愛德士 (IDXX) 2017 Q4 法說會逐字稿

Good morning, and welcome to the IDEXX Laboratories Fourth Quarter 2017 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 Kerry Bennett, Vice President, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.

Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com.

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 measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website.

In reviewing our fourth quarter 2017 results, please note all references to growth, organic growth, constant currency growth, and comparable constant-currency growth refer to growth compared to the equivalent period in 2016 unless otherwise noted.

In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to 1 with 1 follow-up if necessary. We appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits we will take your additional questions.

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

Thank you, and good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2017 results and provide an update on our financial outlook for 2018. We had excellent results in Q4, which concluded another year of outstanding financial performance for IDEXX. We achieved 12% organic revenue growth in the fourth quarter, supported by 13% growth in CAG Diagnostic recurring revenues and 15% growth in premium instrument placements.

Overall, reported revenue increased 14% aided by favorable year-on-year changes in FX rates. Our strong finish to 2017 supported the achievement of full year organic revenue growth of 10.4% consistent with our long-term financial goals. Results were driven by accelerated 13% organic gains in CAG Diagnostic recurring revenues reflecting strong double-digit growth in U.S. and international markets.

Our full year EPS was $2.94, net of a nonrecurring $0.34 per share charge related to the enactment of U.S. tax reform. Adjusted for this factor, full year EPS was $3.28, $0.02 per share above the high-end of our guidance range.

This performance reflected strong top-line growth and achievement of full year operating margins of 21%, a 140 basis point improvement year-on-year on a constant-currency basis. EPS grew 21% on a comparable constant-currency basis in 2017, above our long-term financial goal range for the second consecutive year.

We are well positioned to build on these results in 2018, reflected in our updated outlook for 9.5% to 11.5% organic revenue growth, which now includes an estimated $10 million year-on-year benefit from revenue accounting standard changes. We're also maintaining a consistent outlook for 75 to 125 basis points improvement in constant-currency operating margins while investing $10 million in incremental operating expense leveraging benefits from U.S. tax reform.

Overall, strong operating trends, favorable FX rate changes, revenue upside from accounting changes and significant projected benefits from U.S. tax reform support a $65 million increase to our 2018 preliminary revenue guidance to $2,205,000,000 to $2,245,000,000 and a $0.55 per share increase to the midpoint of our EPS guidance to $4.04 to $4.18 per share.

We will provide an update on our 2018 guidance later in the call. Let's begin with the review of our fourth quarter and full year 2017 results, beginning with an overview of performance by segment and region.

Q4 performance was led by continued strong momentum in our Companion Animal Group. Global CAG revenues were $434 million, up 12% organically supported by 13% organic gains in recurring CAG Diagnostic revenues and in our veterinary software services and diagnostic imaging businesses.

For the full year, CAG revenues increased 11% organically to $1.7 billion, driven by accelerated 13% organic gains in recurring CAG Diagnostic revenues. Livestock, Poultry and Dairy revenue of $37 million increased 8% organically in Q4 ahead of our expectations. Results reflected higher than projected year-end government program and distributor ordering and solid gains in recurring revenue supported by growth of our pregnancy platform. These gains were moderated by continued pressure on dairy and swine markets in China, which have constrained emerging market gains.

For the full year, our LPD revenues were $128 million reflecting relatively flat organic growth. For 2018, we are planning for flat-to-modest organic growth in LPD overall consistent with recent underlying growth trends.

Our Water business revenues grew 16% organically in the fourth quarter to $29 million, aided by favorable comparisons to prior year channel inventory adjustments in advance of our go-direct initiative in Brazil. Adjusted for these changes, we estimate Q4 Water organic revenue growth was about 9%.

For the full year, Water business revenues increased to $114 million, up 10% organically, including about 3 percentage points of growth benefit from go-direct initiatives. We're very pleased with our momentum in the Water business and believe we are on track to continue the high single-digit organic revenue gains in this highly profitable business in 2018.

By region, U.S. revenues were $298 million in the quarter, up 11% organically. Gains were driven by strong 12% organic growth in CAG Diagnostic recurring revenues despite a 1% headwind from fewer equivalent days. U.S. recurring revenue gains were supported by continued strong double-digit growth in reference labs and consumables and high single-digit growth in rapid assay sales. U.S. CAG recurring diagnostic price gains continue to trend in the 2% to 3% range with the bulk of our growth driven by volume.

IDEXX's performance continues to significantly outpace solid U.S. veterinary practice market growth reflected in our data set from about 5,200 clinics. In Q4, patient visits increased 2.0% and clinic revenues increased 6.1% compared to the prior year period.

For the full year, U.S. revenues reached $1,204,000,000, up 10% organically driven primarily by our U.S. CAG business, which represents nearly 94% of total U.S. revenues. We achieved U.S. CAG organic growth of 10% in 2017 supported by accelerated 12% organic CAG Diagnostic recurring revenue gains.

International revenues in Q4 were $208 million, up 13% organically. International results were driven by 14% organic gains in CAG Diagnostic recurring revenues, reflecting continued strong consumable gains supported by our expanding Catalyst instrument base. International revenues reached $766 million for the full year or 39% of total IDEXX revenues supported by organic gains of 11%.

International CAG Diagnostic recurring revenues increased 14% organically for the full year, reflecting double-digit growth across Europe, Asia Pacific and Latin American regions. Overall, international revenue gains were moderated by flat organic growth in our international LPD business.

In terms of segment performance, our Q4 results were supported by accelerated expansion of our premium instrument base and continued strong global gains across CAG Diagnostic testing modalities. Globally, we placed a record 3,650 premium analyzers in Q4, up 15% compared to prior year levels, driven by a 25% year-on-year increase in Catalyst placements and record SediVue results.

Q4 results included 1,863 Catalyst placements. This performance reflected 1,300 placements in international markets, up 34% year-on-year, and 433 placements to new and competitive accounts in North America, a 25% increase over strong prior year levels. Consistent with our strategic focus, 77% of North American Catalyst placements were at new or competitive accounts in the quarter.

In the quarter, we also placed 1,040 premium instrument -- hematology instruments globally, 747 SediVues and 1,630 SNAP Pros bringing year-to-date SediVue placements to 2,267 and year-to-date SNAP Pro placements to nearly 6,000. Instrument revenues in Q4 were $37 million, up 2% organically as very strong placement gains offset deferred revenue impacts under 2017 GAAP accounting standards.

Our EVI metric in the U.S. was up significantly in the quarter, reflecting very strong gains in competitive Catalysts and SediVue placements consistent with our strategy.

For the full year, IDEXX made substantial progress in growing our global premium install base. We now have 29,855 Catalysts installed globally, a growth of 22% year-on-year. These gains reflect 37% year-on-year install base growth in international markets and 10% gains in North America, driven by 1,369 placements in new and competitive accounts, a 14% year-on-year increase in North America. International Catalyst placements reached 3,839 this year, up 19% and on track with our long-term expansion goals.

Growth in our instrument customer base supported by sustained high retention levels and augmented by continued solid utilization gains drove continued strong momentum in consumable revenues. Instrument consumable revenues of $134 million grew 14% organically in Q4 supported by robust gains across U.S. and international markets. Our SediVue installed base continues to expand and contributed 2% to consumable growth in the quarter.

Reference laboratory and consulting services with revenue of $162 million also grew 12% organically in the fourth quarter, net of a 1% equivalent day headwind. Continued high reference lab gains were supported by strong double-digit organic revenue growth in the U.S. reflecting double-digit organic volume gains with existing customers augmented by solid price realization and net customer additions. International reference lab gains were solid in the quarter with organic growth at high single-digit rates driven by consistent gains in Europe.

Rapid assay revenues continue to trend very well. Q4 revenues of $46 million grew 10% organically, benefiting by about 1% net due to favorable international distributor inventory changes offset by fewer equivalent days. Rapid assay gains continued to reflect solid volume growth in 4Dx and specialty tests and continued progress regaining share in first generation products in the U.S.

Veterinary software services and diagnostic imaging systems revenues were $37 million in the quarter, up 13% organically driven by increased penetration of recurring services in our Cornerstone installed base and very strong growth in digital radiography placements, which were up 24% year-on-year in the quarter.

Turning to the P&L. Gross profit was $272 million in Q4 or 53.8% of revenues, up 13% on a reported basis. Adjusting for foreign exchange impacts, gross margin has decreased 30 basis points.

Continued solid net price and productivity gains were offset by stepped-up investments in lab capacity and operations, approximately $1 million of IT-related cost reclassifications from operating expense to cost of goods sold, relatively higher year-on-year LPD and Water costs and relatively lower average instrument margins reflecting strong international growth.

Certainly these impacts were specific to the quarter, and we are targeting continued solid gross margin expansion in 2018.

Foreign exchange hedge impacts reported in gross profit reflected a $1 million loss in Q4, related to the weakening of the U.S. dollar, limiting year-on-year net FX gains to about $0.02 per share in the quarter.

Operating profit in Q4 was $98 million, up 17% as reported or 14% on a constant-currency basis. Operating profit results benefited from strong revenue gains and operating expense leverage supporting a 40 basis point improvement in constant-currency operating margins in the quarter. Operating expenses in Q4 were up 11% as reported or 10% on a constant-currency basis, driven by investments in sales and marketing resources and enabling information technology.

For the full year, operating profit was $413 million. This reflects an operating margin of 21% or an increase of 140 basis points on a constant-currency basis in 2017. This outstanding full year result reflects about 100 basis points of constant currency gross margin gains and 40 basis points of benefits from operating expense leverage, benefiting from our accelerated revenue growth.

EPS in Q4 was $0.43 per share, including a $31 million or $0.34 per share nonrecurring charge related to the implementation of U.S. tax reform, $0.06 per share in benefit from share-based compensation accounting adoption and less than $0.01 in discrete tax benefit from the expected utilization of foreign tax credits.

The $31 million tax reform related charge is our current estimate and relates to the deemed repatriation of the company's foreign profits, net of deferred tax remeasurement at lower corporate tax rates and other related adjustments. The charge came in below earlier estimates reflecting favorable clarification of specific factors related to deemed repatriation tax impacts for IDEXX.

For 2017, EPS was $2.94. Adjusted to exclude the one-time tax reform impact, EPS was $3.28 per share. For the full year, foreign exchange rate changes increased revenue growth by 0.3% and reduced EPS by $0.01 per share, including FX hedge loss impacts of about $4 million.

For the full year, adoption of share-based compensation accounting guidance provided $28 million or $0.30 per share in benefit. Discrete tax benefits also contributed $0.04 per share benefit in 2017. Adjusting for these factors, 2017 EPS growth was 21% on a comparable constant-currency basis.

Free cash flow was $299 million for 2017. This represents free cash flow at 114% of net income or 102% adjusting for the U.S. tax reform charge that includes deemed repatriation taxes required to be paid over 8 years. This performance was delivered while supporting $76 million in annual capital investment.

Our strong cash flows and continued positive business momentum supported the allocation of $270 million in capital towards share repurchases for the full year, including repurchases of 350,000 shares in Q4 for $55 million. This brought our 2017 repurchase levels to nearly 1.75 million shares at an average price of $155 per share.

Of note, over the last 5 years, we deployed just under $2 billion to repurchase 28 million shares or more than 25% of the shares outstanding at the beginning of the period for an average price of $70 per share, significantly enhancing per share returns for IDEXX shareholders.

Our balance sheet is in a very strong position. We ended the year with $1,266,000,000 in debt outstanding, including $606 million in fixed-rate term debt and $655 million outstanding under our $850 million revolving credit facility.

At year-end, we had $472 million in cash and investment balances, of which 99% was held internationally. Our leverage ratios at year-end as a multiple of EBITDA were 2.4x gross and 1.5x net of cash and investment balances.

Turning to our 2018 outlook, our growth momentum and disciplined operating performance positions us well to deliver continued strong financial results in 2018, aided by substantial projected benefits from U.S. tax reform. As noted, we are raising our 2018 organic revenue growth outlook to 9.5% to 11.5% gains, incorporating an estimated $10 million or 0.5% growth benefit from revenue recognition accounting changes.

Our outlook is supported by expectations for continued high-levels of premium CAG instrument placements and 12% to 14% organic growth in CAG Diagnostic recurring revenues, including about 1% of growth benefit to CAG Diagnostic recurring revenues in 2018 from retroactive revenue accounting standard change impacts.

Overall, we are raising our reported revenue outlook by $65 million at midpoint to $2,205,000,000 to $2,245,000,000, or reported growth of 12% to 14%. This increase reflects strong operating trends, including the flow-through of higher-than-expected 2017 performance. The projected $10 million accounting change benefit and about $35 million of additional benefit from updated rate assumptions for foreign exchange, which are reflected in our press release.

At the new FX rates, we project that our reported revenue growth will be increased by 2% to 2.5% in 2018 related to year-on-year weakening of the U.S. dollar. We're raising our 2018 EPS outlook to $4.04 to $4.18, an increase of $0.55 per share reflecting about $0.06 in upside from strong operating trends, $0.10 of additional EPS related to our updated FX estimates and an estimated $0.39 per share in net benefits related to U.S. tax reform.

The EPS outlook reflects consistent goals for year-on-year constant currency operating margin improvement of 75 to 125 basis points. We've maintained this outlook while incorporating $10 million of additional operating expense investment and about $5 million of incremental capital investment in 2018 leveraging benefits from U.S. tax reform. This outlook results in comparable constant currency EPS growth of 28% to 33% (Sic - see press release - 29% to 33%), including an estimated 13% of net EPS growth benefit related to U.S. tax reform.

Our outlook for our effective tax rate in 2018 is now 20% to 21%, including an estimated $11 million or $14 million -- excuse me, including $11 million to $14 million or about 3% in projected tax rate benefit from exercise of stock-based compensation. This outlook reflects projected recurring tax rate benefits from the new U.S. corporate tax structure primarily driven by the reduction in the U.S. statutory rate from 35% to 21% net of certain offsets.

Our updated outlook for share count in 2018 is for a reduction in average shares outstanding from continued stock repurchases of 1% to 1.5%, which assumes that we maintain net leverage at approximately 1.5x EBITDA. Under U.S. tax reform, we will have increased flexibility related to global management of cash and debt balances.

Our 2018 projections reflect an assumed optimization of our global net interest cost utilizing excess cash balances over time, resulting in an outlook for net interest expense of $35 million to $36 million.

Free cash flow is projected at 80% to 85% of net income for 2018, including approximately 15% of free cash flow impact driven by $50 million of combined incremental capital spending related to our Westbrook, Maine headquarters expansion and our German core lab relocation and expansion as well as about $5 million of incremental growth capital investment supported by additional cash flows associated with U.S. tax reform. Incorporating these estimates, our 2018 free cash flow outlook reflects projected capital spending of approximately $140 million.

Foreign exchange rates will be a positive factor impact in 2018 profit results at the updated exchange rates outlined in our press release. At these rates, we estimate that foreign exchange rate changes will increase reported EPS by approximately $0.12 per share, net of $7 million in currently projected hedge losses.

In terms of our first quarter outlook in 2018, we expect Q1 reported revenue growth in the 13% to 14.5% range, reflecting organic gains of 9.5% to 10.5%, net of a 1% equivalent day headwind. Reported Q1 revenue results will benefit by approximately 3.5% to 4% from favorable year-on-year FX impacts at the rates assumed in our press release.

Q1 operating margins are expected to be flat to modestly higher than prior year levels, reflecting near-term moderating impacts from reference lab growth capacity investments and relatively higher levels of operating expense growth, as we lap incremental commercial investments advanced in the second half of 2017. We expect our effective tax rate in Q1 to be 15.5% to 16.5%, including projected benefits from share-based compensation exercise activity, which is typically higher in the first quarter.

That concludes the financial overview. Let me turn the call over to Jon for his comments on our business performance and our areas of focus heading into 2018.

Thank you, Brian. We had a very strong finish to the year across our businesses and around the globe. I'm very pleased with our team's success in 2017 in growing the market for IDEXX's innovative diagnostics and software solutions, including for the Companion Animal market, resulting in over 10% organic revenue growth and EPS gains at the high-end of our long-term financial goals.

Our North American commercial team saw accelerated successes at high-value instrument placements, a key driver to the profitable recurring revenues of instrument consumables. While at the same time, growing both our reference lab diagnostic modality, the largest contributor to North American recurring revenue, and our rapid assay line.

As investors recall, we undertook a 12% expansion in our U.S. field organization, fully in place in Q3, but still early in the learning curve. In Q4, we saw this expansion kick into gear. We also resumed the double-digit productivity in our EVI growth, and instrument placements per rep that we achieved in the first half of the year. And the combination of the expansion in the number of reps and the productivity per rep in North America drove our 25% growth in Catalyst placements to new and competitive accounts and 23% growth in SediVue placements.

Along with these results, we saw sustained high levels of customer retention, which are at world-class levels. Our 98% retention of in-house chemistry accounts in the U.S. compares favorably to any period since we announced our intention to go fully direct in 2014.

Our U.S. reference lab revenue growth in the fourth quarter sustained mid-teen range even with a 1% headwind related to equivalent days. North American growth continues to benefit from strong same-store sales growth, as customers appreciate and adopt our unique offerings, including fecal antigen, SDMA, Molecular Diagnostics. And we saw increasing customer retention levels reaching 97% from the reference lab modality.

These results are driven by our deep sales coverage and strengthening customer relationships that come over time, combined with an expanding diagnostic offering that is unique, as well as new tools and technologies that help customers adopt and grow preventive care testing protocols. This volume-led growth in our reference lab helps us assure our long-term margin expansion growth goals in the lab operation.

Our Companion Animal Group international operations completed the year with exceptional performance in placements of instruments, led by Catalyst, our instrument platform, with the strongest generation of recurring consumable revenues. Premium instrument placements growth was 25% and the high-value Catalyst placement growth was 34%, resulting in full year Catalyst placements of 3,839 and a 37% expansion in our international and Catalyst install base.

Results were strong in virtually every country of every geography: Europe, Japan, China, Australia, New Zealand and Latin America. Our move to a direct sales structure in most countries in each of these regions over time has proven to be highly successful, and our teams around the world are applying their entrepreneurial spirit to bringing Catalyst and the rest of the IDEXX vet lab offering to countries in a way that inspires veterinarians to adopt this advanced technology in accordance with local market needs.

I was also very pleased with the Water's continued growth and profitability and the rebound in the growth of Livestock, Poultry and Dairy, or LPD, from Q3 levels. Of note, Water benefited this year from go-direct initiatives that set the stage for sustained long-term growth in this business, while LPD leveraged the benefits of new innovations like our pregnancy testing platform to offset broader market headwinds constraining overall growth gains in 2017. These are exceptional businesses represented by IDEXX professionals around the world that are committed to our purpose.

The key innovation accomplishment for Q4 was the on-time launch of Catalyst SDMA. In adding this remarkable assay to our in-house Catalyst solution, we are greatly expanding access to SDMA and the availability of SDMA in providing expanded pet care.

As Brian mentioned, we have close to 30,000 Catalyst instruments in customers around the world. And these Catalyst customers have been anxiously awaiting for the availability of this slide as evidenced by the over 3,500 unique practices in North America that have already bought the test since our prelaunch in 30 -- 60 days ago and are beginning shipping just a couple of weeks ago.

Many of our Catalyst customers do not have access to our reference labs for a variety of reasons and others are committed to running their chemistry real-time in the practice. We call this Real-Time Care or the practice of running the panel immediately on the in-house lab during the exam and providing care at that moment in time.

We're also looking to the build clinical appreciation of SDMA with veterinary schools, which is facilitated by Catalyst SDMA since these institutions typically run lab work on their premise and now can do so with Catalyst.

We find that the more customers gain experience with SDMA in a clinical setting, where it can make the difference in the health of their patients, the faster they realize how essential this new parameter is in routine chemistry testing, including in sick animal, disease monitoring and preventive care protocols. Catalyst SDMA will accelerate this learning and market adoption. And once customers conclude that SDMA is critically important, then they become highly loyal to IDEXX for their diagnostic needs.

Our SediVue results were also amazing in Q4, bringing 2017 total placements to well over our 2,000 goal of 2,267 units. This month, we are rolling out our next-generation algorithmic software to the entire customer base called Neuro Network 3.0.

This version has the benefit of images from 1 million patients and uses machine learning to add quantification of red and white blood cells, advance the detection of certain bacteria -- as you can imagine, bacteria is an essential urine parameter -- and also bring other enhancements to the image algorithm.

The instrument's growing capabilities that come from having over 3,800 systems in the field is achievable due to our 10 years of experience with SmartService or the Internet of Things, which means unique IDEXX innovation for in-house lab equipment. Every pet sample run on SediVue improves SediVue for all future patients, and this is the impact of SmartService and machine learning.

We also remain on track for the launch of SNAP 4Dx -- SNAP Fecal Dx in the summer of 2018, our biggest SNAP launch in 15 years. SNAP Fecal will launch our ever-growing install base of SNAP Pro customers and our success with fecal antigen at the reference labs. As a result of the great success in SNAP Pro placements in 2017, we have an installed base of over 17,000 instruments in almost 10,000 practices in the U.S. alone with continued momentum in 2018.

The volume of SNAP 4Dx in the U.S. market that comes from SNAP Pro customers easily exceeds 50% of our U.S. 4Dx volume, up significantly from where we were when we went direct in early 2015. SNAP Pro penetration combined with strong field presence, a powerful online marketing channel, and demonstrated clinical accuracy of our SNAP technology sets the stage for continued solid expansion in our rapid assay franchise.

The strength of our business performance reflects the attractiveness of our recurring revenue business model around the world, which achieved accelerated 13% organic growth in CAG recurring revenue in 2017.

We have consistently focused on aggressively allocating capital to grow our businesses organically. The attractiveness of investing in growth in our franchise will be further enhanced by U.S. tax reform. Simply put, tax reform is huge for IDEXX, as it is for our U.S. customers who are generally small businesses.

And anything that helps our customers become more successful economically also helps IDEXX. And tax reform gives our customers greater resources to invest in IDEXX's advanced innovations, be they diagnostic, digital radiography where we had a breakout Q4, software or staff education. All these areas support practice growth and the acceleration of their partnership with and utilization of IDEXX to the benefit of owners and their pets.

As a result of tax reform, we are accelerating our investment in software, big data and related innovation. We are the innovative leader in veterinary software, with nearly 39,000 VetConnect plus accounts, 22,000 of which we call active monthly users, 9,000 customers for our practice management solutions and over 5,000 customers for our cloud-based apps that add value to the customer's practice management software.

Our data capabilities have already generated groundbreaking insights in medicine, using a data-driven evidence-based approach. And in 2018, we aim to use data to help our customers appreciate how to grow their protocols with the appropriate use of diagnostics to better meet the needs of today's pet owner.

Importantly, we will be able to show how any particular IDEXX customer benchmarks in relation to their peers and colleagues and other practice locations in diagnostic utilization.

We're also using some of the benefits of U.S. tax reform to expand the company's financial match, we provide the -- to U.S. employees who save for retirement using IDEXX's 401(k) plan. This expansion to a dollar-for-dollar match of 5% of salary -- of up to 5% of salary will help our U.S. employees better provide for their retirement in a highly tax-efficient fashion.

Retirement planning is a societal challenge, and we are further supporting our employees with this expanded benefit. Tax reform supports investments towards our purpose and our long-term growth strategy. The return on investments that we've made in past years in the U.S. market starting with our sales force reconfiguration and then decision to go fully direct and the investments we continue to make as we grow the top line will increase on an after-tax basis.

Prior to 2018, a pretax dollar of U.S. return generated $0.65 after federal tax. And in 2018, this same dollar generates $0.79 after federal tax, a growth of 21% all other things being equal. This gives us confidence to continue to grow our investments in this incredibly attractive market.

We are able to do that and still meet the company-wide margin expansion goals that Brian reinforced earlier in the call, driven in part by 2018 operational efficiencies, resulting from our accomplishments in 2017 and prior years. All of us remain dedicated to our purpose: to create exceptional long-term value for our customers, employees and shareholders by enhancing the health and well-being of pets, people and livestock.

So with that, we will open the call to questions.

(Operator Instructions) We will go to the line of Ryan Daniels with William Blair.

This is Nick Hiller in for Ryan Daniels. I was just wondering if you could give a bit of an update on the SNAP Fecal Dx launch, specifically when would peer interest in that product begin. And how much interest is there in that product specifically outside of the core IDEXX customer base, especially given how prevalent fecal tests are and how unique the offering will be? And just a follow-up (inaudible), any thoughts on the potential competitive launch of a rapid assay to compete against 4Dx?

We are very excited about the SNAP fecal launch, which we expect in the summer of 2018. I think as you referenced, fecal testing is a routine preventative care protocol for dogs usually done with the annual or semiannual exam. The vast majority of those are run in-house today using manual methods and the microscope. And so we see this as an opportunity to replace that in-house manual method with using biotechnology and ELISA method.

So our rough estimate is -- around 40 million fecal tests are run in North America annually and a large majority of that is run in-house, although we're also very successful in driving fecal testing in the reference lab with our fecal antigen offering. And so like anything, the penetration and adoption of any product takes time, but we think this is going to be a long-term grower.

I'll just note, I was really excited about the rapid pickup with SDMA on a slide with over 25% of the Catalyst customers buying in the first couple of months. I think it's an amazing startup. But I think fecal will be a major -- the in-house fecal leveraging the reference lab fecal antigen technology will be a major franchise for us.

We remain excited about strong franchises we have with vector-borne disease screening. We believe the announcement to which you refer validates that customers really need multiplexing, a comprehensive disease screening, which has been our strategy from the beginning.

And what we've been doing in that business is turning it into a razor blade business model by adding a SNAP Pro, which not only interprets the result but automatically runs the result, connects it to our ecosystem, captures the charge, and adds it to the medical record. And at this point, easily over 50% of our U.S. volume is running it on SNAP Pro and that will continue to grow as we continue to place SNAP Pro, as we've placed over -- almost 6,000 of them last year.

We also have really unique accuracy, sensitivity and specificity that has been validated by third-party technology I think that is unique to our SNAP ELISA platform. And so I think we remain excited. This is a business though that is still under-penetrated.

Not enough customers are running 4Dx or vector-borne disease screening as part of preventative care protocols on their dogs. And so while we had very strong high single-digit growth in 2017, and we've launched -- originally launched actually vector-borne disease screening over 15 years ago, we see continued growth in this market in 2018 and beyond and that's growth that we expect to continue to drive.

We will go to the line of Derik De Bruin with Bank of America Merrill Lynch.

It's actually Mike Ryskin on for Derik. I want to touch on a couple of quick points. The instrument growth in the quarter, it's nice to see that return to positive growth, but I just want to confirm the difference between the instrument revenue growth and the placements. Is that along the lines of what we saw in previous quarters of the revenue recognition that we talked about in 3Q? Or is there something going on with pricing there?

And then I also have a follow-up on the margins. Saw that you reiterated the targets for '18 of the constant-currency op margin growth, but still saw some choppiness in gross margins this quarter. Can you talk about some of the gives and takes there? And what your expectations are on the gross margin line for 2018?

Why don't I take those? On instruments, that's correct. We did have some deferred revenue impacts, very, very strong growth as noted. And under current accounting, we had deferrals, which under the new accounting will be a new set of rules, and we won't have that same dynamic moving forward. There will be different pieces moving forward, but net-net, I think, we're -- that's more reflective of the current GAAP standards, and we work through that.

And that's starting in 1Q?

Yes. We will break that out for you. It's going to be complicated. There will be very detailed disclosures because you have a restatement of -- a modified restatement of prior year balance sheet information and then, obviously, the new accounting, try to highlight that net. We now estimate that overall, that's going to be a plus $10 million impact for IDEXX.

It will, from a growth rate point of view, it's actually going to help us on the recurring CAG, and we highlighted that was about a point of growth rate impact, and that's more related to the restatement of the balance sheet, the prior year aspect.

And on the instruments, where you -- basically new accounting gets you to more upfront revenue recognition but there will again be some restatement impact that will be a slight headwind. So we will clarify that all for you, but...

But to just get back to your -- the fundamental essence of your question, these remain -- the pricing is not a factor. These are economically very successful placements and are really no different than prior quarters in that regard.

And so I think the unit placement numbers, particularly, in the U.S. to new and competitive accounts and, of course, internationally, we are placing to both new and competitive and upgrading VetTest, which is a good -- which also contributes to recurring revenue growth. These are very quality -- very high-quality placements.

And also, of note, the EVI metric we noted was up significantly. That's a measure of value, and we will be rolling that out in the international markets in 2018 to reinforce that.

On your question on gross margins, a couple of themes here. Our reference lab business in the U.S. is growing very quickly and with accelerating growth momentum, and we made decisions to add routes basically. Add capacity to support the growth that we see coming, make sure that we are fully staffed, we're doing a better job on retention of our lab employees.

And the net of that is, it is an extremely healthy business. We actually delivered close to 100 basis points of constant-currency margin improvements in our lab businesses here while supporting those investments. So in the near term that has some moderating impacts on gross margins, but we will quickly grow into that.

And then also new this quarter was -- fourth quarter, was the reclassification of $1 million from...

Yes, included in that too is our laboratory information management systems, we're recording those costs. Previously the amortization was recorded in the OpEx and we're moving that to cost of goods sold. So no net profit impact, but it has a moderating impact on margins.

We also had another factor that was more specific to the quarter. In our LPD and Water businesses, we were comparing to a prior year Q4 number that had favorability related to basically inventory dynamics, accelerated production growth and higher levels of absorption. It's -- that's not something we anticipate carrying forward.

So the outlook that we have for operating margin growth next year, we reinforce the 75 to 125 basis point improvement. That will be driven by gross margin gains. So we feel good about that, And I'd also note that that covers the $10 million of incremental investment that Jon highlighted. So the underlying growth is really about 50 bps stronger than that.

And that 75 to 125 basis point margin improvement is off of the higher revenue, which as Brian referenced was FX-related, was accounting-related and was flow-through of the revenue over delivery. So a higher growth. But none of those things are changing our 75 to 125 basis point incremental margin on that higher level. So there is some fundamental goodness there.

We will go to the question -- to the line of Erin Wright with Credit Suisse.

I noticed a nice uplift in rapid assay, I guess what's all driving that, I guess, how much of it was price? And it continues to be a competitive market there, do you think that growth rate is sustainable? Or what does your overall growth assumption assume for that segment?

Of course, it is a global business. We had good rapid assay performance around the world. It is predominantly North American. We had good performance in North America that was more volume than it was price. I think -- our reps are pretty engaged in the rapid assay business. It's combined with their -- the value that they are bringing with SNAP Pro placements. So when they're placing SNAP Pro, they're really talking about the entire rapid assay family.

Our 2018 guidance for recurring revenue growth incorporates the benefit of the second half year launch of SNAP Fecal. And so I think our overall rapid assay growth, if you will, combines both what I'd call reasonable assumptions for the rapid assay business augmented by new revenues from a new product launch.

Of course, that will take time to be adopted. So we're only talking about a partial year launch and, like everything, we always like the ramp to be faster than it will be, but that will be new revenue from new innovation.

And it was price -- volume-driven growth.

Volume-driven growth in the fourth quarter and in...

We always have timing of -- year-over-year timing of programs but our underlying of 2% to 3% recurring CAG revenues -- price gains is pretty consistent across the barrel.

Yes. We had just good performance in rapid assay. We saw market share gains -- continued market share gains in the first generation in 2017, and the vector-borne disease franchise just continues to grow in volume. And even though we're 15, 16 years into that, it just shows the long runways of growth that we have.

In fact, that was the best volume growth we have had in that franchise in a number of years. But every year, it has grown. So it's still amazing that we don't have as many dogs as we have that get annual screening for tick-borne diseases.

I'm curious on your thoughts on just the overall market as we stand here kind of, I saw that you saw strong 6% growth in practice revenues across your data set. I guess, what does your guidance imply for 2018 in terms of the underlying veterinary demand trends across the CAG segment?

And where does it stand now? I guess, how much room do we have to run? I mean, we've seen this massive improvement since the recession over -- in terms of overall veterinary demand trends. But I guess, what are some of the key metrics that you're tracking and looking at that give you kind of confidence in underlying demand?

We have, as Brian reported, the 6% growth in veterinary practices, which really comes out of that. That's a measured number out of what, 5,000 or 6,000 practices that we saw in Q4 and really consistent with the growth over the course of the year. And that's overall practice revenue at our customer level.

Our assumptions for 2018 are consistent with really what we saw in 2017, but the runway -- every time we look at this, the runway for growth is amazing because what's interesting is our customers are growing faster than the market. We can measure this, okay.

Our customers are growing faster. They're growing their overall practice revenues faster. They're growing their diagnostic portion of their revenues faster. They're growing it faster because our reps are helping them adopt more and more diagnostics to meet the changing needs of today's pet owner.

What's interesting is the best practices in doing this are 2x to 3x the size of the average practice. And just in our portfolio practices, who are themselves above the market averages. And so we see the opportunity to help customers appreciate that while they may be doing well, they can actually be doing better because other practices that are very much like them are doing better.

And so the diversity of practice performance inspires us to inspire the practices to continue to focus on advancing diagnostic utilization and protocols using IDEXX's expanded and unique menu of tools to bring value to pet health. And to do so, meeting the needs of the pet owners that want this when they appreciate the value and, of course, the best practices are doing a great job doing that.

So we need to bring those best practices to the broad market, and that's why we have very deep sales coverage with strong account relationships so we can grow not just adoption of IDEXX, but adoption of diagnostics as part of the care equation.

We will go to the line of Jon Block with Stifel, Nicolaus.

Maybe 2 questions. First one, what still needs to be done from a regulatory standpoint for SNAP fecal antigen? Is that sort of the gating factor between, I don't know, a June launch versus a September?

And part 2, sorry, that same first question is, Brian maybe you can just talk to some of the moving parts of, call it the low end of the organic guidance versus the high-end, the 9.5 versus the 11.5 as you look at the year. Is it based on traction with new products or limiting rapid assay inroads from competitors, the overall market? Would love to just get your thoughts. And then I've got a follow-up.

Very quickly on the first question, a point of care test that tests for infectious diseases is one of the few areas that requires a regulatory approval. So, for instance, our lab test, fecal antigen test does not require regulatory approval, but the same technology on a SNAP does.

And so that does -- that is a factor that we need to be successful with USDA approval in order to launch the product. We are confident of the track record there, but always adds a little bit of uncertainty as to exactly which month or when.

Yes. And just in terms of the revenue outlook, the key driver of that, of course, is going to be the recurring CAG growth number, Jon. So that's the 12% to 14%. If you adjust for the accounting change, it's 11% to 13%.

We finished this year just under 13%. I think it's a reasonable range. We're obviously growing very quickly, it -- so it's a high-growth rate. We need to execute very well, and we think that's a reasonable range at this time of the year.

It's not projecting risks, it's more just reflecting that we're growing off a higher base at high rates, and need to execute well, and need to execute well against the new innovation launches and that's principally why we have that type of range this time of year.

One of the nice things is we over-delivered in the fourth quarter on revenue, so -- with the same growth rate the absolute revenues in 2018 are -- they're growing off a higher base. So as Brian said, we need to continue to do a great job executing and supporting our customers with great products, reliable products and great sales coverage around the world.

Got it. And just a second question, you beat me across most of the CAG recurring modalities, but maybe the only one that I could sort of nitpick on was the international lab. I think you mentioned up high single digits for the second consecutive quarter. The U.S. has been up mid-teens, it just seems like a relatively big delta.

And I think that's for the second and third quarter where we've seen that delta, arguably international should sort of be in that sweet spot of SDMA. And I know the competitive landscape is more fragmented OUS. So, Jon, any reason why that international ref lab is, call it, lagging some of the other diagnostic modalities that we see with the mid-teen growth from some of your other areas?

Yes. I think that's a fair observation from a relative basis, of course, I wouldn't sneeze at high single-digit organic revenue growth in any business in the current market, but relative to the success of our other business this is a fair characterization.

The fact of the matter is our international organizations are really prioritizing the highly profitable placements of Catalyst, where we just have a unique instrument. You saw those Catalyst placements up 37% year-over-year and then the retention on these Catalysts is -- it's like 100% -- I mean 99.95% or something.

It's an amazing business. It's a -- these are profitable placements and then we also have a reference lab business. By the way, the reference lab business is not as profitable as the VetLab business internationally, whereas, in the U.S., we've got a really good network effect taking place.

We want to make sure that we have that network in fact in place and that when we grow the reference lab business -- and let's recognize the reference lab business internationally is a lot of different labs in a lot of different regions.

Our German lab, for example, is doing very well, it's a very profitable business, which is why we're investing in a world-class lab as part of the relocation of the core German lab. Other parts of the world are not as profitable as they need to be. And so we're focused more on profitably there before growth with the, again, the primary sales growth being the placement of analyzers. These analyzers that we're placing today are going to be there decades from now. I mean, it's just a great business.

We will go to the line of Nicholas Jansen with Raymond James & Associates.

Just following up on that point. Jon, just looking at the greenfield opportunities OUS versus U.S. as you think about Catalyst. Certainly, the U.S. opportunity is probably starting to diminish a bit.

Where are we on the OUS trajectory, as the number of VetTest still outstanding that could be upgraded, areas where you're seeing competitive displacements? Just maybe walk us through how we think about the sustainability of this global Catalyst placement growth that we've seen over the last 3 years?

Yes. I just do want to note the 25% year-over-year growth in Catalyst placements to new and competitive accounts in North America. I don't want to gloss over that number. Our U.S. teams had an extraordinary quarter, and we think there is a lot of runway ahead in the U.S. because of the result of a fabulous product line now supported by SDMA and great, great commercial teams.

But turning to the essence of your question on the international opportunity, it's wide open. And as you know, we've shared the numbers of customers, who we believe are targets for Catalyst placements internationally, 75...

Yes, over 75...

Over 75,000 customers. And that's a growing number, of course. And so we're upgrading VetTest, but roughly half of those placements are to new and competitive accounts, so they're organic accounts. We're replacing really an agent installed base of competitive analyzers that have really fallen behind. And then, of course, once we put Catalysts in there, it stays there, which I've mentioned with very, very high retention rates.

We have markets like China, where it's basically a greenfield opportunity. And then we have markets like Europe, that's both a VetTest and a very attractive greenfield and new account and competitive account. We -- as Brian mentioned in a previous question, we are moving -- international is now moving to the compensation approach, which looks at the economic value index of an instrument placement.

What this is going to do is put even more focus on new and competitive. But it turns out our VetTest customers internationally are pretty loyal customers. I mean, they are in the high 90s in terms of their loyalty. And so it's not like we have to rush to upgrade them because they're already pretty loyal.

Of course, we will continue to do so, but the highest value placement is to a new or competitive account. And as we move to EVI, we expect to see a jump in the productivity of the same sales efforts towards the highest value placements.

So even with the phenomenal success we had in 2017, we would expect to see a productivity jump in 2018 in placements, and yet we have very, very -- it was less than -- a little bit less than 4,000 placements of Catalysts internationally, and you put that in the context of the opportunity. We have a long runway of opportunity for filling out the world with very attractive point-of-care technology to help veterinarians provide care for pets.

And they are all going to have SDMA. And so we are running -- we're rolling out SDMA internationally in the next couple of months on Catalyst. And so that -- and the international markets have developed the market in appreciation for SDMA. So they're just as excited as our North American teams were with the availability of SDMA now being able to be run on Catalyst.

And I'd just reinforce the -- in our strat plan, we talked about the build to our 5-year growth and trying to achieve over the next 5 years, 20,000 placements in international markets, and we are right on track with that. So this year was right in that range, and we're building each year the percentage that's coming out of new and competitive placements. So we're feeling very good about the execution on the international front.

And as we think about the recurring revenue associated with those OUS Catalyst placements, where are we on the utilization map on those relative to the U.S.? And if you maybe compare that to maybe 3 or 5 years ago, are we seeing more and more utilization off of these boxes as these end markets become more like the U.S.? Or are we still very early in that transition?

Oh, it's a great question. The bottom line is, we are still very early, okay. But we are seeing same-store sales growth, and we're seeing it because they're adding menu. We saw it with T4, when we added T4 to the Catalyst installed base, we're going to see it with SDMA.

An interesting parameter we don't talk that much about is CRP. We've launched CRP now globally. They're markets outside the U.S. that already value CRP. We don't have to explain to them why it's an inflammatory market and they're adopting it. That grows the utilization. So as we add menu to the analyzer, we see growth in utilization of the install base.

Where we really haven't even begun the story outside of North America is preventive care. And so that's kind of the next wave, it's not a 2018 wave, it's a couple of years out, as we grow the market, as we grow our intensity of sales coverage, we can then really take the preventive care story around the world.

But right now, they're just working on sick animal testing. And so it's just amazing how early we are in the whole story and yet we are getting utilization growth primarily from sick animal testing from this menu expansion, which customers appreciate is helpful in helping rule in and rule out disease on a sick presentation.

And we will go to the line of -- I'm sorry, go ahead.

We have time for one more question. I know we're up against the hour.

Absolutely, that last question will come from the line of Alex Nowak with Piper Jaffray.

I just have a 2-part question. Jon, you mentioned, this in your prepared comments, but regarding tax reform to your customers, is it fair to say that most of the customers will see some sort of tax break? Because I believe the personal service corporations are going from a flat 35% rate to 21%.

And then the second part to that is, have you talked with any customers since the beginning of the year and have they singled what they plan to do with the extra income such as reinvest in new analyzers, maybe a clinic build out, or are they just simply planning to pocket the extra cash?

Okay. Very quickly. We expect most -- to answer your question, it's a little complicated because there are a couple of different moving parts. But the bottom line is, yes, our customers will see a benefit. They're all small businesses, they're S corps or C corps. They will see a benefit with tax reform.

I think they're just beginning to realize. I'm seeing around the corner on this, okay. I don't think our customers fully appreciate -- because tax -- they didn't take tax accounting in veterinary school, okay. They ask their accountants and their accountants are still trying to figure it all out.

So here we are February 1, I would say, it's still early days. What I'm saying is, as they start to see the benefits, I think their appreciation for the attractiveness of their business gives them some room to make incremental investments and, of course, we're going to be there inspiring them with IDEXX technology.

Okay, that's helpful. And then you're only a couple weeks into the SDMA launch on Catalyst, but are you seeing any cannibalization of SDMA in the reference lab?

No. We -- absolutely not. This is all -- testing begets testing. We, in fact, think the SDMA adoption in in-house will actually grow the reference lab business because of the appreciation. We've seen this issue in launch after launch, where we have something in the reference lab and then we launch it in-house, it actually helps our reference lab.

You can go back 15 years when we launched a 5-part white blood cell differential on absolute reticulocytes with LaserCyte. Everybody said are you going to see cannibalization in your reference lab, and you've seen what's really happened to our reference lab over that period of time. So we actually think this augments reference lab growth over time because it accelerates the clinical appreciation of SDMA in the care of pets.

And I'll turn the call back over to Mr. Ayers for closing remarks.

Yes. Thank you very much. We had the little bit longer comments because of the end of the year and because of the number of exciting things going on at IDEXX. But so -- I appreciate, we didn't get to all the questions, and we will try to do so afterward. And we appreciate all the attention.

I just really want to thank the IDEXX organization for a fabulous 2017 and the excitement and momentum that we have, I think, will be evidenced at the VMX previously known as the North American Veterinary Conference Show that's taking place this weekend. I know some of our investors will be there, our sales teams will be there.

We're very excited about the prospects for 2018, and I think that's reflected in our comments and in our financial guidance for 2018. This is a long-term enduring growth business. As we enhance the health and well-being of pets, people and livestock, we see long-term growth vectors ahead of us. So with that, we'll close the call, and thank you very much for signing in.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.