Good morning and welcome to the IDEXX Laboratories Fourth Quarter 2017 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Kerry Bennett, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission which can be obtained from the SEC or by visiting the investor relations section of our website idexx.com. During this call we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles, or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in our earnings release, which may also be found by visiting the investor relations section of our website. In reviewing our fourth quarter 2017 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth referred to growth compared to the equivalent period in 2016, unless otherwise noted. In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one, with one follow-up if necessary. We appreciate you may have additional questions, so please feel free to get back into the queue and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon.

Thank you and good morning everyone. I am pleased to take you through our fourth quarter and full year 2017 results and provide an update on our financial outlook for 2018. We had excellent results in Q4 which concluded another year of outstanding financial performance for IDEXX. We achieved 12% organic revenue growth in the fourth quarter supported by 13% growth in CAG Diagnostic recurring revenues and 15% growth in premium instrument placements. Overall reported revenue increased 14%, aided by favorable year-on-year changes in FX rates. Our strong finish to 2017 supported achievement of full year organic revenue growth of 10.4% consistent with our long-term financial goals. Results were driven by accelerated 13% organic gains and CAG Diagnostic recurring revenues reflecting strong double-digit growth in U.S. and international markets. Our full year EPS was $2.94 net of a non-recurring $0.34 per share charge related to the enactment of U.S. tax reform. Adjusted for this factor, full year EPS was $3.28, $0.02 per share above the high end of our guidance range. This performance reflected strong top line growth and achievement of full year operating margins of 21%, a 140 basis point improvement year-on-year on a constant currency basis. EPS grew 21% on a comparable constant currency basis in 2017 above our long-term financial goal range for the second consecutive year. We're well positioned to build on these results in 2018 reflected in our updated outlook for 9.5% to 11.5% organic revenue growth which now includes an estimated $10 million year-on-year benefit from revenue accounting standard changes. We're also maintaining a consistent outlook for 75 to 125 basis points improvement in constant currency operating margins while investing 10 million in incremental operating expense leveraging benefits from U.S. tax reform. Overall strong operating trends, favorable FX rate changes, revenue upside from accounting…

Thank you, Brian. We had a very strong finish to the year across our businesses and around the globe. I'm very pleased with our team's success in 2017 in growing the market for IDEXX's innovative diagnostics and software solutions including for the companion animal market resulting in over 10% organic revenue growth and EPS gains at the high end of our long-term financial goals. Our North American commercial team saw accelerated successes at high value instrument placements, a key driver to the profitable recurring revenues of instrument consumables while at the same time growing both our Reference Lab Diagnostic modality, the largest contributor to North American recurring revenue and our Rapid assay line. As investors recall we undertook a 12% expansion in our U.S. field organization fully in place in Q3 but still early in the learning curve. In Q4 we saw this expansion kick into gear. We also resumed the double-digit productivity in our EVI growth in instrument placements per rep that we achieved in the first half of the year and the combination of the expansion in the number of reps and the productivity per rep in North America grow our 25% growth in Catalyst placements to new and competitive accounts and 23% growth in SediVue placements. Along with these results we saw sustained high levels of customer retention which are world class levels. Our 98% retention of in-house chemistry accounts in U.S. compares favorably to any period since we announced our intention to go fully direct in 2014. Our U.S. Reference Lab revenue growth in the fourth quarter sustained mid teen range even with a 1% headwind related to equivalent days. North American growth continues to benefit from strong same store sales growth as customers appreciate and adopt our unique offerings including fecal antigen, SDMA, molecular diagnostics,…

[Operator Instructions]. We'll go to the line of Ryan Daniels with William Blair. Please go ahead.

Good morning, this Nick Hiller in for Ryan Daniels, thanks for taking my questions. I was just wondering if you could give a bit of an update on the SNAP Fecal Dx launch specifically when would produce of that product begin, and how much interest is there in that products specifically outside of the core IDEXX customer base especially given how prevalent fecal tests are and how unique the offering will be? And just a follow-up on assays, any thoughts on the potential competitive launch of a Rapid assay to compete against 4Dx? Thanks.

We're very excited about the SNAP Fecal launch which we expect in the summer of 2018. I think as you referenced fecal testing is a routine preventative care protocol for dogs, usually done with the annual or semiannual exam. The vast majority of those are run in-house today using manual methods in the microscope and so we see this as an opportunity to replace that in-house manual method with using biotechnology and ELISA method. So, our rough estimate is around 40 million fecal tests are run in North America annually. And a large majority of that is run in house although we're also very successful in driving fecal testing in the Reference Lab with our fecal antigen offering. And so, like anything the penetration and adoption of any product takes time, but we think this is going to be a long-term grower. I’ll just noted I was really excited about the rapid pick up with SDMA on slide with over 25% of catalyst customers buying in the first couple months. We think it is an amazing start up, but I think Fecal will be a major -- the in house fecal leveraging the Reference Lab fecal antigen technology will be a major franchise for us. We remain excited about strong franchise we have with vector borne disease screening. We believe the announcement to which you refer validates that customers really need multiplexing a comprehensive disease screening, which has been our strategy from the beginning and what we've been doing in that business is turning it into a razorblade business model by adding a SNAP Pro which not only interprets the result but automatically runs a result, connects it to our ecosystem, captures the charge, and adds it to the medical record. And at this point, easily over 50% of our U.S. volume is running on SNAP Pro and that will continue to grow as we continue to replace SNAP Pro we placed over almost 6000 of them last year. We also have a really unique accuracy, sensitivity, and specificity that has been validated by third party technology and I think that is unique to our SNAP ELISA platform. And so I think we remain excited. This is a business though that is still under penetrated and not enough customers are running 4Dx or vector-borne disease screening as part of preventative care protocols on their dogs. And so while we had very strong high single-digit growth in 2017 and we've launched -- regionally launched actually vector-borne disease screening over 15 years ago, we see continued growth in this market in 2018 and beyond and that's a growth that we expect to continue to drive.

Thank you, we will go to the line of Derik De Bruin with Bank of America Merrill Lynch. Please go ahead.

Hey thanks, it is actually Mike Ryskin on for Derik. Congrats on the quarter guys. Want to touch on a couple quick points, the instrument growth in the quarter, it's nice to see they have returned to positive growth but just want to confirm the difference between the instrument revenue growth and the placements, is that along the lines that we saw in previous quarters of the revenue recognition that we talked about in 3Q or is there something going on with pricing there? And then also I have a follow-up on the margins, saw that you reiterated that targets for 2018 of the constant currency op margin growth, but still saw some choppiness in gross margins this quarter, can you talk about some of the gives and takes there and what your expectations are on the gross margin line for 2018?

Sure, why don’t I take those on instruments, that's correct. We did have some deferred revenue impacts, very, very strong growth as noted, and under current accounting we had deferrals which under the new accounting will be a new set of rules and we won't have that same dynamic. Moving forward, they will be different pieces moving forward, but net-net I think that's more reflective of the current GAAP standards and we work through that.

And that's starting in 1Q?

Yes, we'll break that out for you. It's going to be complicated, it will be very, very detailed disclosures because you have a restatement -- modified restatement of prior year balance sheet information and then obviously the new accounting, try to highlight that net we now estimate that overall that's going to be a plus 10 million impact for IDEXX. It will from a growth rate point of view which is actually going to help us on the recurring CAG and we highlighted that was about a point of growth rate impact and that's more related to the restatement of balance sheet the prior year aspect, and on the instruments well basically new accounting gets you to more upfront revenue recognition, but there again will be some restatement impact that will be a slight headwind, so we will clarify that all for you.

I think just to get back to your -- the fundamental essence of your question, these remain the pricing, it's not a factor. These are economically very successful placements and are really no different than prior quarters in that regard, and so I think the unit placement numbers particularly in the U.S. to new and competitive accounts and of course internationally we're placing to both new competitive and upgrading a VetTest which is a good -- which also contributes to recurring revenue growth. These are very high quality placements.

And also of note, the EVI metric we noted was up significantly, that's a measure of value and we'll be rolling that out to international markets in 2018 to reinforce that. On your question of gross margins, a couple of themes here, our Reference Lab business in the U.S. is growing very quickly and with accelerating growth momentum and we made decisions to add routes basically, add capacity to support the growth that we see coming, make sure that we are fully staffed, we're doing a better job on retention of our lab employees. And the net of that is it is extremely healthy business. We actually delivered close to 100 basis points of constant currency margin improvements in our lab businesses here while supporting those investments, so in the near-term, that has some moderating impacts on gross margins but we will quickly grow into that.

And then also knew this quarter was -- the fourth quarter was the reclassification of million…?

Yeah included in that too was our laboratory information management systems. We're recording those costs that previously the amortization was recorded in the OPEX and we're moving that to cost of goods sold. So no net profit impact but it has a moderating impact from margins. We also had another factor that was more specific to the quarter in our LPD and water businesses. We were comparing to a prior year Q4 number that had favorability related to basically inventory dynamics, accelerated production growth and higher levels of absorption. That's not something we anticipate carrying forward so the outlook that we have for operating margin growth next year we reinforce the 75 to 125 basis point improvement that will be driven by gross margin gains. So we feel good about that and I'd also note that that covers the 10 million of incremental investment that Jon highlighted so the underlying growth is really about 50 bips stronger than that.

And that 75 to 125 basis point margin improvement is off of the higher revenue which as Brian referenced was FX related, was accounting related, and was flow through of the revenue over delivery so higher growth. But none of those things are changing our 75 to 125 basis point incremental margin on that higher level. So there are some fundamental goodness there.

Got it, that's all really helpful, thanks guys.

We will go to the line of Erin Wright with Credit Suisse. Please go ahead.

Hey, thanks. I notice there is a nice uplift in Rapid assay, I guess let's all try the amount [ph], I guess how much of it was price and it continues to be a competitive market there, do you think that growth rate is sustainable or what is your overall growth assumption assume for that segment thanks?

Thank you, yeah, of course it is a global business. We had a good Rapid assay performance around the world. It is predominantly North American. We had good performance in North America that was more volume than it was price. I think our reps are pretty engaged in Rapid assay business it is combine with their -- the value that they are bringing with SNAP Pro, a placement so when they're placing SNAP Pro they are really talking about the entire Rapid assay family. Our 2018 guidance for recurring revenue growth incorporates the benefit of the second half year launch of SNAP Fecal. And so I think you know I think our overall Rapid assay growth if you will combined scope of what I would call reasonable assumptions for the Rapid assay business augmented by new revenues from a new product launch. Of course that will take time to be adopted so we're only talking about a partial launch and like everything we just like the ramp to be faster than it will be. But that will be new revenue from new innovation.

And it was price -- volume driven growth.

Volume driven growth in the fourth quarter and in 20…

We always have a timing of -- year-over-year timing of programs that are underlying 2% to 3% recurring CAG price gains is pretty consistent across…

Yes, we just -- we had just good performance in Rapid assay. We saw market share gains, continued market share gains in the first generation in 2017 and the vector-borne disease franchise just continues to grow in volume. And even though we're 15 or 16 years into that it just shows the long runways of growth that we have. In fact that was the best volume growth we've had in that franchise in a number of years. But every year it's grown so it's still amazing that we don't have as many dogs as we have that get annual screening for vector-borne diseases.

Great and I'm curious on your thoughts on just the overall market as we stand here kind of, I felt that you saw strong 6% growth in practice revenues across your data set, I guess what does your guidance imply for 2018 in terms of the underlying demand trends across the CAG segment and where does it stand now, I guess how much room do we have to run, I know we've seen this massive improvements since the recession over in terms of overall veterinary demand trends but I guess what are some of the key metrics that you're tracking and looking at that give you kind of confidence in underlying demand, thanks?

Well we have as Brian reported the 6% growth in veterinary practices which really comes out of it. That's a measured number out of what 5000 or 6000 of practices that we saw in Q4 and really consistent with the growth over the course of the year. And that's overall practice revenue at our customer level. Our assumptions for 2018 are consistent with really what we saw in 2017. But the runway every time we look at this, the runway for growth is amazing because what's interesting is our customers are growing faster than the market. We can measure this okay, our customers are growing faster, they're growing their overall practice revenues faster, they're growing their diagnostic portion of their revenues faster. They are growing it faster because our reps are helping them adopt more and more diagnostics to meet the changing needs of today's pet owner. What's interesting is the best practices in doing this are 2-3 X times the size of the average practice and just in our portfolio practices who are themselves above the market averages. And so we see the opportunity to help customers appreciate that while they may be doing well they can actually be doing better because other practices that are very much like them are doing better. And so the diversity of practice -- of performances inspires us to inspire the practices, to continue to focus on advancing diagnostic utilization and protocols using IDEXX's expanded and unique menu of tools to bring value to pet health. And to do so meeting the needs of the pet owners that want this when they appreciate the value and of course some -- the best practices are doing a great job doing that. So we need to bring those best practices to the broad market and that's why we have very deep sales coverage with strong account relationships so we can grow not just adoption of IDEXX but adoption of diagnostics as part of the care equation.

And we go to the line of Jon Block with Stifel Nicolaus, please go ahead.

Great, thanks, and good morning. Maybe two questions, first one what still needs to be done from a regulatory standpoint for SNAP Fecal antigen, is that sort of a gating factor between I don't know a June launch versus September? And part two sorry, that same first question is maybe you can just talk to us some of the moving parts of call it the low end of the organic guidance versus the high end, the 9.5 versus the 11.5 as you look at the year. Is it based on traction with new projects or limiting Rapid assay in roads from competitor, the overall market, would love to just get your thoughts and then I got a follow-up?

Very quickly on the first question a point of care test, that tests for infectious diseases is one of the few areas that requires a regulatory approval. So for instance our lab test, fecal antigen test does not require regulatory approval but the same technology on a stamp does and so that does -- that is a factor that will that we need to be successful with, the U.S.D.A. approval in order to launch the product. We're confident of the track record there that always adds a little bit of uncertainty as to exactly which month or when

Yeah, and just in terms of revenue outlook the key driver of that of course is going to be the recurring CAG growth number Jon so that's the 12% to 14% if you adjust for the accounting change, its 11% to 13%. We finished this year just under 13%. I think it's a reasonable range. We're obviously growing very quickly. In terms of high growth rate we need to execute very well and we think that's a reasonable range at this time in the year. It's not projecting risks, it's more just reflecting that we're growing off a base at high rates and need to execute well and need to execute well against the new innovation launches and that's principally why we have that type of range this time of the year.

Okay, got it.

One of the nice things is we over deliver in the fourth quarter on revenue so with the same growth rate that the absolute revenues in 2018 are -- they're growing off higher base. So, as Brian said we need to continue to do a great job executing and supporting our customers with great products, reliable products, and great sales coverage around the world.

Got it and just the second question, you deemed across most of the CAG were occurring modalities but maybe the only one that I could sort of nitpick on was international lab. I think you mentioned up high single-digits for the second consecutive quarter, the U.S. has been up mid teens. It just seems like a relatively big delta and I think that's for the second or third quarter we've seen that delta. Arguably international should sort of be in that sweet spot of SDMA. And I know the competitive landscape is more fragmented O.U.S. So Jon any reason why that international rough lab is call it lagging some of the other diagnostic modalities that we see with the mid teen growth from some of your other areas? Thanks guys.

Yeah, I think that's a fair observation from my relative basis. Of course I wouldn't sneeze at high single-digit organic revenue growth in any business in the current market. But relative to the success of our other businesses a fair characterization. The fact of the matter is our international organizations are really prioritizing the highly profitable placements of Catalysts where we just have a unique instrument you know you saw those Catalysts placements up 37% year-over-year and then the retention on these Catalysts is like 100% and 99.95% or something. It's an amazing business, it's a -- these are profitable placements and then we also have a reference lab business. By the way the Reference Lab business is not as profitable as other lab business internationally whereas in the U.S. we've got a really good network effect taking place. We want to make sure that we have that network in fact in place and that when we grow the Reference Lab business and let's recognize a reference lab business internationally there is a lot of different labs in a lot of different regions. Our German lab for example is doing very well, it's very profitable business which is why we're investing in a world class lab. As part of the relocation of the core German lab. Other parts of the world are not as profitable as they need to be and so we're focused more on profitability there before growth with the -- again the primary sales growth being the placement of the analyzer. These analyzers that we're placing today are going to be there decades from now. I mean it's just it's just a great business.

And we will go to the line of Nicholas Jansen with Raymond James and Associates. Please go ahead.

Hey guys and congrats on a great quarter. Just following up on that point Jon, just looking at the Greenfield opportunities O.U.S. versus U.S. as you think about Catalyst. Certainly the U.S. opportunity is probably starting to diminish a bit. I mean where are we on the O.U.S. trajectory as a number of that test still outstanding that could be upgraded, areas where you're seeing competitive displacements, just maybe walk us through how we think about the sustainability of this global like Catalyst placement growth that we've seen over the last three years?

Yeah, I just do want to note the 25% year-over-year growth and Catalyst placements to new and competitive counts in North America I don't want to gloss over that a number. Our U.S. teams had an extraordinary quarter and we think there's a lot of runway ahead in the U.S. because of the result of the fabulous product line now supported by SDMA and great commercial teams but turning to the essence of your question on the international opportunity, it's wide open. And as you know we've shared the number of customers who we believe are targets for Catalyst placements internationally. Over 75,000 customers and that’s a growing number of course. And so we're upgrading that test but roughly half of those placements are to new and competitive accounts. So they're organic accounts, we're replacing really an aged install base of competitive analyzers that have really fallen behind and then of course once we put Catalyst in there it stays there which I've mentioned with a very, very high retention rates. We have markets like China where it's basically a Greenfield opportunity and then we have markets like Europe that's both a vet test and a very attractive Greenfield and new account and competitive account. We as Brian mentioned in a previous question we are moving -- international was now moving to the compensation approach which looks at the economic value index of an instrument placement. What this is going to do is put even more focus on new and competitive. Well it turns out our vet test customers internationally are pretty loyal customers. I mean they're in the high 90's in terms of their loyalty and so it's not like we have to rush to upgrade them because they're already pretty loyal. Of course we will continue to do so but the highest value placement is to a newer competitive account and as we move to EVI we expect to see a jump in the productivity of the same sales efforts towards the highest value placement. So even with the phenomenal success we had in 2017 we would expect to see a productivity jump in 2018 in placements and yet we have very, very -- less than -- a little bit less than 4000 placements of Catalyst internationally and you put that in the context of the opportunity. We have a long runway of opportunity for filling out the world with a very attractive point of care technology to help veterinarians provide care for pets. And they're all going to have SDMA. And so we're running, we are rolling out SDMA internationally in the next couple of months on Catalyst and so that -- and the international markets have developed the market appreciation for SDMA. So they're just as excited as our North American teams were with the availability of SDMA now being able to be run on Catalyst.

I will just reinforce the strap we talked about, the build to our five year growth and trying to achieve over the next five years 20,000 placements in international markets and we're right on track with that. So this year was right in that range and we're building each year the percentages coming out of new and competitive placements. So we're feeling very good about the execution on the international front.

That's very helpful and as we think about the recurring revenue associated with those O.U.S. Catalysts placements where we are on the utilization map on those relative to the U.S. and if you can maybe compare that to maybe three or five years ago are we seeing more and more utilization off of these boxes as these end markets become more like the U.S. or are we still very early in that transition?

So it's a great question, the bottom line is we're still very early, okay but we are seeing a same store sales growth and we're seeing it because they're adding menu. We saw it with P4 when we had P4 to a Catalyst install base. We're going to see it with SDMA and interesting parameter we don't talk that much about CRP. We've launched CRP now globally. There are markets outside the U.S. that already value CRP. We don't have to explain to them why that's an inflammatory market and they're adopting it that gross utilization. So, as we add menu to the analyzer we see growth in utilization of the installed base. Where we really haven't even begun the story outside of North America it's preventive care. And so that's kind of the next wave, it's not a 2018 wave, it's couple of years out as we grow the market, as we grow our intensity of sales coverage we can then really take the preventative care story around the world. But right now they're just working on sick animal testing and so it's just amazing how early we are in the whole story and yet we are we're getting utilization growth primarily from sick animal testing from this menu expansion which customers appreciate is helpful in helping rule in and rule out disease on a sick presentation.

And we go to the line, I am sorry go ahead.

We have time for one more question, I know we're up against the hour.

Absolutely, the last question will come from the line of Alex Nowak with Piper Jaffray. Please go ahead.

Great, good morning everyone. I just had a two part question. Jon you mentioned this in your prepared comments but regarding tax reform to your customers is it fair to say that most of that customers will see some sort of tax rate because I believe the personal service corporations are going from a flat 35% rate to 21%? And then the second part of that is have you talked with any customers since the beginning of the year and have they signaled what they plan to do with the extra income such as reinvest into analyzers, is that place filled out or they just simply plan to park the extra cash?

Okay, very quickly we expect most to answer your question it's a little complicated because there's a couple of different moving parts but the bottom line is yes, our customers will see benefit. They're all small businesses, they are [indiscernible]. They will see a benefit to tax reform. I think they're just beginning to realize. I am seeing around the corner on this okay, I don't think our customers fully appreciate because they didn't take tax accounting in veterinary school. Okay, they ask their accountants and their accountants are still trying to figure it all out. So here we are February 1st, I would say it's still early days. So what I'm saying is as this starts to -- as they start to see the benefits I think their appreciation for the attractiveness of their business gives them some room to make incremental investments and of course we're going to be there inspiring them with IDEXX technology.

Okay, that's helpful. And then you are only couple weeks into the SDMA launching Catalyst but are you seeing any cannibalization of SDMA in the reference web?

No, we -- absolutely not. This is all a testing begets testing. We in fact think the estimated option in our in house will actually grow the Reference Lab business because of the appreciation. We have seen this issue in launch after launch where we have something in Reference Lab and then we launch it in-house. It actually helps our Reference Lab. You can go back 15 years when we launched a five part white blood cell differential with absolute ridiculous sides with laser sight or by studying you are going to see Campbell's any reference lab and you've seen what's really happened to our reference lab over that period of time. So we actually think this augments Reference Lab growth over time because it accelerates the clinical appreciation of SDMA in the care of pets.

Okay, that's helpful. Thank you.

And I'll turn the call back over to Mr. Ayers for closing remarks.

Yes, thank you very much. We had the little bit longer comments because of the end of the year and because the number of exciting things going on at IDEXX. So I appreciate we didn't get into all the questions and we'll try to do so afterwards. And we appreciate all the attention. I just really want to thank the IDEXX organization for fabulous 2017 and the excitement and momentum that we have I think will be evidenced at the BMX previously known as the North American veterinary conference show that's taking place this weekend. I know some of our investors will be there. Our sales teams will be there. We're very excited about the prospects for 2018 and I think that's reflected in our comments and in our financial guidance for 2018. This is a long-term enduring growth business. As we enhanced the health and wellbeing of pets, people, and livestock we see the long-term growth vectors ahead of us. So with that we will close the call and thank you very much for signing in.

Thank you and ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.