Brian P. McKeon - Executive Vice President, Chief Financial Officer and Treasurer Jonathan W. Ayers - Chairman, President & Chief Executive Officer.

Ryan S. Daniels - William Blair & Co. LLC Jon Block - Stifel, Nicolaus & Co., Inc. Kevin K. Ellich - Piper Jaffray & Co (Broker) Nicholas M. Jansen - Raymond James & Associates, Inc. Mark Massaro - Canaccord Genuity, Inc..

Good morning, everyone, and welcome to the IDEXX Laboratories Third Quarter 2015 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive 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, further events, or otherwise.

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

In reviewing our third quarter 2015 results, please note all references to growth and organic growth refer to growth compared to the equivalent period in 2014, unless otherwise noted. Also when we refer to normalized organic growth, in addition to adjusting for exchange and acquisitions, we have adjusted for changes in distributor inventory levels.

In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up if 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 questions.

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

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

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

Please note that our adjusted EPS results exclude impacts from a capitalized software impairment charge. As part of our evolved information management strategy, we decided to refine our approach to developing our Practice Intelligence business, and our IDEXX Neo cloud-based information management software offering.

Reprioritization of efforts in this area resulted in a non-cash charge of $8 million or about $0.06 per share in Q3. We'll talk more about the evolution of our information management approach, which is supporting strong revenue gains, later in the call.

As we look forward, we're updating our full year 2015 revenue and adjusted EPS guidance today to reflect our growth current trends as well as some select impacts from foreign exchange changes and updated effective tax rate estimates.

From an operating perspective, while our growth remains strong, we're tracking towards the lower-end of our earlier revenue guidance range for 2015, which had targeted a greater acceleration of growth in the second half.

This outlook has been impacted recently by moderated market growth in Europe and effects from more challenging macroeconomic trends, including currency changes, constrained targeted emerging market gains.

Consisting with this revenue outlook, we're refining our adjusted EPS guidance range for 2015 to $2.04 to $2.07 per share, including approximately $0.03 per share of headwind combined related to recent foreign currency rate changes in emerging markets as well as a 50-basis point higher estimate for our 2015 effective tax rate, reflecting updated regional profit mix projections also impacted by currency effects.

Our 2015 reported EPS outlook will also incorporate the $0.06 per share impact from the software impairment charge. As noted, we'll be reviewing our preliminary guidance for 2016 today, which reflects targeted revenue of $1.715 billion to $1.735 billion and EPS of $2.09 to $2.16 per share.

This outlook reflects expectations for continued solid operating performance, including normalized organic revenue growth of 8% to 9% and constant dollar operating margin improvement of 50 basis points, supporting 13% to 16% constant currency adjusted EPS growth.

As noted in earlier reviews, meaningful FX headwinds will constrain reported financial gains in 2016. 2016 foreign exchange impacts include the lapping of $20 million in 2015 hedge gains, year-on-year effects from the strengthening of the U.S.

dollar on revenue and profit growth and an additional 50-basis point increase in our effective tax rate driven by unfavorable profit mix impacts related to currency changes. Combined, these currency-related effects will lower reported operating margins and reduce 2016 EPS by about $0.21 per share.

We'll discuss these impacts more detail as we review our 2016 preliminary guidance. Let's begin with the review of our Q3 performance by segment and region. Organic growth in Q3 continued to be driven by strong global CAG gains. Global CAG revenues were $344 million, reflecting 14% normalized organic growth.

Our Water business also continued its solid revenue gains, increasing 7% organically to $26 million, reflecting solid existing and new business growth across major regions.

Our Livestock, Poultry and Dairy business revenue was $30 million, up 6%, supported by gains in bovine, poultry and swine testing in Europe and emerging markets, including benefits from our new dairy pregnancy testing products. Overall, U.S. revenues were $252 million in the quarter, up 13% organically. U.S.

gains were supported by very strong instrument revenues and 12% normalized CAG Diagnostic recurring revenue growth, reflecting continued strong growth in reference lab and instrument consumable sales as well as improved growth in rapid assay. IDEXX's performance continues to outpace solid U.S.

veterinary practice market growth as reflected in our dataset from approximately 5,200 clinics. In Q3, this market level data showed patient visits increased 2% and clinic revenues increased 5.2%, each down about 1.5 points from strong H1 market growth trends.

International revenues in the third quarter were $154 million, up 13% on a constant currency basis, driven by strong CAG growth, including the benefits of recent acquisitions. International CAG normalized organic growth was 14%, supported by very strong instrument placements and 9% normalized organic growth in CAG diagnostic recurring revenues.

Recurring CAG growth in Europe moderated in Q3, reflecting relatively softer patient traffic trends, impacted by the economy and unusually hot weather trends this summer. As noted, global instrument revenues were outstanding again this quarter, driving 54% organic growth in instrument revenues to $26 million.

When the approximately $3 million benefit from recognition of differed revenue related to Catalyst One introductory offers is excluded, instrument revenues had Q3 organic growth of 37%.

Strong premium instrument placement trends, including sustained high placement levels at competitive accounts in the U.S., are supporting continued growth of our instrument base globally. Of note, our U.S.

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

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

Consumable growth moderated somewhat from Q2, impacted by relatively lower growth in Europe compared to very strong Q2 levels. We also saw relatively moderated consumable growth in Q3, reflecting carryover impacts from heightened competitor placement activity in our U.S.

customer base in Q4 of 2014 and the first half of 2015, which partially offset benefits from strong new customer placement gains and consistently solid same-store growth trends.

While these effects from earlier competitor instrument placements will carryover and constrain consumable growth somewhat in Q4, our progress in driving continued strong competitive chemistry placements, while improving retention rates at existing Catalyst accounts, will allow us to continue to expand our installed base and position us for improved reported consumable growth dynamics through 2016.

Our reference laboratory and consulting services modality, with revenues of $130 million, grew organically 10% in the second quarter (sic) [third quarter] (10:22), supported by 13% growth in the U.S., which offset moderated lab growth in Europe impacted by unfavorable weather trends, which constrained patient visits.

We're targeting continued strong growth in lab revenues going forward, benefiting from a recently introduced SDMA test and fecal antigen panels. Rapid assay revenues increased 7% normalized in Q3 to $48 million, reflecting volume gains in SNAP 4Dx kits in the U.S., stabilized trends in first-generation products and benefits from U.S. margin capture.

Jon will talk more about dynamics in this area in his comments. Combined information management and digital imaging system revenues increased 13% on a constant currency basis, supported by 9% organic gains and benefits from recent acquisitions.

Our digital business posted modest reported gains despite solid growth in new placements, reflecting increased deferred revenues associated with bundled business commitments.

We achieved 19% constant currency growth in information system revenues, reflecting benefits from our recent cloud-based PIMS acquisitions as well as strong organic growth supported by increased services being adopted by Cornerstone customers, including the expansion of Pet Health Network Pro, as well as new business gains in our Practice Intelligence business.

Looking to build on this strong momentum, we refined elements of our information management strategy to support our enhanced cloud-based offerings and to streamline our approach in expanding our Practice Intelligence business.

We're prioritizing investments in our strategy with the greatest return and have decided to discontinue certain development efforts for future commercialization, which were capitalized but not yet amortized in our P&L. This resulted in an $8 million pre-tax write-down of capitalized software assets.

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

Operating profit was $80 million, excluding the asset impairment. On a comparable basis, excluding this charge, currency changes and prior-year transition impacts associated with the implementation of the U.S. all-direct strategy, operating profits increased 10%.

Operating margins were 19.7%, excluding the impairment charge, better than expected, reflecting benefits from cost management in the quarter. By segment, reported operating profit gains were driven by our CAG and Water businesses.

Our Unallocated segment benefited from lower than budgeted spending in our corporate functions consistent with our cost management focus, as well as benefits from previously capitalized favorable variances, which reflected lower production costs. Gross profit was $224 million in Q3, up 5% on a reported basis.

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

Operating expenses increased 6% in Q3, excluding the software impairment charge, reflecting increases in global commercial capability, including resources added in support of the U.S. all-direct sales model. Reported operating expense growth was moderated by impacts from foreign exchange.

As noted, adjusted EPS, which excludes 2016 impairment charges of $0.06 per share, was $0.54 per share, up 2% from prior-year adjusted EPS or 9% adjusting for currency impacts. Prior-year adjusted EPS reflected adjustments for all-direct non-recurring transition costs of $0.03 per share and $0.02 per share non-recurring income tax benefit.

Adjusted EPS growth benefited from share repurchases advanced over the last year, which reduced average share count year-on-year by about 8%. In Q3, we repurchased 1.2 million shares for $86 million. We ended the quarter with $1.14 billion in debt outstanding.

Our leverage ratios as a multiple of EBITDA, adjusted to exclude transition impacts associated with the all-direct change and the impairment charge, were 2.92 times gross and 2.03 times net of $350 million in cash and investment balances at quarter-end; in line with our long-term target range.

Looking ahead, we're refining our full year 2015 revenue and adjusted EPS outlook as noted to reflect revenue trends at the lower-end of our targeted guidance range as well as to corporate updated estimates for currency impacts in our 2015 effective tax rate.

Our revised 2015 revenue guidance range is $1.595 billion to $1.605 billion; reflecting an outlook for approximately 11% normalized organic revenue growth. We expect continued solid organic revenue growth in Q4, supported by benefits from recent new test introductions, including our recently launched SDMA and fecal antigen tests in reference labs.

At the exchange rates noted in our press release, we estimate the effects from the strengthening of the U.S. dollar will reduce 2015 revenue growth by approximately 6% and adjusted EPS by approximately $0.16 per share.

The projected negative impact from FX changes in 2015 is relatively higher than our previous outlook, reflecting recent erosion in emerging market currencies relative to the dollar.

Our 2015 profit outlook benefits from approximately $20 million in pre-tax foreign currency hedge gains from previously established contracts, which mitigate the 2015 profit impacts from the stronger dollar. This equates to approximately $0.15 per share after-tax EPS benefit.

Our refined 2015 adjusted EPS outlook is $2.04 to $2.07, including a combined $0.03 per share impact from additional FX headwinds since the Q2 call and a higher estimated tax rate of approximately 30.5% for 2015.

On a constant currency basis, the 2015 adjusted EPS outlook equates to 11% to 12% growth above 2014 adjusted EPS levels, which included approximately $0.03 per share benefit from the 2014 extension of the R&D tax credit. Reported EPS is expected to be in the range of $1.98 to $2.01, including the $8 million software impairment charge recorded in Q3.

Aside from our updated effective tax rate estimate, other elements of our full year profit outlook for 2015 are basically consistent with our prior guidance. Please note that our 2015 tax rate and EPS outlook does not assume the further extension of the R&D tax credit, which has been renewed every year since 1997.

Assuming renewal, we would expect an incremental EPS benefit of approximately $0.04 per share this year. We're maintaining our free cash flow outlook at 80% to 90% of net income, incorporating higher working capital levels associated with the U.S.

all-direct transition and expectations for capital spending levels of approximately $100 million this year. As we finished 2015, we have solid growth momentum and a strong innovation pipeline that position us well to deliver continued strong operating performance as we move forward. Today, we're providing preliminary financial guidance for 2016.

Our preliminary outlook is for revenue of $1.715 billion to $1.735 billion, reflecting targeted normalized organic revenue growth of 8% to 9%. Consistent with our strategic plan outlook, we're targeting 50 basis points of operating margin improvement on a constant currency basis in 2016, driven primarily by operating expense leverage.

Please note that this outlook adjusts 2015 for the impairment charge. Strong cash flow generation will support continued capital allocation toward share repurchases, resulting in an estimated reduction of approximately 3.5% in our shares outstanding in 2016.

We expect to maintain gross leverage levels of approximately 3 times EBITDA gross, and expect annual interest expense in the range of $31.5 million to $32.5 million in 2016. These drivers are reflected in our 2016 EPS outlook of $2.09 to $2.16 per share, which equates to 13% to 16% growth in adjusted EPS on a constant currency basis.

Foreign exchange impacts related to the significant strengthening of the U.S. dollar will be a key variable impacting our financial outlook in 2016, given that 25% of IDEXX revenues are related to products manufactured in the U.S. for export.

At the exchange rates outlined in the press release, foreign exchange rate changes will reduce reported year-on-year revenue growth in 2016 by approximately 1% and EPS by approximately $0.04 per share.

As noted, the expiration of previously established hedging contracts, which benefited 2015 results through the recognition of hedge gains that mitigated near-term profit impacts will have the effect of increasing reported cost of goods sold in 2016 by approximately $20 million or about $0.15 per share.

These FX impacts combined create approximately 150 basis points of operating margin pressure, which will offset our targeted 50 basis points in targeted constant currency operating margin improvement in 2016, resulting in a reported reduction in operating margins of approximately 100 basis points next year.

Please note that these comparisons exclude margin impacts related to the impairment charge recorded in Q3. FX changes will also contribute to an increase in our effective tax rate to approximately 31%, net of benefits from ongoing tax planning initiatives, reflecting relatively lower profit mix in international regions with lower effective tax rates.

Combined, we estimate that FX impacts will create approximately $0.21 of EPS headwind in 2016, reducing benefits from our targeted 13% to 16% constant currency growth in adjusted EPS next year. That concludes our financial review. I'll now turn the discussion over to Jon for his comments..

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

In total, we placed 2,424 chemistry and hematology instruments, comprised of 1,325 Catalyst chemistry analyzers, 234 VetTest Chemistry units and 865 premium hematology placements. The premium hematology placement growth of 15% was driven entirely by the higher-end ProCyte analyzer, up 36% year-over-year.

This past quarter was the highest premium instrument placement quarter for IDEXX globally on record, notably exceeding any prior fourth quarter, typically the strongest of the year.

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

Placement numbers were supported by customers augmenting their in-house lab capacity with a second Catalyst, as well as our continuing upgrades of our VetTest customers. International placements of Catalyst and hematology analyzers continue to set record numbers supported by highly successful launches in several Asian markets.

International Catalyst placements at 756 instruments were up an amazing 169% over Q3 last year. Globally, competitive and new customer Catalyst placements were up 53% year-over-year versus Q3 2014. Obviously, it was an exceptional quarter for Catalyst One around the world.

Our rapid assay performance was also very solid in Q3 with normalized revenue growth of 7%, including 6% in the U.S. We saw good growth in our all important U.S. canine vector-borne disease category in Q3 during the fall tick season, as U.S.

SNAP 4DX kit volume growth, that's for in-clinic use, was 6% above last year's third quarter, bringing the volume growth to SNAP 4Dx kits positive year-to-date. Obviously, the revenues were much higher because of the price realization. Our 4Dx offering in the reference lab has also been growing, actually much faster, but on a smaller base.

Our first-generation SNAP volume decline stabilized in Q2 and held steady in Q3 and continued to meet our expectation. We are now winning back as many feline SNAP customers as we are losing, a tribute to our superior accuracy in detecting infectious diseases and our U.S.

commercial organization's ability to spread this important message and compete aggressively in the 2015 environment. We also continue to benefit from higher retention of rapid assay customers with SNAP Pro and SNAPshot Dx instruments. These customers contribute 61% of our U.S. rapid assay revenue base. Our U.S.

lab business also continues to expand at a strong 13%, even though up against the tougher compare in Q3 of 2014, supported by our launch of SDMA. We now have three months of experience with the vertical adoption curve of SDMA in North America. In U.S. alone, we've provided results on about 1 million patient samples from over 12,000 accounts.

This includes 1,600 accounts in the month of September that do not use IDEXX as their primary reference lab.

With North American labs online with SDMA, we are proceeding with the rollout in our international labs, having begun to offer the test with full rollout of the automatic inclusion of SDMA in all chemistry panels to incur in early-2016 in most non-North American labs.

As Brian mentioned, we achieved 19% constant currency growth in information management revenues. The revenue profile has now grown to 64% recurring revenues, up from 56% a year ago.

These recurring revenues, which have high gross margin drop through, include software-as-a-service subscriptions, software maintenance fees and other recurring service and product revenues sold into the information management customer base. Profitability in the information management business is improving over time as a result.

We continue to advance our Cornerstone practice information management software offering, which has a growing installed base of roughly 6,000 practices.

A new version of Cornerstone fully launched in September and under development for more than a year provides further advances in usability, functionality and integration with IDEXX diagnostic solutions. Our portfolio of cloud-based software offerings continues to expand with the launch in September of Neo for the U.S.

Neo is a highly innovative practice management system that follows a SaaS or software-as-a-service business model. We've been advancing Neo for a year, built off a cloud-based offering we acquired in Q4 of 2014.

Neo has acclaimed ease-of-use and core functionality, all in an attractive monthly subscription price and little to no upfront cost to the customer.

As a result, Neo becomes a highly effective cost-effective option for new and smaller practices looking to move to current cloud technology software and not needing the more advanced workflow functionality of Cornerstone.

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

expansion of Neo and growing customer base for all of our cloud-based offerings. As to the product pipeline, we continue to track on the launch – with the launch of SediVue, our novel urine sediment analyzer in early-2016.

This instrument and single-use consumable system provides an entirely new automated and highly accurate way to automate the in-house process of examining urine under a microscope.

We expect an average unit price for the instrument in North America of around the high-teens in thousands of dollars and to place over a thousand analyzers in this market in 2016, although some placements will come through deferred revenue deals.

Each instrument is expected to generate a new stream of consumable revenues averaging $3,000 to $6,000 (28:18) per year for IDEXX. We also expect the novel SediVue instrument to attract customers with competitive in-house lab equipment to IDEXX's integrated in-house lab, including Catalyst One Chemistry Analyzer.

Our fecal SNAP product development continues to track nicely on schedule for a second half 2017 product launch. So, really, in summary, we have solid business trends, and we're now in the position to fully leverage our significantly enhanced U.S.

and international direct sales capability and strong innovation pipeline to deliver continued strong performance, including the solid 8% to 9% normalized organic revenue growth in 2016 that Brian laid out. With this, we'll open the call to questions..

Thank you. We'll go to the line of Ryan Daniels with William Blair. Please go ahead..

it looks like your competitive position is clearly improving, but maybe macro headwinds are increasing a bit more and offsetting some of that, so, anyway that you can talk about growth expectations in the U.S. and O-U.S.

as we look at 2016?.

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

I think, Ryan, a couple of factors heading into next year to keep in mind. I think we'll – the trends that we're seeing in areas like rapid assay and (30:39), we feel great about. We will still be working through some anniversarying of effects of earlier inroads that will carry a bit into next year..

In the U.S..

In the U.S., and I think that combined with some of the moderated trends that we've seen in places – international, some of that's currency driven, oil-based economy driven, I think combined lead us to have an outlook that's more consistent with our current growth rate, knowing that we will be kind of working through that.

But I think our underlying operational foundation, we feel very good about the trajectory and the progress that we're making and, particularly, some of the innovation that we'll be bringing to market next year. So, we'll be looking to build on those growth rates..

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

So, can you go into a little bit more on that dynamic? Is it just a timing issue where the gains have been more recent? So, you've got to lap through that. I guess, still with the 18% improvement in the net base, it seems like a pretty strong growth outlook..

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

So, that's been an upward trajectory.

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

And the net impact of that is in an annuity business that kind of plays in and kind of constrains your growth rate for a period of time, until you kind of work through the anniversarying effect. So net-net, we're expanding, we're growing at very good rates. Some of those impacts constrained our growth.

We'll work through that and anniversary that, and we'll be positioned for improving growth as we move forward..

Ryan, as you know, the consumable growth in any quarter is the cumulative impact of your acquisitions, net of any customer losses for the prior four quarters. And we've had obviously very strong and, in fact, improving customer acquisitions as we laid out in the U.S. in this call.

And we believe we've seen a moderating rate of defections, but that's on a kind of quarterly sequential basis. I think what's really happened here from IDEXX's perspective is that our new U.S.

commercial organization, when you – which is about 300 professionals when you include the different types of field-based reps that are responsible for supporting the customer with diagnostics. That has really been seed – in seed now, in territory, they've gained those relationships, they've gained the experience.

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

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

Thank you. And we'll go to the line of Jon Block with Stifel. Please go ahead..

Great. Thanks, guys. And I want this question to be sort of polite, but maybe I just feel like I'm listening to little bit of a different call than when we were a couple of months ago. And I understand at the Analyst Day, there was a bigger emphasis on long-term and near-term.

But still, you look at where we are today, you're bringing down numbers, you're bringing down numbers for maybe the second time in six or nine months.

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

Thank you..

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

And there has been a little bit of a macroeconomic slowdown, as we mentioned, with visits in Europe. But it's really the currency and the tax impact of the currency, which are the adjustments that we're talking about in 2015.

And Jon, as you know, but I would remind everybody else, this call, the third quarter call in October of the year is when we typically provide guidance for 2016 for the first time. So, our guidance for the 2016 operation, I think, is entirely consistent with the long-term goals that we set.

But I think now what we're providing to investors is an understanding of how currency and tax rate translates into the bottom line..

Okay. And maybe just to follow-up a little bit there, can you talk to the lab – I know the 10.5% organic was off of a difficult comp, but it is the weakest number that we've seen in seven quarters. That's on the heels of SDMA, which you laid out as the biggest launch in the company's history.

And we've done a lot of work there, I get it, nothing changes overnight. But can you talk to, was it in line with your expectations and then tie that back to the 2016 revenue growth, it is 200 – the midpoint of 8.5% is 250 bps below the midpoint of your long-term guidance.

I'm a little surprised by the magnitude of that delta, considering SDMA going into 2016. Thanks guys..

Yeah, thank you. Now, the lab growth in the U.S. market was a very solid 13% off of even a strong compare of 2014. So, that was a very solid number. And, of course, it's really U.S. and Canada we've launched SDMA in July.

We haven't yet launched SDMA internationally and, really, the number – our global lab numbers was brought down by the labs outside the U.S. and the labs were affected by the slower patient traffic and the weather trends in Europe, which brings that number down. But we continue to be – get absolutely positive feedback.

I think the people who – the customers who are using SDMA are finding that it is extraordinarily valuable in the management – the diagnosis and management of their patients. And we have strong key opinion leader support globally for that.

So, we continue to believe that's going to be a significant differentiator and driver for growth for us as we go forward. But, of course, we've got to launch it in the international markets and, I said, that won't happen until early-2016..

Thanks, guys..

Thank you. We will go to the line of Kevin Ellich with Piper Jaffray. Please go ahead..

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

Just 1,600..

1,600, sorry. Thanks for the clarification.

Are you seeing any of these guys switching over and are you seeing – you do believe you're gaining some market share in the reference lab market?.

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

Well, can you break that 13% out between volume or – volume and price?.

It's primarily volume..

Volume? Thanks, Brian. And then....

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

Sure. And then just going to your competitive placements for Catalyst, I think you said it was 268 new competitive account, just wondering how that's tracking relative to your internal expectations.

And can you talk a little bit and give us color on the overall competitive environment? Are vet practices more willing to swap out to Catalyst One and, of your placements, I guess, how many were Cat One versus other instruments? And I guess, what's your general outlook and feel for the market at this point?.

Well, it's always been and I think it will always be a very competitive market. I think our Catalyst One as demonstrated by a success around the world is a – it's a blockbuster product.

It's a very cost-effective way to gain chemistry and it has really – it has capability that no competitive analyzer has in terms of menu, speed, and, of course, supported by information management integration uniquely two-way into the Practice Management software and VetConnect PLUS.

And so, really, what we're seeing, I think, is our sales organization is improving in their ability to tell that story to competitive accounts.

And that's why we've seen a tick-up every quarter over the course of these three quarters of 2015 with the new sales organization placed in competitive placement and an extraordinary number of total placements in the North American market. In addition, I think that the retention rates that we're seeing in our Catalyst installed base are improving.

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

I will also mention that as we launch SediVue, the level of excitement in the customer base on SediVue is off the charts, because it really addresses a need that customers have.

And we believe that SediVue will help us continue with – not only provide a nice revenue stream in and of itself, but can help us continue to inspire customers to upgrade to more advanced technology that we offer with the Catalyst One and the in-house lab.

And that would, of course, happen in 2016 – early – starting in early-2016 with the launch of SediVue..

Great. Thanks..

Thank you. And our next question comes from Nicholas Jansen with Raymond James. Please go ahead..

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

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

Yeah, that's a great question. We stopped – the margin capture effects got so integrated with our business, Nick, we stopped breaking that out. But, roughly, it's probably about a 3% benefit this year, a bit below.

I think we originally had about 3.5%, and I think that reflects the rapid assay grew a little slower than this year than we originally planned. So, I think, 3%, if you reduce the 11% that gets you to 8%. And then, if you're – we've got a 0.5-point benefit from the referral this year, so that would equate to roughly 7.5%.

And so this would be an acceleration – a moderate acceleration, and I think that's reflective of some of the improving trends that we're seeing as well as the benefits from the innovation that we outlined at Analyst Day. And I just want to reinforce that we are going to be working through some of the anniversarying of some earlier impacts.

And I think as we get through that, we will see the benefit of that in terms of the improved retention and how that helps our overall growth rate. So, we remain confident on our ability to drive towards higher growth and feel like we'll be on that trajectory as we work through next year..

Very helpful, Brian.

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

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

And on the margin, these are just areas that are – that had some changes over the last three months that constrain our outlook for the year, although, we actually did pretty well in Q3 top line and bottom line considering..

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

Thank you. We'll go to the line of Mark Massaro with Canaccord Genuity. Please go ahead..

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

At face value, if you could just confirm those numbers are right, it would suggest to me that something might have changed competitively in North America this quarter.

And can you just kind of walk me through if my math is right and what might've changed?.

Yeah. Thank you. I believe the 47% is right, but I will also note that the number of competitive placements in Q3 over Q2 grew 15%, the absolute number. And so, you ask, well, how can the absolute number grow and the percentage went down, well, that's because we did a great job placing Catalyst.

In addition to the 15% growth in new and competitive accounts, we placed Catalyst with our – the remaining VetTest installed base, well, that's certainly getting smaller and smaller. And we also had customers desire a second Catalyst; many of our larger customers who are growing their in-clinic volumes.

And the nice thing about when we place a second Catalyst, we re-up that customer for a new five-year lease, which supports our retention. So, I think it's a good news story all the way around on an absolute basis, growth in competitive placements and on an absolute basis, an extraordinary growth in total placements.

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

Great. And your competitor, last night, talked about two contracts in particular being up for contracts, one in the U.S., one outside the U.S., consisting of multiple hundreds of units of analyzers. I assume that those are your accounts today.

Can you just comment perhaps on some of the moving parts that would go into a deal like this, and could you help us frame what type of impact we might see in out quarters?.

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

Okay, great. And then, last question for me. On the new products, clearly, some of my checks came back positive on the contribution from new products with veterinarians in 2015, but – and I appreciate some of the color you provided on SediVue.

Is there any way you could help us frame maybe a dollar impact? Some of my initial thoughts were maybe up to $40 million for SDMA and $20 million for SediVue.

But can you maybe help us think about how the dollar amounts might trickle in and what you've embedded internally in your guidance for 2016?.

Yeah, a couple of things on the instrument side. Obviously, we're going to be anniversarying very, very strong placements with Catalyst in 2016. So, Catalyst growth won't be contributing to instrument revenue growth in the same way in 2016 as it has in particular this quarter.

But on the other hand, we'll be selling a new instrument SediVue and just to give you a little color of that flavor, we expect to place, certainly, over a thousand analyzers in the North American market in 2016 and the average unit price we expect to be in the high-teens of thousands of dollars.

And then, as those instruments are placed, each instrument over time – once they're placed, we expect to generate $3,000 to $5,000 a year in consumable revenue, so you can run the numbers on. That's North America. Internationally, the launch will be a little later in the year and we'll update you in January when we got better feel for it.

But, obviously, the material number is the North America launch. And as your research, I think, validated similar to ours the response to SediVue is really quite strong and every single customer is a greenfield customer for SediVue because we're replacing a manual method.

On SDMA, again, the SDMA is a differentiator, a strong differentiator for the reference lab over time. As you know, but to remind others, we don't charge incrementally for SDMA in and of itself unless they're just getting it as an individual assay. We have automatically included in the reference lab panel.

So, what we expect SDMA to do will to contribute to stronger – even stronger retention in our reference lab business and new customer acquisition, as well as some modest growth in utilization, because many customers are now telling us they have much stronger case to run, preventative care chemistry on their senior paths, because kidney disease is highly prevalent.

In time one in three cats and one in 10 dogs succumb to the chronic kidney disease, and we've actually demonstrated that with our data of over a million data points now. If you look at it by age, it's tracking this very, very interesting data about how the prevalence of chronic kidney disease progresses with age. That's very compelling information.

But any growth in utilization in the veterinary profession takes time. It's kind of a slow, but long-term growth factor for us..

Thank you..

We have now further questions in queue. I'll turn the conference back to Mr. Ayers for closing remarks..

All right. Well, I want to thank everybody for joining the call and I know we have a number of employees on the call too. I just want to congratulate everybody on the advancements in our business that the team has delivered, the extraordinary rate of innovation that we're bringing, plus what is also in the pipeline.

And big kudos, I don't know who to congratulate more, our U.S. commercial organization or our international commercial teams. They both had really, really strong performance. I think we're really seeing these teams seeded in territory now and really strengthening the relationship.

And when you are direct – and we are direct in not only in North America, but in most developed international countries. There are things that you can do.

You've got more control over your destiny and more opportunity to drive growth then when you don't have that advantage and we're really seeing that mature now in the performance in Q3 and we look forward to continuing have a dialog with investors about how that would translate into financials, which will translate into continuous growth in the shareholder value creation..

Thank you..

With that, we're concluding the call. Thank you..

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