IDEXX Laboratories, Inc. (IDXX) Q2 2015 Earnings Report, Transcript and Summary

Good morning, everyone, and welcome to the IDEXX Laboratories Second 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 measures are provided in our earnings release, which can be found on our website, IDEXX.com. In reviewing our second 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 in 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 Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Thanks. Good morning, everyone. Today, I'll take you through our second quarter results and discuss our outlook for full-year performance and Jon will follow with his comments and observations. We had solid results in Q2 supported by consistent organic revenue gains in line with our expectations. In terms of highlights, our second quarter revenues were $413 million, up 6% on a reported basis. Foreign exchange changes over last year resulted in a 7% year-on-year reduction in reported growth and lower operating profits by $7 million or about $0.05 per share, net of hedge benefits. Despite these impacts, we delivered EPS results of $0.60 per share in Q2, up 9% on a reported basis or 18% year-on-year adjusting for FX changes. Results were supported by consistent 11% normalized organic revenue growth and better-than-expected operating margins. Instrument placements were very strong in the quarter. Worldwide premium placements increased 37% reflecting 44% growth in Catalyst instruments and 30% growth in premium hematology. Overall, we placed approximately 2,400 chemistry and hematology instruments in total in the quarter and we are on track to significantly exceed our global placement goals for this year. John will talk more about this progress in his comments. Recurring CAG Diagnostic revenues grew 14% organically in the second quarter or 13% when normalized for prior year changes in distributor inventories. These results were in line with our expectations supported by continued strong growth in reference lab and VetLab consumable revenues in U.S. and international markets. Based on our Q2 performance, we are maintaining a consistent financial outlook for the full year. We will walk through our full-year guidance in more detail later in my comments. In discussing our results and outlook today, we will focusing on our overall revenue growth including margin capture benefits associated with our transition to a fully direct sales model in the U.S. Our original estimates of incremental annual revenue from this change were in the range of $50 million to $55 million for 2015. We now estimate these benefits will be approximately $45 million, factoring in our updated revenue growth projections and estimated net impacts from a range of customer service enhancements we've implemented along with the all-direct change, including free next day shipping and a new return policy for expired product. Given that this change is now fully integrated to our business operations and reporting, we will no longer be estimating the discrete impact of margin capture on specific growth rates. Let's begin with a review of our Q2 performance by segment and region. Organic growth in Q2 continued to be driven by strong global CAG gains. Global CAG revenues were $352 million, reflecting 13% normalized organic growth. Our Water business also continued its solid revenue gains, increasing 8% organically to $25 million, reflecting strong existing and new business growth across major regions. Our Livestock, Poultry and Dairy business revenue was $32 million, down modestly as solid gains in Europe, North America and China were offset by tough comparisons to high prior year growth in Australian livestock and poultry testing. Overall, U.S. revenues were $254 million in the growth, up 13 % organically. U.S. gains were supported by strong instrument revenues and 12% normalized CAG Diagnostic recurring revenue growth reflecting continued strong growth in reference lab and instrument consumable sales. IDEXX performance continues to outpace solid U.S. market growth, reflected in our broadened market growth data set from approximately 5,200 clinics. In Q2, this market level data showed patient visits increased 3.7% and clinic revenues increased 6.5%, in line with improved Q1 market growth. International revenues in the second quarter were $159 million, up 12% on a constant currency basis. International normalized organic growth was over 11% supported by 13% normalized organic gains in CAG Diagnostic recurring revenues, reflecting continued strong gains across major regions. As noted, global instrument placements were outstanding in the quarter, driving 38% organic growth in instrument revenues to $24 million, including approximately 16% of growth benefit from recognition of deferred revenue related to Catalyst One introductory offers. Strong global placement gains set a foundation for continued strong growth in CAG Diagnostic recurring revenues. Global CAG Diagnostic recurring revenues were $300 million in Q2, up 14% organically or 13% normalized. Instrument consumable revenues of $101 million grew 19% normalized in Q2, supported by strong global volume gains and net benefits from U.S. margin capture. Continued strong premium instrument placements and high penetration of competitive and greenfield accounts are supporting a continued expansion of our instrument base in U.S. and international markets. In the U.S., our growing Catalyst installed base now drives approximately 95% of our consumable revenues exclusive of corporate accounts. Our reference laboratory and consulting services modality with revenues of $133 million grew organically 12% in the second quarter, supported by strong double-digit volume-driven gains in the U.S. We expect continued strong growth in lab revenues going forward as we leverage our expanded commercial capability and capture benefits from our significantly enhanced and highly differentiated test menu, including recently introduced SDMA and fecal antigen panels. Rapid assay revenues increased 3% normalized in Q2 to $52 million, consistent with our expectations. Benefits from margin capture and continued strong growth in specialty test offset expected declines in first-generation products and anticipated carryover impacts from first quarter stocking programs. Overall, volumes for 4Dx Test increased year to date as strong growth in lab tests more than offset slight volume declines in clinic. Jon will talk more talk about dynamics in this area in his comments. Overall Information Management and Digital Imaging System revenues increased 5% supported by 2% organic gains and benefits from recent acquisitions. Information System's revenues increased slightly reflecting growing recurring revenues from an expanded installed base including growth in Pet Health Network Pro. We successfully advanced our transition towards a subscription-based software-as-a-service model and practice management. As noted in our last call, this transition will moderate near-term revenue growth reflecting the evolution from a license sale driven revenue model to a subscription based model that will provide a powerful foundation for accelerated, highly profitable growth moving forward. Information Management gains were offset by declines in digital business revenues in the quarter impacted by increased levels at deferred revenue deals associated with bundled business commitments and near-term impacts associated with the alignment of new territory sales accountabilities. Turning to our P&L review, we delivered strong financial performance in the quarter despite continued FX headwinds. Operating profit was 88 million, up 6%. Excluding currency impacts operating profits increased 13%. Operating margins of 21% were in line with prior year levels and better than expected, primarily reflected timing and management of operating expenses in the quarter. Gross profit was $233 million in Q2, up 7% on a reported basis. Gross profit margins increased modestly benefiting from lower product and royalty costs as well as net favorable margin impacts from foreign exchange reflecting benefits from hedge gains. Foreign exchange hedge gains reported in gross profit were $5 million or $0.04 per share in Q2. Operating expenses increased 7% in Q2 reflecting planned 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, EPS was $0.60 per share, up 9% on a reported basis and 18% adjusted for currency impacts. EPS growth benefited from share repurchases advanced over the last year which reduced average share account year-on-year by 9%. In Q2, repurchased 1,415,000 shares adjusted for our recent two-for-one stock split for $92 million. We ended Q2 with approximately 1.1 billion in debt outstanding including a new €90 million10-year fixed 1.785% debt issuance funded in June. Our leverage ratios as a multiple of EBITDA adjusted to exclude transition impacts associated with the all-direct change were 2.9 times gross and 2.0 times net of $344 million and cash and investment balances at quarter end, in line with our long-term target leverage range. Looking ahead, we're maintaining our full-year outlook which includes expectations for higher second half revenue growth supported by our innovation pipeline. We're maintaining our 2015 revenue guidance range at $1.60 billion to $1.62 billion reflecting our outlook for 12% to 13% normalized organic revenue growth. This reflects expectations for higher expected revenue growth in the second half associated with benefits from our recently launched SDMA and fecal antigen tests in reference labs, our Total T4 slide for Catalyst Dx and a new SNAP test for leptospirosis. We also expect growth benefits from relatively more favorable comparisons in the second half in select areas including lapping of Q4 2014 programs in support of the U.S. direct transition. At the exchange rate shown in our press release, we estimate that effects in the strengthening of the U.S. dollar will reduce full-year revenue growth by about 6% and adjusted EPS by an estimated $0.13 per share. Please note that our 2015 profit outlook benefits from about $21 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 about $0.16 per share in after-tax EPS benefit. At current rates and timing of hedge contracts, we will not have the benefit of these hedge gains in 2016. Our 2015 EPS outlook is $2.07 to $2.12, which is consistent with our prior outlook adjusted for a recent two-for-one stock split. On a constant currency basis, this equates to 11% to 13% growth over 2014 adjusted EPS levels which included about $0.03 per share benefit from the extension of the R&D tax credit. Other elements of our full-year profit outlook are basically consistent with our prior guidance including expectations for an effective tax rate of about 30%. Please note that our 2015 tax rate 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 also 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 consistent expectations for capital spending levels of about $100 million this year, driven in part by capacity expansion in our labs business and in our manufacturing operations in support of business growth. For Q3, we expect a 1% to 2% improvement in our normalized organic growth rate, reflecting benefits from new product introductions and a favorable expected normalization benefit related to prior-year distributor inventory changes. At FX rates assumed in our press release, this should correspond to Q3 revenue in the $405 million to $410 million range. We expect Q3 operating margins will be 18.5% to 19%. That concludes our financial review. I'll now turn the discussion over to Jon for his comments. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Thank you, Brian. As Brian indicated, we reported solid results for the second quarter, in line with our expectations. We are well-positioned for accelerating organic revenue growth in the second half of the year, given our unprecedented level of recently announced innovations and an enhanced global commercial capability. Our instrument placement performance in the second quarter was strong. Overall, we placed about 2,400 chemistry and hematology instruments in the quarter, nearly matching our record fourth quarter 2014. These 2,400 placements were up 29% year-over-year and 21% over the excellent Q1 results. The placements were composed of 1,132 Catalyst Chemistry Analyzers up 44% year-over-year; 318 VetTest Chemistry units; and 949 premium hematology placements, up 30% year-over-year and 27% over the first quarter. The premium hematology placements were driven by the higher end ProCyte analyzer, which was up 44% versus the prior year. Our international performance was truly outstanding where Catalyst placements of 683 units were up 137% from a respectable Q2 2014 and hematology placements were up 55%. In Q2, we continued the global rollout of Catalyst One with launches in Australia and Brazil and will complete our Catalyst One launches in non-Japan Asia and the rest of Latin America in Q3. North America had a solid premium instrument placement quarter of 909 units, accelerating 15% over Q1. Of the 449 Catalyst placements in North America, 61% were to new and competitive accounts, a high-water mark matched only once before. We have a strong pipeline of orders in North America entering Q3 with good sales momentum as our expanded sales organization is deepening their relationships in their geographically more concentrated territories. The smaller territories allowing for greater customer intimacy, our goal, as we – as our sales expansion has now been in place six months. Our sales professionals are also continuing to advance as subject matter experts and diagnostics in the unique value of our offerings. Globally, Catalyst One has been an unrivalled success in every country in which it has been introduced. In fact, we are on track to place well over 9,000 chemistry and hematology units globally in 2015. This includes a forecast of over 4,500 Catalyst Chemistry placements for the year, up 45% from 2014. This outlook bodes well for sustained double-digit instrument consumable growth for years to come. Other news in our VetLab modality includes the full launch of Total T4 slide in North America, including to our large installed base of Catalyst Dx customers. The availability of this important component of the chemistry profile and its ability to be included with any chemistry panel with up to 22 other chemistries in one sample run with quick turnaround time is unique to the IDEXX Catalyst platform and brings a new differentiated value to our Catalyst Dx install base, augmenting the already high installed base royalty. The new Total T4 slide also contributes to the increasing recurring diagnostic revenue growth in the second half of the year. Note that the T4 slide has already been available to Catalyst One customers since February, where we already had an over 60% adoption rate. Our global reference lab modality continues to see strong double-digit growth of 12%, with a couple of points' higher growth in the U.S. A few comments on SDMA. The full launch of SDMA in the U.S. is underway in July as we indicated in a press release earlier this week. Numbers are accumulating quickly. As mentioned in the earnings release this morning, we now have over 9,000 accounts that have received over 140,000 patient SDMA results. Mostly as part of their routine send-out chemistry panels but also including standalone SDMA submissions. An interesting fact, these numbers include submissions from over 1,000 accounts who use a competitive reference lab as their primary lab. With this overall volume utilization at our customers, you can see why we expect SDMA will transition in a relatively short period of time from an exciting novel assay to an indispensable element of our customers' routine protocol for preventative and sick animal testing. In this way, the inclusion of an SDMA result will become the new standard of care in chemistry testing, diagnosing and managing chronic kidney disease, one of the most common feline and canine medical conditions. In addition, we're offering a send-out SDMA result at no incremental charge for customers who use both our in-house chemistry instrument and our reference lab services, when they run a patient sample on their Catalyst Chemistry Analyzer in-house. This bundled profile offering further builds the value of using IDEXX for both in-house and reference lab diagnostics, increasing loyalty and supporting cross-selling of reference lab services and in-house equipment. We expect Canada will start the full SDM launch – SDMA launch next week and our other international labs will roll out the full launch over the first half of 2016. We were excited this week that the International Renal Interest Society, or IRIS, has endorsed SDMA by recognizing that SDMA is a new biomarket for renal dysfunction that can allow for earlier detection of chronic kidney disease. According to IRIS, "SDMA has the potential to expand diagnostic insight and therapeutic opportunities for veterinarians caring for pets with this critical disease." In fact, IRIS announced in a press release this morning that SDMA is now included as a component of their well-known IRIS chronic kidney staging guidelines. For investor background, IRIS is a board of 15 world-renowned independent veterinarians, with a particular expertise in nephrology, from 10 different countries. The endorsement of SDMA by IRIS is a capstone to the credibility of 27 peer-reviewed abstracts and publications already available on SDMA in the cat and the dog. In addition to the T4 slide in SDMA, we had a third important customer product announcement this month. We're excited to have begun shipping our SNAP Lepto rapid assay in July. This highly valued point-of-care test is very much appreciated by our customers. Early adopters and key opinion leaders indicate that every practice should have a SNAP Lepto Test kit available in practice to use when a dog is presented with the common symptoms of leptospirosis and when it's on the differential list so as to rule out or aid in the diagnosis of this disease. Note that leptospirosis is contagious and highly dangerous to pets and humans alike. We expect SNAP Lepto will contribute $1 million to $2 million in rapid assays in the second half of this year and continue to contribute to the rapid assay growth for years to come. As Brian indicated, our rapid assay modality revenues met our expectations in Q2. During the quarter, we completed several direct head-to-head studies including one that was peer-reviewed by key opinion leaders and experts, which compare recently available competitive rapid assays test to the high standard of our SNAP ELISA platform assays. These studies demonstrate that our assays, including our feline kits and our SNAP 4Dx, have superior sensitivity, that is, the ability to detect the presence of certain diseases, as compared to the more recent offerings and assays for these same diseases that use a lateral flow platform based on the types of positive patients typically seen in practice. As an example, the peer-reviewed study shows a comparison of sensitivity of SNAP 4Dx versus a competitive offering for ehrlichia ewingii on lateral flow. In this case IDEXX 4Dx had 92% sensitivity versus 60% for the lateral flow test. The head-to-head differences in test sensitivity are quite meaningful. Veterinarians rate test accuracy is by far the most important criteria in choosing a diagnostic test kit, as well they should, when the sole purpose of such test kits is to accurately determine which patients have contracted an infectious disease to enable prompt follow-on care. Positive patients that are missed because the test has inferior sensitivity can not only result in the incorrect diagnosis but also lost income from missed follow-on diagnostics, treatments, and monitoring. We are well-positioned to bring this clinical data to our SNAP customers with our U.S. direct sales organization, including our 181 veterinary diagnostic consultants and 14 professional service veterinarians. It will take time to reach the entire market and the long-tail customers who rely on SNAP accuracy, and to address the incorrect assumption that competitive lateral flow tests are of equivalent accuracy. However, we are confident in our unique ability to do so with our fully direct sales model and to continue to support the profession with a strong rapid assay franchise in 2015 and years to come. We continue to be on track with the development of our urine sediment analyzer called SEDIVUE for launch in early 2016. This novel point-of-care technology provides an entirely new automated and highly accurate way to conduct an in-house urine analysis which is currently a manual bench-top process requiring time-consuming sample prep and microscopic examination, conducted by virtually all veterinary practices and usually several times a day. With this new instrument, the entire market is a greenfield opportunity. Each instrument placement will generate a new stream of consumable revenues without any cannibalization to further differentiate our entire in-house lab solution. On a concluding note, and before we open the call to Q&A, please note that we will be broadcasting our Annual Investor Day next Wednesday and Thursday. During that presentation, we will be detailing several of our novel innovations and key technologies, and dimensioning the size of the global market opportunity and their role in driving long-term double-digit organic revenue growth. Five of these include, first, the long-term opportunity for Catalyst One placements and the continuing impact on recurring instrument consumable growth; second, SDMA and the impact this revolutionary advancement in the core chemistry panel will have on our recurring revenues; third, the greenfield opportunity for SEDIVUE instrument and consumable stream in the automation of in- house urinalysis; fourth, our fecal antigen franchise, another greenfield opportunity, including the recently launched reference lab offering and our fecal product roadmap; fifth, finally, the role that our proprietary bovine pregnancy testing offering will have to grow our livestock and poultry diagnostic business on a global basis. In addition, we will discuss our long-term goals to expand margins, enabled by our innovations and organic revenue growth. With that, I open the call to your questions.

Thank you. And our first question will come from the line of Ryan Daniels with William Blair. Your line is open. Ryan S. Daniels - William Blair & Co. LLC: Yeah. Good morning, guys. Thanks for taking the questions. Jon, let me start with one for you regarding to head-to-head studies. I've seen several of them recently on your website. I guess my curiosity is how quickly do you think you can get that message of the superior sensitivity into the market? And then when that has been presented to veterinarians, have you seen that actually resonate quickly and then switching back to your assays once they understand the sensitivity? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes. Ryan, thank you for the question. We just had a – I was with the – our U.S. sales organization all week last week and I'm really impressed. These reps have over 10 years of sales experience. Of course many of them are new to IDEXX, hired last fall. But they're coming up to speed quickly. We talked about the head-to-head studies, including the new peer-reviewed study that I mentioned for ehrlichia, and I think they're going to be quite good at that. The experience we have, even before the peer-reviewed, is that when customers appreciate the differences in sensitivity, they do switch back. Of course, there are a lot of customers to reach. We have a long tail of customers particularly for our feline products, but of course a smaller number but a significant number on our SNAP 4Dx, a fabulous franchise. And so I suspect that we'll be quite effective. But as I mentioned, it will probably take time to reach that group with our normal calling patterns over the next quarter or two. When we do, we're very effective in switching customers back on the ones that have decided to try the newer lateral flow assays; of course most are loyal to IDEXX. Ryan S. Daniels - William Blair & Co. LLC: Okay, that's helpful color. And then, one follow-up on SDMA and I'll hop back in the queue, I think you mentioned a 1,000 clinics that use another lab as their primary lab provider. Do you have a feel for many of them you actually had been working with prior to the SDMA launch? So is it – they're sending them to you but you've already had relations, are a lot of these novel relationships? And then can you remind me the price of that for them versus the price of a full chemistry profile? Thank you. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, thank you. So, the 1,000 accounts that are not – do not use IDEXX as their primary lab, typically they use us at a very low, or if any, volume. The SDMA that they're sending us sometimes it's their entire chemistry panel because they want the SDMA result with the chemistry panel, other times it's just the SDMA result. In fact probably more often than not it's the entire chemistry panel. And that's a mix of customers who have done business with us. Obviously we have a (30:50 – 30:52) testing portfolio and customers that haven't done business with us. But I will say, I'm pretty surprised that just in a few short weeks we have a 1,000 accounts that aren't our primary lab customers who have adopted this new test and are using it. I've just never seen anything like that in terms of adoption of a new specialized test. In this case of course it's really now a component, critical component of the core chemistry panel.

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

Hey, thanks for taking my questions. You mentioned the change in disclosure on the margin capture and the lower contribution relative to your initial view. So, on a net basis at this point, what are you gaining in the way of economics this year from the direct transition? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: The – as you mentioned the revenue number, we modified down a bit from the $50 million to $55 million range to the $45 million range. I think on a – it's fully (31:57 – 31:59) with our business now, so it's a little tougher to parse but I think that net flow-through is probably more in the breakeven level to modestly accretive versus the $5 million to $8 million benefit that we had anticipated. Going back in time, we didn't do this for $5 million to $8 million of profitability, obviously this was intended to be a significant step-up in our commercial capability, allow us to fund that, and to position us well for accelerated long-term growth and we feel very good about the progress we're making on that front. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. Erin, I would comment, really building on Brian's comments that if you think for example the SDMA launch, that was a virtually false launch but we couldn't have reached 90% of veterinarians including more than half that learned about it from their representative in the first six months without a direct sales model. And so – and that was a just very, very successful launch. It's an example of what our direct sales organization allows us to do that we haven't been able to do previously. And just a follow-up on Ryan's question, I realize I didn't answer the last part. For customers who send in a full chemistry panel, the average price is, for a chemistry panel, might be $30 to $40, but for an SDMA-only result we offer that for $19.95, so it gives you a sense of the revenue contribution depending on how they submit their sample.

Okay, great. Thanks. And there has been a lot of noise out there and I would just like you to comment I guess or characterize the pricing trends across your business relative to the volume contribution, particularly in the consumable side of the business I guess as well as in instruments? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: We are a volume-driven business, always have been, but our pricing trends are positive. As we noted in our results, we had actually an improvement in our gross margins in the quarter and our underlying recurring CAG Diagnostic margins also improved. So net-net we are very much focused on growing the volume in our business consistent with our business strategy but we've seen effectively kind of consistent impacts of net pricing changes and we're able to improve our margins as we grow. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, and just a follow-up on that Erin, with regard to the instruments in particular, we have a variety of different types of programs. There really was no change in those programs from prior quarters.

Okay, great. Thanks.

Thank you. We will go the line of Jon Block with Stifel. Your line is open. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Great, thanks, and good morning. I'll try to fit into two questions, maybe the first one will have two parts so just stay with me for a second. Jon, you maintain the guidance for the company but clearly your cornerstone data and our checks show that the industry has really picked up over the past six months. So can you talk about what that means for your implied market share losses so far this year? And as a function of that sort of do you think you are through the noise? I mean, again, I believe you lost share over the past six to nine months. I think that was a cost-sensitive crowd. You put out huge instruments numbers today to be fair. So, what's your conviction that there is sort of – you are through the noise, there is not a broader cost-sensitive crowd out storm to come? That's part one. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: A couple of comments, I believe that our recurring revenue growth was in excess of the market growth in the U.S. and of course we're a global company and then we have pretty strong performance in other businesses like the water business with 8% organic growth. So I'm very pleased with our performance in the U.S. As I mentioned our U.S. lab businesses was higher than our total global lab growth of 12% by a couple points. So, we're very pleased with where we are in the growth of the recurring diagnostic revenues in the U.S. and on a global basis. In addition, I think our – I think we've correctly gauged where we are in the new competitive environment and our guidance and our tracking is consistent with the guidance that we gave three months ago. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Okay, I will push you offline I guess, but to shift gears, according to our work, or looking at the P&L, the unallocated again seems to have accounted for the EPS upside. And Brian, I know there is always fluctuations but it looks like there is actually like a contra expense item in there for both 1Q and 2Q 2015 because EBIT's higher than gross profit, I went back, that's never happened in any of the other 36 quarters in my model going back to 2005. So, can you at a high level, and we don't need to get into all of the nuances of accounting, but can you just sort of walk through that, what's going on in unallocated that's leading to that event? Thanks. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: It's lower product costs for companion animal and LPD products. We record the segment results at a standard cost and the capitalized variances which are favorable for us, meaning that we had lower product costs than standard flowing through the unallocated portion. So, it is a net lower product cost for the company that just happens to be reflected in that segment. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Okay. And so it happened in the past six months and never in the prior nine years, I'm just curious, so is that a function of going direct or something else in terms of the timing of that? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: It just – I can't speak to the past... Jonathan W. Ayers - Chairman, President & Chief Executive Officer: I think it is a function... Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Last nine years but I think this is – we had benefits from lower product costs that got capitalized into inventory and now they're flowing through, that just reflect our... Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Good cost performance on the product side. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Good operations management and... Jon D. Block - Stifel, Nicolaus & Co., Inc.: And any change between expensing versus capitalizing or no? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: No. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: No. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: No, it's just where it is recorded, Jon, that's all. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Okay, okay guys. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: We record at standard in the segments and we capitalize the variance and have that flowing through in unallocated, it's not an unusual practice. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Fair enough, all right, thanks, guys.

Thank you. Our next question comes from the line of Nicholas Jansen with Raymond James & Associates. Your line is open. Nicholas M. Jansen - Raymond James & Associates, Inc.: Hey, guys. I just want to get a better sense of CAG gross margins. This is the second consecutive quarter where we've had CAG gross margins down year-over-year and considering that you are seeing double-digit recurring revenue, I would have assumed that we might have seen maybe a bit of improvement there particularly with the margin recapture, just – so I wanted to better understand kind of what's going on in CAG gross margins. Thanks. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Yeah, it builds up the question that we just answered which is we have lower product costs flowing through the unallocated segment and if you put that into the CAG picture, they would be actually improved. And the – actually the – keep in mind that as we have very strong instrument placements and the recognition of deferred revenue that has a bit of a negative mix impact on CAG. The underlying CAG recurring margins are improving. So I think the reported segment margin was only down 40 basis points and net-net the underlying CAG recurring margins including the product cost benefits have improved. So we actually see a positive trend on CAG recurring margins. Nicholas M. Jansen - Raymond James & Associates, Inc.: Okay, that's helpful color. And then secondly on the implied 2H organic revenue growth expectations, I think your normalized first half of the year is roughly 11.2%, 11.3% and in the full year it's 12% to 13%. So is there any buckets specifically that you could call out in terms of we expect SNAP Lepto to be a 50-basis-point improvement, we expect SDMA to be this, just wanted to get better comfort because I think there is a lot of concern surrounding the implied acceleration, so any incremental color there would be helpful. Thank you. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. Thank you. It's actually – first of all we have – we do have several new product launches that we've talked about in the last few weeks, all of which will benefit the second half as we've mentioned the T4 slide to our Dx installed base, the SNAP Lepto and the full launch of SDMA in our reference labs. In addition, we have some favorable compares in the second half with regard to some Q4 marketing programs that we had in the U.S. in 2014 associated with our go-direct and a little bit more favorable compare in our livestock and poultry business. Nicholas M. Jansen - Raymond James & Associates, Inc.: Thank you.

Thank you. Our next question will come from Mark Massaro with Canaccord Genuity. Your line is open.

Hey guys. Thanks for the questions. So your rapid test business came in pretty stable and I was wondering if you could maybe talk about some of the competitive dynamics that you are seeing with the competition and lower-priced assays. Jon, can you comment on the 4Dx and your confidence in continuing to – or just clarification that you do not expect to lose share in that segment and really what is driving that? Thanks. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes. So our rapid assay modality overall tracked our expectations obviously of 4Dx which is by far the largest product in that category (41:32 – 41:34) is – has to be a contributing factor there. Our volume actually in the first half of the year on 4Dx has grown. Sometimes customers use the 4Dx in the lab and sometimes they use it in clinic, sometimes they switch. And so when we look at the volumes across the two modalities, we've seen growth. And I think we've made a lot of progress in understanding the relative performance of our assays in the critical dimension of sensitivity, which of course is the dimension. That's the reason why customers purchase these rapid assay tests, is to determine whether a patient is – has contracted the infectious disease. We've seen some customers in some regions such as those that are more ehrlichia endemic temporarily switch to a competitive offering for ehrlichia. But when they are informed of the difference in – of the pretty dramatic difference in sensitivity, we get them back. And so that's a constant process. There are a lot of customers out there that we've got to talk to. And we've got new assets that are available to us as a result of the work we've done over the last quarter that is now in the hands of our sales organization.

Great. And my second question is we're hearing some rather aggressive commercial tactics from some of your competition and can you maybe just characterize maybe some of the instruments that other providers are throwing in to win business. You've been in this business a long time, so how would you characterize this type of activity? Do you foresee it occurring in many additional quarters? And how do you think you can continue to hold ground given this shift? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. Thanks for the question. It's always been a competitive market and we sell on really what is a lower cost system solution, when you take all factors into consideration. Our sales force, which was greatly expanded before the beginning of the year, is getting better and better at not only the customer relationships but being able to have that conversation. We are pleased with the premium instrument placement growth we saw in the U.S. in the second quarter over the first quarter. Of course that doesn't even speak to the extraordinary performance we had on a global basis on instrument placements. And there is really – if there is no difference in the economics of our programs as was asked by – in a previous question, and we've got the most complete product line when you look at our full instrument product line and of course our reference labs and when we can do a multimodal profile as we talked about on our in-house chemistry, with our send-out SDMA result. And the T4 is a wonderful addition not only to – of course we had it on Catalyst One but for the Dx which builds further differentiated value. We believe we continue to be unique in the ability to do two-way integration with the vast majority of practice management software that is in practice because it was built into that practice management software over many years. And the performance of our analyzers is uniquely designed for real-time care with quick turnaround time and minimum tech involvement. And so that with continued advancements in VetConnect PLUS for example where we had, I think, 100% growth in utilization VetConnect PLUS year-over-year in the U.S. market, really combined – that combined and a maturing commercial capability with a unprecedented product line really, we feel quite comfortable in this competitive environment Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: I would also just build on Jon's comments just to highlight that, of course we noted that we had a very strong premium instrument placement quarter in the U.S. with a high-water mark for the percentage going into competitive and greenfield accounts. And of note, we are expanding, and noted in our comments that we're expanding our instrument base in chemistry and hematology in the U.S. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Each quarter. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: So, it is expanding. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: And that's net of customers who stopped using us, so it's a net expansion.

Thank you.

Thank you. And we'll go to the line of Kevin Ellich with Piper Jaffray. Your line is open. Kevin K. Ellich - Piper Jaffray & Co (Broker): Good morning. Thanks for taking the questions. I guess, I wanted to go back to one of the – I think Nick's question on the CAG gross margins, Brian. Could you help explain with the lower product cost that helped drive the unallocated amount, I guess, why would that be in unallocated versus CAG? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: It's just a methodology we use for where we record it in segment recording for simplicity. For internal management, we use a standard cost for the business areas in terms of how they record their profit performance and if there is variances to performance then they get capitalized into inventory before they get recognized through the P&L. We capture that in the unallocated portion just to – as a way to kind of limit some of the noise on the internal management of the business. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes, our internal management responsibility accounting is based on standard costs as you would expect and then our global worldwide operations folks are the ones who are doing quite a good job beating those standard costs. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: And so it's – the numbers were beneficial and that's what you see flowing through and they're somewhat larger than they had been in the past but it's reflective of good underlying business performance and strong volumes. And so that is a – it's a real benefit in that it's supporting improved CAG recurring diagnostic gross margins. Kevin K. Ellich - Piper Jaffray & Co (Broker): Great, that's helpful. And then, so you provided some – an update on the distribution margin capture which you've revised a little bit lower. Just wondering why you've decided to stop disclosing kind of what the breakup or the benefit was on – for each of your segments, is this how you are going to report going forward? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Yeah, we're obviously trying to give you an overall calibration so the net benefit is about 3% on growth versus the original 3.5% overall. When you get down at the modality level, we really have this fully integrated in our business now and so trying to parse the discrete impacts of adjustments we might be making across modalities related to the change, it's not how we are measuring the business. We're obviously measuring ourselves on our current revenues and it is becoming just harder to kind of estimate that with precision. So, we've given directional indications in the past on the benefit by modality and those are directionally consistent and obviously we've updated the overall number, but we're trying to move to a zone where we're talking about the revenues that we're measuring ourselves on and the revenues that drive our profitability performance and that's why we're moving away from this with and without calculation. Kevin K. Ellich - Piper Jaffray & Co (Broker): Great. Thank you. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: You're welcome.

Thank you. And next we'll go to a follow-up from Jon Block with Stifel. Your line is open. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Great, thanks, and thanks for taking the follow-up. Just two real quick ones, Jon, you gave us a little bit more color on U.S. lab noise out there as well but we certainly haven't thought you were losing share and I think you proved that today. You mentioned a couple of hundred basis points higher than the 12% worldwide, is that still predominantly volume? In the past, you've given us some color that in the U.S. it was vast, vast majority volume. Again broadly speaking, is that mostly a volume driven 14% or so? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes that is correct. It's predominantly volume-led. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Okay. And then the flipside, just I want to make sure I've got my arms around the rapid because maybe it's just myself being a curmudgeon but I don't view it as that strong. You print 8.5% organic but 5.9% is from some of the inventory fluctuations. So that gets you I believe to that 3% you sort of detail in the press release. And I know you are not giving the margin capture anymore but if it was anywhere close to last quarter of 9%, that would make the true organic down 6% and the D cell from last quarter is down 3%. So one most importantly, am I thinking it through correctly, and two can you just siphon through the noise and give us what you think is really going on in the trends in your rapid assay business? Thanks guys. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, thank you for the – I think that's – for the question, Jon. I think that's directionally direct and also consistent with the – our calibration of the business last quarter and the expectations that we set. So I think it's entirely in line with expectations. What we are pleased about is the new assets, an appreciation we have for the differences in our products in the critical area of test sensitivity. And we now have those – recently, obviously this is all very recently, have those resources in the field to be able to have those conversations. So that's I think a positive development from a marketing perspective but with regard to volumes, they are – the volumes were consistent with the expectations that we had them set in our April call. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Perfect. Thanks Jon.

Thank you and we have a follow-up from Nick Jansen with Raymond James & Associates. Your line is open. Nicholas M. Jansen - Raymond James & Associates, Inc.: Hey, one, just quick numbers questions. Brian, I think you said earlier that you thought third quarter organic revenue growth would be up 1 to 2 points relative to the first half. Was that – did I hear that correctly? I just want to confirm that and if that is correct, does that imply kind of 13% to 14% or so in the fourth quarter based on the full-year guide? Thanks. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: It's 1% to 2% improvement in the normalized organic growth rate. Keep in mind we will have a favorable normalization benefit related to prior-year distributed inventory changes that get factored into that, but it is an improvement and we do to expect improvement in fourth quarter as well kind of building momentum as we are rolling out the new product introductions and that's built into the full-year growth outlook. Nicholas M. Jansen - Raymond James & Associates, Inc.: Great. I just wanted to make sure I heard that correctly. Thanks. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: You did.

Thank you. We have a follow-up from Mark Massaro with Canaccord. Please go ahead.

Hey, guys. I think you've done a nice job with the SDMA in the early goings here especially with competitive accounts. Jon, maybe could you try to quantify the uplift you think SDMA can hit your topline even directionally at roughly $20 per test for those that are not using your full panel. And then can you comment on (53:04 – 53:06) patients of taking share or folks that migrate to your entire reference lab? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Mark, thank you for the question. Really as a result of years of work, including with the key opinion leaders and six months of preparing the market since we announced SDMA would be part of the core chemistry panel, we concluded a flawless launch earlier this month. And of course it's all in Q3, it's not reflected in our Q2 numbers. And really the excitement and the adoption rate is just quite gratifying. The SDMA will drive our growth on a number of dimensions. Higher loyalty with our current reference lab customers, greater utilization in preventive care, the ability to have greater price realization when we're faced with – a loyal customer who's faced with a competitive offering – a competitive offer that does not include SDMA. Of course, winning new accounts who want to instead of just sending us their – splitting their samples and sending their core to someone else and their SDMA to us and increasing their costs significantly, as a result just sending the entire chemistry panel to us. We have customers who routinely split their business between us and someone else who will, as they understand quickly and adopt SDMA, will be predisposed to seeing their chemistry panels to us if they haven't before. And then, finally, incremental revenue from the 1995 SDMA-only results. To your question about dimensionalizing that, we look forward to doing that next week at our analyst meeting, that is our intent. And I think we'll be able to fully satisfy your question in that regard at that time.

Thank you. And with that, Mr. Ayers, I'd like to turn it back over to you for any closing comments. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Thank you. I want to thank everybody who's been on the call. I know we also have a number of IDEXXers who are on the call or who will subsequently listen in. And I just want to congratulate our organization here for some extraordinary accomplishments in Q2. It really was an extraordinary quarter for the instrument business on a global basis. Sometimes we have to remind ourselves and everybody else that we are a global organization and Catalyst One is really just a blockbuster instrument. The flawless SDMA launch which we had in Q3, a wave of innovations that we're bringing to the market beyond those two products in terms of T4 on a slide, SDMA, we just introduced images for histo and cyto pathologies that are available on VetConnect PLUS, which is a wonderful advancement in the VetConnect PLUS form of receiving results and unique to IDEXX, and I think we have some great success in getting a better appreciation for the differentiation of our infectious disease assays and an organization globally that is really quite engaged. So my gratitude to everyone at IDEXX who helps deliver these results and we look forward to the Analyst Day next week. We will be broadcasting that in our Reg FD forum for all investors to hear and look forward to detailing the long-term organic growth, double digit that we think will come out of our innovation and our comments on margin expansion over the long term and then going into some detail in some of our strategies. So, with that, we will conclude the call.