IDEXX Laboratories Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2022

Key Takeaways

  • Strong revenue performance with Q2 organic growth of 6.5% (H1: 7.2%), but full-year organic guidance trimmed to 5.5%–8% due to softer clinic visit trends and macroeconomic uncertainty; CAG diagnostic recurring revenues now seen growing 6.5%–9% in 2022.
  • Q2 EPS was $1.56, down 30% year-over-year on a comparable basis, reflecting $80 million of discrete R&D investments and a stronger US dollar; full-year EPS is guided at $7.77–$8.05, with operating margins of 26.4%–26.9%.
  • Same-store clinical visits in the US declined 3.1% in Q2 as practices pull back from pandemic-era peaks and face staffing constraints, but diagnostics revenue per visit rose ~9% thanks to higher utilization and pricing initiatives.
  • Product momentum remained strong with record premium instrument placements up 18%, double-digit growth in veterinary software and service revenues, 7% global CAG instrument revenue growth, and 9% organic growth in the water testing business.
  • Ongoing investments include $80 million of R&D in Q2 to support pipeline innovations—new fecal antigen testing for flea tapeworm, FGF23 kidney biomarker, PCR direct testing—and expansion of cloud-based practice management solutions.
AI Generated. May Contain Errors.
Earnings Conference Call
IDEXX Laboratories Q2 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Morning, and welcome to the IDEXX Laboratories Second Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mizelski, President and Chief Executive Officer Brian McKeon, Chief Financial Officer and John Ravis, 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 statements that are subject to risks and uncertainties that and could cause actual results to differ materially from those discussed today.

Operator

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 our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by in the Investor Relations section of our website, idex.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 Q2 2022 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2021 unless otherwise noted. I would now like to turn the call over to Brian McKeon.

Speaker 1

Good morning, and welcome to our Q2 earnings call. Today, I'll take you through our Q2 results and review our updated financial outlook for 2022. In terms of highlights, continued high levels IDEXX execution drove solid organic revenue growth in Q2 compared to strong prior year results. Overall, IDEXX revenues increased 6 0.5% organically supported by 7% organic growth in CAG Diagnostic recurring revenues. Key execution metrics were excellent, Reflected an 18% gains in premium instrument placements, continued strong double digit growth in veterinary software and service revenues And the nearly 1100 basis point U.

Speaker 1

S. HAG Diagnostics recurring revenue growth premium to same store clinical visit levels. For the first half of twenty twenty two, overall organic growth was 7.2%, slightly below our expectations for first half growth at the low end Of our 7.5% to 10% full year guidance range. These results reflect relatively increased headwinds from lower year on year U. S.

Speaker 1

Clinical visit levels and increased macroeconomic impacts in international regions. Profit results were in line with our expectations supported by sustained high gross margins. EPS was $1.56 per share in the quarter, including $0.72 of impact from discrete R and D investments and $0.06 of net year on year impact from the stronger U. S. Dollar.

Speaker 1

As planned, EPS results reflected high operating expense growth, including the impact of $80,000,000 in discrete R and D investments in the quarter and carryover effects from prior commercial investments. As we look forward to the second half of twenty twenty two, we're targeting continued solid organic revenue growth building on the significant We've updated our full year overall organic growth outlook to 5.5% to 8% for 2022, reflecting 6.5% to 9% full year organic growth in CAG Diagnostic recurring revenues. The midpoint of this updated range Reflects an outlook for continued solid organic gains in the second half, aided by strong IDEXX execution trends and benefits from incremental price increases. As we'll discuss, vet practices continue to work through capacity constraints and the lapping of high 2021 demand levels supported by the significant growth in new pets during the pandemic. Given these factors and a challenging global economic climate, Our midpoint organic growth outlook incorporates expectations for continued pressure on clinical visit levels in the second half of twenty twenty two.

Speaker 1

At the low end of our updated growth range, we've also incorporated an additional 2.5% organic growth risk estimate in the second half related to higher potential macroeconomic impacts on demand. Our EPS outlook of $7.77 to $8.05 reflects our updated organic revenue growth estimates and new estimates for foreign exchange effects based on the continued strengthening of the U. S. Dollar. It also reflects expectations for sustained strong full year operating margins, flat to 50 basis points below prior year levels, Adjusting for foreign exchange effects and $80,000,000 in discrete R and D costs in 2022.

Speaker 1

We'll walk through the details of our updated P and L outlook later in my comments. Let's begin with a review of our 2nd quarter results. 2nd quarter organic revenue growth of 6.5% was supported by 7% organic gains in our CAG business and 9% organic growth in our Water business. These gains were moderated by a 5% organic decline in the LPD revenues, driven primarily by year on year impacts related to reduced African swine fever testing in China. CAG Diagnostic recurring revenues 7% organically in Q2 compared to strong prior year levels, reflecting 8% gains in the U.

Speaker 1

S. And 5% growth in international regions. Q2 CAG gains were also supported by 8% organic growth in CAG instrument revenues and 14% organic growth in veterinary software For demand drivers, sustained healthy trends supporting increased utilization of diagnostics were moderated by relatively increased year on year pressure on clinical visit growth. In Q2, same store clinical visits were an estimated 3.1% below strong prior year levels. This compares to an updated estimate of 1.4% declines in Q1 and 2.5 percent to 3 percent increases in the second half of twenty twenty one.

Speaker 1

Our analysis points to 2 primary factors driving the recent change Historically, U. S. Clinical visits for practice have grown at approximately 2% to 3% annually, supported by steady vet practice capacity expansion. Between Q1 2020 and Q1 2021, U. S.

Speaker 1

Average clinical visits per practice jumped nearly 13% and these higher absolute visit levels sustained through 2021. Extraordinary efforts by vets and their staff during the pandemic supported the significant increase in demand for clinical services, including diagnostics. In 2022, U. S. Clinical visit capacity pulled back from these high levels, impacted by staffing challenges, reflected in a 2% contraction in average clinical visit levels in the first half of twenty twenty two.

Speaker 1

This has brought implied vet clinic capacity metrics More in line with longer term expansion trends, while still being below the strong demand in the sector implied by the pet population expansion. We see these specific dynamics as improving over time. However, given the recent pullback in clinic capacity, which continues to be affected by near term staffing challenges And the lapping of strong underlying demand levels seen throughout 2021, we believe it's appropriate to plan for continued year on year pressure on U. S. Clinic visit growth in the second half of this year.

Speaker 1

Offsetting these near term growth headwinds is the continued expansion of diagnostics revenue per visit at the clinic level, supported by IDEXX Innovation and Engagement. While year on year clinical visits declined 3% on a same store basis in Q2, Diagnostics revenue per visit expanded nearly 9%, consistent with strong Q1 trends. IDEXX's U. S. CAG Diagnostics organic recurring revenue growth of 7.6 Q2 continues to outpace solid sector growth trends reflected in a 10 70 basis point premium to clinical visit gains.

Speaker 1

Jay will talk more about how we're driving sustained strong performance on this front in his comments. Globally, IDEXX achieved solid organic revenue gains across our modalities in the Q2. IDEXX VetLab consumable revenues increased 8% organically, reflecting Consolidated gains across U. S. And international regions.

Speaker 1

Consumable gains were supported by 15% year on year growth in our global premium instrument installed base, Reflecting double digit increases across our Catalyst, premium hematology and ZetaView platforms. CAG premium instrument placements increased 18% in Q2, reflecting 8% gains in the U. S. And 25% growth internationally as clinics showed continued confidence in investing towards support of increasing demand for diagnostics globally. The quality of instrument placements continues to be excellent reflected in 9% growth in new and competitive Catalyst placements.

Speaker 1

ProSight 1 momentum continues to build, supported by our global expansion efforts, reflected in the 64 percent year on year increase in premium hematology placements in the quarter. Rapid assay revenues expanded solidly in Q2 compared to high prior year demand levels. Global Rapid Asset Revenues increased 6% organically supported by solid volume gains in the U. S. And benefits from net price increases.

Speaker 1

Global lab revenues increased 6% organically in Q2 as high single digit growth in the U. S. Was moderated by flat organic revenue growth in international regions, reflecting pressure on same store clinic visit growth in Europe, including increased macroeconomic impacts. Reference Lab new business momentum and customer retention remains We achieved continued solid net price gains in the quarter globally with an average 4% Growth benefit to U. S.

Speaker 1

And worldwide CAG Diagnostic recurring revenues in the first half. Our updated outlook includes benefits from additional U. S. CAG Price increases implemented in August, reflecting product and service enhancements and inflationary impacts. We estimate incremental price changes In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 14% organically and 27% on a reported basis, including benefits from the eZYBET acquisition.

Speaker 1

Results were supported by double digit organic gains in recurring software and digital imaging revenues Continued strong momentum in cloud based software placements. Water revenues increased 9% organically in Q2, reflecting strong performance across regions, including benefits from net price improvements. Livestock, Poultry and Dairy revenue decreased 5% organically in Q2. Tough comparisons to high prior year revenue levels for African swine fever and core swine testing in China offset moderate overall And a growing gains in other areas of our LPD business. We've now worked through these comparison impacts and are targeting positive growth in LPD in the second half of this year.

Speaker 1

Turning to the P and L. Q2 profit results were supported by solid gross profit gains. Gross profit increased 5% in the quarter as reported and 7% on a comparable basis. Gross margins were 59.7%, in line with high prior year levels on a comparable basis. Benefits from net price gains, lab productivity initiatives and improvement in software service gross margins helped to offset inflationary effects and impacts from lower LPD revenues.

Speaker 1

Operating expenses increased 46% year on year as reported in the Q2 and 48% on a comparable basis, including a 35% OpEx growth impact related to $80,000,000 in discrete R and D investments. Operating expense increases reflect carryover impacts from Investments advanced in recent quarters related to our expanded global commercial capability. We're planning for moderated operating expense growth in the second half, particularly in the Q4 as we gain leverage from these investments and lap more favorable year on year comparisons. EPS was $1.56 per share, a decrease of 30% on a comparable basis, including a 32% growth impact related to the discrete R and D investment. EPS results included tax benefits of $3,000,000 or $0.03 per share related to share based compensation, which was down $0.04 per share from high prior year levels.

Speaker 1

Foreign exchange reduced operating profits by $6,000,000 and EPS by $0.06 per share in Q2, net of $6,000,000 in hedge gains. Free cash flow was $36,000,000 in the 2nd quarter. On a trailing 12 month basis, our net income to free cash flow conversion rate was 66%. For the full year, we continue to estimate free cash flow conversion of 65% to 70%. This outlook reflects approximately 5% of free cash flow conversion impact from the discrete R and D investments, modestly higher inventory levels to sustain high levels of product availability and higher deferred tax assets.

Speaker 1

We're maintaining our full year outlook for capital spending of $180,000,000 including approximately $50,000,000 for our new manufacturing warehouse expansion project. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.4x gross and 1.3x net of cash. We allocated $314,000,000 of capital to repurchase 809,000 shares in Q2. We intend to continue to support our share repurchase program leverage our strong balance sheet as appropriate on this front.

Speaker 1

Our financial outlook assumes capital allocation to share repurchases aligned with a consistent net leverage ratio, supporting a projected 2% full year reduction in share count. Turning to our 2022 full year P and L outlook, We're lowering our full year organic revenue growth range by 2% to reflect first half performance, recent CAG sector trends and to incorporate potential additional impacts from macroeconomic factors at the lower end of our guidance range. We're also adjusting our reported revenue growth outlook recent strengthening of the U. S. Dollar and updating our EPS outlook to incorporate current expectations for foreign exchange impacts and projected changes in interest rates.

Speaker 1

Our updated full year revenue growth range of $3,305,000,000 to $3,385,000,000 reflects an $80,000,000 to $85,000,000 reduction compared to earlier estimates. This includes a $20,000,000 adjustment related to the recent strengthening of the U. S. Dollar. We now project foreign exchange will reduce year on year revenue growth by 3% to 3.5% for the full year, with approximately 4.5% of year on year headwinds expected in Q3.

Speaker 1

As noted, we've updated the full year organic revenue growth outlook to 5.5% to 8%. This reflects a full year CAG Diagnostic organic recurring revenue growth outlook of 6.5% to 9%. Our updated CAG Diagnostic recurring revenue outlook implies second half organic gains of 5% to 10%. The midpoint of our outlook for H2 reflects CAG Diagnostic organic recurring revenue growth of 7.5% or 8% normalized for equivalent days effects, which we estimate will reduce Q3 revenue growth by approximately 1%. Supporting this outlook are benefits from price increases we're advancing in the second half of twenty twenty two, which we estimate will provide 1.5% to 2% of benefit to worldwide H2 CAG Diagnostic recurring revenue growth building on first half gains of approximately 4%.

Speaker 1

Net of this incremental price benefit, the midpoint growth outlook for the second half of twenty twenty two is consistent with the global sector growth trends exiting Q2 and reflects expectations for sustained high IDEXX CAG Growth Premiums supported by continued strong IDEXX commercial execution. The lower end of our second half growth outlook factors in an additional 2.5% organic growth risk estimate related to higher potential macroeconomic impacts on demand. A 5% second half growth rate for CAG Diagnostic recurring revenues would align with the low end of growth impact seen in the last recessionary period. The higher end of our growth outlook for the second half targets improved 10% CAG Diagnostic At our updated revenue growth rates, we're now planning for full year operating margins of 26.4% to 26.9%, compared to strong 2021 performance, including approximately 230 basis points of margin impact related to discrete R and D Investments. Adjusted for the discrete R and D investments and approximately 20 basis points of year on year net margin benefit from foreign exchange hedges, The high end of this outlook reflects updated goals for relatively flat operating margin gains in 2022 compared to strong prior year levels.

Speaker 1

The full year operating margin outlook is supported by the goals to deliver solid comparable operating margin gains in H2. We're targeting flat to modest comparable operating margin increases in Q3 and higher levels of improvement in Q4 as we benefit from higher net price realization, cost management efforts and the lapping of prior year stepped up investment levels. Our updated EPS outlook is $70.77 to $8.05 per share, including the $0.72 impact from the discrete R and D investments. This represents a decrease of $0.32 per share at midpoint, including $0.05 of impact from higher projected interest rates and $0.03 of additional headwind related to FX. For the full year, at our midpoint outlook, we estimate foreign Exchange will reduce full year operating profits by $23,000,000 and EPS by $0.21 per share.

Speaker 1

This is net of an estimated $26,000,000 We're $0.23 per share benefit from projected 2022 hedge gains. We provided details on our updated estimates and the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Speaker 2

Thank you, Brian, and good morning. IDEXX delivered another quarter of solid growth supported by excellent execution by our global IDEXX teams. Demand for pet healthcare remains high, Building on the step function and sector growth of pets and patient visits during the pandemic. IDEXX is a diagnostics and software partner of choice of veterinary clinicians. This was reflected in record 2nd quarter premium instrument placements, continued high growth in cloud based PIMS placements Integrated clinic wide solution that helps them expand capacity and grow their businesses while providing diagnostic insights that support high levels of pet health care.

Speaker 2

The solid results that IDEXX delivered in the quarter, despite some headwinds from near term clinical visit growth in international macro factors, We enforce our confidence in the durability and long term growth potential of our business, aligned with increasing care standards for companion animals. Today, I'll discuss our performance and progress in the context of current sector trends in advancing key innovation and commercial initiatives that position us for continued solid growth and financial performance. Let me start by providing some updated context on trends in the companion animal sector. CAG sector trends continue to reflect strong global demand for veterinary services, building on a significant step up in the number of pets Against a very strong prior year base as veterinarians use diagnostics to deliver best care standards, Validating the value we bring with differentiated solutions and an excellent customer experience. Specifically, diagnostics remains one of the faster growing areas of the veterinary clinic, continuing to outpace both total practice revenue growth and clinical revenue growth on a same store basis.

Speaker 2

U. S. Diagnostics revenue growth per practice of 6% in the quarter, as noted, was once again driven by positive contribution from both Diagnostics Frequency And utilization. Diagnostics frequency and utilization gains were both above pre pandemic trends, even off a much higher base. As highlighted in the earnings snapshot, clinical use of diagnostics per visit expanded by revenue nearly 9% in the quarter, Offsetting headwinds from lower clinical visits.

Speaker 2

We continue to make progress on initiatives that drive future Diagnostics recurring revenue. We saw increased adoption of our U. S. Preventive care program, where we provide a turnkey diagnostic solution to wellness care growth in international premium insulin replacements, including the successful expansion of our ProSciONE platform. These strong areas of progress have been moderated by year on year pressure on clinical visit trends.

Speaker 2

This Reflects a combination of impacts from pullback in capacity levels following a period of significant demand expansion, including the step up in visits related to the 10% expansion of the pet population during the pandemic. In the U. S, for example, clinics were open around 50% of weekend days in Q2 compared to an average of almost 60% pre pandemic. We're also seeing some impacts from macroeconomic pressures, particularly in Europe. We think it's prudent to plan on continued year on year growth impacts on these fronts in the second half of twenty twenty two.

Speaker 2

Recent research we performed in the U. S. And Germany shows that a majority of veterinarians indicate staff Capacity is a major or moderate issue, while also indicating they see continued higher demand for appointments. As Brian indicated, we are well positioned with clinics in working through these dynamics over time to address what is likely underserved demand for pet healthcare in a significantly expanded global pet population. As we work through these near term headwinds, we're targeting solid organic growth overall in the second half, Building momentum that will keep us on track towards our long term growth goals.

Speaker 2

Let's now discuss our ongoing progress in key areas of our growth strategy. A key factor in enabling IDEXX to drive strong utilization of diagnostics within the sector, IDEXX's Decades long focus on building and supporting our world class commercial team to execute our high touch model. These capabilities, Along with significant new product introductions over the last several years, help our customers grow faster and continue to support strong commercial results. This is reflected in record instrument and software placements, strong EVI gains, sustained solid net new business gains In very high customer retention levels, these results demonstrate the market development benefits of pairing commercial capabilities with highly relevant innovative products. Our sales professionals have shown an ability to maintain and leverage their deep relationships with customers Support these performance levels despite challenges related to staff capacity.

Speaker 2

U. S. Account manager in person visits are now over 70% Approaching desired end state goals. International access was also excellent at close to 70%, where international growth It's a strategic priority and we're applying the successful U. S.

Speaker 2

Playbook to drive strong placements and new business gains. The second quarter represented Continued progress against this strategy with solid year over year growth in customer adoption across modalities in Europe. Meanwhile, on boarding and integration of the 6 country level commercial expansions have been completed and have gone extremely well. We look forward to ongoing future benefits from these expansions as we work through macro driven headwinds in regions like Europe, which are constraining near term organic gains. The international opportunity to drive diagnostics utilization is tremendous and largely underpenetrated as shared at last year's Investor Day.

Speaker 2

Our advancing global commercial capability and product innovations that fit The requirements of these regions are positioning us to realize significant opportunities over long horizons. Putting the right products in the hands of our capable sales professionals drives continued growth in instrument placements with resulting highly profitable future consumable streams. Customers on a global basis have never been hungrier for technology This supports care workflow optimization, excellent clinical performance and friction for use, a key piece of our in house analyzer portfolios for Osei The innovative, customer friendly hematology analyzer, which launched last year and has already surpassed an installed base of over 5,000 units. Reception and adoption of ProSciONE has been exceptional, particularly in international regions where many veterinarians were trained to run hematology diagnostics first We're doing a basic work up on a patient. We had excellent growth in ProSight One placements across regions in the 2nd quarter and Continued high levels of customer satisfaction and retention, supporting the expansion of our global premium hematology installed base The estimated opportunity for 200,000 worldwide premium instrument replacements.

Speaker 2

In addition to these targeted investments in enhanced commercial capabilities, Technology and product innovation is another key pillar of IDEXX's growth strategy as we endeavor to add value to our product and service offerings. In Q2, we announced 3 upcoming laboratory test and service launches. We have a shared mission with our customers to deliver a higher standard of pet healthcare And these new products and services support that care delivery through timely and highly accurate diagnostics insights. These innovations Also enable our customers to do so in an efficient way by using the IDEXX Reference Lab as an extension of the veterinary clinic, which is a key benefit given the current capacity constraints within our sector. These innovations include: number 1, expanding FecalDx antigen testing to include the detection of flea tapeworm, the most common type of tapeworm to infect dogs and cats.

Speaker 2

With this addition, IDEXX's fecal DXC antigen test detects up to 5 times more common and prevalent parasites than fecal flotation alone and provides customers with earlier diagnostic insights. This will drive even greater progress towards the goal we shared at Investor Day in 2018 Of an incremental $120,000,000 in fecal antigen revenues by 2023. Number 2, the addition of FGF23, A kidney disease management biomarker that will provide clinicians along with the use of SDMA not only earlier diagnostic signs of chronic kidney disease, but will deliver more confident recommendations for targeted therapy during earlier stages of chronic kidney disease. And number 3, A new service of PCR direct testing, which provides U. S.

Speaker 2

Reference lab customers with crucial, timely access to next APCR results, enabled by a new PCR laboratory at our Louisville reference labs. In addition of these tests and services support our customers in delivering improved pet healthcare in ways in which an IDEXX partnership adds long term increasing value for our customers. In addition to the development of highly relevant accurate IDEXX's innovation focus is also on our broad portfolio of software services, including multiple cloud native PIMs a variety of tools to manage clinic workflow like VetRadar, VetConnect Plus, payment processing solutions and Web PACS. When combined, these products can benefits around the clinic and at each step of the patient visit process. The rapid uptake of IDEXX cloud based solutions is a reflection of this.

Speaker 2

Customers understand that modern software tools reduce manual work and increase capacity for clinic staff to focus on higher order patient centered tasks. This higher standard of care is further supported by clinical decision support on VetConnect PLUS, which leverages machine learning to offer suggested next steps and is aligned with care protocols. A great example of this is our enhanced 4DX plus introduction, where we not only improved upon our gold standard in a plasma assay, but Storage. We're also seeing incremental follow-up tests for customers engaging with clinical decision support, and we'll share with you at the upcoming Investor Day Promising early results. Customers clearly appreciate these benefits as we saw another quarter of record pins global placements, supported by continued strong demand for cloud based offerings.

Speaker 2

EZNET, in particular, continues to experience strong growth since joining the IDEXX software family, The 2nd quarter placements consistent with the prior quarter is 28% higher than the previous year. These cloud based solutions enable customers to shift their focus For maintaining on premise hardware to providing excellent patient care, while also benefiting IDEXX through growth of a highly profitable recurring revenue stream in the future. We continue to be very pleased with the advancement of our long term strategy to integrate diagnostics and software that help IDEXX customers grow faster. Underpinning our growing commercial and technology capabilities is a commitment to providing world class levels of service to our customers, which is integral to earning our customers' business every day, especially given the high levels of demand within the sector. Strong execution against this commitment takes many forms From consistently high product availability rates to reliable turnaround times at our reference times.

Speaker 2

The high service levels IDEX delivered in the 2nd quarter, including greater than 99% product availability, demonstrates the benefit of our long term focus on building supply chain capabilities in highly scaled manufacturing centers. Our recently communicated U. S. Midyear price increase reflects higher cost to run the business, including investments in our supply chain to ensure excellent levels of product continuity and future network resiliency. Given this, IDEXX is well positioned to manage through supply chain and inflationary dynamics, while building on our strong long term financial performance.

Speaker 2

This concludes our review. IDEXX's execution levels remain strong and aligned towards our significant and enduring long term growth potential. We're well positioned to deliver solid growth and financial results as we advance our mission to create a better future for animals, people and our planet. I'm thankful to our more than 10,000 colleagues for their ongoing dedication to our efforts. They are integral in delivering strong financial performance for the company and creating long term value, while also supporting the advancement of Animal Care globally.

Speaker 2

To those listening in on the call, I'd like to extend a heartfelt thanks in making a meaningful difference to the world. Before we open the line for Q and A, I'd like to remind you that my senior management team and I will provide more information the IDEX strategy and long term potential at our upcoming Investor Day. After 2 years of holding the event virtually, we look forward to hosting the event at our global headquarters at Westbrook, Maine on Thursday, August 11 from 8 to noon. We're also live streaming and recording the event via idex.com for those who cannot make it in person. Participating will be members of my senior management team, including Doctor.

Speaker 2

Tina Hunt, Executive Vice President and GM for Point of Care Diagnostics and Worldwide Operations Julie Durden, Vice President and GM for Global Rapid Assay Mike Lane, Executive Vice President and GM for Reference Laboratories and Information Technology Michael Schreck, Senior Vice President and GM of Veterinary Software and Services Jim Polowasek, Executive Vice President and Chief Commercial Officer and Brian Nikkem, Executive Vice President and CFO. We're also excited to host a live customer conversation led by George Fennell, Senior Vice President and GM of the Americas CAG Customer Facing Organization to discuss recent trends at the clinic level and how IDEXX has their business during these dynamic times. The event will last approximately 4 hours and will conclude with a Q and A session and an investor launch with the extended management team. So with that, we'll end the prepared section of the call and open the line for Q and A.

Speaker 3

Thank you. We will now begin our question and answer And we have our first question from Michael Ryskin with Bank of America. Great.

Speaker 1

Thanks,

Operator

Pardon me, sir, you're drifting from the mic.

Speaker 3

We cannot hear you.

Speaker 1

Is that better? Hello?

Speaker 3

There you go. Thank you.

Speaker 1

Okay, great. Thanks. Sorry about that.

Speaker 4

I want to ask on the pricing side of things first, just because we got a lot of questions on that. Am I understanding correctly that the incremental price you're taking is that you called out in August, the 1.5% to 2%, That's on top of the 4% you took in the first half. And then just sort of how much price do you think you can take until you start seeing a little bit of a pushback? Is this some price you're pulling forward from 23 in a sense? Just wondering the dynamics there, especially as you talk about Weak macro and just uncertain conditions elsewhere.

Speaker 1

Thanks for the question, Mike. Just on the first part, That's correct. So we had approximately a 4% increase in the U. S. And worldwide in the first half.

Speaker 1

And the 1.5% to 2%, we anticipate will be an incremental worldwide benefit, so that would imply 5.5% to 6% For the second half, I'll let Jeff Jay talk to the customer dimension.

Speaker 2

Yes. So qualitatively, as Brian indicated, The price increase was really, I think, a reflection of higher costs of running the business. And to your question around Pet owner pushback, we don't think that that's been a driver to date. In fact, pet owners We have traditionally prioritized pet healthcare spend relative to other things. It's a small percentage Of total consumable consumer expenditures, so it's a relatively small piece.

Speaker 2

And at Weidl, the Human pet owner demand has been strong and growing, and we don't expect that to change.

Speaker 4

And can I ask a follow-up on the vet visit growth you talked about? Obviously, we're all tracking a lot of the same indicators and we're seeing I hope 2Q came in relative to the Q1. He talked about all the gains, in terms of capacity For vet visits in 2020 2021, after first of all, what's your assumption for vet visits for the rest of the year? If I'm backing into the numbers You're assuming gradual improvement from 2Q, but still sort of like negative for the second half of the year. I want to make sure that's correct.

Speaker 4

And then At the end of this year, are we normalized then for the gains we made in 2021 or is there more headwinds in 2023? Is there are we back to a normal level and then can grow next year off of this in terms of vet visits? Or is there still some more digesting of this capacity next year?

Speaker 1

Thanks. So Mike, why don't I walk you through kind of how we're thinking about the outlook analytically And can try to link that back to the underlying sector trends. But just as a grounding, in Q2, the Clinical visits year on year were down 3%. The revenue per clinical visit was very strong, was up 8.5%, and that's A very positive indicator we think we can build on, but I think the clinical visit levels, as you pointed out, were down relatively to Q1 and we're, I would say, modestly softer than that at the end of the quarter. So as we've looked at the midpoint So if we normalize for that, that's 8%.

Speaker 1

And then if you back off the 1.5% to 2% incremental pricing, it comes out to 6% to 6.5%. So we're basically forecasting that the underlying trends in the sector coming out of Q2 Are similar in the second half and that we get incremental benefit from pricing. And the underlying assumptions There are that we're still working through the pullback in capacity that occurred with that clinics early this year. As I mentioned in my comments, there was A big step up from Q1 2020 to Q1 2021, 13% that sustained throughout 2021. And then we saw about a 2% pullback in the average visit level in the first half of the year.

Speaker 1

So that is something that Given just ongoing staffing challenges, we think we're still going to be working through that this year and we're still working through the very strong demand compares to the step up Last year, including the benefits from the pet population expansion. So to the latter part of your question, we do think we'll be working through those headwinds through this year, and those should improve those specific factors should improve as we head into 2023, but We're trying to be realistic on kind of just the near term trends and the headwinds given the dynamics that we continue to see through Q2, and we think that's prudently reflected in our outlook.

Speaker 2

Yes. The other thing I would add to that, Mike, is if you take a look at the net Expansion in the number of pets is up in the pandemic. I mean, there's I think there's some evidence that there's a Potential underserved demand given this 10% growth. If you take a look at just Extrapolate out the 2% to 3% clinical visit trend we saw pre pandemic and add in the number of Yes. The clinical visits should be higher just based on pet population.

Speaker 2

So I think as a profession works through some of the capacity constraints that we've talked about, I think the we'll see it recovering from there.

Speaker 3

We have our next Question from Chris Schott with JPMorgan.

Speaker 5

Great. Thanks so much. I was just trying to get a little bit of clarification on the guidance Change as we're trying to dissect, I guess, this vet visit growth dynamic versus some of the softening demand you referenced in Europe. So can you just maybe quantify how much of the It's 200 basis point or so change in organic guidance is from those two factors. And maybe just then elaborating on the macroeconomic side, Where are you seeing the greatest impacts here?

Speaker 5

Is this kind of broadly across Europe? Or are you seeing specific markets that are seeing as greater pressures than elsewhere? Thanks so much.

Speaker 1

Yes, Chris, thanks for your question. The adjustment that we've made is principally to reflect the more recent Trends we're seeing both in the U. S. And in Europe, principally around the visit trends. I think our execution levels have remained quite strong.

Speaker 1

We feel good about that. I think the underlying revenue per visit utilization dynamics, as you can see in the metrics are holding up well and we think we can build on that. But the adjustment is principally to reflect The more recent trends, which were more aligned with the lower end of the outlook, going back to our earlier guidance, we had talked about The lower end reflecting that some of the pressures continue and that's what we've on visits and that's what we've seen through the And we think we're adjusting for that appropriately. I think we're reflecting in the full range that there's some opportunity for improvement in the second half. To Jay's point, I think there's underlying demand that we believe is out there and that if the clinics can adapt And improve the capacity dynamics, I think that could be a positive factor.

Speaker 1

And of course, we're trying to highlight that there's some potential for additional Macro risk, that's more difficult to calibrate, but I think we're cognizant that, that could be a factor as So on balance, I think we're appropriately adjusting the outlook and reflecting the more recent trends.

Speaker 2

Yes. Let me just maybe directly address your question around geographic balance. So we've done a number of different surveys, both in the U. S. And in Germany as our largest country in Europe.

Speaker 2

And what we're seeing is the majority Now veterinarians indicate that, that staff capacity is a major or moderate issue. Not to say the macro effects, especially In Europe, we're seeing some impact from that, primarily more so on the reference labs than in clinic Testing. And not surprising when you consider some of the factors that our European sector and regions In terms of inflation and energy and the Ukraine, Russian war is much closer to that.

Speaker 3

Our next question is from Erin Wright with Morgan Stanley.

Speaker 6

Great. Thanks. Another question on the macro. If I heard you correctly here, I guess you mentioned that the lower end of the guidance embeds A growth expectation similar to what you experienced during the prior economic downturns here, but what's the difference Across your business now versus for instance, 2008, 2009 that would make you, I guess, more or less insulated from a more challenging economic backdrop And as I think about what was going on during that time, for instance, the Catalyst CX launch, those initiatives Maybe leaving you differently positioned than maybe you would going into a tougher economic backdrop, particularly here in the U. S?

Speaker 6

Thanks.

Speaker 2

Good morning, Eric. Thanks for the question. Yes, I think we're in a much stronger position than we were back in 2,008, 2,000 and And a couple of, I think, very important dimensions. Our sales channel, we worked through distributors over a decade ago, And now we have a direct presence in a 99% plus from a revenue standpoint. We have those direct relationships with customers.

Speaker 2

Our portfolio from an innovation standpoint is much more robust Across the board, both reference labs in clinic, software, for example. So I think we offer Veterinarians, a lot more tools and technology to help manage their practices. I think if anything, the Pet owner pet bond has grown and is stronger than it was a decade ago. And I think the industry itself, the Profession itself is more sophisticated in managing food cycles. I think they are have adopted a number of, I think, business practices, whether it's individual practices or the corporately owned practices in terms Managing Care.

Speaker 2

So I think we're overall in a much stronger position than we were.

Speaker 6

Okay, great. Thanks. And then can you give us an update on innovation and I'm sure we'll hear about this at the Investor Day, but how do you think about the recent R and D investments that you made as well as, the innovation that you called out in your prepared remarks, Pierre. And when will these

Speaker 2

Yes. So from an innovation standpoint, I think we've never More productive if you look out over the last couple of years and the type of innovations really across the board from Instrumentation testing services software. So if you take a look at the instrumentation piece, ProSightOne has just been an incredible success. Our customers, I think, have responded exceptionally well to it. They love the fact that it's very easy to use.

Speaker 2

The performance It's very high and it's priced from an economic standpoint to get in the sweet spot of the marketplace. So we've seen really dramatic uptake In our international regions, which is not surprising. A lot of those countries or regions are really hematology first Marketplaces. And the nice thing about the hematology is it's hard to do. It's really hard to do well and there's a multiplier impact.

Speaker 2

Typically, we sell with chemistry increasingly with SediVue as part of in clinic suites. And then on the software front, I think we're all familiar with the challenges that practices Our facing from a workflow and staff productivity and client communication standpoint. So I think Practices which have traditionally relied on premise software solutions are looking at Contemporary cloud based solutions as a way to address some of those challenges, and we've seen really rapid uptake In our cloud based PIMs portfolio, whether it's EZVET or DIO or Anima in some of our Country and Regions internationally. From a testing standpoint, we continue to, as I mentioned In my remarks, for reference labs, we've had a number of important introductions over the last couple of months And especially in fecal antigen with fleek tapeworms, expanding the portfolio for that. It's a fast growing, I think very important franchise that we have, it protects 5 times as up to 5 times as much compared to location or O and P.

Speaker 2

So it's an important part of the overall reference labs because customers when they use preventive care panels, The fecal is a piece of it, but an important piece of it. So a lot of the, I think, testing is either anchored or driven by the need for the fecal. So overall, we're very excited. We're excited by the in licensing agreements that we struck Ed, we'll continue to provide updates on that over time, including at Investor Day. So look forward to being able to

Speaker 3

Our next question comes from Jon Block with Stifel.

Speaker 7

Thanks, guys. Good morning. Both questions might be centered around price in some way. But when I think about the DX recurring growth ex price, For 2022, it looks like it's shaking out around 300 bps. So in other words, the 8% CAG DX recurring midpoint guidance Less roughly 500 basis points of full year price, Brian, if I've got that correct.

Speaker 7

And historically, you've been closer to 1,000 bps give or take. You've Growing CAG DX Recurring around 12% and price was closer to 200 to 300 bps. So maybe some color on that compression of Call it growth ex price, is there anything to call out other than comps such as less incremental contribution From innovation or maybe what you're even seeing from a market share perspective for that rate of compression?

Speaker 1

John, I'm trying to follow your math, but I think that we're not signaling a fundamental compression in the underlying Kind of growth in excess of kind of visit levels, excluding kind of price changes. I think we've got A benefit this year, we're roughly 1100 basis point premium in the U. S. In the first half, with 4% pricing that would imply kind of closer to the higher end of that 900 basis point to 1,000 basis point range that we saw Pre pandemic and our outlook for the year, underlying it, we're not specifically forecasting clinical visit growth, but it's more of the trends We saw coming out of Q2 would imply consistently kind of high levels and we're not trying to signal A compression on that front. So I think we're that's something that we need to continue to execute well against.

Speaker 1

I think that, That can be impacted by consumer factors at the margin, so I don't want to say that those are things that we're not considering, but I think Our midpoint outlook signals that we think we can continue to deliver well on that front and get some additional benefit from some pricing And that will support our solid full year numbers and second half numbers.

Speaker 7

Okay. And maybe just to clarify, Brian, it might be the same answer, then we can move on. But I'm not talking about, I guess, maybe for once, I'm not talking about Premium to underlying clinical visits. I'm just looking at your CAG DX recurring midpoints around 8% growth. You've got a 500 basis point Contribution from price.

Speaker 7

So CAG DX ex price is around 300 basis points And previously, it had been 900 basis points or 1,000, right? Your CAG DX was growing 12%, your price was 200 to 300 basis points. So why If we normalize for the contribution from price and we throw that out, the growth just looks like a fraction this year versus prior years. And I'm guessing some of that's attributable to the comps, just sort of where I'm going with it. But is there other components to it where You're getting less of an incremental contribution from innovation or less market share gains.

Speaker 7

That's sort of where I was going with it, just to Clarifying again, it might be the same answer and we can move on, but hopefully that was a better question, if you would.

Speaker 1

Yes. John, it's principally the swing in the clinical visit growth. I mean, we're growing 3% declining 3% in Q3. So that's 600 basis points. I mean, I think our underlying execution and Delivery has been quite good and but and the swing in that is, as we mentioned, two factors.

Speaker 1

It's The pullback in the clinic capacity after a significant period of expansion that and restructure the clinics couldn't sustain and I think we believe Can adapt to that over time. And I think that we've got we are lapping some of the step up The big step up in demand we saw in the pandemic, including the benefits from the new patient expansion. So I think for 2022, that's Kind of the key factor that we've been working through, that's the key adjustment in our full year outlook this year. We obviously had to make some changes, and this The change in trend from the second half of twenty twenty one, but that change in the visit level is the clinical visit growth levels is the key Difference in terms of where we're

Speaker 2

That's

Speaker 7

helpful. I've got yes, I've got that swinging 400 bps plus 2 to minus 2 and Ex price compressing 600 to 700 bps, but it gets me a lot closer and I could follow-up offline. So that's why I was asking about market share and innovation. Maybe just to shift gears and the second question still in and around price. I'm just curious, Brian, is it uniform across all your CAG modalities in terms of consumables, lab, RAPIDS.

Speaker 7

And more importantly, are your competitors following on price for both the point of care and reference lab? And if they're not, What does that say, if anything, about your ability to take the same rate of price increase, the same magnitude into 2023? Thanks.

Speaker 2

Yes. John, this was across consumables and reference, not capital. And it was Primarily a U. S. Driven change.

Speaker 7

Sorry, Jay. Point of care I didn't ask capital. Point of care in the reference labs, so across all your modalities of CAG DX recurring and have your competitors followed suit the best of your Knowledge and if not, what does it say about your ability to take pricing

Speaker 2

into 2020? We don't have any insight in terms of what competitors or competitive landscape is up to.

Speaker 1

It is reflective of the overall inflationary environment. So I think that that's a broader factor that I think Everyone in the industry is dealing with.

Speaker 7

Fair enough. Thank you.

Speaker 3

We have our next question from Elliot Wilbur with Raymond James.

Speaker 2

Thanks. Good morning. Understand the granularity on ex U. S. Visit trends is a little bit more difficult to But just wondering if you could comment in general whether or not seeing the same level of Deceleration in clinic visit trends ex U.

Speaker 2

S. Versus U. S, any perspective On that. And then more specifically on the performance or relative performance U. S.

Speaker 2

Versus ex U. S. In the reference lab Business, differential in growth rate, is this purely just a function of Difference in clinic visit trends or are there other factors that continue to lead to the substantial Overperformance in the U. S. Versus international such as price and utilization?

Speaker 2

Thanks. Yes. To your point, to your question on visibility internationally, so we don't have the same size pins installed base across the different regions. So we don't have that type of pinpoint accuracy we do in North America. I would say that we're Seeing similar trends based on other data.

Speaker 2

I think it's a reflection of some of the same capacity Challenges in the practices because we know during the pandemic we saw the same pet boom In countries like UK, Germany, Australia, what have you. I think the overall The factor we see internationally, specifically in Europe, is we do see some of the macro impacts that does impact reference labs more so Point of Care, not surprisingly, there's not as big a wellness or preventive care business Internationally, but there it's probably 20% or so of the visits and that's primarily a reference lab modality. So we do see some headwinds

Speaker 3

We have our last question from Ryan Daniels with William Blair. Yes.

Speaker 8

Thanks for taking the question, guys. I want to take a little bit of a different approach and get any insights you have on what type of IT investments you can make in the near or intermediate term to help your customers increase capacity. So I'm thinking Things like digital intake platforms or self-service billing, etcetera, is that a high priority for you? And do you think that's something that can actually help with

Speaker 2

We see pretty much across the board, Whether it's independent practices or corporate practices, incredible hunger for those type of IT tools, not just PIM systems, but PIM systems, Which provide the Pan Owner engagement modules, which allow them for yes, if you take a step back about 15%, what practice owners tell us About 15% of their staff time is focused on just that patient intake piece and administration of the patient. And a lot of that can be automated. A lot of that can be done virtually like it's done in other industries. So the ability to use and deploy these software tools for client communications, for workflow optimization in every step The patient visit is a high priority for these practices. And I mean and we're seeing that in our software business where we've seen Very rapid growth.

Speaker 2

And I think historically, practices have been somewhat hesitant to move away from PIM systems because The data and that's they've been trained on it and they have all the reports on it, but they're willing to make that switch now because they see the benefits of what a modern software suite can bring. So I think that's a that's only going to get stronger over time as they work to address some of the capacity challenges. Okay. And with that, I'd like to thank everybody on the phone for their We execute at a very high level and support our customers despite the unpredictable and evolving dynamics In our sector and around the world. I'm thankful for your excellent effort and look forward to continuing our strong momentum through the rest of 2022.

Speaker 2

And so with that, We'll conclude the call. Thank you.

Speaker 3

Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.

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