IDEXX Laboratories' CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.25.14 | About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories, Inc. (NASDAQ:IDXX)

Q1 2014 Earnings Conference Call

April 25, 2014 8:30 a.m. ET

Executives

Jon Ayers – CEO

Brian McKeon – EVP & CFO

Analysts

Ryan Daniels - William Blair

Nicholas Jansen - Raymond James & Associates

Kevin Alex - Piper Jaffray & Co.

Erin Wilson - Bank of America, Merrill Lynch

Ross Taylor - CL King & Associates

Operator

Good morning, everyone, and welcome to the IDEXX Laboratories' First Quarter 2014 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 Office, 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, future events or otherwise.

Also during this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which can be found on our website at www.idexx.com.

Finally, we plan to end today's call by 9.30 a.m. Eastern. 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 as necessary. We do appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits, we'll be more than happy to take your additional question.

I would now like to turn the conference over to Brian McKeon.

Brian McKeon

Good morning, and thanks to everyone for joining us today in our call. I'm pleased to take you through our Q1 results in the strong momentum we're building in our business. In today's review of our Q1 2014, results I'll be referring to growth rates in the quarter, and let's otherwise noted these growth rates refer to Q1 2014, performance compared to Q1 2013 performance.

In terms of key things you could take away from today's review, we continue to accelerate our revenue growth driven by global expansion of our CAG franchise.

Organic revenue growth was 8% in Q1, at the high end of our expectations driven by 10.4% growth in global CAG Diagnostic Referring, normalized or changes in distributor inventory levels.

Our focus on innovation and clear benefits from our investments in our commercial capability globally is driving very strong instrument placements.

Worldwide Catalyst and Haematology placements increased 36% and 22% respectively year-on-year in Q1, and we sold over 1200 SNAP pros in the quarter, positioning us well for strong continued CAG annuity growth.

Our results reflect solid growth across regions as we continue to expand our international presence. Overall our international revenues increased 13% in Q1, including a 1% benefit from acquisitions. Growth was driven by 13% organic gains in CAG recurring diagnostic revenues and solid growth in our LPD business.

Finally we're delivering solid profit results reflected in our Q1 EPS growth of 10% to $0.89 per share. This performance is on track with our full year goals as we support investment towards our long term growth potential.

Based on our solid start to the year and the growth trends we've established in our recurring revenue streams, we’re increasing our full year outlook for organic revenue growth for 2014, to 8% to 9%, versus our prior guidance of 7% to 8%.

As a reminder this is effective and 8.5% to 9.5% organic growth rate when adjusted for estimated deferred revenue impact associated with the Catalyst 1 launch. I'll walk through that like in more detail later in the call.

Let me begin by breaking down our quarterly performance starting by an overview of growth by region. We continue to post strong growth across our major regions supported by strong momentum in our CAG business. As noted our international expansion continues on a strong track reflecting a 13% revenue growth in Q1 to $153 million, or 42% of overall revenues. This momentum was supported by strong growth in our CAG business across regions. We drove 14% organic growth in Europe CAG this quarter, supported by double digit gains in recurring diagnostic revenues across all three modalities. We drove strong reference lab growth in Germany and other key markets served by our Life Sick Facility as well as U.K. Favourable weather in these markets reinforced strong business execution.

We also benefited from extra momentum we're building in our organic business through our go-direct strategy. Our Asia CAG revenues grew 28% organically in Q1, reflecting strong growth across the region. Instrument placements were up significantly across Europe and Asia compared to a softer start in Q1 of 2013.

In the U.S we also posted solid gains in the quarter. Q1 revenues were $208 million, reflecting 6% organic growth. U.S. results were driven by CAG Diagnostic recurring revenue gains of 8%, normalized for distributor inventory changes. Note that Q1 revenues excluded $2 million of deferred revenues associated with the Catalyst 1 introductory offer.

This solid performance was achieved against the soft market backdrop impacted by unfavourable weather conditions. These effects can be seen in results of the over 4000 veterinary practises we track through our clinical level data.

For the first quarter in the U.S. patient visits were down 1.2% versus Q1 2013, and practise revenues were up 2.1%. this compares to the relatively steady growth of 2.1% in patient visits and 5.5% in practise revenue growth we saw for the full year in 2013.

Our analysis of regional date shows that practise level growth was clearly impacted by unusually harsh winter weather in the East Coast, Mid West and South East. Based on this regional data we feel that Q1 practise, there's a decline is transitory and doesn’t reflect longer term transfer growth and pet health care spending. We continue to plan for moderate overall market growth at the veterinary practise level for the balance of this year.

Our solid global revenue performance was driven by 9% organic growth in our Companion Animal Group. We're positioning ourselves for strong continued growth through excellent placement and instrument placements. Worldwide Catalyst Placements grew 36% year-over-year, with double digit growth in all major regions. While the high growth rate was held in part by a relatively easier comparison to the prior year Q1, we're up to a very strong start with the Catalyst 1 introductory offer placements in the U.S. and we continue to drive strong momentum across our chemistry platform in international.

We achieved the strong results while also maintaining a very high quality of placements on a global basis with over 50% going to customers new to IDEXX.

As expected the improved economics and footprint of the Catalyst 1 is broadening access to Catalyst Technology as evident by our strong penetration in Greenfield and competitive accounts as well as the accounts operating from Vet Tests.

Given the substantial uplift we've seen in Diagnostic Testing after catalyst is placed, we believe this will support accelerated recurring IDEXX consumable growth.

Worldwide haematology placements also grew robustly in Q1. Overall placements were up 22% year-on-year, with strong growth across all regions.

We continue to be pleased with our success in placing ProCyte Dx into accounts new to IDEXX and saw this metric increase to 50% in Q1, our best performance on record. Consistent with our expectations we are seeing some shift in haematology placements towards LaserCyte Dx, specially when we're sung a full instrument suite with callus 1. This is logical as the price point of LaserCyte Dx is an excellent match to callus-1, while still offering us a purer menu compared to any competitive haematology analyser.

Strong placements drove 16% organic growth in global instrument revenue in the quarter to nearly $19 million. Instrument revenues included benefits from the sale of over 1200 snap core units which Jon will speak to more in his comments.

As noted we estimated that the deferred revenue associated with our Catalyst 1intrudoctury offer was about $2 million in the quarter.

As expected our instrument revenue growth is below our placement growth reflecting the relatively lower price point in Catalyst 1, as well as mix impacts associated with higher international sales of lower cost analysers. These effects have limited economic impact as margins are similar across our product line and instrument margin is a less significant driver of our financial performance.

The key driver of our financial performance CAG recurring diagnostic revenues for revenues associated with instrument consumables and service, rapid acid test kits and lab services were $259 million in the first quarter, representing about 72% of overall revenues.

With highly durable annuity grew 10.4% organically year-on-year in Q1, normalized for changes in distributor inventory levels. As noted these results were supported by strong gains across regions with overall growth straining at the high end of our full year goal of 9% to 11%.

Changes in distributor inventories, the reported growth in recurring CAG diagnostic revenues by about 2% in the quarter. As U.S. distributor inventories finished at 3.4 weeks at the end of Q1, down from over 4 weeks at year end, a decline that didn't occur in Q1, 2013.

Prime Modality instrument consumable revenues of $84 million in Q1 grew organically 12% versus the prior year period or 15% or normalized for changes in distributor inventory levels. Growth continues to be driven by a number of factors, including our steadily growing installed base that comes from customers due to IDEXX,, increased testing as current IDEXX customers upgrade their in-house labs with Catalyst ProCyte enhance loyalty from our customer base.

Note that catalyst customers now account for nearly 90% of U.S chemistry consumable revenue exclusive of corporate accounts with the remaining 10% coming from Vet test customers.

Revenues for our rapid asset kit component of the CAG recurring diagnostic revenue, which excludes SNAP Pro device revenue were $43 million in Q1. These revenues increased 3% normalized for changes in distributor inventory levels, in part reflecting pressure from the U.S weather impact.

We expect benefits from the strong launch of SNAP Pro will support solid continued growth in the rapid assay modality.

A reference lab consulting services modality grew 10% organically to $118 million in Q1. We saw strong growth in all of our regions around the world. In North America the diagnostic sales force model and utilization of VetConnect PLUS has helped to generate an increased in the level of diagnostics being run by our customers while also improving on our already strong customer attention rates. As noted our international regions also delivered strong volume growth added by well executed issues such as our new Life Sick IDEXX Direct Reference Lab, and our go-direct strategy in the Nordics.

Our Practice Management and Digital Imagining Systems business with revenues of $24 million in Q1 grew organically by 13%. We benefited from our base of pet health network Pro customers, largely than typical practice management installations and growth in the service components of both the practise management and digital imaging businesses tied to our loyal install base. Our Livestock Poultry and Dairy business also grew solid in Q1, up 5% originally.

Overall revenues adjusted for foreign exchange grew 10% to 431 million, reflecting benefits from our acquisition of our Brazil distributor last fall.

Solid organic growth was supported by continued expansion of our dairy business in China and progress in expanding our LPD business in Eastern Europe. Results were better than expected in the quarter due to a relatively slower than expected ramp down in bovine programs in Western Europe.

As noted in our last call changes in disease eradication programs get to add to volatility in this business. We expect these impacts will contribute to moderate organic revenue declines in our LPD for the balance of the year.

Our water business grew 4% in Q1, to $21 million, including benefits from the acquisition of our South Africa distributor. Organic growth was 2%, reflecting gains in our America's and Asia Pacific regions, offset by some tougher year-on-year comparisons in Europe in Q1.

Business growth continues to be driven by our Core Colilert Franchise as we build an increasing contribution from newer products. We took benefits from our new products will keep us on track for mid-single digit growth gaol this year.

Solid revenue gains across or business helped to drive continued strong profit in cash flow performance. While profit in Q1 increased 10% year-on-year supported by a 70 basis point year-over-year improvement in gross margin to 56%. Gross margin benefit from product cost efficiencies; moderate price gains and a reduction in royalty expense for one our products that also included a non-recurring benefit of about $1 million. This was offset a bit by some unfavourable product mix from higher proportion instrument sales.

Operating expenses were 37% of revenue in Q1, down slightly from last year as a percentage of revenue. As mentioned upfront, Q1 of 2013 included a $4 million charge to G&A related to the bankruptcy of the vendor. Adjusting for that operating expense as a percent of revenue increased 90 basis points. This increase is primarily driven by the investments we are making worldwide in sales and marketing that's helping to driver accelerated revenue growth.

Strong revenue growth supported margins that were in line with expectations. We need to deliver a fully diluted EPS of $0.89 per share. EPS growth was 10% and currency changes had no material impact. Our effective tax rate at 31.2% was as expected as does not include any benefit for the R&D tax credit for 2014 as it has expired and hasn’t been renewed. As a reminder in regards to the R&D tax credit, Q1 of last year included both an adjustment for all of 2012 plus the normal credit for the 2013 quarter. Adjusting Q1 of 2013 to exclude the R&D tax credit recorded in the quarter and reserve associated with the vendor bankruptcy, EPS grew 12%.

Free cash flow was $29 million or 62% of net income in Q1. Free cash flow for the quarter was as expected reflecting the typical timing that we see in Q1 related to things like bonus payments and accounts receivable and inventory increases in advance of the heartworm [ph] ruined season.

We remain on track towards our full year outlook for free cash flow in the range of 95% to 100% of net income. Our strong cash flow enabled, continues to support our share repurchases in Q1. We repurchased 507600 shares for about $70 million during the quarter.

Turning to our outlook given our strong start to the year, we're increasing our full year revenue guidance. We now expect full year 2014 revenues to be in the range of $1.495 billion to $1.51 billion. This reflects an expectation for full year organic growth in the range of 8% to 9%. The increase in our outlook reflects current trends towards the higher end of our full year goals of 9% to 11% growth in CAG recurring diagnostic revenues as well as upsides from stronger than expected LPD performance in Q1.

Our outlook intends to assume an excepted $5 million to $10 million of deferred revenue associated with a Catalyst 1 introductory offer. Adjusting for the impact of this revenue deferral, organic growth will be about 8.5% to 9.5% in 2014.

We remain on track towards delivery of our full year goal of $3.76 to $3.86 EPS, or adjusted growth of 11% to 14%. This reflects expectations for relatively consistent operating margins for the full year compared to 2013. We intend to leverage upsides from our improved revenue outlook just for increased investment towards key long term growth initiatives which Jon will speak to in his comments.

For Q2 we'd highlight that we expect organic growth consistent with our full year outlook of 89%. We also expect operating margins will be about 100 basis points below year levels in Q2, reflecting increased commercial investments and impacts from targeted organizational changes in our European organization aligned with our growth strategy.

With that I'll turn it over to Jon.

Jon Ayers

Okay, thank you, Brian. As Brian elucidated we have strong performance in the quarter. In revenues, earnings and the key metrics such as instrument placements and the percent that go to accounts that are either competitive or new to IDEXX and thus expand our install base.

All these indicate, I think the health of the business I and the sustainability of our model for growing our markets. This growth and success were in virtually all regions of the world. The result of our Companion Animal Group in North America reflected the success of our sales transformation completed in Q3 of last year. This is the second full quarter of strong performance since having come through the learning period.

Validating the new sales model, the key metrics are consistent with Q4 2013, for Veterinary Diagnostic Consults and 98% territory occupancy rate and a 60% increase in number of in-person customer visits over Q1 of 2013, the last quarter we were still fully in the old sales model.

Customer acquisition for tension and utilization were also strong. Our new compensation plan implemented this Q1, that in part were work professionals for growing or recurring diagnostic revenue in their territory as well as instrument placements was also a great success. We believe we have now created a strong foundation for a North America CAG sales and marketing organization that we can readily scale as our revenues grow.

Internationally we also had strong performance in all of our major country markets. In many markets where we have a direct sales organization we're able to make investments that generate sustained revenue growth through instrument placements, new lab business and growth in veterinary practice usage of our diagnostics.

For illustration purposes let me give you some Q1 year-over-year organic growth of our CAG business in some selected country markets. We had over 30% organic growth in the Nordics, Austria, South Africa, Australia and China. We had over 20% in Japan and in Germany, Holland and Switzerland it 15% to 20% organic growth. In fact CAG International Organic growth was 15% overall. These growth numbers are a result of a strategy augmenting international and in-country leadership, supported by augmented structure and of course the global rule out of our innovative diagnostic offerings.

This growth also shows that pet owners everywhere have a strong bond with their pets and are willing consumers of veterinary healthcare when they understand the benefits of their beloved animals. Speaking advances in our diagnostic offering, our announcement this past January of our newest in-house chemistry platform, Catalyst 1 was a significant success as measured by the success of our introductory offer for this instrument, where customers buy Catalyst 1, and are known to Catalyst Dx until that unit is available. In this way customers immediately see the benefits of the pick up and testing the catalyst enables and of course add to our instrument consumable revenue growth.

The Catalyst 1 price point, it's practise is that run as few as one sample a day which is pretty low considering a single doc practice maybe seeing 13 to 15 patients a day, really should be more than one sample, but that's kind of where the industry is. So we're seeing the Catalyst 1 is the right instrument with the right footprint and the right price point for the vast majority of practices that don't already enjoy the benefit of catalyst technology with the Catalyst Dx and we continue to see strong growth and enhanced testing when customers upgrade the catalyst and a haematology offering for their in-house testing.

This both in utilization does not generally come at the expense of our reference lab testing, showing that testing begets testing. Our in-house instruments and their unique ability to allow customers generate results easily during the client visit, something we call real time care, expands the market for diagnostic testing. We are also very pleased with the launch of SNAP Pro mobile device in March. With sales of over 1200 units we're able to validate the instrument performs extremely well in the practice environment and provides tremendous value to our customers with rapid assay test kits like significantly improving work flow and staff efficiency. While at the same time automatically instantly adding their results to the patient's diagnostic history with Vetconnect PLUS.

We expect to build upon this installed base of customers throughout the year from our very large base of North American customers who regularly use our SNAP Rapid test kits. We expect that the value that SNAP Pro provides our customers are the SNAP family test kits will reinforce their loyalty to IDEXX at the in-house Test Kit modality and feed all of IDEXX Diagnostics.

Turning to our strategy of advancing diagnostic insight and value to information technology, we continue to redefine diagnostics through our club VetConnect PLUS, which changes the focus as the patient's results from what does one sample tell us to how does the most recent result fit into the patient's evolution and metrics over time, thus providing greater medical insight. We continue to grow the number of customer activation which now stands at over 13,300 and have launched the service in Australia in late March, adding to the U.S, Canada, and U.K launches previously.

An addition we continue to add functionality, including a mobile app version for I-phones and I-pads that notifies customers when new results are ready and shows these results.

As I mentioned the customers who adopt that Connect PLUS increase their loyalty to IDEXX Diagnostics because of the unique value they can only receive when they use our ecosystem, including the results from our in-house labs, SNAP Pro and our reference lab services.

As a result of the combination of our new customer-centric sales model in North America and VetConnect PLUS option ,we can continue to see steadily increasing customer loyalty levels across our three diagnostic modalities , even as they today stand at what I would consider world class of 96% to almost 99% depending on the modality.

Our increase in organic revenue growth guidance today for 2014 of 8% to 9% that Brian mentioned reflects our confidence in the success we are seeing in our global markets and the sustained growth of the enduring recurring revenue of our three diagnostic modalities, reference labs, in-house instrument consumables, rapid assay test kits, supported now with launch of SNAP Pro.

The advances of our diagnostic technology offering over the past few years which we have discussed regularly and in detail in this call provides for an offering that is quite unique and differentiate on key dimensions, importance of the veterinary and their staff. Notably our diagnostic ecosystem works in a seamless way to help veterinarians advance the standard of medical care and strengthen the bonds they have with pet owners. This accelerates the growth of their business and thus in turn our recurring revenue.

With this success we have decided to invest in incremental margin that comes from this revenue acceleration in 2014 in further resources that will both assure we achieve revenue in 2014 and propel IDEXX growth in years to come. Specifically we expect to increase the number of field sales, service, marketing and customer education resources in the North American market, scaling our now proven sales model. Scaling is far easier a task then the one we undertook last year to transform that sales model. Second, we expect to do the same key international markets where we believe we can augment demand for diagnostic offerings. Third, we'll be adding international regional and country leadership to support markets where we're are direct, including those markets where we've recently chosen to go direct. Fourth, we'll be adding international infrastructure to support long term growth in these markets. Note, as we are excited as we are today about the potential for growth in North America, we believe the growth opportunity internationally is even bigger. And finally we'll be augmenting our investment in cloud based IP solutions, including the continued global role out of VetConnect PLUS and the expansion of its capability along several dimensions.

So in conclusion, our goal over time is to build the momentum on our business to sustain double digit organic revenue growth. We very much believe this is achievable given the strong bonds between pets and owners globally and the medical value of the diagnostic category, not to mention the state of our innovative diagnostic and IT ecosystem. Yet we have to apply augmented commercial resources around the world to bring this to our customers and this goal to fruition.

We think this investment will provide an outstanding return and create significant incremental shareholder value. So with those comments Cynthia, I will turn the call over to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) we will go to the line of Ryan Daniels with William Blair. Please go ahead.

Ryan Daniels - William Blair

Good morning guys, thanks for taking my questions. I guess Jon the first one for you on the sales force, given the transformation and the changing compensation. I'm curios if you can offer any color on, perhaps any surprises you've seen. Meaning are you seeing customer show proclivity to be more receptive to you know growth in one modality versus another or your seeing, cross on some opportunities to gain share using your in the point of care versus reference lab, just on anything there that's [indiscernible]

Jon Ayers

Sure, well of course you know we do believe we have a significant cost selling opportunity. I remind investors that if you look at our customers for in-house chemistry and our customers for the reference lab, there's only actually 40% overlap. So it's a very-very significant cost selling opportunity and we thought that was one of the key reasons for the transformation and a single point and contact with customers and of course we're able to better achieve that with a 60% growth in the number of visits.

I would say you know the one thing that is continually reinforced to us is the value of real time care. As you know Ryan, our offering and it's ability to generate results in eight minutes easily, full comprehensive chemistry and a hematology profile, [indiscernible] will be added with Catalyst 1 and Catalyst Dx in coming quarters. That customers are now more and more realizing that they get greater compliance when they have the results in front of them and they're able to speak face to face in the moment, in context with the pet owner and greater compliance not only to you know whatever the treatment plan may be, but it's also greater compliance as any suggested follow-on testing which may go to reference lab. Which is why we say testing begets testing. So we believe and I think if you look at the kind of the general trend, we're seeing a growth in the in-house modality which is growing overall, a diagnostics modality that we are driving because of real time care and more and more customers are, you know I speak to customers at conferences, they readily say [ph] I just, you know really working for us. And our reps are very-very good at bringing that insight to customers, now that they are really representing the customer in all of our diagnostic modalities.

Ryan Daniels - William Blair

Okay very helpful and then it’s my follow-up. Jon, I now you choose your words carefully and I think a minute ago you just mentioned inability to sustain double-digit organic growth. So, you think about your growth blueprint. I know you are not far from that in your guidance this year but as that a few years out it’s kind of a three- to five-year goal. Is there any more color that are pretty important change in tone?some of the payers try to maybe ease up a little bit on some of the restrictions here and can just be a tailwinds. For U.S. we think about the balance in 2014 relative to 2013.

Jon Ayers

Well. I don’t think we’re putting a time frame on that goal. Our organic growth goal this year is 8% to 9%. Obviously, we’re higher organic growth in the Companion Animal business, which I believe is on the order of 85% of our revenues. Our overall organic growth for the company is brought down a little bit by the other 15% of the revenues that are generally just a little bit lower organic growth and of course we’ve had the LPD, which has been actually had a good quarter but generally flat is slightly down as we worked through some of these eradication programs, but we are seeing the trajectory to acceleration and our goal is to accelerate at organic growth to the double digit level and at 8% to 9% we are not that far away from it.

Ryan Daniels - William Blair

Right. Okay, thanks guys. Nice talking to you.

Operator

Thank you. Next we go to line of Nicholas Jansen with Raymond James. Please go ahead.

Nicholas Jansen - Raymond James & Associates

Hi guys. Thinking about the international expense you’re kind of announcing right now, what change

to you maybe 6 months ago, 12 months ago surrounding your expectations to bigger investment? Here I’m wondering what happened this quarter that make you comfortable enough to make the switch?

Jon Ayers

I think a number of things that came together. We have really good – we put in some excellent leadership with Michael Williams and we got really strong country management leadership. That combined with the fact that our modalities and our offerings are improving, as Brian mentioned the [indiscernible]extract with the [indiscernible]is really starting to penetrate the continental European market. Obviously, we have the prospects of Catalyst One. If we think Catalyst One is the excessive product in North America, our European guys said “well, we thought developed Catalyst One for us because it’s so perfect” and [indiscernible] for our markets. And of course that will be a 2015 opportunity as we rolled out that out. And then of course we’re rolling out the diagnostic IT ecosystem with VetConnect PLUS. So, we just see the confluence of both and the markets are responding. I wouldn’t say Europe is doing particularly well economy-wise although did have a weather quarter than the U.S. did. But look at the growth we’re achieving but not only in Europe. Look at the growth we’re achieving in Asia and we just of course went direct in Brazil with the acquisition of one of our distributors at Madasa. So, we just the opportunity there. We’re seeing a [indiscernible]. We have the confidence, we have the leadership, we have the portfolio and so we take a time to accelerate that investment . Like I just said when you had good leadership it tends to identify more opportunities and the momentum build on itself and I think it’s reinforcing whatever business we have globally and we’re seeing more opportunity and we want to invest behind that because we think it’s going to be aid to our accelerated growth trend and will be a great return for us.

Nicholas Jansen - Raymond James & Associates

Right . And then maybe on the Noble Pro , the 1200 sign-ups that you had so far in the first quarter, but can you give a [indiscernible] 3:41 flavour in terms of other existing customers on SNAP [indiscernible] about the characteristics of the customers you had thus far.

Jon Ayers

Yeah those are - though of course the target not be existing customers of SNAP because the vast majority of the North American Veterinary practices are customers of our SNAP. Line is fairly [indiscernible]. I’ll tell you what we’re seeing is they really appreciate, they basically load and walk away. I think SNAP, it’s a very – that the workflow is just very, very beneficial for practices that are busy and they neither text every second. [indiscernible] like to think kind of benefit in workloads we brought with the in-house instruments on Catalyst and laser side and pro side on the hematology side, now the big improvement in workflow for the test kit modality in general. In fact, what we are seeing is the average practice. The average practice is buying two, not just one but two because they need them for all kind of volumes. So obviously that’s a mix. Some practices are buying more and another practices are buying one. But we’re just seeing really, really positive customer response. Obviously, we’re very early but it’s nice to see those. That’s 1200 is [indiscernible] the feedback from the customers has just been universally very, very excited.

Operator

Thank you. And as a reminder if you have any questions or comments you may press * and then 1. And we’ll go to the line of Kevin Alex [ph] with Piper Jaffray. Your line is open.

Kevin Alex - Piper Jaffray & Co.

Good morning. Thanks for taking the questions. First off, you’ve mentioned weather a couple of times and also in U.S. it seems like seasonality. We’re getting off to [indiscernible] and hard warm season. What sort of impact do you think that had on testing and I think you mentioned the patient visits were off 1.2% in Q1. Have you seen any sort of improvement since then?

Jon Ayers

Yeah. Thank you for the question . Just give you a little context. That’s a pretty big drop as we look at what patient visits will do quarter before or last five or six years, even during the great recession. 1.2% a decline – this is a fairly robust market. So, we don’t see that. We only see it – I only like to see like one or two other quarters in the last five or six years and clearly it was regional as we’re looking the regional thing. With 1000 practices you can get some fairly good granularity on originality of that. So, that just gives us some indication. I don’t think in diagnostic testing that in general you may get lot, although those visits are lots. I don’t know about other categories. I can only speak about our category. And so we expect there to be good demand. We think that decline is transitory. The 2% we saw in patient visits and the 5.5% in revenue growth with the clinical level for tech care services with our base of 4000 customers we saw on 2013 we think it’s more the sustainable rate, but I don’t think beyond that we’ll make up any of the loss on the diagnostic category in the second quarter.

Kevin Alex - Piper Jaffray & Co.

Got it. And what the informatics you have, did you notice any kind of delay or drop in diagnostic testing especially in the South as I think hardware season got off to a late start?

Jon Ayers

Brian mentioned that rapid assay was a little bit a down again. We think that’s kind of a weather transitory issue and a chunk of our rapid assay testing is parasitic disease which includes hardware testing and the purpose there is obviously you want to test before you put them on a preventative, kind of a co-indicator if you will. I guess it’s the only thing I would say on that.

Kevin Alex - Piper Jaffray & Co.

Yeah. Hardware [indiscernible] I would say that bigger impact as Jon highlighted was kind of a consistent weather impact in the year that you would expect see it just given the unusual conditions this winter. So, I think this was definitely more of a transitory planning and we would anticipate getting back to [indiscernible] that you saw last year.

Jon Ayers

Yeah . Good point. My people really came at the transitory impact on the patient visit day [indiscernible] that were reporting obviously were very, very pleased with our performance. And I’m not going to put weather it’s – I think it was very strong performance for the quarter when you [indiscernible] everything in and I’m not thinking any weather component there.

Kevin Alex - Piper Jaffray & Co.

My second question is one Catalyst One. On your prepared comments you mentioned that it’s the right product because [indiscernible] don’t use Catalyst now. Can you give us an idea of how big that [indiscernible] market is and what sort of penetration we should expect overtime?

Jon Ayers

Well customers who don’t use Catalyst today they use it by-product back to 50%. So, it’s a ____ addressable market and that is it’s the U.S. or North America number and that doesn’t even include international. Obviously, we have very, very Catalyst Dx placement performance international. We don’t have any introductory offer for Catalyst One international. We haven’t really brought Catalyst One outside North America. So, that addressable market is even bigger, far bigger.

Kevin Alex - Piper Jaffray & Co.

Okay.

Jon Ayers

Generally speaking, practices are smaller outside North America than they are in North America.

Kevin Alex - Piper Jaffray & Co.

Right.

Jon Ayers

There are obviously [indiscernible] like country but they are not, you don’t have these practices.

Kevin Alex - Piper Jaffray & Co.

I guess I [indiscernible] figure out I guess how quickly should we see that ramp in. It’s obviously a gigantic market both in the U.S. and outside.

Jon Ayers

Well, we had given an outlook for the 10% to 15% growth this year in Catalyst placements and hematology placements and we’re obviously up to a solid start on that. So, this is something that will occur over time, but feel that’s the pace of ramp that were projecting. We feel good about how we’re executing on that opportunity.

Kevin Alex - Piper Jaffray & Co.

Okay. Thanks.

Operator

Our next question comes from the line of Erin Wilson with Bank of America, Merrill Lynch. Your line is open.

Erin Wilson - Bank of America, Merrill Lynch

Great. Thanks for taking my questions. Associating with the global initiative PR, where is the focus specifically internationally by geography and where will you be adding an international capacity on the lab side of the business like a new lab similar to what you’ve done in Germany? Did that support that sort of global demand or how you’ll be entering entirely new market here?

Jon Ayers

Yeah. Thank you, Erin for that question. You know what the neat thing is that we really already have a base in almost every market. I would say the market that we really didn’t feel like we had a strong base in was Brazil and now with the acquisition of a wonderful, wonderful distribution organization in which IDEXX aligned very consistent with our culture of entrepreneuralism. We have a strong base in Brazil. Obviously, we’ve been in Europe since early 1990s, we had been in China, for example since 2002. So, it’s really broad based. It’s there really isn’t any market where people have pets. They generally if they have pets, they value their pets and they value more and more. So, whether it’s Europe including Eastern Europe or for example South Africa, we have now gone direct in South Africa and Asia. We are doing very well. I think I may have mentioned in the call, Japan is a very strong market for us, the combination of Catalyst and ProCyte is. Japan is an in-house market that large majority of the testing is done in-house. They like to run in house. We got a very, very competitive portfolio there and our Japan organization really kicked in and gearing starting in Q4 and continued in Q1, and so it’s really across the board. And with regard to labs, we continue to look carefully about how to build out an optimise the lab infrastructure to provide world class service levels. In just little context here in the U.S. the majority of the market will kind of take place today service level for granted, but that’s an innovation outside the U.S. and that’s [indiscernible] picked up results in the evening and provided results the next morning. It wasn’t something that was really being done in continental Europe until we launched the [indiscernible] With its great logistic type of work and it was totally innovative thing. And so we think that combination of the [indiscernible]and our core lab in Lubisberg, Germany really makes a very powerful platform for continental European growth and of course we have strong lab organization in the U.K.

Erin Wilson - Bank of America, Merrill Lynch

Okay. Great. That’s helpful. And fondly speaking, how would you characterize the profitability of the overseas business relative to the North American business in Companion Animal?

Brian McKeon

It’s a same fundamental economics in terms of the contribution that we get from recurring CAG diagnostics across modalities. I think it is we’re in a relatively earlier stage in investment and the infrastructure given the size of some of the businesses that we built to date. So the U.S. is obviously further along main. So, I think it’s relatively lower, but it’s not driven by fundamentally different economic drivers. It’s more our choice in growth markets to be investing maybe any infrastructure to build the business for the long term and as Jon said I think we see opportunities to do that investment [indiscernible] broadly and over time expect it will yield similar type of returns that what we see in the U.S.

Jon Ayers

Yeah. And I would say I will take the instrument and consumable business. The economics are very attractive around the world taking very little bit by country but overall they are very, very attractive and [indiscernible] we have a mature organization like we have in North America are very, very attractive. Obviously, the places will adjust getting more invested in new lab or starting up the lab organization just as what we, and start a lab anywhere there is an investment period. But I would reinforce what Brian is saying the core economics are quite equally attractive around the world.

Erin Wilson - Bank of America, Merrill Lynch

Okay. Great. Thanks you so much.

Operator

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

Unidentified Analyst

HI. I’m actually Ethan Robb [ph]. I’m for Jon Block. Thanks for taking my questions. Just a first follow-up on Catalyst One I note so early in the lunch. But I was wondering if you could give any commentary on Catalyst One’s contribution to the 36% growth in Catalyst placements and then also are you seeing these Catalyst One placement, why not it’s something placed yet, but are you seeing the customer ordering Catalyst One more new accounts or is it upgrades from that at best? Thanks.

Jon Ayers

Yeah. I would say a large majority of what we saw in North America were Catalyst One and obviously Catalyst One has had pre offer and we were placing Catalyst Dx and we have deferred revenue component that Brian mentioned of up $2 million. Our percent placement to what I want to call “accounts that [grow on sold days] [ph]” that would be competitive at these placements or Greenfield accounts or just generally accounts that are new to IDEXX. Brian mentioned that greater than 50% Metric. In North America it was even higher than that, it’s anywhere at 50% or 59%. So, that’s a very attractive – that’s actually a high point for us in terms of competitive placements. And again one of the metrics that I mentioned I think really speaks the core health of the business and the opportunity for growth that we have. Obviously, we still have VetTest. We don’t have as many VetTest as we used to have little bit more than 10% of our consumables excluding corporate accounts and these are coming from VetTest accounts. But one of the things that we see when we upgraded the VetTest is they grow. They grow their in-house testing by 45% and we don’t fully realise that 45% because we’ve given some rebates to expand the profile with haematology and electrolytes. So, we only achieved 25%, so pretty good. But they’re saying that big uptake in growth and that helps their practice. This is a growth agenda and they see that uptake whether they are upgrading from that test or they are upgrading form a competitive analyser because of the unique nature that are in house lab. That’s the ability to turn results around easily and quickly 8 minutes within the 20-30-minute exam so they see that nice uptake. So, we really are by placing our analysers were expanding the market and so we get growth on both pipes of placements. Obviously when it’s a customer needed IDEXX we get a 100% of that is added to our consumable growth.

Unidentified Analyst

Okay. Great. And then just a follow-up question on the referring flat and you put up a really strong number even with some challenging weather conditions. Could you share us any details on how the business in North America performed relative to international?

Jon Ayers

We had a strong dimension stronger across regions. Europe, interestingly we had questions on the weather dynamic. It actually had good weather in Europe, I think, that helped a bit, but it was relatively stronger growth international but quite solid growth in the U.S. as well and the bulk of that growth was driven by volume gains. So, we feel very good about the health of the business across regions and particularly with some of the headwinds we saw in the U.S.

Unidentified Analyst

Okay. So, one last housekeeping [ph] question here. On a full-year EPS guidance, how you’re thinking about the FpEx impact. It seems as if you’re expecting having six centric [ph] the last time you reported. Now is it just a three centric from FpEx?

Jon Ayers

We changed the methodology there. I’m glad you point that out. We in the past had adjusted how we normalize for FpEx as we had adjusted the current year to prior year rates. We got a new methodology that it kind of leaves our current year numbers as is an adjust to prior years to see all the change in the table. There really isn’t much of a change in terms of the impact of FpEx. If you look at the normalized EPS growth, it’s very similar 11 and 14 or it’s the same. And that’s really just the change you see in a success and three centric [ph] is just related to that, that methodology change is not. There was some slight improvement in that impacts but it wasn’t a material impact.

Operator

Thank you. And as a reminder if you do have any questions or comments press * and then 1. We’ll go to the line of Ross Taylor with CL King. Your line is open.

Ross Taylor - CL King & Associates

I had a question related to your comment about you potentially getting to double digit organic growth and you’re able to accelerate to that page. How much would that be dependent on increasing your installed base of customer versus just higher utilization of your existing customer base.

Jon Ayers

I don’t know we are both advancer [ph] and third is greater retention and those were kind of some modest price realization as Brian said it’s not a big factor, it’s a small factor but it’s mostly volume both in our in-house, it’s as price of bulk of our growth that we’re exhibiting in first quarter is volume. We think volume is very healthy. We think when we see revenue growth is driven by volume growth and testing is a very healthy dynamic. But it’s going to some about we really see – if we look as I mentioned are our new comp plan [ph] which rolled on Q1 great success with the North American Veterinary diagnostic consultants. We’ve advising [ph] them to grow a recurring diagnostic revenue and they get what their lost ways to grow it and they were quite successful in doing it and I think there is just a lot there in that opportunity that we see is on tape and it’s going to be utilization, it’s going to be new customer acquisitions with customer retention.

Brian McKeon

I would highlight the key – we talked about overall growth but obviously the key drive for our business is this recurring CAG diagnostic annuity, which grew 10% in the quarter and that now looks 9% to 11% for the year and what percentage of our total revenue that is 7% of our total revenues? This is a 72% in Q1 and that’s from what we’re trying to drive as a business model at the end of the day that’s what going to drive cash flow on our success economically and we’re feeling very good ---

Ross Taylor - CL King & Associates

Just one final question and maybe I missed this in some of your prepared remarks but I guess revenues were a little better than you expected in the first quarter and can you give any comment as to whether in other words certain regions or product areas that really outperformed versus your expectations or whether it was more just across the board?

Brian McKeon

I would say two themes to highlight one is just strong execution, very pleased with how the company executed in Q1, a great start to the year. LPD was better than we expected in Q1, we expected a slow ramp down in some of the bovine testing programs in Europe and that’s – we do expect that to happen and we expect to pressure the balance year on that, but it was delayed a bit in Q1 and I would highlight that as a factor on the margin.

Jon Ayers

And the only one on the other margin is, as Brian mentioned briefly we had – while we had unfavourable weather in the US, we had favourable revenue in Europe and that probably added a little bit to the European performance although that execution fundamentally was very very strong, underlying that – when you put the two together but it was – and by the way I don’t think about favourable weather – it’s not a big as the US. So but probably we are going down the fine points here to answer your question.

Operator

We will go to the line of Jeff Frelick from Canaccord Genuity.

Unidentified Analyst

Thanks, good morning, this is Mark in for Jeff. Wanted to just maybe ask Jon if you can maybe add some color on increase in the field sales organization outside of North America? Can you walk us through or would you be able to quantify number of direct reps you are targeting for 2014 whether it is by region or even by continent?

Jon Ayers

Yes, no, I'm not really in the position to do that. It is really very, very country specific and there are a lot of different countries and the – one interesting thing about that companion animal business is each country is a little different. The core economics are the same, the opportunities the same but the way we execute in each country's a bit different. Part of it is because the way veterinary medicine is taught, it is different by country. So we really take a country specific approach. I think that's one of the strengths of our international organization is we have strong country management, strong entrepreneurial country management, they understand and take advantage of the market opportunity in front of them. They are able to adapt these core strategies to the market in general, as we've mentioned we've gone direct in the Nordics. We've gone direct in South Africa. We've gone direct in Brazil with an acquisition. And other markets we use, some markets we've been direct for 20 years and other markets we have very strong distribution that works well for us, so it is very specific. So it is hard to give numbers there.

Unidentified Analyst

And just as a follow-up, obviously weather was an impact in Q1. Could you maybe discuss what your expectations are for vet growth both at practice volume and practice revenue bucket?

Jon Ayers

I would say for the balance of the year we really expect the same that we saw for the full year of 2013, which was 2% roughly practice visit growth and 5 to 5.5% I think in terms of practice of revenue for the balance of the year. That’s the US number, obviously outside the US we don’t have the same kind of metrics but generally they are very good growth markets.

Operator

And we have no further questions at this time. So with that, we will finish here with closing comments.

Jon Ayers

I want to thank everybody for joining the call. I also really want to thank all the employees of IDEXX around the world for just a great quarter. I think we are doing great things to bring support and technology to our customers and the companion animal business, we are helping strengthen the bonds that matter, including the pet human bond and the bond between pet owners and the practice. We are bringing great things to the world in terms of our water and life style poultry diary business, and just really phenomenal success, so I really want to thank all – to take this opportunity to thank all of our employees and we look forward to continuing to update investors with our progress throughout the year in our future calls. That concludes our call.

Operator

Again 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.

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IDEXX Laboratories (IDXX): Q1 EPS of $0.89 beats by $0.02. Revenue of $360.2M (+8.5% Y/Y) misses by $1.38M.