Good morning, and welcome to the IDEXX Laboratories Fourth 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 fourth 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. Fourth quarter 2019 and full year 2019 comparable constant currency, operating expense growth, operating profit growth, operating margin growth and comparable constant currency EPS growth exclude the impact of the fourth quarter 2019 CEO transition charges. (Operator Instructions) I would now like to turn the call over to Brian McKeon.

Thanks, and good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2019 results and to provide an update on our financial outlook for 2020. IDEXX achieved continued strong financial performance in Q4, which supported delivery of full year revenue and EPS gains aligned with our long-term financial goals. In terms of highlights, we achieved 10% organic revenue growth in the fourth quarter driven by 11% organic growth in CAG Diagnostics recurring revenues and 10% organic growth in our LPD and Water businesses. Solid fourth quarter gains supported full year organic revenue growth of over 10% and nearly 12% organic growth in CAG Diagnostics recurring revenues. Our full year EPS was $4.89, an increase of 21% on a comparable constant currency basis, supported by 120 basis points in comparable constant currency operating margin improvement. Note that our comparable growth rates and comparable operating margin improvement metrics now exclude impacts from Q4 CEO transition charges. These charges reduced operating profits by $13.4 million in Q4, aligned with expectations; and EPS by $0.14 per share after tax, approximately $0.04 better than initial projections, reflecting updated tax provision estimates. Full year EPS results included $0.22 per share in tax benefit from share-based compensation activity, $0.05 per share above our guidance estimates. We also saw an additional $0.04 of below-the-line upside to our earlier guidance estimates related to final tax provision estimates and lower-than-projected interest expense. We're well positioned to build on these strong results in 2020. We're maintaining our outlook for 9% to 10.5% organic revenue growth reflected in our increased guidance range of $2.620 billion to $2.655 billion in annual revenues, which include updated FX estimates. We're raising our EPS guidance range by $0.12 to $5.42 to $5.58 per share, reflecting 13% to 16% comparable constant currency…

Good morning, and thank you, Brian. IDEXX had a strong finish to 2019, with double-digit growth across our Companion Animal, Livestock and Water diagnostic businesses. Core CAG Diagnostics recurring revenue, which now represents over 3/4 of overall company revenues, grew 12% organically for the full year. Excellent execution across our businesses enabled us to deliver organic revenue of 10%-plus and comparable constant currency EPS growth of 21%, aligned with our long-term financial goals. Return on invested capital at 46% for the year was exceptional. The progress we are advancing on key strategic fronts positions us well to build on this performance in 2020. Outstanding commercial execution is an essential pillar in our organic growth strategy, and we consistently see a high return in increasing these field-based capabilities that allow our sales professionals to spend more time with customers. Expansion in the number of our global customer-facing resources and investments in enabling commercial systems in areas like Salesforce or service club were two areas of focus in 2019. We completed the U.S. commercial expansion in Q4 and started the year with our expanded U.S. team in seat and trained. We now have 530 field-based professionals in the U.S. to support market development, more than double the number from five years ago. As we enter 2020, we anticipate some settling in during the first quarter of the expansion as sales professionals, including those newly recruited, develop relationships in their new or reconfigured territories. Notably, we accomplished this expansion in Q4 while delivering 425 new and competitive Catalyst placements in the U.S., a record number. We also continue to make progress with preventive care, with 360 new enrollees in the quarter to reach over 3,800 enrollees in the program to date. Customers are embracing the IDEXX Preventive Care turnkey solution and increasingly view…

[Operator Instructions]. And we will take the first question from the line of Nathan Rich with Goldman Sachs.

Brian, maybe just starting off on how we should be thinking about kind of the cadence of organic growth this year. I think you said the first quarter would be 10% to 11.5%. I think that includes 100 basis point benefit from the leap days. So if we back that out, I think the range is consistent with kind of the full year guidance that you gave for organic growth. So should we be expecting sort of a relatively consistent cadence over the balance of the year?

We'll obviously provide more detail as we work through the year, but I think that's an accurate read, Nate, is that we've got a full year outlook of 9% to 10.5%. We'll have some benefit from days in Q1. We have, I think, a bit of a headwind in Q2. But net-net, on balance for the year, those should wash out. And I think our 11% to 12% recurring CAG growth is very much in line with the trends that we've been seeing if you adjust our fourth quarter results for the days' impact and just some of the shipment timing effects we noted in Asia, which were modest but can impact the growth rate a bit. We're basically right in the middle of that range and looking to build on that in 2020.

And I would add to that. We're well positioned to sustain that 11% to 12% gain that - we reflect in our going for 2020. You start with the fact that it's a good market backdrop. We saw good clinical visit growth over 2019, 2.5%. We have really nice growth and momentum in our - the expansion of our premium installed base: 16% in total, 19% in Catalysts, 35% in SediVue and those result in consumables growth as customers use those products. We're pleased with the adoption we see around IDEXX innovation. Customers are very enthusiastic about the differentiators we've introduced in past years as well as VMX. And we have an expanded sales force, which is out there partnering with customers, driving awareness and education and ultimately, consideration. And then we note that - as Brian mentioned in his remarks, we have very high retention across all of our modalities. Customers tell us that they appreciate the differentiators we bring, like integration and the platform extensions they've come to rely on. So we're feeling like we're in a very good position to sustain that growth.

Jay, that's helpful. And just a follow-up on your comments on the end market. You kind of noted a strong 2019. Obviously, 4Q is a little bit softer. I know there's kind of always quarter-to-quarter volatility. Is that sort of kind of what you would attribute the 4Q number to? And I think, Brian, you had mentioned December was maybe a little bit stronger. I'd just be curious to know if you've seen that improvement continue into January.

Yes. So the - Q4 was solid, 1.8% clinical growth. Keep in mind, we focus on the clinical growth piece. That's where the veterinarian actually sees the patient and where diagnostics is used as a whole. Now that came off fairly strong Q3, and as noted, a little soft going into the quarter, but picked up in December. So we're positive on the market. We think it's a strong market in 2020 and we don't see anything from a change standpoint.

Our next question comes from the line of Ryan Daniels with William Blair.

A couple of follow-ups on the new digital cytology. I'm curious, number one, if you can speak to the early feedback you got, particularly at VMX? And then number two, as my follow-up, I'm curious what the revenue will look like from that? I know there's an instrument but also reading at the reference lab. So will that be in the equipment or reference lab lines? Or how should we think about the revenue model?

Right. Thank you, Ryan. Let me give you just some market backdrop and the feedback from VMX. Customers were really very enthusiastic about digital cytology service. Typically, the veterinarian will see patient everyday with lumps and bumps. And they'll take a sample, prepare a slide, look at it under a microscope and then decide whether or not they need to send it out for expert interpretation. That process very often takes a couple of days. But it can - depending upon when they send it in, like kind of Friday, can take 4 or 5 days or so. So they were very, very appreciative and enthusiastic about the ability of being able to send it to us and get a result back with an expert interpretation within two hours and be able to do that all hours of the day, every day of the week and all days of the year. So the - and the reason we were able to do that, by the way, is because we were able to fit that into our existing infrastructure and investments that we've made, in terms of integrated IT workflow; having a field service organization, which is out there who can help install these systems and onboard and train customers on slide preparation; having clinical pathologists around the world to be able to provide that service. In terms of market size, and then I'll hand it over to Brian to talk a little bit about revenue. The way we think about this is about 5% of practices are higher-volume users of cytology. So we define that as 5-plus cases per month. About 6,000 of IDEXX practices actually send today out cytology to our reference lab for expert interpretation. That's 6,000 of about a little over 20,000 practices that we do business with in reference labs in some measure. So that gives you just a scope of what we're talking about. We think as they continue to use this, there's potential benefits in using more of it over time and more customers adopting it.

Yes. And I think that one way to think about it financially, Ryan, is it is a factor that will be supportive of sustaining the 11% to 12% CAG Dx recurring growth company, including the strong growth that we've seen in U.S. reference labs. It's a valued service and a differentiator and I think something that we believe can support, continue to expand that franchise. And in terms of instrument revenues, as Jay noted, it's a relatively smaller set of the market that would likely be earlier adopters of the instrument. And we'd anticipate this will be integrated into 360-type program placements, more in the second half of the year as we kind of build market awareness and get the service up and running. But it's not calling it out as a distinct material driver. I think it's something we anticipate will build over time. But we're very excited about it as another example of how IDEXX is adding to the scope of services that we're providing, adding to our differentiation and value and leveraging that to drive the strong double-digit growth in CAG Dx revenues that we should to achieve.

Next, we will go to the line of Michael Ryskin with Bank of America.

I want to follow up on an earlier question just about market conditions, just get a little bit more specific. Maybe you could, I guess, help put my mind at ease. I've had a lot of questions over recent days and weeks about some international markets: the wildfires in Australia towards the end of the year. You've had similar weather in California or heat waves in Europe affect you. Just curious if that had any impact. And also on the recent coronavirus outbreak in China, just a lot of attention there in the market, obviously. And if you could sort of size your China exposure, how much of that is companion versus livestock? And if you've seen anything in terms of vet visits or sort of what you're seeing there in that market and how that factors into your expectations for 2020?

Yes. Why don't I start with that, Mike, and hopefully, I can hit on some of your specific questions? I'm sure Jay can expand on that. But in terms of the coronavirus as context, China for IDEXX is a little less than 2.5% of our overall revenues - all of our revenues in China. So it's a - we have a relatively smaller exposure to that market. Over half of that revenue is LPD. So in terms of the more consumer-driven aspect of that business, it's a relatively smaller exposure. We have seen limited impact to-date. We are monitoring it, of course and - but have not factored a specific kind of impact into our outlook at this point. We've got a range for performance. We're comfortable with that. And I think the headline there is relatively smaller for IDEXX and it's relatively early on to kind of be calibrating more impacts. I think you had a specific question on the Australia wildfires. We did not see a meaningful impact on that in our results. Again, it's something that we're monitoring, but we had very good results in Australia, continued good results. And I think we've - the European market, we highlighted that we had nearly 20% consumable growth in the fourth quarter, outstanding instrument placements. I think we - the market - and continued solid results in labs. So I think we feel the market backdrop in Europe looks quite healthy.

Yes. A quick follow-up. I appreciate all the color there. You also cited a lot of investment on the gross margin line. You saw that in this quarter and you mentioned some of that's going to continue through 2020 across the reference lab and the rest of the business. Could you help us think through the pacing there, sort of how that progresses over the course of the year? And is that - is this a slight step-up in investment? Is this something that's going to be the run rate go forward? Or is this sort of relatively onetime that should play out over the course of - you'll see the benefits of this over the course of many quarters?

Yes. I think if there's any investment in our business, it's truly onetime. I think we're always adding capability. But what we were trying to highlight was that we had, through the second half of 2019, a number of investments that we advanced on the lab front in terms of our expanding our capacity, adding day labs. We had some system investments that we've been making; initial integration of Marshfield, which we'll continue; and obviously, some of the investment we made in the commercial organization in the U.S. And just trying to highlight that, that is going to be on a year-over-year basis, carrying into the first half of 2020. And there are a couple of discrete factors that will be additive to that, and that's basically our Westbrook headquarters, which is coming online in Q1. So we'll have the depletion of that starting to factor into our OpEx growth. And in the second quarter, we will be having the impact of the German core lab coming online. So the net of that is it's - it wasn't intended to signal incremental investment in the labs other than those discrete areas in the Marshfield acquisition but just trying to highlight that we anticipate our margin gains that we're targeting for next year will be second half-driven, will have some moderate pressure in Q1 and basically, just as we grow into those investments. And we would reinforce our long-term goals of 50 to 100 basis points-plus of constant currency annual margin improvement supported by strong recurring revenue growth, so no changes on that front.

And next, we will go to the line of Jonathan Block with Stifel.

Maybe just a couple, more high-level ones for me. Jay, anything on the competitive landscape that's evolved or maybe that you expect to evolve? Zoetis has had Abaxis for some time now, and they purchased a couple of labs. I know it's early, but - and you got another player that's also making a bigger push in international markets. So curious for your thoughts and any color or details that you see on calling and the potential evolution from a competitive standpoint?

Yes. Thank you. So the - it's always been a competitive market, and it's clearly still a competitive market, and we continue to perform very well, as we've highlighted this morning. Our focus is really on growing and adding value for our customers. A lot of our volume growth, as Brian highlighted, comes from same-store sales, comes from existing customers, creating awareness and adoption of relevant testing. So from a strategy standpoint, it's really continuing to be able to work with those customers, introduce the innovations, take our commercial capability, expanding commercial capability, partner and help those practices succeed. So that's really the focus. The - a lot of competitive intensity, but that really hasn't changed. And we continue to do well and we continue to experience moderate price increases on the 2% to 3%, net basis. So we're feeling good.

Okay, great. And there's a few surprises I thought about on the P&L, so I'll stick high level. Jay, your thoughts on - and willingness to work with other players in the industry to help drive diagnostics growth? And what I mean by that is, that's what you want to do. You're working with Trupanion in some shape, way or form on pet insurance. But there was chatter at VMX that you're going to partner with QE with their sort of their prescriptions platform. And so as leading the company, I'd love to get your thoughts on how you see these opportunities evolving for the company over the next couple of years and IDEXX' willingness to take a more aggressive role there.

Yes. So we've had ongoing partnerships with the specialty diet that - in pharma and software companies in the marketplace. The way we tend to think - I'll address the software piece and the integration piece specifically. The way we tend to think about that is we take an open systems approach. So a group of customers, once it reaches a certain size of critical mass come to us and say that they would like us to integrate an application into our PIMS systems, then we do it. We want to be able to give the customers the workflow that they desire. But in terms of overall partnering at VMX, we participated in a park study, which showed the efficacy - the superior efficacy of fecal antigen. So always looking for ways in appropriate sort of partnership structures of developing the market for diagnostics.

Our next question will come from the line of Erin Wright with Crédit Suisse.

I had a similar question, just given some of the bundling tactics of your competitors. I was curious if you could better leverage your unique positioning in this market as sort of an agnostic player but also partner with large pharma manufacturers to do your own creative bundling with therapeutics or other product offerings? I guess, have you contemplated those sort of partnerships or collaborations more so recently than you have in the past? I'm just curious how that's evolving.

Yes. So when we talk to customers, what customers tell us, is that they - when they're looking at diagnostics and they're looking at solutions to adopt, they believe that it's highly differentiated. It's a highly differentiated category in their practices. It's a decision that they make through the lens of how to deliver best care. It tends to be separate from how they think about therapeutics or specialty diets. They are making typically long-term decisions because of systems that they're buying that need to be integrated that they may have in their practice 5, 10 years. So from a buying standpoint and partnering decision, the customer really separates those two. So the - that hasn't changed with the recent acquisition of some of our competitors.

Okay, okay. That's helpful. And then where do you stand now in terms of market share on your PIMS systems? Where are we at across the industry in terms of converting to cloud-based systems? And can you speak to your positioning around the competitive front there as we head into some sort of potential wave of system upgrades as well?

Yes. So we did - we've done very well this year in terms of payment placements. Cornerstone, we've been able to upgrade more than half of our installed base of Cornerstone with a completely new user interface. We've been able to do this because we have a field-based organization, field service reps who go out and partner with customers. We also - our Neo system, which is really more geared towards general practice customers and mobile customers, is native cloud-based. That's received just, I think, very enthusiastic reception, and we've been able to grow that nicely. But the key is it's not so much in the PIMS system per se. It's in the connectivity that we're able to provide between software and our diagnostics and the applications that work together. So what customers tell us is they appreciate our PIMS systems. But what they really like is they like the fact that it all works better together, so the PIMS and the applications and VetConnect Plus and the diagnostics. And that ability to support their workflow clinically and from a business standpoint and capturing charges and work that they do is what sets us apart and continues to really provide strong differentiation.

Next, we will go to the line of Andrew Cooper with Raymond James.

With the integration going as expected, was there anything that sort of surprised you? And I guess, from a from a customer reaction perspective, I think sometimes we view some of the regional players as - sometimes view it as an alternative to the larger options that are out there in the market. So has there been any pushback from customers? And then from a margin perspective, the gross margin, I think, in 4Q was maybe a little lighter than we had expected. So what's the opportunity kind of on Marshfield? And in general, how much maybe did mix impact in the quarter? But on Marshfield specifically, to capture synergies and get kind of that incremental revenue up to - similar to your consolidated lab margins or kind of how you view that in terms of the extra capacity that you added with the acquisition? So any color there would be great, and I appreciate the feedback.

Great. Yes. So the Marshfield integration is on track. We're excited by Marshfield. It really - we've welcomed over 2,000 customers from Marshfield, and they now have access to IDEXX' differentiated tests like SDMA and fecal antigen and VetConnect Plus. And the initial reception has been enthusiastic from those customers. We - keep in mind that a good number of those customers were IDEXX customers already. They use one of our modalities. They may have used our software systems. So it's not like they didn't know us. This just gives us a chance to work more closely with them and to provide reference lab services. I'll turn it to Brian if Brian would like to make a remark on margin and what we see there.

Yes. As expected, we - as we're working to integrate Marshfield, there are some impacts from that. And that we did highlight that as one of the factors, and that will continue into the first half. We're - we have work going on, on that front. But look, over time, I think we're - we've demonstrated and we're confident that the addition of customers into our national lab network and supporting them through our over 50 labs now in the U.S., which is how we think about this business as a national business, is something that we would anticipate in getting leverage from and is supporting the longer-term goals that we have for margin improvement from our reference lab network. So it was a near-term factor and will be a near-term factor to a degree, and we'll get leverage on that over time. It will support our margin improvement going forward.

And we'll take one final question.

Yes, this will be our last question. Thank you.

That will be from the line of David Westenberg with Guggenheim Securities.

So some of the feedback from veterinarians on the cytology instrument starts the conversation in oncology. So I apologize, I'm going to kind of ask an industry kind of wide question here. But does this - how do you see the oncology market kind of playing out in the next, say, 3 to 5 years? Is there opportunities here in diagnostics, in the reference labs? Is there opportunities in therapeutics kind of the way we have in the human market with, say, cancer profiling or early detection of cancer? Just if you can give me kind of a broad overview of that and maybe just cytology kind of start that conversation.

Yes. So the oncology service is something that exists in the marketplace today. It's centered more around specialty practices and there's lots of different areas in oncology, just like there are on the human side in terms of both drugs and therapeutics and LINAC systems and chemotherapy. So that's a very broad question with lots of different areas. From a diagnostic standpoint, that's something we're always taking a look at. There's - around genomics and proteomics and being able to detect cancer earlier. Certainly, digital cytology, in many instances, you're looking for cancer. So it does begin that discussion when a patient comes in with mumps and bumps and wants to know whether or not their pet is okay. Okay. And so with that, thank you. With that, we'll conclude the call. I want to thank our employees for the very strong progress and performance in Q4, for the full year of 2019 and for the advancement of our purpose, which is enhancing the health and well-being of pets, people and livestock around the world.

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