Good morning everyone, and welcome to the IDEXX Laboratories Fourth Quarter 2015 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Ed Garber, Director, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding IDEXX's future expectations, plans, and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should, and similar words and expressions. Such statements include, but are not limited to statements regarding management's expectations for financial results for future periods. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and except as required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, further events, or otherwise. Also during this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which can be found on our website, idexx.com. In reviewing our fourth 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.

Thanks, and good morning everyone. I'm pleased to take you through our fourth-quarter and full-year 2015 results and provide an update on our financial outlook for 2016. We had a solid finish to 2015. We achieved 11% normalized organic growth in Q4 supported by 12.5% normalized growth in CAG Diagnostics recurring revenues and continued strong gains in instrument placements. Recurring CAG growth improved from Q3 levels supported by gains in US rapid assay revenues and higher consumable growth rates in Europe. Our full-year normalized organic growth was 11.3% slightly above our expectations reflecting solid year-end performance. Full-year results were supported by 13% normalized organic growth in total CAG revenues, reflecting strong double-digit gains in both US and international markets. Full-year adjusted EPS was $2.11, above about the high end of our guidance range reflecting solid operating performance and $0.03 per share benefit from the permanent extension of the R&D tax credit. On a constant currency basis, adjusted EPS grew 14% in 2015. Our operating trend positions well to deliver strong constant currency revenue and EPS growth in 2016. Let's begin with a review of our fourth quarter and full-year 2015 results beginning with an overview of regional performance. In reviewing our results today, please note that we will be normalizing down year-on-year growth rates to adjust for transitional impacts related to our move to an all direct sales and distribution model in the US in the fourth quarter of 2014. This included a reduction in revenues of $25 million in Q4 2014 related to the elimination of product inventories held at distributors as well as cost associated with ramping of sales resources and one-time cost associated with the transition. We achieved solid organic growth in US and international regions in the fourth quarter, driven by improved CAG Diagnostic recurring revenue…

Okay, thank you Brain. We were pleased with the continued progression of our growth globally in Q4 of 2015 as well as the progress in bringing first and only innovations to our market. Coming out of 2015 and all investments we have made, we are well positioned to achieve our financial goals in 2016. Certainly a highlight of our Q4 2015 performance was our record level of instrument placements globally that Brain reviewed including the 61% growth in catalyst placements in Q4 and 59% for the year. Another way to look at it, in 2015, globally we replaced more than twice as many catalysts as we placed in 2013. Q4 was the highest premium instrument placement quarter for IDEXX globally on record exceeding the quarter we just established in Q3. In the North American companion animal market, we achieved impressive results on a number of important metrics that we track. First, catalyst placements were at record levels of 694 units. Importantly, placements in new and competitive accounts grew to 395 units; up 37% over Q4 of 2014, which itself was a quarterly record. Hematology placements were strong too at 582 units, driven by ProCyte our higher-end platform. Second, early indications from an analysis of our US installed base shows that customer chemistry retention rates continued at their strong levels of Q3 of at least 97% annualized, if not slight further improvement. Third, the growth of the reference lab modality in the US continued at a strong 13% and was primarily volume led with about 2% attributed to price. Fourth, our rapid assay business in the US delivered strong results, our all-important SNAP 4Dx unit volumes continued to be up for the quarter and for the year. On top of that, we had a very strong double-digit growth in 4Dx in…

[Operator Instructions] And our first question will come from the line of Ryan Daniels with William Blair. Your line is open.

Yeah, good morning and thanks for all the color. Jon, maybe a quick question for you just on catalyst as we look towards 2016. I know you mentioned it got approved in Japan, so I guess two specific questions on that. One, when will that actually start shipping? And then number two, I know Japan is a pretty receptive market for new technology. So what kind of market opportunity is that as we look to kind of ‘16 and ‘17 in instrument placement?

Yes, Japan is a diagnostic market that really is oriented towards in-house point of care real-time care and it’s a market with significant opportunity because we probably have a lower share in Japan than any other market that I can think of. And of course Catalyst One is a blockbuster product that we've proven in virtually every other market around the world and we have a good organization, a direct organization in Japan that’s in place for decades. So it's going to be a nice combination. We've also launched VetConnect PLUS in Japan which I think is highly appreciated by the Japanese veterinarians because they are very visually oriented. And so, we’re excited about the growth opportunity in Japan for the next couple of years.

And do you have a data on when that will start shipping?

They’ll start shipping this quarter.

And maybe a follow-up on the financials just on Capex. I think you are guiding towards about $100 million as recently in October but it came in about $83 million. I think next year the guidance is only $90 million. So I'm curious if you're seeing any specific capital efficiency that’s allowing you to trend that down and could drive stronger long-term free cash flow?

Yeah we’re always focused on that Ryan, I think this year part of that was just driven by kind of year-end privatization and also some carryover into – that’s not unusual at year-end where project is going to carry over into the next year and that's all factored into our $90 million outlook. I think our numbers is still probably a little higher than they normally would be just reflecting the very strong volume growth that we’ve had in reference lab as well as some of the work we're doing on enhancing our manufacturing capability with new products but I think we’re – our long-term outlook would be and our focus would be on continuing to drive capital efficiency. So we think that can be a point of leverage for us over time.

Okay, thanks I’ll humpback in the queue.

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

Great thanks and good morning. Jon, maybe just first one on international CAG, you sort of laid it out that it was choppy last quarter and it seemed to improve this quarter. But oddly enough there is some orders that are calling out some international weakness in calendar 4Q. So, maybe just walk us through how you see the international market unfolding now that you have entered 2016 and just your level of conviction at the worst is behind you there?

Yes, thank you for the question. The weakness that we saw specifically was the deceleration in recurring revenue growth in Europe; obviously in international markets we've had extraordinary level of growth in Catalyst One placements including Europe. And that varied same quarter of Q3 I think, we had 169% year-over-year growth in catalyst platform placements internationally. And so we hypothesized in Q3 that was related to very hot weather in markets that don’t traditionally have air-conditioning, believe it or not, that’s Continental Europe. And it was nice to see the rebound to 10% recurring CAG diagnostic revenue growth in Europe. Other markets around the world I think have just been very strong. I mentioned Brazil, Asia is very strong and so I think we have the combination of investments we’ve made in a direct and strong commercial organization for the last years internationally combined with new innovative market leading products such Catalyst One. VetConnect PLUS is now - I think we have customers using VetConnect PLUS in 60 countries and of course now the global rollout of estimate for our reference lab modality which gives us confidence that we will continue to have above US growth in the international markets in part because they are simply far less mature in their - not that US is mature, but they are just so much earlier than the US in their adoption of diagnostic protocols for pet healthcare.

Got it, very helpful. And then just on guidance and I just find my opinion, but I find the two set of ways that you call that an operations on a $2 plus number, just a little bizarre at this stage of the year considering the events of last year. So can you just talk to your confidence that this isn’t going to be sort of the one step forward, two steps back in terms of the guidance and maybe tell us why you decided not to just keep some dry powder in case the environment gets even more competitive as the year progresses? Thanks guys.

Yes, John, thank you for that question. What a difference a year makes. I think we're not entering a huge disruptive change. We are beyond that disruptive change and we are seeing the progression and productive of our commercial investments in the US and internationally. We expect to get productivity on those investments and operating expense leverage particularly in the US market in 2016. So we don’t enter the year with the kind of risks that we entered last year. The only think I can’t really comment on is macro, but out underlying markets are very strong, so it's more of an issue of currency and those kinds of things.

Yeah, John, just to highlight, the adjustment is entirely related to we had better than expected operating margins finishing the year in Q4 through good cost management. So we’re basically just flowing that through. We are still targeting 50 basis points of constant currency improvement and really all you are seeing is that we had a very good cost management at the end of the year and we are flowing that through and driving toward the same objectives we talked about earlier. It’s actually not an increase in our revenue outlook. We maintain a consistent -

The 89% organic growth is consistent with the guidance in October.

I appreciate it guys. Thanks.

Thanks.

Thank you. [Operator Instructions] And we will go to the line of Kevin Ellich with Piper Jaffrey. Your line is open.

Hey, good morning. Thanks for taking the questions, just a couple in the reference lab business. So the 13% growth in the US was pretty strong I guess. Could you quantify or break down how much of that’s coming from share gains and I guess how much is coming from vets ordering more tests per requisition. Obviously you are getting great traction with SDMA. And I guess kind of following upon that as well, how much of the growth from SDMA is coming from non-IDEXX customers? Jon, I think you might have mentioned that.

Yes, thank you. Well, of course vast majority of our customer does come from continuing – revenues does come from continuing customers. So I think what we're pleased with the non-customers is that the growth in sending us panels is demonstrating that they are voting with their feet and seeing SDMA as an attractive addition, but those numbers are small contributors to overall reference lab growth. Getting back to the first part of your question, I think that the trends are balanced between net new account acquisitions and same-store sales account from existing customers who are adopting more and more of our unique menu innovations such as fecal antigen and some of the other tests that we offer. And in some cases we may have a core customer who is using us as their primary reference lab, but maybe not using us entirely. And so with the value that SDMA brings to the core chemistry panel perhaps, they are shifting more of their – what they may have been splitting more their chemistry volume to us. And of course we have net new customer acquisitions which is also contributing to that growth. [Indiscernible], I mean continued strong retention metrics and new customer acquisition exceeding whatever customer losses that we're seeing.

That's helpful. And then just one follow-up. Brian, I think in your prepared remarks you made a comment that in Q1 you expect rapid assay to be flat. Can you go over what’s driving that again? I think you said tough comps and analyzing the margin capture?

Right, I think we obviously don’t get the benefit of the margin capture as we move into 2016. And so it is really reflecting that we will have some compares from some of the losses in the first generation product that have stabilized.

Which occurred over the course of Q1 and Q2 of last year, so we have to anniversary those.

But I would highlight, it’s kind of a solid positive projection in rapid assay that we're seeing and it reflects that from we had some headwinds here that we've been sequentially improving in terms of the performance with very good growth in the 4Dx business and we're going to be working through some of these compares and that will contribute to relatively flat performance in Q1.

Right. And then I guess one last one. Did you guys give any stats out on Cornerstone in terms of the numbers of users or anything like that?

No, but we are happy to. We have a highly loyal Cornerstone and DVMAX is our client server platform, about 7,000 customers. I think the loyalty in that customer base is 99% plus. We continue to invest in those platforms, but our focus on new customer placements will be with Neo, our cloud-based platform which is unique in not only its ease of use, but the fact that it has virtually zero upfront cost for customer to start using consistent with cloud technology and it has full integration into our diagnostic ecosystem. And so that will be a small but because of we don't get upfront revenues, the same – the customers don’t have upfront cost, but a growing contributor to our installed base building on top of the high loyalty we have with Catalyst and DVMAX customers. It’s interesting if you look at the information management and digital revenues that product line that we report actually at this point a little over 50% of those revenues are what we consider recurring revenues. There are kinds of things like subscriptions and maintenance and add-on services and the rest is things like hardware and supply sales, they are not what we call non-recurring, they are not capital per se, but they are hardware and supplies and our data business. Very good performance in 2015 and we are well positioned in 2016 to build out our cloud-based customer adoption through our five or six cloud-based offerings in that segment.

Thanks again.

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

Hey, guys, thanks and congrats on a nice quarter. So I think Neo has rolled out now in January and can you help us to understand what the impact will be on the digital imaging business as presumably more people will order the subscription based Neo as opposed to the more capital intensive cornerstone. So can you just help us understand the impact as we look at our model for Q1, Q2 throughout 2016?

Well, the growth in that segment is going to come from not only Neo, which really won’t be a large element that will be a growing and strategically important element, but we are also growing the adoption of add-on services, primarily cloud-based incremental services to our Cornerstone and DVMAX install base as well as continued growth in our digital radiography, including the cloud-based software that supports and stores all the images on cloud, and one needs to have a local server and backup and all that just the radiography system fully integrated with Cornerstone and with Neo. So it’s really both the continued growth and continued replacements, but more importantly the growth in the recurring revenues Neo and these add-on services to the existing install base that will propel profitable growth in that line of business in 2016.

Great, thanks. And on SediVue, I think at the conference last week, you – I think you mentioned that SediVue would sell for $20,000, is that the list price, because today I think you said 16 to 18? Is the 16 to 18 more your expectations for an average sale price? And when you take the midpoint of the recurring stream that you provided today and thank you for that color, would get me to somewhere around $21.5 million incremental for ’16 from SediVue? Any clarification there would be helpful.

Yes, let’s just a latter point, I think we can all do the math, I can’t – you can take 16 to 18 in times of by a 1000 and that’s pretty easy because $16 million to $18 million and then the incremental value as that install base grows, obviously you got pricing analyzers and they got to start using it in order to generate the recurring revenue of the pay by run. We are selling the analyzer at 19, 9, 95, but in cases that we are selling it in a bundle with other equipment to competitive accounts, when they are buying, they are looking at SediVue and then they are saying, hey, this is a new look at IDEXX and I see the benefits of IDEXX and fully integrated approach and all the key differentiators, now I’m looking at SediVue for catalyst and hematology. When we put on our bundle, we will have a lower unit price associated with the SediVue placement and in some cases, some deferred revenue. So that’s really what brings down – we are selling it at list price, because it’s our first and only innovation and customers are so excited about it, we have no pushback on that. But the average unit price will come down. And then we will have some sales in the latter part of the year that will be international and will probably at lower AUP, so those are things that bring down the average unit price from the list price.

Great, that’s very helpful. And last question for me. Thanks for commenting on the annualized 97% customer retention rate. Would you say that’s modestly ticked up, I know you have called out some stability, say in Rapid Test. But I don’t recall you providing that number in the last couple of quarters. I know it’s in line with your historical numbers, call it 96% to 99% customer retention. But can you just help us understand if that has ticked up at least modestly in the last couple of quarters?

It definitely ticked up in Q3. We saw big, a nice tick up in Q3 from – in fact it’s on – as we look the annualized retention rate by quarter, it turns out that fourth quarter 2014 was our most challenging quarter. And every quarter since then the annualized retention rate for that quarter has ticked up and it ticked up to about 97% in Q3, and what I will say is, sometimes it just takes us a little while to absolutely solidify that number. Early indications are for Q4 as we sit here four weeks into 2016 because it takes time to see the dust settle and look at customer ordering patterns to really be secure. But certainly the early indications are that we were – we maintain if not a slight improvement in that metric in Q4 2015.

Great. Thank you.

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

Hi, guys, nice job finishing the year. Just wanted to better understand Brian, maybe the moving parts for the first quarter. I think you guys reported a 11.1% organic growth in the fourth quarter when you addressed for the distribution dynamic in the prior year and I think if I heard you correctly, you are saying 8% to 9% for the first quarter, but that includes kind of 100 basis point benefit from leap year. And you have had a lot of moving parts in terms of share erosion and things along those lines. So can you perhaps maybe bridge the delta from that 11.1% normalize to let’s call it a core 7% to 8%? And then how we get the ramp for the balance of 2016, I assume SediVue and others are built into that. But it will be helpful to better understand the mechanics of the guidance is, I think investors are still trying to figure out all the moving pieces given the variety of moving parts that we have seen over the last five quarters. Thanks.

Sure. I think one of the key elements in the bridge is you have to recognize if the 11% in Q4 benefited from margin capture, right, so you have to – comparing that Q1, you have to normalize for that. So basically that’s in a range of 3%. We don’t quantify that specifically anymore. But say we are at an 8% level and we are effectively saying 8 to 9 or 7 to 8 adjusting for leap year. And so it’s largely consistent trends. We did have really strong instrument revenue growth year-on-year in Q4, so that’s obviously benefiting us. I think we are targeting continued solid progress on recurring CAG growth and improvement as we work through the year as we – Jon highlighted these improved retention rates and working –

For the Chemistry customer base.

The consumables and for also the rapid assay kind of working through the headwinds there and getting to a place where we are growing versus down on a margin, excluding margin capture, we had some headwinds, of course, this year from the first generation losses. So those things will benefit us as we work through the year and we’re basically projecting Q1 for another strong quarter.

That's very helpful. And then secondly, I've always assumed that, let's call it, the churn rate, at least in North America of instruments is like a 5 to 7 year cycle where you’re not necessarily. Once you buy one, you’re going to be working with it for a while. Have you seen that change over the years? It just seems like the interest rate numbers that obviously you guys are poising are quite strong and even some of your competitors certainly not as strong, but still are poising a fair amount of instruments. I'm just trying to get a sense of how easy is it for a customer to say, I'm going to use catalyst this year and then next couple of quarters, the distributor comes in and they switch to Abaxis or a competing machine. Has there been any change in kind of the churn, because it feels like there has been, but I can't fully grasp it? Thank you.

Yes. Thank you. I think the instrument placement is pretty sticky as evidenced by our estimate of 97% retention on an annualized basis. And so that will be 3% of customers who are in our installed base, as measured by the revenue that they are contributing, the consumable revenue that they are contributing are switching to different analyzer. That is, what I call a very, very sticky and loyal installed base and I think in the case of IDEXX, that’s because they’ve adopted elements of our in-house lab whether it be advanced 2a integration or unique menu or the benefit of real-time care or VetConnect PLUS integrated with the reference lab results. Also, of course, when they purchase an analyzer, they typically buy it either in a six-year lease or some kind of a contractual commitment, multi-year contractual commitment, which also adds to the stickiness. So it is not, it's a very sticky installed base to answer your question.

Thanks for the color. Nice job.

Thank you.

Thank you. Our next question will come from the line of Ben Haynor with Feltl & Co. Your line is open.

Good morning, gentlemen. Sorry if I missed it, but did you give the visit and revenue growth?

Yes.

The market growth?

Correct.

Yes. No. We did. Q4 patient visits increased 3.7% and clinic revenues increased 7.1%.

So that was a very strong number. That number can bounce around from quarter to quarter. I think we saw one quarter since the Great Recession that was higher than that, but certainly I would suggest that the underlying market trends are robust.

And then secondly, for me, are you seeing competitors become more aggressive at all on equipment pricing in North America?

I would say that it’s always a very competitive environment. And I think the difference in terms of IDEXX is that customers value unique aspects of what our solutions provide that they cannot get from others. And so if something is lower price but does not provide an adequate solution, that isn’t going to be something that customers like to do. In addition, I mentioned – our veterinary diagnostic consultants are really now covering the market, you think of 48,000 visits in a quarter, they are basically covering the market price over on average. And so our reach and frequency into the customer and that's just with our veterinary diagnostic consultants, which are around 180, we have another 120 other types of field-based professionals that are also visiting customers, we are present. We have those relationships and I think customers value those businesses, because we are bringing value, both in terms of support and new innovation. And so always a very competitive market. But we win with a combination of innovation, new and unique personal innovations and a very strong commercial presence.

Great. That makes sense. Thank you very much gentlemen.

Thank you.

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

Yes. Thank you, Cynthia and thank you everyone for joining the call. I just want to also, a very special callout to IDEXX employees, our 6000+ employees who’ve worked really hard this year or last year, should I say, 2015, in the phase of a lot of competitive and macro challenges to deliver what I think was a very strong finish to the year. A special callout to our North American Field organization that has really done a great job in coming online with new territories and establishing customer relationships and bringing value and growing the level of care that our customers are providing to pet owners. This is a very satisfying outcome for all of us at IDEXX, when we see this kind of growth that we’re driving and we’re seeing care providers being successful, both medically and economically, and pet owners benefiting with improved health of their pets. And so it really gives us confidence that we’re on the right strategy for sustained growth for years to come with the investments we've made in 2015, both in the US and around the world. And with that, we will conclude the call. Thank you.