Jon Ayers - Chief Executive Officer Brian McKeon - Chief Financial Officer Ed Garber - Director, Investor Relations.

Ryan Daniels - William Blair Erin Wilson - Bank of America/Merrill Lynch Jon Block - Stifel Nicholas Jansen - Raymond James Kevin Ellich - Piper Jaffray Mark Massaro - Canaccord Genuity Ben Haynor - Feltl and Company.

Good morning, everyone, and welcome to the IDEXX Laboratories’ Third Quarter 2014 Earnings Conference Call. As a reminder, today’s conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Ed Garber, Director, Investor Relations.

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

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

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

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

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

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

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

In reviewing our quarterly results, please note that growth rates refer to Q3 2014 performance compared to Q3 2013 performance unless otherwise noted. Also when we refer to normalized organic growth, in addition to adjusting for exchange in acquisitions, we have adjusted for changes in distributor inventory levels.

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

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

Good morning and thanks everybody for joining us today in our call. I am pleased to take you through our Q3 results and the strong momentum we continue to drive in our business.

In terms of highlights from today’s review, we drove 13% reported revenue growth in Q3 with strong global gains across our business lines including 12% normalized organic growth and CAG recurring organic revenues. Instrument placements were outstanding with over 30% year-on-year gains in catalyst and hematology placements in both U.S.

and international markets. Adjusted EPS came in at $1.05 per share, up 24% benefiting from high revenue growth, strong profit flow-through and benefits from reduced shares outstanding.

In the quarter, we repurchased nearly 2.2 million shares for $272 million bringing year-to-date repurchases to over 3.7 million shares or about 7% of shares outstanding at the beginning of 2014. Our excellent business momentum is positioning us to deliver strong 2014 and 2015 financial performance. Today, we are updating our financial guidance.

We are increasing our strong underlying 2014 outlook reflecting organic revenue growth trending at the high-end of our previously raised guidance range as well as benefits from a lower effective tax rate and reduced shares outstanding.

We are also updating our preliminary outlook for 2015 top line and EPS guidance with expectations for 13% to 14% organic revenue growth, including incremental revenue from distributor margin capture and strong operating profit and EPS gains.

Our outlook for 2014 and 2015 absorbs the headwinds associated with the significant recent strengthening of the U.S. dollar, which we will discuss in more detail. Let’s go through breakdown of our quarterly performance starting with a brief overview of our regional performance.

Our results reflect strong growth across regions in our CAG business as well as continued solid momentum in water revenues and better than expected LPD performance. U.S. revenues were $225 million in Q3 with normalized organic growth of nearly 10%. U.S.

gains were driven by 11% normalized gains in CAG diagnostic recurring levels reflecting 14% gains in reference lab and consultant service revenues, 13% gains in instrument consumable revenues and 3% growth in revenues from rapid assay kits. We continue to outpace solid underlying U.S. market growth, analysis of U.S.

clinical level data for practices that we track showed patient visits were up 0.8% and practice revenue grew 4.9% in Q3. Our international growth momentum continues as well. International revenues increased 15% to $158 million in the quarter or 41% of total revenues reflecting nearly 14% organic growth.

International CAG diagnostic recurring revenues increased 15% normalized with strong double digit organic gains in Europe, Asia, Australia and Latin America. Strong momentum in instrument placements in both U.S. and international markets sets the stage for continued high growth in durable CAG recurring diagnostic revenues.

Global catalyst placements increased 32% year-on-year in Q3 and hematology placements also increased 32%. Year-to-date we placed over 2,100 catalysts and over 2100 premium hematology analyzers globally representing year-on-year growth of 34% and 22% respectively.

While we do expect some moderation in this high growth rate in Q4 as we lap strong prior year placement levels, we are tracking well ahead of our goals for 10% to 15% placement growth this year. In the U.S. we have placed over 340 catalysts of 30% year-on-year with 60% going to competitive accounts.

At the same time we placed 352 hematology analyzers, up 31% year-on-year demonstrating continued high customer interest in benefiting from the integration of IDEXX’s in-house solution. Our placement results also demonstrate clear benefits from our integrated U.S.

sales force structure which is being expanded significantly in support of our go direct sales approach. We look forward to building on this momentum with the first shipment of Catalyst One in November which will expand the accessible market for a highly differentiated catalyst technology.

Catalyst now drives over 91% of our instrument consumable revenues in the U.S. with consistent 99% retention rate. The continued expansion of our catalyst base and uplift in testing that occurs when customers switch to catalyst supports our outlook for strong sustained growth in the U.S. recurring CAG revenues.

We also continue to see high demand for our SNAP Pro Mobile Device. We placed 3,200 SNAP Pros in the quarter bringing our install base to 6,100 in just 7 months since our launch in the U.S. Internationally we also achieved impressive results with 35% and 33% gains in catalysts and hematology placements respectively.

As a reminder in international markets we are placing only Catalyst Dx currently ahead of future plans for global rollout of Catalyst One in 2015.

Global instrument revenue of $80 million was down about 5% organically in Q3 reflecting $2.5 million of revenue deferrals associated with the Catalyst One introductory offer as well as expansion in international markets where we are placing relatively lower AUP instruments.

We continue to expect an instrument revenues growth will lag placement growth this year reflecting high placements of relatively lower priced analyzers such as Catalyst One and mix impacts from expansion in international markets.

CAG recurring diagnostic revenues are revenues associated with instrument consumables and service, rapid assay test kits and lab services were $278 million in the third quarter, representing 72% of overall IDEXX revenues. As noted normalized organic revenue growth was 12% in Q3.

Year-to-date gains are now over 11% supported by 10% year-to-date growth in the U.S. and 14% growth in international. An increase in U.S.

distributor inventories to 3.6 weeks at the end of Q3 from 2.8 weeks at the end of Q2, combined with a decrease in distributor inventory in the prior year period increased reported growth in CAG recurring diagnostic revenues by about 2% in the quarter.

The continued rapid expansion of our CAG recurring annuity in the quarter reflects robust global gains across our three modalities. Our Q3 results were supported by very strong growth in reference lab sales. Our reference lab and consulting services revenues grew 14% organically to $126 million in Q3.

High growth continued in all regions around the world in part aided by an additional business day in the quarter which added about 1% for lab growth.

In the U.S., we achieved volume driven 14% organic revenue gains reflecting the benefit of our integrated sales force model, test innovation and continued adoption and increased utilization of VetConnect PLUS. Instrument consumable revenues were $91 million with normalized organic growth of 15%.

Growth continues to be driven by our steadily expanding installed base of over 14,000 catalysts and nearly 19,000 premium hematology analyzers and increased testing as customers upgrades were premium instruments. Revenues for rapid assay kits were $47 million in Q3. This reflects normalized organic growth of 5%.

We continue to drive solid gains through increased test utilization and very high customer retention, both of which will benefit from our rapidly expanding SNAP Pro installed base.

As we look forward to the balance of the year, while we expect continued strong volume growth in rapid assay, rapid assay revenue growth in Q4 will be moderated by a delay in timing from our normal annual price increases as well as timing related to our enhanced SNAP Up The Savings program.

Our practice management and digital imaging systems business with revenue of $25 million in Q3 grew organically by 10% supported by continued expansion of our Pet Health Network Pro business.

Our Livestock, Poultry and Dairy revenues grew 18% in Q3, excluding exchange impacts of $30 million reflecting organic growth of 14% and benefits from the acquisition of our Brazil distributor last year. Organic revenue growth was aided in part by accelerated timing of orders in Europe, which will impact Q4 LPD results.

Overall, LPD continues to grow ahead of our expectation supported by increased sales in China and high levels of testing in New Zealand related to Livestock exports. We also continue to benefit from a slower than expected ramp down in bovine programs in Western Europe, which will moderate future growth.

Our water business grew 11% in Q3 to $26 million, including benefits from the acquisition of our South African distributor. Organic revenue growth for the quarter was 9% supported by solid gains across North America, Europe and Asia-Pacific, primarily reflecting benefits from new customer acquisitions.

High revenue growth in Q3 and strong flow-through drove 17% year-on-year growth in operating profit, excluding transitional impacts associated with implementing the all-direct sales strategy in the U.S. and 24% growth in adjusted EPS.

In Q3, we incurred about $500,000 in cost associated with the ramp up of our sales – in sales and operating resources ahead of the expanded 2015 sales model. We also incurred about $4.3 million in non-recurring project management and other one-time costs required to implement the strategy.

The commentary that falls on Q3 profit drivers excludes these transitional impacts. Gross profit was up 15% slightly ahead of revenue growth. We saw benefits from reduced products and service cost reflecting volume leverage and modest increases in selling price.

These positive impacts were partially offset by comparisons to higher prior year foreign exchange contract gains. Operating expenses, excluding transition impacts, grew 13% driven by increases in global commercial spending and support of accelerated revenue growth.

Adjusted EPS was $1.05 for the quarter, up 24% year-on-year and $3.04 year-to-date, up 16%. Reported EPS benefited by about $0.04 per share from a non-recurring income tax benefit related to prior years. Including this benefit and transitional impacts associated with implementing the all-direct U.S.

sales strategy, reported EPS was $1.03 in Q3 and $3.03 year-to-date. Free cash flow was $176 million year-to-date or 113% of net income. Our strong cash flows have enabled continued allocation of capital towards share repurchases. As noted, we repurchased nearly 2.2 million shares for about $272 million during the quarter.

Year-to-date, we repurchased over 3.7 million shares for $469 million. In the quarter, we strengthened our balance sheet through the addition of $200 million in low fixed rate term date through private placements of 7, 10 and 12-year senior notes with interest rates ranging from 3.3% to 3.8%. We ended the quarter with $725 million in debt outstanding.

We have significant liquidity reflecting $325 million of borrowing capacity available under our recently expanded $700 million revolving credit facility and $293 million in cash balances. Our leverage ratios as a multiple of EBITDA were 2.0 times gross and 1.2 times net of cash balances at the end of Q3.

That concludes the review of our quarterly performance. Let’s now turn to our outlook for full year 2014 and 2015. We would like to point that our updated outlook incorporates recent changes in FX rates. In Q3, we saw substantial strengthening of the U.S. dollar relative to other currencies. This has the effect of lowering reported U.S.

dollar revenues and profits. Given the substantial change in rates, we estimate that this will have the effect of lowering our 2014 outlook by about $10 million in revenues, $3 million in operating profit, and $0.04 per share compared to rates that were used in developing prior guidance.

For 2015, at current rates and given established hedge positions, FX will lower reported revenues by about $20 million, operating profit by $7 million, and EPS by about $0.09 per share incrementally. Despite these headwinds, we are well-positioned to deliver strong financial performance consistent with our business goals.

We will begin with our baseline outlook for 2014 before transitional impacts associated with the U.S. all-direct sales strategy. We are updating our revenue outlook before expected impacts of inventory drawdown in the channel to $1.505 billion to $1.510 billion.

This reflects expectations for full year organic growth of about 9.5% at the high end of our previous guidance range of 9% to 9.5%. Our revenue outlook also incorporates the $10 million of negative impact from recent FX changes.

We are raising our adjusted 2014 EPS outlook, while covering the $0.04 negative share impact – the $0.04 per share negative impact relates to current FX rate changes. Our updated adjusted EPS outlook is now $3.85 to $3.90, which reflects expectations for full year operating margins of about 19.5% consistent with our prior outlook and goals.

Net interest expense for 2014 is now expected to be about $14 million reflecting the recent borrowings. We now expect that one-time transitional impacts related to the drawdown of inventories related to the transition to the all-direct sales strategy in the U.S.

will result in a slightly lower one-time reduction in revenue and operating profit of approximately $18 million to $23 million and $15 million to $19 million respectively in the fourth quarter. The higher end of the estimated impact range corresponds with the full estimated impact of the inventory drawdown impact.

We are also refining our expectation for transition sales and operating ramp up cost to be approximately $6 million this year, reflecting the timing of new hires and continue to expect to incur $10 million to $12 million in total of other one-time cost this year with the balance of the spending expected in Q4.

Incorporating these transitional impacts, we expect reported revenues of $1.482 billion to $1.492 billion and reported EPS of $3.42 to $3.54. Our outlook includes expectations for a tax rate of 29.0% excluding benefits from the non-recurring income tax item noted earlier.

The lower tax rate in part reflects benefits from transition costs and drawdown impacts being reported at relatively higher U.S. tax rates. We now expect free cash flow to be about 100% to 110% of reported net income and capital investments to be about $75 million.

The higher cash flow outlook as a percent of net income reflects our relatively lower capital spending projections as well as working capital benefits in 2014 from our accelerated transition to the all-direct model. Our growth momentum and strength in commercial capability is positioning us well for continued strong financial performance in 2015.

Our 2015 outlook is for revenue of $1.690 billion to $1.710 billion. This reflects expectations for normalized organic growth of 13% to 14%, including expected distributor margin revenue capture of $50 million to $55 million.

This outlook incorporates expectations for 9.5% to 10.5% organic growth before margin capture, including about 50 basis points of year-on-year growth benefit related to the deferred revenue changes associated with the Catalyst One launch. As noted, FX will be a material headwind in 2015 given significant recent strengthening of the U.S. dollar.

At current rates, FX will reduce reported revenue growth rate about 1.5%. We are on track to deliver strong profit performance reflected in projected EPS of $4.38 to $4.48 or growth of 13% to 16% compared to our midpoint 2014 adjusted EPS guidance. Note that, projected EPS absorbs a negative 2% EPS growth impact from FX changes.

This outlook reflects expectations for double-digit revenue gains sustained operating margins despite negative FX impacts and $5 million to $8 million of incremental operating profit benefit from the all-direct U.S. sales strategy after funding a substantial expansion of our commercial capability.

Our outlook is supported by benefits from share repurchases, given repurchase activity to-date and expectations for continued future capital allocations towards share repurchases, we expect year-on-year weighted average share count reductions of 7% to 7.5% in 2015.

We have increased debt moderately in this context and anticipate additional longer term financing in early 2015, which we project will increase interest costs in 2015 to about $28 million to $30 million. The net effect of these changes will continue to be highly accretive to IDEXX.

Our 2015 outlook also reflects an expected effective tax rate of 30.5%. Please note that our outlook excludes potential impacts from carryover inventory in the distributor channel in 2015. There is a potential for up to $5 million of revenue and $4 million of operating profit or about $0.05 per share EPS impact in early 2015.

We aim to minimize the 2015 impact through our efforts in Q4 and we will update our success in this regard and our outlook here following year end. Thanks and I will now turn the call over Jon for his comments..

Brian thanks. It was a phenomenal quarter with broad based growth in our global revenues. Close to 9% I might mention are recurring revenue business model. The strong growth in recurring revenues delivered strong profit growth. This performance reflects the effective combination of three key elements of company’s strategy.

First, a sustained focus on innovation and new product launches; second, our transformations in the commercial model; and third, highly functioning global organization. Let me provide updates and comments on each of these elements starting with innovation.

IDEXX’s long history of building and growing veterinary practice diagnostic utilization through innovative and complementary products and services, this generates long lasting revenue as customers increasingly value the complementary nature of our offering.

This makes our offerings increasingly attractive to customers resulting in increasing customer royalty and has a multiplier effect as it grows customers’ use of our entire portfolio. Developing unique tests to better diagnose disease and manage pet health is a core element of our innovation strategy.

As an example in the reference lab segment of our diagnostics business we introduced the Whipworm Antigen test in early 2014. This specialized test along with our entire portfolio of unique tests that we have introduced in the reference lab is helping to generate strong volume growth particularly in the U.S. Note that almost all of the 14% U.S.

reference lab growth in Q3 is volume and much of that is coming from our existing customer as they increase their adoption of our unique specialized testing solutions. In addition, we are leader in using information technology to revolutionize veterinary medicine and change the standard of care.

Our VetConnect PLUS service is both an example of technology and business model innovation in this area.

VetConnect PLUS, a cloud based service which we provide for free for our diagnostic customers delivers actual insights from the diagnostic data generated by both our in clinic diagnostics and reference labs including base line levels, changes and trends in graphical form.

This delivers not only more meaningful clinical information but also helpful communication tool to the highly valued by pet owners.

Use and adoption of VetConnect PLUS increased customer loyalty to the entire IDEXX portfolio of diagnostic solution and actually increases pet owner loyalty to the veterinary practice, which in turn helps to sustain their growth and our growth in recurring diagnostic revenue.

We are increasing adoption and uses of VetConnect PLUS by expanding geographically and by continuing to add new features. VetConnect PLUS is being offering in 14 countries today and will be 16 by the end of the year. In addition, popular mobile notifications and lab results are now available on both iPhones and the android mobile devices.

Globally we have over 16,000 VetConnect PLUS activations of which 12,500 are in the U.S. We also continued to advance our in-house lab integrated with our diagnostic ecosystem.

Earlier this year we launched SNAP Pro our mobile device that automates the running of the test kits and adds the results instantly to VetConnect PLUS in the cloud of all of our rapid assay family. While we knew from early on that SNAP Pro brought intuitive and obvious value to the hospital operations and work flow.

We now see that practice staff is keenly bringing the SNAP Pro into the exam room to show the client the result of the SNAP test on the SNAP Pro screen.

The SNAP Pro screen clearly shows any positive results and also all of the negative results from our multi-analyte SNAP test including our flagship canine product SNAP 4Dx which tests for six common mosquito and tick-borne diseases.

SNAP Pro provides a powerful way for the practice to show the pet owner the value of running our multi-analyte SNAP test on their bellowed pet. By showing value to the pet owner, we increased practice loyalty, compliance, visits, hospital revenue and IDEXX revenues.

We have now placed over 6,700 SNAP Pros year-to-date with customers, including 600 quarter-to-date in Q4. This product has huge continued momentum.

Speaking of the rapid assay business, we have been extraordinarily successful in the last month with our annual SNAP Up The Savings membership program, a marketing program which we have run annually for over a decade and well-known by our customers.

We have now over 9,000 practices enrolled in the 2015 program, way ahead of any prior year at this time, which gives certain discounts on purchases of all of our SNAP kits as the program has done in prior years.

We expect that by the end of the year 85% of our rapid assay customers will be 2015 SNAP enrollees, SNAP Pro or SNAPshot Dx customers, corporate accounts or some combination of the above.

So, in addition to the unique value that our family of SNAP tests brings to the practices, these elements strengthen the customer value and thus retention in this segment of our recurring diagnostic revenue.

Of course, we won’t be done placing SNAP Pro in 2014, we project significant further placements in 2015, but no product more clearly defines IDEXX instrument innovation than Catalyst One, our next generation chemistry analyzer that we are launching this quarter.

Catalyst One will prove in time to be the most successful and widely used point-of-care instrument globally. We will begin shipping Catalyst One to our new customers in North America on November 3. Now, that we have completed development and an extensive lab and field testing program.

As such, we have begun taking orders for customers’ delivery this quarter, an announcement that has been highly anticipated by our North American sales organization. Catalyst One brings unique value of the catalyst platform to our customers with simplicity and in a very competitive entry cost.

The analyzers leaf cost can be fully funded with IDEXX rebates by running as few as one patient profile per day. This addresses the vast majority of the market particularly when measured by recurring consumable revenues. Catalyst One functionality and clinical value is completely unique in relation to competitive offerings.

Let me just briefly mention four of the dimensions of uniqueness. First is test menu. Catalyst has test breadth and complete flexibility. The instrument can run a complete chemistry profile of 22 tests using whole blood in 8 minutes similar to a profile that you would send to the reference lab.

The largest panel of competitive offering is only 14 tests, but it can also run 17, 15, 14, 10 or 6 test profiles as well as single individual tests. Customers appreciate this flexibility as some cases require only a single test or two and others a complete Chem 22.

Catalyst One is also unique in the ability to run several highly important tests for thyroid disease, kidney disease, diabetes and therapeutic drug monitoring. Each of these tests can be run either alone or together with a profile. Without Catalyst, customers will have to send the sample to the reference lab at greater cost and longer turnaround time.

Second is speed. Catalyst One is unique in being able to reliably generate chemistry results using whole blood within 8 minutes. With Catalyst One, results can easily be generated during the exam and what we call real-time care. Third is two-way integration.

With all major practice management software systems, a huge benefit to staff productivity and engagement, electronic medical records and automatic charge capture as the patient information never needs to put into the analyzer. The auto-charge capture and invoicing feature alone can augment a practices’ EBITDA by 2% or more.

This economic value is large in relation to the cost of the analyzer and itself can pay for all of the equipment within months. I would note that this capability does take years to develop, including the requisite collaboration of development by third-party software providers.

And fourth is of course, VetConnect PLUS, the cloud-based service provided at no incremental charge with instant results on your smartphone the moment the analyzer is complete. Test menu, speed, elegant integration and VetConnect PLUS, four unique elements of Catalyst all at competitive costs.

However, the chemistry analyzers only part of the in-house lab, which almost always includes an analyzer for hematology. A simple biology review provides useful context here. Blood is made up of plasma and cells.

The chemistry analyzer gives critical data on the contents of plasma and our hematology analyzer provides 25 parameters on the cells, red blood cells and white blood cells as well as platelets. Clinically, chemistry and hematology needs to be run together and this is exactly what veterinary practices do.

The evidence, over 95% of profiles sent to the reference lab that include chemistry also include hematology and 96% of our Catalyst Dx customers in the U.S. also have one of our two advanced hematology analyzers. Customers buy chemistry and hematology together with IDEXX VetLab Station, because they work in delivering results on a patient sample.

Just as you would want only one app to give you a stock’s price and volume, our veterinary customers want an in-house lab that gives the patient’s chemistry and hematology results in one report or mobile app.

Customers also want an in-house lab, where patient information is entered only once for all the analyzers or better yet has real-time two-way integration with the practice management software and that is the role of IDEXX VetLab Station, the information hub for the in-house lab that integrates all the instruments and connects them real-time with customer practice management software.

IDEXX is unique in being able to do this and IDEXX VetLab Station also connects to the internet or smart service as well as the VetConnect PLUS instant results.

So, while Catalyst One is truly unique, innovative and cost effective in comparison to today’s competitive offering, all these advantages that I just thrive for Catalyst One are also enjoyed by our Catalyst Dx customers today.

As Brian stated, our Catalyst Dx installed base of customers account for 91% of our consumable, chemistry consumable revenues in the U.S. with certain – when certain corporate accounts, which we had historically served direct or excluded.

The unique value that Catalyst brings plus IDEXX hematology to the veterinary practice explains why we have maintained consistent 99% customer retention. Okay.

Moving to the commercial transformation, in the veterinary market a sustained rate of innovation must be matched by strong field sales and support organization that can bring these benefits to the practice and support their adoption and thus growth of the diagnostic category.

In the U.S., we have transformed our sales organization in 2013 to an account manager model, where our customers are supported by a single veterinary diagnostic consultant representing all three diagnostic modalities that makeup our recurring diagnostic revenues.

Territories have become small enough that our sales professionals can establish regular customer calling cycles. In 2013, we demonstrated a 60% increase in customer visits in this new model, with just a 15% increase in sales staff.

With this model gaining maturity in 2014, we have seen consistently strong growth over the course of the year in diagnostic recurring revenue in the U.S. with Q3 coming in at 11% normalized growth.

One of the key reasons for this growth is that as we are regularly calling our customers, we create awareness and education of unique new testing capabilities and workflow innovations that we offer both with our in-house instruments and our reference lab. This is one of the reasons why customers have consistently asked that we visit them more often.

The result is that when we visit at subject matter experts, customers grow their use of IDEXX diagnostics faster contributing to the growth of our recurring diagnostic revenue. This is another reason why, for example, we are seeing 14% reference lab and consulting services modality growth in Q3 in the U.S.

And so with this insight, we are embarking on a further expansion of direct sales and support model as we go to our fully direct sales strategy in the U.S. This allows us to shrink territories even further, with each sales professional having smaller, more concentrated geographies and thus able to visit more customers more regularly.

In fact, in this new model, a VDC can visit accounts that make up 60% of his or her revenues in a week and 95% in four weeks. We have made exceptional progress in Q3 and moving to our new fully direct sales strategy in the U.S.

Some milestones of note, we have hired 96% of our expanded sales and field support physicians and expect to be virtually complete by November 3, including our 174 veterinary diagnostic consultants, 22 veterinary diagnostic specialists and 23 regional managers.

Second, this staffing success also includes an expanded team, 73 field support representatives for diagnostics, which we have now 100% filled.

These folks, which are made up of highly experienced veterinary practice professionals, train existing customers on our steady stream of new innovation, such as our in-house lab, advanced menu, and VetConnect PLUS and they are highly appreciated by our customers.

Third, we are now live with a fully staffed inside sales center consisting of 75 regionally assigned professionals. This group both receives inbound and makes outbound customer calls, helps customers with orders as product line experts and has tremendous customer reach and frequency.

Fourth, we are alive with our nationwide logistics capability now providing free shipping and next day delivery to the entire continental U.S. leveraging our partnership with UPS and FedEx.

And fifth, we have introduced several other elements of our direct sales and marketing strategy, such as credits for expired products and special promotions when ordering direct. Our teams involved in all these elements, the plan have done a truly phenomenal job and we are ahead of an ambitious schedule laid out just a few months ago.

We are now in the position to begin to transition our customers to our fully direct sales model through the balance of Q4 and leading into 2015. The growth in our commercial capability extends beyond the U.S. Companion Animal Diagnostics part of the business as we are now operating as a highly effective global organization.

As Brian enumerated, we have achieved strong growth globally in the companion animal market. In the quarter, Europe as a whole had 15% organic growth in recurring diagnostic revenue, Asia-Pacific 18% and Latin America 43%, where we benefited from our direct presence in Brazil.

This momentum in our global CAG diagnostic recurring revenue is a result of significant country and region leadership additions we have made along with additional field based resources.

I was in Europe last week and our international teams are highly engaged doing a great job at accelerating growth of IDEXX and leveraging the unique value of our diagnostic offering. Also, important to note that this CAG international momentum does not yet even benefit from the launch of Catalyst One slated for Q1 in major European markets.

Catalyst One with its low entry cost and unique capability is going to be a significant driver of recurring revenue growth globally for years to come. Practices are generally smaller internationally, so Catalyst One’s lower price point is better suited to these markets than Catalyst Dx.

Our international teams can’t wait to get their hands on the new analyzer and its integration with VetConnect PLUS.

Our water business with 43% operating margin year-to-date and is almost 100% recurring revenue from a highly loyal customer base also is effectively in investing commercial resources for accelerated growth achieving 9% organic growth in Q3, building on 7% in Q2 and 2.5% in Q1.

It’s really amazing to see what this team is able to do with a little investment and by taking a fresh perspective on driving growth in this highly profitable business. Our Livestock, Poultry and Dairy business is a mix of recurring and multi-year campaign revenue.

Both sides of the business did incredibly well achieving 13% organic revenue growth and performance with contributions from all regions in this global business model. Again, this team is really engaged and focused on global growth, particularly the recurring revenue portion of the business.

In this call as we traditionally do, we are getting top line and bottom line guidance for the next calendar year 2015 that incorporates 13% to 14% normalized organic growth.

This outlook reflects the continued output of investment R&D and innovation projected at over $100 million in 2014 and growing, a level we believe represents greater than 80% of the identifiable industry’s investment in diagnostics and information technology R&D for companion animal health.

Note, much of this R&D is devoted to products, services and software advancements that we have yet to announce, with some exciting additions to our lines slated for 2015 introduction. The 2015 also reflects our investment in the U.S. and global commercial expansion and the full rollout of all-direct sales strategy in the U.S.

Note that it also incorporates contingency, appropriate for the risks in our business, including the all-direct sales strategy.

Finally, our outlook accounts for promotional strategies to take advantage of our direct approach to drive diagnostic customers, diagnostic volumes in the sustainable, profitable recurring revenue growth and bottom line performance.

So, before I open the call for questions, I just really want to thank the 6,000 IDEXXers who helped make this such an amazing quarter performance, one of the best in my 12 years at IDEXX. And so with these opening remarks, Brian and I are ready to take your questions.

Cynthia?.

Thank you. (Operator Instructions) And our first question will come from the line of Ryan Daniels with William Blair. Please go ahead..

Yes, good morning guys. Thanks for taking the questions. Brian, maybe I will start one with you before my follow-up.

If I go back and look at kind of July and then your October update and then today, it seems like the impact you are anticipating from the all-direct sales shift has lessened over those periods, both in regards to the sales investment required and some of the revenue and operating profit hit to the inventory drawdown, can you just go into a little bit more detail how you have honed in that range and why it looks to be less than anticipated?.

Sure, why don’t we breakout into – Don into two components. One would be the cost estimates that we had.

They have – the major change there was the – on the we obviously we are making some preliminary estimates back in July and on how this would rollout on the ramp costs so the cost that we – the ongoing cost that we are putting by the sales resources, operating resources that we expect to continue, we took that estimate down for 2014 from $8 million to $6 million and that’s basically just timing.

It’s of when the costs actually flow through. As Jon noted we are fully on track to be fully staffed. And just relative to our earlier estimates which were a big conservative we came in a bit better on that front. The second change was related to the impact of the distributor drawdown.

And we had higher estimates when we first came out with our outlook there we didn’t, we hadn’t had the opportunity to speak to others about how to manage this. And so we estimated that the impact would largely take place in early 2015. We have been very effective at working together to move this forward, so we can have a clean transition on January 1.

We did reduce the impact of the revenue and profit in part because the impacts that we estimated in 2015 would have been grossed up for the additional margin capture. So you reduce that by the 15% of margin capture by moving it into 2014 as less of a revenue offset.

And just versus our last outlook we have moved it a couple of million more again just based on refinements as we are getting closer to the date.

So taking a step back it was more that we had more limited information when we put out the original estimates that were bit conservative and as we were refining this it’s we are able to tighten that range up a bit..

Okay, that’s perfect, very helpful color. And then as for my follow-up, I guess one for you Jon, you talked a little bit about your rapid assay initiatives both in regards to making that more of an instrument consumable with the strong placements there, but also the SNAP Up The Savings program and your corporate accounts.

So can you maybe the one thing I am not as familiar with is the SNAP Up The Savings, does that actually walk consumers in for some kind of minimum purchase or is it just a very high retention vehicle because they incur more savings the more products they use just some more color on that and the retention aspects of it? Thank you..

Yes. It gives them a discount when they are enrolled in the program, it gives them discounts upfront and it gives some discounts based on the volume of their purchases in the back too. So it’s – it doesn’t lock our customers in anything.

But it’s a very well appreciated program and it does give some attractive volume discounts as a – as they use SNAP products over the course of the year..

Okay. Thanks a lot for the color and congrats on the strong performance..

Thank you..

Thanks Ryan..

Thank you. Our next question comes from the line of Erin Wilson with Bank of America/Merrill Lynch. Your line is open..

Great. Thanks so much for taking my question.

Instrument placements were very strong as were consumables but was there any meaningful promotional activity that was new or just implemented in the latest quarter as opposed to what occurred in the first half of the year that had a significant impact on Catalyst One as well are you seeing the initial traction or feedback that you had hopped to see ahead of that launch, where do orders stand and how big is the market opportunity there?.

Yes. There was nothing indifferent about Q3 from in terms of the types of programs that we used versus the prior programs. They were all continuing focus on the Catalyst introductory offer and everything was basically a business as usual. This program has been very effective first of the year.

With regard to the anticipation of Catalyst One, we only began taking orders this quarter. I do note that we actually entered with a little higher backlog of catalyst coming into the quarter than we normally do. So obviously we are in good shape and it’s not a big backlog business but more units in the backlog is helpful for Q4.

But I think Catalyst One really and we had a number of customers who said I love what you are talking about with catalyst but I really want to wait for the analyzer I don’t want to go through the introductory offer and now we can serve those customers and they can take their Catalyst One delivery in Q4 get the tax write-off and start enjoying the benefits of catalyst technology.

So we have – we do have customers who have been waiting for Catalyst One. And then of course Catalyst One is going to be very effective at both upgrading the remaining vet test customers that we have out there of which we have thousands of course.

And also it’s a wonderful tool to upgrade customers who are in decade old technology and want to move to the unique value of IDEXX’s diagnostic solution that have competitive offerings and that’s a very attractive base of customers to go after.

I think Brian noted that even in Q3, 60% of our placements work to new and competitive accounts and that just shows that there are a lot of customers who are not using IDEXX today, who want to move to the new capability that we bring..

Okay, great.

And on the direct transition, you mentioned previously that 60% of your business are roughly that is direct already, has that moved at all ahead of the full direct initiatives or your full direct effort? Where is the metric now and has it surprised you based on kind of customer responses following recent changes from Patterson and Schein?.

Yes. That in Q3, our business model was the same as Q2, so the 60% roughly holds. I think we are now of course in the market and we are close to our 365 field and phone-based representatives who are representing for the diagnostic line between veterinary diagnostic consultants and the specialists and our inside folks and our field service folks.

And when we have conversations with customers, we are easily able to ease any concerns they have and build enthusiasm as they become aware of the change. So, I think we are well facilitized to do that.

And it’s just – it’s a matter of going out there and talking to customers and I think we are fully staffed in the position to be able to do so and in fact are doing so quite effectively..

Okay, great. Thanks so much..

Thank you. Our next question comes from the line of Jon Block with Stifel. Your line is open..

Great, thanks and good morning guys. Maybe the first one, Brian for you and there was a lot of moving parts and a lot of helpful numbers, but just when I look at sort of the 3Q/4Q cadence and what’s implied for fourth quarter, you beat by roughly something like $0.17, you raised by $0.05 for the year.

I know you called out I believe roughly a nickel in FX headwind, but maybe if you can talk to the cadence in the 3Q/4Q do we just all have it wrong, because of a lot of OpEx coming on from the hiring towards the tail end? That would be on the bottom line. And then on the top line, you steadily increased the organic growth throughout 2014.

Fourth quarter is an implied step down, obviously a tougher comp, but maybe if you can talk to that as well? And then I will go ahead with my follow-up. Thanks..

Sure. And why don’t – as you know, Jon, we provide full year guidance, not quarterly guidance, so why don’t we focus on kind of what our outlook was and what our outlook is.

We – as you noted, we had a very good Q3 and that is giving us confidence in taking up our organic revenue growth rate to the high end of the range and from where we were currently and our revenue number is aligned without excluding the FX adjustment.

In terms of the fourth quarter, we expect that our growth is going to be in line with our full year outlook adjusting for a couple of factors. We are delaying the rapid assay price increase just to align it with our other – our practices to Jan 1 and we have this expanded SNAP Up The Savings program.

Combined, those are probably going to reduce our organic growth rate by about 1 point in the fourth quarter and we do expect some moderating growth in LPD. It was extremely strong in Q3 as well, but basically, the underlying growth is consistent with our full year outlook adjusting for those factors.

And we are expecting the same kind of flow-through, the same kind of flow-through on the operating profit margin. As you noted, we had some FX headwinds and had some things like benefits from the accelerated share repurchases, which help to mitigate that.

I think relative to where the Street may have been I do believe our revenue number was a healthy beat to what people were expecting for us then I think that was probably the key driver in the quarter..

Okay, great. Very helpful.

And then Jon for you, you had I guess one competitor report in front of you in a way of three competitors reporting behind you, can you just talk to what you are seeing in the field? I mean, you gave a lot of specifics on catalysts, but I guess where I am going with this is I am anticipating that we are going to hear from others their success in moving share and how they are being impactful out in the field and do you want to speak to vet test retention at all and in other words, do you think if they are citing success, it’s more just a function of them placing the boxes instead of Abaxis or are you seeing any higher levels of churn within vet test even though it is only 9% of consumables ex-corporates? Thanks..

Thank you. So, I think that’s a good question, obviously, 91% of our consumable volumes comes from our 9,000 plus catalyst customers, where we have consistently maintained 99% loyalty that really didn’t change in Q3. All those trends hold steady.

By the way, the trends with the vet test, which are typically low 90s retention are – those trends haven’t changed other than maybe 30 basis points impact on the consumable value of the move of one of our corporate accounts to a competitive analyzer, but that was a pretty low volume account. So, clearly, catalyst technology is very unique.

A lot of vet test customers that we have been trying to convince to upgrade for a long number of years with our partners that haven’t upgraded typically are smaller accounts obviously. I think we have 6,000 of them. Some of them are – let me have another analyzer in their practice too. So, that’s why they are lower volumes. Now, we have Catalyst One.

And Catalyst One looks and feels like an instrument that is worth upgrading to that. It’s an easier decision both economically in terms of how it looks on footprint than Catalyst Dx is, but clearly, it’s the – it’s where we see the lower royalty is in the low volume vet test installed base at 9% of our consumable revenue.

So, I think that’s – I think you probably understand that’s an important factor..

Thanks for your time guys..

Thank you. Next, we will go to the line of Nicholas Jansen with Raymond James. Your line is open..

Hi, guys. Two quick ones for me. First, on the inventory in the channel in the quarter, it looks like obviously you had a couple of more – about a full week of more this quarter relative to last quarter and I would have thought that the distributors would want to kind of draw that down in anticipation of the change.

So any comments of why you thought the acceleration in 3Q relative to normal trends?.

No, just 3.5 weeks is totally business as usual. Our inventories in the field for the last as long as I have been at IDEXX 12 years that range between 3 to 4 weeks that’s right smack in the middle, I think the two-way it was just a low number happen to be how the days fell at the end of the quarter.

I think it’s – that’s what the distributors typically need in order to fill their warehouses across the country and serve customers..

Okay, that’s helpful.

And then secondly on the international growth, another very strong quarter there and I am just trying to get a sense of how you thought about Catalyst One internationally and what that could do from maybe a top line perspective over the coming years as you better penetrate the much bigger international opportunity versus the U.S.? Thanks..

Yes. Catalyst One was as much designed for the international market as was the U.S. market, because it’s really got all the functionality Catalyst Dx, but it’s 40% less cost and a smaller footprint actually has incremental functionality, if you consider VetConnect PLUS and the addition of the T4 tests.

So, our international teams we are very, very excited about Catalyst One, but they have been gearing up.

That’s why we have increased our investments in our international operations and we were now direct in most European countries in South Africa and Brazil and we geared up our capability in some of the Asia-Pacific country and we are going to be launching Catalyst One in virtually every market in 2015 with the exception of Japan, where there is a regulatory approval required.

It takes a little longer in Japan, but we have got a great offering in Japan with Catalyst Dx. And the Japanese really appreciate ProCyte as a hematology analyzer. So, I think we are in a – just in a phenomenal position to grow the recurring diagnostic revenues internationally for years to come.

Obviously, we have got a lot more vet test upgrade and a lot of Greenfield accounts. We have a much more fragmented competitive scenario. It’s kind of country by country and we are growing the lab business. I didn’t mention it, but our lab operations in Europe did very well in the third quarter.

The Leipzig lab is really becoming a very effective tool, a twin lab business, because we are able to provide far superior turnaround time next morning which is really unheard of in the markets that we are serving with that lab previous to it’s introduction and that works in conjunction with Catalyst One.

These are trying to work together to buildup integrated diagnostic offering much in the same that we have done in the U.S.

So we are very, very excited about the global market and it’s not really dependent on economies obviously with 15% organic growth in Q3 in Europe we didn’t get any help from the economy in that regard, but these are attractive markets for us..

Thanks for the color. Nice job guys..

Thank you. (Operator Instructions) And we will go the line of Kevin Ellich with Piper Jaffray. Your line is open..

Good morning. Thanks for taking the questions.

I guess just starting off wanted to ask about the delay in the price increases, Brian I think you made a comment about that, could you give us a little bit more clarity why you decided to lay that price increase and I have got a follow-up on that?.

Thanks for that question. We actually made that decision about a year ago. Our price increase – last price increase was September of 2013, but the industry standard is January. And what happens is all the suppliers increase their prices to the veterinary practices in January. And what practices do is they go update all of their systems, one.

And so when you have a price increase that is not timed with that, it’s an inconvenience to the customer. So what we decided about a year ago is that we would go 15 months without price increase, so we can move it to January which is an industry norm and also the norm for where we had already moved the vet lab consumables.

So we would be consistent with ourselves and with industry norm..

And that makes sense. Thanks Jon.

And then just could you give us a little bit of color as to what type of increases you typically push through and what this move to the direct sales model and maybe more competitive landscape do you think that changes the pricing power in the industry overall?.

Yes, these are typically a very standard normal price increases of – in some cases 3% or 4% and in some cases less, but not more and they are just ordinary as we are taking customers through the change through direct model. I think they are totally comfortable. We are able to address any concerns that they might have with regard to pricing.

And those are – we are well facilitized and plan to have those conversations and the conversations that we have been having to-date are universally successful..

Great. That’s helpful. Thanks..

Thank you. Our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is open..

Hi guys. Thanks for taking the question.

Maybe could you provide a little bit of color around strong growth in Europe, it looks like probably your strongest quarter I have ever seen and if you could comment on the trajectory of that growth as we paced out into ’15 and beyond?.

Yes. Thank you. It really was a great quarter. I think we have a great management team there. Michael Williams moved over there two years ago with really broad understanding of the diagnostic business. And we actually have very long tenure country managers but I think we added some supporting personnel.

We hired – we actually hired Head of Abbott Diagnostics European business. Who is now running that business and she joined in June and she has been just a phenomenal addition and we have added other capabilities. But I think the other thing is that the products and services have gotten better.

We have – both our hematology and our chemistry offering they know how to sell them. Of course our lab business is really starting to grow nicely across the major countries. We have that 15% growth obviously is a portfolio of countries some of which are growing higher than that. We had obviously higher growth in the Nordics by the way.

We already lapped going direct there and which we did at the beginning of 2013. So this is – that’s positive. But we had in excess of 20% - 15% growth in Germany and Italy and Spain of all places.

So it’s a broad based capability people love their pets in Europe and I think we are particularly well positioned both commercially in terms of our product line..

And I would just add Mark I think that 15% growth is certainly what we hope we can achieve on a sustainable basis in Europe over time which I think is incredible given the economic backdrop. I would highlight, there were some things in Q3 that benefited us.

The prior year was floods in Germany and there were some softer performance that benefited the growth a bit, but it’s…..

There are always things like, when does the Easter fall or weather good or weather bad in Europe that can affect it. But as Brain said, that’s a good number to go for going forward..

Great. And just as a follow-up, you commented on the reference lab, but I think that probably beats most of street models, so can you comment on first of all you didn’t provide revenue guidance by segments.

So, at what level do you think the reference lab can grow and if you can comment on the variability through the quarter that would be helpful?.

Yes. We don’t run it by segment, that’s why we don’t comment and give guidance. But we are talking about we believe in growing recurring diagnostic revenues. And when we do that, we actually free ourselves to think about all the opportunities that can grow the whole.

So, that’s why we don’t actually give guidance that’s not the way we think about the business anymore it’s an integrated offering. But clearly, lab modality is doing well. I think it’s doing well because of our specialty test portfolio in North America.

And combined with the fact that we are calling on our existing customer, this is the change in the business model last year. Prior to last year, we had laboratory diagnostic consultants basically we are only calling on potential customers, not existing customers. Now, we are routinely calling on our existing customers.

And when we call on them, they are actually adopting that long list of specialty portfolio that we have launched over several years, but which we didn’t have brought adoption because we just didn’t have that commercial channel. So, that – and then, we are just, we are investing in labs all around the world and improving the service levels.

And I think that’s what’s driving the global sales..

And Mark, I would point out, we did provide guidance on recurring CAG diagnostic revenue growth this year, 9% to 11% and we are trending slightly above the high end of that and that’s giving us the confidence throughout the year to raise our guidance ranges through revenue growth and as well going into 2015, given that’s a very durable revenue stream giving us confidence for the high growth rates we are projecting next year..

Great..

Lab is a significant contributing factor as you know..

Yes. Thanks. Nice quarter..

Thank you..

Thanks Mark..

Thank you. Our next question comes from the line of Ben Haynor with Feltl and Company. Your line is open..

Good morning, gentlemen. Thanks for taking the questions.

I was just wondering, how many pent-up Catalyst One placements are to go out in the next week and a half when you start placing those things, are most of those accounts that have committed to it, already having the Catalyst Dx in the practice already or are there some that have committed to that?.

No, our Catalyst One is not – all of our placements in Catalyst One in Q4 will be the new customers. They won’t be just to upgrading the introductory offer customers who – that will happen in 2015.

So and just a background here, we went to introductory offer at the beginning of 2014 and said well we’ll sell you Catalyst One, but we will loan you Catalyst Dx until for a year until you get to Catalyst One. So, the year doesn’t start until 2015. So, those Catalyst Ones are to customers who have vet tests or competitive analyzers.

And, it’s hard to quantify because we weren’t really taking orders for Catalyst One direct placements until this quarter..

Okay. That’s helpful.

And then, one other thing is, we are hearing in our survey is that about a quarter of practices are concerned about the volume discounts that they receive from their distributor now that IDEXX has gone direct, is there a plan to address that whether its discounts on consumables or some other promotion or do you just not worry about those people and think they will get over their concern?.

No, we are not surprised that you are hearing that. We absolutely have a plan and it’s in all regards that you say. And the conversations we had with customers when we take them through it, they are absolutely fine. And so, we just need to take customers through it. We have 365 people who can do that.

And we are very confident that we had different creative ways including some standard promotions that we are introducing in our direct model for the business that starts program as well as on the Vet Lab side, which I think will – which are proving to be quite satisfactory to customers as we have those conversations..

And that’s all factored in our financial outlook..

All of those our promotions, everything are factored into our financial outlook. As well as contingency, we have recognized that perhaps on the vet test and small base that will have some customers that we don’t reach with Catalyst One and we will make the unfortunate decision to invest in a decade old technology that doesn’t have that capability.

And so, we have really – we have factored all of that into our guidance. We are running a bit over. So, we will take one more and close..

And that will come from the line of Erin Wilson with Bank of America/Merrill Lynch. Your line is open..

Great, thanks so much.

Apologies if I missed this, but as far as incremental invested capital associated with the direct transition goes, the original guidance was $15 million to $20 million, has that number changed at all? And is it all in 2014 or ‘15? And Jon, you continue to mention innovation on the IT front going into 2015, can you give us a sense of what’s the next step there? Is it focused more broadly on expanding Cornerstone utilization or some other sort of capability, any sort of details there would be great? Thank you..

On your first question, it’s the same estimate, Erin and it will be in 2015..

Okay.

Yes, on the IT innovation, obviously we are continuing to add capability to the ecosystem whether it’s VetConnect PLUS or Pet Health Network Pro, Cornerstone you have mentioned or that’s not our only practice management software, but certainly practice management softwares are core to that ecosystem, plus we have other areas that we are investing in that are all really generated to help grow the practice and increase their relevant pet owners.

We find as practices invest and particularly our cloud-based – newer cloud-based technology such as VetConnect PLUS and Pet Health Network Pro combined with their practice management software in many of the cases it’s IDEXX, but not always. They can grow their practice. They are reaching out to customer before during and after the visit.

They are earning into new kinds of business models.

And this really is a roadmap I think for the profession, roadmap not only we ourselves, but in conjunction with the American Animal Hospital Association and AVMA, American Veterinary Medical Association really is how practices can effectively operate in the future and have strong growth in the current environment. Thank you..

Thank you. And with that, I’d like to turn it back over to you for any closing comments..

We just want to thank everybody for being on the call. And again, just a huge note of thanks and gratitude to the IDEXX customers who have really worked hard in many ways, including of course the IDEXX all-direct strategy in the U.S., but around the world to achieve just a phenomenal Q3.

I am so proud of everybody and we look forward to updating investors on our results for the full year in January. Thank you..

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