Q1 2020 Earnings Call
Good morning, and welcome to the IDEXX Laboratories first quarter 2020 earnings Conference call. As a reminder, today's conference is being recorded participate.
In the call. This morning, R.J., Mazelsky, President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John Readiness Senior Director Investor Relations I'd actually like to purpose for discussion today with the caution regarding forward looking statements listeners I reminded that our discussion during the call will include forward looking statements that are subject to risks.
And uncertainties that could cause actual results could differ materially from those just got 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 Securities and Exchange Commission, which can be a chain from the FCC or by visiting the Investor Relations section of our web site IDEXX Dot com.
During this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or gap.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which May also be found by visiting the Investor Relations section of our web site.
In reviewing our first quarter 2020 results. Please note all references to growth organic growth constant currency growth and comparable constant currency growth refer to the growth compared to the equivalent period and Twain 19, unless otherwise noted.
Allow broad participation in the Q1 day, we ask that each participant limit his or her questions to one with one follow up as necessary. We appreciate you may have additional questions. Please feel free to get back into the queue and if time permits we'll take our take your additional question I would now like to turn the call over to Jay Mazelsky.
Thanks, and good morning, everyone welcome to the call today, we're pleased to report strong Q1 results. Despite late quarter impacts from the Cobot 19 crisis as will discuss the covert Nike pandemic is impacting our cat customers and unusual ways given broad based social distancing efforts, which are changing the ways that variance.
Our prioritizing and providing care we're working through these near term dynamics ensure that were fully supporting piece essential health services it away that prioritizes customers needs.
We're doing this while we continue to advance our business strategy today, Brian will review, our Q1 results and provide an update on current trends that we're seeing in our markets and our business. He will also described the steps were taken to mitigate near term impacts and position ourselves for a strong and sustained recovery in the highly attractive pet health care more.
I will then talk more about how we're seeing trends above in the market and how we're managing our business for the near term and the long term in this context now I'll turn the call over to Brian.
Thanks, Jay and good morning, everyone will be using a somewhat different format for todays financial review I'll begin with an overview of our first quarter financial results, which resulted in solid revenue and profit gains despite linked quarter impacts related to the cobot 19 pandemic.
Well then spend time discussing the near term dynamics that we're seeing the companion animal health care market, including evolving impacts from cobot 19 containment approaches on clinical visits and diagnostic testing levels.
Review, how we plan to managing this environment and highlight the steps we've taken to mitigate near term piano impacts and strengthen our balance sheet and flexibility too busy to position our business for a strong recovery.
Well, we're optimistic about the ability the pet health care market in IDEXX is business in particular to rebound strongly from near term covert 19 effects withdrawing or for your financial guidance as we work through these dynamics as such we won't be providing an update on that front today.
Let's start with an overview of our Q1 results.
Our next delivered 9% organic revenue growth in the first quarter supported by 10% growth and CAG diagnostics recurring revenues, reflecting double digit gains across both us and international markets as well a solid gains in our water and LPD businesses.
Overall organic revenue growth benefited by less than 1% from accelerated stocking orders in our water and LPD businesses related to the coven 19 pandemic.
Through early March woke CAG diagnostics recurring revenue gains were trending very strongly above the high end over for your goals for 11%, 12% organic growth.
We were also tracking towards an excellent instrument placement quarter, driven by continued momentum in new and competitive catalyst placements globally.
These gains were against a backdrop of improved market trends reflected in 4% same store growth and U.S. clinical visits through this period.
Yeah, social distancing policies advanced more broadly in Europe, and the U.S. through March and as vet clinics adapted to prioritize health care procedures to align with interest Green government guidelines, we saw significant declines and clinical visit activity and restriction on access to vet clinics, which moderated or Q1 revenue gains.
Despite these impacts our business momentum enabled strong overall Q1 organic revenue growth across our modalities.
Global reference lab revenues increased 9%, reflecting 8% organic gains and approximately 2% growth benefit from acquisitions offset by a 1% FX headwind.
Through early March Global lab organic growth rates were excellent driven by continued mid teen organic revenue growth in the U.S. and high single digit gains in international markets.
For Q1 overall late quarter, social distancing impacts can screen U.S. lab organic growth to high single digit rates and international lab organic growth to the low to mid single digit range.
IDEXX Vetlab consumable revenues increased 14% on inorganic racist despite late quarter, cobot, 19 impacts, reflecting low double digit gains in the U.S. and mid teen growth in international markets.
Our consumable revenue growth results through early March were also very strong benefiting from an expanded premium instrument installed base sustained high levels of customer retention and continued gains in testing utilization.
The quality of CAG instrument placements remain high in Q1 reflected in 238 catalyst placements at new and competitive accounts in North America, and 698, new uncompetitive placements in international markets.
We also benefited from 273 second catalyst placements driven by momentum with North American customers.
These gains and sustain high customer retention levels supported a 17% year on year growth in our global catalyst installed base.
We also achieved 760 premium hematology placements in 408, Sedivue placements, bringing our global Sedivue installed base to over 9300 instruments up 32% year on year.
Restriction on access to vet clinics in late March lifted deferrals or quarter end placements, however, which contributed to year on year instrument organic revenue declines of 16% overall in the first quarter.
Rapid assay revenues increased 6% organic way in Q1, despite late quarter Cobot 19 impacts supported by solid volume growth in snap 40 X plus first generation and specialty products and moderate net price gains.
First quarter results reflected normal promotional and customer stocking activity, which supported volume gains ahead of the peak to testing season.
In other areas of our CAG business, our veterinary software in diagnostic imaging revenues achieved 11% organic growth supported by continued strong gains in recurring service revenues as well as sustained solid sales of new cornerstone and digital imaging systems, and strong growth and our neo and Smartflow cloud based software offerings.
Overall gains were also constrained by cobot 19 related impacts on vet clinics late in Q1, which led to a deferral of new software and digital system installations.
Turning to our other business segments, we saw strong performance in our water note PD businesses in Q1.
Water revenues increased 15% organically, including an estimated 2 million or 8% growth rate benefit from accelerated stocking orders.
Overall, our water business demand has remained solid globally as drinking water testing remains an essential service and priority for local governments and utilities.
Livestock poultry and dairy revenue increased 12% organically in Q1, including approximately 3 million or 9% growth rate benefit from accelerated stocking orders.
LPD results benefited from demand for from demand for diagnostic testing programs for African swine fever, and improvement in core swine testing volumes in China.
We're also seeing continued solid growth for poultry testing.
Overall LPD gains were constrained in Q1 by lower heard health screening levels compared to strong prior year results impacted by the rebuilding I've heard populations in key Asia Pacific markets, which is reducing export supply.
Livestock diagnostics are also considered essential services supporting continued demand for LPD products.
Turning to the piano profit results were strong in Q1 benefiting from solid revenue gains and controlled operating expense growth.
Operating profit in Q1 increased 8% as reported an 11% on a constant currency basis, driven by solid operating profit growth across our CAG water and LPD segments.
Operating margins increased approximately 30 basis points on a constant currency basis, reflecting operating expense leverage on strong revenue gains.
Gross profit increased 8% as reported or 10% on a constant currency basis in Q1.
Gross margins were relatively flat year on year on a constant currency basis as benefits from strong consumable and water growth and continued moderate net price gains were offset by relatively lower margins in our reference lab business, reflecting late quarter pressure on lab revenues related to cobot 19 impacts lab capacity and.
Vestments advanced in 2019 and effects from the integration of the Marshall acquisition.
Operating expenses in Q1 increased 9% as reported and on a constant currency basis.
Operating expense increases were driven by cost related to the expansion of our global CAG commercial capability advanced advanced in 2019.
And growth in corporate general and administrative costs, including the Onboarding of our Westrock remain headquarters expansion.
During the quarter, we benefited from early efforts to prioritize investments in control discretionary spending to mitigate emerging covert 19 impacts.
EPS in Q1 was $1.29 per share, including tax benefits of 6.6 million or eight cents per share related to share based compensation activity activity.
On a comparable constant currency basis, EPS increased 13%.
Overall, we're pleased to have delivered strong financial results in Q1, despite linked quarter headwinds related to the cobot 19 pandemic.
Let's now spend some time discussing how social distancing policies and associated restrictions on business activity are impacting veterinary clinic visits and our CAG business in the near term.
Clinical visits have been impacted significantly by the cobot 19 pandemic through the implementation of social distancing protocols as well as industry guidelines for the prioritization of sick patient and immersion cheat emergency procedures at vet clinics.
These dynamics can be seen in us vet clinics tracking data, which is shown in that routing snapshot on our IR website.
We've added weekly tracking data for 2020 clinical visits extended through the week ended April 24th in the snapshot.
As well as detail for wellness and non wellness business.
As shown in this data for the first quarter through early March on a same store basis clinical visits were up approximately 4% in the U.S. solid improvement from 2019 trends.
As social distancing procedures expanded in March we saw sharp correction in these trends with same store us clinical visits declining approximately 25% for the weeks ended March 27th through April 10th with 15% to 20% year on year declines in sick patient visits and 35% to 40% declines in wellness because.
This during this period.
We saw similar dynamics in European markets with more significant declines in severely impacted regions, like Italy, and Spain, as well as markets, which we implemented more restrictive stay at home policies like the UK.
In addition to this clinic clinical visit data, we've been monitoring Rolling weekly averages for chemistry slide run volumes and rapid asset runs through our global Smartservice connectivity as well as rolling weekly trends for accession volumes in our reference labs.
In the late March through the early to mid April period, we saw meaningful pressure and diagnostic testing levels associated with restrictions on veterinary clinical activity.
These initial impacts are relatively more significant in our reference lab and rapid assay businesses with average weekly volume declines of approximately 30% in the us and approximately 35% in Europe. During this period with more moderate impacts in Asia Pacific markets.
Testing volume and these modalities were impacted in part by the de emphasis of wellness testing clinics as part of the pandemic response.
Response, consistent with industry guidelines.
Vetlab in clinic chemistry, when volumes are relatively less effective during this initial period reflected an approximately 20% run declines in the us and 25% declines in Europe.
These metrics reflected lower test utilization utilization levels as well as moderate reduction in the number of clinics actively operating during this initial high impact period.
Over the last two weeks, we've seen significant improvement in clinical visit and diagnostic testing trends.
These changes reinforce the high resilience of demand for companion animal health care and May indicate that we work through the bottom of near term cobot 19 effects on veterinary care.
For the most recent weak end of April 24th overall us clinical visits declines have moderated to 15% year year with only 9% year on year declines for sick patient visits and 24% year on year declines for wellness visits with steady improvement across us regions week by week.
We're seeing similar indications of improvement in European markets in Asia regions, where which were impacted at an earlier stage by the pandemic.
In terms of our business, we continue to see pressure and diagnostic testing levels. However, these impacts of improved meaningfully.
In the us in Europe on a rolling seven day basis, IDEXX Vetlab chemistry run declines have now moderated to approximately 5% year on year and reference lab session volume declines have moderated to 10% to 15% overall with continued steady weekly improvement across regions.
Chemistry, slide runs and leading edge markets like China have actually returned to double digit growth over the last eight weeks following significant initial impacts on clinical activity.
These changes vary by region, a may change depending on region specific dynamics related to the cobot 19 pandemic, but overall recent trends have been very encouraging.
As we track data on Carbonite in related impacts over time, some insights are emerging when insight because that most veterinary practices have sustained operations as an essential services through this initial high social distancing period positioning the market for a strong recovery.
In the U.S. are tracking of the number of customers doing chemistry runs only declined to about 90% to 95% of prior year levels. During the peak pressure period in early April and has now returned to prior levels over the last two weeks.
Active customer tracking metrics have also rebounded strongly in Europe, where we saw more meaningful reduction in active clinic levels earlier in the over 19 expansion in lockdown regions, like Italy and Spain.
We're seeing the same structural market strength in Asia Pacific regions as well.
A second insight as that is that the effects of on diagnostic testing levels appear to be heavily influenced by the stage of development of Copel 19 case management and the associated stage of stay at home as social distancing procedures.
Theres a significant variation in the level of decline into diagnostic testing volumes by region.
Regions with higher relative covert 19 cases, and expanded lockdown policies have experienced much more significant clinical visiting diagnostic testing volume declines.
As an example clinical visits in the northeast US declined approximately 35% in late March to mid April will southern Eureste regions decline approximately 20%. During this period with more recent data from southern us region, showing year on year declines of less than 10% overall.
Internationally near term pressure on lab accession volumes in regions like Germany have been much more moderate compared to markets with extended lockdown conditions like the UK in Canada.
In Asia Pacific markets. We're also seeing moderated impact in regions that are farther along in terms of managing pandemic effects, including recent solid growth in IDEXX Kim lab chemistry runs in markets like Australia, which has less restrictive social distancing controls.
This is dynamic will continue to margins monitor and which is challenging to project.
Overall, it does appear that as regions more past peak levels for covert 19 cases, and adjust stayed home and social distancing procedures near term pressures on clinical visit activity and related diagnostic testing lessons significantly.
While we remain very optimistic about the health of the healthcare market and IDEXX is ongoing growth opportunity reinforced by recent encouraging trends.
Over 19 pandemic effects will pressure, our near term revenue revenue results.
Given the high gross margin over IDEXX, Vetlab and rapid assay products and our intent to sustain our reference lab operating a service capability to position ourselves for recovery in demand as market restrictions are lifted.
We anticipated we anticipate a high level of gross margin flow through impact from near term CAG diagnostic recurring revenue pressures.
To mitigate these impacts we've advanced prudent steps to reduce planned operating expenses by approximately 25 million on quarterly basis compared.
Compared to the original plan levels.
This includes temporary reductions in salaries of 30% for the CEO, 20% for officers and senior executives and 10% for the majority of other salaried employees, which we plan to cease overtime as business conditions improve.
As well as temporary freezing of four one k. matching contributions and suspension of cash compensation for IDEXX is board of directors.
Our balance sheet is in a very strong position and we've taken additional steps to strengthen our liquidity and flexibility to answer business strategy and market position during this period.
We ended Q1 with leverage ratios of 1.70 times gross and 1.59 times net of cash.
81 million and cash and 362 million in capacity available on our then $850 million revolving credit facility.
In April we increased committed financing availability by $350 million by expanding their credit facility to $1 billion under new three year agreement and by issuing 200 million of 10 year, 2.5% fix rate nodes.
In the current environment were prior to his funding of our business operations and have suspended or stock repurchase program.
Overall, we're very pleased with the strong momentum momentum demonstrated in our case or business in Q1.
We've got a great business model and we're confident we can manage effectively through near term impacts from covert 19 in our CAG business, while positioning ourselves for a strong recovery in the highly attractive and resilient companion companion animal healthcare.
That concludes our financial review I'll now turn the call over Jay for his comments.
Thank you Brian for your comments on Q1 financial performance.
We're pleased with our solid Q1 results despite linked quarter impacts from the Koeppen 19 crisis, we went into the year with strong momentum into early March global CAG diagnostics recurring revenue gains were trending above the high end of our full year goals for 11% to 12% organic growth, we were still able to deliver 10 per se.
Outage points CAG diagnostics recurring organic growth in Q1 supported by double digit growth in the us and international in spite of impacts from China in the early part of the quarter from Italy in early March and then for much of Europe, and North America. Shortly thereafter.
Instrument placements for excellent in Q1, resulting in sustained year over year levels of catalyst.
Our catalyst installed base grew 10% in North America, and 25% internationally with the overall premium instrument installed base, increasing 15%, we developed a new remote inflation process for instruments, which also supported placements impacted regions.
The IODEX preventive care program enrollments also achieved record levels with approximately 400, new enrollees in more than 4200 cumulative enrollments since program inception. This was accomplished despite late quarter impacts from cobot 19.
Customers continue to embrace the IODEX preventive care turnkey solution in record numbers and increasingly view it as a foundational element to their care offering, though we expect in some cases for implementation and take a bit longer due to covert 19 impacts the IODEX preventive care program will be a key element of what we and our customers see as our recover together.
Our plan for North America.
Our product innovations announced that the MX were launched on schedule and where enthusiastically graded by customers. Our digital cytology placements starting in early March were primarily sell to larger IDEXX customers via our I'd X 360 program customers are enthusiastic about our test promise of results and expert interpretation and under two.
[music] hours.
24 hours a day seven days, a week 365 days a year.
Catalyst bile acids with reference hub quality performance was also launched in the quarter.
We're pleased with adoption to date with over 340 customers Sedivue narrow network 5.0 updates began rolling out in March and advanced bacterial detection kit started to ship at April.
Our innovation highlights also included the announcement in Q1 that we would begin monitoring clinically symptomatic pets for covered 19 infection. We then announced that April that we would offer this test commercially throughout the world based on a small number of confirmed cover 19 cases in cats experiments have demonstrated the susceptibility of cats in Paris and.
Veterinarian demands for testing option, we expect this veterinary test to not have an impact on human covet 19 testing or test availability.
Additionally, the company's human health business Opti medical systems is advancing support of human Covet 19 testing with the validated PCR task. It enabled by IDEXX his expertise in livestock PCR test development and manufacturing.
It is intended for limited initial distribution to existing customers, including labs, serving animal production needs that have been re purpose for human Koeppen 19 testing.
Moving to software, we saw excellent ongoing momentum in our software business, which I'll speak to later with over 10% growth and PIMS placements in North America record orders for Smartflow at with now over 4800 customers on web pack subscriptions.
Moving to a quick update and our European core lab located in corn West time, Germany, we've begun testing in it remains on track to transition by the end of Q2, we're excited by the World class capabilities. This facility, which is 50% larger than our next biggest lab will bring to our European reference lab customers. Our team is.
On an amazing job to stay on track despite the pandemic.
Finally, our water and livestock poultry and dairy businesses. Both performed solidly in Q1 demand for livestock diagnostics testing is also considered essential and we're seeing sustained solid demand in our LPD business.
Brian highlighted some of the dynamics, we're seeing in a market in our testing volumes from Cobot 19 next I'll discuss how we're managing in this environment, helping our customers and positioning ourselves for the future.
Let's start with how the cover 19 pandemic is impacting the IODEX workplace and employee safety approximately 60% of our employees are now working from home, we've invested heavily in telephony and IP infrastructure over many years. So that we were able to transition a majority of our employees home without missing a beat still other jobs require employees to.
On site like doesn't manufacturing distribution and the reference labs, we've instituted practices at these locations to minimize risk like staggered shifts or frequent and deeper cleaning and local social distancing procedures.
Our teams continue to stay highly engaged and productive not only have we launched products on schedule like the previously mentioned digital cytology service catalyst file assets at advanced bacterial detection for Sedivue, but we continue to advance our product pipeline as our teams are adapting to the new circumstances in highly creative ways.
Moving to how veterinary practices are being impacted they're experiencing similar challenges as other businesses based on client visits. The good news is that veterinary practices of the David designated as essential businesses throughout the us and in almost all countries. The vast majority are open and operating and we're still performing.
Essential services for their clients caring for sick and injured pets in need of attention demand for other services, including wellness visits and elected activities have slowed due to government policies and guidance from veterinary organizations designed to control covered 19 spread.
So our veterinary customers consequently, seeing fewer patient visits at this point volumes impacted our inline with the aggressiveness of social distancing procedures. Many services are only deferred and we believe will return relatively quickly as in past downturns. Once the recovery begins we believe the bond between people and their companion animal.
Family members is as strong as ever as Brian noted, we have seen dampened demand relatively more and I referenced that business versus testing in the clinic. This is related in part to fewer preventive care visits versus those involving a sick patient.
Further practices like all businesses are also concerned with workplace and employee safety. They have instituted practices like curbside drop off and pickup robo checking bill pay along with the creation of modified shifts for veterinary staff to ensure care team well being and continuity for clients. Our field service organization has played in it.
Pardon roll, helping customers make these required adjustments to their practice workflow in the student new Covent 19 environment.
I'd like sales professionals have also adjusted well to this dynamic continuing to generate demand for our products and services virtual visits that standard can be highly sophisticated our sales professionals are using tools like web extra demos and docusign to bring pipeline deals across the line.
We also continued to visit practices when requested by a customer and with an appointment abiding by necessary safety procedures are in person availability has been welcomed by customers and in April constituted about 25% total us visits.
Then areas look to business partners, and all times, but even more so now to have sufficient product supply on hand, and be able to supply services like reference lab testing in an uninterrupted manner.
They want to focus on their businesses and know that their partners can handle there's IDEXX as performed exceptionally well in this regard and we have high confidence that we can continue to do so in the future. Our manufacturing operations are largely based in the us and we have excellent visibility to secondary suppliers for key components and products that we do not directly.
Manufacturer.
Our reference our performance has been especially noteworthy and lighted the disrupted flight schedules challenging logistics at more complex workplace procedures to keep lab in play assays.
With over 80 labs worldwide not unexpectedly theres been a handful of instances, where it's needed to temporarily shut a facility for a short time due to an employee being or suspected of being infectious.
Because of our network lab capability across regions and geographies, we were able to seamlessly toggle to an alternative lab without service disruption or deterioration. These capabilities are unique in the industry and only possible because we have made significant investments over very long period of time in lab density common labs and for me.
Hi, Good management systems, Farrior route and logistics capability. We also deployed a global lab digital cytology service in the middle of all this another example of global agility and advantage.
Our commercial execution also continues to be noteworthy our expansion in the US was completed going into Q1 and the team seamlessly settled into their new territories and account assignments account managers continue to call out customers with similar frequency, but now the majority of visits or virtual our European Cup.
National team continues to mature into VDC model and is also performing at a high level, we entered into the year with record customer loyalty across modalities and all actions taken to date have been taken with a long term view to continue to earn us loyalty for years to come.
I'd like centenary software and services are also playing an important customer enabling role in this pandemic right now customers being forced to rethink how they deliver patient care and IDEXX, a software solutions, both new and existing to help them adapt the IODEX telehealth offering includes a multiple third party and close model.
The third party telehealth integrations into our global PIMS offering 90 day free secure remote access for our cornerstone customers the ability to use smartflow through an iPad from their parking lot for curbside check in and contact with payment processing integrated with the right expense.
These capabilities enable customers to de lever remote care as well as continued to see patients in their practices, while biting by social distance and guidelines.
We also believe that in the medium term telehealth can expand demand for diagnostics the deeper pet owner client connections enabled by real time convenient communications that millennial pet owners expect and pet owners of all ages. Appreciate further tele health has a potential to expand patient access, especially for cats comprise.
Only approximately 20% to practices its today.
Next I'll share a snapshot view of the health of the business. There are broad macroeconomic uncertainty systems, the depth and length of the impacts from cobot 19. Consequently, our focus has been on what we can control on our plans for recovery, we took quick and deliberate action to prudently control costs, while leaving us well positioned.
For future growth. These included temporary salary reductions reductions in essential business and capital expenses and the cessation of stock buybacks. Our intent is to cease those reductions that are temporary like salary reductions as conditions improve critically. These actions were taken in ways that allow us to preserve the considerable strategic advantages Tam.
Okay and organizational engagement, we have as a company.
Our financial strength has allowed us to support veterinarians at a time when they need us most and I believe they will reward our approach with their business long into the future. We have taken practical actions, which extend payment terms for customers needed as well as to provide near term flexibility for minimum commitments, while maintaining these long term diagnostic part.
And ship agreements with customers customers have given us and we'll continue to give us as much testing volume as possible. Our focus is therefore to support the health of their practices and allow them to focus on delivering excellent medical care in the challenging environment and when the time comes support them as they quickly rebuild client traffic.
We participate in great markets nothing has changed in this regard due to covert 19, social dispensing practices that have temporarily limited veterinary visits if anything pet owners have become even more attached to their companions as a spend even more time with them at home.
Adoptions and fostering at an all time high and breeders in many instances report waiting list of 12 or more months and most importantly, pets still need to go to the veterinarian and most pet owners do not consider these visits to be discretionary.
Diagnostics will continue to play a central and growing role in the care of the patient as well as practice help many practices have seen accelerating impacts from etailers gains in online sales of food and medicine.
This has business that is not likely come back at the same levels that variance will continue to look for practice categories like diagnostics that are medically necessary drive the care envelope and almost always best on in the practice.
Our belief is that as a result of pent up demand from covert 19, which has constrained care that is desired and needed, though perhaps not time critical veterinary practices might experience a stronger V shaped recovery than the vast majority of other market segments.
See some early evidence of this in select markets like China, and Australia and regions within the US where these markets have begun to relax strict sheltered home policies.
Practices will be in good shape to meaningfully take up where they left off though they have reduced hours and furloughed employees in some instances, we believe that there isn't structural damage to the industry or the balance sheet of practice centers.
As practices rebuild client traffic with a focus on wellness care will be there with our strategic advantages fully intact. We're using this time wisely continuing to advance our product pipeline strengthen relationships and provide exceptional day to day service.
Unique capabilities that we bring our now even more widely appreciated and keep in mind that this is a highly resilient business with history of the outperforming in economic recovery period.
While these are difficult times, there to partner reminder of our company purpose and that what we do makes a big difference in the lives of pets people and livestock.
I'd like to express my deep appreciation and thanks for the team for their extraordinary support during this period.
Now we'll take questions.
Ladies and gentlemen, as a reminder, our process for questions have changed please press one than zero on your Touchtone phone.
You'll hear an indication that you've been placed in Q.
And you may remove yourself from the Q by pressing the one than zero command again.
If you're using a speakerphone please pick up your handset before pressing any buttons.
Again for questions press, one than zero at this time.
Our first question will be from Michael Raskin with Bank of America go ahead. Please.
Thanks for taking questions guys.
I want to talk about some of them the steps to just placed on the cost call from the salary reductions you implemented early in the quarter can you talk us through the rationale that.
Capital to the sooner and was more significant than initially expected you talked about the V shaped recovery in the sharp.
Down and yet.
Those are some a meaningful meaningful cost is there any concern that you could see increased employee turnover potentially that some of your competitors as a result of this and what criteria are used to determine what you'll with some of these measures will give an improvement.
Sales in that market.
Sure I'll cover some of the high level, our high level thinking and philosophy behind US and then bright may want to talk through some of the specifics in terms of how we were thinking about that we have a great business. We have a great organization, we really.
Croak shifts with the idea that we want to that we're going to come out of this that we're going to come out of this strong that the market that pet owners love their pets that they believe that taking their pets to that variance and and getting testing is the right thing to do we know that veterinarians belief that testing is as good medicine.
Ended uncovers disease, and so we wanted to approach us at away that allows us to maintain all of our strategic advantages yet either advantages that we built up not just a year or two but over the over decades.
You take a look at the reference for example, 80 plus reference labs comment Labs information management systems Korea room service levels.
That are exceptional including weekends, we don't want to lose any of that capability, we don't want to.
We want to be able to continue to execute our product roadmap maintain high engagement in the organization continue to deliver exceptional service levels make sure that we have supply when when customers need it and most importantly, if you take a look at our customer facing organizations maintaining full staff level.
And being able to continue to serve customers is even more importantly, so we did this had away that we think it was prudent that maintains engagement that the organization understands and responded to positively and said that as we as we come out of this all these strategic advantages.
Okay and engagement remains intact. So Brian did you want to address any of my I think we as I mentioned in some of the the commentary we provided a early on in those I think the stay at home policies and.
That were being implemented late March.
Very early April were we were seeing significant impacts and we didnt have clarity on how that might evolve and thought it was prudent to.
To get out in front of that and as Jay you highlighted we had a goal of protecting employment and trying to find ways to mitigate what we.
We're expecting in terms of some near term impacts with without.
Damaging our underlying ability to advance or business strategy or or serve customers and I think.
The intent was to seize those cuts we knew it made sense I think we're very encouraged by the recent trends.
It is improving.
Significantly day by day, and so I think we'll we'll keep an eye on us, but I think that was that was the intent.
The changes were implemented at a time, where I think the the depth of the impact from the social distancing policies wears was more significant.
Our next question will be from the line of Aaron right with Credit Suisse go ahead.
Thanks going.
Hi, good changes in the competitive landscape at this point.
Good day.
Competitor disruption.
Do you care side or reference lab.
Given that you can withstand this quarter volatility would be a little bit more Paul.
The next thanks, a question Aaron Yeah, we've always said that our markets that have historically been very competitive it's no different now even if it's within the corporate 19 environment. They continue to be very competitive we're very pleased with away with.
The inroads that we continue to make in terms of if you take a look at the competitive catalyst placements globally, we were up 17% premium installed base year over year.
15%, we continue to expand reference lab testing.
Point of care solutions like Vetlab have held up relatively well.
In the Cobot 19 environment now part of that is due to the fact they support.
Or sick patient testing with real time results. If you take a look at the reference lab for example, before the culprit 19 impact we were at a saw solid middle teens in the us from a growth standpoint high single digits internationally.
So we did see some drop off in volume in line with the visit and prioritizing case management. This is Brian described it but we've also seen even.
Now with the with the drop off and the.
Beginnings of a recovery that customers have a.
The new appreciation of far deeper appreciation for what we're bringing in terms of service levels Lab network density corrugated logistics all of those things and I think what they're saying from from some other participants in the marketplace is they don't have that capability in that footprint to be able to provide that level of service.
Okay, Great and then can you remind us of the sustainability of pricing across your business in prior economic downturn can you update.
Thank you how minimum purchase agreements associated with consumable very impacted from the covert disruption.
Yes. So from the ended Q1, we continue to realize.
Modest price realization up between two and 3%.
Relative to future pricing dynamics, where we're certainly not going to forecast that today. The thing that I would point out is that customers don't just think about price per say they look at price within the context of overall value from what they get we're always pressure testing the economics within that.
You construct in terms of actually the programs themselves.
We do have volume, we do have volume based commercial programs and in some cases were making allowances for rebalancing obligations were programs just.
I think reflect than reality that theres, some reduced client trafficking and testing volumes and I want to be able to support our customers through that.
And our next question will be from the line of Jon Block with Stifel Go ahead.
Hi, Thanks, guys. Good morning, maybe for Jay or is there way to think about.
Well, what sort of loss versus deferred revenue in other words your growth has been so consistent and durable every year around 10% to 12% organic.
If the growth just throw to numbers up low single digits. This year.
Well, we think about 2021.
We sort of go back to that 10 to 12 off of that low single digit number.
Or is there a chance for call it.
In a big acceleration mid teens growth.
As we think about the deferred coming back and I think this is an important area that we're trying to get their arms around I'm defaulting to lost revenue because in emergency would've occurred and I don't think you do to wellness isn't one age 21, but maybe you can go and talk to that that'd be helpful.
Yes, I think as as you point out John is it's a little deferral difficult to estimate at the moment I think our feeling is that there will be a level of pent up demand here for care that will come back as people were able to access vet clinics is it is likely theres a level of kind of sick patient.
Care that.
Is just going to be lost in terms of the the impacts at this time and this is just until we kind of work through this and going to get back to what we think is going to be a rebound to two to two good place in terms of the industry's health it's a little.
Tough to project that out which is why we're moving away from guidance at the moment, but I think the under we feel the underlying fundamentals of the industry are.
Very sound, we think that.
Working through the dynamics with their customers will only reinforce these advantages that we have as a business I think we'll be very well positioned to grow as we come out of those yeah I'll share with you John It a couple of things, where we're hearing from that Aaron Let me focus on.
While this because to your point, if the patient this sick and or need to the surgery. They have obviously still have the opportunity to do that if you take a look at tier one we had a record number of preventive care enrollments in the first quarter for 400 sat puts the overall program at 4200 to date as I indicated earlier.
The important thing about preventive care just as a category is pet owners see that as something that's not discretionary something that they truly prioritize for their pet and more and more what practice centers and veterinarians are telling us is not only to they consider the split medicine, because that uncovers more and drive.
Karen blog, it's important to their practice economics, it's important to client engagement say said it from both the medical necessity and practice health standpoint. So they are chomping at the bit that speaks to what Brian.
Ahead indicated where we are relatively optimistic around sort of this pent up demand had more of a V shaped.
Recovery.
It's part of our it's going to be part of our recovery strategy recover together strategy to emphasize that there's still tons of work to do on sick patient testing.
In addition to preventive care. So we're we're relatively optimistic.
If you maybe follow up in that that last 0.1 thing that we're hearing about koby 19 is the change of workflow.
Within the practice curbside pickup.
Sort of spacing out the visits more entities, reducing the overall number of is just from a war perspective, and I think it's unclear how long that hangs around right. How it plays out over time. So you talk about this V shaped recovery, but do you have any concerns that this altered workflow as a lasting impact sort of which results in a more port tractor.
Returning to normal for the industry. Thanks, Yes, I mean, this that that just a couple of observation share. The first couple weeks, then dairy practices. They struggle to adapt workflow I mean, partly it was.
Drop off in visits partly as you describe it they extended ahead to extend appointment blocks and it was more challenging for that that we worked with customers through our field service organization to be able to help them design, new workflows in terms of per site drop off and pickup in and remote check in and contact list payment processes state.
Gotten much better added dislike you'd expect that over time, you begin to optimize your processes. So different states different regions are different stages of recovery and sell initially was.
Only from the parking lot I think overtime, we will see that than relaxation, yes point that I would make just tying together year. Two questions is that when you take a look at what's happened within the practices with the Etailers and a lot of product sales, both food and medicine.
Going online the the.
Business is not going to return leased at the same levels that they experienced before that's going to put even more focus on getting the patient into the practice, having checkups using diagnostics. So again, we'll see how this develops over time, but I think all the all the trends are positive.
Okay. Thanks for the color guys.
We have a question in queue from the line of Ryan Daniels with William Blair Go ahead.
Hi, guys. Thanks for taking the questions. Jay can you talk a little bit more about recover together it sounds like you've developed.
Specific blueprint for kind of the bounce backs I'm curious what that involved in higher marketing that.
Yeah, I mean thats if it comes out with the fact that even within this over 19 environment. We're still highly engaged with that customers are our customer facing folks are are visiting customers, 75% to stick to us for example is virtual but 25% when.
Requested were president and fully decked out and it safety guests that has a high level of engagement. We are building pipeline or we're working with with our customers in terms of developing strategies that as we recover they rebuild client traffic we saw coming out of the Greg necessitated the in 2009 that.
A lot of we're a could.
Clients are petta pet owners returned almost immediately where that areas I think needed needed. Some help at assistance is for those relatively newer clients to help build muscle memory of.
Semi annual or annual visits so we're looking at programs that we have for example, our preventive care program is perfect for that and even though sick patient visits are allowed or advice. There's still some things that people are likely pet owners are likely to vary. So we're looking at all of our programs.
Available to support that just one word odd I'd X 360, because that's where I tailor made for this type of environment. If you think about I'd actually 60, you're able to get capital.
Purchases with zero money down severe veterinary practice at here in this constrained environment from an economic standpoint, you can you can still purchase instruments and you pay on a monthly basis that you're able to match invoicing to the customer with testing volumes. So.
For this type of environment. So we're looking at all of those things in terms of how to support customers.
Okay. That's very helpful. Thank you and then you go a little bit more color on Opti medical I know that doesn't get a lot of airtime.
An acquisition you did to benefit the companion animal business, but what what's the potential for that if you get FDA approval and kind of how will that process go I assume you all have a distribution partner for that and the human markets any color. There. Thanks guys.
So weve develop and validated the human.
Type PCR test for overnight pain, and really to your question, we leveraged to capability, we have it IP in our which is our human health business from a regulatory standpoint has channels, but also our experience in developing and manufacturing lifelock infectious disease kits.
In our current business. So this is a testament PCR test it is highly effective in terms of sensitivity and specificity from a performance standpoint, yes results you typically get results and well under four hour. So it's it's fairly quick add up we've used up is use or isn't a processing using the FDA emergency.
This authorization process, where we're waiting for approval as well as we've applied for CE Mark in the European Union add so work, we're advancing our ability to get the manufacturing base in our lifetime, poultry and dairy business and really targeting for initial distribution existing IDEXX customers. So not.
Necessarily using external channel. So these include things like livestock laboratories public Health Laboratory State CDC labs.
Stuff.
Entities like that.
Our next question, we will go to Nathan Rich with Goldman Sachs go ahead.
Hi, Good morning, Thanks for the question I guess.
No I think.
Jay you mentioned.
That services the tended to be pretty resilient during past downturns.
Obviously consumers are going to be in kind of on certain economic condition coming out of the I guess I'd be curious.
No when you look at you know walnuts.
In recent weeks I mean has there been any change in metrics light the percentage of those that include while the work or the number of test orders that might provide an indication of that consumers the ability to to spend on diagnostics for their pets.
Yes, So let me I'll answer that question at a couple levels, because you had mentioned that recessionary environment.
Ill.
The resilience of the business, which is absolutely true when you take a look at the great recession.
In 2009, we performed extremely well growing growing 5% coming at the trough of that and if you now race at 10 years later.
Where he then I think better positioned to be able to.
Formed strongly.
It'll be shaped recovery. So you think about the business as a whole we're extremely well diversified geography across businesses like CAG water livestock poultry dairy across different modalities.
And plus you know lots of shape. So just up a couple of things that I would emphasis.
I would emphasize which includes our.
Commercial organization with the if you take a look at a decade ago. We were represented primarily through distributors and now we have more direct representation and so we're not reliant on others I think the fact that our portfolio is far broader and includes SEC and some of the wellness pieces that that you emphasized and.
I think the role of diagnostics is far more appreciated and how important it is.
How it feeds into not only good medical care, but but practice help you know in terms of.
In terms of the component of diagnostics over that the recent couple weeks and what that looks like.
Not sure we have visibility to that data yet that's something that we'll continue to look at on a weekly basis in terms of both labs sessions as well as to Smartservice, what that testing PSS, but still still too early to comment specifically on that question, Yes, I would highlight I think the as we're looking at this data day by day.
Hey, literally it's.
It's it's very encouraging to see how quickly it is.
Coming back so I think it's.
We we.
I think thats reinforcing the willingness that we've seen for a long time of the pet owners on.
On on on critical care and and have it for it for there.
Has now remember their family I think this was even more powerful than it was over 10 years ago with the last great reserves and so.
Early early indications are we're very encouraged by and deserves will continue to monitor.
Great. Thanks, Thats, just a quick follow up.
You seen restrictions start to ease in some areas have you also.
Seeing kind of rep visits pick back up I'm, just curious to know if there could maybe more prolonged impact there.
With.
That's kind of want to limit the number of sales reps in the clinic just due to the concerns around covet.
I'm sorry, it in the I guess have part reset the number of what visits picked back up.
Have you have have your sales reps like yet been able to start to go call on customer than in areas where.
Constriction.
And could that have a more prolonged impact on.
And just their ability to kind of get back in the customers yeah, Okay I got it absolutely.
The the way we conduct visits today is when customers ask us to be president or present that differs that a lot of other companies out there that have essentially 100% virtual visit policy. So if you take a look at April for example, 25% of the visits of the field organization was actually.
Physically visiting the practice now if you break that down by state said and reagents that differ based on the how strict the social distancing procedures, where.
In the practice and what we saw at places like Texas and the south relatively.
More visits and relatively higher visit levels in terms of clients and more testing.
Impacted higher impacted regions like the northeast and the Great Lakes for example.
Bit lower so very much in line and proportional what.
The local guidelines are per day per region.
Thank you.
We have a question in queue from the line of David Westenberg, just one moment. Please while we opened his line.
Alright. Thank you for taking the question. So I'm just a layer on some of the questions that have already been asks can you talk about your balance sheet right now some of the rationale between I'm taking on the additional that is that Adam offense can we expect.
At the practice level, maybe there's some clothes liquidity needs and right now it's your opportunity to help those practices that need to preserve cash.
And then just.
Related to that do you think that they're going to be more likely to.
Avoid the cash flow and signed the contract or do you think there might actually be some hesitancy on that contract and then as a follow up on the near term can you quantify the pent up demand I know VCA used to say in their practice they have an 80% recovery rate.
Snowstorm kind of environment of those appointments is that a good way to think about it in terms of when social distancing hands and I'll I'll take these questions offline. Thank you.
Thanks, David just on your balance sheet question I think we had some of the work that we highlighted was in flight before though the pandemic really started impacting the business. We were in the process of securing some of the term note financing at low rates and we're able to execute that effectively in our our revolver was up.
In addition.
This year, regardless, so I think we we just.
Advanced that and we're able to extend it may actually upsize it and I think we we were in an excellent position, we're in even better position and I think you raise a very good pointed it enables us to to continue to be highly supportive of.
Of our of our customers, we are helping to independent practices in the in the us in Europe with some with some payment term dynamics in the in the near term and trying to be is helpful. As we can.
As Jay mentioned I think our programs are very well suited to.
To helping people to get through if they have near term concerns about cash flow management.
We continue to advance their their businesses and.
We will continue to be leaning in on that front and helping practices in ways that.
Makes sense for for us all to move back to normal overtime together.
All right I would just also again reemphasize. The IODEX 360 program is ideal in many respects for for new customer acquisition in this environment no cash outlays matching customer invoices with use of consumables and the I think David as we're able to calibrate future commitment expectations for customers in terms of of how we.
Yes, so I think we all recognize that this has.
Mint and.
We can highly configure.
These type of volume commitment programs for that that environment.
Oh, and then if I could just get on that the recovery rate, if theres any way to quantify like.
VCA is 80% recovery on weather related thing that east again.
Five years ago in their Republic, but.
Well again, we don't have benchmarks like that I'm not sure snowstorms. The best analogy you know at the moment business units very dynamic region by region, but I think as a theme.
We're very encouraged by how quickly we see demand coming back as policies are for.
Less restrictive and.
We're optimistic about how this will play out over time.
Thank you.
We'll go next to the line of Andrew Cooper with Raymond James Go ahead. Please.
Hi, everybody. Thanks for the question Ive been covered so I'll, maybe just ask one.
Kind of attacking something a little bit differently, but as we think about the transition to virtual visits and obviously, you're still doing a number in person, but when we think about installs you've done a lot of.
Second instruments and things like that as a portion of your growth.
When we think about demand for that obviously, it's a little bit different than than sort of.
Net new competitive placement, but how do we think about exiting when.
Clinics aren't necessarily seeing the same volumes that they were is that delay that need or potentially are our clinics that are well capitalized sitting there, saying, hey, we can get an install and without really disrupting as busy of a day where were kind of working at full capacity as it is.
Any comment there just kind of on the pace of instrument installations will integrate as you come out of it yes, let me Thats a couple of questions and now let me let me just address the question around or the points you made around second catalyst placements and practices.
These tend to go to higher volume customers. So it's it's not like we're placing a second catalyst and it's just it's sitting there I mean, the reason they may want to second catalyst as they're growing their practice are growing.
Client visits it's a highly modular.
Most of this represents.
A real volume driven decision.
On the part of customers, we think from out a.
A recovery standpoint, as well as longer term trends, yes, diagnostics utilization will continue to be robust both sick patient preventive care menu offering our our product roadmap and the different assays were launching continue to drive continued to drive usage continues to drive utilization.
Though it's you know it's at somewhat lower now because of this environment, we think that all the dynamics and all the sort of the value drivers are still intact. So we don't expect.
We don't expect through the recovery for that to change.
We have time for one more question.
I'll wrap up from anybody other than the queue. Thank you.
That will come from the line of Michael Ryskin with Bank of America go ahead. Please.
Hey, guys. Thanks, I think I dropped after the initial against the follow up just real quick I want to go Bob Cole.
Hello, My concerns over the longer term about the while dynamic as we think through this MPOG.
So it was four from online is that what they're going to be economically challenged here in potentially for an extended period of time.
Both from economic recession, and potentially some some tail risk here in terms of volumes. So how do you think about.
Thats being a little bit more price sensitive around their offerings and we know that IDEXX definitely the premium brand in this space in terms of.
In terms of pricing compared that Heska antibodies system the cheap alternatives.
Are you concerned that let there be while diagnostics utilization overall and visits need Oldham pretty well due to bad economic challenges and.
From the pressures on them that may trade down too.
The limited cheaper offerings.
So here's how I would say here's how at least we think about like customers have always been concerned with the economics of the solution I mean that.
That hasn't changed prices a component of it the value that we deliver as the other component of it and as I indicated you know, we're always testing to make sure that the value and economics lineup at from a customer standpoint, what we work to do through our programs is to make sure that based on.
Our environment and based on the circumstances, we provide the appropriate program that allow them to purchase where they think are the best tools and allow them to deliver the best medicine for from that standpoint nothing's changed.
Terms of our solutions and what they perceive to be the best solution for their for their needs and as I had indicated we have programs that allow them to.
Get that get the products get the service offerings, they want and do it in a way that that works for that works from an economic standpoint, and that matches and alliance.
The the invoices that they.
Collect or charge to the client and what they have 10 turn path. So.
We're confident that we can continue to meet their dates and do it in a way that's economically sensitive to the environment.
Great. Thanks, so much.
And with that I.
I want to thank everybody for calling in I'd always have some employees who are also on the call and I'd like to express my gratitude for their extraordinary performance. There in these unsettling times, we run the company in a way that both delivers a day and takes a long term view designed to maintain and growth as strategic advantages of our business I couldn't be more proud of the IODEX team and the purpose.
Which animates our work and so at that will conclude the call. Thank you.
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