Brian P. McKeon - IDEXX Laboratories, Inc. Jonathan W. Ayers - IDEXX Laboratories, Inc..

Erin Wright - Credit Suisse Securities (USA) LLC Ryan S. Daniels - William Blair & Co. LLC Jon Block - Stifel, Nicolaus & Co., Inc. Anne Edelstein - Bank of America Merrill Lynch Nicholas M. Jansen - Raymond James & Associates, Inc. Mark Anthony Massaro - Canaccord Genuity, Inc. David Westenberg - C.L. King & Associates, Inc..

Good morning and welcome to the IDEXX Laboratories Fourth Quarter 2016 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Kerry Bennett, Vice President, Investor Relations.

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

Listeners are reminded that 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, 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 fourth quarter 2016 results, please note all references to growth and organic growth refer to growth compared to the equivalent period in 2015, unless otherwise noted. In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one and with one follow-up if necessary.

We appreciate you may have additional questions, so please feel free to get back in the queue and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon..

Thank you and good morning everyone. I'm pleased to take you through our fourth-quarter and full-year 2016 results and to provide an update on our financial outlook for 2017. We had very strong results in Q4 which concluded a year of exceptional financial performance for IDEXX in 2016.

We achieved 12% organic revenue growth in the fourth quarter supported by 13% growth in CAG Diagnostic recurring revenues and continued strong gains in premium instrument placements supported by the expansion of SediVue, which contributed about 2% to overall revenue growth.

Our full-year organic revenue growth was 11.4%, about 3% above our original 2016 growth goal entering the year. These results were supported by 12% organic gains in CAG Diagnostic recurring revenues reflecting strong double-digit growth in both US and International markets.

Our full-year EPS was $2.44 above the high end of our guidance range, reflecting strong topline results and operating margin gains. In 2016 we achieved a 19.7% operating margin, a 170 basis point increase on an adjusted constant currency basis, reflecting solid gross margin gains and significant operating expense leverage.

EPS grew 25% on an adjusted constant currency basis in 2016, well above our long-term financial goals. Our operating trends position us well to deliver strong constant currency revenue and EPS growth in 2017 consistent with our long-term goals. We'll provide an update on our 2017 guidance later in the call.

Let's begin with a review of our fourth quarter and full-year 2016 results beginning with an overview of regional performance. We achieved strong organic growth in US and International regions in the fourth quarter driven by continued momentum in expanding our Companion Animal business. US revenues were $268 million in the quarter, up 12% organically.

Gains were driven by continued strong premium instrument placements and 12% organic growth in CAG Diagnostic recurring revenues reflecting our strongest quarterly US growth performance in 2016 in this important annuity revenue stream.

US recurring revenue gains were supported by continued strong double-digit growth in reference labs, accelerated double-digit consumable gains and solid growth in rapid assay sales. US CAG recurring diagnostic price gains continued to trend in the 2% to 3% range with the bulk of our growth driven by volume.

IDEXX's performance significantly outpaced solid US veterinary practice market growth in Q4, reflected in our data set from – about 5,200 clinics. In Q4 patient visits increased 1.4% and clinic revenues increased 5.6% compared to the prior year period, somewhat similar to Q2 and Q3 market growth trends.

For the full year, US revenues reached $1.09 billion driven by over $1 billion in US CAG revenues, a significant milestone for the company. We achieved US organic growth of 11% in 2016 driven by an increase of 11% in US CAG, supported by 10% CAG Diagnostic recurring revenue gains and strong growth in premium instrument placements.

Instrument revenues in Q4 were $175 million up 11% organically. International results were driven by 16% organic gains in CAG Diagnostic recurring revenues reflecting continued strong consumable gains supported by our expanding Catalyst instrument base.

International revenues reached $686 million for the full-year or 39% of total IDEXX revenues reflecting organic gains of 12%. For the full-year international CAG revenues reached $506 million up 16% organically.

International CAG Diagnostic recurring revenues also increase 16% organically for the year reflecting strong double-digit growth across Europe, Asia-Pacific and Latin American regions. Overall international gains were moderated by modest growth in our international LPD business.

Turning to segment performance our Q4 results benefited from strong premium instrument placements reflecting global expansion of our Catalyst instrument base and continued strong momentum with SediVue. Global instrument revenues for IDEXX were at $35 million, up 24% organically supported by 15% growth in premium instrument placements.

Globally we've placed 1,493 catalysts, 1,128 premium hematology analyzers, and 546 SediVues in the first quarter. Catalyst and premium hematology placements were down modestly compared to very strong prior-year levels which included benefits from nearly 200 second Catalyst placements in the U.S. related to our successful customer retention programs.

In North America we have placed 524 Catalysts in Q4 with 347 or 66% at competitive or greenfield accounts consistent with our commercial focus. Catalyst retention rates remain very high at 98%. The U.S. Catalyst consumable revenue now represents 98% of total chemistry consumable revenues excluding corporate accounts.

International instrument placement performance continues to be very strong reflected in 1,783 premium instrument placements including our initial placements of SediVue in the U.K. and Australia.

For the full-year, we placed 5,198 Catalysts, 3,699 premium hematology analyzers, and 1,575 SediVues globally; nearly 10,500 premium instrument placements in total representing growth of 21%. Strong instrument placement trends supported continued global expansion of our instrument base. We ended 2016 with an active install base of 24,500 Catalysts.

Our install Catalyst instrument base increased 23% globally in 2016 supported by 11% year-on-year growth in the U.S. and 40% gains in international markets. In fact our international Catalyst base is now nearly as large as our U.S. Catalyst base.

Global expansion of our premium instrument base sets the foundation for continued strong gains in CAG Diagnostic recurring revenues. In Q4 global CAG Diagnostic revenues were $312 million up 13% organically. For the full year of 2016 CAG Diagnostic recurring revenues reached nearly $1.3 billion or 72% of total IDEXX revenue.

CAG recurring annuity growth reflected strong gains across modalities reflecting the multiplier effect of strong premium instrument placements, benefits from new test innovation and excellent execution by our global commercial organizations.

Reference laboratory and consulting services with revenues of $141 million grew 13% organically in the fourth quarter supported by 13% organic gains in both U.S. and international markets.

Instrument consumable revenues of $115 million in Q4 grew 18% organically supported by continued very strong gains in international markets and accelerated double-digit growth in the U.S. including building benefits from the expansion of SediVue.

Rapid assay revenues increased 6% organically in Q4 to $42 million supported by continued solid gains in SNAP 4Dx and stabilized volume trends in first-generation products.

Livestock poultry and dairy revenue of $33 million declined modestly in Q4, as solid gains in recurring revenues supported by emerging-market expansion and growth of our pregnancy platform were offset by declines in bovine disease eradication testing in Europe and lower health herd screening revenues.

For the full-year our LPD revenues were $126 million, up 1% organically. For 2017, we are planning for flat to modest growth in LPD overall as we continue to work through pressures from year-on-year comparisons in these select product lines. Our water business revenues grew 3% organically in the fourth quarter.

As expected we saw moderation in our Q4 growth reflecting impacts from channel inventory adjustments in advance of a go-direct initiative in Brazil as well as lapping of strong prior-year sales associated with the launch of our Quanti-Tray Sealer PLUS product and the crypto outbreak in the U.K.

For the full-year water business revenues increased $104 million, up 9% organically. We're very pleased with our momentum in the water business and we believe we're on track for continued high single digit organic revenue gains in this highly profitable business in 2017.

Turning to the P&L, gross profit was $241 million in Q4, up 11% on a reported basis. Adjusted for foreign exchange impacts including the lapping of $6 million in prior-year foreign exchange hedge gains gross margins increased 90 basis points, reflecting solid net price gains and volume leverage from strong consumable and reference lab growth.

Foreign exchange hedge gains reported in gross profit were $2 million in Q4. For the full-year 2016, foreign exchange hedge gains were $4 million or a benefit of about $0.03 per share. Operating profit in Q4 was $84 million, up 25% as reported reflecting an increase of 35% on a constant currency basis.

Operating profit results benefited from strong revenue gains and operating expense leverage. Operating expenses in Q4 were up 3% driven by investment in sales and marketing resources and enabling information technology.

Q4 expense growth was lower than projected reflecting timing of select head count additions and benefits from favorable year-on-year accrual comparisons.

For the full year operating profit was $350 million, this reflects an operating margin of 19.7% or an increase of 170 basis points on a constant currency basis compared to 2015 levels adjusted to exclude the prior year software impairment charge.

This very strong full-year result reflected about 40 basis points of constant currency gross margin gains and 130 basis points of benefits from operating expense leverage reflecting our strong topline performance and high returns from global sales and marketing investments. EPS in Q4 was $0.58 per share.

For 2016, adjusted EPS was $2.44 up 19% as reported and 25% on a comparable constant currency basis, adjusted to exclude the impacts from the 2015 software impairment charge.

For the full year foreign exchange rate changes reduced revenue growth by less than 1% and operating profit by $24 million primarily reflecting the lapping of $21 million in 2015 hedge gains. Combined with tax rate impacts, foreign exchange created a $0.20 per share headwind to full-year 2016 reported EPS results.

Free cash flow was $284 million for 2016 or 128% of net income. This very strong performance reflected benefits from strong working capital management including a $30 million reduction in inventory from relatively higher 2015 ending levels and improvements in DSO.

We also benefited from controlled capital spending timing, including favorable impacts from timing of investments which resulted in full-year capital spending of $65 million or 3.7% of revenues. Our cash flow performance in 2016 builds on strong long-term trends for the Company reflecting the strength of our business model and focus.

Of note, over the last five years free cash flow has averaged 102% of net income including effects related to our transition to a fully direct commercial model in the U.S. Our strong cash flows and continued positive business momentum supported allocation of $225 million in capital towards share repurchases in Q4.

In the quarter, we repurchased 2 million shares. This brought our full year repurchase levels to nearly 3.1 million shares reflecting a deployment of $313 million in 2016 at an average price of $102 per share. We ended 2016 with $1.207 billion in debt outstanding.

At year end, we had $392 million in cash and investment balances, and $238 million of borrowing capacity available under our revolving credit facility. Our leverage ratios as a multiple of EBITDA were 2.7 times gross and 1.8 times net of cash and investment balances at year end.

We anticipate maintaining gross leverage ratios in the 2.5 times to 3.0 times range in 2017 with continued deployment of excess cash flow towards share repurchases. Our solid finish to 2016 positions us well to deliver continued strong constant currency revenue and profit growth in 2017 consistent with our long-term goals.

In terms of organic revenue growth, we're maintaining our outlook for 9% to 10.5% gains in 2017. This results in consistent reported revenue guidance of $1.910 billion to $1.935 billion as benefits from strong final Q4 performance were offset by updated rate assumptions for foreign exchange which are reflected in our press release.

Overall, at the new assumed FX rates we project that our reported revenue growth will be reduced by 1.5% in 2017 related to the year-on-year strengthening of the U.S. dollar.

Our strong revenue growth outlook is supported by expectations for 10.5% to 11.5% organic growth in CAG Diagnostic recurring revenues driven by double-digit gains in reference lab and consumable revenues and continued solid growth in rapid assay.

While we're targeting continued high level of premium instrument placements year-on-year growth in instrument revenues will moderate compared to very strong 2016 performance.

Today we're raising our 2017 EPS outlook to $2.85 to $3.01, an increase of $0.08 per share to reflect approximately $0.07 per share in flow-through benefits from strong 2016 operating profit performance and $0.04 of benefit from updated estimates related to the implementation of new accounting guidance related to employee stock-based compensation.

These positive factors offset about $0.03 of additional EPS headwind related to our updated FX estimates.

As noted in our last earnings call under the new accounting guidance, tax benefits from the exercise of stock-based compensation which have been reflected in cash flows will be treated as a reduction in reported income taxes in the P&L going forward rather than as an equity adjustment.

In addition we will no longer assume that the tax benefit is used to repurchase shares in our diluted EPS calculation. Based on analysis of vesting stock option grants and historical exercise activity, we now estimate that implementation of this new guidance will increase 2017 EPS by $0.12 to $0.16 to per share.

This reflects a projected reduction of 350 to 450 basis points in IDEXX's 2017 effective tax rate offset by projected reduction in shares outstanding from estimated share repurchases of about 50 basis points. Incorporating these new estimates our preliminary outlook for our 2017 effective tax rate is 26% to 27.5% assuming no change in U.S.

corporate tax policy. Our outlook for share count in 2017 is for a reduction in average shares outstanding from continued stock repurchases of about 1.5% net of the 0.5% accounting impact noted. This is a relatively higher benefit than estimated in our preliminary guidance reflecting share repurchases in Q4.

As noted we expect to maintain our gross leverage levels at 2.5 to 3 times EBITDA in 2017 resulting in projected net interest expense of $32 million to $33 million. Foreign exchange impacts related to the strengthening of the U.S. dollar will continue to be a variable impacting our financial performance in 2017.

We've updated our financial outlook to reflect more recent exchange rates, which have weakened relative to dollars since we issued our preliminary guidance.

At the updated exchange rates, outlined in our press release, we estimate that foreign exchange rates will reduce our reported year-on-year revenue growth in 2017 by about 1.5% and EPS by about $0.06 per share net of approximately $7 million in currently projected hedge gains. We estimate that a 1% change in value of the U.S.

dollar relative to foreign currencies will result in a $7 million-change in 2017 revenue and a $2 million-change in 2017 operating profit net of hedges. Please note this sensitivity is on a full-year basis. Without the hedges the full year operating profit sensitivity would be about $3 million.

Adjusting for benefits from the new accounting guidance and foreign exchange impacts our EPS outlook is consistent with our long-term goals of 15% to 20% constant currency EPS growth.

This outlook reflects a targeted 70 basis point year-on-year improvement in operating margins on a reported basis, net of modest headwinds associated with year-on-year FX changes. This is also consistent with our long-term target of 50 to 100 basis points of annual constant currency operating margin improvement.

Free cash flow is projected at about 95% of net income for 2017. Note that the implementation of the new accounting guidance for stock-based compensation which raises reported net income but has no impact on cash flow will reduce this metric by about 5% going forward. So this equates to about 100% of net income under previous GAAP.

Our 2017 outlook reflects projected capital spending of $90 million. In terms of our first quarter outlook in 2017, we expect Q1 reported revenue growth in the 8.5% to 10% range reflecting organic gains of 10% to 11% offset by 1% to 1.5% of FX headwind.

While we'll be facing some tougher growth comparisons related to a very strong prior-year first quarter which included benefits from leap year, we will be benefited from solid momentum heading into the year and expect to see year-on-year upside from SediVue instrument revenues in Q1.

Recall that we didn't start shipping SediVues until last year's second quarter. Year-on-year operating margin in Q1 is expected to be about 50 basis points up compared to reported 2016 Q1 levels.

That concludes the financial overview, let me turn the call over to Jon for his comments on our business performance and our areas of focus heading into 2017..

Thank you, Brian. It was indeed an exceptional Q4 completion to an exceptional 2016. Our strategy is all about enduring growth supported by a growing global market for pet healthcare combined with a combination of continuous improvement and continuously strengthening customer relationships.

The year 2016 showed the potential we have with the strategy completing a year of 11.4% organic growth driven by 12% in organic growth of CAG Diagnostics recurring revenue, which comprises of 72% of the Company's total revenue.

Of note Q4 for this recurring metric was a bit over 13% organically the highest growth for the four quarters of the year showing the momentum we are sustaining in the business model.

We're seeing the benefits of world-class sales and marketing in our global markets coming on the heels of a series of investments we have made over the last several years to position ourselves with a direct presence in our markets. Our International Companion Animal commercial organization had a phenomenal year in 2016.

International Companion Animal Diagnostic recurring revenue grew 16% led by the over 20% growth in VetLab instrument consumables. Clearly, our 2016 recurring revenue growth is benefiting from a strong number of Catalyst One placements for the past two years.

And yet we're still early days for Catalyst One penetration internationally even as we embark on the SediVue launch in global markets. We launched SediVue in the U.K. and in Australia in Q4 2016, commencing an international launch that will roll out over the course of 2017.

Our Reference Labs also grew 13% organically internationally where we're seeing the benefits of SDMA and other investments in our global Reference Lab network. This solid volume led growth contributed also to the expansion of our global lab gross margins, a metric where we see opportunity for years to come. Focusing on the U.S.

companion animal market, we're also delivering impressive revenue growth. A combination of our new innovations and expanded presence with customers is not only growing our share of customers who use IDEXX as their diagnostic partner, but also the growing the market for diagnostics through increased customer utilization. Clearly with U.S.

companion animal recurring revenue diagnostics showing full year growth in double-digits the strength of our fully direct model is proving out. Looking back on 2016, our U.S. field sales and support organization made over 250,000 in-person visits with veterinary practices, or an average of approximately 10 visits for every practice in the U.S.

This kind of frequency is what builds enduring trust and our ability to support practices growing utilization of our advanced diagnostics in providing high quality care. We also had very high occupancy rate in our veterinary diagnostic consultant territories, which is so important for consistent customer presence.

This occupancy rate averaged 99.5% over the course of the year, world-class levels of territory occupancy. Our research on U.S. customer satisfaction with IDEXX shows a strong trajectory in 2016 over prior years, further validated by an independent study of industry sales force effectiveness where IDEXX really stood out.

In 2017, we plan to continue to augment and deepen our U.S. field sales and service presence, while at the same time achieving operating expense leverage. We can do both because of the rates of recurring revenue growth. We see the outcomes of our 2016 U.S. and Canadian sales coverage in a number of areas. Let me just list a few.

First, continued strong performance in placements and chemistry analyzers and new and competitive accounts nearly 1,200 for the full-year. Second, placements of over 1,500 SediVue instruments, an entirely new instrument launched in 2016 that generates a novel recurring revenue annuity.

Third, an all-time record number of placements of digital radiography units in Q4. And speaking of digital radiography, we have reached almost 1,500 customer subscribers with our cloud-based digital software called IDEXX-PACS which is only one of five of our subscription-based SaaS offerings.

Loyalty and retention metrics across all CAG Diagnostic recurring revenue modalities improved every quarter in 2016. Low customer churn is one of the most important performance metrics for our recurring revenue model. We also continue to grow our U.S.

reference lab customer count or the number of practices that sent at least one sample to us during a six-month period. Two years ago before we started the journey to an expanded field sales organization that came with the U.S. fully direct implementation our customer count was about 58% of U.S. practices.

And while this is an impressive level of penetration, it has since grown to 65% at the end of 2016. Clearly our strategy of covering the market with dedicated veterinary diagnostic consultants and offering expanded and unique menu of tests is expanding our reference lab presence in the market.

Once a customer has used IDEXX for any of their reference lab needs, our sales representatives can work to expand that utilization to more diagnostic categories with the goal of eventually becoming the customers' primary or sole reference lab provider.

While the most visible innovation we have added to the reference labs is with SDMA we also have several other areas of unique innovation including our fecal antigen test to find more intestinal worms not otherwise diagnosed and offerings in cardiac, molecular diagnosis, pancreatitis and several other categories of differentiated menu.

Speaking of SDMA we are targeting an end of year launch for SDMA on Catalyst. Our market research shows extremely strong interest among our Catalyst customers with over 90% of surveyed Catalyst customers saying IDEXX was necessary on their Catalyst and two thirds likely to purchase.

We will be offering SDMA for customer, for Catalyst customers in two forms. As a single slide that they can add together with a chemistry panel in a single run or in a combo kit with our T4 slide again to run with the chemistry panel in a single run as customers do with our T4 single slide today.

I'm very excited to announce that for practices that are buying the T4 slide today for the Catalyst they can add the SDMA slide in a combo kit at no incremental costs to the T4 slide. This offer is highly relevant.

To-date two thirds of our US Catalyst customers already use the T4 slide and T4 is an essential diagnostic marker for thyroid disease, a major concern in both the dog and the cat.

If customers want to run SDMA as part of the chemistry panel that does not include T4 the SDMA slide pricing will be akin to adding an additional single slide to a Catalyst panel today in a way that is designed to encourage adoption and also augmenting VetLab recurring revenue per Catalyst installation.

We often get the question, will our introduction of SDMA in-house cannibalize, if you will, our reference lab volumes and the answer is quite the opposite. Testing always begets testing. In addition, we have a number of customers who use us for in-house testing around the world but don't use IDEXX for their send out testing.

To summarize on SDMA, customer appreciation for this remarkable addition to the chemistry panel is growing every quarter.

We believe the launch of SDMA on a slide will lead to a relatively rapid ramp to adoption by our Catalyst customer base, increase loyalty, generate incremental revenue from utilization, not impact our reference lab volumes and yet perhaps most importantly, introduce SDMA to a whole new segment of customers who don't yet use our reference labs for chemistry profiles.

We find that once a customer experiences the benefit of SDMA in their practice with a specific patient and thus seeing better outcomes they realize they don't want to run chemistry panels without it whether in-house or sending out. We are bringing a number of other innovations to the market in 2017, let me just update on three.

First for our SediVue customers later this quarter we will update their instrument software using a second-generation algorithm that benefits from the 14 million images we received in the IDEXX cloud since the launch of SediVue.

A reminder to investors, all of our SediVue customers are connected to IDEXX through the Internet sort of an Internet of Things strategy, if you will, using our proprietary SmartService technology.

These 14 million images are 30 times the roughly 450,000 images we used to develop the first generation of the algorithm and will further advance the capabilities of the algorithm and the customer experience with SediVue. This is one of the most profound and unique advantages of our instrument business model.

We can use big data, sourced from the field and machine learning to continually advance capabilities of an instrument such as SediVue DX and then automatically upgrade the instruments in the field in the background through SmartService. In this way the platform for existing and new customers just gets better and better with time and more big data.

Second, we have launched the PROREAD software update for SNAP Pro. PRORREAD allows SNAP Pro to automatically interpret results for all SNAP tests. We see increased loyalty to our rapid assay lines when customers adopt SNAP Pro into their workflow which supports continued growth of this diagnostic modality.

Third, our unique cloud-based VetConnect PLUS offering continues to gain adoption even as it grows in capabilities for our customers. We saw over 25% growth in engaged customers in 2016 to well over 14,000 globally and total connected customers with VetConnect PLUS is over 32,000.

We see growing views of radiographs through VetConnect PLUS and growth in VetConnect PLUS usage across all modalities, web, mobile and within the practice management software. Our VetConnect PLUS functionality and geographic coverage continues to grow as a result of continuous investment in this unique global cloud platform.

Note that we find that active VetConnect PLUS customers exhibit meaningfully higher loyalty for diagnostic recurring revenue. Our Company is executing well on all key dimensions and while 2016 was indeed an exceptional year for IDEXX what I'm most excited about is the opportunity that we have in front of us.

People love their pets the world over and want to take good care of them. Diagnostics as an essential part of the care equation with the pet are way underutilized in practice and at IDEXX we are all about enhancing the health and well-being of pets, people and livestock. We see great potential to continue to expand our global markets.

I want to conclude by saying how grateful I am for the hard work and accomplishments in 2016 of our over 7,000 employees worldwide who pursue this purpose. And so, Cynthia, with that, we'll open the call to questions..

Thank you. [Operating Instructions] and our first question will come from the line of Erin Wright with Credit Suisse. Your line is open..

Hey. Thanks for taking my questions, Jon, Brian.

Can you speak a little bit to the competitive positioning of SediVue? How has the feedback been in the field so far and has there been any sort of surprises in terms of consumables utilization, just sort of what's incorporated in your 2017 guidance in terms of placement trends, the revenue contributions? Should we expect some sort of promotional activity around NAVC? Thanks..

Well, thank you for the question. Yeah, we're very excited with SediVue which is a whole new category of urine diagnostics and – so obviously a very, very successful launch and momentum. We will be continuing that in 2017. We don't really see any change in the utilization per instrument.

We continue to believe it will be around $3000 to $4500 per year in very, very profitable recurring revenue per instrument installation. As I mentioned, we'll be updating the algorithm, but that won't be the last update, this instrument will continually get better.

I think what I would just step back to say is that, urine has a ton of diagnostic insight and historically while vets appreciated that, they were kind of hesitant to run urine because it was – there wasn't really a great way to do it. In-house it took a lot of tech time, 20 minutes, send it out to the reference lab, the urine changes.

It's not as accurate. Everybody knows that. So it's kind of a between a rock and a hard place. And SediVue changes that. So long-term we really see urine as a growing diagnostic category.

In practice that is significantly underutilized in relation to bloodwork, chemistry and hematology, which itself is underutilized in relation to what I'd say the current standards of care would suggest. So I just think there's a lot of momentum and of course our field sales force is going to be continuing with that in 2017..

And Erin, I'd just add that our outlook for 2017, we expect or targeting placements of 2,000 or more globally for SediVue. So obviously that's building on the strong momentum we had in the U.S. and we should be seeing additional benefits from our expansion internationally..

Right. We just really started the launch at the tail end of the quarter in the U.K. and Australia outside of North America and we'll be rolling it out over the rest of the major markets over the course of 2017 outside of North America..

Okay. Great.

And I understand you don't want to comment on specific relationships like Banfield, NVA but I have to ask and broadly speaking how are your corporate relationships progressing? Are there any changes in your relationships, I guess, anticipated in 2017 particularly given the WOOF transaction and also are you placing SediVues into corporate accounts? Thanks..

Yeah. Thank you for those questions. We have outstanding relationships with all of our corporate accounts and continue to grow our presence in corporate accounts and so I think that is reflected in our expectations for the year.

We don't really see any fundamental change with the transaction that was announced earlier this year it's a very competitive market, it will continue to be a competitive market. We have an outstanding relationship with the entities that make up Mars in their veterinary business.

And I would also just say that with regard to corporate accounts in general, what we see is actually the interest starts at the field – the interest starts in practices where they say, hey, this would really help our workflow and then corporate accounts we're always working at multiple levels..

Thank you. Our next question will come from the line of Ryan Daniels with William Blair. Your line is open..

Yeah. Good morning, guys. Thanks for taking the question. First one, just based on my math. It looks like the delta between your CAG recurring revenue growth and the industry growth you're tracking expanded quite a bit in the fourth quarter more than we normally would see.

And I'm curious if there's anything in particular maybe it's a residual effect of the instrument placement starting to really come through but anything you would highlight that starting to try that delta between you and the industry data..

Well, I think we report global numbers of course right so we've got I think Jon highlighted that in international markets we had over 20% growth in consumable revenues and I think that's reflective of our efforts to expand the industry and the huge placement opportunities that we see – we've highlighted strategically.

We think there is a 100,000 Catalyst placement opportunities globally and we've placed over 5,000 Catalyst incrementally this year. So we took steps towards that big opportunity but we see a lot of runway to continue and that's supporting the higher growth.

In the US, we've seen accelerating gains through the year and that's a combination of the Catalyst gains and we're starting to see some of the benefits of SediVue blowing into the consumable growth rate and that will be something that will support us moving forward.

So, basically really strong sales and marketing execution globally, the benefits of the expanding Catalyst platform, and our ongoing test innovation..

Yeah I would just add obviously very strong customer loyalty that is added to adding new customers. But the other thing, Ryan is, we're growing the category of diagnostics through innovation.

For example, the SediVue that we just talked about, that's a whole novel element that previously wasn't part of the category if you will in any meaningful way; a very small supply or something of no consequence.

But we're also growing in places like fecal antigen, SDMA is, people are now more, have a stronger case to do preventative care when SDMA is a part of the chemistry panel because now they can actually find diseases, not just chronic kidney disease, but other diseases that have a secondary impact of injuring the kidney and thus SDMA coming up.

And SDMA thus becomes a flag for something like a urinary tract infection, latent kidney stones or something like that. And of course that generates even more diagnostic revenue because you have reflex testing.

So these are all kind of what we think are long-term secular trends that we are able to drive as a combination of bringing novel tests and innovation to the market and of course having a strong presence with our customers, so that we can educate and support them in the growing utilization..

Okay, helpful color. And then Brian you highlighted this a bit but one follow-up on CapEx, I think, for 2016 came in quite a bit below your target, and you're looking for about 40% year-over-year growth next year, is that just timing and then if so anything in particular that caused that and that will drive the uptick next year? Thanks..

It largely is timing. I think we basically had a pretty favorable year 2016 that was 3.7% of revenue....

Down from 50% the year before..

I think longer term we've indicated we expect spending more in the 4% to 5% range and that's basically consistent with what we see in 2017..

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

Great, guys, good morning. I've got two. I'd say with that quarter, I am not going to, move on. I am not going to bug you about leverage. I will go in another direction and focus on international. Just, Jon, anything to slow down the international momentum, I guess what I'm grappling what is – you seem to have a lot of runway with Catalyst One, SDMA.

SediVue is just first starting to gain traction.

So maybe if you can just compare and contrast sort of the runway with innovation versus the various end markets, and if you are seeing or hearing about any pockets of strength or weakness in the different geographies?.

Yeah. Thank you. It's obviously people love their pets the world over and you mentioned some of the major innovations of that we're bringing. Interesting just on on SDMA, many markets, particularly – many markets in Europe interestingly are – they are more medically centric.

And so SDMA is actually getting faster, if you will, pick up and sort of adoption and appreciation in those markets. Maybe it's because they're doing just sick animal testing, they don't do as much preventative care.

For whatever reason the medical centricity is actually supporting the quicker appreciation for SDMA than we see in say the North American markets. You mentioned SediVue DX, I mean, we really haven't begun the launch of SediVue DX it's not reflected in the 2016 numbers and of course SediVue is a profitable category.

Not only for the obviously the recurring revenues and we'll be running – we'll be rolling out the pay-per-view – pay-per-run model globally as we have in North America but the instrument placement is also higher profit than our typical instrument placement.

And just as a reminder, we've made a series of investments including go-direct and strengthening our commercial organizations in markets such as Europe. In China we're very focused on the in-house market.

In Brazil, people love their pets, in Brazil, and dress them very nicely but they don't have a full appreciation that veterinary care is also part of that an equation and so that's an attractive growth market. Even though the Brazil economy is nothing that you would crow about, our business in Brazil is doing really well.

We've opened a reference lab in São Paulo and of course we're very focused on the in-house business and it's also an attractive market for the LPD business. And so it's interesting that we're seeing good growth in these markets that are in what I would call varied and not as, not always very exciting general economic areas..

Okay.

Okay, very helpful and then Brian I'll just ask you about sort of the unknown of tax reform, and just your thoughts at a high level of would IDEXX be a potential net beneficiary with some of the plans at least being thrown around or discussed in Washington and maybe just from a COGS perspective if you could just comment on your manufacturing around the world and sort of net imported versus exported.

Thanks guys..

Yeah. I think that's the big theme that you just noted at the end of your question, Jon, which is we are very much an exporter. We have over 20% of products that we sell in international currencies in foreign markets.

We either manufacture or source here in the U.S., we have a large manufacturing capability here in Maine, which we are very proud of and look to expand. And we do very limited actually production overseas that is sold into the US market. It's very selective.

So I think it's hard to predict where tax reform will go, we're looking forward to that, but I think that the theme in a lot of the discussions are things that would help exporters and improve I think the climate for business.

And, we're looking forward to more clarity on that front, but hopefully we'd be a net beneficiary if things go in that direction..

Yeah. Jon, just I just want to give a big shout out to our Westbrook-based manufacturing. We are very proud that the Catalyst was designed and manufactured here in Maine and the prior instrument, the VetTest, which is obviously about 30 years old – 25 years old vintage. That was not actually manufactured in the U.S.

So we moved the manufacturing of our chemistry analyzer from outside the U.S. to the U.S. with the transition to Catalyst. And so one of our many proud accomplishments here in Maine obviously, we're going to be – we manufactured the T4 slide here in Maine.

We manufacture the – we'll be manufacturing the SDMA slide in our Georgia facility, it's where the electrolyte slides are manufactured, our core chemistry panels are manufactured for us in Rochester, New York. So, yeah that's one of the reasons why we're a very significant net exporter..

Got it. A lot of color. Thanks, guys..

Thank you. Our next question comes from the line of Derik de Bruin with Bank of America. Your line is open..

Hi, this is Anne Edelstein on for Derik, thanks for taking the question. A couple of broader market questions. First, did you provide a full-year same sales store gross estimate and just wondering if you think that given the expected uptick in U.S.

discretionary spending, where you think that that growth can go in 2017, specifically if it can breach the long-standing high single digit growth bar?.

Yeah. Thank you for that. We didn't provide a specific outlook for 2017. Obviously we reported the data comes from over 5,000 practices of all different kinds and all different softwares each quarter. So you can see that we're typically in the 6% revenue growth on a same-store sales basis..

That's about what it was for the full year..

Yeah, for the full year 2016 – that's at the customer level not at our level. And so I think what's embedded in our outlook is really similar in 2017 kind of hard thing to forecast but we don't really see any reason to change. Our first quarter will – we did have the benefit. It was a very strong quarter last year.

Brian mentioned leap year, but it was also a – that was a very favorable weather and since we haven't finished the fourth – first quarter this year from a weather point of view that's always a – that can effect practice visits if people can't get to the practice from a weather point of view though.

And, so that's a favorable compare that we have to – but we – people love their pets and one of the things we've said and observed is that while baby boomers were real big driver of the growth in pet care, they seem to have passed on to millennials an even stronger love for their pets and millennials keep – prioritize even higher than baby boomers their pets and making trade-offs to take care of their pets..

Thanks for the commentary.

And then another question on your livestock business, I understand that's a small revenue base but the lower herd screening revenue, is that something seasonal or are you seeing a fundamental change in that business?.

Well, that's a number, the herd health screening, is a number that can move up and down. I wouldn't call it seasonal. I'd just say it's the propensity of exports from one country to another to ebb and flow. And so it's a pretty small number but it does create a little bit of year to year volatility in the LPD growth rate..

Fair enough. Thanks..

Thank you. Our next will come from the line of Nick Jansen with Raymond James. Your line is open..

Hey, guys. Congrats on a strong finish to the year. Two questions; first on the margin expansion that you saw in the fourth quarter and pretty much all year.

I think you've kind of talked about every quarter, if I go back to the transcripts, that you kind of delayed some expenses or expenses were a little bit lower than what you were thinking and I am just trying to get a better sense of why can't the significant constant currency margin improvement you saw in 2016 not be delivered similarly in 2017, particularly if consumables and recurring revenue is – should be accelerating amidst the premium placement launches that we saw or placement that we saw in 2016.

Thanks..

Yeah. We are planning for continued operating margin expansion and operating expense leverage in 2017. So that's factored into our outlook. It's at the midpoint of our longer-term goal. And, so I think we are intending to build and we did flow through the strong operating performance in 2016.

So we're building on top of the progress that we made this year. I think in terms of this year we – I'm sorry last year, 2016 – we clearly had very good revenue growth at the higher end of our goals. We were full three points above our original growth goals for the year.

So I think we entered the year with a series of investment plans based on a level of growth that we significantly exceeded and that helps us to deliver relatively more operating expense leverage and we're clearly getting a great return from the sales and marketing investments that we made.

In fact that was the biggest area of leverage that we took advantage of this year, this past year.

So we always have variations in terms of like when we actually execute hires and things like that that may change quarter to quarter, but I think the longer-term theme here is, we believe we can grow at very healthy rates and continue to get leverage out of our model while we're investing towards the significant long-term growth potential we see in the business..

Yeah. Just to add with what Brian said, we've seen high ROI on incremental absolute OpEx and – so we're going to continue to double down and grow in our – that because that helps drive organic growth of very profitable revenues which then translates into areas of gross margin and allows us to achieve some operating expense leverage.

So, that's one of the benefits of enduring growth model that we can both simultaneously make investments and achieve both gross margin and operating expense leverage..

Thanks for that and then secondly on SDMA, largely today it's free for most customers who are your existing kind of reference lab users adding to the kind of normal chemistry panel.

And then you said today that you're adding it to Catalyst by the end of 4Q and two-thirds of your Catalyst customers already use T4 and you're going to be giving it away for free within the T4 as well with no incremental cost.

So I'm just trying to better understand how we go from the revenue today of SDMA to the $200 million that we're hoping for by 2021 in context of a lot of this being added without incremental revenues. So, just maybe better understand maybe the price levers that you're pulling to drive that figure. Thanks..

Yeah. Thank you for highlighting that and it's an area that's really exciting for us. Of course, what SDMA does is it grows the entire diagnostic modality. We get higher customer retention than we otherwise would have. It allows us to attract new customers to the reference lab modality.

It allows us to achieve maybe modestly higher price realization and utilization.

What we're doing is we're estimating what the incremental impact is on SDMA in all those categories and none of that is direct, if you will, revenue from SDMA itself, because just to rephrase what you said, we're adding it at no incremental charge if they bought a chemistry panel from IDEXX in the reference lab.

And we are adding it at no incremental charge on in-house if they're already buying the T4 slide. And, what we see though is that we'll probably have greater T4 SDMA utilization per customer than we would have had T4 standalone.

And, of course if they are just wanting to add SDMA to the panel and not T4 we would suggest they should want to run T4 because actually our big data just recently showed that one in seven dogs, regardless of age, across the entire age cohort, has a low T4 rating which would suggest a thyroid or other disease that needs to be further investigated.

I mean that's healthy dogs. That's not sick dogs. That's healthy dogs. Can you imagine, if you had a disease, you would have a one in seven chance of getting it, that you might want to get tested for that. And it's one in 10 cats.

So we would recommend that they run the – that's kind of the case for T4, but then we've got a great case for SDMA, so why don't you just run the two together and add it to your profile.

But if they ran SDMA without T4 then of course that is going to be incremental revenue on top of all those other sources which will support the modality growth in the modality revenues of instrument consumables and then give more customers exposure to the value of SDMA.

What we find is when SDMA has, provides clear information they would not have otherwise gotten, they act on it and they see different patient outcomes they realize how important it is to have SDMA as part of the core chemistry panel.

And so we're adding a whole new class of customers who wouldn't have had that experience once we launch SDMA on a slide..

Super helpful. Thanks, Jon. Congrats..

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

Hey, guys, great quarter and thanks for taking my questions. The first one is on SediVue and would love to just get a little bit more clarity around – you launched it, I believe, April of last year.

Now that you have three quarters in the books can you speak to customer level feedback and then can you also speak to the number of tests per day per box that maybe some people initially were running and are running now? Has there been any lift and can you speak to utilization of SediVue and the early install base?.

Yes. Well, thank you. It's roughly, they're roughly running one a day. And that's what gets us plus or minus and that's what gets us to the $3,000 to $4,500 per year in recurring revenue on a SediVue placement. That is way underutilized but that is what we've seen in the first nine months. Still obviously very, very early days.

I think as customers continue to appreciate the value of urinalysis, we would hope for that to grow but that's going to be a long-term trend. That's not going to be a short-term trend as all trends on growing utilization in diagnostics are in veterinary medicine.

But I think customers are very excited about adding urine to the category and we're only at 1,500 out of 25,000 plus customers in the U.S. so we've got a lot of runway..

Excellent. And it's really hard to poke holes in your quarter and especially given the fact that you posted your strongest quarter in the U.S. in Q4 relative to any other and you did it in a period where the same-store Cornerstone volumes increased 1.4%.

It's a little bit lighter than we've seen earlier in the year and Jon, you called out Q1 was certainly helped by weather. But as we think about 2017 same-store volumes do you think you can get back to that maybe 2% same-store volume level and just maybe speak to the drivers around some of the moving parts? Thank you..

Yeah. Just one quick correction. So that 5,200 practice is not just Cornerstone. It's – we get data from all different practice, four, five different practice, it's very representative to the market. And so I think it's pretty good data; 5,200 observations of real data is pretty good data.

Look you know the Q4 – the revenue growth in the practice is what, 5.8%. So that was a – that trend data can bounce around; you look for the average of the year was higher than that. I don't think there's anything in particular that would suggest that that is the start of some kind of trend.

And we are providing on our website that historical information in graphical form so I might point you and investors to that. Thank you and thank you for your kind comments..

Thank you. Okay..

Thank you. Our final questions will come from the line of David Westenberg from CL King. Your line is open..

Hey, guys thanks for taking my question. So I will keep it short, since it's already been an hour, so – you highlighted the strong consumables versus instruments on a go forward basis, but you didn't necessarily highlight that in the margins.

Is that already reflected in the guidance update for this quarter or is there a possible upside to some of the margins with that? And then, there's kind of a second part to that, and that is, if there is some upside in that and you have any maybe updates or puts and takes that could change the outlook from that 50 to 100 basis point long-term margin expansion, operating margin expansion goal?.

We're comfortable with that outlook. I think the growth in our recurring revenue base is a positive dynamic on margins and if we continue to grow at strong rates that's helpful as well both on gross margins and operating expense. We do intend to continue to invest towards the long-term growth opportunity.

Jon highlighted some aspects of that today in the call in talking about the sales and marketing investments we want to continue to make globally which are yielding very high returns.

So we're comfortable with delivering on that balance and it reflects if you look at our EPS outlook for 2017, normalized for foreign exchange and for the accounting guidance change, it's right in-line with the 15% to 20% that we said we were targeting delivering and we look forward to having another great year in line with our long-term goals..

Perfect and I am looking forward to seeing you guys at NAVC..

Thank you..

Yeah. Great. Same here. Appreciate the questions..

And I think with that we are going to conclude the call. We appreciate everybody calling in. I also just want to reiterate my huge thanks to the 7,000 plus IDEXXers around the world who come in every day to pursue our purpose of enhancing the health and well-being of pets, people and livestock.

And it's just gratifying to see and to be able to report and to be able to represent the outcome of their efforts with investors as we wrap up 2016 and move into 2017. And, we're definitely looking forward to an exciting new year in 2017. And with that, we'll conclude the call..

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