IDEXX Laboratories Q2 2021 Earnings Call Transcript

Participants

Corporate Executives

• Brian P. McKeon, Executive Vice President and Chief Financial Officer
• Jonathan J. Mazelsky, President, Chief Executive Officer and Director

Analysts

• Michael Leonidovich Ryskin, BofA Securities
• Erin Elizabeth Wilson, Credit Suisse Group AG
• Jonathan David Block, Stifel, Nicolaus
• Nathan Allen Rich, The Goldman Sachs Group, Inc.
• Katerina, JPMorgan Chase & Co.
• Nicholas Hiller, William Blair

Presentation

[Operator]

Good morning, and welcome to the IDEXX Laboratories Second Quarter 2021 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 2021 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2020, unless otherwise noted. [Operator Instructions]

I would now like to turn the call over to Brian McKeon.

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Good morning, everyone. I'm pleased to take you through our second quarter results and to provide an update on our full year financial outlook for 2021. In terms of highlights, IDEXX delivered another quarter of outstanding financial results supported by continued strong global momentum in our companion animal business. Revenue increased 30% as reported and 25% organically, supported by 26% organic growth in CAG Diagnostic recurring revenues, reflecting continued high gains across U.S. and international regions.

As we work through comparisons to prior year COVID impacts, we'll be highlighting select two year average annual revenue growth metrics to calibrate our business trends. In the second quarter, average annual two year organic growth for CAG Diagnostic recurring revenues was 16%, in line with the strong two year growth trends in Q4 and Q1.

Operating profit increased 30% on a comparable basis in the second quarter, reflecting benefits from high revenue growth and moderate operating margin gains as we begin to lap the tight cost controls introduced during the initial stages of the pandemic in 2020. High operating profit gains enabled delivery of $2.34 in earnings per share, an increase of 33% on a comparable basis. Continued strong momentum in our CAG business has us on track to deliver high revenue and profit gains in 2021. We're raising our full year revenue growth outlook range by $55 million at midpoint to $3.170 billion to $3.205 billion. This reflects an outlook for reported revenue growth of 17% to 18.5%, including favorable impacts from FX changes and benefits from our recent acquisitions. Our updated full year outlook is for 14.5% to 16% overall organic revenue growth and 16% to 17.5% growth in CAG Diagnostic recurring revenues.

These organic growth ranges are 1% to 1.5% higher than our last outlook, reflecting expectations for sustained strong performance in our CAG business globally. Our full year financial outlook reflects a targeted 175 to 225 basis point improvement in operating margins on a comparable basis, up 25 basis points from our last outlook, as we advance increased investments in our CAG innovation and commercial capabilities. We're increasing our EPS outlook to $8.20 to $8.36 per share of $0.25 per share at midpoint reflecting 25% to 27% full year comparable EPS growth.

We'll discuss our updated 2021 financial outlook later in my comments. Let's begin with a review of our second quarter results and recent sector trends. Second quarter organic revenue growth of 25% was driven by 27% CAG revenue gains and 27% growth in our water business, benefited from the lapping of prior year pandemic impacts. As noted, CAG Diagnostic recurring revenues increased 26% organically, reflecting 24% growth in the U.S. and 30% growth in international regions. On a two year basis, average annual CAG Diagnostic recurring revenue growth was 16% overall, reflecting 16% gains in the U.S. and 18% growth in international. Strong CAG results were also supported by 78% organic growth in CAG diagnostic instrument revenues compared to constrained prior year levels. Q2 growth in U.S. CAG Diagnostic recurring revenues was aided by high year-on-year gains in U.S. clinical business, benefiting in part from comparisons to lower visit levels in April and May of 2020. U.S. clinical visit growth was 13% overall in Q2 with strong gains across nonwellness and wellness visit categories.

On an average two year basis, same-store clinical visit growth increased at a 4.8% annual rate, down modestly from strong Q1 results. The IDEXX U.S. CAG Diagnostic recurring revenue growth premium to U.S. clinical visits was approximately 1,100 basis points in the second quarter, up moderately and on track with our full year outlook. Expanding pet health care services, including continued solid increases in the utilization of diagnostics, supported a 16% same-store increase in overall veterinary clinic revenues in Q2. Diagnostic revenue per practice increased 15% on a one year basis and 12% on an average two year basis in Q2. Looking ahead to the second half of 2021.

As noted on our last call, we expect to see lower levels of one year growth in U.S. clinical visits and CAG Diagnostic revenue gains as we lap the significant step-up in demand we saw in the second half of 2020. These dynamics are factored into our revenue guidance, which projects sustained strong tier growth in CAG Diagnostic recurring revenues in H2. IDEXX innovation and commercial initiatives continue to build on positive health care demand trends, driving high Q2 organic revenue gains across our major testing modalities globally. IDEXX global reference lab revenues increased 25% organically in Q2, reflecting 20% plus organic gains in the U.S. and approximately 30% growth in international regions.

Our international reference lab gains continue to benefit from strong growth in Europe, supported by our new German core lab capability, our expanded commercial presence and growth in IDEXX 360 program agreements. Global reference lab gains continue to be driven by high same-store volume growth with strong gains across testing categories. IDEXX VetLab consumable revenues increased 26% on an organic basis in the second quarter, also reflecting continued 20% plus growth in the U.S. and approximately 30% organic gains in international.

Gains continue to be supported by increases in testing utilization across regions, high customer retention levels and expansion of our global premium instrument installed base. CAG instrument placements increased significantly in Q2 compared to constrained prior year levels. Total premium placements reached 3,756 units, up over 400 units from strong Q1 results and double the placement levels seen last year. The quality of CAG instrument placements remains excellent, reflected in 308 catalyst placements at new and competitive accounts in North America, up 87% year-on-year and 938 new and competitive placements in international regions, up 75%. We also benefited from 571 second catalyst placements driven by continued strong demand from high-volume customers.

These new placements and high customer retention levels supported a 14% year-on-year growth in our global catalyst installed base. We achieved 1,119 premium hematology placements, including hundreds of ProCyte One installs as we advance our global rollout schedule. This supported 11% growth in our global premium hematology installed base compared to Q2 of 2020. We also placed 662 SediVues, including strong placement levels in international regions under IDEXX 360 agreements, which supported a year-on-year global increase in our premium urine sediment installed base by 24%.

We're looking forward to building on this momentum as we gain increased direct access at veterinary clinics globally and supports strong demand for diagnostic testing. Rapid assay revenues also expanded at a strong 28% organic growth rate in Q2, reflecting 20% plus gains in the U.S., supported by high demand for wellness testing and accelerated 30%-plus growth in international geographies. Of note, core vector-borne disease retention rates for U.S. rapid assay reached 97% in the quarter, aligned with sustained high IDEXX retention rates across our major modalities.

High CAG Diagnostic revenue growth remains primarily volume driven across our modalities with consistent overall net price gains of 2% to 3%. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 26% organically and 33% as reported, including initial benefits from our recent ezyVet acquisition. We saw high growth in diagnostic imaging system placements driven by favorable customer response to our entry-level ImageVue DR30 platform with approximately 80% of placements at competitive accounts.

We also continue to see 20%-plus growth in recurring digital service revenues, including expansion of web pack subscriptions, aligned with our expanding cloud-based capability. In our veterinary software services business, we posted double-digit organic revenue gains driven by growth in Cornerstone and Neo placements and strong growth in recurring services. As Jay will discuss, we expanded our cloud-based software capability through our recently announced acquisition of ezyVet, which closed in June. We estimate ezyVet will contribute approximately $15 million to full year 2021 revenues which is factored into our updated outlook.

Turning to our other business segments. Water business revenues increased 27% organically in Q2 compared to 16% declines in last year's second quarter driven by early pandemic-related impacts. We continue to see a solid recovery in demand for Water Testing as economies reopen, including recovery in noncompliance-related testing volumes that have been more constrained during the pandemic. Livestock, Poultry and Dairy revenue decreased 2% organically in Q2. Growth results were constrained by the lapping of high prior year demand in key areas such as African swine fever testing. Revenue growth was also impacted by relatively lower herd health screening levels reflecting reduced exports, including effects from restrictions on live animal imports into China.

We're planning on reduced LPD revenues year-on-year in the second half of 2021 as we continue to lap the benefits from high prior year demand for our ASF programs and manage through expected pressure on our China LPD business, from rebuilding swine herds, low port prices and changing government requirements related to livestock infectious disease programs. Turning to the P&L. We had another quarter of strong profit gains in Q2, driven primarily by benefits from high year-on-year CAG Diagnostic recurring revenue gains.

We're now starting to work through comparisons to control cost levels in the prior year that were implemented as part of our pandemic contingency management efforts. Despite these dynamics, our strong revenue growth supported a solid 110 basis point expansion of our operating margins on a comparable basis, helping to drive an increase in operating profits of 34% as reported and 30% on a comparable basis. Gross profit increased 29% in Q2, driven by higher revenue gains.

Gross margins decreased modestly on a comparable basis, reflecting mix impacts from higher instrument revenue and moderated lab gross margin gains as we lap tightly controlled prior year cost levels in key areas such as lab operations. Gross margin gains continue to benefit from strong CAG Diagnostic recurring revenue growth, including positive impacts from moderate price gains. We're planning for constrained gross margin gains over the balance of this year as we continue to tightly controlled prior year spending levels and see impacts from increases in reference lab staffing and capacity aligned with supporting high revenue growth.

Operating expenses in Q2 increased 24% as reported and 20% on a comparable basis. In Q2 of 2020, we advanced approximately $25 million of cost reductions related to plan levels, including temporary reductions in salary and benefits and also saw significant cost reductions in other areas such as employee health care cost accruals. The higher operating expense cost growth in Q2 reflects lapping these dynamics as well as the advancement of investments in our global commercial and innovation capability aligned with our accelerated revenue growth profile.

We anticipate operating expense growth will be higher than revenue growth in the second half of 2021 as these investments and the integration of the ezyVet acquisition advance. We also expect to see relative increases in costs such as employee health care claims and travel as pandemic-related restrictions are eased. Q2 EPS was $2.34 per share, including benefits of $6 million or $0.07 per share related to share-based compensation activity. On a comparable basis, Q2 EPS increased 33%. Foreign exchange added $8 million to operating profits and $0.07 to EPS in Q2, net of $3 million in hedge losses.

Free cash flow was $211 million in the quarter and $316 million for the first half of 2021. On a trailing 12-month basis, our net income to free cash flow conversion rate was 95%, including benefits from delayed capital spending and extension of tax payments last year. We're increasing our outlook for full year 2021 capital spending to $150 million to $160 million to reflect additional investments to support manufacturing and distribution growth capacity, including approximately $20 million in real estate purchases.

With this higher level of projected spending, we're updating our free cash flow conversion outlook for the full year to approximately 80% of net income. Our balance sheet remains in a very strong position. We ended the quarter with debt-to-EBITDA leverage ratios of 0.9 times gross and 0.7 times net of cash with $232 million in cash and no borrowings on our $1 billion revolving credit facility. We allocated $188 million in capital to repurchase 341,000 shares in the quarter. Turning to our 2021 full year outlook. We're increasing our projected range for overall revenue to $3.170 billion to $3.205 billion. At midpoint, this reflects approximately $30 million in organic operational improvement, approximately $10 million benefit from updated FX assumptions and approximately $15 million in increased full year revenue benefit from acquisitions. Our updated revenue outlook is 17% to 18.5% as reported, including approximately 2% of full year growth benefit from FX at approximately 0.5% benefit from acquisitions.

Our updated overall organic revenue growth outlook of 14.5% to 16% reflects an estimated organic growth range of 16% to 17.5% for CAG diagnostic recurring revenue. The high end of our CAG diagnostic recurring revenue growth outlook range reflects two year average annual growth rates in line with strong H1 performance levels. As noted on a one year growth basis, we expect to see moderation in H2 from very high year-on-year growth rates seen in the first half of this year.

As we work through the acceleration -- comparison to the acceleration of growth that we saw in the second half of 2020, including fulfillment of pent-up demand in last year's third quarter. Other elements of our revenue growth outlook include expectations for lower year-on-year LPD revenues in the second half and for a reduction in human COVID testing revenues year-on-year as we lap the benefits of our prior year initiatives and planned for lower human PCR testing levels. In terms of key financial metrics, we're increasing our reported operating margin outlook for 2021 to 28.6% to 29.1%, reflecting increased expectations for 175 to 225 basis points or full year annual -- full year comparable operating margin improvement.

Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide $0.17 of positive full year EPS benefit net of established hedge positions. Our full year outlook also includes an updated estimate of $0.25 per share of tax benefit related to share-based compensation activity, $0.06 per share higher than our prior projections. We provided details on our updated estimates of the tables in our press release and earnings snapshot. That concludes our financial view.

I'll now turn the call over to Jay for his comments.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Thanks, Brian, and good morning. Today, we're pleased to report another quarter of strong results, supported by continued favorable trends in our core CAG business and excellent execution by the IDEXX team. As noted, we delivered 25% organic revenue growth in the second quarter, supported by high organic CAG diagnostics recurring revenue growth. There were strong gains across all CAG business segments and testing modalities, representing a continuation of the accelerated growth trends we've seen since the second half of 2020. Strong sector growth and outstanding execution by the IDEXX team gives us confidence to raise our 2021 financial outlook as we continue to invest towards our significant long-term growth opportunity.

Today, I'll provide a brief update on the trends we're seeing in key regions in our companion animal sector and discuss the status of our initiatives to strengthen our international commercial capabilities. I'll also share an update on our ProCyte One launch and growing software portfolio, including the ezyVet acquisition, which will better position us to capitalize on favorable tailwinds, further enhance practice productivity and raise the standard of patient care.

Let me start with an update on sector trends. Global sector trends remained favorable in the second quarter, reflected, for example, in sustained high U.S. clinical visit models that support continued strong increases in veterinary service revenues, including diagnostics. As Brian noted, U.S. clinical visits increased 13% in the quarter and 4.8% on a two year average annual basis, with continued strong gains across wellness and nonwellness categories.

This growth was supported by a growing pet population and veterinarians focus on medical services, which are sustained even as pandemic restrictions have eased. These solid trends were seen across all global regions in Q2. Our strong commercial execution is building on this momentum, reflecting in IDEXX CAG diagnostics organic recurring revenue growth of 26% on a one year basis, and 16% on a two year average annual basis. Within the clinic, veterinarians and the teams continue to rise to the challenge of increased demand, working hard to keep up with industry growth while also delivering excellent patient care to ever more engaged pet parents. IDEXX is well positioned to provide them the tools and services necessary to meet these demands, supporting 15% diagnostics revenue growth per practice and even faster growth for IDEXX revenues. Overall, we feel very positive about the strong sector backdrop.

Our strategy to bring testing and information management and innovations to the practice and our team's level of execution, which is reflected in our raised full year revenue outlook. In terms of execution, our commercial team continues to deliver exceptional results despite continued constrained clinic access. Instrument placement showed increased momentum in the second quarter with over 3,750 total premium placements, up solidly from a strong Q1, helping to drive 14% growth in our premium worldwide installed base for the quarter. This included double-digit growth in premium chemistry, hematology and urinalysis installed bases as well as continued excellent growth in new and competitive accounts.

Veterinary customers are extremely busy due to high visit volumes. And they're investing in IDEXX instruments, diagnostics and tools to support practice growth, patient care and staff productivity. Our digital cytology solution is an excellent example of this point. An innovative service that extends the capability and reach of the practice by providing cytology testing results in the U.S. with a report authored by expert pathologists another two hours at any time during the day or week, 365 days a year, veterinarians are able to provide a higher standard of care to their patients, improve staff and clinical productivity and drive appropriate testing and practice revenues.

Validating this medical value proposition, we saw strong customer interest in orders for a digital cytology solution in Q2. We also continue to advance key programs like IDEXX Preventive Care that help clinics raise the standard of care aligned with higher levels of pet owner engagement. In Q2, we executed 150 new preventive care enrollments as we continue to advance towards our goal of 10,000 engaged customers in the U.S. by 2024. In terms of customer access, we continue to operate in a hybrid model, with access still limited but improving in both the U.S. and international regions. In the U.S., approximately 60% of customer visits were in person in Q2, whereas it was approximately 50% in Europe.

This has impacted our ability to deliver outstanding results as both new innovations and our excellent relationships we have with customers have driven significant growth across all regions. The deep customer relationships with our sales professionals have only been reinforced and strengthened by the best-in-class support we provided to customers throughout the pandemic. Of note, we're particularly pleased with our high levels of execution in regions like Europe, where we are expanding the successful go-to-market approaches we've applied in the U.S.

This was reflected in 400 catalyst placements at new and competitive accounts outside of North America, with half of these placements under IDEXX 360 agreements. The expansion of the IDEXX 360 program is also supporting sustained strong gains in lab revenues in Europe, accelerating new account acquisition and helping to inspire faster customer growth at IDEXX 360 customers. A key focus of our strategy in this context is on developing the long-term international revenue opportunity through an expansion of our direct commercial presence.

We've completed the commercial expansions first announced in Q3 of last year, which were focused on three countries: Germany, France and South Korea. By almost doubling our commercial footprint in these countries, we have appreciably increased the frequency and intensity of our calling activities with existing customers and competitive accounts. Our experience is that when we do this, our customers grow faster as they adopt our innovations. And so do we.

Three additional countries have been targeted at the next stage for expansion over the remainder of 2021 and into 2022. We're excited to share with you our broader commercial approach at the upcoming Investor Day. Our expanding global commercial capability will support the adoption of key innovations like ProCyte One, following our first U.S. shipments in late March, ProCyte One's international launch began in June with installations and presale customers in France, Germany, U.K. and in Southern Europe. Many of our international geographies are hematology-focused, meaning customers prioritize CBC for patient health assessment. Not surprisingly, we've seen an extremely positive reaction to the ProCyte One introduction in international regions.

Customers applied its simplicity and small footprint while still delivering the excellent accuracy, usability and reliability profile veterinarians and their staff price so highly. Additionally, we expect a multiplier impact for ProCyte One as chemistry and hematology testing go hand-in-hand with the additional potential to inspire Reference Lab and Rapid Assay business when placed as part of the IDEXX 360 program. Speaking of Rapid Assay, we're very pleased with the strong momentum we continue to drive in this business globally. We achieved 20% plus organic growth in the U.S. in Q2, while raising customer retention levels to 97% supported by innovations like SNAP Pro, we now have over 80% of SNAP 4Dx customer volume engaged on this platform, which enhances insight and supports practice workflow. SNAP Pro is also helping to achieve accelerated growth in international regions.

In Europe, after installing a clinics first SNAP Pro, we see a significant expansion in testing volumes. We look forward to building on the strong momentum supported by continued IDEXX innovation. We're also excited with the progress we're advancing in our cloud-based software capability. We had another excellent quarter of new software installations with Cornerstone and Neo placements growing 21%, while cloud-based offerings continue to represent the majority of PIMS placements. As we continue to expand our installed base, we also continue to drive expansion of profitable recurring services, such as credit card processing, which grew at strong double-digit rates organically.

Software solutions have taken on significant importance to the effective management of the veterinary practice. Practices have never been busier, and IDEXX integrated, easy-to-use software solutions support patient care and workflow, staff productivity and communications amongst the care team and with the client. Moreover, IDEXX diagnostic solutions are seamlessly integrated into both our and third-party solutions, enabling practices to capture and invoice the full range of activities that veterinarian deliver. We know that IDEXX customers who use all of our solutions have a higher customer experience and tend to test more and grow faster.

Relating to the growing importance of practice software solutions, cloud-based technologies have the potential to make important contributions to the overall software experience of the veterinary clinic. For example, practice owners are free from the challenges of supporting on-premise IT solutions that include frequent hardware update. Moreover, providers of cloud-based solutions like IDEXX can provide frequent seamless updates in an environment that offers security advantages.

Our software capabilities were augmented in Q2 with the acquisition of ezyVet, a fast-growing, innovative practice information management system that is native cloud-based used by advanced general practices as well as specialty, emergency and large corporate groups worldwide. This acquisition complements our PIMS portfolio by providing additional options to practices with more complex needs and enterprise functionality. Customers appreciate ezyVet software for its easy use and rich features.

In fact, ezyVet is the number one rated full-feature practice management solution with 94% customer satisfaction according to Capterra, an industry standard business software customer review site. Bringing ezyVet into the IDEXX family also grows our cloud development talent enabling us to capitalize on the evolving nature of the veterinary clinic software product. With that, I'd like to welcome the ezyVet team to IDEXX. We look forward to working together with you to continue to develop best-in-class software products.

We're also excited about the progress we're driving in our diagnostic imaging business. We saw very strong growth in digital imaging placements in Q2 and strong growth in our backlog, reflecting a continued appreciation of our focus on providing a full range of premier low-dose imaging solutions. Growth in these placements also supports the expansion of recurring services, including cloud-based services like Web PACS. Our Web PACS subscriptions grew at high teens rates with much faster growth in premium and unlimited subscription tiers, reflecting the high value and diagnostic insight clinicians drive from IDEXX software solutions.

Overall, we're very pleased with our business momentum and optimistic as we continue to respond to the reopening of economies globally. In terms of IDEXX' specific plans, we're excited to advance plans to bring more IDEXX back to the office safely and in ways that ensure business continuity. We anticipate maintaining a more hybrid working environment and appreciate our employees flexibility, and adapt into new ways of working while continuing to deliver high growth, provide top-notch customer service and support our world-class product portfolio.

Before I wrap up my remarks, I'd like to publicly welcome a new leader to IDEXX. As Dr. Martin Smith will be joining my leadership team in August as Executive Vice President and Chief Technology Officer. Martin brings 30-plus years of experience in the life sciences industry, most recently as Chief Technology Officer at Cytiva and Pall Corporation, both subsidiaries of Danaher. He's a strong track record of driving R&D strategy in concert with enterprise strategic initiatives, commercial efforts. And we look forward to Martin leading our world-class R&D organization. Welcome, Martin. With that, I'd like to add that I'm extremely proud of the way the entire IDEXX team is executing as we are on track for another strong year in 2021 with financial performance aligned with our long-term goals.

Our growth and performance reflect a consistent business strategy focused on opportunity development within our core businesses and our employees continue to execute against this strategy daily. I look forward to sharing more on our strategy and long-term potential at our upcoming Investor Day on Thursday, August 12. The event remains virtual due to the evolving nature of COVID-19 and we invite you to register on the Investor Relations section of our website. Participating will be members of my senior management team, including Brian McKeon, Executive Vice President and CFO; and Dr. Tina Hunt, Executive Vice President and General Manager for Point of Care Diagnostics and Worldwide Operations; Mike Lane, Executive Vice President and GM for Reference Laboratories and Information Management; Jim Polewaczyk, Executive Vice President and Chief Commercial Officer; Kerry Bennett, Senior Vice President of Corporate Strategy and Advanced Analytics and Michael Schreck, Senior Vice President of Veterinary Software and Services. The event will last approximately three hours and will conclude with a Q&A session.

That concludes my opening remarks. We now have time for questions.

Questions and Answers

[Operator]

[Operator Instructions] And our first question is from Michael Ryskin from Bank of America.

[Michael Leonidovich Ryskin, Analyst at BofA Securities]

Hey guys. Thanks for taking the question, and Congrats on the quarter. I guess first question would be on sort of the updated guide and the outlook for the second half of the year. And mostly, I want to focus on the P&L. I just want to make sure we have all the moving pieces. It seems like you're expecting some incremental spend some T&E coming back, some health care costs going higher. Could you walk us through the cadence of that and how we expect that to come back? And is that really just tied to going back to prior ways of doing business pre-COVID? Is that some incremental spend on top of that? So what are the investment areas, how that should roll in, in the second half? And sort of what's the plan there going forward as far as that affects the opine line.

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Sure. Thanks, Mike, for your question. On opex, we're transitioning into a period now where we're comparing to more controlled cost levels from the prior year. I think you saw that in the second quarter where the comparable opex was up 20%. And we are starting to see some costs come back, things like health care accruals were up in the second quarter. We expect that to continue. And as the pandemic conditions hopefully continue to get eased, we expect to see some T&E come back.

As well, we're advancing investments. We've talked about the commercial investments, particularly in areas like international and our R&D organization. We're leaning into the positive growth. And overall, we think that will create an environment where we've got sustained higher opex growth year-on-year and it will be above the revenue growth, which is now up against tougher compares. So that's really the dynamic that we're working through. I think it's all very healthy. We think we're on track for a very good full year performance in terms of margin improvement and look forward to building off that going forward. But second half, we'll be working through those dynamics.

[Michael Leonidovich Ryskin, Analyst at BofA Securities]

And are you seeing any incremental issues or freight cost, transportation cost, any other inflation factors, whether it's sort of on material side or on the human and the capital side in the market?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Selectively, I wouldn't say it's been a big impact on our business. I think more just managing through keeping up with the high demand, has been the bigger challenge for the business. And I think we've been able to manage those dynamics well. So it hasn't been as big a factor for us to date.

[Michael Leonidovich Ryskin, Analyst at BofA Securities]

Okay. And as far as some of the new products you called out, there's a ProCyte. Can you give us an update on sort of how vets are interacting with the sales force and how some of the new launches are going. I realized it's been a very different environment, launching something during COVID and traditionally. I'm just wondering if you could speak to a willingness to uptake and sort of expand the menu offering versus sort of relying on the traditional tools.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes.Yes, as we indicated in the remarks, the practices are incredibly busy at this point, maybe never busier. And so they certainly welcome, I think, new menu, new tools ProCyte One specifically that helps us with productivity. So the reception has been outstanding. We see, in the case of the U.S., about 60% of our visits are now in person. Internationally, it's about 50% or so. So really welcome the opportunity to reengage what they consider to be trusted advisers and partners in the field. And they -- more and more, they're looking to IDEXX to be able to provide the analyzers and software solutions that really help them from the standpoint of not just increasing patient care, which has always been the case, but also really driving staff productivity and communications within the practice and with their clients. Overall, very, very positive. And we think that there's really an exceptional long-term opportunity, not just in hematology with ProCyte One, but the entire in clinic that lab suite because, as you know, hematology and chemistry are also very often in the vast majority of cases used together.

[Michael Leonidovich Ryskin, Analyst at BofA Securities]

Thanks. I'll get back in the queue

[Operator]

And our next question is from Erin Wright from Credit Suisse.

[Erin Elizabeth Wilson, Analyst at Credit Suisse Group]

I'm curious what you're seeing or assuming in your guidance in terms of the sustainability of growth in clinical visits and just overall veterinary demand trends? What are you seeing on a monthly basis? And also quarter-to-date. I'm just curious if the recurring CAG momentum here is holding up on a two year stack basis and if there's any sort of seasonal dynamics as well to consider here?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Yes. Why don't I start? And I think Jay can help with color on what we're seeing at the clinic level. The trends in the sector and in our growth held up very well in the second quarter. The CAG Dx recurring as you note, on a two year stack basis, that's the way we like to track it as we're working through some of these compares was a little above 16%. It's pretty much in line with what we saw in Q1 and Q4. And so that's very encouraging. I think we're benefiting from continued solid market trends at the clinic level and the visit number was down a bit Q4 to Q1, but the diagnostic revenue growth on a one year and a two year stack basis sustained at very good rates. So all indications are demand is holding up very well, and that's informing our full year outlook.

The higher end of our outlook ranges for the two year trends to continue in the second half for CAG Dx recurring and we obviously have a range because there may be some other dynamics that -- we don't anticipate that go on, and we're going to learn more as we're working through, hopefully, the economies continue to open, but I think we're very encouraged by the strong trends.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. I would -- just to build on that. Definitely, the demand trends remain intact. And I think the execution and our ability to be able to build on that has also been very strong. We saw as Brian indicated, 16% global two year CAG diagnostics recurring revenue. And if you break it down by region, it was 15.5% in the U.S. and international and really across all modalities.

So the in-clinic, rapid assay and the reference lab business. I think the really positive thing on top of that was just the instrument placement, really strong growth coming off of a strong Q1 and then to compare to a depressed level last year. The practices report, as I indicated earlier, being extremely busy. It's not surprising given the -- a lot of the factors we've talked about in the past. And they're looking more and more to be able to really partner with IDEXX and helping them increase the productivity of care workflow as well as the business itself.

[Erin Elizabeth Wilson, Analyst at Credit Suisse Group]

Okay. Great. And then just given some of the stepped-up investments internationally, are you seeing any changes in the competitive landscape there? And this goes back also to a bigger question, I guess, that people have is what's the right size for the commercial effort overall. It sounds like you're seeing the growth to justify it, but how are you thinking about in terms of your optimal goal there?

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Sure. So we'll talk a bit about that at Investor Day in terms of how we're thinking about the international market and sort of what the end state is and what the footprint should look like. What I will say is that the -- our international investments we're doing this on a rolling basis, as I indicated, three countries are behind us and three countries are now on the dock. And lots of -- I think there's -- the markets internationally are very robust. The veterinary practices are also busy. And we know that from the standpoint of best or most optimized loading, we're still far off from where we are in the U.S. just by way of benchmark where we have about 120 accounts or so per account manager internationally, it's a lot less. So we think that the investments internationally offer a really good return. There's a lot of -- I think there's a lot of market development still before us. And again, we'll provide a little more specific meat and bone when we meet in a couple of weeks.

[Erin Elizabeth Wilson, Analyst at Credit Suisse Group]

Okay, great. Thank you.

[Operator]

Our next question is from Jon Block from Stifel.

[Jonathan David Block, Analyst at Stifel, Nicolaus]

First question is centered on capacity. And the snapshot and the wellness clinical growth decelerated on a two year stack basis to roughly 8.5%. It had been 12% to 13% stacked. Again, the wellness, the prior three quarters. And I feel sometimes Wall Street takes for granted like sort of the ability of an industry to absorb all the additional demand. We've actually anecdotally heard of some practices turning away new customers. So as market leaders, I'd love to get your thoughts. What are you guys hearing? Are there any capacity constraints going on in the industry that's pushing off wellness test, and this might be a slight headwind for the industry as we think about the next handful of quarters.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. Jon, I'll take that. The veterinarians will tell you that they're extremely busy, and that's a good thing. So they, at times, may find themselves fatigued or not being able to take on to clients, and that's to be expected. Having said that, I think they're very creative at being able to increase the capacity within the practices. We're doing things like adding staff and that sometimes takes time, increasing the number of exam rooms. I think they're investing in software, in diagnostics and other tools that help them be more productive. There's lots of things that they can do in short term as well as intermediate term to be able to increase capacity, extending hours using reference lab services, which takes some of the pressure of veterinary technicians. So I think it's largely a good thing, and we're seeing some of the markets work in terms of dynamically being able to react to the increased demand.

[Jonathan David Block, Analyst at Stifel, Nicolaus]

Okay. And maybe just part B to that, I want to follow up. Are you seeing that translate from the veterinarian's perspective on raising prices to the pet parent? In other words, the demand is there. They're actually pushing through price? And does that give you guys an opportunity when we think about 2% to 3% annual price increases to maybe bulk that up? And then I'll just ask my second question, if that's okay.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. So I mean that situational. We don't have end market visibility in terms of how they're pricing to their clients. We obviously sell them diagnostic solutions, they mark up on it. Insofar as they may be paying their staff more, I think what is true is the -- their end markets are very robust and there's -- they do have room to increase prices without necessarily negatively impacting patient demand. But I think that's case by case. I think both practices are taking a long-term view and really they're very loyal and have very good relationships with pet owners and they want to obviously maintain those, and they're -- where they have to raise prices, I guess, bottom line as they do. But in most cases, what we're seeing is it's pretty moderate.

[Jonathan David Block, Analyst at Stifel, Nicolaus]

Okay. And then my second question, Brian, for you. I think I've got these numbers right, but you raised EPS from 1Q to 2Q, the midpoint by $0.25. I think stock comp, tax and FX was $0.12 on the button. And I'm guessing easy might have been another nickel. But can you talk about the flow-through on the remaining $30 million of core revenue increase. It just seems like the incrementals on that $30 million, if I run to the math, is it too dissimilar from corporate averages? Is that true? And maybe is that reflective of what you're alluding to of some of the reinvestments in the business in the back part of the year?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Yes. I think you're bridging math, we did have a couple of cents from FX. I think stock comp was 6% from where we were. So that was about 8% of the 25% and the stock comp is the tax effect. I would note ezyVet is not something that we're -- in fact, that's a bit of a headwind for us as we integrate that acquisition. So the flow-through -- the flow-through is quite good in terms of the increase on the full year. It's not fundamentally different than the outlook that we had before. I think we're very pleased to be able to raise the revenue number operationally and the EPS number operationally. And just building on the strong trends that we have in the business, and that allows us to also continue to invest towards the future growth opportunities that we try to highlight. And I think we're -- we are very encouraged with the strong growth in our international business is reinforcing, that's a great place to invest and can really set us up to sustain the strong growth going forward.

[Jonathan David Block, Analyst at Stifel, Nicolaus]

Perfect. Thanks, guys.

[Operator]

Our next question is from Nathan Rich from Goldman Stack.

[Nathan Allen Rich, Analyst at The Goldman Sachs Group]

Brian, maybe going back to your comments on margins. There's obviously been a lot of variability last year and in the first part of this year, just given the different pandemic effects that you guys have felt. So I guess like when we think about operating margins for kind of 2022 and beyond, how should we kind of frame the right jumping off point kind of assuming that these pandemic effects normalize, I guess, what's sort of the right baseline type margin as we think about the business going forward?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Yes. We'll share more on that at Investor Day. I think we -- it will be a similar discussion to dialogues we've had in the past. We think that we can build off the improvements that we've been able to drive, and we'll continue to target sort of that 50 to 100 basis points of annual comparable improvement over time. The drivers there are the strong CAG diagnostic recurring revenue growth enables us to do things like continue to improve our lab productivity and that's a positive driver for us. We still -- we think we've got ongoing runway to improve our gross margins. And it enables us to reinvest towards expanding the annuity in our business over the long term, which has been very high-return investment for us. And we can -- we try to calibrate that appropriately based on how we can execute and ensuring that we're delivering good financial performance annually. But we look forward to building on this progress. I think we're going to have some -- as we noted, some specific dynamics we're working through here more just related to compares to the pandemic and some of the cost controls we had in place, but that's a near-term dynamic that we're confident we can manage.

[Nathan Allen Rich, Analyst at The Goldman Sachs Group]

Great. And then just a couple of quick follow-ups. Brian, I think if I caught the number right, you said that in the second quarter, you were lapping, I think, $25 million of cost reductions. Did I catch that right? And do you have a comparable number for 3Q and 4Q as we think about cycling the temporary cost reductions from last year?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

We implemented the -- at the height of the kind of early phase of the pandemic spread, salary and benefit freezes and a number of other actions. And that was a $25 million reduction to the -- our plan levels. And so that -- it gets a little noisy. As we work through the year, we started reinstating aspects of that, but we basically kept headcount controls in place and benefited from pretty significant year-on-year reductions in things like T&E and in health care costs. So we'll continue to see dynamics from that. I think it was meaningful in Q2, relatively more than the balance of the year, but still something that will play out over the next couple of quarters. And we'll try to help you understand that dynamic as we report the results.

[Nathan Allen Rich, Analyst at The Goldman Sachs Group]

Great. And if I could just sneak one more in. You've continued to see the premium or the spread between clinical visits and the CAG Dx growth above that 9% to 10% range that I think had been assumed in guidance at the beginning of the year. Is that still roughly the right range to use for the full year overall? Or just given what you've seen develop in the first half, do you think that you could continue to see that slightly higher spread than what you've seen historically?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Well, it's a good question. I think we're very pleased with that. It was about 1,100 basis points in Q2, and it was 900 in Q1 normalized. It was about 1,000 to 1,100. If I recall, we had some days effects in there. So we feel quite good about that. It's -- I think we've factored that thinking into our guidance range. And as we noted earlier, the high end is really sustaining those kind of trends, the strong two year growth trends for the back half. So that's clearly a factor that helps to drive our confidence in that number.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. Nate, the way we tend to think about that is. It's also, I think, directly related to our execution, which has been excellent, both from an innovation standpoint, and we have lots of new stuff like ProCyte One and digital cytology and software solutions like ezyVet and also our commercial expansion. So the market is doing one thing and it's a very strong market backdrop. And then our execution and the ability to develop these markets is the other factor. And I think we've demonstrated a very strong execution in being able to do that. So we're optimistic.

[Nathan Allen Rich, Analyst at The Goldman Sachs Group]

Great. Really appreciate the comment.

[Operator]

Our next question is from Chris Schott from JPMorgan.

[Katerina, Analyst at JPMorgan Chase & Co.]

This is Katerina on for Chris. So the first question is on innovation. We've obviously seen some very healthy pet ownership and standard of care trends over these past several quarters. Is this making you think any differently about R&D and the type of tests that you're developing, something that perhaps don't make economic sense for the better pet owner previously, but makes sense just given the higher willingness to pay? And then the second question is, outside of the U.S., talk a bit about the regional differences you're seeing in both visits and testing utilization as countries are exiting the pandemic. Are there countries where you're seeing better worse trends? And how do you see that evolving through the year?

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. So I'll talk about the innovation piece first. We -- our investment appetite for innovation has always been very high. We think that innovation at the end of the day, produces differentiation and solves really challenging customer problems both clinically and from a business standpoint. So if you look at 2020 last year, we came out with seven I think, significant product and service introductions. And they were all extremely well received by our customers and adopted. So we continue to invest in innovation. We'll talk at Investor Day about our approach and the framework in terms of how we think about it, but it involves platforms and instruments and assays. And obviously, software as we've talked about, but also innovation in terms of just business models and our reference lab network. So that's alive and well and continues to be a real focus area for us. In terms of your questions around regional differences and testing utilization, as indicated, we've seen really strong growth across the board.

The U.S. and North America has much higher use of diagnostics, and that's something that we think, over time, we can drive increase market adoption internationally with the TAM is about 2 times from a potential opportunity standpoint relative to the U.S., and that's a function of more than just commercial expansion. It's a function of really putting in place reference lab network like we've done in Kornwestheim, the centers of excellence and broader set of solutions that customers value so much. You do see some, and I would say, modest differences just by country in terms of how they're reacting to the pandemic. So we've seen a little bit lower in-person visits in Europe relative to the U.S. U.S. is about 60%. Europe, for example, was 50%. But the -- our ability to continue to support our customers and customers transacting business hasn't really changed as a result of that. I think they've adopted well to the changing environment, and they're seeing a lot of traffic just like we're seeing in the U.S.

[Katerina, Analyst at JPMorgan Chase & Co.]

Thank you.

[Operator]

And our next question is from Ryan Daniels from William Blair.

[Nicholas Hiller, Analyst at William Blair]

Nick speak out in for Ryan. And congrats on the solid quarter again. Earlier in your comments, you mentioned that about 60% of your visits in the U.S. at least right now are in person. I'm assuming you're talking about your sales visits? And then if so, how has that kind of been tracking over the last quarter? Has it been kind of steadily going up?

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Right. The 60% does refer to customer facing. You got sales visits. That has gone up from what's plateau 50% thereabouts at sort of the height of last year is a little bit below 50%. But we adapted very quickly to the changed environment. And obviously, it's a function of how things play out going forward of course, whether that continues to increase in terms of the Delta variant and some of the procedures, local governments have put in place in addition to CDC. But we expect as the pandemic recedes that will continue to increase our in-person visits and -- but to be determined.

[Nicholas Hiller, Analyst at William Blair]

Is that a number that -- like in a post-COVID era ever returns to 100%? Or are you kind of realizing some of the benefits from kind of a virtual sales process such that you'll kind of keep that going on at least for a little bit going forward?

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Yes. I think there's been some great takeaways in terms of what visits really should be done in person versus where you can support the customer virtually, I think from the standpoint of getting those benefits from a productivity standpoint. We -- I don't think we'd go back to 100%. Having said that, I think what our customers would like to say, given how busy they are is more efficient visit. So at one point, maybe they have time for 45 minutes or an hour, and now they'd like to be able to get them the same amount of work in conversation in 20 minutes or 25 minutes. So we think there's great opportunity there to help them and to increase productivity on both sides of the partnership.

[Nicholas Hiller, Analyst at William Blair]

Great. That's definitely helpful. And then I guess on the visit and practice revenue front, it looks like there is a little kind of variability in what would be revenue per visit quarter-over-quarter. I was wondering if there's any dynamics to kind of call out on that front?

[Brian P. McKeon, Executive Vice President and Chief Financial Officer at IDEXX Laboratories]

Held up well. I think there's always a bit of quarter-to-quarter variability. Nothing really specifically, we're trying to highlight our trends. We're quite good. I think that's a very busy. I think that's one thing that we hear gives us a way so that could be a dynamic. But overall, I think the bigger theme is continued strong growth, and we're feeling good about our outlook.

[Jonathan J. Mazelsky, President, Chief Executive Officer and Director at IDEXX Laboratories]

Okay. I want to thank everybody for calling in. I also want to express my gratitude to the IDEXX team for their continued exceptional performance. We have an amazing purpose as a company and our employees represent our values every day. I couldn't be more appreciative of their efforts and what we accomplished this past quarter. With that, we'll conclude the call, and thank you.

[Operator]

[Operator Closing Remarks]