IDEXX Laboratories Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

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.
AI Generated. May Contain Errors.
Earnings Conference Call
IDEXX Laboratories Q3 2022
00:00 / 00:00

There are 11 speakers on the call.

Operator

Morning, and welcome to the IDEXX Laboratories Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelski, 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 with us today.

Operator

Additional information regarding these risks and uncertainties is available under the forward looking statements notice in our press release issued this morning as well as 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 be also found by visiting the 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 and A, We ask that each participant limit their questions to 1 with one follow-up as necessary.

Operator

We appreciate you may have additional questions, 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.

Speaker 1

Good morning, and welcome to our Q3 earnings call. In terms of highlights, IDEX achieved solid organic revenue profit growth in Q3, building on strong prior year results. Overall, IDEX revenues increased 8% organically supported by 9% organic growth in CAG Diagnostic recurring revenues. Key execution metrics remain strong. This and 10% organic growth in U.

Speaker 1

S. 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. 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.

Speaker 1

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. 3rd quarter 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. CAG Diagnostic recurring revenue increased 9% organically in Q3 compared to strong prior year levels, reflecting 10% gains in the U.

Speaker 1

S. 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 in clinic visit levels globally, including effects from a pullback in 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.

Speaker 1

CAG instrument revenue was down modestly compared to high prior year 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 U. S. Clinics. Diagnostic revenue increased 7% on a same store basis in the U.

Speaker 1

S. 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 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 4th quarter, which is factored into our outlook. IDEXX's U.

Speaker 1

S. 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. The strong And innovation gains and customer additions and an estimated 6% net price benefit in the U. S. Supported by our second half price initiatives.

Speaker 1

Globally, IDEXX achieved solid organic revenue growth across our modalities in Q3. IDEXX VetLab Consumables revenues increased 9% organically, reflecting solid gains across U. S. And international regions. Consumable gains were supported by 14% year on year growth in our global premium instrument installed base, reflecting double digit increases across our Catalyst, Premium Hematology and SediVue platforms.

Speaker 1

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 our instrument placements continues to be excellent, reflected in 13% growth in new and competitive catalyst placements compared to strong prior year levels. ProSight 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 U.

Speaker 1

S. Was moderated by modest organic revenue growth in international regions, reflecting pressure on same store clinic visit growth in Europe, including macroeconomic impacts. We continue 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 debt price benefits in the range of 5% to 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 Imaging revenues increased 15% organically.

Speaker 1

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. We completed the acquisition of Tech Tip PDS in the quarter, 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 work through comparisons to high prior year revenue levels for African swine fever, core swine testing.

Speaker 1

Turning to the P and L, Q3 profit results were supported by solid gross profit gains. Gross profit increased 7% in the quarter as 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. Operating expenses increased 6% year on year as reported in the 3rd quarter and 9% on a comparable basis.

Speaker 1

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 $8,000,000 and EPS by $0.08 per share in Q3, net of $9,000,000 in hedge gains. Free cash flow was $151,000,000 in the 3rd quarter.

Speaker 1

On a trailing 12 month basis, our net income to free cash flow conversion rate was 67%. For the full year, we've updated our estimate of free cash flow to 60% to 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 and D investments, Higher inventory levels, higher deferred tax assets driven by increased R and D tax credits and an investment in a major facility expansion. We've updated our full year outlook for capital spending to approximately $165,000,000 including $40,000,000 to 50,000,000 We ended the quarter with leverage ratios of 1.4x gross and 1.3x net of cash. We increased our financing Flexibility with the recently completed credit facility amendment, which provides for a $250,000,000 term loan on attractive terms with proceeds applied to reducing our revolving credit balance.

Speaker 1

In Q3, we allocated $167,000,000 Capital repurchased 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 European 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 $80,000,000 R and D investment recorded in Q2. We're updating our reported revenue EPS outlook to reflect the recent strengthening of the U.

Speaker 1

S. Dollar, which we estimate will reduce 2022 revenue by $10,000,000 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 $3,325,000,000 to $3,365,000,000 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.

Speaker 1

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% to 8.5%. Our updated CAG Diagnostic recurring revenue outlook implies 4th quarter organic gains of 5% to 10%, aligned with earlier estimates, which factors in a 2.5 percent 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% to 26.8%, reflecting consistent operational outlook at midpoint and an estimated 10 basis points in year on year net margin impact from updated foreign exchange estimates. This outlook reflects a projected 230 basis point to 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 and 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 and D investments.

Speaker 1

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 $28,000,000 and EPS by $0.25 per share. This is net of an estimated $29,000,000 or $0.26 per share benefit from projected 2022 hedge gains. Our outlook factors in no EPS impact from stock based compensation tax benefits in the second half. We provided details on our updated outlook in the tables and our press release and earnings snapshot.

Speaker 1

Looking forward, we're advancing our planning process We're targeting sustained strong execution that supported delivery of solid organic revenue and comparable profit growth, Building on substantial financial gains IDEX achieved through the pandemic. Given the significant strengthening of the U. S. 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.

Speaker 1

That concludes our financial review. I'll now turn the call over to Jay for his comments.

Speaker 2

Thank you, Brian, and good morning. 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 Health Care 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 continue to turn to IDEXX for the support in the Q3.

Speaker 2

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. These continued trends demonstrate that veterinarians appreciate IDEXX's integrated ecosystem and the layers of innovation would 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 U. S.

Speaker 2

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. 3rd quarter CAG Sector trends We're supported by solid global demand for veterinary services, building on a significant step up in pet ownership and patient visits during the pandemic. U.

Speaker 2

S. 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 during the pandemic.

Speaker 2

IDEXX grew overall U. S. CAG Diagnostics recurring revenue at approximately 10% normalized 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 1300 basis points to U. S.

Speaker 2

Growth in Q3 on a normalized basis. This reflects benefits from continued expansion of our premium instrument installed base, adoption of IDEXX Innovations, consistent business gains, Record retention levels and increased price realization. On a multiyear basis, critical visit growth was healthy in the quarter With solid growth in both wellness and non wellness visits, 3 year CAGR wellness visit growth in particular was in line with historic trends of 2% to 3 Demonstrating that U. S. Pet owners are continuing to prioritize pet healthcare.

Speaker 2

This trend continues to be supported by IDEXX's Showing that customers continue to appreciate the simple yet comprehensive testing in 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 the near term challenges related 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 Addex organization supported strong performance during a dynamic third quarter with commercial teams delivering the day while also building the foundation for long term growth across regions. Record Quarterly placements of premium instruments supported another quarter of double digit growth in our worldwide premium instrument installed base.

Speaker 2

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 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 U. S. And nearly 70% in Europe, IDEXX sales representatives are welcome in the clinic as trusted advisers to their customers, Adding value by helping customers provide high standards medical care, drive strong practice economics and improved practice efficiency. These results are also supported by our world class innovative products like ProSci One and customer friendly marketing programs that help support the adoption of IDEXX Innovations.

Speaker 2

ProsciONE provides customers with an efficient lower cost hematology platform at the point of care And it is especially sought after in international regions where veterinarians have been trained to do hematology testing first 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 Doctor. Tina Hunt shared at Investor Day, and 3rd quarter results continue to be very encouraging. Premium hematology placements in the quarter with international regions representing approximately 75% of ProCyte 1 placements And more than 60% of its installed base, attach rates for ProsciONE are consistently high. Over 95% demonstrating the excellent placement quality and strong multiplier benefit of this platform.

Speaker 2

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 survey work in Germany and France demonstrates that customers have had an overwhelmingly positive experience during the 1st year 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 and practices who receive continuous commercial engagement, this feedback highlights a benefit of our high touch commercial model, We're diagnostic subject matter experts partner with practice centers 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 our 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 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 In addition to these excellent commercial results, we also delivered multiple new Technologies to our customers during the quarter.

Speaker 2

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 IDEX, while demonstrating our commitment to a technology for life strategy. 5 out of 8 of these projects were launched in the Q3. These are: number 1, expanding the comprehensiveness of our fecal antigen reference lab test By adding a flea tape worm assay, which now detects up to 5 times more than traditional methods number 2, providing Number 4, improving the efficiency, convenience and sustainability of the Catalyst SDMA test by reformulating the test to include onboard reagents. And number 5, delivering enhanced accuracy and longer room temperature storage in our best in class 40X Plus test. The rollout of these new products 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 healthcare and develop our sector, while also providing very high customer service levels.

Speaker 2

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. Record Q3 PIMs placements highlight strong customer interest in the whole product solution that IDEXX offers. Furthermore, the shift to cloud based products 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 Acquisitions continues to bring to the business. Strong results across this business in the quarter were not limited to PIMS products. Diagnostic Imaging Systems placements, Webpack subscriptions, PIMS application adoption like payment processing And VetConnect PLUS with clinical decision support engagement all advanced at healthy levels in the quarter.

Speaker 2

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. The benefits of these products and solutions to IDEXX and their customers are compelling. They have highly favorable economics given the recurring nature of their revenue stream High incremental gross margins. They also drive customer engagement, which supports a high levels of retention since they improve our customers' productivity and overall experience. IDEXX's innovation agenda also extends beyond our companion animal business.

Speaker 2

We recently took the opportunity to advance our water business by acquiring Tecta Pathogen Detection System 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 and drinking water supplies. This application provides 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 Supply chain and customer service teams continue to deliver high levels of service reflected in another quarter of approximately 99% product availability ongoing challenges in the external environment.

Speaker 2

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 and financial results over the long run, We're 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.

Speaker 3

And our first question It comes from the line of Chris Schott of JPMorgan. Please go ahead.

Speaker 1

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?

Speaker 1

And I guess Where we are in that process as we're trying to get to get our hands around kind of the trajectory of the business as we look out to next year? Thank you.

Speaker 2

Yes, sure. Good morning, Chris. We expect we'll work through the impacts of the pullback in capacity this year In 2023, 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, the labor supply dynamics that we've talked about And even potential impacts from further COVID outbreak. So we'll be monitoring those macro impacts as they impact Pet owner behavior and really factor that into our outlook.

Speaker 2

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. And we continue to do extremely well in being able to support customers with technology, whether it's PIM system software, which their productivity and support their efficiency, clinic instrument placements, in clinic instrument placements were at record levels. I think that reflects At a basic level, there is very positive outlook, the industry and their willingness to invest It really support growth. We think that from an overall dynamic standpoint, Europe's a little bit different, but in the U. S, Capacity constraints are the primary factor affecting clinical visits versus end Customer demand in Europe, we're seeing some impacts from just the macro factors and we We'll see how that plays out and whether that continues going forward.

Speaker 2

Thank you.

Speaker 3

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

Speaker 4

Hi. This is Wolf on for Mike. Thanks for taking questions. It looks like you as you mentioned, the OUS This also 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

Speaker 1

Thanks for your question. In international markets, we're seeing Similar dynamics in terms of IDEXX execution. So the we highlighted in our comments that we think we've got a 1300 basis point benefit The combination of things like new business gains, expansion of our premium instrument install base, Price utilization and 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 new business gains and solid price gains.

Speaker 1

So, it's I think international markets been relatively More impacted by the macro dynamics, particularly in regions like Europe. And we've been seeing that really going back to Q4 of last year. So that's been a relatively more meaningful headwind, but the progress that we're making and the very strong instrument placement gains and continued high retention level is excellent level excellent engagement with our customers is allowing us to deliver solid continued growth.

Speaker 2

Yes. Just to add to that. The fit of our in clinic instruments now with Procyte One is outstanding for these international markets. We saw ProSight 1 grow 26%, as I indicated in my comments. And so from a footprint, price, performance, Connectivity, easy use standpoint, it really fits those international markets very well.

Speaker 2

The International customers, it depends 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. Very often when we sell At ProSciONE, we also sell it with a chemistry analyzer and in some cases, it even a set of you. So we feel very Positive about solutions and our ability to help customers achieve their objectives. Certainly, there's some macro Factors that we've talked about in the past, including the Russia and Ukraine conflict and energy prices, and We'll just continue to monitor that and see how that plays out over time.

Speaker 1

Got it. Much appreciated.

Speaker 3

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

Speaker 5

Great. Thanks for taking my questions. So 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? And then, are there further price increases, I guess, embedded for the remainder of the year?

Speaker 5

And then

Speaker 1

Thanks for your question, Aaron. Our price realization is very much in line with what we shared at Investor Day. So the we had roughly 4% price realization coming out of the 2nd quarter. We're advancing some additional price increases in the second half. As I mentioned, globally, we were in the 5% to 6% range in Q3.

Speaker 1

It was at the higher end of that for the U. S. And that's very much in line with the 5.5% to 6% year on year benefit that was implied in our outlook for the second half, And that equates to 5% for the full year. So as we head into 2023, we will have carryover benefits From the pricing that we've achieved this year, including the second half initiatives, our plan is to have a normally timed price increase. So we'll have an additional increase beginning of the year, and we'll share more details on that as we roll that out, but that will incorporate The conditions that we're seeing in terms of the value that we're adding and also inflationary impacts in the business.

Speaker 2

Yes. I would just add to that, that from a customer perspective, what customers are most interested in, in the message we keep hearing back from them, They want to make sure that from a product testing continuity standpoint, supply chain, how we support them That all those pieces are in place and they realize that given the current environment, it's a little bit more expensive They have to run the business and they want us to invest in being able to support them. And we see that reflected in very high Customer retention rates really globally across the world, we think that's an important input or input into the growth formula Of the company. So that's an area we're going to continue to invest in. And as Brian indicated, we think our pricing approach is unbalanced.

Speaker 2

On balance, very reasonable given the current environment.

Speaker 5

Okay. Thanks. And then on 2023, the FX dynamics here are understandable given the environment that we're in. But 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?

Speaker 5

Or what are some of those dynamics as we think about the headwinds and tailwinds into 2023? Thanks.

Speaker 1

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 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 will be a positive Dynamic. And as Jay mentioned, we do think we'll work through some of the headwinds related to the capacity pullback that we saw this year. I think it's early for us to talk about the trajectory into next year.

Speaker 1

Just given the macro backdrops, we'll gain more insight here and focus What we can do, which is to execute well, and we think that will position us for continued solid growth, and we'll share more in those details as we complete

Speaker 2

I think what's just to add to Brian's comments, what's been very gratifying is the And I think interest amongst our customers of our solutions, I talked about software. But our customers And pretty much across the board are feeling pressures, maybe capacity pressures and or staff Pressures within their practices and trying to run a business, delivering excellent medical care, but also Sensitive to the economics and making sure they have a healthy business and they're looking to software solutions. So 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 communication, All the things that they've been looking for. So 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 and even at Reference Lab had really nice growth, especially in the U.

Speaker 2

S. As we looked, We've expanded our menu. We've improved our service offerings in the case of PCR at Louisville, which is Next day, if customers would like that, and they're using that as an extension of their own practice. So we're Optimistic that for those things that we can control, we'll do a good job and that customers are highly enthusiastic about these solutions.

Speaker 5

Okay, great. Thank you.

Speaker 3

Before we go to our next question, may I remind you that if you have a question, And our next question comes from the line of Jon Block of Stifel. Please go ahead.

Speaker 6

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 and that just seems at odds with just capacity issues in the U. S, Which would I'm thinking it would be more acute on the wellness side of the equation.

Speaker 6

So can you guys just talk about what you're Seeing out there and why this is weighing more on and why we're not seeing sort of the capacity issues that emergent more, right? Why is the wellness performing better? And 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 the emergent volume a bit around the edges. Thanks.

Speaker 2

Yes. John, on balance I mean, on balance there, there is some variability within any given quarter. But if you look at over a 2, 3 year CAGR rate there, It's pretty it's what you would might expect. So I don't think there's anything specifically related to capacity. The capacity speaks to the length in getting an appointment and with existing pet owners.

Speaker 2

Most veterinarians aren't turning those folks away, whether it's a wellness visit or a sick visit. So you wouldn't necessarily expect to see any dynamic related to that piece of it. We know that people are going back to work at least in hybrid fashion. We haven't been able to pull out anything specifically related Return to work, whether it's 2 or 3 days a year, what we do see is capacity pullback, especially On weekends, it has gone down somewhat over the year, and we think that just reflects Practices who are maybe short of staff and trying to balance their working environment better for their employees, But nothing specific that I think we can call out or point to. Okay.

Speaker 6

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. So a lot of those premium instruments are the relatively new ProSight 1, 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?

Speaker 6

Are you getting just a little bit more aggressive in terms of some of the selling programs? 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.

Speaker 2

Yes. John, it's primarily related to both geographic mix. We're selling more Internationally and then product mix more ProSight-1s, which have a lower AUP than the ProSight Yes. So the Prosci ONE grew 26%. It's a lower AUP.

Speaker 2

The international mix was higher. So that I think that accounts for the 5% drop in revenue on a very, very strong placement rate.

Speaker 6

That accounts for the 1500 basis point delta between up 10% and down 5%, no selling programs have evolved?

Speaker 1

There are impacts from selling programs as well. I think we Feel very good about the expansion of 360. We've seen very high attach rates of when we're placing ProSight-1s, we're replacing catalysts And that's really the multiplier benefit that we've tried to highlight and that gets folded into, the 3 60 type agreement. So That's part of the dynamic as well, but largely the factors that Jay was highlighting. The bulk of our growth is in international markets and that's a meaningful Driver of some of the relative revenue changes and but on balance, the overall growth in our base is very strong.

Speaker 1

Our EVI metrics were up We're up at high levels. Consumable gains are strong. The instrument base expansion is a big driver of our execution Growth benefit. So we feel really good about the instrument performance.

Speaker 2

Yes. One driver we focus on from just the quality of instrument placements It's new and competitive catalyst because that drives an outsized portion of the consumables revenue and the clinic business. And that was up 13%. And so that's a reflection of just I think the focus of our commercial Organization and the importance of chemistry consumables for the business.

Speaker 6

Good color. Thanks guys.

Speaker 4

Thank you.

Speaker 3

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

Speaker 7

Hi, good morning. Thanks for the questions. I wanted to follow-up on the price realization. I guess, how are you thinking about Customer sensitivity to price increases in this market. I guess, given the 1300 basis point normalized spread that you referenced, it doesn't Appear to have had an impact on volumes, but could you maybe just elaborate on any potential impacts on demand that you might see as we move forward?

Speaker 2

Yes. Thanks, Nate, and good morning. 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 We continue to see really good end customer demand within the clinics. And their focus is really on They want to make sure they get the support from our product continuity testing results on time, the engagement that we provide with customer technical support Organizations, their primary focus is on that.

Speaker 2

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 and software reference labs and our clinic businesses. And so that helps them from Both the standpoint of delivering better patient care, but also productivity and efficiency within the practice and I appreciate that. And 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 all important Healthcare services envelope for their practice, so they see this as a really core enabler to what they do.

Speaker 7

Thanks. And for my follow-up, I wanted to ask on the 4Q, CAG DX guidance. Brian, I think you had said 5% to 10%. Could Could you maybe just talk about what factors would put you at the high end versus low end of that range? And the midpoint is about 100 basis points below what you did this Quarter.

Speaker 7

I was a little surprised, just given I know you faced a tougher compare, but I'd assume there's maybe some incremental price realization. So could you maybe just talk about your expectations for 4Q in a little bit more detail?

Speaker 1

Yes. Thanks, Nate. We thought it was appropriate to maintain a similar I'll look to what we had shared for the second half. I think we're very pleased with our Q3 execution of performance. I think the on the clinic visit growth trend side, I think that that was a relatively favorable factoring In Q3, but we're not following that out as kind of a longer term trend.

Speaker 1

We think the trends that we've seen kind of in the last few months are appropriate kind of to And our pricing execution is in line with our plans. So we thought the we really focus Risk that we think is appropriate to build in and of course the higher end would be if we can continue to execute well and We'll see some improvement in the underlying visit trends, but I think the we think on balance, it's a consistent outlook and we think that's appropriate

Speaker 7

Helpful. Thank you.

Speaker 3

Our next question comes from the line of David Westerberg of Piper Sandler, please go ahead.

Speaker 8

Hi. Thank you for taking my question. So I wanted to talk about the percent of your platform that might be using learned Staff versus unlearned staff. And 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 or veterinarian supply constraint environment in vet techs. And then 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?

Speaker 8

So if We are in an environment where they can't really fully capture all the clientele. Do they have capacity to say

Speaker 2

There's we have a multifaceted strategy to really support the efficiency within practices. I mentioned The portfolio piece, including software and to answer a part of your question directly, Practices are taking the time to implement new PIM systems, specifically EasyVet. They see a very good return on that. And they're enthusiastic about moving to cloud based systems and In some cases, modifying or optimizing workflow, if it helps them. Specifically around the Questions around training.

Speaker 2

We have a number of different platforms to be able to support the training needs and Knowledge needs practices, 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 on peer to peer, it does both in person and through our internal medicine group over the phone. We've seen nice growth in engagement and calls and IDEXX to help support them. So there's lots of, I think, avenues open to customers for training and practice efficiency support.

Speaker 3

Thank you. Our next

Speaker 9

Obviously, rightfully a lot of airtime on the CAG business, but I'm hoping you could go into a bit of color on the water and LPG, in particular, kind of what the growth outlook is If we continue to see macro headwinds both in the U. S, how recurring is that versus somewhat sensitive to the consumer overall Macro environment, thanks.

Speaker 1

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 and we feel very good about the momentum in that business As we reported, 12% organic growth in the quarter. And so I think The backdrop there is, it's strong global growth, good growth across regions.

Speaker 1

We have solid net price realization as well, and We highlighted an acquisition this quarter, which complements our product offering. And so, feel very good about the momentum in that business, Building off the progress that we've made recently, LPD, as we reported, had positive growth, 7% in We were have worked through the tough compares that we've been facing in recent quarters in China and actually we're up against really an easy compare. Last year in China was probably our toughest quarter in the year. So we've worked through that and we a positive benefit from herd health screening as a driver and overall kind of modest growth, Water 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.

Speaker 9

Okay, perfect. And then 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? And Given the investments you've made in OUS, is there potential to push that more and try to make that even more recurring in the face of a potentially weak OUS macro environment?

Speaker 9

Thanks.

Speaker 2

Yes. Thanks, Ryan. Good morning, Gail. We definitely are expanding preventive care beyond the U. S.

Speaker 2

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 National country regions, but the same I think that's the same level of interest. It just may not be as much You know, in terms of from a workflow standpoint and customer education work That sale needs to be done.

Speaker 2

So we're making I think we're making progress. I would just say it's more embryonic and we think represents

Speaker 3

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

Speaker 10

Thanks. Good morning. I want to go back to the subject of clinic visit trends and thinking about the sequential improvement down 3.1% in the 2nd quarter and improving Over the course of the quarter, whether or not the full quarter rate is indicative of the actual exit Great. And then as a follow-up and thinking about the trend in clinic visit trends despite the continued declines Which has been up 100 basis points 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, that relatively higher DX frequency per visit metric It's sustainable if in fact we see clinic visit trends revert to positive trends in early 2023, just sort of Getting into the idea that maybe the decline in petting visit trends is more related to sort of the Of pet owners, who have perhaps a little bit more or less propensity to spend, so 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.

Speaker 10

Thanks.

Speaker 2

Yes. Good morning, Elliot. A couple of different, I think, questions you're getting at. So we saw, As you indicated, a negative 2.4 percent clinical visit decline in the quarter, and this was modest sequential Improvement compared to Q2. But we don't really see this as a fundamental change in the trend.

Speaker 2

We continue to expect Your term impacts from reductions in capacity and obviously the macro environment remains dynamic. We are pleased as we've talked about The overall diagnostics 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 This year relative to historical rates. And that's, I think, the reflection, again, getting back to the execution drivers In the business, really driving through commercial engagement and innovations 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. And so with that, that will conclude the Q and 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 IDEX employees listening, and I'd like to just say thank you for your continued commitment to our purpose and your focus on execution against our strategy.

Speaker 2

Your continued engagement in the midst of what we all know as dynamic external factors, I think, helped deliver another Excellent quarter and excellent execution. So I'm thankful for all your work and look forward to finishing 2022 on a strong note. And so with that, We'll conclude the call. And again, thank you.

Speaker 3

Thank you, ladies and gentlemen. This concludes today's conference.

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