Good morning, everyone, and welcome to the IDEXX Laboratories First Quarter 2013 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer; and Pete Levine, 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. Actual results could differ materially from those indicated by such forward-looking statements. Factors that could cause or contribute to such differences are described in IDEXX's annual report on Form 10-K for the year ended December 31, 2012, in the section captioned Risk Factors, which is on file with the SEC and also available on IDEXX's website, idexx.com. In addition, any forward-looking statements represent IDEXX's expectations only as of today and should not be relied upon as representing the company's expectations as of any subsequent date. The company specifically disclaims any obligation to update or revise any forward-looking statements in the future even if its expectations change. 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. Finally, we plan to end today's call by 10:00 a.m. Eastern. [Operator Instructions] I would now like to turn the conference over to Merilee Raines. Please go ahead.

Good morning, and thank you for joining our call today. As you've seen from our press release, our first quarter revenues of $332.1 million grew on a reported basis and organically by 3%, and fully diluted earnings per share of $0.81 grew 12%. There are a couple of discrete items in earnings noted in our press release. First, the benefit of the reinstatement in early January of the federal R&D tax credit for 2012 is recognized in full in the first quarter and contributes $0.05 to earnings per share. This benefit was anticipated and reflected in our 2013 guidance at the time of our fourth quarter earnings call in January. The second item relates to the recording of a loss reserve of $4.1 million or a $0.05 reduction to earnings per share due to a misappropriation of funds leading to a bankruptcy filing by Trendset, a vendor providing audits and payment services for our North American freight invoices. We became aware of this issue all relating to payment activity in the first quarter in late March. Earnings per share, as adjusted for this item, were $0.85. First quarter organic growth was a couple of points below our thinking in January. At that time, we called for mid-single-digit growth in the first quarter due to difficult year-to-year comparisons for both our Companion Animal offerings due to the unseasonably mild weather in the first quarter last year and result in high patient visits, and our Livestock, Poultry and Dairy business due to episodic testing related to a milk contamination outbreak in China. The lower-than-anticipated growth comes primarily from revenues associated with our placements of capital equipment and to a lesser extent, our reference lab services. And I will provide further details momentarily. Overall, our assessment is that our core diagnostic offerings for…

Thank you, Merilee. Thank you for that and another fine job in describing the quarter. There's a lot of detail there, and we're going to go through some of it in the Q&A. Certainly, we are pleased with our profit performance x items. It was better than our expectations by $0.01 to $0.02. And we really remain fundamentally very enthusiastic about the strategic outlook for the company. Let me make some comments in that regard. The diagnostic portion of the Companion Animal Group and we've referred to this historically as VetLab instrument and consumables, the rapid assay and reference labs lines of business is the single largest, single line at IDEXX. You put them all together, what we call the CAG diagnostics, and it contributes about 75% of the company's revenue. Our product offering provides real and unique medical and economic value to our customers. And within this group, we are doing well internationally, with particularly good growth in Europe despite the economy in that region. Instrument consumable growth globally, which is the most important part of the instrument modality, is right on track with 10% underlying revenue growth in the quarter and a solid forecast to accelerate to 11% to 13% for the full year. This growth is in large part as a result of the quality of our instrument placements and the strong loyalty of our customer base. While the instrument revenues are pulling our growth down for the quarter for various reasons, the objective behind the lower margin instrument revenues is being achieved. That is placements that drive consumable growth. Rapid assay's growth is tracking right ahead of expectations. Reference lab offering is a point or so in growth below our expectations. However, we believe that the market opportunity for lab services is quite significant and our…

[Operator Instructions] And our first question comes from the line of Ryan Daniels with William Blair. Ryan Daniels - William Blair & Company L.L.C., Research Division: The first question, let me focus on some of the changes you're making in the field sales force. It appears that, that's something that could be a big long term positive. But in the near term, are you actually pulling some of your reps out of service for a while to do the training on the areas that they were not representing before? And if so, is that kind of accounted for in your growth outlook going forward?

Oh, yes, but it's very -- it's a week of intensive training and for example, we accomplished it in the first week of April for our reps. It's really nothing out of the norm and it is fully accounted for in our numbers. Ryan Daniels - William Blair & Company L.L.C., Research Division: And as we think of your organic growth guidance, how much of that is driven at this point by increased quotas or expectations that the sales force will drive a ramp in the second half versus some of the other innovations you've made and some of your other product launch objectives? Just trying to get a feel for how dependent you are on this working for your growth.

Again, Brian -- Ryan, that's a great question. It really isn't -- there isn't any increased quotas. We have -- we're assuming a continued productivity of the sales force. But the upside and, of course, it'll take time to determine exactly when that upside is going to happen and a lot of that upside will be adding -- having customers add other diagnostic modalities from what they already use at IDEXX, given that, it's interesting, majority of our customers actually don't use all of our diagnostic modalities. They only use some of them. So the answer to your question is, we don't have any upside associated with this change in the forecast. And clearly, that's a possibility. It's hard to predict when that will happen. We are confident it will happen, and it'll be a sustained long term but it will start happening in Q3 or Q4, or will that really drive 2014 growth. None of that's in our guidance for the year. Ryan Daniels - William Blair & Company L.L.C., Research Division: Okay. And then one quick follow-up and I'll hop off. Just as you think about the realignment in the field sales force, is it really moving more towards a consulting-type role where you're working less to just push your product sales versus showing the value of integration and how to drive overall practice revenues, and how that can manifest by using more of your diagnostics?

That is exactly what is happening and one of the benefits. What's interesting is instead of coming with a point of view, which the specialized reps came with, we're coming with, what is the customer's need and how do they want to grow their practice and what do they want to achieve and what role does -- do the in-house modalities of instruments, consumables and our rapid assay kits and what role does the reference lab play in helping them grow that. Now, obviously, we believe there are some best practices out there like Real-Time Care, but there are other best practices like using the broad menu that's available both on the in-house and even more particularly in the reference lab to gain deeper insight and then there are best practices associated looking at all the diagnostic history on a patient over time. This organization allows us to have those far deeper conversations and including things like integration than previously, in part because the reps are going to be able to establish a deeper relationship. They're going to be calling on these customers, on average, once every 4, 5 weeks, which is far different than what we had historically. And with customers who are already full IDEXX Diagnostic Advantage customers, meaning that they're already using all the parts and therefore, we're full partners with them, we can have a conversation about how to grow their practice. And we've got a lot of different tools already that have been fully in the portfolio to help them do so. And the customers are really resonating with that conversation.

Our next question comes from the line of Jon Block with Stifel, Nicolaus. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Jon and Merilee, you gave many reasons for the reacceleration of revenue growth throughout 2013, which was very helpful. But can you talk to what, if any, expectations there are for share losses to this called the altered distribution either in chemistry or rapid as we enter the back part of the year? I mean, what are you guys building into the internal plans over the next several quarters?

Yes, thank you. We've been carefully monitoring the situation with the new distribution arrangement that we have with one of our national distributors. And we are very pleased by the way with the performance of all of our distributors in the new -- in 2013. In particular, we're pleased with our nonexclusive distributor, which actually had a growth of IDEXX diagnostics that was higher than average for all distributors, which is -- really shows that I think we've retained the engagement of all our distributors in supporting our customers in adopting our innovations. And so as we monitor this very carefully, we don't see any share loss and quite frankly, we don't expect any share loss. And the reason is because we've got, historically, great loyalty with our customer base. We've executed very well. And we just look at the numbers for the instrument consumables and the rapid assay growth. And even without the change in our sales structure, we would expect that to continue. But one of the big benefits we believe of this transformation and being much more customer-centric is that we will have even higher loyalty of our customer base because we're going to be calling on them every 5 weeks and supporting them, including our existing customer base. So we haven't seen any evidence. And I think it's because -- what is the real thing here? Distributors are valued partners, but they're really supplemental. The primary role here is for IDEXX to grow the business and the distributors play a helpful secondary role. But they're not a primary driver of new instrument placements or the medical messenger, things like that, that we do. So we really don't really see this as a very big change and of course, it does also give us the opportunity to take some of the savings with the change in margin to reinvest in our sales organization and grow the number of feet on the street, as I mentioned in the opening comments. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: Right. That's very helpful. And maybe just a follow-up on that sales change. The timing is interesting. In other words, can you phrase it for us whether you view it as offensive as you've got Pet Health Pro, you've got VetConnect PLUS, you've got stuff that maybe if you're pushing can really lead to better utilization if you highlight those benefits to your customer base or again, just the timing, I mean, one quarter into an alter distribution agreement? Is it somewhat defensive in nature that you've got to spend more time in front of your customers, you've got to increase the times that you're calling on them because you've now got a nationwide distributor that's not exclusive from exclusive?

Yes, I see it as really a way to step up our presence in customers, I guess, if I have to pick between the 2 in an offensive way, but I think it's a natural outgrowth of our strategy now in the diagnostic lines that what we're providing is highly relevant medical information that's really in large degree, common across the in-house and reference lab modalities. And it's so apparent when all that information is fed into VetConnect PLUS. And so we really see this sales transformation is -- we're in a perfect position to be able to do this because it's aligned with our overall strategy. And so we're quite enthusiastic. This is in no way I think related to the change in distribution. It made sense as the evolution of our product line became more and more integrated. And it's just coincident now that it happens to happen with this change of distribution, which we really see as a pretty small factor as we look at our commercial and channel strategy in the U.S. We're recognizing -- by the way, we're making the same change in Canada and that has no change in -- there's nothing changed in the distribution side in Canada and yet, we see the same opportunity. And in fact, we've already made this change in some of our countries outside the U.S., which helped us inform both the benefits of the change and how to make the change. And so it's really been an evolution of IDEXX that is independent and coincident with the large focus investors have had on the changes in U.S. distribution. Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division: One last quick one, if for no other reason to point it at Merilee and say, "Marilee, thanks for your help throughout the years." But just a quick one, lower revenues, I think you talked about gross margins up 50 bps, OpEx will be hit by 100 bps. I wasn't clear if that was a function of the bankruptcy. In other words, you're netting out largely the same on EPS after all the adjustments. Can you talk to how that's possible with what I just laid out to you, accelerating the share repo or does that OpEx up 100 bps factor in the bankruptcy?

Well, first, thanks for your well wishes. And I would say with the operating expenses, that really -- the increase of 100 basis points versus January is largely due to the fact that of lower revenues and spending staying relatively on par. And Trendset has an impact in the first quarter, but over the full year, it's a very minimal impact to the OpEx percentage. And so what we do see going on are a couple of things in the couple of pennies that we have related to business performance that we've reduced the high end of our range by about $0.02 related to business performance. So as you'd indicated, we do have...

Have an increase to low end.

And we've raised the low end by $0.02. So but the -- with regard the $0.02 at the high end, that is really a netting of we have some favorability, higher favorability than previously anticipated due to a lower share count and a somewhat lower tax rate and then that is offset by a reduction in operating profits due to the lower organic revenue growth guidance that we provided.

Your next question comes from the line of David Clair with Piper Jaffray.

First one for me, I was just curious given the commentary on decelerating vet market growth, vet patient growth in the quarter. I was just hoping you could maybe give us some details on what your expectations are from a macro perspective for North America and Europe included in the guidance.

Yes. Well our really -- our expectation going into the year was that there wouldn't be much improvement in the economy over the trends we had seen in 2012. Every quarter can have its own story. I think first quarter was particularly impacted by weather, but I think that's not a fundamental secular issue. I think that was an issue within the quarter. So our outlook is modest growth in the profession, similar to what we had in 2012. But of course, we did want to give commentary on the quarter.

Okay. And then...

And I'm just -- to answer your question on Europe, Europe is a lot of different economies as it turns out. But overall, we're not counting on much going on economically in Europe and yet, Europe is also, for us, Eastern Europe and Middle East, Africa, I mean, we've got a number of emerging markets in there. And so overall, we're actually pretty -- we're pretty optimistic about our opportunity in Europe. Don't ask me about Italy, for example, but that's just one country in a whole portfolio of countries there. So we're -- we have some core successes in big countries and in emerging markets.

Okay. And then you mentioned expectations for less than 5% sales force turnover as a result of the changes that you're implementing. Just curious, was there any turnover following the first 20% conversion that you did in April?

Well, the 5% is the total. What we did, to be clear, is as a result of all this planning. We told the sales force about all the new territories, okay? So everybody knows how they're affected, whether they're in the new territory in April or they're new in their new territory in July or they have to move to be in the new territory. And so we've had -- already have all the conversations with all of our sales reps, and we know for those that have -- it's basically those that have to move, for those who have to move, which ones are willing to move to a new territory and which one that's that not going to be possible. And we sorted all that out in entirety. We believe it's less than 5%, pretty good metrics on that.

Good. And the hematology business, so what's the strategy to reaccelerate growth there? And I'm sorry I missed it, what were the chemistry placements up in North America in the quarter?

Let me just -- while Merilee gets the chemistry -- the hematology. We have a -- we really have a unique hematology line between ProCyte and LaserCyte, particularly with the new LaserCyte Dx. And I think it's -- so really, if this is not a product issue, it's -- in the U.S., I think we really focused on chemistry placements in Q1, and really exceeded our expectations in the quality and the quantity. And the quality of placements, as measured by the size of accounts and the number in the new accounts to IDEXX and all that. I think with this new IDEXX diagnostics sales structure, hematology, we will be able to have the ability to talk to customers about the importance of hematology, in-house hematology, as part of having a full diagnostic portfolio. And let's recognize that while -- while chemistry has always been, for quite some time, highly penetrated in veterinary practices. Not the same for hematology. There's not the same -- it's well penetrated, but it's not, by any means, fully penetrated. And so there's greenfield opportunity in hematology and I think with this new structure, we're going to have a better chance to be able to talk to customers about the role that we'll play in growing the practice.

And David, I just wanted to get back on your question about chemistry placements in North American in the first quarter. They were -- the total placements were down about 5%. This was actually below what we have projected for a decline. We projected to be closer to 10%. And the reason we were projecting a decline is that the protocol-based rebate programs that we had launched in the back half of 2011. So -- and really in Q3 2011, we saw a very strong placement growth for those, not only in the back half of 2011, but also into the first quarter of 2012. And then the program, the impact started to tail off. So we did anticipate somewhat of a difficult compare for chemistry placements in the first quarter of this year for North America.

Okay. Then just one quick last one before I ask this, thanks for all your help over the years, Merilee. But can you give us an update on how the new CFO search is going?

Yes, let me cover that. We are actively recruiting. I think we're going to -- we're recruiting primarily outside candidates and although we have a very -- Merilee does lead a very strong second level team of finance within IDEXX, which is going to serve us well. As we continue the recruitment, we've talked to a number of very strong candidates and yet with any recruitment, it's not over until someone has signed and ready to come. So it's a very active process and we're confident we're going to have a great addition on -- to fill that role, just as we achieved in the recruitment of our General Counsel, which we announced a couple of weeks ago. Jeff Fiarman, who will be joining us next week. So we're excited about his arrival.

And our next question comes from the line of Erin Wilson with Bank of America Merrill Lynch.

Can you quantify or comment anecdotally how much price realization the new lab in Germany and going direct to Nordic countries is actually contributing to your new organic growth guidance range and what sort of underlying fundamental utilization trends you are assuming?

Let me just comment on Nordic. Nordic has 2 factors, which are driving that greater than 35% growth. One is go direct, but we're also seeing good volumes and we're seeing a pickup in volumes. And remember that, that number includes the portion that we've previously gone through a distributor as well as the lab services, which had always been direct. So that was a Companion Animal Group diagnostic numbers that included the mix and despite the fact that only part of that went from distributor direct and the other part was direct all along, we've seen that good growth is because of both the price and volume and the response to customers by having our direct sales organization there.

Erin, I would say with those initiatives and remembering that they're going to continue to gain momentum over a number of quarters, those are contributing probably somewhere in the neighborhood of $5 million to $10 million in total growth for the year. So they're a small portion of the many different contributors we have to grow for the year.

Okay, that's helpful. And then as it relates to the sales force transformation, I know you've spoken to a lot of the questions there. But how should we, I guess, think about the quarterly progression of incremental costs associated with that? And has this sales force change been in development or in your kind of thought process over several years? Or has this been something that's more new?

Well, I would say that we have thought about this type of change for a long time. And have evaluated it versus our prior, more specialized strategies. So this was something that we've thought about for a long time. I think what we realized though was with the introduction of VetConnect PLUS, it became so apparent that we have -- to the customer and to our sales and to our sales force, to everybody that it really is a common diagnostic offering supported by multiple modalities. That really tipped the scale to the benefits of this structure versus the benefits of the prior structure. In addition, as we talked to our customers and we talked to our sales organization, this was something that -- and we consider it the change. This was something that they were very positive on. I mean, they were -- this was a -- in large part, it really came from the field. And so of course, you don't undertake a change like this without a lot of consideration and then a lot of planning. And so we've been in the planning stage on this for almost a year and then in very detailed implementation of it for the last 6 months. It's like a product launch, if you will. And I'll tell you, I am just extremely pleased by the role that our Jay Mazelsky, our Executive Vice President, supported by Johnny Powers and our entire North American commercial organization. They've worked really hard to make this a success because they all know it's the right thing to do. So I hope that answers your question.

Yes. No, it does.

And your next question comes from the line of Jeff Frelick from Canaccord Genuity.

Jon, just to be clear on the changes with the sales force, just really curious on how you're going to measure and manage this. Is this really looking at each territory and what their growth is? You're looking at other reps adding new customers. I'm just curious how that ties into the sales comp and if you can share anything on the comp plan, that'd be helpful as well.

Yes, ultimately -- that's a great question, Jeff. Thank you for that. The great thing about this new structure is that I think we'll have real ownership by our sales professionals in their territory for the growth of IDEXX diagnostics. And that's going to help in, really, the 3 drivers of growth, which is adding modality and having a customer add a modality that they did not have before. So moving to our reference lab, maybe they had our in-house, but they didn't have a reference lab or maybe they had our reference lab and they didn't have the in-house. That's a big driver of growth. Ensuring customer loyalty by supporting them and then driving growth in utilization of their diagnostics from IDEXX by things like preventive care and other protocols that really help advance the standard of care that the hospital's practicing and achieving their mission. So adding modalities, ensuring high loyalty and growth in utilization. This is -- this rep is going to be able to drive growth through all 3 of those. Now, obviously, there are specific elements to that and what isn't going to change is that we fully expect -- in fact, we see opportunity that, we did not -- were not fully taking advantage of before in that the majority of our customers, you just take the in-house instruments and the reference labs. It's pretty surprising that the majority of our customers use one but not both. You would think that it would be more difficult to get them to use the first than it would be to fill out the portfolio with the full IDEXX Diagnostic Advantage. And yet, that's in fact what we've done. We've done with our specialized sales force the work of getting a lot of customers to use 1 of those 2 modalities and of course, most of our customers use our rapid assays in some fashion. And now with this new structure, we will have the opportunity to fill out. And so that's going to, I think, be a significant long-term opportunity for growth, very aligned with our strategy of providing highly relevant medical information through our diagnostic modalities.

And our last question comes from the line of Ross Taylor with CL King. Ross Taylor - CL King & Associates, Inc., Research Division: You all have answered a lot already, but I'll just list 2 or 3 very quick questions, if I could, and answer as time permits. But I wonder if you could review again some of the reasons that your expectations for hematology placements had come down over the course of this year. And closely related to that, I just wondered if you could comment on how ProCyte placements have been developing compared to your expectations? And the final question I had was VetConnect PLUS, now that it's -- it's been out there for a few more months and in more accounts. Just whether you could give any incremental color as to how that might be having an impact on customer retention and maybe even on new customer wins as well.

Good, thank you. Those are great questions. With regard to hematology, I think one of the things that hematology does for us is, it helps us gain or grow an account that is using our in-house instrument modality. And one of the things that ProCyte has done for us is allow us to bring accounts for both hematology and chemistry because they see the highly differentiated value of ProCyte, both medically and in terms of workflow. I mean, there's really just nothing like it. And so -- but the issue with hematology indeed, all instrument placement is there is an upfront cost and there's a lot of -- a lot more consumable volume that comes with a chemistry placement 4, 5x than there is a hematology placement. So we've rightly focused on the chemistry side, but we see hematology as an important supplementary element to the growth strategy. And so I think it's reflective of that. Merilee, do you have more comments on hematology before I turn to the VetConnect PLUS question?

Again, part of the bringing the growth down, Ross, is obviously, a function of the growth in the first quarter was off from what we had expected, so we a bit had expected kind of a mid-single-digit placement growth, and so with the number that we reported, that's a piece of it. We also see and project that we're going to have some very nice acceleration in growth internationally. And we think there's just a lot of opportunity there. But I think we just want to be a little bit more conservative about that growth prospect outside the U.S. as well.

And then to your question -- again, thank you for the question. On VetConnect PLUS, we were pleased to see continued, very significant growth in the number of customers who've activated VetConnect PLUS up to 6,700 from 4,500 at our last call. So continuing at the same pace it did in the first 2 quarters of its introduction. And I think what is even really now more profound is that our customers, the key opinion leaders, our sales organization, our medical, our professional service veterinarians, they're all -- the introduction of Pet Health Network Pro and the benefit of sharing medical information and diagnostic information with pet owners, the trend towards preventative care that's been a big theme of independent groups such as the American Animal Hospital Association is that we're beginning to see the realization about how profound a change it is when you have access to a patient's diagnostic information in a value-added, electronic way through VetConnect PLUS and the ability to analyze, to share with the pet owner electronically and directly in the exam and also through email or other ways of electronically sharing. So much easier to do that. And then the insight about really what this is doing to profoundly change the standard of care that can be practiced in veterinary medicine, that is a much larger kind of thing. And that doesn't happen overnight. But what we've seen is over this quarter is, I think, for example, in particular, our sales organization really got how to have that conversation with customers and how that helps the customers meet the needs they see in their practice to provide client value and to make -- to continue to help their practice be relevant in this world that we live in, where you have online pharmacies and…

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