IDEXX Laboratories Q3 2022 Earnings Report

IDEXX Laboratories EPS Results

• Actual EPS: $2.15
• Consensus EPS: $2.04
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: N/A

IDEXX Laboratories Revenue Results

• Actual Revenue: $841.66 million
• Expected Revenue: $829.23 million
• Beat/Miss: Beat by +$12.43 million
• YoY Revenue Growth: N/A

IDEXX Laboratories Announcement Details

• Quarter: Q3 2022
• Date: 11/1/2022
• Time: N/A
• Conference Call Date: Tuesday, November 1, 2022
• Conference Call Time: 8:30AM ET

IDEXX Laboratories (NASDAQ:IDXX) develops and provides diagnostic, information technology and veterinary practice-management products and services. The company primarily serves the companion animal, livestock and poultry, and water testing markets, helping customers detect, monitor and manage disease.

Its companion animal business includes in-house laboratory analyzers and consumables, reference laboratory services, diagnostic tests, veterinary software, digital imaging and related practice-management solutions. IDEXX also provides diagnostic products and services for livestock and poultry, as well as microbiology testing systems and services used to assess the safety and quality of water.

Founded in 1983 and headquartered in Westbrook, Maine, IDEXX serves veterinary practices, commercial laboratories, public health organizations and other customers internationally. The company operates through a global network of offices, laboratories and distribution capabilities. Jay Mazelsky has served as IDEXX’s president and chief executive officer since 2022.

IDEXX Laboratories Q3 2022 Earnings Call Transcript

Key Takeaways

• IDEXX delivered 8% organic revenue growth in Q3, with operating profits up 12% and EPS up 13%, keeping the company on track for full‐year targets.
• The company maintained its organic growth target of 6.5%–7.5% but cut reported EPS guidance to $7.74–$7.98, reflecting a mid‐point decline of about 5% due to foreign exchange impacts and $80M of R&D investments.
• Premium instrument placements rose 10% year‐over‐year to 4,737 units, including a 26% jump in ProCyte One hematology placements, bolstering the premium installed base by 14% and driving consumables sales.
• Net price realization of 5%–6% in CAG diagnostic recurring revenues contributed to gross margin expansion, offsetting inflationary pressures and supporting profitability.
• Same‐store veterinary clinic visits fell 2.4% in Q3 amid capacity constraints, with continued headwinds anticipated in Q4 as the industry navigates staffing and macroeconomic pressures.

Presentation

[Operator]

Good morning, and welcome to the IDEXX Laboratories Q3 2022 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, 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 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.

[Operator]

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 be also found by visiting the Investor Relations section of our website. In reviewing our Q3 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. To allow broad participation in the Q&A, we ask that each participant limit their questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon.

[Brian McKeon, CFO at IDEXX Laboratories]

Good morning, and welcome to our Q3 earnings call. In terms of highlights, IDEXX achieved solid organic revenue and profit growth in Q3, building on strong prior year results. Overall, IDEXX revenues increased 8% organically, supported by 9% organic growth in CAG Diagnostic recurring revenues. Key execution metrics remain strong. This is reflected in record Q3 premium instrument placements, double-digit growth in veterinary software and digital imaging revenues, and 10% organic growth in US CAG Diagnostic recurring revenues. Operating profits and EPS increased 12% and 13% respectively on a comparable basis, reflecting solid gross margin gains and controlled operating expense growth. Outstanding execution in the quarter has us on track to deliver strong full-year financial performance aligned with our updated guidance range.

[Brian McKeon, CFO at IDEXX Laboratories]

In terms of our full-year operational outlook, we've incorporated our Q3 organic growth results and maintained a similar midpoint estimate for EPS performance, supported by strong second half comparable operating profit gains. We've also adjusted our reported revenue and EPS outlook to reflect updated estimates for foreign exchange impacts. We'll walk through the details of our full-year outlook later in my comments. Let's begin with a review of our Q3 results. Q3 organic revenue growth of 8% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 12% organic growth in water, and 7% organic growth in LPD revenue.

[Brian McKeon, CFO at IDEXX Laboratories]

CAG diagnostic recurring revenue increased 9% organically in Q3 compared to strong prior year levels, reflecting 10% gains in the US and 6% growth in international regions, net of a 1% equivalent day growth headwind. We achieved double-digit organic growth benefits from key execution drivers, including expansion of our premium instrument base, consistent new business gains, sustained high customer retention levels, and solid expansion of diagnostic revenues per clinical visit, including benefits from higher net price realization. These gains helped IDEXX deliver continued solid CAG recurring revenue growth, offsetting near-term headwinds related to year-on-year declines in clinic visit levels globally, including effects from a pullback in vet clinic capacity this year and macro impacts in international markets. Overall organic revenue gains were also supported by 15% organic growth in veterinary software and diagnostic imaging revenues.

[Brian McKeon, CFO at IDEXX Laboratories]

CAG instrument revenues was down modestly compared to high prior levels as strong placement gains were moderated by mix effects. In terms of CAG sector demand drivers, continued healthy trends supported solid increases in diagnostic revenues at US clinics. Diagnostic revenue increased 7% on a same-store basis in the US in Q3, or approximately 9.5% on a per-visit basis, reflecting continued solid gains in diagnostic frequency and utilization, including benefits from higher net price realization at the practice level. Clinical visit levels in Q3 were down 2.4%, a slight improvement from Q2 trends as we continue to work through impacts from reductions in vet clinic capacity from peak levels and the lapping of the significant step-up in demand for pet healthcare during the pandemic. We anticipate year-on-year visit growth headwinds will continue in the Q4, which is factored into our outlook.

[Brian McKeon, CFO at IDEXX Laboratories]

IDEXX's US CAG Diagnostic organic recurring revenue growth of 9.6% in Q3, which included a 1% equivalent days growth headwind, continues to outpace sector growth trends. This strong performance was supported by a 1,300 basis points normalized growth benefit from IDEXX execution drivers. This included consistent growth benefits from IDEXX utilization and innovation gains and customer additions, and an estimated 6% net price benefit in the US supported by our second half price initiatives. Globally, IDEXX achieved solid organic revenue growth across our modalities in Q3. IDEXX VetLab consumables revenues increased 9% organically, reflecting solid gains across US and international regions. Consumable gains were supported by 14% year-on-year growth in our global premium instrument install base, reflecting double-digit increases across our Catalyst, premium hematology, and SediVue platforms.

[Brian McKeon, CFO at IDEXX Laboratories]

We placed 4,737 CAG premium instrument placements in Q3, an increase of 10% year-on-year, building on the record placement levels achieved in the Q3 of 2021. The quality of instrument placements continues to be excellent, reflected in 13% growth in new and competitive Catalyst placements compared to strong prior year levels. ProCyte One momentum also continues to build globally, supporting a 26% year-on-year increase in premium hematology placements in the quarter. Global rapid asset revenues expanded 7% organically in Q3 compared to high prior year demand levels, supported by benefits from net price increases. Global lab revenues increased 8% organically in Q3 as double-digit growth in the US was moderated by modest organic revenue growth in international regions, reflecting pressure on same-store clinic visit growth in Europe, including macroeconomic impacts.

[Brian McKeon, CFO at IDEXX Laboratories]

We continued to achieve solid new business momentum and sustained high customer retention levels across our major modalities, supporting sustained solid volume growth. CAG recurring revenue growth included net price benefits in the range of 5%-6% to worldwide CAG diagnostic recurring revenues in the quarters, reflecting product and service enhancements and coverage of inflationary impacts. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 15% organically. Results were supported by double-digit organic gains in recurring software and digital imaging revenues and continued strong momentum in cloud-based software placements. Water revenues increased 12% organically in Q3, reflecting strong performance across our major regions, including benefits from solid volume gains and net price improvement.

[Brian McKeon, CFO at IDEXX Laboratories]

We completed the acquisition of TECTA PDS in the quarter, an automated microbiology testing platform, which complements our existing water offering and expands our capabilities in this highly attractive business segment. Livestock, poultry, and dairy revenue increased 7% organically in Q3. Results benefited from growth in herd health screening and improved results in China, where we worked through comparisons to high prior year revenue levels for African swine fever core swine testing. Turning to the P&L, Q3 profit results were supported by solid gross profit gains. Gross profit increased 7% in the quarter as reported and 10% on a comparable basis. Gross margins were 60.2%, up 120 basis points on a comparable basis. Benefits from net price gains, lab productivity initiatives, improvement in software service gross margins, and business mix offset inflationary cost effects.

[Brian McKeon, CFO at IDEXX Laboratories]

Operating expenses increased 6% year-on-year as reported in the Q3 and 9% on a comparable basis. As planned, operating expense growth was more in line with revenue gains as we prioritized investments and gained leverage from our prior commercial expansions. EPS was $2.15 per share, an increase of 13% on a comparable basis. Q3 EPS results did not include tax benefits related to share-based compensation, which were down $0.05 per share from high prior year levels. Foreign exchange reduced operating profits by $8 million and EPS by $0.08 per share in Q3, net of $9 million in hedge gains. Free cash flow was $151 million in the Q3. On a trailing twelve-month basis, our net income to free cash flow conversion rate was 67%.

[Brian McKeon, CFO at IDEXX Laboratories]

For the full year, we've updated our estimate of free cash flow conversion to 60%-65% to incorporate expectations for continued higher inventory levels aligned with sustaining high product availability. The full year outlook reflects approximately 20% of free cash flow conversion impact this year from discrete R&D investments, higher inventory levels, higher deferred tax assets driven by increased R&D tax credits, and an investment in a major facility expansion. We've updated our full year outlook for capital spending to approximately $165 million, including $40-$50 million in 2022 spending for our new manufacturing and warehouse project. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.4 times gross and 1.3 times net of cash.

[Brian McKeon, CFO at IDEXX Laboratories]

We increased our financing flexibility with the recently completed credit facility amendment, which provides for a $250 million term loan on attractive terms, with proceeds applied to reducing our revolving credit balance. In Q3, we allocated $167 million of capital to repurchase 453,000 shares. Capital allocation to share repurchases supports our projected 2% full year reduction in share count this year. Turning to our 2022 full year P&L outlook, we're narrowing the organic revenue growth range to incorporate our solid Q3 performance and a consistent outlook for Q4 organic revenue growth aligned with the midpoint of our prior second half guidance. We're also maintaining our full year outlook for comparable operating margins, which sustained strong prior year levels, adjusting for the impact of the discrete $80 million R&D investment recorded in Q2.

[Brian McKeon, CFO at IDEXX Laboratories]

We're updating our reported revenue EPS outlook to reflect the recent strengthening of the US dollar, which we estimate will reduce 2022 revenue by $10 million and EPS by $0.04 per share compared to our last outlook. We're also factoring in a $0.01 per share adjustment for projected changes in interest rates. Overall, our updated full year revenue growth range of $3.325-$3.365 billion is consistent at midpoint with earlier estimates, as FX impacts offset improvements to our operational outlook. We now project FX will reduce year-on-year revenue growth by 4% for the full year, with approximately 6% of year-on-year headwinds expected in Q4.

[Brian McKeon, CFO at IDEXX Laboratories]

Our updated full year organic revenue growth outlook is now 6.5%-7.5%, reflecting a full year CAG Diagnostics organic recurring revenue growth outlook of 7.5%-8.5%. Our updated CAG Diagnostics recurring revenue outlook implies Q4 organic gains of 5%-10% aligned with earlier estimates, which factors in a 2.5% organic growth risk estimate at the low end of the range for potential macroeconomic impacts on demand. We've updated our estimated full year operating margins to 26.3%-26.8%, reflecting a consistent operational outlook at midpoint and an estimated 10 basis points in year-on-year net margin impact from updated foreign exchange estimates.

[Brian McKeon, CFO at IDEXX Laboratories]

This outlook reflects a projected 230-280 basis point decrease on a comparable basis compared to strong 2021 performance, including approximately 230 basis points of operating margin impact related to the discrete R&D investments. Our updated EPS outlook is $7.74 a share to $7.98 per share, including the $0.72 impact from the discrete R&D investments. This represents a decrease of approximately 5% per share at midpoint, reflecting updated estimates for FX and interest rate impacts. For the full year, we estimate foreign exchange will reduce full year operating profits by approximately $28 million and EPS by $0.25 per share. This is net of an estimated $29 million or $0.26 per share benefit from projected 2022 hedge gains.

[Brian McKeon, CFO at IDEXX Laboratories]

Our outlook factors in no EPS impact from stock-based compensation tax benefits in the second half. We've provided details on our updated outlook in the tables in our press release and earnings snapshot. Looking forward, we're advancing our planning processes for 2023. We're targeting sustained strong execution that supported delivery of solid organic revenue and comparable profit growth, building on the substantial financial gains IDEXX achieved through the pandemic. Given the significant strengthening of the US dollar this year, in 2023, we estimate that foreign exchange will reduce reported revenue growth by approximately 3%, reported operating margins by approximately 70 basis points, and EPS by approximately $0.45 per share at the rates assumed in our press release with current hedge positions. We'll provide updates on these estimates as we share our 2023 guidance on the year-end conference call. That concludes the financial review.

[Brian McKeon, CFO at IDEXX Laboratories]

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

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Thank you, Bryan, and good morning. I'm pleased to share that IDEXX delivered strong results in the Q3 as teams across the company continued excellent execution to advance our strategic priorities. Demand for companion animal healthcare remains high, building on stepped up levels during the pandemic and supported by a continued focus on service within veterinary clinics. Veterinarians are looking for partners to support their growth while they provide high levels of care in an efficient manner. These professionals continued to turn to IDEXX for the support in the Q3. This was reflected in yet another quarter of record placements of premium capital instruments, strong momentum in PIMS placements amidst its continued desire for cloud-native products, consistent new business gains, and sustained high customer retention levels.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

These continued trends demonstrate that veterinarians appreciate IDEXX's integrated ecosystem and the layers of innovation which support and improve each step of clinic workflows. The result was expansion across IDEXX execution growth drivers, including relatively higher net price realization, which drove IDEXX CAG Diagnostics recurring revenue growth to significantly outpace clinical visit growth. This supported solid same-store diagnostics revenue growth in the US, despite moderating impacts from reductions in clinic capacity levels this year. This morning, I'll highlight how IDEXX continued to advance our key strategic initiatives in the quarter while delivering strong financial results. I'll begin with a review of recent trends in the companion animal sector. Q3 CAG sector trends were supported by solid global demand for veterinary services, building on a significant step-up in pet ownership and patient visits during the pandemic.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

US same-store diagnostics revenues grew 7% per practice during the Q3, a sequential increase from the prior quarter and well above total same-store practice revenue growth of 4% in the quarter. Services remain a key focus for veterinarians, and within services, diagnostics is a key component in providing valuable healthcare insights, supporting practice economics and driving revenue growth. Consistent with trends through this year, diagnostics revenue growth at the practice level continues to be driven by increases in both the frequency and utilization of diagnostics, resulting in 9.5% growth in diagnostics revenue per visit for the quarter, building on the strong gains seen through the pandemic.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

IDEXX grew overall US CAG Diagnostics recurring revenue at approximately 10% normalized despite recent clinic visit growth headwinds, as we benefit from decades of focus and investment, which brings differentiated value to our customers. As Brian noted, IDEXX execution drivers contributed approximately 1,300 basis points to US growth in Q3 on a normalized basis. This reflects benefits from continued expansion of our premium instrument installed base, adoption of IDEXX innovations, consistent new business gains, record retention levels and increased price realization. On a multi-year basis, clinical visit growth was healthy in the quarter, with solid growth in both wellness and non-wellness visits. Three-year CAGR wellness visit growth, in particular, was in line with historic trends of 2%-3%, demonstrating that US pet owners are continuing to prioritize pet healthcare.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

This trend continues to be supported by IDEXX's turnkey preventive care program, which included approximately 200 new US enrollments in the quarter. This is the Q2 of year-over-year increased enrollments, showing that customers continue to appreciate the simple yet comprehensive testing and pet owner communication tools included in this program. This program is just one example of how we are engaging with our customers to support them through near-term challenges related to managing clinic capacity and meeting growing demand for healthcare services. We are building on our strong customer relationships to drive continued solid organic growth in our CAG business. With that, let's now turn to discuss IDEXX's strong progress against our key strategic growth initiatives. As mentioned, excellent execution across the IDEXX organization supported strong performance during a dynamic Q3, with commercial teams delivering the day while also building the foundation for long-term growth across regions.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Record quarterly placements of premium instruments supported another quarter of double-digit growth in our worldwide premium instrument installed base. Global premium instrument placements grew 10% in the quarter, and placements in new and competitive accounts grew even faster at 13%, supporting strong EVI gains across regions. These results, combined with continued sustained new business gains and 98% Catalyst customer retention rates, will support future recurring revenue growth aligned with the long-term financial framework shared at our recent Investor Day. Sustained high levels of commercial performance were aided in part by continued improvement in the rate of in-person visits for account managers, up to 75% in the US and nearly 70% in Europe. IDEXX sales representatives are welcome in the clinic as trusted advisors to their customers, adding value by helping customers provide high standards medical care, drive strong practice economics and improved practice efficiency.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

These results are also supported by our world-class innovative products like ProCyte One and customer-friendly marketing programs that help support the adoption of IDEXX innovations. ProCyte One provides customers with an efficient, lower-cost hematology platform at the point of care, and is especially sought after in international regions where veterinarians have been trained to do hematology testing 1st when doing a basic workup on a patient. This platform is integral to our strategy to address the approximately 230,000 long-term global instrument placement opportunity that Dr. Tina Hunt shared at Investor Day, and Q3 results continue to be very encouraging. ProCyte One was a key driver of 26% growth in premium hematology placements in the quarter, with international regions representing approximately 75% of ProCyte One placements and more than 60% of its installed base. Attach rates for ProCyte One are consistently high.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Over 95% of ProCyte One customers overall and more than 80% of competitive customers also utilize our chemistry platform, demonstrating the excellent placement quality and strong multiplier benefit of this platform. These results are further supported by benefits from investments we have made to expand our global commercial organization, where we are seeing positive reach to revenue trends and deeper customer relationships. Customer survey work in Germany and France demonstrates that customers have had an overwhelmingly positive experience during the 1st year of the new commercial ecosystem. Over 90% of customers in Germany, for example, indicate that their commercial experience is the same or better than a year ago, with the highest satisfaction rates at practices who receive continuous commercial engagement.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

This feedback highlights the benefit of our high-touch commercial model, where diagnostic subject matter experts partner with practice owners and staff to drive practice patient care and business objectives. Our commercial and operational teams in the Asia Pacific region are also driving successful execution against their strategic plans. Asia Pacific premium instrument placements are at a record high and were delivered while hiring and onboarding new sales professionals in Japan and opening a new reference lab in Brisbane, Australia during the quarter. Concurrent seamless execution of our commercial investments across multiple regions is not easy to do, and to do so while also delivering against our business goals. This demonstrates the value of the investments we've made in these teams, which will continue to benefit us as we work to address the significant long-term addressable opportunity outside the US.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

In addition to these excellent commercial results, we also delivered multiple new technologies to our customers during the quarter. Since VMX in January, we have announced 8 new product, service and software solution enhancements across IDEXX modalities, each of which add value to the relationship that customers have with IDEXX while demonstrating our commitment to a technology for life strategy. five out of eight of these projects were launched in the Q3. These are, number one, expanding the comprehensiveness of our fecal antigen reference lab test by adding a flea tapeworm assay, which now detects up to five times more than traditional methods. Number two, providing faster access to PCR results for North American customers by opening a next-day PCR lab in Louisville. Number three, improved veterinary insight into the treatment of feline chronic kidney disease by adding an improved disease marker, FGF23, to our reference lab menu.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Number four, improving the efficiency, convenience and sustainability of the Catalyst SDMA test by reformulating the test to include onboard reagents. Number five, delivering enhanced accuracy and longer room temperature storage in our best-in-class SNAP 4Dx Plus test. The rollout of these new product and services was enthusiastically received by our customers and highlighted the IDEXX team's ability to deliver high-quality new products, which will help increase standards of animal health care and develop our sector while also providing very high customer service levels. Another strategic area of innovation is IDEXX's software and diagnostic imaging businesses, which include a full suite of software product offerings to create a connected ecosystem within the clinic that supports each step of clinic workflow through the patient appointment. The Practice Information Management System and its easily updatable, customer-friendly front-end interface is the center of this solution.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Record Q3 PIMS placements highlight strong customer interest in the whole product solution that IDEXX offers. Furthermore, the shift to cloud-based products that we highlighted at Investor Day continued in the quarter, as over 90% of placements were cloud-based subscriptions, reflecting 50% growth in cloud-based placements compared to the prior year and demonstrating the value that last year's ezyVet acquisition continues to bring to the business. Strong results across this business in the quarter were not limited to PIMS products. Diagnostic imaging systems placements, Web PACS subscriptions, PIMS application adoption like payment processing, and VetConnect PLUS with critical decision support engagement all advanced at healthy levels in the quarter. We know veterinarians are looking for ways to obtain, understand, and communicate diagnostics insights in a digital and streamlined way, and our software portfolio is well-positioned to provide them with these solutions.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

The benefits of these products and solutions to IDEXX and our customers are compelling. We have highly favorable economics given the recurring nature of the revenue stream and high incremental gross margins. They also drive customer engagement, which supports our high levels of retention since they improve our customers' productivity and overall experience. IDEXX's innovation agenda also extends beyond our companion animal business. We recently took the opportunity to advance our water business by acquiring TECTA-Pathogen Detection Systems, with an automated microbiology detection platform that uses patented technology to automate the incubation, reading, and results notification for E. coli and total coliform testing in drinking water supplies. This application provides an automated data-enabled instrument, an EPA-approved coliform testing solution that complements our core water solutions by providing value for customers operating under rush conditions.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

We're excited to be able to invest in the attractive area of water testing and leverage our commercial resources to scale this new technology. This innovation agenda demonstrates a relentless focus on providing our customers with world-class products that increase in value over time, products that not only provide them with important insights, but also help increase workflow efficiency and effectiveness. In addition to these top-notch products, our customer focus is supported by extremely high service levels to ensure customers have a wonderful experience with IDEXX, allowing us to earn their business every day. Our frontline supply chain and customer service teams continue to deliver high levels of service, reflected in another quarter of approximately 99% product availability despite ongoing challenges in the external environment.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

This strong performance leverages years of investment in our supply chain and customer support resources as we continue to deliver on the operational needs of our customers. That concludes our review. I'm proud to report another quarter of strong results as IDEXX remains well positioned to deliver solid growth in financial results over the long run, while also delivering on our mission to create a better future for animals, people, and our planet. Our performance reflects the commitment and talents of our IDEXX team. On behalf of the management team, I'd like to thank our more than 10,000 colleagues for the passion and engagement they bring to our purpose and strategy every day. You're making a meaningful difference to the health and well-being of pets, people, and livestock around the world. Now we'll end the prepared section of the call and open the line for Q&A.

[Operator]

Thank you. Our 1st question comes from the line of Chris Schott of JP Morgan. Please go ahead.

[Chris Schott, Managing Director and Senior Equity Research Analyst at JPMorgan Chase & Co.]

Great. Thanks so much for the question. I was trying to get a little bit more color on how you're thinking about vet visit growth dynamics as we look out to 2023. I don't know if it's premature to get a view there, but maybe just qualitatively, can you just elaborate on what you think needs to happen for vet visit growth to start growing again? I guess just where we are in that process as we're trying to just get our hands around kind of the trajectory of the business as we look out to next year. Thank you.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, sure. Good morning, Chris. You know, we expect we'll work through the impacts of the pullback in capacity this year in 2023. You know, the overall clinic visit growth, as you indicated in the outlook, it still remains fairly dynamic. There's a lot of external factors like macro impacts, you know, the labor supply dynamics that we've talked about, and even potential impacts from further COVID outbreaks. We'll be monitoring those macro impacts as they impact pet owner behavior and, you know, really factor that into our outlook. You know, what I would point out is that our focus is on those things that we can control from an execution standpoint, both innovations and commercial engagement with our commercial teams.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

You know, we continue to do extremely well in being able to support customers with technology, whether it's PIMS system software, which help their productivity and support their efficiency, you know, clinic instrument placements, in-clinic instrument placements were at record levels. I think that reflects, you know, at a basic level that there is very positive outlook on the industry and their willingness to invest and really support growth. You know, we think that from an overall dynamic standpoint, Europe's a little bit different. In the US, capacity constraints, you know, are the primary factor, you know, affecting clinical visits versus customer demand. In Europe, we're seeing some impacts from, you know, just the macro factors and we will see how that plays out and whether that continues going forward.

[Chris Schott, Managing Director and Senior Equity Research Analyst at JPMorgan Chase & Co.]

Thank you.

[Operator]

Our next question comes from the line of Michael Ryskin of Bank of America Global Research. Please go ahead.

[Wolf Chanoff, Investment Analyst at Bank of America]

Hi, this is Wolf on for Mike. Thanks for taking questions. It looks like you, as you mentioned, the OUS results were a bit softer this quarter. I was wondering if you could just go a little deeper into what you're seeing internationally and your expectations for how trends will look there going forward versus the US?

[Brian McKeon, CFO at IDEXX Laboratories]

You know, thanks for your question. In international markets, we're seeing similar dynamics in terms of IDEXX execution. We highlighted in our comments that we think we've got a 1,300 basis point benefit from the combination of things like new business gains, expansion of our premium instrument install base, price utilization. We actually think our numbers are roughly in a similar zone in international markets. I think what we're seeing more in international markets is some pressure on the clinical visit growth levels. You can see that in our lab growth, which was up modestly in the quarter despite these, you know, new business gains and solid price gains. It's, I think international market's been relatively more impacted by the macro dynamics, particularly in regions like Europe.

[Brian McKeon, CFO at IDEXX Laboratories]

We've been seeing that really going back to about Q4 of last year. That's been a relatively more meaningful headwind. The progress that we're making and the very strong instrument placement gains and continued high retention levels, excellent engagement with our customers is allowing us to deliver solid continued growth.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, just to add to that, you know, the fit of our in-clinic instruments now with ProCyte One is outstanding for these international markets. You know, we saw ProCyte One grow 26%, as I indicated in my comments. From a footprint, price, performance, connectivity, easy use standpoint, it really fits those international markets very well. You know, the international customers, it depends, you know, based on country or region, but they tend to test hematology. First, it's a really important solution for these customers, and it's a big multiplier impact because very often when we sell a ProCyte One, we also sell it with a chemistry analyzer, and in some cases, it even a SediVue.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

We feel very positive about, you know, solutions and our ability to help customers achieve their objectives. You know, certainly there's some macro factors that we've talked about in the past, including, you know, the Russia-Ukraine conflict and energy prices. We'll just continue to monitor that and see how that plays out over time.

[Wolf Chanoff, Investment Analyst at Bank of America]

Got it. Much appreciated.

[Operator]

Our next question comes from the line of Erin Wright of Morgan Stanley. Please go ahead.

[Erin Wright, Senior Equity Research Analyst at Morgan Stanley]

Great. Thanks for taking my question. On pricing, where do we stand now in terms of net price realization for the year? What's embedded in guidance, and what's that relative to what you were disclosing last quarter? Are there further price increases, I guess, embedded for the remainder of the year? How should we think about your ability to take incremental price in 2023? Are you seeing any pushback there from customers? Thanks.

[Brian McKeon, CFO at IDEXX Laboratories]

Thanks for your question, Erin. Our price realization is very much in line with what we shared at Investor Day. We had roughly 4% price realization coming out of the Q2. We're advancing some additional price increases in the second half. As I mentioned, globally, we were in the 5%-6% range in Q3. It was at the higher end of that for the US That's very much in line with the 5.5%-6% year-on-year benefit that was implied in our outlook for the second half, and that equates to 5% for the full year. As we head into 2023, we will have carryover benefits from the pricing that we've achieved this year, including the second half initiatives.

[Brian McKeon, CFO at IDEXX Laboratories]

Our plan is to have a normally timed price increase, so we'll have an additional increase at the beginning of the year, and we'll share more details on that as we roll that out. That will incorporate, you know, the conditions that we're seeing in terms of the value that we're adding and also inflationary impacts in the business.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, I would just add to that that, you know, from a customer perspective, what customers are most interested in the message we keep hearing back from them, is they wanna make sure that from a product and testing continuity standpoint, supply chain, how we support them, that all those pieces are in place. They realize that given the current environment, it's a little bit more expensive, you know, to run the business, and they want us to invest in being able to support that. We see that reflected in very high customer retention rates, really globally across the world. We think that's an important input into the growth formula of the company. That's an area we're gonna continue to invest in.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

As Brian indicated, you know, we think our pricing approach is on balance very reasonable given the current environment.

[Erin Wright, Senior Equity Research Analyst at Morgan Stanley]

Okay, thanks. On 2023, the FX dynamics here are understandable given the environment that we're in. How are you thinking about CAG recurring organic growth in 2023, just given the price realization that you are seeing and the ability to kind of assume a more potentially stable vet clinic growth as you kind of lap some of the labor dynamics, assuming that those don't get worse, but don't get better either. I guess, is high single digit CAG recurring growth the right way to think about 2023, or what are some of those dynamics as we think about the headwinds and tailwinds into 2023? Thanks.

[Brian McKeon, CFO at IDEXX Laboratories]

I think that we'll share more on that obviously, as we get further along here. You're pointing out some positive factors that I think will be helpful for us heading into next year. I think the price realization is higher than we've achieved historically. We think it's appropriate in the current environment, and that'll be a positive dynamic. As Jay mentioned, we do think we'll work through some of the headwinds related to the capacity pullback and that we saw this year. I think it's early for us to talk about the trajectory into next year, you know, just given the macro backdrops. We'll gain more insight here and focus on what we can do, which is to execute well, and we think that'll position us for continued solid growth.

[Brian McKeon, CFO at IDEXX Laboratories]

We'll share more on those details as we complete our plans and give you an update on the year-end call.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

I think what's you know just to add to Brian's comments what's been very gratifying is the resonance and I think interest among our customers of our solutions. I talked about you know software but our customers in you know pretty much across the board are feeling pressures. They may be capacity pressures or and/or staff pressures within their practices. Trying to run a business delivering excellent medical care but also you know sensitive to the economics and making sure they have a healthy business and they're looking to software solutions. We see this with our PIM solutions cloud-based PIM solutions and their enthusiasm around really upgrading software within their practices that help support workflow optimization staff productivity client communications all the things that they've been looking for.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

I think we have the right solutions at the right time, given the market circumstances. We're seeing that in clinic pretty much across the board, across all the solutions. Even at a reference lab had very nice growth, especially in the US as we've looked, you know, we've expanded our menu, we've improved our service offerings in the case of PCR adding Louisville, which is, you know, next day if customers would like that, and they're using that as an extension of their own practice. We're optimistic that for those things that we can control, we'll do a good job and that, you know, customers are highly enthusiastic about these solutions.

[Erin Wright, Senior Equity Research Analyst at Morgan Stanley]

Okay, great. Thank you.

[Operator]

Our next question comes from the line of Jon Block of Stifel. Please go ahead.

[Jon Block, Managing Director at Stifel]

Thanks, guys. Good morning. I'll start with clinical visits. They were down 2.4% year-over-year, but it looks like wellness performed a bit better than emergent. That just seems at odds with just capacity issues in the US, which would, you know, I'm thinking would be more acute on the wellness side of the equation. Can you guys just talk about, you know, what you're seeing out there and why this is weighing more on, and, you know, why we're not seeing sort of the capacity issues hit emergent more, right? Why is the wellness performing better? Then just maybe your thoughts, is this just also a return to work dynamic, right? People going back to work maybe noticing less things about their dog or cat, and that's just crimping, you know, the emergent volume a bit around the edges. Thanks.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, Jon, on balance, I mean, on balance there, you know, there's some variability within any given quarter, but if you look at over a 2- or 3-year, you know, CAGR rate there, you know, it's pretty—it's what you might expect. I don't think there's anything specifically related, you know, to capacity. You know, the capacity speaks to the length in getting an appointment and with existing pet owners, you know, most veterinarians aren't turning those folks away, whether it's a wellness visit or a sick visit. You wouldn't necessarily expect to see, you know, any dynamic related to that piece of it. You know, we know that people are going back to work, at least in hybrid fashion.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

We haven't been able to pull out anything specifically related to, you know, return to work, whether it's, you know, two or three days a year. What we do see is capacity pull back, especially, you know, on weekends, has gone down, you know, somewhat over the year. We think that just reflects, you know, practices who are maybe short of staff and trying to balance their working environment better for their employees. Nothing specific that I think we can call out or point to.

[Jon Block, Managing Director at Stifel]

Okay. I guess I could just follow up with you offline for more color there. Just to move on, I think I have some of these numbers correct, but you mentioned the 4,700 and change premium instruments. I think that was up 10% year-over-year, but the vet instrument revenue was down 5% organic, if I've got that correct. You know, a lot of those premium instruments are the relatively new ProCyte One, which I think would have a solid ASP. Can you just talk about the discrepancy between, call it the premium placement instruments, the growth, I think again, up 10%, the organic instruments down 5%, and then what that delta means? Or are you getting just a little bit more aggressive in terms of some of the selling programs?

[Jon Block, Managing Director at Stifel]

I mean, that's an IDEXX 360 and the trade-off there is sort of in return for longer term commitments from some of those customers. Thanks, guys.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, John, it's primarily related to both geographic mix, we're selling more internationally, and then product mix, more ProCyte Ones, which, you know, have a lower AUP than the ProCyte Dx. The ProCyte One grew 26%, it's a lower AUP. You know, the international mix was higher. That, I think, accounts for the 5% drop in revenue on a very strong placement rate.

[Jon Block, Managing Director at Stifel]

That accounts for the 1,500 basis point delta between up 10% and down 5%. No selling programs have evolved?

[Brian McKeon, CFO at IDEXX Laboratories]

There are impacts from selling programs as well. I think we feel very good about the expansion of IDEXX 360. We've seen very high attach rates when we're replacing ProCyte Ones, we're replacing Catalysts, and that's really the multiplier benefit that we've tried to highlight, and that gets folded into the IDEXX 360 type agreement. That's part of the dynamic as well. Largely, it's the factors that Jay was highlighting. The bulk of our growth is in international markets, and that's a meaningful driver of some of their relative revenue changes. But on balance, the overall growth in our base is very strong. Our EVI metrics were up at high levels. Consumable gains are strong.

[Brian McKeon, CFO at IDEXX Laboratories]

The instrument base expansion is a big driver of our execution, growth benefits. We feel really good about the instrument performance.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah. One driver we focus on from just the quality of instrument placements is new and competitive Catalysts, because that drives an outsized portion of the consumables, you know, revenue and the clinic business. That was up 13%. That's a reflection of just, I think, the focus of our commercial organization and the importance of chemistry consumables to the business.

[Jon Block, Managing Director at Stifel]

Good color. Thanks, guys.

[Brian McKeon, CFO at IDEXX Laboratories]

Thank you.

[Operator]

Our next question comes from the line of Nathan Rich of Goldman Sachs. Please go ahead.

[Nathan Rich, Research Analyst at Goldman Sachs]

Hi. Good morning. Thanks for the questions. Wanted to follow up on the price realization. I guess, how are you thinking about, you know, customer sensitivity to price increases in this market? I guess, you know, given the 1,300 basis point normalized spread that you referenced, it doesn't appear to have had an impact on volumes. Could you maybe just elaborate on any potential impacts on demand that you might see as we move forward?

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah. Thanks, Nathan, and good morning. You know, our customers, I think, see this, see our pricing as reasonable. Given the current environment, they know it's more expensive for them to run their businesses. I think they see, continue to see really good end customer demand within the clinics. Their focus is really on, they wanna make sure they get the support from a product continuity, testing results on time, the engagement that we provide with the customer technical support organization. Their primary focus, you know, is on that. You know, pricing, the flip side of pricing is the value that we deliver, and we continue to deliver extremely high value. We've had 8 product introductions or enhancements this year, just 5 in Q3 alone, really across the business in software, reference labs, in our clinic businesses.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

That helps them from both the standpoint of delivering better patient care, but also productivity and efficiency within the practice, and they appreciate that. You know, from the standpoint of their own, they have the ability from an end customer pet owner pricing standpoint to increase prices. They've done that. I think diagnostics is a small piece of their overall cost envelope, but it drives the important healthcare services envelope for their practice, so they see this as a really core enabler to what they do.

[Nathan Rich, Research Analyst at Goldman Sachs]

Thanks. For my follow-up, I wanted to ask on the 4Q CAG DX guidance. Brian, I think you had said 5%-10%. Could you maybe just talk about, you know, what factors would put you at the high end versus low end of that range?

[Nathan Rich, Analyst at Goldman Sachs]

The midpoint's about 100 basis points below what you did this quarter. I was a little surprised, just given I know you face the tougher compare, but I'd assume there's maybe some incremental price realization. Could you maybe just talk about your expectations for 40 in a little bit more detail?

[Brian McKeon, CFO at IDEXX Laboratories]

Yeah. Thanks, Nate. We thought it was appropriate to maintain a similar outlook to what we had shared for the second half. I think we're very pleased with our Q3 execution and performance. I think you know, on the clinic visit growth trend side, I think that was a relatively favorable factor in Q3, but we're not calling that out as kind of a longer-term trend. We think the trends that we've seen kind of in the last few months are appropriate kind of to plan off of, and our pricing execution's in line with our plans. We thought we really focused on the midpoint of the range. We think that's still a you know, appropriate place to be.

[Brian McKeon, CFO at IDEXX Laboratories]

The lower end of the range is really reflective of potential macro risk that we think is appropriate to build in. Of course, the higher end would be if we can continue to execute well and, you know, see some improvement in the underlying visit trends. I think that we think on balance, it's a consistent outlook, and we think that's appropriate in the current environment.

[Nathan Rich, Research Analyst at Goldman Sachs]

Helpful. Thank you.

[Operator]

Our next question comes from the line of David Westenberg of Piper Sandler. Please go ahead.

[David Westenberg, Senior Research Analyst and Managing Director at Piper Sandler]

Hi. Thank you for taking my question. I wanted to talk about the percent of your platform that might be using trained staff versus untrained staff. Is there a means of kind of using your sales force to accelerate training of these kind of programs while we're in a supply of veterinarian supply constraint environment in vet techs? Just as a kind of a follow-up to that, can you help us reconcile the constraints in labor with kind of easing them into new platforms? If we are in an environment where they can't really fully capture all the clientele, do they have capacity to, say, try new Cornerstone or try new platforms? That's all the questions I have. Thank you.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah. David, good morning. We have a multifaceted strategy to really support the efficiency, you know, within practices. I mentioned the portfolio piece, you know, including software. To answer a part of your question directly, practices are taking the time to implement, you know, new PIM systems, specifically ezyVet. They see a really good return on that. They're enthusiastic about, you know, moving to cloud-based systems and in some cases modifying or optimizing workflow if it helps them. You know, specifically around the questions around training, we have a number of different platforms to be able to support the training needs and knowledge needs of practices.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

You know, some of it is clinical, some of it is business and workflow optimization, both online and in person. We have a very significantly sized field service representative organization as well as professional service vets for more peer-to-peer. It does both in person and through our internal medicine group, you know, over the phone. We've seen, you know, nice growth in engagement and calls into IDEXX to help support them. There's lots of, I think, avenues open to customers for training and practice efficiency support.

[Operator]

Thank you. Our next question comes from the line of Ryan Daniels of William Blair. Please go ahead.

[Ryan Daniels, Partner, Group Head of Healthcare Technology and Services at William Blair]

Yeah, guys. Thanks for taking the questions. Obviously, rightfully, a lot of air time on the CAG business, but I'm hoping you could go into a bit of color on the water and LPD. In particular, kind of what the growth outlook is there if we continue to see macro headwinds both in the US, how recurring is that versus somewhat sensitive to the consumer overall, macro environment? Thanks.

[Brian McKeon, CFO at IDEXX Laboratories]

Thanks for your question, Ryan. Let me start with the water business. The water business is probably our highest recurring revenue business in terms of our customer relationships. It's very much embedded with the ongoing workflow for water safety testing. You know, we feel very good about the momentum in that business as we reported 12% organic growth in the quarter. I think the backdrop there is it's strong global growth, good growth across regions. We have solid net price realization as well. We highlighted an acquisition this quarter which complements our product offering. Feel very good about the momentum in that business, building off the progress that we've made recently.

[Brian McKeon, CFO at IDEXX Laboratories]

LPD, as we reported, had positive growth, 7% in the quarter. We have worked through the tough compares that we've been facing in recent quarters in China. Actually we're up against really an easy compare. Last year in China was probably our toughest quarter in the year. We've worked through that, and we saw positive benefit from herd health screening as a driver and you know, overall kind of modest growth, moderate growth in our testing areas. I think it is an area that we're paying attention to in terms of macro backdrop, but I think we've worked through the tougher compares here and feel that we're positioned for positive growth moving forward.

[Ryan Daniels, Partner, Group Head of Healthcare Technology and Services at William Blair]

Okay, perfect. My follow-up, a little bit different. Just the preventive care program obviously continues to roll out nicely. Can you remind us the status of that OUS? Given the investments you've made OUS, is there potential to push that more and try to make that, you know, even more recurring in the face of a potentially weak OUS macro environment? Thanks.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah, thanks, Ryan. Good morning. Yeah. We definitely are expanding preventive care beyond the US We see a select number of markets and especially corporate accounts outside the U.S. are very interested in preventive care. It's a little bit earlier stages from the standpoint of interest and adoption in some of our international, you know, country regions. I think it's the same level of interest. There just may not be as much, you know, knowledge in terms of from a workflow standpoint and customer education work that still needs to be done. I think we're making progress. I would just say it's more embryonic, and we think represents a, you know, solid long-term opportunity.

[Operator]

Our next question comes from the line of Elliot Wilbur of Raymond James. Please go ahead.

[Elliot Wilbur, Senior Research Analyst at Raymond James]

Thanks. Good morning. Wanna go back to the subject matter of clinical visit trends and thinking about the sequential improvement down 3.1% in the Q2 and improving it down 2.4% in 3Q. I'm just wondering if you could comment on the cadence of improvement over the course of the quarter, you know, whether or not the full quarter rate is indicative of the actual exit rate.

[Elliot Wilbur, Senior Research Analyst at Raymond James]

As a follow-up in thinking about the trend in clinic visit trends, despite the continued declines over the last couple of quarters, it's been offset by relatively favorable diagnostic frequency per visit metric, which has been up 100 basis points the last two quarters, and I think that compares to positive 50 basis points in 1Q and longer-term average of 50 basis points. I'm wondering if you think that relatively higher DX frequency per visit metric is sustainable if in fact we see clinic visit trends reach or revert to positive trends in early 2023. Just sort of getting into the idea that maybe the decline in clinic visit trends is more related to sort of the loss of pet owners who have perhaps a little bit more or less propensity to spend.

[Elliot Wilbur, Senior Research Analyst at Raymond James]

Maybe a little bit lower quality customer has sort of been lost and that is reflected in kind of that more favorable DX frequency number. Thanks.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

Yeah. Good morning, Elliot. A couple different, I think, questions you're getting at. We saw, as you indicated, a negative 2.4% clinical visit decline in the quarter, and this was modest sequential improvement compared to Q2. We, you know, don't really see this as a fundamental change in the trend. You know, we continue to expect near-term impacts from reductions in capacity, and obviously, the macro environment remains dynamic. We are pleased, as we've talked about, the overall diagnostics, you know, revenue per practice visit. That's both a function of adoption as well as utilization. Those two pieces, I think, are performing extremely well through the 1st three quarters of this year relative to historical rates.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

That's, I think, a reflection, again, getting back to the execution drivers in the business, really driving through commercial engagement and innovations, the type of things that I think, customers want and that supports, medical services within the practice and things that are important to really delivering exceptional patient care. With that'll conclude the Q&A portion of the call. I'd like to thank everybody on the phone for their participation this morning. I know we have lots of IDEXX employees listening, and I'd like to just say thank you for your continued commitment to our purpose and your focus and execution against our strategy. Your continued engagement in the midst of what we all know is dynamic external factors, I think help deliver another excellent quarter and excellent execution.

[Jay Mazelsky, President and CEO at IDEXX Laboratories]

I'm thankful for all your work and look forward to finishing 2022 on a strong note. With that, we'll conclude the call. Again, thank you.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect. Speakers, please stand by for your debrief.

Participants

Executives

• Brian McKeon, CFO
• Jay Mazelsky, President and CEO

Analysts

• Chris Schott, Managing Director and Senior Equity Research Analyst at JPMorgan Chase & Co.
• Wolf Chanoff, Investment Analyst at Bank of America
• Erin Wright, Senior Equity Research Analyst at Morgan Stanley
• Jon Block, Managing Director at Stifel
• Nathan Rich, Research Analyst at Goldman Sachs
• Nathan Rich, Analyst at Goldman Sachs
• David Westenberg, Senior Research Analyst and Managing Director at Piper Sandler
• Ryan Daniels, Partner, Group Head of Healthcare Technology and Services at William Blair
• Elliot Wilbur, Senior Research Analyst at Raymond James