Good morning and welcome to the IDEXX Laboratories' Second Quarter 2018 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Kerry Bennett, Vice President-Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. 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 is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our second quarter 2018 results, please note all references to growth, organic growth, constant currency growth and comparable constant currency growth refer to growth compared to the equivalent period in 2017 unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon.

Thank you and good morning, everyone. IDEXX delivered continued high growth and excellent financial results in Q2, building on our strong start to 2018. In terms of highlights, Q2 revenues of $581 million grew 14% on a reported basis, driven by consistent 13% organic growth in CAG Diagnostic recurring revenues, 21% growth in premium instrument placements and favorable year-on-year foreign exchange changes. EPS was $1.23 per share, an increase of 33% on a comparable constant currency basis. These results reflect strong revenue growth, related operating expense leverage, which drove a 110 basis point constant currency improvement in operating margins, and net benefits from U.S. Tax Reform. In terms of our outlook, we're raising our full year organic growth outlook to 11.5% to 12.5% and refining our full year revenue guidance to $2.205 billion to $2.230 billion. The reported revenue outlook is down $7.5 million at the midpoint compared to our earlier guidance as operational upsides are offset by $20 million to $25 million of negative impact related to the recent strengthening of the U.S. dollar. We're raising our 2018 EPS outlook by $0.02 at midpoint to $4.10 to $4.20, or 32% to 36% growth on a comparable constant currency basis. At the midpoint of our guidance range, this new outlook builds in approximately $0.07 per share of full year operational benefit related to our raised organic revenue growth outlook and updated expectations for 90 to 130 basis points in full year constant currency operating margin improvement, incorporating benefits from our strong first half performance. This outlook also factors in additional investments we're advancing in our global commercial capabilities, which we'll discuss in more detail today. We're also projecting $0.02 in full year EPS benefit related to a lower effective tax rate, including additional tax benefit related to stock compensation activity.…

Brian, thanks. Let me put those great results in context here. Our strategy is to help veterinarians around the world to grow their appropriate use of diagnostics in the care of the pet, keeping pets healthy and meeting the needs of owners. The current medical standards practice today broadly define a fraction of what they could be with IDEXX's unique toolkit of tests and services assisted by software technologies. In the second quarter, our commercial teams around the world made great progress advancing our strategy, as evidenced by the record Q2 instrument placements and the 13% organic growth in the testing that make up our Companion Animal Group Diagnostic recurring revenues. Commercial successes driven by field presence and ever-growing field productivity drove the results that Brian enumerated. The productivity drivers include our EVI, or economic value index, basis for instrument placements, which has now been adopted globally in 2018; our IDEXX 360 program to grow IDEXX proprietary diagnostics; and our investments in sales force automation. Our advanced CRM helps our field professionals answer the three key questions they face every day: Where do I go? Who do I see? And what do I say? The extensive proprietary real-time data we have integrated into our CRM, Salesforce.com, empowers our consultants to be highly relevant to our customers in supporting their adoption of IDEXX innovations and advancing their practices. Our IDEXX 3 (sic) [IDEXX 360] (20:41) program has already shown significant successes in the North American market, evidenced by the second quarter performance of 346 Catalyst placements to new and competitive accounts and 650 SediVue placements, up 32% year-over-year. We will be implementing the IDEXX 360 program in major international markets over the next six months. We expect this customer-friendly program will advance instrument placements further and support the enduring growth of…

Thank you. Question will come from the line of Derik de Bruin with Bank of America. Your line is open.

Thanks. This is Mike Ryskin on for Derik.

Hey, Mike.

Thanks for taking the call. A couple of quick questions. One, I just wanted a little more clarity on what you just talked about, Jon, with fecal SNAP. You mentioned previously it was expected in the summer of 2018 and on the last call, you said it was more about workflow and some of the earlier response you got from the early users on just optimizing the workflow. So I want to get a little bit more clarity on what has changed since then and why this additional change to the fecal. And then a quick follow-up on the sales force expansion. You highlighted some of the international markets you're going. But in the United States, for example, is there any territory reshuffling associated with this or is this more just in each territory additional sales force and also timing on how long you expect for those to get up to speed, three, six months things like that?

Yeah, thank you. On the fecal offering, we've been so successful with the proprietary antigen-based technology in the reference lab, combining it with core blood work, IDEXX Chemistry with SDMA and CBC. And that fecal offering is going to – it's an outstanding level of sensitivity and specificity. And by the way, it's going to advance further when we adopt the Applied BioCode, which is the technology we announced earlier in 2018. And so, in that context, we are continuing to evaluate the customer requirements we need for an in-house screening test for SNAP. And you heard all the investments that Brian mentioned that we're – in expanding our reference lab, our presence, our information systems and the field expansion, we're really going to be focusing on the reference lab side of the fecal testing in 2019. And as I mentioned, that wasn't a product that was even planned until 2019 and we don't think the change in our outlook here changes, of course, either 2018 or 2019 growth prospects. With regard to the U.S. expansion, we've already actually hired the majority of the people as of now, as part of that expansion and they're in training and in the field. There's always a small reconfiguration of the territories when you do an expansion by definition because we're adding more territories. That will take place in Q4. Typically, it takes a quarter for everything to get up to speed, but we have so much momentum and obviously we have a lot of supporting people in those territories, our veterinary diagnostic specialists, the instrument specialists, the professional service veterinarians that we – and this is the third – actually, this is the third expansion of this nature that we have done. So we're really down the learning curve on how to do this smoothly with the field. So that's going to be fully in place towards the end of the year and obviously preparing for 2019.

Thanks. Appreciate it. Look forward to seeing you at the Analyst Day.

Thank you. Our next question comes from the line of Ryan Daniels with William Blair. Your line is open. Ryan S. Daniels - William Blair & Co. LLC: Yeah, guys. Thanks for taking the question. Jon, seems like an important data point is the upped investment internationally with growing the customer-facing organization. Can you talk a little bit more about what's driving that? Is that increased demand for diagnostics that you're seeing opening up the market? Is it the company's success rolling out EVI or 360 that gives you the comfort? Or is it investment ahead of potential competitors maybe increasing their investments in the market? Just what's really driving that because it seems like a pretty big uptick?

Thank you very much. We're very, very excited about the international expansion. And you're right, that is a new data point on the call and noteworthy that we're talking about and it's really the fact that we've had just tremendous success internationally with our instrument business, Catalyst placements outside of North America up 55% in the second quarter. And we've only started to achieve the benefits of EVI. We haven't even started with IDEXX 360. And we're really early days on leveraging the productivity benefits of sales force automation, all of which working together increases the productivity of our investment. And so given the market opportunity that we've laid out in past discussions and we'll reinforce in the Investor Day in a couple of weeks, we just see the opportunity to be significant. The other point I will make is that we've launched SDMA for Catalyst internationally in the second quarter and it's unbelievable what the take-up is. We have 50% of Catalyst customers outside the U.S. who purchased the SDMA slide. This is amazing because we've only been in the market a couple months. It's faster take-up in the U.S. I think these international markets, our teams have done a great job and they're more medically-centric, believe it or not, than the U.S. and we don't even have reference labs in a lot of these – in some of these markets that we've seen SDMA pick-up or a strong reference lab presence. And so the proprietary nature of our offering, once we get a Catalyst into a customer – the loyalty of our Catalyst customers outside the U.S. is 99.9% and so we really see the opportunity to double down on growth in these markets around the world. Ryan S. Daniels - William Blair & Co. LLC: Okay. Very helpful. And given that it is a novel data point, just want to get a little bit more of a reference here. Is the 15% uptick in the customer-facing organization OUS, incremental to what you started with at the start of the year? Or did you have some plans to grow that and now it's higher and you're just talking about this 15% as an overall growth metric? Any color there would be helpful. Thanks.

Yes. It is incremental to what we had as our plan going into 2018 and it's really reflective of the exceptional performance that our teams have achieved, the maturity of our management teams and supporting functions. These are disciplined expansions. We don't do these things willy-nilly. We want to do them right. We want to do them in a way that our customers benefit and our organization in an organized fashion. We know how to do this. We've done more of these expansions in the U.S., but we're prepared to take this kind of growth mentality – augmented growth mentality internationally. So, yeah, this is something that we really – it was not part of our plans going into 2018, but we feel the ROI is there and that's characteristic of IDEXX. We move very, very fast when we see new opportunities.

Yeah, just on the return point, if you look at the incremental growth that we're able to drive as well as the durability of these revenues, the inverse of a 99% retention rate is a very long customer relationship. The return on these investments is several times what we're putting into it. And I think with the 55% instrument growth, over 20% consumable growth, we're really encouraged by the momentum that we have and think this is a great place for us to be spending our time and our resources.

There's another interesting dynamic, Ryan, on top of everything we're talking about, what we've done in the U.S., we basically upgraded all the VetTests to Catalyst, okay? There is like less than – I think over 99% of our chemistry consumable revenue in the U.S. is now coming from Catalyst customers. In large part, we aren't as far along, but we're well on our way. 80%, 85% of our chemistry consumable outside the U.S. is coming from Catalyst customers. And so while we continue to upgrade VetTest, we're actually turning our forces towards the new and competitive placements. And we don't have to spend as much time upgrading vet tests because, quite frankly, there are not that many left, and usually they're smaller, they're harder to upgrade. And so we take the same resources and turn them to new and competitive and, of course, that accelerates the consumable growth, which is why we're getting over 20% consumable growth in the international markets in Q2 because we've really turned now to the new and competitive. So it's another reason why we feel good about augmenting our sales organization.

Thank you. We will go to the line of Erin Wright with Credit Suisse. Your line is open. Erin Wilson Wright - Credit Suisse Securities (USA) LLC: Great. Thanks. Can you speak to some of the more one-time factors impacting the gross margin in the quarter and the dynamics that are influencing that potential or potentially better trend in the second half? And tied to that, I guess, can you speak to the overall price realization in the quarter and the sustainability of pricing trends in general across reference laboratory, rapid assay as well as VetLab consumables? Thanks.

Sure. Why don't I start with price, Erin? We noted we were at a 2% net price increase in the quarter. It's very consistent with the strategy that we've been advancing. Not a lot of change on that front. I would say, if anything, at the margin, we're just doing really well with new customer acquisition. And so that's a growth-oriented investment that causes a little bit of moderation in the gross to net conversion, but that will come back over time, of course, as we secure those accounts and get the benefits of growth with them over time. In terms of the gross margin dynamics, there are a number of investments that have been flowing through cost of revenue in the first half. Late last year, we really stepped up some investments in our lab route capacity given the mid-teen volume growth that we were seeing in our U.S. labs. We're rolling out and completing the rollout of our global LIMS system implementations that also flows through cost of revenue. We added capacity to our software, services field service rep organization and we had some cost reclassifications.

Yeah, 20 basis points of cost reclass.

That we talked about. And so along with the strong instrument growth, it's all kind of flowing through gross margin at the moment. As we look ahead, we'll start lapping some of those investments, particularly the route capacity and the lab information systems will be moderating in terms of their growth. And so looking ahead to the back half, I made a comment that we'll have more favorable comparison, so our increased operating margin outlook factors that in even as we're advancing these incremental commercial investments. Erin Wilson Wright - Credit Suisse Securities (USA) LLC: Okay. Great. And then, I guess, the sequential step-up in practice revenue and patient visit growth that you noted based on the metrics you track, I guess, do you think that there was any delay in the flea and tick season that possibly impacted overall visits and influencing your consumables or reference laboratory volume? I guess, what's embedded in your guidance also in terms of that underlying veterinary demand trends in the U.S. in particular and potentially what you saw over the course of the quarter? Thanks

Yeah, thank you. I think with regard to our performance, we're not as dependent on the flea and tick season as maybe other companies that are serving the industry with different categories, but I think it was a slow start to the year, that was probably weather. I think most people said April was a weird month and then May and June were good months. And it's hard to parse this by month, but there's a lot of anecdotal evidence about that, but I think the market is strong. And, as you know, Erin, people love their pets, millennials love their pets even better and it turns out Generation Z may even be beyond millennials. So millennials are moving into their own homes and first thing that comes is a pet. So, they're getting married later, having kids later, but they're getting the pet. So I think the overall market is strong. I think our customer base, those who are using IDEXX and who are regularly working with IDEXX that we're finding this preventative care is a big growth driver and that's one of the things that is driving particularly our reference lab growth in the first half of the year. Erin Wilson Wright - Credit Suisse Securities (USA) LLC: Okay. Great. Thank you.

Thank you. And we will go to the line of Jonathan Block from Stifel. Your line is open. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Thanks and good morning. Maybe two and change in terms of questions. Jon, you detailed the actual head count associated with the recent expansion. Where is the approximate U.S. call cycle after this most recent expansion of the sales force? And then, what's the optimal call cycle as you see it after factoring in your level of innovation?

Jon, we get that question all the time. The more we call on customers, the faster they grow with IDEXX. And because the adoption of our innovations is still a fraction of what it could be, the adoption of preventative care is still just really the earliest stages. And the other thing is we are really starting to see huge productivity from our CRM at Salesforce.com. It's pretty impressive. A rep can now basically quickly sort their territory by any number of metrics, for example, adoptions of what customers have purchased SDMA-on-a-slide. And they can sort it and pick the top opportunities, drop it right in the map anything and they got two days of calls on that particular topic. And it's really powerful and it's used by the entire sales management team. That is really – what we've been doing is building the infrastructure and now we're starting to see the real benefit. So we're going to – this expansion allows us to make more calls on customers and we expect a good ROI. It's hard for me to say where is the end of this because we're all about advancing the standards of care and that's what we see as the opportunity. And the most mature market in the world, the U.S., is not mature at all. And then we look outside the U.S. and we say if the international market got to the U.S. standard of care, I mean, what would it take? And it turns out it would take 25 years of 10% organic revenue growth to get the U.S. standards of care. And, of course, the U.S. isn't standing still. So, yeah, we have a lot of opportunity in front of us and this is going to increase the call intensity with our customers. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Okay. Just to try to quantify a bit, are you some, call it, once a month in terms of your U.S. sales force on how frequently they're currently calling on your customers?

Well, remember, we call customers, everybody out there, whether they're using us or not. Now, most practices use us for something, but not all. So we're calling on them, whether they're using us or not. And I'd say once a month is – we're going to have some more of those metrics. It's hard to say. Obviously, the big customers that we're calling on far more frequently than once a month and we're calling more than just with the veterinary diagnostic consultant. We've got professional service veterinarians and we've got specialists and we've now got, Brian mentioned as part of the gross margin factor, the investments we're making with field-based, field support reps who help them with their software and this is highly appreciating our customers who have adopted our PIMS and our apps are larger and more loyal and growing faster. And so, yeah, there's a lot of working with the customers and they really appreciate our presence because we're really bringing subject matter expertise. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Okay. I'm not trying to be difficult, but let me ask one more just to be clear, this is still part of the first question. You made a lot of hires. I guess, what I'm trying to get at, by the numbers, it seems like you are calling on much more than once a month. I understand your growth has been highly, highly impressive, but I think what we're all trying to figure out is, is there a point in time where this at least goes a little bit more on auto pilot rather than handholding. So, Jon, just to try get the crux of the question, if you're now at – I think it was close to 600 reps in North America, what is peak number? Is it 700? Is it 1,200? Is it somewhere in between? Can you give us some context there? And then I promise I'll move on to part two.

I guess, the question is, what is peak growth? We keep accelerating our growth. So we can spend some more time on this on the Analyst Day. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Okay. Fair enough. The second question is really following up on SNAP Fecal. And I know you talked about the pipeline being very robust despite the setback in SNAP Fecal. But a couple of questions here. So, one, I wanted to be clear. Is this product still likely coming to market at some point? I don't think I really knew. And then the $15 million in incremental revenue that I think was supposed to be derived from SNAP Fecal, that could have been 100 to 200 basis points of incremental growth depending on the cadence of those revenues. So what was the point earlier in the call that you're going to find ways to make up some, most, or all of that through the traction that you have at the reference lab? Thanks, guys.

Yes, that is our expectation. Jonathan David Block - Stifel, Nicolaus & Co., Inc.: Okay. That was pretty tight. So I'll ask the last 0.5. With this product seemingly unlikely to hit the market in 2019, a big part of the IDEXX story has been a continual cadence of new products. Should we expect this to be replaced by something else that you may have in the pipeline next year? Thanks, guys. And I'll see you in a couple weeks.

We're going to bring more products to the market next year. They are all different types and sizes and we'll have more to say when we get closer to 2019. I do want to say, though, what we're really benefiting from is the cumulative effect of the advancements in our proprietary test portfolio. And while everybody loves new products, we've got so many new products and so many proprietary advances out there that are still early in the adoption and which bring along all the other diagnostic recurring revenue that the vast majority of our growth is the core growth that comes from the cumulative technology we've brought to the market over the last several years.

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

Hey, guys. Thank you very much. You reported outstanding consumables growth of 20%. This appears to be the strongest I've seen in a long time. And I guess, Brian, for you, I think you indicated that both SediVue and SDMA in a slide added I believe 2 points to consumable growth in the quarter.

That's right.

Okay. So that's clarified. And then as we think about – I know you're not prepared to guide 2019. These products are certainly very early. Should we be thinking about these products as potentially 2 points additive into 2019 as we think about next year?

So a couple clarifications. Our organic growth in consumables globally was 18%. It was over 20% internationally. These are long adoption cycles. So these products will continue to augment consumable growth in 2019.

I think the way to think about it is consistent to how we've talked in our long-term strategic plan where we highlighted a long-term potential for 9% to 13% recurring CAG growth and we're obviously at the high end of that range right now and incorporated in that were benefits from SDMA, SediVue, other new products, including fecal antigen in labs and which I believe was – I think we had 0.5 point to 1 point in total from fecal antigen. So these are things that build over time and they all go into the mix. And as Jon pointed out, combined with our commercial approaches and integrated strategy to hitting those growth numbers. So we're not trying to signal that we are adding to that long-term growth potential. We'll talk more about that at Investor Day, but I think we're executing quite well and at the high end of what we've been targeting to achieve and we think with the additional investments we're making, we're looking to build on that momentum and sustain that into the future.

Great. And then last quarter you indicated that 42% of your Catalyst installed base had adopted SDMA-on-a-slide. Do you have an updated number on that? And then I think you were hoping to get to maybe somewhere around 60% of your installed base at the end of the year. Is that still maybe on track?

Yeah, thank you for that question. The 42% was a U.S. number because we really hadn't launched it internationally. We're right now at 50% globally, which – sorry, almost 50% – 49% globally. And so we're pretty happy with what the international did. I mean, international is like at 50% and U.S. is at 48%. That averages 49%. So we're really pleased with the progress at this point in the year.

That's great. And maybe one last quick one. Certainly, a very strong quarter highlighted by organic revenue growth that beat our forecast. Just wanted to ask on the rapid assay piece. Obviously, you do have a competitor on the market in the FLEX4 from Abaxis-Zoetis. Can you just speak to your view on what the pro forma growth rate of that market is? Is that mid-single-digits, high-single-digits? Or can you talk about any competitive dynamics there?

Yeah, we achieved a little higher than 5% – I think we were at 6% in Q1 and 4% organic growth in Q2 in our rapid assay business, which, as you know, is predominantly a North American business, a U.S. business. So that was both in volume and price. There was a new test out there. Always a new test generates some interest. I think the bloom is off the rose on that right now because I think customers appreciate the accuracy and sensitivity of our test. And by the way, that's the reason why you buy these tests and run them is so they find the disease. And when they don't find, customers are realizing, it's pretty obvious, it's not capturing a lot of the disease that the 4Dx is. And so we had to work through that. We're working through that, educating customers every step of the way, and so there was some impact on that certainly in our numbers in the second quarter.

Consistent with what we had baked into our plans this year.

Thanks. Look forward to the Analyst Day.

Thanks, Mark.

Thank you. And our final question will come from the line of David Westenberg with C.L. King. Your line is open. David Westenberg - C.L. King & Associates, Inc.: Hey. Thanks for squeezing me in. So really excited about the adoption of SDMA in the clinic. Now, I know that no customer is unique and you're going to probably see across the board kind of behaviors. But can you kind of give us a sense on how your customers are adopting? Kind of what percentage of chemistry panels are they adopting, if you can give us that? Or if you can't, maybe can you just give us some anecdotes about how they're using it right now? Just anything right now is helpful in understanding how quick that's going to be adopted.

Yeah, thank you very much. It's a great question. So customers are at all different stages of the journey to belief and understanding of the immense clinical value that SDMA adds to a chemistry panel. We have several hundred customers in the U.S. who are well along that journey and including SDMA and the large majority of their panels are running SDMA at a large percentage of what they're running core chemistry panels. But we've got a lot more Catalyst customers than that. So there are people that are partway there, there are people that are just starting that journey. And so this is a change in established doctrine over 50 years. We've made a lot of progress with the reference lab. But I think the availability of Catalyst SDMA is bringing new excitement and I think we're seeing more and more customers, as they get experience with SDMA, they realize it's an essential element of the chemistry panel. We're going to show some really interesting data, some of our big data on the impact that SDMA has at the Analyst Day, David, which I think you'll all find interesting. And this is why we're expanding our field resources because we've got to bring that story to the practice. And it's a great medical story. It's about medical education, and medical education is what advances the adoption of things like SDMA and our other proprietary expanded test menu. David Westenberg - C.L. King & Associates, Inc.: Great. Thank you very much. And just one last question in terms of international. So one of your competitors was acquired by a large company that has international expansion, so can you remind us a little bit about macro outside the U.S., the utilization behavior, how greenfield it is, whether or not somebody else in the market really has an impact in terms of the reach there and what you can do there in terms of the greenfield miss? I know that's not really a word, but just kind of remind us about the international dynamics, please.

Yeah, there are greenfield customers. We think outside of North America estimated to over 60,000 opportunities that – either the small number of remaining VetTest upgrades, competitive analyzers, which we're routinely swapping out by the way, and also the greenfield. Greenfield is probably about a third of that 60,000 and yet it's expanding because these markets are growing. People love their pets worldwide and medicine is advancing and we're a driver to advancing that. So we really do see a lot of growth opportunity globally, which is why we're embarking upon this 15% expansion in our field-based professionals between now and the end of the year when you look at our international field as a whole. David Westenberg - C.L. King & Associates, Inc.: Thank you. And I will see you in two weeks.

Great.

And with that speakers, I'd like to turn it back over to you for any closing comments.

Yeah, thank you. Thank you all for the call. And, again, I want to thank all the IDEXXers who are working hard to achieve our purpose of enhancing the health and well-being of pets, people and livestock around the world. It's why we do what we do. And along the way, we're generating a nice return on it, but we just have so much work ahead of us. It's what propels us and we're pleased to be able to share those results with investors and look forward to seeing all of you in person or through the Reg FD Presentation at our Analyst Day in a couple of weeks. Thank you very much.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.