Jonathan Ayers - Chairman, President and Chief Executive Officer Brian McKeon - Executive Vice President and Chief Financial Officer Edward Garber - Director, Investor Relations.

Erin Wilson - Bank of America Merrill Lynch Ryan Daniels - William Blair Jon Block - Stifel Kevin Ellich - Piper Jaffray Ross Taylor - CL King Nick Jansen - Raymond James Ben Haynor - Feltl and Company Mark Massaro - Canaccord Genuity Robert Willoughby - Bank of America Merrill Lynch.

Good morning, everyone, and welcome to the IDEXX Laboratories' second quarter 2014 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Office, and Ed Garber, Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution, regarding forward-looking statements.

Listeners are reminded that statements that members of IDEXX management may make on this call regarding IDEXX's future expectations, plans and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions. Such statements include, but are not limited to statements regarding management's expectations for financial results for future periods.

Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the company's filings with the Securities and Exchange Commission.

Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements.

All forward-looking statements are made as of today and except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Also during this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which can be found on our website, idexx.com.

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

I would now like to turn the call over to Jon Ayers..

Thank you, Bonnie. Welcome to our second quarter earnings call.

As you can see from the press release, we reported a very strong quarter, driven by our Companion Animal businesses globally, with continuing double-digit recurring diagnostic revenue growth, and a particularly strong quarter in instrument placements, which bodes well for the future of recurring diagnostic revenues.

Other segments of our business also did quite well in row, including our Livestock, Poultry and Dairy business and the Water business. Our strategy of investing in innovative products coupled with investments in our go-to-market organization worldwide is working.

In that context, today we are announcing exciting plans to take another big step in our commercial capability by moving from a hybrid to an all-direct product distribution in the U.S. for our Companion Animal business in 2015. We have much to cover on the call today. So the overview of the structure of the call is as follows.

Brian McKeon, our CFO, will start with a brief review of quarters results, I will then talk about the move to a fully direct strategy in the U.S.

Brian will then review the financial benefits and one-time impacts associated with the change, and conclude with opening remarks with the review of our financial outlook in this context, and then we'll open the call to your questions. So with that info, I'll turn it over to Brian..

Thanks, John, and good morning, everyone. As John noted, I'll be walking through the highlights of our second quarter performance, and we'll come back to discuss our updated 2014 guidance and our preliminary 2015 outlook later in the call.

In reviewing our quarterly results, please note that growth rates refer to Q2 2014 performance compared to Q2 2013 performance, unless otherwise noted. Also, when we refer to normalized organic growth, in addition to adjusting for exchange and acquisitions, we've adjusted for changes in distributor inventory levels.

In terms of highlights for the quarter, Q2 was another strong quarter for revenue growth, driven by global momentum in CAG recurring diagnostic revenues and better than expected performance in LPD. Total company organic growth of 9% was driven by normalized CAG Diagnostic recurring revenue growth of 12% with strong gains across regions.

We also delivered solid EPS results, while strengthening our cash flows and capital structure. Operating margins were as expected, which reported delivery of $1.10 in EPS in Q2, an 11% year-on-year increase.

We continue to drive very strong cash flows in business and took advantage of favorable market conditions to advance financings that will term out $200 million of our debt structure at very attractive interest rates.

We're executing very well against our growth strategy, which has raise our confidence in our financial outlook, which we'll discuss in more detail later in the call. Let's go through a breakdown of our quarterly performance, starting with a brief overview of our regional performance.

We continue to driver strong growth across regions supported by strong momentum in our CAG business. We had an excellent quarter in the U.S. Revenues were $225 million with total normalized organic growth of 11%, reflecting solid gains across business segments, including 12% growth in CAG recurring diagnostic revenues. Underlying demand in the U.S.

improved from the tough weather impacts we saw in Q1. Our analysis of U.S. clinic-level data for practices that we track, show that patient visits were up 0.6% and practice revenue grew 4.3% in Q2. Our international business also posted another excellent quarter.

International revenues increased 12% to $165 million or 42% of total revenues, reflecting 9% organic growth. International CAG recurring diagnostic revenues increased 11% normalized, supported by strong growth in instrument consumables and reference-led services in Europe, and continued double-digit gains in Asia-Pacific.

Globally, high levels of instrument placement set the stage for continued expansion of durable CAG recurring revenues. Catalyst placements increased 34% year-on-year to nearly 800. We placed nearly 500 Catalyst, a North American order, with over 60% going to customers new to IDEXX in-house chemistry.

The new sales force structure is executing very well and we're seeing benefits from the Catalyst One introductory offer. Catalyst placements were also very strong in international markets with about 30% placement gains in both Europe and Asia.

As a reminder, international markets were placing only Catalyst Dx ahead of future plans for global rollout of Catalyst One, which will further expand the market for Catalyst technology. Worldwide hematology placements grew 13% in the quarter.

Results were supported by strong growth in North America, where we're having success both in bundling LaserCyte, as part of the Catalyst One introductory offer; and in placing ProCytes, which account for 60% of total placements.

International hematology placement gains in the quarter were moderated by timing issues, in part reflecting early shipments of orders in markets like Japan this year in Q1, ahead of sales tax changes. We also continue to see rapid customer adoption of our SNAP Pro for mobile device.

We placed 1,700 SNAP Pros in the quarter, bringing our installed base to 2,900 and setting the foundation for continued expansion of our rapid assay modality. Global instrument revenue of $19 million was down 10% organically in Q2, reflecting about $3 million revenue deferrals associated with the Catalyst One introductory offer.

We expect that instrument revenue growth will lag placement growth this year, reflecting high placements at relatively lower priced analyzer such as Catalyst One and the overall expansion in international markets.

CAG recurring diagnostic revenues, or revenues associated with instrument consumables and service, rapid assay test kits and lab services, were $282 million in the second quarter, representing 72% of overall revenues. Normalized organic revenue growth was 12%. A decline in U.S.

distributor inventories to 2.8 weeks at the end of Q2 from 3.4 weeks at the end of Q1, reduced reported growth in CAG recurring diagnostic revenues by about 1% in the quarter. Continued expansion of the CAG recurring annuity in the quarter reflects robust global gains across our three modalities.

Instrument consumable revenues were $89 million with normalized organic growth of 13%. Growth continues to be driven by our steadily expanding and increasingly loyal installed base and increased testing, as customers upgrade to our premium instruments. Note, Catalyst customers now account for 90% of our U.S.

chemistry consumable revenue, excluding corporate accounts, and we see greater than 99% retention on our Catalyst slide purchases. Revenues for rapid assay test kits were $49 million in Q2. This reflects normalized organic growth of 11%, benefiting in part from a rebound and testing post to weather-related impacts experienced in North America in Q1.

We expect benefits from the strong launch of SNAP Pro will support solid continued growth in the contribution of rapid assay to recurring diagnostic revenues. Our reference lab and consulting services grew 11% organically to $129 million in Q2. High growth continued in all of the regions around the world, driven almost entirely by volume.

In North America, the diagnostic sales force model and continued option of VetConnect PLUS continues to help generate an increase in the level of diagnostics being run by our customers, while also improving on our already-strong customer retention rates.

Our Practice Management and Digital Imagining Systems business with revenues of $26 million in Q2 grew organically by 20%. Our more tenured sales force is growing our base of pet health network Pro customers, and is helping to drive system and instrument placements. We're also seeing strong growth in the service components of this business.

Our Livestock, Poultry and Dairy revenues grew 14% in Q2, excluding exchange impacts of $33 million, reflecting organic growth of 6% and benefits from the acquisition of our Brazil distributor last year. Organic revenue growth was supported by increased sales in China coupled with increased testing in New Zealand related to Livestock exports.

We continue to benefit from a slower than expected ramp down in bovine programs in Western Europe. Although, we do anticipate these impacts will moderate gains in LPD in the second half of 2014. Our Water business grew 9% in Q2 to $24 million, including benefits from the acquisition of our South African distributor.

Organic revenue growth for quarter was 7%, reflecting gains in our North America and Asia-Pacific regions. The growth continues to be driven primarily from our core total coliform/E. coli testing products primarily due to new customer acquisitions.

Solid profit results in Q2 were driven by strong revenue growth with operating margins and cash flow tracking as expected. Gross profit was up 11% in line with revenue growth, as gross margins were flat year-on-year.

Pricing gains were offset by comparisons to prior-year foreign exchange contract gains and relatively higher freight and distribution cost, in part due to the success of the Catalyst One introductory offer.

Operating expenses as a percent of revenue were up 100 basis points as expected, mainly due to the worldwide investment in sales and marketing that are driving our accelerated revenue growth. Fully diluted EPS was $1.10 for the quarter, up 11% year-on-year and a $1.99 year-to-date, also up 11%.

Free cash flow was $98 million year-to-date or 94% of net income. Our strong cash flows have enabled continued allocation of capital for share repurchases.

We repurchased 973,000 shares for about a $126 million during the quarter and our board recently authorized a repurchase of 5 million additional shares, which is on top of the 1.4 million remaining from our previous authorization. We also continue to strengthen our balance sheet.

We expanded our revolver in June to $700 million reflecting growth in our business.

We also advanced steps to add $200 million in low fixed rate term debt through a $125 million private placement of seven and 10 year senior notes that close in July and execution of an agreement for an additional $75 million of 12 senior notes with funding anticipated in September. Interest rates on the senior notes range from 3.3% to 3.8%.

We'll use the proceeds from these offerings to pay down our revolver resulting in a structure with substantial flexibility and low overall financing cost. That concludes our review of the quarter. I'll now turn the call back to Jon to discuss our plans to move to an all-direct product distribution approach in the U.S..

Thank you, Brian. We believe that move to an all-direct U.S. distribution model will be a strong enabler of long-term growth for our companion animal business in the U.S. and we are confident in our plans to enable this change, but first a bit of background.

Our strategy focused on an integrated diagnostic solution for both reference labs and point-of-care diagnostics, it's highly successful in gaining momentum in the U.S. veterinary market.

The sales transformation undertaken in 2013 to a Veterinary Diagnostic Consultant sales role or VDC, a VDC that represents IDEXX and serves the customer with our integrated offering has also been highly effective. The Q2 results show that our growth momentum continues to accelerate.

We are seeing the significant benefits of smaller territories, a single customer contact for diagnostics, and greater call frequency by IDEXX. To this point, we analyze the growth and IDEXX revenues from customers called on at least once by us in the first half of 2014 versus those that we did not call on.

The good news is that while both customer groups grew, the customers that we visited grew at least 9% faster. Interesting, with these new structure, we reach most of the market, but we didn't reach it all and we still don't have the resources to call frequently enough to adequately serve all the customers and maximize growth.

So here are the key elements of our plan to fully go-direct in the U.S. First, this change affects how we distribute our rapid assay test kits and instrument consumables or kits and consumables, which comprise a minority of our U.S. CAG revenues. The majority of our companion animal group revenues we derive from U.S.

customers are already derived direct, as are majority of our CAG revenues internationally. Second, the change to an all-direct distribution will be effective on January 1, 2015, after the expiration of our current annual contracts with our U.S. distribution partners for kits and consumables.

Until then we will continue to work with our distributors under the current contract terms. Third, under the new direct approach IDEXX will provide all the elements of the value chain for kits and consumables.

As a result, we will recognize revenue at the practice level on this set of products instead of at distribution, capturing about $50 million to $55 million in pro forma annual CAG recurring revenue in 2015. Fourth, as we won't be using U.S.

third-party distribution starting in 2015, at that time distributors that are currently exclusive to us will now be free to carry competitive diagnostic products at that time. In anticipation of going fully direct in 2015, we will significantly enhance and expand our U.S. commercial organization in the latter half of 2014.

So a couple of points on this. First, we'll be expanding from a 125 to 174 Veterinary Diagnostic Consultants, VDC, in corresponding territories, a nearly 40% Increase in feet on the street. Now, this expansion is a relatively straightforward as the sales model's already been implemented and scaled across the U.S.

and no field reps are being displace as part of this expansion. We are decreasing territory size allowing for a greater density of coverage, recruiting sales personnel through a proven recruiting model, and we are expanding sales coverage to geographies previously covered only through telephone sales. We've already announced this change for our U.S.

sales organization and the reaction has been very positive, as you can imagine. Second, with more dense territories, Veterinary Diagnostics Consultants are able to increase their calls per week by another 15%. So together with the expansion, this increase equates to a 60% increase in total calls with customers as compared to where we are today.

Third, we're also adding 25 more field service representatives or FSRs to our force of 48, a 52% expansion.

Field service reps would typically have extensive prior experience and practice as a veterinary technician and extensive training from IDEXX, play a highly valued role in supporting our customers use of diagnostics, including growing the adoption of VetConnect PLUS.

Fourth, we're increasing our insight sales and order taking representatives from 24 to 68.

And fifth, we are adding a cadre of regional based professional service veterinarians to support our customers with the medicine behind our advance diagnostic offering, including the clinical support for our test technologies and the appropriate use of ever growing specialized test portfolio, which even today quite frankly is vastly underpenetrated in the customer base.

So those are the details of what we are doing. Let me comment on the strategic benefits. First, our field sales and support expansion that I just went through will be valued by customers and support our long-term growth goals. As we have seen when we call on customers, they accelerate their growth of IDEXX.

We've also determined through our data analytics, the customers who use the full IDEXX diagnostics solution grow their practices diagnostics faster than those who don't. And thus diagnostics become a larger part of their practice to the betterment of their patients' health. This makes sense as we have brought a series of new innovations to the market.

In 2015, we will have substantially more resources to provide the consulting support that customer need to better promote diagnostics' pet owners as part of the Pet Care Plan, growing IDEXX recurring revenues with these customers, what some may refer to as same-store sales.

In addition, calling on customers more regularly -- even more regularly also increases customer retention and also helps us expose a greater part of the market to the benefits of IDEXX's innovated, integrated approach to the three diagnostic modalities. So second, this also leverages integration.

In the context of our integrated diagnostic solution offering, paired with an integrated diagnostics sales role, the VDC, we found that our current hybrid model of distributing some elements of the diagnostic solution direct, reference labs, point-of-care instrumentation, telemedicine, for example and other elements through third-party distribution, rapid assay test kits and instrument consumables, creates complexity that doesn't add value for our customers.

It's kind of crazy when you think about it, a practice who's patient needs a diagnostic profile, where some of the tests in that profile are run immediately on the IDEXX in-house lab. And some of the elements of that profile are sent to the IDEXX reference lab.

One patient, one profile, one integrated solution supported by one IDEXX field sales and service team. In this context, it creates greater value and efficiencies for customers when all the components of this profile come directly from IDEXX.

And we are confident we can manage this expansion effectively through the balance of the year and into 2015, so a couple of points on that. First, as mentioned, the majority of our U.S. CAG revenues are already direct, reference labs, instruments, software, digital radiography and telemedicine.

We also serve certain corporate accounts with the direct model today. Thus, we have the underlying systems processes and infrastructure to support a fully direct approach in the U.S. Second, we know our customers. In fact, we believe we already interfaced with over 99% of U.S. veterinary practices.

And through our data analytics capability, we believe we know the U.S. veterinary market and our customers, and all the customers, better than any one else in the industry. As part of this capability, we know in detail our customers histories and buying habits for kits and consumables. Third, IDEXX's customer retention in the U.S.

is very high for kits and consumables, as we've mentioned on prior calls and has been increasing. Today, we stand at 97% and 99% in kits and consumables, up 2% roughly in the past 18 months. High retention is the result of a couple of things that have been going on.

First, the highly loyal installed base of the instrument customers, including a rapidly growing installed base of SNAP Pro customers for our rapid assay test kits. Second, a unique and expansive proprietary test menu, a test that they can only get from IDEXX.

Third, increasing usage of VetConnect PLUS, a valued way to access a pet's diagnostic results and history real-time and with mobile. Again, a solutions that's unique to IDEXX. And fourth, our new VDC sales model where we are far more frequently calling on and thus supporting our existing customers of IDEXX diagnostics.

So more evidence on why we can do this effectively. We have a fully direct and go-to-market model in most major international countries today. So this approach is not new to us. In fact, the U.S. is behind IDEXX Europe in that regard. We have demonstrated successful change management capability through the North American sales transformation in 2013.

In addition, we've completed several successful go-direct initiatives internationally recently. This includes the four Nordic countries, where we have seen accelerating organic revenue growth beyond the one-time margin capture as a result of going direct.

And so while we have work to do to bring out the change in the U.S., we're fully confident in our ability to execute and we have the track record to prove it. In summary, I think you will see that the transition to a fully direct approach in the U.S. is a natural evolution of our strategy.

We believe the benefits will be profound and historic for IDEXX and the impact we will have on the growth and relevance of the veterinary profession in the U.S.

The change will help us accelerate the appropriate use of diagnostics for the care of the pet, growing our market, our revenues and our profitability, while serving practices, pet owners and pets alike. So let me now turn it over to Brian to discuss in detail the financial elements of the change..

Thanks, Jon. Implementing an all-direct product distribution strategy in the U.S. will provide meaningful incremental ongoing benefits to revenues and operating profits.

As Jon noted, through this approach, we estimate our revenues will increase by $50 million to $55 million in 2015, as we recognized full revenue on consumable and rapid assay sales and capture current distributor margins. This will provide a 5% increase to our CAG diagnostics recurring revenues that will grow as we continue to expand our franchise.

The change will also be accretive. We estimate annual operating profit benefits beginning in 2015 of $5 million to $8 million annually that will scale over time. This benefit is net of the incremental ongoing cost to substantially enhance our sales capability and to provide full order to fulfillment services for our customers.

Moving to a fully direct approach will involve transitional impacts associated with sales and operational cost ramp in 2014, and one-time effects associated with project implementation and the drawdown of distributor inventories.

As we move forward, we'll highlight these transitional impacts discretely, as they don't affect our underlying business fundamentals. In 2014, this will result in $18 million to $20 million in transition cost or an estimated $0.23 to $0.25 per share EPS impact.

In the second half of 2014, we estimate that we'll incur $8 million in incremental cost as we ramp sales and operating resources ahead of the planned January 2015 change to the all-direct model.

Beginning in 2015, these costs will be covered by the benefits from distributor margin capture and are included in our estimate for net accretive operating profit benefit from the change. We also expect to incur $10 million to $12 million in one-time cost in the second half of 2014 associated with the implementation.

This includes internal and external project management cost and one-time transition cost related to enabling the new sales organization. In 2015, we also expect to incur one-time impacts, primarily associated with the drawdown of distributor inventories.

At yearend 2014, we estimate that there will be approximately 3.5 weeks of inventories on hand with distributors. Our direct sales in 2015 will need to reflect that these inventories will also be sold through to customers by our distributors in early 2015.

This will have the effect of a one-time offset of our projected revenues of $30 million to $35 million and $23 million to $27 million in operating profits. We also anticipate that we'll have $2 million to $3 million of remaining one-time project management cost in early 2015. Let's now review our financial outlook in the context of these changes.

We'll begin with our baseline outlook for 2014, before transitional impacts associated with the U.S. all-direct product distribution approach. Today, we're raising this outlook reflecting strong underlying momentum in our business.

We're raising our full year organic revenue growth outlook for 2014 to 9% to 9.5% or $1.51 billion to $1.52 billion in projected revenue, reflecting strong global momentum in CAG and better than expected year-to-date performance in LPD.

Please note that this outlook assumes that distributor inventory levels in the year at about 3.5 weeks, within our normal 3 to 4 week range. We're also tightening our 2014 guidance range for EPS as adjusted, which excludes transitional impacts associated with the distribution change to $3.79 to $3.86 or 11% to 14% adjusted growth.

Benefits from higher revenue growth are partially offset by about $0.02 in higher interest expense associated with the new term debt. This reflects expectations for about $14 million of interest expense this year.

Our outlook assumes relatively flat year-on-year operating margins for the full year and the tax rate of around 31% for the second half of the year. As noted transitional impacts associated with the move to the all-direct product distribution model in the U.S.

will reduce 2014 operating profits by about $18 million to $20 million or $0.23 to $0.25 per share. We expect these impacts in total will be balanced relatively evenly across Q3 and Q4. Incorporating these impacts, our new reported EPS guidance for 2014 is $3.54 to $3.63. Today, we're providing a preliminary view on 2015 as well.

Given strong momentum in our business, our outlook is for 9% to 10% baseline revenue growth and relatively flat operating margins before transitional impacts related to the new distribution approach.

As noted, we expect that the all-direct distribution approach will add $50 million to $55 million to CAG recurring revenues and $5 million to $8 million to operating profits in 2015. This is on top of the baseline outlook.

These benefits will be offset by one-time reductions of $30 million to $35 million to projected revenues and $25 million to $30 million to operating profits associated with distributor inventory draw downs and one-time transition cost. As noted, we'll track these one-time impacts discretely, so our underline business fundamentals are clear.

We'll also provide an update on our preliminary 2015 guidance on our Q3 call. That concludes our review. John and I would now be happy to take your questions. Operator, we'll be happy to take questions now..

(Operator Instructions) And our first question, we'll go to the line of Erin Wilson with Bank of America Merrill Lynch..

As it relates to the direct sales effort, it doesn't look like you're gaining much in a way of economics here.

How do you justify the stuff that's expensed in CapEx, working capital requirements and strategic risk associated with this sort of transition? And what's the next move to here? How is this a platform for that next strategic move?.

Well, I guess, Erin, we believe that we will be gaining a pretty significant strategic benefit. Of course, we have, as Brian noted, the distribution margin capture of $50 million, $55 million with $5 million to $8 million incremental profit drop through that comes on top of our baseline guidance.

But more importantly, what I went through is a fairly significant expansion in our direct model. And the point is that we believe we're more effective in representing our diagnostics, when we can represent it all together. And we're more effective directly representing through distribution.

Just to give you an example, with SNAP Pro placements in Q2, the vast majority of those placements were done by IDEXX. And you know, while we worked really hard with our distributors to help, they really just weren't much of a factor.

We know how to talk directly with our customers, whether with our field sales force, with our phone sales force, we just think that they're doing it. So that's a pretty significant increase in field resources on our already proven and successful model.

So we believe this really positions us well for long-term double-digit organic revenue growth in the companion animal market in North America..

I'd just add to Jon's comment about the strategic benefits that from a financial point of view, the benefits that we highlighted on an ongoing basis are an incremental recurring annuity benefit that will grow in scale over time. So I think the financial benefits beyond the strategic benefits are meaningful as well..

And also the impact on the balance sheet is really de minimis, so impact on inventory and working capital, its de minimis. So that's really not a necessary element of the expansion..

And you spoke to this a little bit, but what sort of fluctuations are you expecting as these distribution relationships kind of wind down here with potential channel stuffing in the second half..

Well, we don't expect any -- we expect steady as you go. And I believe that's what customers want. Customers want steady as you go. I think that's a customer-centric approach. They want to buy product when they need it and we expect to manage our distributor inventory accordingly..

And just one last quick one. VetConnect PLUS is obviously key to implementing this sort of strategy.

Are you seeing the improved retention rates that you initially anticipated and what percent of your addressable customer base is currently active now?.

So we have around 14,600 VetConnect PLUS activations. That has just continued to expand its presence in our customer base in the U.S., and of course internationally, too, because we're in several international markets, but I think the relevant question here is, is the U.S.

-- and as I've mentioned, the retention that we have on kits instruments -- consumable and kits, its 97% to 99%. And I think that's in part as a result of how people are valuing VetConnect PLUS and not only the historical trending, but the mobile app is very successful.

It really helps with real-time care when the results pop up on the vet or the tech's iPhone, when they're in the exam room.

And so an expansion of our field service reps who have been very helpful to us in teaching customers how to use VetConnect PLUS in practice is going to help us to continue to really finish out the growth and the adoption of VetConnect PLUS in the marketplace..

And we'll go to the line of Ryan Daniels with William Blair..

Jon or Bryan, the $50 million to $55 million you talked about capturing in 2015, is that purely the margin that you'll capture from not giving that to the distributors or does that incorporate enhanced sales to the end-market from this distribution change..

That's up. That's the former. It's purely the margin capture on a pro forma basis for what we see to be the growth of our expected revenues in 2015 for kits and consumables. It doesn't reflect any additional..

And the $5 million to $8 million, just to be very clear, before transition cost, that incorporates both the investments you'll make in the sales force expansion as well as all your distribution cost and capabilities?.

Correct. That's correct. And the way this is phasing is we'll obviously have, that will be ramping in 2014 before we get the revenue benefit. So we're highlighting that there is a incremental expense that wasn't in our outlook before, but as we get into 2015, that's embedded in the $50 million to $55 million and the $5 million to $8 million..

Yes. That the difference between the $50 million and $55 million and the $5 million to $8 million is, of course, the cost of physical distribution and the ramp-up of that rather significant and effective direct presence..

And then maybe a broader question.

As you look at this change over the long-term, do you think the bigger opportunity is to increase utilization within your existing accounts, which is already quite robust in the United States or share gains? I know you probably want to accomplish both, but do you see a bigger opportunity to increase that $50 million to $55 million from one of those avenues?.

Well, a simple answer to that is both. We've seen that when we've gone direct. And we've gone direct in seven international markets in the last two years, when we have a direct presence which is more effective. And a lot of those international markets, it's not as much about share gain, it's about expanding the market.

And we believe the same opportunities here in the U.S. As I mentioned in my upfront call and my upfront comments, we have a very, very good understanding of our customers' use to diagnostics in the context to their total practice revenues. And we know that there are a lot of things that customers want to do to grow their practices.

And the key driver to growing their practices in diagnostics is, in fact, diagnostics historically grows 2% and 2.5% higher than overall practice revenues, but we believe we could actually accelerate that. And that's why we've got to have these veterinary diagnostic consultants and what I would consider a fairly intense presence.

We're now at the scale in the U.S. to be able to have that kind of presence. Interesting fact here Ryan is that the other category leaders in the veterinary market are also direct.

And so really all we're doing is we're taking a full category, in fact an industry leadership position, we believe this will actually be beneficial to the entire profession, because we will help practices, respond to the challenges and opportunities they have to increase the relevance of pet care with pet owners.

We know pet owners want more pet care when they're well informed, and it's up to us to help veterinarians achieve that objective of informing pet owners. And through this direct, we're going to be far more effective in doing it, then with our hybrid approach of some direct and some distribution..

And Ryan, I'd highlight the $50 million to $55 million from a financial point of view, of course, is just the margin capture related to rapid assay kits and consumables, about 40% increase in feet on the street, 60% increase in call frequency, will benefit all of our revenues, not just those two modalities..

And we'll go to the line of Jon Block with Stifel..

Jon, maybe you can just speak high level, why now? I mean certainly you've rolled out a lot of innovation over the past couple of years and people have already mention VetConnect PLUS, amongst a couple of other things. But can you speak to, why now, did you initiate this or was there something from the distributors that may want the better economics.

If you could talk to that, that'd be very helpful?.

This was completely our initiative. And the answer to that question is, we saw the pretty dramatic effectiveness of the Veterinary Diagnostic Consultant sales model. We went into that model in the third quarter last year, and every quarter since then it's gotten better and better.

And when we call on customers, their revenues go up with IDEXX, and their practice success goes up. And then as we looked at it, we simply, we felt we needed to be fully direct to really leverage the benefit of that change. The other thing that became more and more clear to us, we've been talking about this, but it's really happening in practice.

It's not about a lab business or an instrument business or even rapid assay business. Now, we've launched SNAP Pro and we're turning the rapid assay business through a value-added step of the SNAP Pro into an installed base business model.

All of these things coming together thorough VetConnect PLUS, it's very clear that it is the integrated diagnostic solution. So what we are finding was that, we were kind of wrapping ourselves around in a pretzel to be able to go part direct and part distribution, it was adding a lot of cost, it was adding a lot of complexity.

And we felt that by now, we have the veterinary diagnostic channel, it just became clear that this was the right move to make. And that's not to say that we don't value the relationships we've had with our distributors over the many years that we worked with them, and we respect them and we value them.

It just turns out, we believe, we're going to be a lot more effective by using that $50 million to $55 million or the good chunk of it. Some of it obviously drops to the bottomline by enhancing our direct capability.

We know how to have a conversation with a customer about the diagnostic category that someone who is representing 1,000 different products is simply not able to do. They simply can't do it in the way that we can do it..

And then maybe just part two of that question, if I could. How about any relationships internationally, I mean, clearly I think you've got a big one with Henry Schein in international market.

So can you speak to, does that completely remain intact and do you think there is any ramifications with Schein in international markets?.

I would just say that internationally every country is unique. Within our Schein distributor, we had a distributor that we felt really wasn't representing us well in the Nordics. We went direct. We got not only the margin capture, but we've had accelerating organic revenue growth beyond the margin capture in the Nordic countries.

A set of markets, we think is very appropriate for our diagnostic innovations. We've gone direct in South Africa, it's kind of a different situation, but we felt that was right. So every market is a little bit different, but I think we've been very successful I think at seven different markets in the last two years we've moved.

And some markets were hybrids, some markets were fully distribution, some markets we've been direct. The continental European markets and the U.K., we've been direct in those markets for a long time. I'm talking decades. This is not new to us. We know how to do this.

And so as we looked at that, we realized that in some markets, where we didn't have distributors that was as strong as we'd like, and they were more of emerging market situation, that moving direct helps us to grow.

And I think that has been a contributor to what Brian has laid out is pretty strong first half international growth, over 30% increase in catalyst Dx placements. I mean we haven't even mentioned Catalyst One in the international market yet, and we're getting very, very strong growth in instrument replacements.

I think that's because we're really developing and we're rolling out of our direct capability in some of these markets and improving our capability in those, where we're already direct..

And last question, and you guided this a little bit, but maybe just a bit more clarity. You gave a lot of figures, exact figures, on where you're going with fields reps and service reps here in the U.S. to go direct.

How do you know that's the right size? I mean is it a function Jon of been there, done that internationally, and therefore you feel very comfortable that the infrastructure that you alluded to in detail in the U.S.

is going to get the job done from a service standpoint?.

I think that's right. We know our market in U.S. We know our reach and frequency today in the VDC model. We know our presence in these customers. We know our customers buying habits very well.

I don't think there is anyone who understands, not only their own market, but the entire market through our data analytic capability and the numbers that we typically present with regard to visit and revenue growth. I mean there is no one who has that kind of data that we have. So we know the market very well.

We've spent a fair amount of time in the last couple of months mapping this out. And quite frankly, Jon, what we did is we mapped it out. We said this is what we need, and then we said let's add 20%. Let's just totally nail it as an insurance policy. That's how we approached it..

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

Jon, I guess just a few more follow-up questions here.

I can understand shifting the strategy, if you have bad distribution partners like you mentioned in the Nordic region, but I guess what does this message send to Butler Schein, Patterson, MWI in the U.S.? I mean do you think that's going to cause some near-term disruptions with the distributors?.

I really don't want to speak for them. And they have been valued distributor partners, and they have been good partners. I think what we concluded was in the context of already being direct with a part of our diagnostic solution, and by the way a majority of U.S.

revenues are already direct today with IDEXX, that the model of going through distribution was a model we needed to move from, because it lived its useful life. So I don't think this is a comment on our distributors and the great work that they do with other manufacturers.

I think it's a situation that I can't comment on the rest of the market, but very specific to us. We feel this was the right change. And I just would leave it at that..

You might have mentioned this and I might have missed, and I am sorry.

But have you guys reached out to on the vet practice customers, and I guess what sort of reaction do you think they'll have? Are you expecting much turnover, if any?.

I'll tell you what, vet practices, when we do our surveys with vet practices, the number one thing they say, we'd like you to call on us more frequently. We'd like more support from you. We'd like to have maybe a professional service vet show up and tell us a little bit about the clinically efficacy of some of your specialized test.

When we look at our specialized test, while they've grown very meaningfully, they're a small fraction.

We believe the specialized tests penetration in the U.S., when we look at the number customers who are using versus the number of customers that should be using, whether it's our cardiac or molecular diagnostics, the list goes on, it's like 10% penetration. It should be 10 times of what it is.

And customers want to do it, but they need people to help them in practice to educate them. So we're adding this cadre of a dozen professional service vets as part of this expansion. We're expanding obviously the whole infrastructure, to have more time in front of customers, and this is really responding.

And what customers are saying, they're saying we'd like to see more of you, we don't see enough of you. We know you have really good technology. We're here in practice, it's a challenging situation. We need your help.

And with this new VDC model now, we're able to call on existing significant customers that are already using all three of our modalities, what we call IDEXX Diagnostic Advantage Customers and are already doing well.

But in fact, we can accelerate the same-store sales growth of those by them, adopting some of the additional specialized test and other innovations that we bring. But we need to call them in order to do that.

And so this new model that we launched last year, the Veterinary Diagnostic Consultant model, and at that time the 60% increase in calls allow us to do it. And now we're going to do another 60%. So that's 60% growth on top of 60% growth. I don't know it gets around to 250% growth.

We're going to be in front of customers now enough to really help them expand their appropriate use of diagnostic..

And then just lastly on the reference lab business, do you think you're gaining share? Again, I might have missed that, if you talked about in the prepared remarks..

We mentioned that we grew globally 11% and that was basically all volumes. So I think from a volume point of view, we're doing quite well in terms of how we're growing our business relative to the market..

And that add contributions from all regions..

Would you say 11% is comparable to the U.S.

market as well?.

Very strong growth, U.S. and internationally, we don't break that out specifically..

As you know, we gave out the total growth in recurring diagnostic revenues for Europe..

And we'll go to line of Ross Taylor with CL King..

I am just trying to look beyond 2015 a little bit. And the incremental profit of $5 million to $8 million that you talk about gaining in 2015, do you see that growing beyond 2015, because you're able to leverage some of these incremental cost you're going to add.

Can you leverage them substantially or is the incremental growth that's going to come beyond 2015, really just going to result from revenue growth?.

We would expect benefits from revenue growth, of course. And we do expect that we can scale the structure as we grow. We're making a meaningful upfront investment here to enhance our customer coverage, as Jon has talked about in detail. And we think we're going to have the right kind of infrastructure in place.

So as we continue to grow and build off of this, we should be able to get additional scale benefits over time..

I think we will see the revenue growth, but just to your point on leverage and scale, we design this really to be the optimal VDC territory alignment for 2016, right. So as we grow whatever way, we're going to grow between 2015 and 2016. We would expect to see some operating leverage on the sale structure..

And second question I have is I would imagine that your distributors are pretty disappointed about this, from the top levels of management you're kind of all the way down to the distributor reps. And do you anticipate that they're going to work a lot harder to make up for losing your revenues by working harder to grow your competition.

And I wonder, does the direct sales model, is it maybe more efficient or more effective with larger clinics as opposed to smaller clinics, so do you maybe end up giving up some of those smaller clinics?.

No. We're going to call on all the clinics. When we talk about reach and frequency, it's really talking about calling on everybody in the territory, as well as a very capable inbound and outbound call center. We know how to do this. And so I think the bottomline is we have a very differentiated products in what goes through distribution.

Let's remind ourselves what goes through distribution today and will by the way through the end of the year of 2014. It is instrument consumables. So that's based on having bought the instrument. Obviously, in Q2 we're doing pretty good with continued instrument placements, right.

And then, you've got the rapid assay test kits, which all by the way, is now becoming an instrument business model with SNAP Pro, but also very differentiated tests, really a unique and proprietary test portfolio.

So this is not something -- a distributor rep, if I could speak for, they want to have a good relationship with the customer, that they're kind of more customer-focused than they are product-focused, I mean that's their role.

So when things are really working, and I'm not going to go and try to upset the applecart for very tiny, what's going to end up being a very, very small product category for them, when they're covering that, when they got a thousand different products.

So I think the strength of our product portfolio is really combined with all the differentiators that we've added, whether it's VetConnect PLUS or SNAP Pro or -- and the customer's high degree of satisfaction, very, very high customer satisfaction rates in our instruments and our rapid assay test kits, this stuff is working for them.

And in many cases they can't replace it with a like-for-like product..

And if I can maybe just sneak in one other question just related to lab.

You said that the growth was primarily volume? And is that statement kind of applicable across all the geographies as well including the U.S.?.

Yes..

And we'll go to line of Nick Jansen with Raymond James..

Regarding your preliminary 2015 outlook, prior to all this changes, it looks like you were expecting operating margins to be flat in '15. And I was just wondering, better understanding some of the investments you're making maybe outside the U.S.

to just kind of explain that, because I would have thought with the recurring revenue piece growing in the double-digits that you would have at least gotten some level of leverage next year irrespective of business..

Well, one comment we'll also make along with that comment on margins is that the organic revenue growth guidance is 9% to 10%. So I think that's a nice goal. We've had a long-term goal to get to double-digit organic revenue growth. And it takes operating investment to make that happen. But I'll turn it to Brian..

So we're obviously early. We wanted to provide a baseline for everyone to help them understand how these impacts would add to a baseline outlook for the company. I think that we are very much committed to driving strong profit growth and faster EPS growth on top of the strong revenue gains.

I think in terms of the momentum that you're seeing in the business right now it's reflective of the growth investments that we're making. And our anticipation right now is we're in period of accelerating growth. We want to ensure that we're investing appropriately behind it.

These are investments that yield annuity returns, very high returns for us, and we are anticipating, we're going to continue to invest against things like international, commercial capability, and infrastructure, and R&D and that all factors into our flat operating margin outlook..

So I want to highlight also one -- reinforce one point that Brian made. We're giving guidance for 2015 here in July. We'd hoped typically do it in October, but we have the confidence to do this time in July. We wanted to provide a baseline, so you'll understood the impacts of going direct.

But the fact is how many companies are providing 2015 guidance right now. We have a very enduring, predictable recurring revenue consistently growing market that allows us to be able to do this with a confidence you need to in order to give these kind of guidance. So it's relatively early for us.

It's fastly early for most companies, but we're in the position to be able to do, we thought it would be helpful to you as you analyze the changes that we're talking about today..

And we'll go to line of Ben Haynor with Feltl and Company..

Just a quick point of clarification on the $50 million to $55 million in annual revenue due to the distribution model change, is that inclusive of $30 million to $35 million one-time inventory drawdown impact, or I guess in other words, for 2016, would you expect that to be $50-plus million or $80-plus million?.

The $50 million to $55 million is the pro forma increase that comes from the margin capture. In early 2015, there will be an offset to that of $30 million to $35 million, so approximately the net number would be approximately $20 million, right. And that is a one-time offset as the distributors are in the market and winding down their product sales.

So as you go to 2016, the benefit would be $50 million to $55 million, plus the growth that we'd anticipate delivering in -- excuse me, in 2016, it will be the $50 million to $55 million-plus the growth that we would be driving in 2016..

The organic growth in that, right. So also that's obviously that drawdown will be relatively concentrated to 3.5 weeks. So it's going to be relative to concentrated impact..

And then for my second question, you mentioned that customers, they called on in the first half grew 9% faster than those that you didn't call on. I would assume that you're typically calling on customers that represent higher volumes of testing.

Could you kind of give an estimate of what type of volumes that you -- of the customers that you did touch, is it 60% of the volume that you generated, 90% of the volume, where does that kind of fall?.

First of all, the number, it was a broad number. And we had to make at least one call in the half year. That's not enough to really have an impact on that, a big impact on the customer, but that was just the way that we measured it.

It was obviously the vast majority of the volume, but we would more like to be calling on customers, our customers, on the average of once or twice a quarter. And of course, with customers that have opportunities, significant opportunities to grow more frequently than that.

So there is really a spectrum all over the math of the call intensity, but I just wanted to give a -- I thought that was a pretty striking statistics. When we are in front of the customer they grow faster. And so I just wanted to give a ballpark on that with that number.

And as I mentioned, even with our current sales model, which by the way is going to have 60% more calls in the model, we were able to get the vast majority of the customers in the first half of the year. And by the way those are direct calls. Those don't include our insight sales people calling on customers.

So that group can also be very effective in highlighting the customer's new product opportunities and such. And of course, that group is going to be growing substantially as part of this expansion..

And we'll go to line of Mark Massaro with Canaccord Genuity..

In your prepared remarks you commented that the Catalyst One placements in global geographies trended well.

Could you comment on how they did in the United States? And maybe try to frame what percentage of Catalyst placements for next year might be Catalyst One?.

Just to clarify, we have two products. We the Catalyst Dx and we have the Catalyst One introductory offer, which we only offered in the U.S. And that introductory offer is an anticipation of the launch of Catalyst One, a lower cost, but fully functional analyzer, in October.

So, obviously, very good growth internationally with the premium analyzer, the Catalyst Dx. But the vast majority of the revenues are very strong growth in the U.S. And let's say up 37%, Brian can correct me if I'm off by a couple of percent, in the U.S., and also very strong growth in hematology.

Our Veterinary Diagnostic Consultant sales model did very, very well in the second quarter. I think it's a combination of the maturation of that model combined with Catalyst One. It's really resonating with customers. And let's recognize, we don't even have the analyzer yet and we're selling it. I mean this is amazing. We don't even have analyzer.

We're giving them the Dx, as an interim, until they get the Catalyst One. So we see the opportunity for Catalyst One in the North America market as a pretty significant opportunity going forward. I suspect we will move to virtually all of our placements being Catalyst One.

We'll have a small number of Catalyst Dx, but all of our placements Catalyst One. And in 2015, when we launch Catalyst One internationally and that's going to be -- I can tell you, our international teams, and we had them all in here a couple of weeks ago, they are so excited about Catalyst One.

Imagine how well they could do with Catalyst One just based on what they're doing with Catalyst Dx right now and the analyzer is got 40% lower entry cost and yet all the capability. And then, we're going to be launching Catalyst One internationally like we have it in U.S. now mobily-enabled.

In other words, in most markets we'll be able to sell the Catalyst One, it will be a low cost analyzer and they'll be getting the results on their smartphone. I mean this is very, very innovative and totally unique to IDEXX, and part of the package of going with IDEXX in-house equipment..

And just a quick follow-up.

Do you think there will be any changes to the compensation structure of our sales force? And can you kind of frame your confidence of hiring the new reps and maybe comment where they'll be coming out of?.

The good news is, I think, we've really refined the whole sales model, including the compensation model in the first half of this year, with the Veterinary Diagnostic Consultants we move to a territory growth sales model. So the major element of their variable compensation is the growth in that recurring revenue in their territory of diagnostics.

And that's turned out to be a very successful change. Our reps like it. And all of those systems and processes are in place, as we do this expansion. We're expanding a proven model. And so we have the success of that behind us.

Remind me, other part of your question?.

Maybe just the confidence you have in attracting the new direct reps?.

I'm going tell you what, this is an exciting industry. IDEXX is an exciting area.

How many companies do you have, where you can actually call on really nice people, call veterinarians with a series of new product launches and an innovative product portfolio? We were very successful last year with the sales transformation, where we were hiring into the role that was brand new.

We think this year this is going to be a relatively straightforward exercise to get very tenured reps into IDEXX. And they come from a variety or areas. Typically they come from outside animal health or occasionally they come from inside animal health. They come from serving a trauma physician or sometimes it's dental or sometimes human medical device.

They come from a variety of areas, where they understand a solution orientation, they understand a consultative approach and they are familiar with medical technology. We've been very successful with that.

So we really think we're just building on the track record here in our recruiting, and our recruiting expansion implied in what we've talked about today..

We're running a bit over here. We'll leave time for a couple of questions, so just that the people can keep them focused..

And we'll go to Erin Wilson with Bank of America Merrill Lynch..

It's Robert Willoughby sitting in for Erin Wilson. Jon, I guess a question for you. You mentioned the distributors not as effective in their sales effort, as your own team would be.

I guess it's understandable, but you look at disclosure out by the distributors today, the economic that you are giving them on the sales of their products maybe not so high.

So I guess my question would be, could you have accomplished the same types of pickups that you're looking for from a sale standpoint, if you had given a bit more economics to those suppliers? If you incentivize the kind of behavior you're looking at, and then you could forego some of these expenditures, CapEx things, that you're doing.

I mean how do you balanced that?.

We've been analyzing our U.S. distribution structure for quite some time. It's something that I think you do as a good business person. And if you look at what a distributor rep does, they are not -- we are a solutions-oriented company.

And a distributor has a product of thousands -- a basket of thousands of products, that all one-off products, it's very hard for them to represent any kind of detail in any of those products.

And as our technology portfolio has evolved and as the reference lab pieces integrate, which is already direct, has integrated with the -- and by the way, we sell the instruments direct, so we're selling the instruments direct and then our distributors sell the consumables, right.

So it's like we've been working with our distributors and trying to have them to assist us in selling instruments for a long time. What we found as we move to this new Veterinary Diagnostic Consultant, we are more and more just doing it on our own. And this is relatively unique to IDEXX, but we felt that this was the right direction to move.

And I will mention there is very relatively little, with the investments that we have here, to acquire a business that's growing at 9% to 10%, $55 million, with a good margin, you know, what kind of multiple in today's environment would you put on that. You would probably put a pretty high multiple of sales on that.

And yet the transition cost that we're putting here are de minimis. I mean if you think about this in the context of an acquisition, this is like the best deal you could ever have, because it's a fraction of the value of what we're acquiring.

But we're not doing it for that doing, we're doing it for the strategic reason, we believe this is the right move to support the growth of the industry..

I guess, I kind of viewed you had the best of all worlds. So you had some distributor relationships, some pretty good terms for you, maybe not the most effective, but they certainly kept a competitor at bay here.

And I guess, to an earlier question that it just seems to me, you open the door and you create an incentive for that competitor to drive more sales?.

I think the core -- and we've been working with distribution for a long time, Rob. Very simply, distributors do not move OEM share. Manufactures move their share. Distributors can move distributor share back and forth, who's going to serve that customer supplying them the thousand different products they buy through distribution.

They don't move OEM share. This has been proven. In fact, I would say that the change that we've had in the last two years where we went to one non-exclusive distributor, proved the point here that distributors do not move OEM share.

Even when we moved away from -- when we moved from three exclusive distributors to two exclusive and one non-exclusive, our revenues accelerated. I think that's prima-facie evidence that distributors don't move OEM share in diagnostic, the manufacturers do..

And we'll go to Ryan Daniels with William Blair..

Guys, I want to ask one totally unrelated question to the distribution changers. Regarding the NAD announcement related to your SNAP 4Dx, can you give a little bit more color on that.

I came across and wasn't quite sure what that related to?.

The NAD stands for National Advertising Division of the Better Business Bureau. We brought a challenge to the NAD with regard to the claims that were being made by VCA on their AccuPlex product, because we felt that confused -- there were confused comparisons.

We appreciated that the NAD reviewed and recommended that VCA discontinue its claims that compare AccuPlex to our SNAP 4Dx product and that in particular its claims, and there were several claims that are to be discontinued. But one of them is a test to distinguish between early Lyme exposure infection between exposure and vaccination.

We believe that VCA overstated the benefits of the test, as it compares with 4Dx. And I think that the bottomline is we take a very robust approach to product development, we involve inside people, we do involve outside people, we have a number of -- we do peer review studies.

In fact, Ryan, I would point you to a recently published peer review article in The International Journal of Applied Research in Veterinary Medicine that compares 4Dx Plus to AccuPlex. And I think there were over 400 observations in the study. The study concluded that there were clinically significant differences between SNAP 4Dx Plus and AccuPlex.

The 4Dx Plus has significantly better sensitivity and specificity with fewer false positives and a better test-to-test reproducibility. I think the bottomline is we put a tremendous amount of science to insure clinical efficacy. This is so important to the franchise. And we back that up. We don't ask customers just to believe us.

We back that up with third-party peer reviewed study, including the one that we just mentioned here. We can send you the link, Ryan, if you want. But we're certainly pleased that the NAD ruled that VCA needed to change their advertising. And my understanding is that they're going to be doing that..

And at this time, I'll turn the call back to Jon..

Thank you all for the call, for the interest in IDEXX again. It was a really strong quarter. We have seen accelerating growth across the company over the last several quarters.

And then we were announcing, I think it's a very exciting clear next step in our strategy to bring, to increase the relevance of veterinary medicine to pet owners through the diagnostic category, which is such a central category. We have a very strong innovative portfolio.

And bringing new effective resources, direct resources to the market that we're doing with this go-direct in 2015, we think we'll service well for a long-term growth, as we have detailed in this call, long-term growth, organic growth in revenues and an attractive profitability.

Just come back to the point that I think one of you had asked about, do we see operating leverage in future years with this model on the direct piece? And very much we do. We talked about the 2015 to 2016, but we see operating leverage being achieved over time.

But I think the key thing is what it will do to help us achieve our goal of sustained double-digit revenue or a long-term goal of sustained double-digit revenue growth. So with that, we really appreciate everybody else. And a huge thanks to all the IDEXX employees that help make the quarter.

We have a lot of people working on a lot of different initiatives. We've been working for the last couple of months on this go-direct, and that was extra time that people spent.

Obviously, the sales organizations around the world, our R&D organizations and the work that they're doing to bring, things like Catalyst One, the SNAP Pro to the market, it takes a village and really my huge thanks to all the employees who make this such a great company. So with that we're going to conclude the call..

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