IDEXX Laboratories, Inc. (IDXX) Q1 2015 Earnings Report, Transcript and Summary

Good morning, everyone and welcome to the IDEXX Laboratories First 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, 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, IDEXX.com. In reviewing our first 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 as necessary. We do appreciate you may have additional questions but please feel free to get back into the queue and if time permits, we'll be more than happy to take your additional questions. I would now like to turn the call over to Brian McKeon Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Good morning, everyone. Today I'll take you through our first quarter results and spend some time reviewing our updated financial outlook for the full year. Jon will follow with his comments and observations. We had a solid start to the year in Q1. In terms of highlight our first-quarter revenues were $382 million, up 6% on a reported basis. Foreign exchange was a significant headwind in Q1 resulting in a 6% year-on-year reduction in reporter growth. These changes reduced year-on-year operating profit by over $5 million or about $0.01 per share more than originally projected. Despite these impacts, we delivered EPS results of $0.98 per share on Q1, reflecting 18% year-on-year gains on a constant currency basis. Results were supported by strong organic growth and better than expected operating margins. Normalized organic revenue growth in Q1 was 11.4% and recurring CAG diagnostic gains were nearly 14%, supported by continuous strong growth in VetLab consumables and reference lab services across our U.S. and international markets. Instrument placements were very strong in the quarter. Worldwide premium placements increased 24%, reflecting 35% growth in Catalyst instruments and 13% growth in premium hematology. Globally, we achieved 925 Catalyst placements, including 425 in North America, with a significant backlog heading into Q2. While we posted high organic growth results in Q1, revenue gains fell below our raised growth expectations. Overall growth was constrained by tough weather conditions across much of the U.S. in the quarter. While consumable and reference lab sales remained strong, rapid assay results were below expectations reflecting lower sales of first-generation lines, that is, feline and single test canine products. Lower than expected revenues in our digital imaging business also moderated overall growth. Looking forward, we're recalibrating our 2015 financial outlook to reflect the continued strengthening of the U.S. dollar, which we estimate will reduce revenue by an additional $15 million and EPS by $0.05 per share in 2015 compared to rates used to calculate our original 2015 guidance shared on our January earnings call. We're also revising our full year organic revenue growth outlook by 1.5% to 12% to 13% to reflect Q1 results, expectations for moderate organic declines before margin capture benefits in our rapid assay business and revenue impacts from a transition in our Information Management business towards an increased focus on cloud-based services. Along with FX impacts, this revised outlook will lower our 2015 EPS outlook to $4.14 to $4.24 per share this year. We'll walk through our updated guidance in more detail later in my comments. Let's begin with a review of our Q1 performance. We achieved solid organic growth across our major business segments in Q1. Global CAG revenues were $325 million, reflecting 13% normalized organic growth or 9% growth excluding benefits from U.S. go-direct margin capture, driven by continued strong gains in instrument consumable and reference lab sales. Our Livestock, Poultry and Dairy business revenue grew 3% organically to $31 million, benefiting from growth in new products and overall gains in Asia-Pacific, which offset an expected moderate decline in European bovine sales. Our Water business also continued its solid gains, growing 6% organically to $22 million, reflecting continued new business inroads across major regions. Overall, U.S. revenues were $235 million in the quarter, up 13% organically, or 8% excluding margin capture benefits. U.S. gains were supported by normalized CAG Diagnostic recurring revenue growth of 15%, or 8% growth excluding margin capture benefits, reflecting continued high growth in instrument consumable and reference lab sales, which offset lower practice level sales and rapid assay. IDEXX's performance continues to outpace solid continued U.S. market growth, reflected in our broadened data set of 5,100 clinics. In Q1, patient visits increased 3.4% and clinic revenues increased 6.7% compared to the soft overall market results in Q1 of 2014. International revenues in the first quarter were $147 million, supported by 9% normalized organic growth. Normalized CAG Diagnostic recurring revenue growth was 11% in international markets in Q1, reflecting continued strong gains across major regions. As noted, global instrument placements were excellent in the quarter, driving 19% organic growth in instrument revenues to $20 million. U.S. premium instrument replacements increased 15% with an estimated 59% of Catalyst placements going to competitive and greenfield accounts. International premium instrument placements increased 32% supported by the European launch of Catalyst One. We also placed 291 VetTest Chemistry Analyzers in international markets, expanding our foothold in smaller clinics. Strong placement gains set a foundation for continued strong growth in CAG diagnostic recurring revenues. Global CAG diagnostic recurring revenues were $279 million in Q1, up 14% organically, or about 9% excluding benefits from go-direct margin capture. By modality, instrument consumable revenues of $98 million grew 22% normalized in Q1 or 13% excluding margin capture benefits. We saw continued strong gains across regions. In the U.S., we're expanding our penetration of premium analyzers, including solid continued growth in our Catalyst installed base, which now drives 93% of our consumable revenues exclusive of corporate accounts. This supported continued strong growth in consumable revenues well ahead of U.S. market growth rates. Our reference laboratory and consulting services modality with revenues of $123 million grew organically 12% in the first quarter. High growth continued across all our major regions including double-digit volume driven gains in the U.S. despite weather challenges. We expect strong continued growth in lab revenues going forward as we leverage our expanded commercial capability and benefits from our test menu expansion including SDMA. Continued high growth in consumable and lab revenues help to offset softer than expected performance on a couple of fronts in Q1. Rapid assay revenues increased 6% normalized in Q1 to $44 million. Excluding benefits from U.S. margin capture, rapid assay revenues declined about 3% in the quarter. In addition to impacts from tough weather conditions in the U.S., we experienced greater revenue declines than expected in our first-generation SNAP products. These impacts offset solid volume gains in our core canine SNAP 4Dx Plus and specialty test products, which make up the majority of our rapid assay revenues. Based on our Q1 results and our assessment of these trends, we're lowering our full year 2015 outlook for rapid assay revenues by about $15 million, below our earlier projections for low to mid-single digit growth before benefits from margin capture, to reflect expectations for mid-single digit declines in rapid assay sales this year, before an estimated 11% growth benefit from margin capture. Jon will talk more about dynamics in this area in his comments. Our digital business also fell short of growth goals in Q1 as a result of both increased levels of deferred revenue deals associated with bundled business commitments and the impact of new territory alignments with our expanded diagnostic sales reps. These impacts limited overall Information Management and Digital Imaging System revenues to $26 million in the quarter, or 3% organic growth, despite solid gains in Information Systems. We're also recalibrating our full year growth outlook to reflect expectations for more moderate revenue gains in Digital Imaging this year, as well as to reflect revenue impacts related to an accelerated transition towards a subscription-based software-as-a-service model in Information Management. We expect this will result in reported IM and Digital revenue growth of 5% to 10% this year, below our earlier estimates of 15%-plus gains. Despite these pressures and additional FX headwinds, we delivered strong financial performance in the quarter. Operating profit was $73 million, up 4%. Excluding currency impacts, operating profits increased 12%. Operating margins of 19% were better than expected, primarily reflecting timing and management of operating expenses in the quarter. Gross profit was $216 million in Q1, up 7% on a reported basis. Gross profit margins increased modestly, benefited from lower product costs. Foreign exchange hedge gains reporting gross profit were $4.5 million, or $0.07 per share in Q1. Operating expenses increased 8% in Q1 reflecting planned increases in capabilities supporting the U.S. go-direct strategy and global increases in commercial spending, in part reflecting stepped-up investments advanced in the second half of 2014. EPS was $0.98 per share, up 10% on a reported basis and 18% adjusting for higher than expected currency impacts. EPS growth benefited from share repurchases advanced over the last year, which reduced average share count year-on-year by nearly 9%. In Q1, we repurchased over 859,000 shares for $134 million. We ended Q1 with $1.05 billion in debt outstanding, including $150 million of new term debt issuance funded in February. Our leverage ratios as a multiple of EBITDA adjusted to exclude transition impacts associated with the all-direct change, were 2.8 times gross and 2.0 times net of $320 million in cash and investment balances at quarter-end, in line with our long-term target range. Looking ahead, we're updating our full-year guidance today. We're adjusting our 2015 revenue guidance range to $1.60 to $1.62 billion to reflect an additional $15 million of currency headwind at current rates, and our revised outlook for 12% to 13% normalized organic revenue growth. This outlook reflects expectations for 14% to 15% normalized growth in CAG recurring diagnostic revenues. At the exchange rates shown in our press release, we now estimate that effects from the strengthening of the U.S. dollar will reduce year-on-year revenue growth by about 6% and adjusted EPS by an estimated $0.27 per share, or about $0.05 per share more than estimated at the time of our January earnings call. Please note that our 2015 profit outlook benefits from about $22 million in pre-tax foreign currency hedge gains for previously established contracts, which mitigate the 2015 profit impacts from the stronger dollar. This equates to about $0.33 per share in after-tax EPS benefit. At current rates and timing of hedge contracts, we will not have the benefit of these hedge gains in 2016. We're adjusting the 2015 EPS outlook to $4.14 to $4.24 to reflect the incremental FX impacts and the net flow-through effects of our revised organic growth outlook. On a constant currency basis, this equates to 11% to 13% growth, but above 2014 adjusted EPS levels, which included $.065 per share benefit from the extension of the R&D tax credit. With our updated outlook for FX impacts, we now expect modest year-on-year declines in full year 2015 operating margins compared to 2014 levels adjusted for transition impacts. Other elements of our FX profit outlook are basically consistent with our prior guidance, including expectations for an effective tax rate of about 30%. Please note that our 2015 tax rate outlook does not assume the further extension of the R&D tax credit. We're also updating our free cash flow outlook to 80% to 90% of net income to reflect expectations for relatively higher capital spending levels of about $100 million this year, driven in part by a capacity expansion in our labs business and in our manufacturing operations in support of business growth. For Q2, we expect reported and normalized organic revenue growth to be relatively consistent with Q1, with operating margins down 50 to 100 basis points compared to the prior year, reflecting timing of spending and FX impacts. We expect our organic revenue growth rates to improve as we work through the year, reflecting the benefit of the maturation of our expanded direct commercial organization in the U.S. and the rollout of new product introductions, including our T4 addition to our Catalyst profile and the additions of SDMA and fecal antigen to our reference lab offering in the second half. That concludes our financial review. I'll now turn the discussion over to Jon for his comments. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Okay, thank you, Brian. In the first quarter of the year, we achieved strong performance across broad areas of the IDEXX portfolio. We're seeing strong market validation that our Catalyst One is the global blockbuster that we had hoped. In addition, we expect that an important group of true diagnostic innovations that have been years in the making – SDMA, T4, expanded fecal antigens and a new urine analyzer – will be introduced to the market in the next 12 months. However, we also face some new competitive headwinds this quarter in the U.S. rapid assay market that has impacted us at a time when we are perfecting our new direct sales model. Our products compete favorably with these new products in terms of test accuracy and integration; however, it is proving to take time to demonstrate these differences and reach veterinary practices with this message. I'll speak more about this later. Despite these impacts in one part of our rapid assay business, we remain on track for strong normalized organic growth of 12% to 13%, including 14% to 15% CAG Diagnostics recurring revenues growth. We had – we are well-positioned for strong sustained organic growth in quarters and years ahead. So let's talk about areas of progress supporting this momentum, starting with Catalyst One. Our 35% growth in Catalyst placements globally were helped by our international operations which achieved 66% increase in Catalyst chemistry analyzer placements. Europe placements grew over 100%. We benefited from both the launch of Catalyst One in Europe and very strong commercial performance in almost every international country. In Italy, for example, we placed an incredible 81 Catalyst analyzers in three months. And we have yet to launch Catalyst One in Asia-Pacific and Latin America geographies which will take place in Q2 and Q3. Catalyst One is proving to be the winning product for all geographies globally. We now have over 1,200 Catalyst One's in the field since the launch in Q4 and the performance of this product is virtually flawless, reflecting our deep experience in instrument development. We now have a direct in-country commercial presence for our CAG business in all major international country markets. The practice, education and reach accomplished by our well-trained and medically sophisticated sales professionals is showing signs of paying off with these outstanding early results. In the North America CAG market, we completed the transition to the expanded sales structure and new territory mapping in the U.S. Note that this involved adding 50 new sales professionals as we expanded from 125 to 175 sales territories. With these territory design changes, 9,000 out of 23,000 covered customers have a different veterinary diagnostic consultant representative than they did in Q4. While we expect these new relationships will take time to mature, we still achieved excellent gains in instrument placements and consumable growth in the U.S. while we're in the early stages of our new model. We also saw 59% of our instrument placements come from competitive and greenfield accounts in Q1, very close to a record. I expect this competitive and greenfield placement level to continue to be impressive in future quarters as new and competitive customers come to appreciate that Catalyst One is cost-effective next-generation analyzer that leapfrogs their practices, medical capabilities and economic success. We also saw strong continued reference lab growth in U.S. The expanded sales team is timely and effective in discussing the benefits of our reference lab, including our recently announced reference lab innovations – SDMA and fecal antigen – topics of keen interest to veterinarians. We also note from experience that after a realignment of territories, the field sales organization deepens relationships in their new territories and the new reps that are added to the company move through the learning curve. Our sales performance thus accelerates each quarter. Our experience with our salesforce transformation that was put in place in Q3 of 2013, saw a progression of increased performance each quarter thereafter. With a strong base of performance already in Q1 of 2015 in the first quarter of the expansion in territory alignment, we fully expect this same dynamic going forward. While overall organic growth continues to be strong, we are recalibrating our growth outlook for the rapid assay modality. As Brian mentioned, certain first-generation product lines within our rapid assay diagnostic modality faced new competition in 2015 that is impacting the overall revenue growth of this modality. These first-generation IDEXX products made up of our feline retrovirus SNAPs, canine heartworm single-line analyte SNAPs and certain smaller volume single analyte canine products have a level of differentiation, be it accuracy or integration, that is more subtle and thus a greater competitive risk as we refine our new sales model. In addition, these lines are also purchased by the vast majority of veterinary practices in the U.S., including customers where these are the only IDEXX products that they buy. Thus, we require different ways of marketing and we are learning to communicate more effectively to this broad group of customers by augmenting our field sales organization with other channels such as our inside sales professionals. Nonetheless, we are now estimating that with the new guidance that Brian gave, these first-generation products in the U.S. will now contribute approximately only $50 million to our 2015 revenues or 3% of the company total. Of course, many of our customers do appreciate the superiority of these lines, including those that have adopted SNAP Pro and its productivity and integration benefits. We believe we have correctly estimated the impact of the new competition, as the assumptions in the competitor trends for the full year 2015 are somewhat greater than the competitive impact we saw in Q1, even as we continue to refine our strategies with our new direct model. The rest of our rapid assay business remains highly differentiated and showed in the first quarter the growth we expected in volumes, revenues or both. These lines are made up of our fourth-generation canine SNAP 4Dx Plus, certain unique specialty SNAPs, and of course, our businesses outside the U.S. Note that unlike the U.S., we face competitive offerings in our international markets that are similar to the competitive offerings being introduced in the U.S. this year. While this adjustment to our growth as noted – with this adjustment – we've maintained our outlook of 12% to 13% organic growth for the year driven by broad based gains in the portfolio. This growth is supported by continuing set of important product launches, in addition to Catalyst One, coming out of our investments and innovation in R&D. So let me review with you five significant new competitive offerings that are expected to come to the market in the next 12 months. First is SDMA. As I mentioned in our January call, our next generation chemistry marker, SDMA, is the most important test innovation we have brought to the veterinary profession in the history of IDEXX, as a diagnosis of chronic kidney disease earlier in the progression of this irreversible condition than traditional parameters. Early diagnosis allows for earlier treatment. The launch of SDMA in our reference labs is now underway with the results already being provided to a couple hundred customers as part of our rollout process. The automatic inclusion into the chemistry panel for IDEXX reference lab customers in North America, well over 10,000, is now scheduled for the beginning of July. SDMA is proving to be of keen interest to veterinarians and its introduction is giving our expanded sales force of 175 U.S. veterinary diagnostic consultants, as well as those that we have in Canada, virtually unlimited access to veterinarians and decision makers. Our market research shows that perhaps 20% to 25% of reference lab costumers will consider switching labs just to gain access to SDMA and the chemistry profiles. And those that don't can still send us samples for SDMA testing at a price of $19.95 per sample. SDMA will augment IDEXX's reference lab growth and indeed our overall growth of the CAG recurring diagnostic revenues through new customer acquisition, strong retention and greater utilization. Second is fecal antigen. Next week, we will complete the launch of our expanded fecal antigen panels in our North American reference labs. Our new hookworm and roundworm antigen tests will be added to our already highly differentiated whipworm antigen offering. Our unique antigen panels catch the presence of adult worms earlier in the infection cycle than current egg detection methods, enabling faster diagnosis and treatment for pets. This innovation in fecal test will also continue to drive good growth in our reference lab mortality. Third is the T4 slide on Catalyst Dx. At the end of June, we'll be launching our already highly popular T4 slide available on Catalyst One since February, to our large Catalyst Dx installed base in North America. T4 is an important test for canines and felines and is already included by customers in over 60% of the panels that are sent to the reference lab. The T4 slide can be run conveniently with the rest of the chemistry panel on the Catalyst platform, a unique capability in in-house chemistry. Fourth is our advanced software-as-a-service practice management software. Later in Q3, we'll be launching a highly innovative SaaS-based practice information management offering in North America. We've launched a similar offering in Europe in Q4 and growth since launch has exceeded our already high expectations. We will also be launching a SaaS-based digital imaging software in Q3. A SaaS-based IT ecosystem for our customers, which of course, many are already using with VetConnect PLUS, adds a profitable subscription-based revenue stream, but importantly, supports increasing diagnostic utilization, customer retention and acquisition. Fifth, is a new analyzer, a urine sediment analyzer. In early 2016, we expect to launch a urine sediment point-of-care analyzer that is an extension to the IDEXX VetLabs suite of in-house analyzers. Virtually every practice performs urinalysis manually as part of the basic workup or the minimum – what we call the minimum database of chemistry hematology and urinalysis. This instrument system introduces an entirely novel way to perform a urine sediment review with unparalleled accuracy, staff productivity and turnaround time. We estimate that we will generate between $150 million and $200 million in profitable cumulative revenue over five years after launch and that's (26:10) between instruments and consumable revenues. The availability of this novel analyzer reinforces the value of the IDEXX integrated diagnostic offering. With SDMA, fecal antigen, T4 and Catalyst, new software-as-a-service offerings in 2015 and the new analyzer in early 2016, our innovation strategy remains in high gear. Our commercial organization, both in the U.S. and internationally, is in place and growing in capability with each passing quarter. The combination of a highly differentiated diagnostics and information technology offering and a highly effective direct global commercial organization that is representing our solutions effectively to veterinary practices gives us confidence of strong organic growth for years to come in the highly attractive market for animal health. With these comments, Brian and I are now willing to open the call up for questions.

We'll go to the line of Ryan Daniels with William Blair. Please go ahead. Ryan S. Daniels - William Blair & Co. LLC: Yeah, guys. Thanks for taking the questions and for all the information. Let may ask another one on the rapid assays. I'm curious with the first-generation products there, are you seeing actual market share losses to the volume of those products or is it just increased price competition such that you're lowering your prices to match competitors and that's impacting the growth outlook? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, it's – obviously we're responding with selective pricing strategies – and it is also impacting the volume. So really what we saw in Q1 – and just a reminder – what we've calibrated for the year is a little bit greater than what we saw in Q1 is a combination of both of those. Ryan S. Daniels - William Blair & Co. LLC: Okay. And you mentioned there's about $50 million in first-gen products, I'm curious how much of that is currently sold, if you have the number, outside of what you would refer to as the larger IDEXX customer. So, again, those that just use those first-gen products and no other IDEXX which may be more susceptible, if you will, to share loss? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, obviously some of our customers, larger customers, have adopted SNAP Pro. We generally have a better position with larger customers. Obviously, we're calling on the larger customers more frequently and of course, larger customers buy more diagnostic. So certainly the majority is, with the large customers, but of course there's a long tail of small-cap customers that makes up the minority of that revenue. Ryan S. Daniels - William Blair & Co. LLC: Okay. And then, one quick follow-up on the salesforce and I'll hop off, just how many quarters have you seen it in the past take to ramp to what you would consider kind of a normal run rate performance when the reps start seeing new accounts? Is that a one to two quarter phenomenon or does it last longer? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Well, I think if you go back to when we reconfigured our salesforce in 2013 and the third quarter was really the first quarter that we had that fully in place. That was, what I would call – and you can go back and look through your notes too – a good but not great quarter. The fourth quarter was a very good quarter. And then the first quarter of 2014 was an even better quarter. So, we're pleased with the base that we established with this new territory configuration and expanded sales reps in the first quarter of 2015, and we expect that every quarter, as their relationships with their calling patterns and the customers deepen, and of course our product offering continues to have new things to impress and talk about that – the productivity of that salesforce will increase like it did when we made that change in 2013. Ryan S. Daniels - William Blair & Co. LLC: Okay. Thank you, guys.

Thank you. Our next question comes from the line of Jon Block with Stifel. Your line is open. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Great. Thanks and good morning. I guess, I've got a follow-up on the rapid assay and then just sort of more of an overall P&L question. But to follow up on rapid assay, Jon I think you said, $50 million of the $65 million in the first generation sort of remains, that would imply that about 25% of the first generation is being lowered. But it seems like a really big number, especially when I believe the $65 million would be worldwide, so I guess what I'm trying to tease out, can you just talk to us about your confidence in call it your 4Dx or 4Dx plus business? What are you seeing there? Are you seeing any signs of churn in that particular business? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. So first of all, the $50 million is just the U.S.; it doesn't include any international revenues, so just to clarify on that, on that one point. We saw good volume gains in 4Dx in the first quarter and so 4Dx remains highly differentiated. Obviously, it's got six tests. Its accuracy is unparalleled. Its convenience is unparalleled. Many of those customers are integrated with SNAP Pro. It's a little bit more concentrated customer set, a little bit more concentrated geographies. They're the ones that our reps call on. We'll be, of course, augmenting our capability there as we expand. One element of our field sales strategy which is really being put in place in second quarter, is our professional service veterinarians, the 12 regionally-based professional service veterinarians. And we've hired almost all of them now; they generally come from other animal health companies. So they know exactly what the job is – they just need to learn our part of veterinary medicine. And they're very effective in communicating the importance of vector-borne disease testing. So we – of course, we have competition across all of our products – but we think we're better positioned with a highly differentiated product line and a little bit more concentrated customer set. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Okay, great. And then I'll ask a second question. I'll try to make it into two parts. I guess the first one, you beat our estimate by a penny, but you fell pretty well far below in CAG, EBIT, the unallocated was meaningfully ahead. Brian, is that a function of some of the FX hedges that you mentioned? I guess I'm just trying to sort of tie out why the – the EBIT missed and CAG and came so far ahead in unallocated. And then Jon, part B of that is to shift gears. At a high level, can you just share with us any other surprises? I mean, you're six to nine months into this transition, I'm guessing call it the first-gen rapid churn is a surprise on the negative side. Anything else you want to call out negative or positive at this point? Thanks, guys. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Look, I think our profit performance reflected better than expected operating expense performance in the quarter which was largely just driven by timing of costs. We saw some pressure there but relatively less than we anticipated and that helped us to deliver solid results in the quarter. The unallocated segment includes things like capitalized variance benefits on product cost that we, for simplicity, kind of capture that centrally. And so that's a true benefit to the company; it's just where we reflect in in terms of our segment reporting. It is a lower product cost benefit that helps us support better margins. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: And Jon, to answer your questions, I think the ones were on surprises in the quarter. I would call out two. First of all, our European organization really took the Catalyst One launch and delivered over 100% growth in Catalyst platform placements. Not all of them are Catalyst One's, but they have really demonstrated the potential of Catalyst One in our international markets and that's just an extraordinary performance. And of course, they had very strong growth in the hematology platform, too. And we have a very good set of direct sales organizations in Europe. We have it internationally; we haven't launched it fully internationally yet but that was very impressive performance. And their momentum, I might say, our instrument placement momentum in the second quarter, both internationally and the U.S., the order rates continue to be extending from the momentum we had out of Q1. So that was very, very impressive. The second thing is SDMA. We knew SDMA was going to be a really innovative test, but we have been surprised that what SDMA has done to allow us to gain access to veterinarians that would normally screen out sales reps. They want to hear about it. And the reason why they want to hear about SDMA is because every week, they suffer the pain of diagnosing too late a chronic kidney patient; and typically these only have months to live and there's not a lot they can do. There's short term things to do, but it's a very frustrating thing for a veterinarian to diagnose something too late. And SDMA gives them a lot more time to have a lot more opportunity to slow the progression of this irreversible disease. And they want to hear about it and it is well researched with a number of patients – dozens of papers and abstracts including one that just got launched – published yesterday. So well documented, they want to hear about it. Our reps are fully able to talk to them about it. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Thanks for your time.

Thank you. Our next question comes from the line of Erin Wilson with Bank of America. Please go ahead.

Great. Thanks for taking my questions. On sort of the retention rate in rapid assay platform, when a clinic switches over, how would you characterize those types of practices? Is it high-volume rapid users? Are they still using 4Dx? Are they experiencing lots of fluctuations on the equipment side of the business, the reference laboratory testing? If you could characterize that dynamic, that would be great. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Right. As we – as I mentioned – it's really a tale of two parts of the rapid assay business. We saw good volume gains in the first quarter for our highly differentiated products including SNAP 4Dx and some of our specialized rapid assay, but we saw volume declines and some prices we responded in the first generation. The first generation products like the feline combo product and heartworm, they were launched in the early 1990s, so they have been around a while. So it's really a different behavior between the two – this is – the thing about rapid assay is you can – a customer can switch back and forth. Sometimes they try something and they realize it wasn't what they thought it was or wasn't what it was built to be or didn't have the accuracy. It's very painful to miss a positive, which is really important because we're diagnosing deadly infectious diseases here. And when they miss a positive – one positive that they miss because perhaps the platform they were using and the product they were using is not as accurate – can be very painful. So, we saw that's when our competitor in the reference lab business launched – reference lab competitor of 4Dx – people tried it but they came back. And many of them came back, so we expect to see a little bit of that kind of churn. But we think we have – we think we have the outlook calibrated.

Okay. And in light of the noted competition, it seems like it's a little bit greater than what you initially thought. Do you see the need to step up investment or expand your salesforce over the next six to 12 months or is this something that you're going to reassess at a later date? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. No, I think what – our plans that were already in place are underway. And as I mentioned, we are adding the professional service veterinarians. We always planned to add that in the second quarter; that's on track. Most of those are already hired and on board. And so that's an expansion that's already underway. But I think it's more that we're gaining both relationships and experience in the new model – as we have demonstrated – happens when we made the first change in 2013.

Okay, great. Thanks so much.

Thank you. We'll go to the line of Kevin Ellich with Piper Jaffray. Your line is open. Kevin K. Ellich - Piper Jaffray & Co (Broker): Good morning, thanks for taking my questions. I guess, starting off with Brian. Could you give us some color on your free cash flow? Turned negative on the operating cash side and there's a big change in working capital, I'm just wondering, what's causing that and how should we think about that going forward? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: A lot of that is just driven by the transition of the go-direct model and stepping up the – our internal receivables levels and inventory. We had projected before $15 million to $20 million increase this year in working capital related to that change and I think that's basically all you're seeing there. And our full year outlook is largely the same. We are growing very quickly in the lab business and doing more self-manufacturing and we have increased some investment in those areas and that was what was noted in the free cash flow outlook. Kevin K. Ellich - Piper Jaffray & Co (Broker): Great, that's helpful. And then, Jon, just going back to some of the new competitive offerings starting with SDMA. I think you guys said that's going to be included in all panels. And it's obviously great that it will help vets diagnose for earlier treatment options, but just wondering how you're thinking about the revenue generation expectations and how can you participate in some of these earlier treatment options to benefit IDEXX? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. Well, we are not – that's a great question. Okay. So we're not in the treatment business, we're in the diagnostic business, but I will tell you that those who are in the treatment business are very interested in promoting SDMA because it expands their treatment options. I mean, obviously, if you can catch it in one case, 19 months earlier or six to 12 months earlier and slow the progression through whatever treatments that there are out there, that's good for their business. So that's kind of a positive tailwind in our business. From our perspective, it really drives our overall recurring revenues. Veterinarians appreciate highly that we are adding it at no incremental cost to the chemistry panel. What this will do, Kevin, is instantly change the standard of care in veterinary practice. And so, that's going to aid in customer retention, customer acquisition. It makes a stronger case to do preventative care testing, because if you can catch things earlier in a preventative care scenario that's – that pets live longer. And then also, we'll have a revenue stream from those who just want to send us their samples for SDMA only, as I mentioned into my comments. Kevin K. Ellich - Piper Jaffray & Co (Broker): Great. And actually I just had one quick follow-up there. On the urine sediment analyzer, I think you said it was going to be $150 million to $200 million in revenue over five years. Is that all incremental or how should we think about cannibalization away from like some in-clinic and reference lab testing? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: I greatly appreciate that question. First of all, it doesn't cannibalize anything internally because what it is replacing is manual microscopy, right. So this is a are brand-new category. This isn't an incremental, a better, faster, cheaper version of something that we already offer. This is a totally new category, so it's all incremental to in-house. We have found that testing begets testing. When it's easier to do a urine sediment, you're going to do more of them. Most – we think that there are roughly a little bit more than half of urine sediments are run in-house – some are sent out to the reference lab. This could make the case to run it more in-house, but we've seen really time and again, when you run more testing, it generates more reflex testing at the reference lab. And this was the question that we got when we launched our very innovative – I remember we got this question a lot – when we launched LaserCyte over a decade ago. Is that going to take away from reference lab business? And you've seen, of course, the reference lab business grow and the market grow significantly over that period of time. So the nice thing is it's all – this is a whole new category of testing for us and reinforces really the value of having an integrated IDEXX suite of analyzers because they all work together with one patient. It's fully integrated into the software, and of course, instant results through VetConnect Plus. Kevin K. Ellich - Piper Jaffray & Co (Broker): Sounds good. Thank you.

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

Hey, guys. Thanks for taking the question. You were able to accelerate competitive account wins to 59% from 54% on Catalyst. Is the 59% a global number and would you attribute the acceleration largely to Italy and other parts of Europe? And then maybe the second part, Jon, given the lower price point of Catalyst One, I'm curious what your degree of confidence is to accelerate competitive wins into the 60%'s? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes, that is a U.S. number or North American number. That is not – the 59% – is not a global number. So it's a little harder to track globally. Obviously, when you had 66% growth in Catalyst placements internationally, it's coming from a lot of places. So obviously, international was a good number but I really wanted to focus on the North America. We believe there are over 10,000 accounts that have the opportunity for us to convert to a Catalyst One. Catalyst One is a very effective price point and it is – brings far more capability to the practice in terms of menu, in terms of time to resolve, in terms of ease of use, in terms of workflow, of course, integration with VetConnect PLUS. I mean, the list goes on. So – and at a very competitive price point – so we expect that number is, as I've mentioned, again North American number, we expect that number to stay strong and perhaps grow over time as our salesforce gains in their capacity and their relationships with all the customers in their territory. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: I'd just add, we get a lot of questions as you know, on the chemistry dynamics in the U.S., our Catalyst space expanded in the quarter and our consumable revenues continued to grow well ahead of market growth rates. So we're expanding our presence. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, that's – and acquisitions net of Perfection (45:27). So, and of course, the consumable growth is what it's all about and that's growing, as Brian mentioned, higher than – at very attractively and higher at-market rate.

Great. And then maybe my follow-up question, with the Catalyst One launching in Asia-Pacific and Latin America, I think you said it might roll into Q3. I'm curious if there's any modest delay there and maybe can you help us frame what your expectations are in some of these, what I might call, emerging markets? Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah, well, no, there's no delay. This is – this was – it is totally – these smaller country operations are – they have – we have limited – we have, of course, direct capability, but they're limited, they've got a lot going on. So the Q2 and Q3 are really very consistent with our plans. No delay in launching, as I mentioned, the instrument is performing really fabulously and that of course makes it easier to launch in these smaller country operations. I might mention, for example, when we say Asia-Pacific, we're talking about Australia. I wouldn't call that an emerging market. That's a very attractive market for us; but of course we've got the Asian countries. The only market we're not going to be able to launch it in this year is Japan, because that has regulatory approval associated with it. We're also very excited about our presence in Latin America, but for Venezuela, which is basically gone off the map. We've got a great organization in Brazil and Mexico and some of the other South American countries. As you know, we acquired our distributor in Brazil and they've really gotten off to a great start. And so – this analyzer is just very, very well suited to the kinds of practices that are – smaller practices, these are typically international but also in the U.S. that didn't buy the Catalyst DX, it was too much analyzer for them, maybe a little bit higher price point. Catalyst One brings all capability of DX at a lower price point.

Great. Thank you.

Thank you. We'll go to the line of Nicholas Jansen with Raymond James. Your line is open. Nicholas M. Jansen - Raymond James & Associates, Inc.: Hey, guys. A lot of topics have been addressed, but just two ones for me. Regarding the hedging gains, Brian, that you've talked about, I think, several times in the release, I think it was $0.33 to earnings and that's offsetting some of the FX headwind. How should we be thinking about that for 2016 in terms of the modeling? Is that a baseline of take our 2015 number, $0.33 lower and grow, or just maybe help us sort of better understand the economics or math behind the hedging gains for 2016? Thanks. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Sure. Yeah, no, we obviously haven't given any indications for 2016 at this point, but I do think it's important to note that we will not have the benefit of those gains next year. So that will be something that we'll need to lap and will be a headwind for us heading into next year, which is why we're trying to disclose it and be clear on that. As you know, hedges are effectively something that delay impacts; they don't eliminate things so the prior hedges we put in place kind of protect our profit this year, but as those roll off the net impact of the substantial strengthening of the dollar will be reflected in our operations. Nicholas M. Jansen - Raymond James & Associates, Inc.: Okay. Thanks for the color there. And then on the – going back to the rapid assay, not trying to beat a dead horse here – but thinking about the timing of some of the competitive announcements. Baxter's, I think, had some inter-quarter new placement – or new approvals – and considering, I think, Jon, you mentioned that you're expecting more of a headwind in the back half of the year relative to what you witnessed in 1Q regarding this first-generation devices. Is that the reason from a – because you're a little bit worried about competition or is there something I'm missing there? Thanks. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yes. Again, my comments were focused on the first-generation of products. And I think it's just a calibration as we look at all the factors involved. The competitive products are out there. They were out there in the first quarter. That affect these first-generation of products. So I think it's just basic – we wanted to make sure that we calibrated it correctly – as best we could using our judgment. Nicholas M. Jansen - Raymond James & Associates, Inc.: Thanks.

Thank you. Our next question comes from the line of Ben Haynor with Feltl & Company. Your line is open. Ben C. Haynor - Feltl & Co.: Good morning, gentlemen. Thanks for taking the questions. First of all, on the urine analyzer, you project a launch early in 2016. On the $150 million over five years, do you mean cumulative revenue over five years or looking at $150 million annually in kind of 2020 or 2021? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: No, that was a cumulative – it was to just kind of give you a ballpark understanding – but it was a cumulative over the first five years. Obviously, we're going to sell it beyond the five years; it has a consumable stream. We think that virtually every practice is a candidate to buy this analyzer because virtually every practice does a manual urine sediment review as part of the work-up. But it's a cumulative number. Ben C. Haynor - Feltl & Co.: Okay, thank you. And then on the rapid assays – excuse me – have you changed or do you expect to change the 4Dx pricing as a result of the pressure on the first-generation single test products? Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: No, I think, we're always fine tuning our pricing strategy. One of the things we have is a program called SNAP Up the Savings; that's worked for us historically. We are always fine tuning that. But I think the trends that we saw in Q1 with – where we had good volume – very, very good volume means that really – not in the 4Dx, not a lot of pricing gains. It was real – good volume would be the expectation that we have, generally speaking, for the balance of the year. Ben C. Haynor - Feltl & Co.: Okay, great. That's all I had. Thank you, gentlemen. Brian P. McKeon - Chief Financial Officer, Treasurer & Executive VP: Thank you.

Thank you. Our final question will come from the line of Jon Block with Stifel. Your line is open. Jon D. Block - Stifel, Nicolaus & Co., Inc.: Yes. It's actually funny, I thought I took myself out of the queue but while I've got you I might as well ask it. Just at a high level, Jon, I mean, again going back to the rapids, the $65 million to $50 million, can you just talk about where we go from here? In other words, I'm just trying to figure out, do you believe that continues to bleed lower? And I guess what I'm trying to ask another way is, when we get beyond 2015 where things just went pretty south pretty quickly in that direction if you sort of strip out the margin capture, you're looking down according to our numbers, I think, down 3% to 4%. Can you restage growth in rapids in 2016? Thanks, guys. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: Yeah. We haven't really given a guidance for 2016, but what I will mention is, we do have superior products and this is the first quarter within our new sales model. And so, we're really ramping up our relationships and in case of infectious disease, which of course the majority of rapid assays are infectious disease, our professional service veterinarians are important. And our marketing strategies to this broad base of customers, both not just field, but of course, phone-based (52:49) and other marketing strategies. So, we think we've correctly calibrated the reset here for the introduction of new competition. Obviously, what's really driving growth in IDEXX is the continued innovation across the diagnostic portfolio and we think that's – again these products, in many cases, were launched over 20 years ago – but we think it's really the innovations that are going to be driving our growth going forward. And we do – we're refining our strategies to keep the entire customer relationship in all the product lines and certainly when we're calling on customers – when we call on customers we do a very good job of talking about the level of differentiation. It's just that we can't always get to all customers with our direct field organization early on with the new competitive entrants.

And with that, you can go ahead with any closing remarks. Jonathan W. Ayers - Chairman, President & Chief Executive Officer: So I want to thank everybody for being on the call. And I really also would take this time to congratulate the IDEXX organization. This was a major transformation that we undertook in 2015 with our U.S. direct strategy. Our international operations just had an extraordinary performance. I think it sets us up well for the year globally. And certainly our product and innovation teams, as I've mentioned, our innovation is in high gear with a variety of product launches that start from next week and extend over the course of the year – balanced toward the first part of this upcoming 12 months – and then the urinalysis analyzer – a whole new analyzer. So, we've got the field organizations to sell the product and our innovation is on track. So with those closing comments, I'll conclude the call and thank you, everybody.