Q2 2020 IDEXX Laboratories Inc Earnings Call
Welcome to the arbitrary second quarter 2020 earnings conference call.
Today's conference is being recorded.
Just putting in the call. This morning, I'm talking about game, President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer.
Right.
Your director Investor Relations.
Next I'd like to process the discussion today with a caution regarding forward looking statements.
So those are reminded that our discussion during the call will include forward looking statements that are subject to risks and uncertainties.
Cause actual results could differ materially from lots of stuff today I.
Additional information regarding these risks and uncertainties is available on the other forward looking statements notice in our press release issued this morning as wells in our periodic filings with the Securities Exchange Commission, which can be apart from the FCC or by visiting the Investor Relations section of our website IDEXX Dot com.
During this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles 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 website.
During our second quarter 2020 results. Please note all references to growth organic growth constant currency growth and comparable constant karthik well refer to growth compared to the equivalent carried into 2019 unless otherwise noted.
So a broad participation on the cyrano react to each participant limits his or her questions. One one follow up if necessary. We appreciate you may have additional question with a please feel free to get back into the Q.
Well take your additional question.
I'd now like to turn call over the problem account.
Good morning, everyone IDEXX delivered excellent financial results in the second quarter, we benefited from a V shaped recovery in our cat business and flow through proper benefited from favorable product mix and disciplined cost controls.
In terms of highlights revenue increased 3% as reported and 4% organic waste supported by 7% growth and CAG diagnostic recurring revenues.
Following a period of significant pressure on CAG diagnostic testing volumes in late March through mid April we saw sharp recovery and market demand for diagnostics globally in the second quarter, including very high growth levels in June supported by pent up demand for wellness anonymous testing.
Better than expected CAG diagnostic recurring revenue growth and benefits from proactive cost controls drove a 410 basis point improvement in constant currency operating margins in the quarter.
This enabled delivery of $1.72 and early earnings per share an increase of 23% on a comparable constant currency basis.
The first half of 2020, we delivered EPS or $3.01 up 18% on a comparable constant currency basis, despite headwinds related to the covert endemic.
As well discuss solid pet health care market growth trends have continued in July pointing to a foundation for continued solid revenue growth for our core CAG business.
We're also well position in terms of our financial management approach aligned with our goal to deliver operating profit gains at or above the rate of revenue growth in the second half for 2020.
Well, we're very encouraged by recent market trends and our ability to manage through the covert pandemic effectively we recognize the potential future effects related to the pandemic, maybe dynamic and challenging to project as such we will not be providing specific financial guidance for 2020 at this time.
Let's begin with a review of our second quarter revenue results in recent market trends.
Second quarter organic revenue growth of 4% was driven by 7% organic gains and CAG diagnostic recurring revenues in both U.S. in international markets.
Our overall revenue growth also benefited by 1% from or Opti Human PCR Test initiative.
These gains offset impacts related to the pandemic, which reduced new IDEXX, vetlab and digital instrument placements and pressured noncompliance water testing.
We also saw impacts from the reversal of March stocking orders, and our water and LPD businesses, which reduced Q2 revenues by 4.5 4.5 million or less than 1%.
As noted our overall performance was driven by growth in CAG diagnostic recurring revenues, which strengthened considerably through Q2.
By month CAG diagnostic recurring revenues declined approximately 16% April increased 8% in May and grew an impressive 30% in June supported by strong gains across our major modalities.
Consistent solid revenue trends were seen across our major regions, reflecting the global strength and resilience of the veterinary health care market.
CAG diagnostic recurring revenue gains were aided by a rebound in clinical visits as demonstrated in our same store U.S., we tracking data published in our earnings snapshot available on our website.
Following an 18% contraction in clinical visits in April same store clinical visits remounted to plus 2% in may and plus 7% in June resulting in a 3% overall decline for the quarter.
Early quarter pressure on testing was greater and wellness, because its which were down 5% per quarter overall, but rebounded strongly in may and June.
Non wellness business, which we estimate drive about 75% of U.S. diagnostics revenue were down only 1% on a same store basis in Q2.
Clinical visit activity outpaced overall debt practice visit activity in the second quarter as business mix of veterinary clinics has shifted towards more service based offerings.
These dynamics supported a solid 2.5% increase in overall veterinary clinic revenues in Q2.
Despite a 5% decline in overall visits to clinics in the quarter.
We're very encouraged by the broad market recovery. These solid tens of solid trends have continued in July reflected in gains of 6% and U.S. same store clinical visits for the through the first three weeks ended July 17th with solid growth now reflected across major us regions.
Please note that there is some latency in the reporting in the most recent weekly data.
With these metrics continue to improve as additional visit data is added overtime.
We believe the health and resilience of the global Pet healthcare market is a positive factor that can support continued solid growth and CAG diagnostic recurring revenues in the second half for 2020.
These improved market trends supported a strong recovery and IDEXX revenues in the quarter by mortality IDEXX Global reference lab revenues increased 7% in Q2, reflecting 6% organic gains and approximately 2% growth benefit from acquisitions offset by 1% FX headwind.
Results reflected at high single digit gains in the U.S. and modest overall organic growth in international markets as strong gains in key regions like Germany, Japan, and Australia were offset by walk down related impacts in the UK in Canada.
IDEXX Vetlab consumable revenues increased an impressive 13% on an organic basis. Despite early quarter pandemic related impacts, reflecting low to mid teen growth in both us and international markets.
Gains were supported by solid increases in testing utilization sustained high customer retention levels and continue to expand expansion of our global premium installed base.
As expected CAG instrument placements were constrained in Q2 impacted by restrictions on sales access to veterinary clinics and deferrals of new purchase decisions.
This contributed to a 19 million or 40% year on year decline in reported CAG instrument revenue in the quarter.
The quality of care against replacements remain high reflected in 165 catalyst placements at new and competitive accounts in North America, and 536, new and competitive replacements in international markets.
We also benefited from 231 second catalyst placements driven by momentum with North American customers.
These new placements and sustain high customer retention levels supported a 16% year on year growth in our global catalyst to install base.
We also achieved 545 premium hematology placements and 275, sedivue placements, bringing our global Sedivue installed based over 9500 instruments up 25% year on year.
As Jay will discuss our field sales forces refocused on rebuilding the new instrument pipeline globally as we gradually game increased access to vet clinics.
Rapid assay revenues to increase decreased 5% organically in Q2, primarily reflecting early quarter pandemic related volume pressure as well as year on year dynamics related to promotional timing and activity.
Consistent with our overall trends rapid assay revenues showed a strong rebound from nearly 40% year on year revenue declines in April to nearly 30% year on year gains in June.
Supported by pent up demand for wellness testing.
Overall CAG diagnostic recurring revenue growth remains primarily volume driven with consistent net price gains of 2% to 3%.
In other areas of our CAG business or veterinary software in diagnostic imaging revenues declined 3% organically overall.
Double digit gains and recurring service revenues were offset by declines in new veterinary software and digital diagnostic imaging system placements, reflecting pandemic related constraints on new sales activities.
Turning to our other business segments, following a 16% organic gain in our water business in Q1, we saw a 16% organic revenue decline in Q2.
Second quarter results were impacted by the reversal of $2 million of accelerated stocking orders, reducing organic growth by 7%.
The vast majority of our water testing volumes, our compliance related or mandated by government regulations and these volumes have sustained as an essential service, albeit with some disruption in early Q2 related to business lockdown effects as well as beach and pool closures.
Approximately 20% of our water revenues are from noncompliance testing related to areas like special projects construction and real estate transactions.
We saw a greater than expected decline in this area related to reduced overall business activity and prioritization of labs spending.
While we saw improvement in water revenue trends as we work through the quarter, we anticipate that noncompliance testing demand will be uneven in the near to moderate term as public and private testing labs and public utilities adapt to pandemic related macro impacts.
Livestock poultry and dairy revenue increased 2% overall in Q2 net of an estimated 2.5 million or 8% headwind related to the reversal of accelerated stocking orders.
The company results continue to benefit from demand for diagnostic testing programs for African swine fever and improvement in core swine testing volumes in China supported by large producer efforts to rebuild swine herds.
We're also seeing continued solid growth for poultry testing globally.
Overall LPD gains were moderated in Q2 as expected by lower health screening levels compared to strong prior results impacted by the rebuilding of bovine heard populations in key Asia Pacific markets, which is reducing export supply.
Finally, as noted IDEXX overall growth in Q2 benefited by approximately 1% from revenues associated with our op, Ed Cobot 19 PCR test.
This includes benefits from our initial test supply program with the state of Maine.
We're extending the support efforts the through the implementation of a lab based testing capability in partnership with the main CDC that will provide capacity for up to 350000 human cobot tests over the next several months.
We're continuing to focus on supporting Cold PCR testing globally, leveraging the capabilities of our optic human and LPD businesses.
We note that human PCR testing is a very dynamic area with shorter term project commitments and growing competition from alternative suppliers that make demand difficult to project.
In addition to these efforts we recently completed work to adapt our Opti PCR test for use on waste water samples, which will be offered to iducs water customers to our water commercial organization.
We're very pleased to be leveraging the capability buybacks to contribute to the management of the covert 19 pandemic globally.
Turning to the Pinedale profit results were very strong in Q2 benefited from solid revenue gains favorable product mix and proactive steps to manage costs in the context to the pandemic.
These actions supported a 380 basis point improvement and reported operating margins or gains of 410 basis points at a constant currency basis, driving an increase in operating profits of 18% as reported and 20% on a constant currency basis.
EPS was $1.72 per share, including benefits of 4.9 million or six cents per share related to share based compensation activity.
On a comparable constant currency basis, EPS increased 23%.
Gross profit increased 6% as reported or 8% on a constant currency basis in Q2.
Gross margins increased 210 basis points on a constant currency basis supported by net mix benefits from strong consumable sales and lower instrument revenues benefits from moderate net price gains and solid productivity improvement in our lab operations supported by tight cost controls.
And the second half of 2020, we will see relative increases in our reference lab costs, reflecting the onboarding of our new German Coral laboratory.
As we add lab staffing to ensure high customer service levels globally in a growing market.
Operating expenses in Q2 decreased 4% as reported and 2% on a constant currency basis.
As noted on our last call, we advanced a targeted $25 million quarterly operating expense reductions compared to our original spending plans to mitigate potential impacts from the pandemic.
Benefits from these initiatives as well as approximately $5 million in lower than expected health and dental costs were realized in the quarter.
These efficiencies in combination with stronger than expected revenue growth enable 200 basis points of positive operating expense leverage.
Given the strong recovery in our business, we've discontinued temporary salary and benefit reductions, which yielded an estimated 13 million and savings in the second quarter.
And the second half for 2020, we intend to advanced targeted hiring and prioritized investments in support of our long term growth strategy, including augmentation of our international commercial capability, while delivering solid operating profit gains at or above the rate of revenue growth.
In terms of cash flow, we generated 236 million and positive cash while year to date.
On a trailing 12 month basis, our net income to free cash flow conversion rate was 80% or 93% adjusted for our investments in our Westbrook headquarters expansion and German lab relocation, which are now largely complete.
Our balance sheet is in a very strong position enhanced by steps in Q2 to add to our liquidity and flexibility. We ended the quarter with leverage ratios of 1.4 times gross and 1.26 times net of cash with 105 million in cash in the $877 million and kept in capacity available on our expanded $1 billion revolving.
Credit facility.
We do not allocate capital to share repurchases in the quarter and it can tend to continue prioritizing funding of our growth strategy and business operations. This year.
Overall, we're very pleased strong momentum at high level of operational execution demonstrated in our business in Q2.
Our next has a great business model with tremendous long term potential. We're very pleased to have managed to the first half for 2020 effectively despite the band pandemic impacts and look forward to building on that progress.
I'll now turn the call over to Jay for his comments.
Thank you, Brian and good morning, welcome to our.
Q2 earnings call today, we're pleased to report excellent Q2 results supported by a sharp global recovery in the pet health care market as Brian noted in Q2, we delivered 4% overall organic growth and a 7% increase CAG diagnostics recurring revenues despite significant early quarter headwinds related to stay at home.
Yes.
We managed well the initial impacts from the cover 19 pandemic and we've seen a strong and sustained recovery in our core companion animal health business that is highly encouraging and reinforces our optimism in the long term growth potential of our business.
Proactive cost discipline allowed us to deliver strong profit gains while ensuring ongoing investment in our innovation programs a high level continued service for our customers and investments in health and safety of our employees. The strong level performance reflects items I'd excess extraordinary resilience and gives us confidence in our ability.
To sustained solid growth at financial results as we manage through the underlying dynamics associated with a pandemic.
Let me start with a brief update on our supply chain performance market trends observations on how our customers are adapting and the success of our commercial organization and engaging customer support the recovery of the market.
I'd excess supply veterinary practices in an uninterrupted fashion with point of care diagnostic products and services like reference lab test and we have high confidence that we can continue to do so in the future.
Our manufacturing operations, which are largely based in the us have excellent visibility to secondary suppliers for key components and products that we do not directly manufacturer.
I reference lab performance has also been especially noteworthy in light of disruptive and challenging logistics more complex workplace procedures to keep lab in place.
Our network lap capability enables us to seamlessly toggle to an alternative lap without service disruption in the event of the cover 19 infection.
These capabilities are possible through significant investments that have been made over long period of time and Bob density common Latin information management systems, and Courier route and logistics capability.
Not having to worry about service product availability, our customers have been able to focus their mission of caring for patients and that in highly resilient through the pandemic. They have now expanded the breadth of services provided from the early covered 19 focus on sick and emergency patients services as Brian noted despite an overall, 5% Dick.
Client in same practice visit levels in Q2 that clinics were able to increasing practice revenues by 2.5% supported by increased emphasis of medical services enabled by diagnostics testing.
Customers have adapted to new ways of delivering service such as an increased use of talhout curbside check and where the pad and remains in a car during the appointment staff for veterinary clinics have indicated that this has increased their comfort level with recommending more comprehensive and clinically relevant diagnostics with support from pet owners.
Then there is also say that they are increasingly focused on delivering core medical services to their patients as a result of the substitution of product sales to E retailers, which have accelerated.
To treat veterinarians have to first diagnose and I'd excess proprietary diagnostics are a key tool and advancing the standard of care.
Supported by these trends, we've seen solid improvement in both wellness and non wellness visits with additional acceleration of wellness visits more recently, reflecting in part pent up demand.
The proportion of clinical visits including at least one diagnostic has increased since March in both wellness and non wellness visits.
In addition, we're seeing greater dollars diagnostic revenue preclinical visit overall the average diagnostic revenue preclinical visit in 2020 that included at least one diagnostic has been trending above previous years levels as well.
Approximately 5% higher for the first half of 2020.
Versus the first half of 2019 in fact diagnostics revenue preclinical visit overall and per non wellness visit has been higher than in 2019 every month this year.
We're also seeing evidence of increased interest in pet ownership to the pandemic, including among current pet owners another indication of the strengthening of the pet human bond.
These improvement trends, our global and have sustained in early Q3 as evidenced by continued solid us clinical contracts, albeit at moderated levels from the extraordinary growth rates seen in June.
We are monitoring the evolution of the pandemic and associated management of infection rate growth across regions, which may impact future demand. We remain encouraged by the solid global recovery in demand in our core CAC business supported by an ever growing pad on our bond.
Our commercial execution also continues to be noteworthy.
We're very pleased with the effectiveness of our global commercial team during a period with very challenging market backdrop field occupancy remains in the high Ninetys and customers appreciate that the cadence and level of our field visits whether they are physical or virtual in nature are at very high levels.
Our global teams also show tremendous agility and supporting our customers during this period, including designing and implementing a new remote instrument installed and training process, which enabled us to successfully onboard new customers to the safe and effective way when requested some of these new processes enabled us to place over 1800 premium instruments glow.
Finally in the quarter, including over 1000 catalyst placements with over 700, and new and competitive accounts. Our field service Representatives continued to be welcomed by veterinary practices and we've seen an increase in person visits by a customer account managers up to 40% in June versus the 25% we solid.
April for the last.
While pandemic related factors have constraint CAG instrument placements as well as new software system implementations and pressure new digital imaging system sales.
We expect the pace of capital placements to gradually improve over the balance of the year. Our field teams have used this time to build pipelines.
And the rate in which this improvement to curse will be related to ongoing approved BDC access the veterinary practices and to higher practice on our confidence that will inevitably come with an economic recovery.
As Brian noted moving forward, we will be augmenting our commercial presence internationally.
Our approach will be to add resources selectively on a rolling basis in targeted markets leveraging the capabilities of our new global commercial model, which we look forward to discussing bar at our upcoming Investor day, We're encouraged by the resilience of the companion animal market and believe there is a significant long term opportunity to increase standards.
Fair globally supported by our direct commercial capability.
As we support customers. We are working to continue to advance programs that support a higher level of care such as preventive care. We saw continued adoption of the IODEX preventive care program with over 100, new enrollees in the quarter supported by the strong recovery and market demand for veterinary services at a robust wellness visits traffic.
Bringing our total enrolled practice level to 4300 as expected our Q2 additions were reduced from prior quarters at this as a program that requires broad practice access to onboard and train a large number of staff.
Customers continue to embrace the IDEXX preventive care purge and considered a foundational element of their care offerings as they look to uncover more with IDEXX proprietary diagnostics growing enrollment and engagement in the IODEX preventive care program is a key focus for our commercial team into second half of the year in that recover together and then.
Got it.
As we support continued market recovery. We also continue to advance our new product initiatives introduced to BMX in January.
Capital placements have experienced some near term headwinds in the second quarter as a result of restricted practice access digital cytology is experiencing strong customer interest with our sophisticated information management systems and clinical pathology experts around the globe, we were able to provide results very often in well under the two our commitment.
Allowing veterinarians to provide plus the real time cytology professional services.
Our technology for life philosophy as represented by the introduction of bile acids in our IDEXX Vetlab instrumentation suite has also been received with strong enthusiasm bile acids reflects the eight parameter introduced and catalyst over the last eight years, we're pleased with the breadth of global adoption to date as about 1000 customers across there.
Five countries have now utilize bile acids on catalyst with reference lab quality performance as noted on the last call. Our Sedivue advanced bacterial detection kit started to ship in April and over 750 customers have now utilize the kit detecting bacteria in here. It is a key driver clinical value and we are.
Confident that this enhanced capability will drive an even greater appreciation for and testing with the setting new platform.
In addition to keeping innovations on track as Brian discussed, we brought new Covent 19 test the market for both animals and people by leveraging our technical and manufacturing capability.
We also continue to advance our operating capability. We're excited very excited to have completed the move into our new European core lab located in corn West time, Germany.
Now houses over 500 employees with state of the art capabilities and automation our quarter West type facility will enable us to further optimize our lab network in Europe expand service levels and bring improved efficiency, while supporting our continued growth for years to come.
Hard to West time is now the largest lab in our global network at the dedication and perseverance of our team made it possible to bring this lab online in the middle of a pandemic.
Moving to our VSS business, although we faced some headwinds related to new software and diagnostic imaging system placements as access the veterinary practices was impacted by cover 19, we had excellent double digit growth in our recurring service revenues supported by the expansion of our customer subscription base for cloud solutions like Westpac Smartflow at Neal.
To highlight a few applications. We also saw hundreds of customers take advantage of integrated software solutions like secure remote access and tell how that how practices manage their business in this environment.
We continue to strengthen our leadership and global execution software and are excited to announce the addition of Michael Schreck is corporate Vice President and General manager IDEXX Veterinary software and services reporting to me Michael has over 20 years of experience at industry, leading software and technology. He has global responsibility for our customer facing.
Software business and will work closely with our global CAG commercial team to advance software solutions.
More efficient Workless practice management improved patient care and value added services that drive the overall health of veterinary practices.
The health and safety of our workforce and their families in our communities continue to be a top priority for us that we have begun to bring back a small number of employees engaged in product development with our benefits on site access the majority of IDEXX employees continue to work remotely and travel remains highly restricted we are providing spending.
Allowance for many of our remote workers to help to maintain a health and safety work environment outside of our facilities on the specialty appreciative of our employees around the world his role required them to work on site. During these last several months in order to provide essential services to our customers health and safety procedures continued to advance for our on site in place.
In addition to physical distancing and PB. Now also include daily temperature checks in many locations given improved market in business trends, we're happy to share that we discontinued temporary reductions in play salary and benefits and lighted the recovery at market demand, we are adding resources to critical areas like manufacturing amount of operations.
To ensure we can support market demand and customer service levels moving forward.
Our teams continue to stay highly engaged and productive our 2020 midyear play engagement survey showed an all time high employee engagement level for the organization.
During a period in which a global pandemic has created significant business and personal challenges for our employees.
Overall, we're very encouraged by the strong recovery in our business the resilience of our industry Anite excess business in particular is extraordinary.
We're positioning ourselves to support sustained market growth, while delivering solid financial performance as we continue to advance our long term strategy in this context, it would be remiss if I didn't take the opportunity to take both our employees and customers are customers continue to provide medical services against the backdrop economic uncertainties and new.
Challenging workplace and employee safety requirements as many of us, including the our pet owners, we couldn't be more appreciate it and the huge thank you to miteks colleagues around the world for their tremendous efforts in continuing to support these customers and our business Im very proud of what we accomplished this past quarter.
In closing, we're looking forward to our first evel ever virtual Investor day on Thursday August 13th.
We will share updates on our long term opportunity strategic priorities and financial goals.
And now register for the event on the Investor Relations section of our website participating in the event will be members of my senior Lynch management team, including Bryan Keane CFO Pina Hot General manager for point of care Diagnostics worldwide operations, Mike Lane General manager of reference Labs, and information technology and Jim problematic.
The Chief commercial officer.
And that concludes my opening remarks, we now have time for some questions.
Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your touched on fallen if you wish to be removed from the Q. Please press the pound signed by the hash key if you're using a speaker phone you may need to pick up the handset first before passing the numbers once again for any questions on the line that started in one on your touched on phone.
And we're standing by for questions.
And our first question on line comes from Mr., Michael risks from Bank of America. Please go ahead.
Hey.
Thanks for the Thats, taking the questions, Brian Jay I want to start with.
Your comments clearly indicate that conditions improve throughout June and July and your snapshot data in a lot of other third party data indicates that right now we're at a run rate that's in line with if not above prior year trends I'm just curious given.
Given the improved trends we've seen in recent months what factors led the decision to not reissue a guide.
There are any additional uncertainty you're anticipating.
Is it tied to some potentially economic sensitivity later in the year.
Give us an insight into the thank you, Matt and I have a follow up.
But you know I think we're very encouraged by the trends in the business and our execution.
At the the decision to to continue to suspend guidance is not reflective of a lack of optimism for the business I think it's more just reflective of its continues to be a dynamic you can see 30% growth in the business in June we have.
Some some dynamics that continue to evolve and we're gaining more experienced and insight as we work through this were.
We're planning for solid revenue and profit growth in the near term we've got the same long term outlook.
For our business.
See the same potential and I think the strength of their business during the pandemics reinforcing that potential. So we're feeling good about the business but.
We'd like to gain more experience with some of the dynamics before assert updating the Bruce specific projections.
Sure the color.
Quick follow up exactly on that.
The strengths than June July and you had some comments of you expect that some of this could have been pent up demand from April.
From late March April downturn, any color you could give us any way to parse that apart because obviously the 30% recurring CAG in June is clearly above any prior.
Prior level of performance. So anything you do that sort of give us a sense of what the underlying demand levels are right now.
Sure I mean, we do think as we indicated that that some of this is due to pent up demand both on the wellness on non wellness side. I mean, we also pick that up there as a potential change and the delivery of care, which is both driving.
As a set of practice and higher diagnostics and let me just expand on that through the lens of both the pet owner and the veterinarians.
Think about the pad on overall spending significantly more time with our pets as we work from home.
We're observing more issues could be very simple things like limping scratching lesions, so I think being more attuned to our path in their activities certainly.
Pet owners are bringing their pets that the practices pulp catch up as well as observing the thanks, and then from the fed area dimension.
We believe that.
If anything Coca 19 has continued to support and potentially accelerated the focus.
Medical services and a part of that baby to Duda, they've seen product sales both to E retailers as practices, where close or access somewhat restricted and when you focus on medical services as I indicated to treat you first have to diagnose and sell diagnostics place a.
Really key role there we've also heard from variants that.
They are recommending in some cases, a higher standard of care with the owners dropping off the pad at the curb side some of the on comfort or discomfort of of the face to face conversations are easier that to happen when here.
Looking to the pet owner.
Remotely and there may be some some factors related to just at awareness that need to provide a full care.
If there is a second wave or there's a recession down the road so in the pets and the practice.
Taking care of that the pet to the full extent possible. So all these things are are playing in and we'll have to see overtime, how they play out.
Yes this growth.
Right.
Yes, Mike I think Thats a close some.
Some recent benefit from the pent up demand, but the underlying market demand across our regions look solid. So we're obviously monitoring that but we feel very good about the underlying trends.
Great. Thanks, guys.
Thank you. Our next question on line comes from Mr., Ryan Daniels from William Blair. Please go ahead.
Hey, guys. This is Nick you got in her Ryan I guess at the start up it's been a lot of plot in data out there about.
Club in new properties have been growing who will be going to adopt new pads. We working at home I was just wondering would you would you kind of define that more as being a pull forward.
Like people.
We're planning I getting pets originally engines now they're working from home the to spot the good time or do you view of more than incremental.
Yes.
Yes, so we havent seen hard data out there that that quantify today dynamic between adoptions and and fostering and yet you have to factor in all the puts and takes but there's a lot of anecdotal evidence that with Jess.
Options and.
The options from Braiders efforts as well as fostering is up and we've seen a number of different reports looking at.
The different dimensions of diverse sell.
I think it's reasonable to assume there is some benefit from that.
But overtime will lots and better data behind that.
Yes.
And then I was wondering if you could provide a little bit more color.
The decline in rapid assays this month.
Theres any loss per why consumables would grow pretty healthily blood rapid assay the decline or was that just a function of strong from wall Street.
Yes, there are a couple takes work we're pleased with the rapid assay business and the progress we continue to make and thereafter.
Assay business revenue declined 5% organically in Q2 is primarily related to two things one as we were relatively more impacted in the early quarter piece of the pandemic impacted volume pressures keep in mind, a good could portion of our rapid assay business is 40 accident heartware.
Which is more of a screen.
Test.
Adam the pandemic occurred right smack in the middle of pick season.
Clearly that was impacted and then there were some year on year dynamics related to promotional timing activity in 2019, we had two decent sized.
Promotional so the compare was a bit more challenging we don't believe it's a competitive issue where do you take a look at couple of things one is a unique customers and new unique customers where were modestly above where we work. So we're happy with away.
Businesses is progressing and if you take a look more at the sick patient testing piece of the portfolios. So these vehicles like parcel and share idea as well as CPL at FPL, Yes, that's what those are pretty healthy so we've pretty much pinpointed it to both the.
Promotional compare as well as where that pandemic fell relative to the exceeded and as I highlighted the in June it was up 30%. So we have the same kind of strong delivery we've seen in other purposes.
Got it great. That's very helpful guys appreciate it.
Thank you.
Our next question on line comes from Nathan Rich from Goldman Sachs. Please go ahead.
Good morning, Thanks for the questions.
Jay maybe to start.
The outlook you, obviously highlighted the strong visit growth continuing into July.
You know the proportion of visits that include diagnostic continues to go up and that kind of been a longer term trend.
In kind of going into the year, you guys did kind of expected, 11% to 12% kind of CAG recurring growth.
I guess, we see these end market trends continue and obviously there is some uncertainty around that I mean is that the type of of revenue run rate that we should expect the business to get back to over the back half the year, assuming that these end market trends hold.
Yes, yes, part as Brian said, we were very encouraged by the strong recovery.
In the market business, and and we think were properly it appropriately positioning ourselves to be able to support that and solid business growth has that develops weather service levels, our commercial capability, but.
Given that that environment to sell very dynamic and it's challenging to project.
I'm, just not going to go down the path of of.
Hypothesizing, what that looks like it's hard to predict with the future.
These type of coveted related restriction second will look like and how they play out.
Though as head were very positive I think we're very optimistic on the outlook and the resilience of the marketplace, but it will walk to say how all the puts and takes play out I think as.
It's early but I think as a longer term trend.
Some of the themes that Jay was reinforcing on the increased emphasis on services and comfort level with recommending diagnostics, we certainly think that that can be.
A positive factor for us, but in terms of our near to moderate term outlook I think there are number variables at work.
We're we're gaining more experience with enroll we're planning for solid growth that's that serve.
Our outlook.
No that's there and that kind of dovetails into my second question.
The thought that gave around diagnostic revenue per per bid up 5% year to date.
Finally kind of very good considering the backdrop.
I guess have you seen the accelerated at all.
Cobot head and.
Is this a longer term potentially tail that there could be beneficial to the business kind of coming out of out of it.
Yes so.
Whatever whatever pettinari its focus on medical services.
We benefit from a diagnostic standpoint and.
It drives the caramel and they need to be able to.
Characterize the condition of the patient.
At the able to treat the patient and the only way where the best way that they do that as the diagnostic testing. So that's certainly a very positive factor they have to the other positive factor is more in our control it nets through innovation as we continue to expand our menu as we continue to expand the solutions and tools that we provide.
Veterinarians they test and then that the third factors, obviously, creating awareness education and ultimately more testing and Thats done through our field organization are both professional service, that's as well as our account managers to vtcs solve those things come into play I think it's a very positive story in terms.
Of those those factors driving this engine of growth in diagnostics.
Great. Thank you.
Thank you again for any questions on the line that Star then one on your Touchtone phone. Our next question. The line comes from Jon Block from Stifel. Please go ahead.
Thanks, guys good morning.
Long first question over the past two to three years.
This CAG recurring gross premium has been about 1000 basis points to same store clinical visits let me see if I can make sense here for June the premium was massive moves are 2300 basis points to 30% that you guys allude to the release.
At June up 7%.
You guys in the release anything on the call talk about July same store clinical visits up 6%, but how about the CAG recurring I'm just curious if that massive CAG recurring premium.
Remained elevated and very wide at over 20% or did start to tighten guys back to the historical which is sort of closer to that 10% Delta hopefully that makes them. So.
As I wanted to focus on the on the Q2 dynamic but to your point we've.
Weve typically grown at a very healthy premium we look at it a few different ways, we'll whether it be to clinical visits or things like PC growth and I think that even with the.
The dynamics at one on earlier in the quarter the actual gap.
Widened in Q2 versus historical leverage levels somewhat.
And so we think that's very encouraging.
We think it reinforces the themes that Jay was talking about which is emphasis on services and some positive dynamics that may help us going forward.
We're not in a position to protect our monthly revenues what would I would say is at.
The strong clinical visit trends that were reinforcing and seeing globally by the way our are indicative of solid.
Momentum in our business overall, so its a.
It's it's a positive dynamic we feel very good about that and.
Before to building on those trends going forward.
I think to try to push push a little bit Brian I guess I'm curious about is.
For the overall quarter I believe according to my math, the average premium wasn't too dissimilar than years past. It was around 1000 bets, but it was crazy right in April.
CAG recurring was down 16% and so was the visits to the premium was zero in the beginning of the quarter in April and then.
300 basis points as you exited June trying to get appeal on a month by month basis that that's a very big moves as we went into July and clearly you have the data was elevated at that 2300 or did start to work its way and compressed a little bit.
Thats, what sort of what I'm trying to get it.
Yes, we are look I think we're going to learn more as we go forward. We were we think were.
We obviously, we're surprised us was better than we expected we knew was a resilient business and thought we would recover quickly, but I think this has come back even stronger than weve than we thought and.
Well, we'll we'll see how this plays out over time this lot of dynamics going on in the in the near term. There is some pent up demand effect, that's going on and.
Perhaps some changes the way.
[noise] are delivering services that Jay highlighted so lamar.
Okay and second question is a little bit different but you talked about some of the stuff. We recently called out in our checks with work from home, resulting in pet owners, you see more stall will proceed issues and bringing their dogs and cats in the that's all vision as a result, they're running diagnostics Im you also talk about curbside Thats our comfort.
People selling so curbside just easier for them to push diagnostics, but those are arguably I think we all hope in some way a temporary and.
Good work from home eases, who knows but going into 21, and we're never going to remain curbside right. Hopefully people are going to go back into in the best practice.
How did that unfold I guess, what I'm trying to get at our these structural long term changes in terms of Tailwinds for diagnostics or do you see some of those benefits that you alluded to arguably unwinding over the next handful of months. Thanks guys.
Yes side I would.
Pat a couple of operation one I think as veterinarians recommend let's say more of a full service approach and pet owners are supportive of that.
They often desktop and cut that change themselves and say, okay. I've asked the pet owner for it I thought they were kind of push back or maybe more budget minded.
And they were and in fact, they fit very receptive to it. So I think what we often said we see this had preventive care program is the whole process of helping the pad on or does that change management pace of bringing the pad and.
And having this check that includes diagnostics.
As important both for the pet owner as well as the veterinarians and then.
The other thing that I would height heightened or at least a highlight is that.
Whatever the whatever the long term.
Okay.
Lighting or.
Whether people stay at home Mark the it's more of a hybrid type bought or or please come back to work.
I think both.
Experts, who are looking at this belief that there will be more of a hybrid model, where you have a combination of employees working from home and work and I think that if if anything.
There will be.
Continued continued visibility to the pets health.
And strengthening the human pet bond, which is I think but for the industry.
Great. Thanks. Thanks.
Thank you. Our next question on line comes from that David Westenberg from Guggenheim Securities. Please go ahead.
Hi, Thank you for taking my question I'd be investors have pretty good sense of what's going on in the us getting a third party data, but I'd say.
Europe seems to be kind of lost black box, where a lot of invested your global company. So I was hoping maybe just talk about European macro and then you could probably you you assets kind of a benchmark in terms of what it looks like relative to us because that is a a question you get a lot.
That's pretty hard for us that understands fences MACRA and recovery.
Sure. So just stepping back our CAG recurring Dx numbers as we mentioned, we're we're up.
Similar rates, 7%, both in us and internationally.
Europe has I think overall scene of.
Similar strong recovery trends I think fee.
There are some specific market dynamics, we've seen consisted very solid growth in areas like Germany and in southern Europe, particularly recovering from some of the significant lockdown effects.
That we're seeing.
In March and April the UK lacked the just having lockdown procedures in place for a longer period, and we noted that in terms of the.
The lab growth was was relatively lower than the us, but I think overall very similar dynamics V shape recovery vet clinics back online very positive feedback on demand and.
A little a little kind of an evolution of some of the markets, but as we as we speak basically all the markets are back online and and we're feeling good about the.
The growth outlook in that context.
Gotcha, and then I may be on doubled we present your out your analyst day here you talked about contribution from maybe psychology contribution from bile acids that the new product launches and where it's gone in growth maybe right now in waiting it has stated growth.
You know you give us similar things after that you analyst day, So if I am just part of that.
My apology bearing all the wafer.
With that.
Yes ill provide just give you a quick quick update and that flavor of the two two products you mentioned, where as I indicated where we're very pleased with the market reception to digital cytology, we we think that being able to provide.
Cytology services in under two hours 24 hours a day seven days a week 365 days a year is truly transformational.
We take if I just characterize the for us market.
Were primarily targeting the higher cytology users. So these are.
Customers to submit.
Plus a cytology exams.
To exports that pathology experts like like we have and we think that that represents about 5% of the overall marketplace.
Just to give you another data point, we have about 6000 customers IDEXX customers, who use our reference labs that also use our cytology services. So we think that has a pretty decent size opportunity out there that's going to take some time that developed but so far so that in terms of customer enthusiasm and market receptor.
And.
To this service in in terms of the bile acids question. The way, we think about it as each parameter that we introduce is important that has a lot of value to customers, but it's the cumulative menu.
That I think has the most impact in the case a catalyst. This has now our eight test.
To put one previous to that with progesterone. So it's being able to provide a menu where you don't need to have a new our separate instrument that fits within the the workflow.
And use model of our chemistry analyzer is very important.
The particular to test the question bile assets very accurate as reference lab quality.
Performance and we were very pleased with the rate of adoption and the rate of awareness amongst our customer base.
Given that it's only been merely a couple of months and we're in a bit off a pandemic felt that type of uptake is quite gratifying.
Got it thank you.
Thank you. Our next question on line comes from Andrew Cooper from Raymond James. Please go ahead.
Hey, thanks for the time.
I guess, starting with maybe the PNM, a little bit obviously kind of an odd quarter with Kobe, but but good results, but as we look at.
Gross margin line is there anything you'd call out obviously theres some costs that came out you've got.
Kind of a fluid things across gross margin and Opex that you talked about but is there anything in particular to call out on on the gross margin line in terms of.
Really.
Very strong number I think the strongest weve maybe ever seen from you guys. So anything to point out there.
A big part of that's mix so just the the strength of CAG.
Recurring Dx and at the same time declines in the instrument revenues. So the that that is definitely a factor in terms of the absolute number we did benefit from from cost control. So we in late March early April when we saw the initial coven impacts we were.
Very focused on making sure we can manage to that effectively we have very very tight on hiring and staffing. We ensured we had good service delivery, but that was.
A benefit as well so as as we move forward.
I think we as we noted we're going to be.
Adding resources to make sure that we can support staffing we're seeing some.
Higher freight distribution costs, which I think as a broader macro dynamic that's going on and importantly will have the German core lab coming online. So we'll have some incremental costs there, though so that'll that'll be have some moderating effects, but we're very very pleased with the.
The gross margin results and it really reflects the.
The the the health and kind of the high margin flow through of the recurring annuity of the Rx business.
Okay, Great and maybe just kind of a similar question on Opex, obviously, the 13 million coming back presumably at some point.
The benefits cost in terms of dental care you talked at talked about at least normalizing, but you know as we think it at a high level you know about how cove. It has changed how we behave you mentioned doing installation that are mode and things like that does this change how you think about some of those.
Some of those line items on a more permanent basis in terms of.
Well cost savings that you could drive either.
Thank you hadn't thought of before or potentially I guess, just faster than maybe you would have planned otherwise in terms of.
The overall sort of cost basis.
I mean, I think it it has opened up everybody's is any different industries to things you can do more productively port different I think some of the examples we cited like being able to freshly.
Partner with with customers, whether it's through.
Sales process or remote installation, providing software tools, which allow which allow them to do telehealth visits.
I think these six are.
Certainly areas of.
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Focus that we can look at that will drive productivity, I think having a larger workforce without needing bricks and mortar and being able to support or modem place.
In a productive fashion I think as we're all finding that there's some.
Some benefits in doing that I wouldn't quantify it at this point in terms of operating expense savings, but we're constantly as business leaders looking at how we can run the business differently and more productively, while still supporting our customers.
Okay, great and maybe one more kind of asking.
Question, a different way than it's been asked so far but.
When we think about that pent up demand and backlog.
Do you have a sense for.
Hey, it feels like a lot of whats come out we've worked our way through and now all the visits that are being seen or kind of more on the steady run rate or is there still some of that that pent up demand that you're feeling you know early in July that potentially is whether its elevated visit.
Is it numbers themselves are elevated utilization within visits because it maybe been longer.
That was last in the clinic is there anything you could kind of point us to.
To give us a little bit of a level set for where we sit entering into twoq or threeq you.
I think there is still some pent up demand effects going on you could you can see that in the wellness visit growth. It was up 10% through the first three weeks, so I think that that.
That is supporting that I and.
It's tough to calibrate you know we grew 7% in Q2 that's.
Below what we had normally grown so that would indicate that we didnt make up some of the visits and so.
What were.
We're not in position yet to say whats, whereas this settling out if you will you know I think the underlying factors all worked very positive.
Industry looks healthy vet clinics or online there.
They are doing more service based work.
Anecdotally every the feedback has all been really good and I think we're just seeing factors that reinforce the strong pet owner Bon willingness to spend on pets. So.
What will we were we are liking see likely seeing some continued pent up demand benefit, but I think the underlying trends look very very healthy.
Great I'll stop there appreciate the time.
Q.
Okay.
I want it with that.
Where we're going to transition to conclude the call.
Okay. Thanks, guys.
And I want to thank everybody for calling in.
No. We have some employees who are also on the call and I just want to express my gratitude for their extraordinary performance. During these unsettling times, we run the company in that way that takes a long term view designed to maintain and grow the strategic advantages of our business, while still delivering today.
I couldn't be more appreciative of the IODEX team and the purpose, which animates our work we look forward to meeting many virtually as part of our Investor Day program and so with that will conclude the call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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