823 premium hematology analyzers, up 25% and 10%, respectively, compared to strong prior-year results.

International performance was exceptional, reflected in 1150 premium instrument placements, up 28% over prior year levels. In North America we placed 443 Catalysts in total with 258, or 58% going to new and competitive accounts, reflecting our commercial emphasis. These gains and continued improvement in placement retention supported a 15% expansion of our US Catalyst instrument base over prior-year levels.

Strong placement gains continued to expand for growth in CAG diagnostic recurring revenues. Global CAG diagnostic recurring revenues were $305 million in Q1, up 11% organically. By modality, instrument consumable revenues of $108 million grew 12% organically, reflecting strong volume driven gains across all major regions.

Our reference laboratory and consulting services modality with revenues of $141 million grew 15% organically in the first quarter, driven by very strong US gains and improved performance in Western Europe. Strong global lab momentum reflects leverage of our expanded commercial capability and benefits from our test menu expansion including SDMA.

Rapid assay revenues decreased 1% organically in Q1 to $43 million. As expected US rapid assay revenues were down modestly, reflecting timing of promotional programs and relatively tougher prior-year comparisons. Rapid assay trends over the past two quarters have remained basically consistent with sustained 40 times volumes and stabilized impacts from competitive first-generation assay products.

Customer information management and digital imaging system revenues were $29 million in the quarter, up 14% organically. Solid information management revenue gains were supported by continued penetration of Cornerstone services and our loyal install base, as we in parallel advanced the introduction of our new cloud-based Neo platform. Digital revenue growth continued to improve, reflecting strong unit sales and benefits from recognition of deferred revenues associated with long-term business commitments.

Turning to the P&L. As expected the lapping of $4.5 million in 2015 hedge gains and unfavorable year-on-year changes in foreign exchange rates had a moderating effect on our reported first-quarter financial results. Despite these headwinds we delivered solid financial performance in the quarter. Operating profit was $74 million, up 1% compared to the prior year, supported by gains in our CAG segment which offset FX impacts. Please note that in our segment reporting now includes a more comprehensive view of the financial performance of our operating segments by including the capitalization of manufacturing variances in operating segment results. These impacts were previously disclosed in unallocated amounts.

Excluding currency impacts operating profits increased 10% supported by strong revenue gains. Operating margins of 17.7% were better than expected due to volume leverage and timing of operating expenses, which moderated cost growth in Q1.

Gross profit was $228 million in Q1, up 6% on a reported basis. Excluding foreign exchange impacts, including the lapping of prior-year hedge gains, gross profit margins declined approximately 70 basis points, reflecting comparisons to favorable prior-year product costs and product mix impacts from higher instrument sales. For 2016 we had a foreign exchange hedge gain reported in gross profit of approximately $800,000 in Q1.

Operating expenses increased 8% in Q1, modestly below revenue growth reflecting increases in capability supporting the US go-direct strategy and global increases in commercial spending advanced through 2015. As noted EPS was $0.51 per share, up 4% on a reported basis and 14% adjusted for currency impacts. The federal R&D tax credit, which benefited 2016 but not 2015 first-quarter results, had a favorable 2% EPS growth impact.

EPS growth continues to benefit from share repurchases advanced over the last year, supported by our strong free cash flow and optimization of our capital structure which reduced average share count year on year by approximately 5%. In Q1 we repurchased over 700,000 shares for $50 million. Absolute levels of share repurchases moderated in Q1 from accelerated levels in recent years as we've achieved debt leverage ratios within our long-term target range.

We ended Q1 with approximately $1.2 billion in debt outstanding with an average interest rate of 2.5% and a balanced multi-year tenor. Cash and investment balances were $351 million at quarter end.

Looking ahead we are updating our full-year guidance today to reflect our strong start to 2016 and favorable changes to foreign exchange rates. We are increasing our 2016 revenue guidance range to $1.73 billion to $1.75 billion, an increase of $40 million. As noted, we are raising our 2016 organic growth guidance to 9% to 10%. We're also incorporating updated FX rates in our outlook which contributed approximately $27 million to our full-year revenue guidance. At the updated exchange rates outlined in our press release we now estimate that foreign exchange rates will reduce year-on-year revenue growth in 2016 by approximately 1%.

We are raising our EPS outlook range by $0.08 to $2.18 to $2.25 reflecting flow-through benefits from higher organic revenue growth and FX changes offset by a 50 basis point increase in our expected tax rate. The increase in our effective tax rate estimate to 30.5% to 31% reflects updated estimates for higher US profit growth. In terms of FX impacts at updated exchange rates, we now estimate that foreign exchange will reduce 2016 EPS by approximately $0.21 per share, including net impacts from the lapping of $21 million in 2015 hedge gains compared to projected hedge gains of approximately $2 million in 2016. We're maintaining our outlook for strong cash flow generation of 95% to 100% of net income this year.

For Q2 we are projecting revenue gains of 7.5% -- reported revenue gains of 7.5% to 8.5% supported by organic growth of 8% to 9%. In addition to expectations for continued strong CAG recurring diagnostic gains, benefits from the launch of SediVue will mitigate effects from comparisons to very strong prior-year instrument results.

In terms of the P&L we expect that operating margins will be approximately 150 to 200 basis points below prior-year Q2 levels reflecting the impacts from FX operating profit headwinds of approximately $7 million, including the lapping of $5 million in 2015 foreign exchange hedge gains and timing of 2016 operating expenses. That concludes our financial review. I will turn the discussion over to Jon for his comments.

Thank you, Brian. Q1 performance was outstanding and it was the result of a combination of factors. First, we achieved strong performance in our commercial organizations in the US and around the world. Second, we're seeing the sustained benefits of a highly innovative line of veterinary diagnostics. Finally, we are seeing generally favorable market trends, particularly in the US.

As we exited the fourth quarter of 2015 with revenue and profit performance that built from Q3 results, I think most concluded that we had indeed successfully completed the transition in the US to our fully direct sales model. With these Q1 results and our revised 2016 organic growth guidance, we are now beginning to see the power of this new sales model and what it can achieve.

We went fully direct because we believe that by being closer to our customers we could augment revenue growth and adoption of our first and only innovations in the veterinary market. This has been our strategic plan executed over several years, not only in the US but in markets around the world. It's very simple. The more IDEXX representatives as subject matter experts in our category visit customers, the faster our customers grow their adoption and use of IDEXX's unique and innovation -- innovative solutions.

Let's look at a few numbers. In Q1 of 2016 in the US we made nearly 63,000 field visits to veterinary practices, up 31% year over year. 23% of this growth came from productivity in the form of more visits per field representative. The remainder was a consequence of more feet on the street year over year. This visit rate is higher than I quoted in Q4 2015, as it includes not only our 180-plus veterinary diagnostic consultants but also other types of companion animal group diagnostic roles in our field organization. Namely, our highly experienced professional service veterinarians and their wonderful team of field support representatives.

As there are roughly 25,000 veterinary practice locations in the US, 63,000 visits in an average of more than 2.5 visits per practice in a quarter, or 10 per year. And this number does not include a variety of other ways we interact with customers, including trade shows, group educational dinners, online education, phone sales and support, corporate account interactions, and sales rolls in information management and digital radiography that are part of the field team activities.

We're finding that when we show up regularly at the practice quarter after quarter, the cumulative effect is a continued strengthening of relationships with customers and prospective customers alike. Veterinarians are more and more seeing a unique Company that is truly committed to bringing an impressive set of first and only diagnostic and software solutions that advance their practice.

Internationally we're also seeing the benefits of enhanced commercial capability that we have built over the past few years. In all markets outside the US the level of pet care and the adoption of diagnostic technologies is far earlier in the curve than the US, even though people love their pets just as much. Our Companion Animal Group recurring diagnostic revenues grew 13% organically over Q1 of 2015 outside the US, supported by our ever-increasing level of Catalyst One placements. In addition, strong recurring gains in major developed economies in markets such as Europe, we're also seeing exceptional growth in the companion animal revenues in emerging markets such as China and Brazil, demonstrating the substantial long-term growth potential we see in our markets globally.

A reason for our optimism on our long-term growth potential flows from the strength of our innovative pipeline which is expanding the market for diagnostics globally. So let's do a couple of updates here on these newest technologies. In Q1 we generated over 250 orders for SediVue, our first and only urine sediment analyzer. We have begun shipping SediVue to fulfill this backlog in April. And the early customer response has been simply off the charts. So that means that while the field (inaudible) is busy generating customer orders, our Q1 results do not yet recognize the benefit of revenues from SediVue.

If you consider US order generation rate for all premium instruments in Q1, adding Catalysts, our two hematology platforms and SediVue together, our sales team achieved 36% growth over Q1 of 2015. We see a high level of excitement about SediVue in our commercial organization and customers alike, as the new instrument addresses a critical pain point in the practice while increasing the quality and consistency of urinalysis results.

We continue to educate the market on the remarkable value that SDMA brings in diagnosing and managing chronic kidney disease, a common condition in pets, likened to heart disease in humans. The veterinarian nephrology community has fully bought into the unique medical and clinical value of SDMA. And the International Renal Interest Society has incorporated SDMA as a key parameter in their diagnosis, staging and treatment protocols.

As investors know, SDMA is automatically included in every chemistry panel that is sent to IDEXX reference labs. Interestingly, our chemistry panel unit volumes and revenues in the US are now growing faster than the reference lab overall, acceleration that coincides with the SDMA launch last summer. This is likely because the number of veterinary practices sending us chemistry panels in the latest month is up 15% over March 2015 when we had yet to launch SDMA. SDMA is now essentially fully launched on our global reference lab network. And to date we have run 3.5 million SDMA tests for vets and pet owners globally.

Finally, kudos to our Water team. We haven't taken the opportunity lately to talk about our Water business. This is a terrific business for IDEXX, and part of our core portfolio of businesses with attractive recurring revenues. Our Water team delivered 11% organic growth in the first quarter, a continuation of its strong 7% to 8% organic revenue growth over the prior two years. This global business delivered a 41% operating margin in Q1, requiring only nominal invested capital. Our water testing business addresses a market that appears to be able to sustain high single digit organic revenue growth and sustained operating margins for years to come.

Overall we believe that we are well positioned for sustained organic revenue growth and margin expansion in the Company altogether over the next several years, building on our accomplishments over the last several years, and serving our core markets of animal health and water diagnostics, markets that are exhibiting underlying long-term secular growth globally.

With these introductory comments, I'll now open the call to Q&A.

(Operator Instructions)

Ryan Daniels, William Blair.

Thanks for taking my questions, and good morning. Jon, maybe I'll start with one for you. Just in regards to the data you provided on the significant increase in the visit rate on a year-over-year basis, can you give us a little bit more color on what the vet participants that you are talking to are most interested in? Is that some of the new technologies? Is it going back and learning about the entire IDEXX portfolio? Just anything in particular that you are noticing in the numbers that might be sparked by those increased visits?

First of all, I think they are most interested in the fact that we keep showing up. We are there. The consistency of our presence is being noted by veterinarians.

We're not showing up and then not showing up for a long period of time. We keep coming back.

This is true with our customers that are using all of our diagnostic modalities. We're supporting them with helping them to grow their practice. But it is also true with customers that maybe using very level of IDEXX. But we keep showing up with ideas.

They are very interested in our point-of-care solutions, Real-Time Care, our reference lab modalities, our advances, SDMA is a big topic. Obviously SediVue is a big topic.

But generally what we're finding is while initially as we could get through to a decision-maker, it maybe something new that captures their initial attention, but then it really opens up the door for how IDEXX is really profoundly different in terms of integrated solutions, in terms of VetConnect PLUS, in terms of the real fundamental technological innovation we're bringing to the reference lab venue. We may start with SDMA, but then we move onto fecal antigen or molecular diagnostics, or several of other areas of specialized tests that quite frankly they just hadn't fully appreciated that we have and they are seeing that we really are bringing innovation to the market which really differentiates us and is kind of unique. I think the consistency of the presence is capturing the attention and then the new innovations are drawing those relationships closer.

That is very helpful color. And then maybe a follow-up. As you move more of your IT platforms into the cloud, and I know that you already have links directly to the equipment and what is being used. Can you talk a little bit about your future thoughts on things like vendor managed inventory where customers really don't even have to think about consumable reorders? So that even more of the time spent in the office can be discussing innovations or things like cost accounting to show the true value in something like SediVue? Thanks

Thank you. Ryan, I do believe that is a big deal. Obviously we have been ahead of the Internet of Everything innovation that is going on in industries around the world with cloud-based technology and the vast majority, for example, of US Catalyst and premium hematology are connected to IDEXX with SmartService. So we are now beginning to see with the example of the introduction of SediVue. One of the exciting responses we're getting with the customers is that you don't have to buy inventory. They only pay for a run when they actually do the run.

Here's an interesting thing. As I said, we started to -- we probably now have installed a couple of dozen SediVue analyzers as part of the backlog. That doesn't include the couple of the dozen analyzers that we had as part of the beta field trial. But these are new customers who are paying customers, first experience with SediVue as part of the launch.

As we do the initial installation, our field reps, service reps do a lot of training. Historically customers are very nervous about using the consumables. But with SediVue we only charge during the run.

We don't charge them for any of the runs in the first day. We get every single person in the practice to run the analyzer because they aren't worried about using up their inventory or paying for consumables. This idea that they don't have to manage their inventory and we're just going to ship them supplies, like the reference lab model. We're going to ship them supplies on a demand generation basis based on their usage is very, very well appreciated by the customer. And really I think the beginning of a new wave of innovation that we can bring to the market. And we will learn a lot with SediVue over the course of this year on things that we can do in future years on things like auto ship and vendor managed inventory.

Okay, perfect. Thanks for the color. Congrats on this strong start to the year.

Erin Wilson, Credit Suisse.

Thanks for taking my questions. The first one is sort of a follow-up to the first part of Ryan's question. I guess, can you speak to the one lab approach and the competitive advantages of that offering, and what you can offer now from a bundling standpoint or promotional standpoint, high promotional standpoint? Has that promotional activity changed in response to this one lab effort and the direct approach? Are you really starting to take advantage of what you can do there with the direct strategy as it matures?

Yes, thank you. Obviously first of all the one first lab approach starts with one diagnostic consultant that showing up regularly at in the practice and can support a customer by growing their practice through adopting -- what is interesting is that we have advanced menu on both our in-house analyzers and in the reference labs that isn't fully utilized by our customers. So we go in there and we have a discussion about how they can advance their diagnostics, regardless of modality.

So let's just start with the relationship is one which is agnostic to whether they want to run it in-house or reference side. And that really -- customers appreciate that and they take their guard down because they know we're not coming with a point of view.

And of course I did mention my opening comments, we've continued to see the growth in VetConnect PLUS utilization, not only for results -- by the way, and not only for results but results with images, and now of course with SediVue we are going to have in-house urinalysis images as part of the VetConnect PLUS. But now for ordering and status and alerts, the whole online ecosystem, which is integrated between in-house and reference labs.

The so-called bundling isn't just a marketing program. It is an overall approach to the way they're utilizing diagnostics in their practice. It just makes it easier to run, utilize and interpret and see the results of their diagnostics, because it is fully integrated between reference labs and in-house.

Okay. Great. And then the strong growth in the domestic labs business, that was a pretty significant step up. What is driving that? Is it market share gains, pricing, volume, the new testing capabilities such as SDMA, or is it just seemingly a fundamental kind of demand trend that is driving that?

We're very pleased with the high teens growth in the US reference lab business. Volume led growth. And I think the simple answer is it is all of the above.

I noted the increasing number of customers who are sending us chemistry panels because they want the SDMA result, either because it is part of their core protocol or maybe they have a pet where they want to send us the panel. But this is true also with our fecal antigen is growing same-store sales.

Obviously I think you are seeing from the phenomenal metrics that Brian quoted, the 6% visit growth year over year and the 9%. It was a very strong quarter in terms of the overall business dynamics. Those numbers, by the way, are normalized for days including leap year.

So obviously it was a very strong market in general. And I think that was supporting our reference labs. So there were a lot of contributing factors. We are certainly pleased with the results and we're pleased with the fundamentals in the reference lab business that, while the first quarter I think was an exceptional quarter because of some unique aspects of the quarter, I think we are pleased with the fundamentals of growth in the reference lab modality. And I'll mention it's the largest of the three recurring revenue CAG diagnostic recurring revenue modalities at IDEXX. So it is nice to see that one doing so well.

Quickly, did you break out that percentage of SDMA that's sent out on a one-off basis? And is there any change to the pricing there?

No, with regard to SDMA on a one-off basis, what we're really seeing is that when a customer who may not be using us as a primary lab or maybe they are splitting their lab volume among more than one lab, they are not sending us the SDMA-only sample. They are sending us the whole chemistry panel, because it just makes sense to do so.

Why would they go to the trouble actually of splitting the sample? It is just easier just to send us of the whole sample. And economically it is more attractive to do so because the cost of the sample, the total chemistry panel includes SDMA and no incremental charge.

Where we are really seeing the one-off SDMA are our customers who are our loyal customers for both in-house and reference labs, and they might have been running the SDMA on the -- I mean, they might have been running the chemistry panel on the in-house Catalyst and they want to augment that with an SDMA at the reference lab. And for that we charge a nominal shipping charge. But we want to encourage people to continue to run Real-Time Care if that is the modality they're most comfortable with.

Excellent. Thanks.

(Operator Instructions)

Jon Block, Stifel.

Thanks. Good morning, guys. Maybe two from or me. First one. Jon, back to what you mentioned on the sales and marketing. Is that business per year, is that the right number? Does it need to go higher as the Company's innovation increases, meaning the need for more reps? Or now that you're almost 18 months into the go-direct experience, just your conviction level that you have the right number of reps and OpEx leverage may start to ramp a bit going forward?

Yes. Thank you for that question. I would approach that from a couple of dimensions. Fundamentally from a financialing model we do see operating expense leverage in the North American commercial market.

With the kind of gross that we're seeing, we can have operating expense leverage and we can add a few more feet on the street along the way. So those two are not inconsistent with each other because of the strong growth rates that we are seeing, and certainly that would be our intent. But it is really just backing and filling little places that we haven't quite gotten to the optimal level. We believe that the roughly 180-plus veterinary diagnostic consultants, within a couple of percent, is the right set to fully cover the market.

But the other thing that I want to mention is, I mentioned the 23% year-over-year growth in visits on a same-rep basis for the veterinary diagnostic consultants. We have seen -- while we have seen tremendous productivity advances already that we have booked, and those will have a cumulative of effect. This is at quarter after quarter. We're not anywhere near gaining the full productivity of this new organization. We have got some work to do over the next couple of years. We are going to be putting in salesforce.com as a more advanced -- we have done a lot in terms of sales force automation, but that's going to be a productivity driver.

We are continue to refine our calling patterns. We're going to see greater presence in the market per rep. So these productivity drivers, I think as you have seen, they're going to be probably the number one contributor to the impact of our field organization and that's going to translate into operating expense leverage.

Okay, great. Very hopeful. And one more. Jon and Brian, actually. Some interesting comments on the promotion dollars, I believe I heard you correctly, decreasing sort of helping to aid results. So again Jon, your thoughts on sustainable going forward. Is the belief that as long as the Company's innovation is there you can sort of keep those promotion dollars under wraps because of the differentiation? And then Brian, just one from an accounting perspective. Are there fewer promotions? Is that less dollars netted against revenues? I think that is correct. Or is it an OpEx expense? Thanks, guys.

We obviously have a have a number of different ways that we go to market with our customers. We have gotten a lot of questions on the net customer acquisition cost and you could see that in our balance sheet, actually, and our disclosures in terms of the short- and long-term acquisition costs net. And the key thing to look at there is as we add business, we add customer acquisition costs. So growth is a good thing.

We did see accelerated growth last year and that has moderated significantly in Q4 and Q1. So that 's kind of key point one, which is this normalization of the competitive environment that we have seen. And we just wanted to highlight that. Those costs do get amortized over time in terms of the long-term business commitments that we have.

So the degree that we have basically less money going against defending customer retention, that will improve our net price realization over time. So our current results really where we had actually modest net price increases, even with some of this carry-over impacts, as we move forward assuming kind of a continued normalization of the competitive environment, that could be a tailwind for us on the pricing front.

And I would just add, I think it is because we do see increasing loyalty with our customers across the modalities. And so what we are seeing here is two nice trends that are not inconsistent with each other. Moderation in the growth of the customer acquisition costs, but no moderation in the growth of customer acquisitions.

Got it. Thanks, guys. I appreciate it.

Mark Massaro, Canaccord Genuity.

Hey, guys. Thanks for taking the questions. Jon, can you provide us an update on when you initially started putting the SediVue in the hands of the initial users? And I think your guidance assumes 1000 units. Can you just give us some context as to how you think that will track as we look out for the balance of the year?

I talked about two things. We had a couple of dozen units in the field that were non-revenue units in the first quarter. That is part of our beta trial, it is part of our normal refined instrument development and bringing it to market.

We have gotten really good at bringing instruments to market. And one of those is to make sure we put the analyzer in the customer hands in a beta to fully integrate all the learnings when the customers start using it. Because they do things we would never imagine they would do when we are looking at in our test labs. What customers do with instruments in a veterinary environment, or maybe it is not just customers but their pets, do to the instruments is -- surprises us.

So by the time we started shipping revenue units in April, we already had very good experience of how the unit would perform in the field from those beta trials. And so then simultaneous to that, of course, we generated a revenue order backlog load, as I said, in Q1. And we started shipping revenue units against that. We have a couple of dozen in as part of a controlled launch process. We're always checking with customer feedback along the way to make sure we've capture those learnings before we ramp the volume.

The initial customer feedback has been extraordinarily positive. We are very pleased with where we were on the instrument launch. We are very -- SediVue is going to be a major new modality. The value of the SediVue placement is closer to the value of a competitive catalyst than it is to a competitive hematology. And so we're very -- we feel very good about our outlook for the year and that is Incorporated in our -- all the puts and takes in our revised organic growth guidance.

Okay, great. So you raised 2016 revenue guidance by $40 million. $27 million is FX related. So as we're looking at our model, how would you suggest we allocate the incremental $13 million beat? Is it broad-based or is it there a particular bucket we should be focusing on?

Q1 was clearly a key part of that, right? We had signaled and 8% to 9% growth rate and we achieved 11%. So that's flowing through the Q1 benefit and the balance is really kind of through the year. I think we gave you some specific numbers, Mark, for Q2. And I think we're feeling good about the SediVue trends. Over time we think that can flow through. But I think a meaningful part of that is the Q1 beat.

I just want to remind you that there are a lot of moving fast moving parts at IDEXX. Obviously we get a lot of focus on parts of our business and not as much focus on other parts. We're an international company. We are in a lot of markets.

Let's take the Water business had a phenomenal, knocked it out of the park in the first quarter, 11%. That is not likely a sustainable number. We believe that's a high single digit growth business. So all of that is incorporated in the annual guidance.

Great, thanks. And maybe just one last one. You've commented that the rapid test declined 1% organically in the quarter. Should we -- how should we handicap the possibility that you return to a low to mid-single digit growth outlook in 2016? And what are some of the challenges you are seeing in the field as you go out and compete against other providers?

I would say that I think that is -- by the way, our rapid assay performance is as we expected and I think we indicated that we felt it would be flat in the first quarter. And that is because of the compares are toughest in the first quarter versus the balance of the year.

We don't give guidance by modality by region. We don't really see any change in the fundamental trends that we have seen over the back half of last year in terms of strength of the 40X franchise and the trends in our first generation of SNAP products. All those trends are continuing as we expected.

Great. Thank you.

(Operator Instructions)

David Westenberg, C.L. King.

Hi, guys. Thanks for taking my question, and great quarter. You're seeing good traction abroad. Can you talk about the expected utilization internationally compared to the US?

Thank you for the question. I think you are probably referring to the instrument and consumables utilization there?

Exactly. The Catalysts utilization. The Catalyst placement numbers abroad have been really good for the last few quarters.

We're seeing really nice consumable growth that is coming out of that augmented rate of placements. So the accounts outside of the US are smaller than the US, generally speaking. So the utilization per account is lower. There is still a very significant install base of tests that we are upgrading, although we continue -- none of those numbers include a VetTest placements. We continue to place VetTests in some markets too, expanding our overall chemistry base, which is now over 40,000 active customers globally.

But the rate of placements is really quite good in what are generally speaking haven't always been smaller accounts. I think Catalyst One is just a phenomenal instrument because of all of the things it brings. Complete menu, unique menu with things like T4 integrated, ease-of-use. Using whole blood with no issues, the footprint, the integration. the VetConnect PLUS. These are all unique aspects of Catalyst ONE that may get very attractive for these smaller practices outside the US, let alone practices in the US where if they need the capacity it' s very economical to add another Catalyst One to the same IDEXX VetLab station.

It is a very flexible analyzer that works in big practices and the types of practices that we see internationally, combined with a phenomenal and experienced commercial organization. We have a very experienced set of country managers. Many of our -- some of our country managers have been in their roles over a decade. They have grown with IDEXX. They know their markets inside out.

We are fully direct in most developed countries now. It is been a systematic process that we have been putting in place over the last several years. And I think we're seeing the benefits of that.

And then when you talk about utilization, the thing is that things like preventive care, or just things that are actually doing a full panel on a sick pet, it's surprising how little that is done today. So part of what we are doing is we're growing the market. We are expanding the market through education and providing them the tools with things like Catalyst One and reference lab to be able to do that.

So a lot of this is market development. I really don't see any end in sight in the opportunity to develop the market in these -- in what some people refer to as mature developed economies. Well, they are not mature and developed to us, let alone the kind of growth we're seeing in markets like Brazil and China.

Great. That is helpful. And then both you and your competitor are seeing massive growth rates in reference lab. I believe that you quoted high teens in the US, your competitor quoted 9%.

Can you talk about what's driving that in North America, specifically? Are you seeing some cannibalization of inside lab, or is this just an overall incredibly healthy market that is doing a lot more diagnostic testing?

First of all, it is a very attractive market. And I think that you can see that from our visit data and same-store sales practice data that Brian quarter of 9.2% in the first quarter. That was a very, very strong underlying market that we were seeing.

We can really speak to what we are seeing. But the other thing we're seeing is volume growth in existing customers that is not just things like existing panels but adoption of our advanced menu. Things like fecal or molecular diagnostics, or some of our other specialty test categories.

So what we have seen is a growing utilization of things that only the reference lab can provide. But we're still seeing strong growth in the in-house modalities in chemistry in-house. I think testing begets testing. I don't think there's any kind of fundamental shift happening between one and the other. They just have their own growth dynamics.

Thanks, and congratulations on a good quarter.

Thank you.

Nicholas Jansen, Raymond James.

Hey, guys. Nice quarter. Just wanted to get a better sense of constant currency gross margins. Obviously hedging gains and FX is playing a role there. But gross margins were a little bit below our estimates. And I'm just trying to get a better sense of how underlying trends are performing. I know you've had a strong instrument quarter. So that might play a role. But just wanted to get more thoughts on constant currency gross margins.

Mentioned that the constant currency change year on year was 70 basis points down. So taking out the currency hedge gain impacts, and it was really two dynamics.

It was the -- part of this was the compare to -- we had some favorable capitalized variances last year in terms of, particularly in our LPD business that just had a high volume rates that flowed into lower product costs. And we had a -- you can see that in our reporting last year that we highlighted. And that was a key part of it. And the other piece of this is the instrument revenues and the instrument mix.

Say that comparable margins in our business are quite good. We are improving gross margin in labs. Our margins in our core instrument businesses and things like that are doing quite well.

So net/net we think we're right on track relative to where our gross margin goals. We knew we had some of the compare issues and FX heading into the year. But we are reinforcing the operating margin outlook, which was (inaudible) sustained gross margins this year, constant currency and some OpEx leverage. And we're right on track for that.

I also, Nick, want to reinforce that we see the opportunity over time, over the next several years for gross margin expansion driven by our reference lab business around the world, as well as the instrument and consumable business and also to a smaller degree, because it is a smaller business, our information management business as we shift to the cloud. So these are all long-term trends we think that will support our overall margin expansion strategy.

That's helpful. And then you think about the organic growth guidance for the full year. Obviously off to a very strong start. Is there anything that you are seeing in the marketplace that would suggest to you that the end market could potentially decelerate?

Because it is clear to me that you have momentum across a variety of modalities. You have a burgeoning sales force that is successfully undertaking this transition. So I'm just trying to get a sense of why you would think that potentially growth would decelerate off of the strong Q1 levels. Thanks.

There are a couple of factors in Q1 that we did highlight. I think the extra day was about 1 point and it is tough to parse weather, but clearly we had some favorable US weather compares. And so let's say that was about 1 point. It's again, hard to estimate. But net/net that is in line with what we said we were going to do this year, net of those effects.

We feel very good about the trends in the business. We have obviously raised our guidance reflecting that. So we're not projecting -- it is not reflective of an expected deceleration in the business. It is more reflecting a couple of the unique factors to Q1.

I think Brian did appropriate call-outs some special factors in Q1, which is embedded in our guidance. Certainly we don't see a deceleration. Our crystal ball isn't any better than anybody else's with regard to the general economy.

But what I will say is that what happens is over time as consumer confidence remains okay, maybe not fabulous but okay, then they add pets to their household and then they need to take care of them. I think the fundamental underlying environment that we have been in, that's built up over the last couple of years of consumers feeling okay or reasonably confident, or having moved further away from the financial crisis, really means that the trends in pet healthcare growth are pretty solid. It takes a lot to change those trends, because people love their pets and they are going to make sure that their pets are taken care of, even if they get pressed in other areas of their wallet.

They may not always replace their pet if they face a Great Recession like they did in 2019 (sic), and that moderated the growth for a couple of years, 2010, 2011. But now we're kind of come back out of that. And I think we have seen generally a very, very good market. And of course the level of care that can be provided now by veterinarians is ever-expanding. We are blessed by serving an important, growing secular growth markets.

That is it for me. Nicely done guys.

Thank you. I just want to thank everybody for signing on the call. We are also just want my huge congratulations to the work that has been done by IDEXX around the globe, across all of the functions. We have done a lot of work to reposition the Company over the last couple of years and I think now we're in a place where we can perfect our new model. We're not making any big model changes like we have had in the past. And it is very, very gratifying that we can see the result of the hard work, including innovation and customer contact and supporting organizations. So I just want to really thank our organization for that.

We recognize that we are here to create shareholder value and that is part of our job, part of our model, part of our purpose. And we are very focused on continuing to grow the Company in a way which will generate, and continue to generate attractive returns on invested capital.

So with that, we will conclude the call.

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