Q4 2019 Earnings Call
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Good morning, and welcome to the IDEXX Laboratories fourth quarter 2019 earnings Conference call. As a reminder, today's conference is being recorded.
Participating in the call. This morning, RJ, Mazelsky, President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John Rayva Senior Director Investor Relations.
I'd actually like to preface the discussion today with a caution regarding forward looking statements listeners are reminded that our discussion during the call. It 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 wells in our periodic filings with the Securities and Exchange Commission, which can be obtained from the FCC or by visiting the Investor Relations section of our web site IDEXX Dot com.
During this call will be discussing certain financial measures not prepared in accordance with generally accepted accounting accounting principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which May also be found by visiting near <unk> Investor Relations section of our website.
In reviewing our fourth quarter 2019 results. Please note all references to growth organic growth constant currency growth in comparable constant currency growth refer to growth compared to the equivalent period in 2018, unless otherwise noted.
Fourth quarter, 2019, and full year 2019 comparable constant currency operating expense growth operating profit growth operating margin growth in comparable constant currency P.S. growth exclude the impact of the fourth quarter 2019, CEO transition charges.
To allow broad participation in the Kuni, we ask that each participant limit his or her questions to one with one follow up as necessary.
Appreciate you may have additional questions. So please feel free to get back into the queue and if time permits will take your additional questions I would now like to turn the call over to Brian Mckeon.
Thanks, and good morning, everyone I'm pleased to take you through our fourth quarter and for your 2019 results and to provide an update on our financial outlook for 2020.
Our next achieved continued strong financial performance in Q4, which supported delivery or for your revenue and EPS gains aligned with our long term financial goals.
In terms of highlights, which you 10% organic revenue growth on the fourth quarter, driven by 11% organic growth in CAG diagnostic recurring revenues and 10% organic growth in our LPD in water businesses.
Fourth quarter gains support for your organic revenue growth of over 10% and nearly 12% organic growth in CAG diagnostics recurring revenues.
Our full year EPS was $4, an 89 cents an increase of 21% on a comparable constant currency basis supported by a 120 basis points and comparable constant currency operating margin improvement.
Note that our comparable growth rates in comparable operating margin improvement metrics now exclude impacts from Q4 CEO transition charges.
These charges reduced operating profits by 13.4 million in Q4 aligned with expectations.
And EPS by 14 cents per share after tax approximately four cents better than initial projections reporting updated tax provision estimates.
For your EPS results included 22 cents per share and tax benefit from share based compensation activity five cents per share above our guidance estimates.
We also saw an additional four cents below the line upside to our earlier guidance estimates related to final tax provision estimates and lower than projected interest expense.
Well position to build on these strong results in 2020, we're maintaining our outlook for 9% to 10.5% organic revenue growth reflected in our income increased guidance range.
2.620 billion to 2.655 billion, an annual revenues, which include updated FX estimates.
We're raising our EPS guidance range by 12 cents to $5.42 to $5 at 58 cents per share, reflecting 13% to 16% comparable constant currency EPS growth.
Positive revisions to our preliminary guidance range reflect the flow through of our 29 team performance were consistent operational improvement assumptions and favorable up updates to projections for interest expense share based compensation tax benefits and FX impacts.
Walk you through the details over 2020 guidance later my comments, let's begin with a review of our fourth quarter and for your 2019 results by segment.
Q4 results were supported by continued strong momentum in our companion animal group.
Global CAG revenues were up 11% organically driven by 11% organic gains in CAG diagnostics recurring revenues net of a modest equivalent days headwind overall.
By region Us CAG diagnostic recurring revenues increased 10.5% organically that have a 0.5% equivalent days impact.
Consistent strong U.S. gains were supported by low to mid teens organic growth in reference lab sales deleverage double digit gains invent lab consumables and solid gains in rapid assay revenues.
He was CAG diagnostics recurring revenue growth remains primarily volume driven with net price gains trending in the 2% to 3% range.
We also maintained high levels of customer retention across modalities.
You asked CAG diagnostic revenue growth continues to outpace broader market trends.
Total visits per practice were relatively flat in the quarter on a same store basis with the 4.3% increase on overall same store practice revenue.
Total market clinical visit growth was 1.8% in Q4 falling relatively strong Q3 results with some moderation of visit gains earlier in the fourth quarter offset by stronger gains in December .
For the full year clinical same store visit growth increased 2.5% of the 7500 practices and our data set up from 2.1% in 2018, reflecting continued solid market expansion in diagnostic services.
International CAG diagnostic recurring revenues increased 12% organically in Q4 net of a modest overall equivalent days headwind.
International results reflected mid teens organic growth and consumable revenues supported by a 25% year in your expansion in or catalysts installed base outside of the U.S.
Strong consumable gains of nearly 20% in Europe and continued strong gains in Canada, and Latin America, where moderated to a degree in Q4 by impacts related to the timing of shipments in Asia, which benefited Q3 2019 in prior year Q4 results as well as equivalent day impacts.
For the full year international consumable revenues increased nearly 20% organically.
International reference lab sales increased organically a consistent high single digit rates in Q4 was solid gains across our major regions.
For the full year global CAG diagnostic recurring revenues increased nearly 12% organically, reflecting 11 forget present gains in the U.S. and 13% growth in international markets aligned with a long term goals.
By mortality global reference lever lab, and consulting services revenues expanded 11% organically in the fourth quarter.
Supported by nearly 1% equivalent day growth benefit with an additional 2% reported growth benefit related to the initial integration of Marshall labs.
For your organic growth of 11% and lab revenues was driven by consistent strong growth in the U.S. supported by continued higher same store sales growth at IDEXX customers.
Global Vetlab consumable revenues grew 12% organically in Q4 net of a 1.5% equivalent day headwind.
For the full year Vetlab consumable revenues increased 14% organically driven by double digit growth across us in international markets supported by increases in diagnostic tests utilization and ongoing expansion of our premium instrument installed base.
We had another excellent quarter in terms of high quality instrument placements in Q4 supporting double digit year on year growth in our economic value index or either.
Global premium placements increased 13% year on year in Q4, driven by 23% year on year growth in catalyst placements supporting a 19% year on year growth in our global catalyst installed base.
Overall, we placed 2517 catalysts in the quarter with 456 at new and competitive accounts in North America up 8% year on year in 1119, new and competitive placements in international markets, a 24% year on year increase.
We also achieved 1200 48 premium hematology placements.
Excuse me.
We also achieved 1200 40 premium hematology placements.
Up, 7% and 713, sedivue placements down 4% compared to strong prior levels.
Overall, our Sedivue global installed base is now over 8900 instruments of 35% year on year.
Rapid assay revenues grew 4% organically in Q4, reflecting solid gains across us in international markets net over 1.5% equivalent day headwind.
For the full year rapid assay revenues grew nearly 8% organically, reflecting continued solid growth of 40 X plus specialty and first generation products.
Growth in high customer retention in our rapid assay business continued to benefit from ongoing expansion over engage snap pro installed base.
Supported by an additional 10000 placements in 2019 bringer global installed base to over 37000.
Veterinary software services and diagnostic imaging system revenues increased 9% organically in Q4 supported by double digit gains in VSS and continued solid expansion a dividend of digital imaging services.
Overall global clients CAG revenues grew nearly 11% organically in 2018, and we're targeting continued double digit organic gains in the CAG business in 2020.
In terms of our other lines of business water revenues grew 10% organically in Q4, including approximately 1% benefit from equivalent days supported by solid game across our major regions.
For the full year water revenues increased 9% organically with faster operating profit growth resulted in 47% full year operating margins.
We're very pleased with our continued momentum in the water business and are targeting continued high single digit organic growth in this highly profitable business in 2020.
Livestock poultry and dairy revenue in Q4 increased 10% organically.
Strong Q4 growth results were supported by benefits from the sales of diagnostic testing programs for our person swine fever in China, which offset declines in course wind diagnostic testing as well as solid growth in poultry testing and hurt health screening.
Q4 results also benefited from favorable year on year comparisons related to timing of government and distributor orders.
For the full year 2019, or LPD revenue was up 6% organically with relatively higher operating profit growth benefiting from productivity improvements and cost controls.
We're pleased with our progress in expanding our LT revenues and profits in 2019 in a very dynamic global climate.
In 2020 were targeting flat to modest organic growth in our LTV business as benefits from growth in our pregnancy testing franchise and African swine fever testing programs are moderated by expected ongoing pressures on broader swine diagnostic testing in Asia.
And bovine government disease control programs in Europe .
As well as tough compares religious strong 2019 heard health screening levels.
Turning to the PML gross profit was up 10% on a reported basis in Q4 or 11% adjusted for foreign exchange impacts.
Gross margins decreased slightly on a constant currency basis, reflecting increased investment in our reference lab business related to de lever capacity Radek Spansion system investments and acquisition integration.
Which offset benefits from moderate net price gains and continued strong consumable revenue growth.
Foreign exchange hedge gains would have benefited gross profit were $3.5 million in Q4.
Operating profit in Q4 was flat as reported including Impaction CEO transition charges.
On a comparable constant currency basis operating income increased 12% reflected solid profit gains across our CAG water and LPD segments supported by high revenue growth.
As expected comparable constant currency operating margin gains were relatively flat in Q4.
Operating expense growth increased to 10% on a comparable constant currency basis, driven by increases in global flag CAG commercial capability in R&D.
As we've discussed in our guidance update investment impacts will carry into the first half for 2020.
For the full year operating profit increased 13% as reported or 16% on a comparable constant currency basis.
This reflects an operating margin of 23% and an increase of 120 basis points on a comparable constant currency basis, which excludes CEO transition charge impacts.
Constant currency operating margin gains reflected a balanced 50 basis points in gross margin improvement in 70 basis points of operating expense leverage on strong volume growth.
EPS in Q4 was one dollar for per share, including five cents per share and tax benefit related to share base compensation activity.
On a comparable constant currency basis, EPS increased 17%.
For 2019, EPS was $4, an 89 cents of 21% on a comparable constant currency basis.
For the full year foreign exchange rate changes decreased EPS by five cents per share net of FX hedge gains of nearly 11 million.
Full year EPS results included $19 million or 22 cents per share in tax benefit or related to share based compensation activity, which provided 3.7% of benefit in our 2019 effective tax rate of 18%.
We had interest expense of 30.6 million for the year net of approximately 2 million of capitalized interest related to major facility projects.
Free cash flow was 304 million for 2019 or 71% of net income.
Capital spending came in at $155 million, including $58 million of combined investment.
Or approximately 14% of net income related to our Westport main headquarter expansion and German core lab relocation with some favorability to earlier estimates related to timing of major project cash deployment.
We allocate a 304 million a capital towards the repurchase of one 1.215 million shares for the full year 2019 at an average price of $250 per share.
This included repurchases of 532000 shares in Q4 for $139 million.
Our balance sheet is an excellent position we ended the year with $991 million debt 90 million in cash and $560 million in capacity under our revolving credit facility.
Our leverage ratios as a multiple of adjusted EBITDA were 1.4 times 1.45 times gross and 1.32 times net of cash at year end.
Our strong financial performance and disciplined capital allocation supported achievement of of 46% after tax return on invested capital, excluding cash and investments for 2019.
Well positioned to build on the strong performance in 2020 with a financial with a financial outlook aligned with our long term goals.
We're increasing our reported revenue guidance range to 2.620 billion to $2.655 billion up $7.5 million point, including approximately 5 billion a benefit from updated FX assumptions.
We're maintaining consistent guidance for 9% to 10.5% organic revenue growth.
Supported by continued strong CAG diagnostics recurring revenue growth of 11% to 12%.
Our guidance assume 0.5% growth rate benefit from completed 2019 acquisitions, which office is offset by a projected 0.5% FX growth headwind resulted in projected revenue growth of 9% to 10.5%.
We're raising our 2020 EPS outlook to $5 and 42 to $5 of 58 cents per share an increase of 12 cents.
This aligns with a comparable EPS growth of 13% to 16%, reflecting a consistent outlook for 50 to 100 basis points of comparable constant currency operating margin improvement.
The 12 cents increase in the EPS outlook compared to our preliminary guidance includes approximately five cents in combined benefit from the flow through 2019 operating performance and favorable updates to assumptions for interest expense and projected reductions in average shares outstanding.
We're now projecting approximately $35 million net interest costs in 2020, and a 1% to 1.5% reduction average shares outstandings.
Average shares outstanding with both metrics aligned with an assumed maintenance of our net leverage at 1.5 times EBITDA.
Our updated outlook also reflects five cents and projected tax benefit from share based compensation activity.
We're now projecting an effective tax rate in 2020 of 20% to 21%.
Including 7.5 to 9.5 million or 1.5% and tax rate benefit from exercise of stock based compensation in 2020.
Which equates to nine cents to 11 cents per share.
Finally, our guidance benefited by two cents from updated FX assumptions overall, we're now projecting an estimated nine cents negative year on year impact from FX net of $5 million projected hedge gains in 2020.
In terms of free cash flow retarding deployment of 140 million to 155 million in capital spending, including approximately 35 million related to the completion of our Westbrook headquarters German core lab projects and the acquisition of real estate associated with the Us core lab.
For 2020 this results in an outlook for free cash flow of 75% to 80% of net income, including approximately 7% impact from these discrete investments.
In terms of our first quarter outlook in 2020, we expect Q1 reported revenue growth in the 9.5% to 11% range reflected organic gains of 10% to 11.5%.
Including a projected 1% equivalent date, Ted tailwind related to the leap year.
We expect our operating margins will be moderately below prior year levels, reflecting stepped up commercial in lab investments advanced in the second half of 2019 and as we continue to integrate our Marshall acquisition and onboard our west broke headquarters expansion.
We expect operating margin gains in 2020 will be driven by second half performance as we grow into our scaled investments, including our new headquarters and German core lab facility.
That concludes the financial overview, let me now turn the call to Jay for his comments.
Good morning, and thank you, Brian IDEXX had a strong finish to 2019 with double digit growth across our companion animal livestock and water diagnostic businesses.
Core CAG diagnostics recurring revenue, which now represents over three quarters of overall company revenues grew 12% organically for the full year excellent execution across our businesses enabled us to deliver organic revenue of 10% plus and comparable constant currency EPS growth of 21% aligned.
With our long term financial goals return on invested capital at 46% for the year was exceptional the progress we are advancing on key strategic fronts positions us well to build on this performance in 2020.
Outstanding commercial execution is an essential pillar in our organic growth strategy and we consistently see a high return in increasing the field based capabilities that allow our sales professionals to spend more time with customers expansion and the number of our global customer facing resources and investments at enabling commercial.
Systems in areas like Salesforce as service clubs were two areas of focus in 2019.
We completed the us commercial expansion in Q4 and start the year with our expanded use team in seat and trained we now have 530 field based professionals in the us to support market development more than double the number for five years ago as we enter 2020, we anticipate some settling in during the first quarter.
Of the expansion as sales professionals, including those newly recruited develop relationships in their new or reconfigure territories.
Notably we accomplished this expansion in Q4, while delivering 425, new and competitive catalyst placements in the US a record number. We also continued to make progress with preventive care with 360, new enrollees in the quarter to reach over 3800 enrollees in the program to date.
Customers are embracing the IODEX preventive care turnkey solution and increasingly view it as a foundational pillar in their own practice strategies.
We believe that our north American commercial resources are properly balanced at this point with the addressable market opportunity and in 2020, we will focus on driving productivity in our expanded salesforce, which becomes even more effective over time with tenure and with deeper customer relationships.
Our commercial capability and performance in international markets also continues to advance as they build tenure and competencies with key commercial programs like I'd X 360.
The commercial teams priorities have been driven by the economic value index of an instrument placement that prioritizes high value competitive chemistry placements, resulting in 24% growth in new and competitive catalyst placements in Q4, two a record of more than 1100 units.
Our catalyst installed base outside of North America grew 26% year over year supporting nearly 20% organic revenue growth and IDEXX Vetlab consumables internationally in 2019, we expect to gain global leverage and further strengthen execution in 2020 with our enhanced field global commercial organization.
As previously announced.
Leading with innovation includes expanding our testing platforms is another key growth pillar. We are excited by the new innovations that we announced that via mix earlier. This month. These were busy ethically greeted by customers is clinically rigorous and value added since veterinarians embrace new and expanded tools that enable them to raise.
The standard of care it workflow efficient ways. This year, we are bringing bile acid. So our catalyst platform with shipments expected this quarter catalyst bile acids as a measure of liver function brings reference lab test quality in clinic. This is a great example of how we constantly make our catalyst platform more valuable to customers catalyst.
Have steady innovation heartbeat with eight clinically important test launched over the past eight years the technology for life benefit of catalyst is supporting continued global expansion of this best in class testing platform.
Following another great year of instrument placements and customer retention as of the ended 2019, approximately 41000 practices of catalyst install.
Even with a successful installed base expansion, we estimate there remain approximately 70000 addressable placement opportunities for catalyst alone around the world.
Our innovation focus increasingly use as large clinical data sets with AI and machine learning to develop highly capable algorithms that assists clinicians with even the most challenging patients. This is a case of sedivue Dx at groundbreaking platform with narrow network 5.0, leveraging 350 million images launching this quarter.
Okay.
We are adding advanced bacteria detection capabilities made possible by proprietary reagents, leveraging patent pending technology and no additional charge for 8900 customers.
Bacterias clinically relevant and especially challenging because of their very small size the difficulty of seeing bacteria and highly cluttered image and because to break can be mistaken for bacteria to the similarity in appearance.
Moreover, because our in clinic analyzes are all connected by Smartservice, we'll be able to quickly update our global installed base with no customer disruption.
In reference lab abroad, and differentiated service portfolio, including fecal antigen Dx continues to support strong same store customer growth because the fecal antigen test does not rely on the visual confirmation of parasite eggs, it's able to uncover twice as many infections. This LMP alone that debt.
Defying the presence of intestinal parasites earlier in the lifecycle of the infection.
We're also further expanding our reference lab offering with an exciting new service digital cytology announced that BMX for launch in North America in February .
Cytology results often have at least a two day turnaround time with our new digital Cytology service, we're transforming the speed at which customers receive results with expert interpretation to within two hours.
Seven days, a week 365 days a year.
We are able to do this by leveraging existing capability and the of an integrated IP workflow the wide adoption of customer facing applications like Vetconnect plus a field service diagnostic workforce of about 150 field service reps to install and train customers and a global network of more than 100 veterinary clinical pathologists.
We continue to invest in further improving our lab service offering internationally.
We're excited about adding our stated the art core Chairman reference laboratory in late spring of this year to our sophisticated global and regional hub and spoke laboratory network.
Adoption and utilization of IDEXX SDMA continues to advance nicely in clinic and lab diagnostic modalities, 75% of global catalyst customers have ordered catalysts SDMA and have now run at three and a half million times in fact in North America that number is almost 80% adoption.
IDEXX SDMA has also been included it almost 28 million chemistry panels at IDEXX reference labs.
Customers are increasingly seeing SDMA, a direct measure of g., if our impairment or kidney function as a standard of care in fact, the American Animal Hospital Association has updated their canine diagnostics wellness testing highlights by life stage and testing guidelines now for the first time include SDMA.
Our veterinary software offerings continue to enjoy robust customer adoption.
Commercial use our software applications fleet that they are an outstanding enabler to delivering excellent patient care and to running their practices in an efficient manner.
For was another strong quarter for new placements of cornerstone Neo Ottomana and Smartflow systems in North America, We had record patient management software placements, including cloud based an on premise software for 63% year over year growth at installs for the quarter.
We introduced a much improved user experience update with cornerstone software version 9.1 in March of last year.
And we are pleased that well over half of our installed base upgraded by the end of 2019.
Work on cornerstone cloud continued to progress on schedule in Q4 with very positive customer feedback positioning us to scale for commercial launch later this year.
Our next Webex enjoyed another strong quarter with 23% year over year increase in subscriptions and a customer installed base of more than 4500 subscribing practices. We recently released for the end of Q1 delivery a cloud based software update it provides new functionality powered by artificial and.
Diligence automatically that correct image orientation and starts images by body part potentially shortening retied by 25%.
Overall across these multiple integrated software offerings, we are providing the most comprehensive technology stack offering relied on by independent practices and corporate groups around the world.
In addition to our progress in our core CAG business. We also had strong performance in our water and livestock diagnostic businesses in the fourth quarter with both achieving 10% organic revenue growth.
We continue to expand our high return water business globally to focus on commercial execution.
Our livestock business has also shown tremendous resilience as here in the face of macro challenges and continued input from the African swine fever in Asia.
Looking ahead, we are optimistic about the long term potential of our business and our ability to sustain its high growth.
One of our key strategic growth goals is to grow CAG diagnostics recurring revenue, which in 2020, we're targeting at 11% to 12%.
Major drivers include the strong global momentum and expanding our installed base of premium instruments continued customer adoption of IDEXX differentiators like integration and ongoing new platform features and our expanded commercial capability aligned with building on this momentum.
Over the next 25 years, we see tremendous opportunity for ongoing growth of CAG diagnostics recurring revenues with a global addressable companion animal diagnostics market of over $30 billion with the majority of that existing outside of the United States.
We remain focused on our commitment to providing exceptional service to our customers and improving the standard of care to enable the best clinical decision, making and healthy practice growth.
Before we open the call to questions I want to thank our employees and congratulate them for the accomplishments in 2019 in pursuit of our purpose to enhance the health and wellbeing of pets people and livestock.
Okay and with that we'll take questions.
Thank you and ladies and gentlemen, if you wish to ask a question. Please pass one and building the roll on you touched on phones.
You had tone, indicating that you have been placed in Q you may removed himself from queue by hitting the same keystrokes of one in zero.
Once again for any questions or comments press, one and then zero on your Touchtone phone.
And one moment please for the first question.
And we will take the first question from the line May then bridge with Goldman Sachs. Your line is open.
Good morning, Thanks for the questions.
Brian maybe just starting off on.
How we should be thinking about kind of the cadence of organic growth. This year I think you said.
First quarter would be 10 to 11, a half percent I think that includes a 100 basis point benefit.
From the leap day, so if we back that out I think the ranges consistent with kind of the full year guidance that you gave for organic growth.
Should we be expecting sort of a relatively can consistent cadence.
Over the balance of the year.
Oh, It will obviously provide more details work through the year, but I think us that's an accurate right now is that we've got.
A full year outlook of nine to 10 and a half will have some benefit from days for in Q1, we have a I think a bit of a headwind in Q2.
But net net it on balance for the year, those should wash out and.
I think our 11% to 12% recurring CAG growth is very much in line with the the trends that we've been seeing if you.
If you adjust or or fourth quarter results for the days impact than some of the shipment timing effects. We noted in Asia, which were were modestly.
In fact, the growth rate a bit we're we're basically right in the right in the middle that range.
Looking to build on that in 2020.
I would add to that or we're well positioned to sustain that 11% to 12% gave that.
Reflecting our calling for 2020, yes, you start with the fact that it's put good market backdrop, we saw good political visit growth over 2019, 2.5%, we have really nice.
Growth in momentum in our the expansion of our premium installed base, 16% and totaled 19% in catalyst, 35% in Sedivue and does result in consumables growth has as customers use those products.
We're pleased with the adoption, we see around IDEXX innovation customers are very enthusiastic about the up that the differentiators. We've introduced in past years as well as the MX that we have an expanded salesforce, which is which is out there partnering with customers driving awareness and education and ultimately.
Consideration and then we note that as Brian mentioned in his remarks, we have very high retention across all of our modalities customers tell us that they appreciate the differentiators, we break like like integration and add the platform extensions that come to rely so we're feeling like we're in a very good position.
To sustain that growth.
Thanks Thats helpful. Just a follow up on.
Your comments on the end market you know you kind of noted the strong 2019, obviously for Q as a little bit softer I know this kind of always quarter to quarter volatility.
Is that sort of kind of what you would attribute the fourq you number two and I think Brian you had mentioned December was maybe a little bit stronger I'd just be curious to know if you see that improvement continue into January .
So the Q4 with with solid 1.8% clinical growth keep in mind, we focus on the clinical growth pace, that's where the veterinarian actually sees the patient and where diagnostics is used as a whole the that came off a fairly strong Q3 and as noted.
Soft going into that going into the quarter picked up in December so our or a positive on the market. We think it's a strong.
Market in the in 2020, and we don't see anything.
From a chain standpoint.
Thanks for the question.
Thank you.
Our next question comes online Ryan Daniels with William Blair. Your line is open.
Good morning, guys. Thanks for taking the questions couple follow ups in the new digital cytology I'm curious number one if you can speak to the early feedback you've got particularly VMAX and then number two is my follow up I'm curious with the revenue will look like from that I know theres instrument, but also reading as a reference lab.
So we'll not be in the equipment a reference on lines or how should we think about the revenue model. Thanks.
Thank you Ryan Let me, let me give me to sub market backdrop and add the feedback from Neovacs customers were really very enthusiastic about digital cytology service.
Typically that that area, we will see patient everyday with lumps and bumps and they'll take that they'll take a sample prepare slot look at it under a microscope and then decide whether or not they need to send it out for expert interpretation that process very often.
Next couple of days, but again, depending upon when they send that and like on a Friday intake for five days or so so they were very very appreciative and enthusiastic about the ability of big able send it to us and get a result back with an expert interpretation within two hours and be able to do that.
All hours of today everyday of the weak and all days in the year solve the and the reason we were able to do that by the way. It's because we were able to fit that into our existing infrastructure and investments that we've made in terms of integrated IP workflow, having field service organization, which is out there who can help install.
These systems and onboard and train.
Customers on slide preparation, having clinical pathologists around the world to be able to provide that service in terms of market size and then I'll hand, it over to Brian talk a little bit about revenue. The way. We think about this is about 5% of practices are higher.
All users of cytology, so we define that as five plus.
Cases per per month.
About 6000 abide ex practices actually sent today out cytology too I reference lab for expert interpretation at 6000 out about a little over 20000 practices that we do business with in reference labs and in some measures that issue just a scope of what we're talking about we think as they continue to use.
Yes.
Potential benefits and using more of it over overtime add more customers adopting it.
Yes, I think the way to think about a financially Ryan as it is a factor that will be supportive of sustaining the 11% to 12%.
Dx recurring growth for the company, including the strong growth that we've seen in us reference labs.
It's a valued service in a differentiator and and I think something that we.
We believe can can support continued to expand that franchise and in terms of instrument revenues as Jay noted it's.
A relatively smaller set of the market that would likely be earlier adopters of the of the instrument and we'd anticipate this will be integrated into 360 type program placements.
More in the second half of year as a kind of build market awareness and get the service up and running but it's not calling it out as a distinct material driver I think is something we anticipate will build overtime, but we're very excited about it as another examples of allied mixes, adding to the scope of services that were providing adding to our differentiation.
And value.
End of leveraging that to drive the the the strong double digit growth and CAG recurring revenues that were shoot neutral.
Thanks.
Q.
Thank you next as adults the line of Michael Ryskin with Bank of America. Your line is open.
Hey, guys height.
I want to follow up on an earlier question just on market conditions, just get a little bit more specific maybe you could.
Helpful commodities have had a lot of questions over recent days and weeks about.
International markets the wildfires in Australia.
Was the ended the year, you've had similar weather in California or heat wave in Europe effect, you just curious if that had any impact and also on the recent chronic virus outbreak in China.
Just a lot of especially on the market. Obviously in if you could sort of size your China exposure or how much of that if companion versus livestock and if you've seen anything in terms of that visit or sort of.
What you're seeing there in that market and how the factored into your expectations for 2020.
What I wouldn't I start with that Mike and Mulligan hit on some of your specific question is a richer Jay can expand on that but in terms of the current of ours as context, China for IDEXX is a little less than 2.5% over overall revenues all of our revenues in China.
So as we have relatively smaller exposure that market over half of that revenues LPD.
So in terms of the more.
Tumor driven aspect of the business, it's a relatively smaller exposure we have seen.
Limited impact to date.
We are monitoring it of course.
And but have not factored a specific kind of impact into our outlook at this point, we we've got a range for performance we're comfortable with that.
And I think the headline there's relatively relatively smaller for IDEXX and is relatively early on to kind of recalibrating market impacts.
I think at a specific question on in Australia.
Wildfires, we did not see a meaningful impact on that in our results again, it's something that we're monitoring but we we have very good results in Australia continued good results and I think we the European market, we highlighted that we had nearly 20% consumable growth in the fourth quarter.
Outstanding instrument placements, I think where the market and can continued solid results in lab. So I think we feel the market backdrop.
In Europe looks quite healthy.
Yes.
I have there.
Thanks, a quick follow up.
I appreciate all the color there.
You also play that a lot of investment on the gross margin line you saw that in this quarter you mentioned, some that's going to continue.
Through 2020 Cross reference lab and the rest of the business could you help us think through the pacing, they're sort of how that progresses over the course of the year has that.
Is it.
The white step up and investment as its something thats going to be the run rate go forward or is this sort of.
Relatively onetime that should play out over the course of you'll see the benefits of this over the course of many quarters I don't think theres any investment in our businesses as truly one time I think we're always adding capability. Both what we are trying to highlight was that we had.
Through the second half of 2019.
A number of investments that we advanced in the lab front in terms of or expanding our route capacity, adding day labs sweeter system investments that we've been making initial integration of Marshfield, which will continue and obviously some of the investment we made the in the commercial organization in the us and just trying to highlight that that is.
To be on a year over year basis carrying into the first half of 2020 and they are a couple of discrete factors that will be additive to that and thats basically or or Westbrook headquarters, which is coming online in Q1. So we'll have the depreciation of that starting to factor into our opex growth and.
In the second quarter, we will be having the impact of the the German core lab coming online. So the net of that is is it gets it wasn't intended to signal incremental investment in the labs other than just those discrete areas and the Marshall acquisition, but just trying to highlight that we anticipate our margin gains that were targeting for next year will be second have driven.
We'll have some moderate pressure in Q1.
And basically as you just as we grow into those investments and we would reinforce our long term goals of 50 to 100 basis points plosive of constant currency annual margin improvement supported by strong.
Recurring revenue growth so no changes on that from.
Great. Thanks, Brian really appreciate the color.
Thank you.
We will go through.
Can block with Stifel. Your line is open.
Hey, guys. Good morning, maybe just a couple.
Hi level ones from me, even JV on the competitive landscape has evolved or maybe that you expect to evolve as wide as decide abaxis for some time now they purchase a couple allowed I know it's early but you got another player. That's also making a bigger push in international markets are curious for your thoughts and any color or details that you see on calling on the potential of alone.
And from a competitive standpoint.
Good morning, John Thank you so.
It's always been a competitive market at the end, it's clearly still a competitive market and we continue to perform very well as we've highlighted this morning, our focus is really on growing at adding value for our customers a lot of our volume growth. This as Brian highlighted comes from same store sales comes.
From existing customers at creating awareness and.
Adoption of relevant testing so from up strategy standpoint, it's really continuing to be able to work at those customers introducing innovations.
Take our commercial capability, expanding commercial capability partner and helped us practices succeeds that thats really the focus the.
Lot of lot of competitive intensity, but that really hasn't changed and we continue to do well and we continue to experience moderate price increases on the 2% to 3%.
Net net basis, so we're feeling good.
Great and a few surprises I thought in the BNL, So I'll stick high level of your thoughts on and willingness to work with other players in the industry to help drive diagnostics growth and what I mean, why that is that's ultimately what you want to new you're working with Trupanion shape, where form in pet insurance, but there was chatter and via Max that youre going to partner.
Julien with their sort of their pet descriptions platform and so.
Leading the company I'd love to get your thoughts on how you see these opportunities are evolving for the company over the next couple of years in IDEXX his willingness to take a more aggressive role there. Thank you. So we've had ongoing partnerships.
With.
Specialty diet, and Barba and software companies in the marketplace. The way we tend to think I'll address that the software piece and the integration piece specifically the way we tend to think about that as we take an open systems approach. So.
A group of customers once it reaches a certain size of critical mass kept us and say that they would like us to integrate in application into our Pim systems and we do it we we want to be able to give to customers.
The workflow that that they desire up but in terms of.
Overall partnering at the MX weight we.
Dissipated in adult Park study, which showed that.
Efficacy the superior efficacy and fecal antigen, so always looking for ways inappropriate.
Set of partnership structures of developing the market for diagnostics.
Okay, Thanks for telling us.
Thank you and next question will come from the line and right with credit Suisse. Your line is hoping.
Great. Thanks.
Question, just given some of the bundling tactics of your competitor dairy.
Thank you can better leverage Gerry.
You mean in this market as part of an agnostic player, but also partnered with large pharma manufacturing to your own creative bundling with therapeutic or other product offering I guess have you contemplated that sort of partnerships that collaboration more. So recently then you have an impact I'm just curious how that's evolving.
Yes, so when we when we talk to customers what customers tell us is that they when they're looking at diagnostics and then looking at at what solutions to adopt a day.
I believe that it's highly differentiated it's a highly differentiated category in their practices. If say, it's a decision that they make the lens of how to deliver best care. It tends to be separate from how they think about therapeutics or specialty diet they are making.
Typically long term decisions because of systems that they are buying that that need to be integrated that they may have in their practice.
Five 510 years, so from a buying standpoints to add that partnering decision that the customer really separates those too so the.
That has into that Hasnt changed with the recent.
Acquisition of some of our competitors.
Okay. Okay. That's helpful and then where where do you stand now in terms of market share on your tenants. This Dan.
Where we add across the industry in terms of converting to cloud the sedans and in key speak to your positioning on the competitive front there as we head into some sort of potential ways.
Great. Thanks.
Yes, so we.
We did we've got very well this year in terms of PIMS placements.
Cornerstone, we've we've been able to upgrade more than half of our installed base quarter started with a completely new user interface, we've been able to do this because we have a field base.
Organization up field service reps will go out and partner with customers.
We also are Neil system, which is really more geared towards general practice customers and mobile customers.
His native cloud base. That's received just I think very enthusiastic reception and we've been able to grow that nicely, but but the key is it's not so much in the pin system for saying it's in the connectivity that were able to provide with between software and our diagnostics and the applications that worked together so what customers.
Palaces. They appreciate RPM systems, but what they really like is they like the fact that it all works better together, so the pins and the applications and Vetconnect plus in the diagnostics and that ability to support their workflow politically and from a business standpoint and capturing.
Charges and work that they do is what sets us apart and continues to really provide strong differentiation.
Okay. Thank you.
Thank you next we will go to line up and to Cooper quite Raymond James Your line is open.
Thanks for the question everybody I've been asked so I'll keep it relatively brief but just on Marshfield has has the integration gone as expected was there anything that sort of surprised you and I guess from.
From a customer reaction perspective, I think sometimes we view.
Some of the regional players as some have viewed as an alternative to.
The larger options that are out there in the market. So has there been any pushback from customers.
And then from a margin perspective.
The gross margin I think in Fourq, you would maybe a little lighter than we had expected so.
What's the opportunity kind of on Marshfield and in general how much maybe didnt mix impacting the quarter, but on Marcia specifically.
To capture synergies and get kind of that incremental revenue up to a.
Similar to your consolidated lab margins are kind of how you view that in terms of the extra capacity that you've added with the acquisition. So any color there would be great and I. Appreciate the feedback right. Yes. Other partially helped partially aggression on track were excited by Marshfield It right.
Welcome to over 2000 customers from our shelf and they now have access that the I'd excess differentiated Tessa like SDMA and fecal antigen and Vetconnect plus and the initial reception has been enthusiastic from from the us.
Customers, we keep and keep in mind that a good number of those customers were IDEXX customers already they use one of our modalities I may have you started our software systems that it's not like they Didnt know US is just gives us a chance that work more closely with them and to provide.
Reference lab services I'll I'll turn it to Brian Brian we thought to make a remarked on margin and what we see there as expected we as we're working to integrate Marshall. There. There is there are some impacts from that and that we did highlight that as.
One of the factors and that will continue into the first half. We're we have work going on on that front, but.
Overtime I think we're we're we've demonstrated and we're confident.
The addition of customers into our National Lab network and supporting them through our over 50 labs now in the US which is how we think about this businesses national business is something that we would.
Anticipating getting leverage from owners supporting the longer term goals that we have for for margin improvement from a reference lab network. So it wasnt near term factor will be in near term factor to a degree and we'll get leverage in that overtime will support our margin improvement going forward.
Thanks, I'll I'll leave it there.
Thank you.
And we'll take one final question.
Yes. This will be last question. Thank you. Thank you that will be from the line data at Westenberg with Guggenheim Securities. Please go ahead with your question.
Hey, Thanks for taking my question so.
Some of the feedback from from veterinarians on the cytology answer Matt as perhaps it starts the conversation in oncology, so I apologize I'm going to Cascade industry kind of wide question here, but.
This is.
How do you see the I'd encourage you market kind of playing out in the next stage three to five years has their opportunities here and diagnostics in the reference lab is their opportunities in therapeutics.
The way, we have any human market, where wed say.
Cancer profiling early detection to cancer, just if you can give me kind of a broad overview that maybe just cytology kind of start that conversation.
Yes, so the oncology services is something that exists in the marketplace.
Today, it is centered more around specialty practices ad.
Yes, there's lots of different areas in.
Colleges sector are on human side in terms of both drugs as therapeutics in the next system. The sad chemotherapy sets up that's a very broad question with lots of different areas from up a diagnostic standpoint, that's something we're always taking a look at there's around genomics and proteomics and being able to.
Tact cancer earlier.
Certainly digital cytology in many instances you're looking for cats ourselves it.
It does begin that that discussion when a patient comes in with lumps and bumps and wants the.
Whether or not there their patents okay.
Okay, and so with that thank and with that will conclude the call I want to thank our employees for the very strong progress and performance in Q4 for the full year of 29 team and for the advancement of our purpose, which is enhancing the health and wellbeing of pets people at livestock around the world.
In Q on ladies and gentlemen that does conclude your conference call for today. Thank you for your participation at these in 18 <unk> executive teleconference.
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