Good morning. And welcome to the IDEXX Laboratories Third Quarter 2019 Earnings Conference Call. As a reminder, today’s conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties, that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning, as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our second quarter 2019 results, please note, all references to growth, organic growth, constant currency growth and comparable constant currency growth, refer to growth compared to the equivalent period in 2018 unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue and if time permits we will take your additional questions. I would now like to turn the call over to, Brian McKeon.

Good morning, everyone. And thanks for joining us on our third quarter earnings call. Today I will take you through our quarterly results and our updated outlook for the full year 2019. I will also provide an overview of our preliminary for 2020. Jay, will follow with his comments. IDEXX delivered continued strong revenue and profit gains in Q3. In terms of highlights, revenues of $605 million grew 11% as reported and 12% organically, including over 1% of growth rate benefit from equivalent days. CAG Diagnostic recurring revenues increased 14% organically, including nearly 2% of equivalent day growth rate benefit, reflecting double-digit gains across U.S. and international markets. EPS of $1.24 per share increased 21% on a comparable constant currency basis, benefiting from better than expected organic revenue growth, which supported 130-basis-point improvement in constant currency operating margins. Excellent operating results are keeping us on track towards strong full year financial performance. In terms of our 2019 revenue outlook, we are refining our full year guidance to $2,395 billion to $2405 billion, a $5 million increase million increase at midpoint, incorporating our strong Q3 performance. This reflects an updated full year organic growth of 10% to 10.5% overall and 11.5% to 12%, for CAG Diagnostic recurring revenues, both at the higher end of our previous guidance range. We are adjusting our 2019 EPS guidance to $4.72 to $4.78 or 15% to 16% growth on a comparable constant comparable constant currency basis. This is $0.12 per share lower than our prior guidance midpoint incorporating $0.18 per share in projected Q4 charges related to our recently announced CEO transition. Adjusting for this impact, our outlook is $0.06 per share higher at midpoint and corporate benefits from our strong third quarter operating performance and lower projections for full year net interest costs. In…

Good morning, and thank you, Brian. IDEXX’s third quarter results reflected solid growth, across our Companion Animal, Livestock and Water Diagnostic businesses, an outstanding achievement by our IDEXX team globally. High growth in CAG Diagnostic revenues continues to lead our performance, with attractive flow through benefits to profit, keeping us on us on track to deliver strong full year operating results. Excellent commercial execution is a key theme in our continued growth momentum and enhancing capability in this area consistently delivers a high return on investment. In our U.S. CAG business we benefit from the increased IDEXX engagement with customers, in an underdeveloped diagnostics market, with solid growth momentum, as evidenced by the 2.7% growth in same-store clinical visits seen in the quarter. Our U.S. commercial team remains highly productive, delivering 13% CAG Diagnostics recurring organic revenue growth in the U.S., including approximately 2% benefit from equivalent business days. Execution was excellent across the Board, resulting in both impressive revenue gains from all modalities and sustained high customer retention rates. Increased customer engagement is helping to drive sustained, low to mid-teens organic growth in Reference Labs, led by same-store testing expansion and double-digit organic gains and consumable revenues, supported by our expanding premium instrument installed base. Instrument placements were excellent in the quarter, led by 14% year-on-year growth in U.S. new and competitive catalyst placements. This supported a 10% year-on-year expansion of our U.S. catalyst installed base and double-digit growth in U.S. EVI. SNAP Pro placements were also robust in Q3 with over 2,200 placed in the U.S., up 77% year-over-year. SNAP Pro bring significant workflow electronic medical record and charge capture benefits that complement our differentiated rapid assay point-of-care diagnostics. Importantly, customers who are connected to SNAP Pro are highly engaged and stay with us longer. Our U.S. commercial…

[Operator Instructions] We will go to the line of Michael Ryskin with Bank of America. Please go ahead.

Hey, guys. How you are doing?

Good morning, Mike.

Good morning, Mike.

First off congrats on the quarter really solid results in Q3, but I want to ask on the 2020 outlook briefly. First on the operating margin gains, you highlighted a couple of different moving pieces with the CEO charge in the fourth quarter. But you have also seen some really strong gains in gross margins this year. How should we think about the moving pieces in the progression extra you talked about 100 bps to 150 bps operating margin constant currency? How do we think about price on the gross margin line some of the cost controls in SG&A? You also have the sales force expansion that you talked about in the U.S. So a couple of different moving pieces. So how does that all shake out? And then a follow-on just on the broader outlook for next year, slightly more conservative view for the top line organic $9 million to $10.5 million, I realize still very early on. But anything really changing in the market just high level or is this just any particular area you could point to within Reference Labs or consumables or instruments or is this just initial guide, I want to take a cautious glance at the markets?

Yeah. Let me start with the operating margin clarification. You are right. The -- we have a compare here with the CEO transition charge that we tried to highlight. So our preliminary outlook of 100 basis points to 150 basis points, we noted included 50 basis points related to the comparison or favorability related to the charge, so if you adjust for that. It’s 50 basis points to 100 basis points which is very consistent with our long-term goals and what we were indicating, what our goals were for 2020 back at Investor Day. We are demonstrating that this is a leverageable business model that delivers a nice profit flow-through when we grow. At the rates we are targeting and have good progress with that as reflected in our Q3 results and our outlook for 2019. I would highlight heading into next year we have a couple of factors that are built into the operating margin outlook. One is that, we have two significant new facilities that are coming online next year or new core lab in Germany, as well as our new Westbook headquarters. And we will -- that will involve a level of incremental costs and we will grow into that overtime. But initially that will be something that has the effect of moderating margin gains. And as you pointed out, we have got the U.S. expansion, the additional expansion of U.S. commercial resources and we have a pretty healthy growth rate now in our year-on-year investment as we are fully ramped with our international expansion that we implemented a little earlier this year and we are investing in our R&D initiatives consistent with our stated goals. So we have got a healthy level of investment, some factors that will moderate kind of the upside on that. But…

And Mike just in terms of the market itself we feel good about where the market is. As Brian indicated, we saw 2.7% clinical growth in Q3 over 5% revenue growth $5.3 million and that doesn’t include new practice formations. So our outlook assumes that the market stays in that range.

Great. Thanks.

And we will go to the line of Ryan Daniels with William Blair. Please go ahead.

Hey, guys. Thanks for taking the question. Jay, one for you in regards to Marshfield Labs. It’s a little unique to see you purchasing lab assets, let alone in the U.S. So I am curious what the strategy was there, and then more specifically, outside of the lab network and the client base, you will get from that was there anything proprietary that can be broadened into the IDEXX labs existing network that you garner from the acquisition?

Yeah. Ryan, thank you for the question. We are very excited by the Marshfield acquisition. It’s a high-quality, very professional laboratory, we are adding approximately 2,000 Marshfield customers. These -- some of which we already do business with. Our focus is really on being able to maintain continuity of service, understand the needs of those customers better and introduce some of the innovations that we have like SDMA and fecal antigen and VetConnect PLUS over time to them. So it’s a -- we think it’s a great acquisition, it’s a great laboratory and it fits in well with our overall strategy.

Okay. And then I may have missed this, this is a different question, but in commenting on the 8% uptick in Q4 on the North American customer facing organization. Is there a specific focus of the hires you are making there, if it’s VetTech, is it field sales reps, is it anything in particular that it’s kind of a focus and will you be changing the territories at all or is it just on many existing territories? Thanks.

All right. Thank you, Ryan. Let me give you an overview of the model and I will give background on the why. Essentially, at its core, we are adding 23 territories and our model is we have a VDC per territory. So we will be going from 220 -- 227 territories to 250. On average, the VDC today has about 110 accounts and post-implementation of the expansion will be down to about 100 and as is the case when we expand the number of VDCs, we augment the number of field service reps to support them, generally two VDCs per single FSR. So any addition to the 23 VDCs and new territories, we are adding 12 FSR. So that represents the core of the change. And our thinking really is, when you take a look at our market. We have been growing strongly in the U.S. and the average business we do with the -- with our customers has grown. And so from both the depth and breadth standpoint, we have many customers that are 40%, 50% bigger in terms of the business they do with us just compared to three years ago. Their expectation as they do more business with us is that they see more of us, whether it’s full staff trainings or understanding their practice better, identifying opportunities where we can help them. And then you layer on top of that initiatives like preventive care, which take relatively more time of the VDC upfront, including things like on-boarding and getting those customers calling Marshfield Labs that I mentioned and the couple thousand of new customers. There’s a real draw on the capacity of our commercial channel. We tend to look -- there’s a couple of metrics that we look at, that sort of guide our thinking about this. One is a reach to revenue metrics, so if you take a look at Q3, we are about 90% reached the revenue, which is where, historically, we like to be. But when you take a look at reached a customer, which incorporates not just IDEXX customers, but competitive customers, we are about 75% or so. So we are a bit lower than we would like to be. We think there’s really good opportunity outside of the IDEXX installed base still. So that guided our thinking and how we implemented this.

Okay. That’s super helpful. And I want to just wish my best to John as well. Thank you.

Thank you.

Thanks, Ryan.

And you have a question from the line of Erin Wright. Please go ahead.

Great. Thanks. Do you know how much of the Marshfield customers are IDEXX customers on the point-of-care side or generally speaking, how much overlap, maybe there is, so we can think about like an opportunity for cross-selling and what does that put your U.S. lab count at now, following the Marshfield transaction? And then, can you kind of just broadly speak to the broader competitive environment across reference laboratory, are there any changes there? I know there have been some more competitive movements on the SDMA side or for kidney disease testing, I guess, how do you compare your SDMA capabilities at the reference lab compared to others? Thanks.

All right. So there’s -- I will take a few of those. There are a number of questions in there. As I indicated, there’s about 2,000 in total Marshfield customers, many of whom we do business with currently. We haven’t broke out the specifics in terms of in what modality across all the modalities. Generally speaking, most customers in the U.S. do business with us and in some fashion, whether it’s rapid assay or our software products. So we do think that there’s a really nice opportunity to cross-sell, our full solutions. But our focus is really first on being able to understand those customer needs and work with them. In terms of, you had mentioned specifically competition to SDMA. In our view, there are really no comparable offerings, the SDMA in the marketplace. We continue to make excellent progress, expanding SDMA adoption is differentiated. I gave you some statistics in terms of not only the reference lab but SDMA on the slide, with our catalyst. We are super excited by the updated guidelines of virus that Elevates SDMA, really from an adjunct or chronic care disease treatment into a primary recommended diagnostics biomarker. Alongside puratone, of course, for staging of CKD, an important thing to keep in mind, in terms of the staging guidelines is that, veterinarians rely on them to classify by the patient, severity and progression of kidney disease. So this guides that the treatment paths that they take, it helps the market standardize on best care approaches for the patient. It drives -- we think more standardized or better outcomes for the marketplace as a whole. It assures the pet parents that their pets getting the best treatment. So we think this is a really big deal and that’s something we are excited by.

Okay.

And Erin, we had 52 labs before -- in the U.S. before this and we will be adding a few additional locations, including the Core Lab for Marshfield, which we are as Jay mentioned it’s a really high quality operation.

Okay. Great. And then, just generally speaking, also how would you characterize current demand trends across the veterinary market. I guess, you noted this slight acceleration in the clinical visit growth this quarter and what was driving that, you think, and is that normalized for the day impact as well? Thanks.

Yeah. The -- I mean, we think the market is healthy, it’s 2.7% clinical growth and that’s the important metric that we track, because it involves -- those visits involve diagnostics testing. The overall practice growth is $1.4 million in revenue at 5.3% was pretty healthy. It’s -- we think it’s largely consistent with what we have seen in the past. It does tend to be some variability quarter-to-quarter. We have got a pretty good beat on the market as a result of the -- our analytics approach with 7,500 practices. We take data from five of the leading PIM systems. So we have got a nice proportional both regional and practicized representation in this data and I think what it’s showing is pretty consistent, strong growth across the market.

Hey, Erin. Just on the days impact clarified. Basically, what we had in Q3 was an extra Monday. And so what that really impacted was our business, we do a lot of shipping on Monday so sees positive benefits to consumables and rapid assay, which we highlighted and actually very limited impact on labs, and it wouldn’t have really impacting the market metrics in that context, it’s more of a shipping dynamic.

Got it. Thank you.

We will go to the line of Nathan Rich with Goldman Sachs. Please go ahead.

Thanks for the question. I wanted to follow-up on the revenue guidance, Brian. I didn’t hear a range for your expectations for the CAG Diagnostic recurring growth next year. I just wanted to know if you could kind of talk about the type of growth you expect and kind of what the key factors we should have in mind that would influence on the growth outlook for next year?

Yeah. we -- in our preliminary guidance we don’t get that granular. We did want to highlight that in the 9% to 10.5% outlook we are looking to sustain the high level of growth that, this year we are guiding to 11.5% to 12%. So all indications are we are trending quite well and looking to build on that as in the U.S. right now we are about 11.5% adjusted for days year-to-date and kind of 13.5% in international and international actually improved a bit in the quarter. We had relatively better reference lab growth, which is something we have been working on. So we are looking to build on that, and we will be sharing more specifics as we get through the finalization of our planning process and we will share that on the year-end call.

Placement numbers that you gave, it looks like you saw some nice improvement internationally specifically in new and competitive placements. Could you maybe just talk about what drove that and specifically what you are seeing in China, I think that had been a little bit of a drag earlier this year, I just wondered, if you had seen improvement there?

Yeah. So we saw really nice placement growth and consumables growth internationally, 20% normalized and I think if there is a couple of factors. It’s clearly been an ongoing focus for us. I think the maturing of our VDC model, continuing maturing of our VDC model is helpful. We are getting nice traction with the IDEXX 360 program, with our international customer’s, I think they appreciate what that brings in terms of flexibility in the ability to access our solutions. And the products themselves, it fits our international markets really well, I think we have said in the past that Catalyst One was initially designed for international markets in terms of its cost profile and physical footprint and we just -- we continue to see that bit in our sales momentum and Brian’s going to address the China question.

Yeah. China, we had a very good performance on new and competitive placements and we continue to work through the lapping of compares to prior levels where we had high levels of vet test upgrades. So the mix has shifted. We are -- that does constrain our overall revenue growth, reported revenue growth somewhat, but I think the underlying quality of the placements we are doing new and competitive accounts across regions, contributed very high quality performance from our lens in the quarter and the double-digit EVI gains that we talked about. So, we feel good about the progress we are making across markets and that sets us up well. It’s really about expanding our global installed base, and as Jay highlighted, we are up 18% year-on-year with our catalyst installed base globally, and that really sets a solid foundation for continuing to grow our consumable revenues at high rates.

We will go to the line of David Westenberg. Please go ahead.

Hey. Thanks. Hi. Thank you for taking the questions. So just first you noted customer shifting preferences to cloud based solutions. I know that PIMS has very high barriers and switching out seems it is rather on the difficult side. So are you having a lot of success in terms of switching customers or adding on that cloud -- the Cornerstone cloud solution, is that the way you kind of see the market shaking out? Can you just maybe run through competitive dynamics in that PIMS market, please?

Yeah. So I will take that. Thank you for the question, David. The -- our PIMS offering is very broad. So we address the market in the -- more of the advanced workflow with Cornerstone, but also those practices that may be single or mobile practices with NEO. And what we see is our veterinary customers like all customers, whether independent of industry, you appreciate ease of use benefits, they specifically focus at workflow, does it help them address the challenges, both from a care delivery standpoint, as well as a business standpoint in the practice. And what they are telling us with Cornerstone 9.1, which is our most recent revision, is that they really appreciate the improvements we have made in user interface and the ability to do the work that they do with fewer clicks, with just all the easiest benefits. So we are seeing really nice placements across the Board. It’s included, as I had mentioned, in our IDEXX 360 program, so more customers are deciding, choosing to go all in with us in terms of diagnostics and software, what they find is when they do that, it works better. In terms of Cornerstone Cloud, that as I indicated, is really in field trials. At this point, we think the marketplace over time will migrate at least in part, as you had indicated. PIM systems tend to be a bit sticky, but I think customers increasingly recognize that there are some benefits that having their software in the cloud in terms of lower cost for being able to maintain the hardware in the practices. And somewhat more quick or a number of revisions that they can expect on an ongoing basis without having to shutdown their practices for an hour, two hours, that type of thing. So lots of benefits, we think, over time, that the market will move in that direction, and we will be ready for it. Yeah, keep in mind, our NEO practice management system is already in the cloud.

All right. Well, thank you very much for the color. I am just going to do one really quick housekeeping question. I really do appreciate how you call out the extra day in the quarter. So I was just wondering in terms of housekeeping. Is there an extra day or one less day then in Q4 that we need to be -- that we need to anticipate and then maybe as we look at 2020, is there any kind of growth headwind in terms of extra days there, just as a housekeeping question.

On Q4, we will have one less Monday, but we anticipate some positive benefit around the holiday week time link. So I think it’s a modest net headwind. There may be some modality impacts, but we are not calling that out and the team is telling me what the next year is -- it’s relative -- we get some benefit in Q1 for leap year, but I think on the full year, it’s relatively neutral.

Appreciate it. Thank you so much.

Yeah.

We go to the line of Jon Block. Please go ahead.

Great. Thanks guys. Good morning. Jay, maybe the first one for you, just curious about the increased North American sales force, I guess, why now, I think, it was a couple of quarters ago, you said, you guys are sort of good with your commercial infrastructure and I get it. It’s a business that responds well to increased investments. But just curious what you are seeing in the marketplace that caused you to move now versus maybe in a couple of quarters and then I have got a follow-up.

Yeah. So Jon, I think, it really comes down to what I was describing earlier. A number of our customers, a large number of our customers in our territories have gotten bigger over time. And there’s more demand from the VDC in terms of working with these customers. It’s an expectation that they have as they use more broader and deeper. And then when you take a look at some of these initiatives like preventive care, as I mentioned, they really do require more time upfront, in terms of getting these customers on-boarded and helping make them successful. You add in a couple of thousand more customers for Marshfield Labs. As well as what we said at Investor Day, it’s $11 billion addressable market, $3 billion in wellness business alone. So we continue to see that when we apply time with customers that they grow more and use more of our diagnostics and we do better. It really just comes down to that math.

Okay. Fair enough. And then Brian, maybe the second one for you on the guide, some moving parts on stock-based comp. I think largely in line, but the midpoint of revs was a tad below where we were. So I guess the question is, does this bake in what we may see from a new product standpoint in 2020, does it reflect that? And then part B that is just I thought you alluded to net interest expense of $36.5 million, which seems like a decent step-up year-over-year, despite rates continuing to go down. So I want to make sure I got the right number there and if so, why do we have a step-up? Thanks guys.

Yeah. Just on your first question, our outlook for 2020 incorporate projections for growth across the business including adoption of our current innovations and any new introductions. So that’s factored in. We feel it’s very much in line with kind of how we have been trending. We always target growth, Jon, at the higher end of what we talk about, that’s what we try to execute and just calibrate that appropriately. But we are looking to build on the strong growth rates and are very comfortable with the outlook in the context of our long-term goals. And on your question related to interest expense, the -- it was $36 million and that included an assumption for -- we did not assume a change in interest rates. So I think that if there are reductions in things like variable interest rates we would there may be some modest benefit to that. But that was our assumption and it assumes a flat net leverage ratio, so basically will -- we saw some benefit this year, reductions in interest rates, we are not projecting the underlying interest rate rejections into next year in the broader market.

Our final question will come from the line of Mark Massaro with Canaccord. Please go ahead.

Hey, guys. Thanks for the question. I guess, Brian, as we think about the 2020 guidance, I assume, you are contemplating the inclusion of Marshfield Labs. So it looks like Marshfield has about three or four Reference Labs, with particular strength in Wisconsin, Minnesota, Michigan, Ohio. One is, can you give us a sense of what your share was for Reference Lab in those regions and how you think that might bump it up? And then can you give us a sense for what level of growth you think that Marshfield could add in basis points to your reference lab line in 2020?

Yeah. So just on Marshfield, it’s a lab with national customers. So we see this as adding to our national capability. Within our guidance, Mark, it is roughly $15 million, the annualized revenue we expect is about $15 million from Marshfield, that’s what’s baked in and it’s offset by FX. So in terms of when you see our reported organic numbers those two factors offset. So I would say, we have got that factored in. We are very excited about adding Marshfield to the IDEXX family and working with their employees and very pleased with their capabilities. And as Jay mentioned, I think there’s real opportunities for us here nationally to leverage our innovations and expand our IDEXX business with those customers.

That’s excellent. And so I also wanted to ask about potential expansion internationally. I believe you have over 900 people on the field globally, which is certainly a significant global infrastructure. But can you give us a sense for where you are at internationally and whether or not you are contemplating future sales hires OUS? And I guess, related to that, you have got the new lab in Germany opening up next year. Can you just speak to some of the dynamics in play both competitively and organically internally focused in Europe for 2020?

Yeah. So we are -- we just completed our expansion in Europe and internationally, and we are comfortable where we are. We think we have the right capacity to address the opportunity and our growth projections. So at this point, there’s no additional plans to go beyond that. It’s really -- our focus at this point is really maturing out the organization. What we find is that it takes time to continue to develop deeper relationships with customers and with those deeper relationships where we are able to grow, so that’s really the focus. In terms of the Reference Lab marketplace, as Brian indicated earlier we are pleased with where we are right now. We are focused on being able to improve our reference lab performance and we think, over time, with the IDEXX 360 program and the maturing of our VDC sales organization, we can build on that. We are excited to be able to bring on the new Reference Lab in Germany, we think that, that positions us well additional capacity in the future but no other specifics at this point.

Okay. And okay -- so thank you. With that, we will conclude the call. I want to thank our employees for the very strong progress and performance in Q3 and the advancement of our purpose, which is enhancing the health and well-being of pets, people and livestock around the world.

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