Idexx Laboratories Earnings Call Insights: New Distribution Agreement, Acceleration in Organic Growth

On Friday, Idexx Laboratories (NASDAQ:IDXX) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

New Distribution Agreement

Ryan Daniels – William Blair: I know you don’t want to get into the details exactly on 2013 guidance at this point and on the nuances, but I am curious if you could talk a little bit more about some of the nuances with the new distribution agreement in regards to you getting higher margin of that and how you reinvest proceeds I am curious if it will go on proceeds margin will go into more R&D, more direct sales and marketing. Just how are you thinking about that at this point?

Jonathan W. Ayers – Chairman, President and CEO: Just to remind investors as we expected the new agreement with MWI would transition to 10% margin for them or say a target margin based the retail price or clinic price of our products from 15%. So, there would be 5% margin there. It’s hard to say, because it’s really a mixture of a lot of different things. If money is (fungible) and we’re – it’s probably a combination of everything that you mentioned.

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Ryan Daniels – William Blair: Then I guess my follow-up, just on the VetLab instrument placements, I know you mentioned there was a little bit of weakness and I know the summer months might be a weaker quarter versus Q4 or anyways, but anything in particular you’re seeing there is it more competitive pressures, is it more of a focus on kind of selling and launching all the new products you’ve had. Just any color there would be helpful?

Jonathan W. Ayers – Chairman, President and CEO: I think the market is fine and I don’t really see the competitive pressure, it’s very competitive market, of course, and I don’t really see it any different in Q3 than it was in prior quarters. We did have a lot of new launches and we had some management that – new managements that changed position in the first part of the quarter. So, I think it’s kind of a transitory thing and I’ll also reinforce Merilee’s point that we had a very strong instrument placement quarter last year. So the year-over-year compare is a little bit tough. Instrument placements have very strong quarters and quarters like Q3, but we’re very excited about the momentum and we’re also excited about the quality of our placements. Quality can be measured in a couple of dimensions; one is the percent there are new customers and Merilee mentioned that, the 40% for the Catalyst placements; and the second is the size of the customers. We are continuing to win big customers. For example, we completed outfitting the Animal Medical Center in New York City, which is the world’s probably largest and most well-known veterinary practice and now it is all IDEXX with Cornerstone that went into Q3; we have a lab there, they have our in-house equipment, and that’s just – it’s a great example of the kind of big accounts that we’re winning. But if you look at Q3, one of the things that we are very pleased about is the continued momentum in the core annuity portion of the business; that is the consumables and the labs. That just continued to power along as you heard from the metrics primarily. So, that gives us confidence with the outlook.

Acceleration in Organic Growth

David Clair – Piper Jaffray: So my first question is on the 2013 guidance; just given the macro environment that we’re seeing, the distributor change and the decelerating growth we’ve seen through 2012, just want to try to get a little bit more comfortable with the outlook here. Can you give us some additional details just on the acceleration in organic growth?

Merilee Raines – Corporate VP, CFO and Treasurer: Sure, David. I’ll take a stab at that and Jon may add some things as well. But of course, in January we’ll get into more details by product line, but I say at a higher level, there are a few things that are driving that step-up in organic growth. First, we do expect that the information innovation such as VetConnect PLUS and Pet Health Network Pro will generate volume growth; both the account acquisition and also an increase in account loyalty, and as well, because of the value of those offerings bring to our entire portfolio, we will see increased price realization. In addition, we have some – we’ll have some favorability or we expect some favorability in price as we anniversary to ramp-up some marketing programs; programs such as the protocol-based rebate program that we launched in the third quarter of last year that’s driving the tough instrument placement compare and that program negatively impacted the price of VetLab consumables the way the accounting treatment works and as well the instrument and lab bundled programs negatively impacted the pricing on our reference lab business and I think we alluded to that in the last couple of quarters. We expect some acceleration in growth from geographic expansion, and example of that is the new hub lab in Germany which will extend our reach in Europe. More generally, we see opportunity for growth internationally from investments that we are making in commercial resources, I just mentioned that we are making the investment to go direct in Scandinavia and also the investments in recent product launches as we roll those out internationally things like ProCyte was just launched couple of quarters ago or last quarter Q2 in Japan and so that’s still got a nice growth ramp to it, and as Jon mentioned, VetConnect PLUS we intend to bring out internationally next year. So, those are just some of things that would be behind that step-up in organic growth from 2012-2013.

Jonathan W. Ayers – Chairman, President and CEO: The other thing I’d like to – I think it is important question, Dave, and I really appreciate it. In addition to the factors that Merilee has mentioned, you know you mentioned that the changes in the U.S. distribution, I think it is important to recognize, as Merilee mentioned in her prepared comments, that 80% of our chemistry consumables that are served by the market that distribution serves you take out corporate accounts, 80% of those even today and if that percentage continues to grow is what Catalyst chemistry analyzes and the loyalty we have on Catalyst is over 99%. It’ hard to get much better than that. People love Catalyst; they love everything about it, and in addition when they start using VetConnect PLUS, they are going to love it even more. So, it’s a very, very loyal customer base, and the vast majority of our consumables today are actually coming from that portion of the chemistry base. In addition, we have a couple of hundred reps in the field. We have three times that number of distributor reps. We have a wonderful relationship with all of our U.S. distributors, including a continuing strategic relationship with MWI, particularly because they’re also helping us with the Cornerstone software. So, really I think it’s – the changes is really a minor aspect when you look at the; first of all, the innovation we’re bringing in the market, the situation that we have, and of course the breadth of go-to-market channels and assets that we use to commercialize our product. So, we’re very excited about 2013.

David Clair – Piper Jaffray: As a follow-up from me, I was curious, give the new software launches that we’ve seen recently, can you parse the performance at digital radiography versus practice management?

Jonathan W. Ayers – Chairman, President and CEO: They both grew, but the practice management was clearly the lead horse in that low double-digit growth of that line of business – of that product line.