Q4 2020 IDEXX Laboratories Inc Earnings Call
Good morning, and welcome to the IDEXX laboratories fourth quarter, 'twenty and 'twenty earnings Conference call. As a reminder, today's conference is being recorded participating and the call. This morning are Jay Mozelle ski President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer.
And John <unk> Senior Director Investor Relations.
IDEXX would like to preface the discussion today with a caution regarding forward looking statements.
And as a reminder, that our discussion during the call will include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.
Additional information regarding these risks and uncertainties is available under the forward looking statements notice in our press release issued this morning as well as on our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website IDEXX Dot com.
During this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which May also be found by visiting the Investor Relations section of our website and.
And reviewing our fourth quarter 'twenty and 'twenty results. Please note all references to growth organic growth constant currency growth and comparable constant currency growth refer to growth compared to the equivalent period and 2019 unless otherwise noted.
During the question and answer session. If you have a question. Please press Star then one on your Touchtone phone to allow broad participation in the Q&A, we ask that each participant and limit their questions to one with one follow up as necessary. We appreciate you may have additional questions. So please feel free to get back in the queue and if time permits we'll take your additional questions I would now.
I'd like to turn the call over to Brian Mckeon.
Good morning, everyone I'm pleased to take you through our fourth quarter and full year, 'twenty and 'twenty results and.
To provide an overview of our initial financial outlook for 2021.
In terms of highlights IDEXX delivered excellent financial results and Q4 and supported by expanding global demand for companion animal health care.
Revenue increased 19% as reported and 17% organically.
And by 21% organic growth and CAG diagnostic recurring revenues.
<unk> diagnostics recurring revenue growth sustained at high levels across the U S and international markets through the fourth quarter, reflecting continued strong clinical visit growth trends and increased utilization of diagnostics.
Flow through operating margin benefits from high CAG diagnostics recurring revenue growth supported achievement of $2, one and <unk>.
And yes, which included a 25 cent nonrecurring tax benefit and.
13th and tax benefit from stock based compensation and activity.
Strong CAG growth results and proactive cost controls supported delivery of outstanding full year 2020 per financial performance above our long term goals.
IDEXX achieved 12% full year organic revenue growth driven by nearly 15% gains and CAG diagnostics recurring revenues.
Full year operating margins reached 25, 7% and increase of 340 basis points on a comparable constant currency basis.
The combination of high revenue growth and operating margin gains supported delivery of full year EPS of $6 71 per share and increase of 31% on a comparable constant currency basis.
Robust CAG market trends position us for continued strong financial performance and 2021.
Today, we are providing our initial outlook for full year revenue growth and key financial metrics and expanded information table shown in our press release and snapshot.
Highlights include and outlook for 11, 5% to 13, 5% overall organic revenue growth supported by 12% to 14, 5% organic growth and CAG diagnostic recurring revenues.
Our financial outlook reflects the targeted 50 to 100 basis point improvement and operating margins on a comparable constant currency basis building on strong 2020 performance.
These gains are projected to support 15% to 20% comparable constant currency EPS growth aligned with our long term goals.
We will discuss our 2021 outlook later in my comments, let's begin with a review of our fourth quarter and full year results and recent market trends.
Fourth quarter organic revenue growth of 17% was driven by 21% gains and CAG diagnostic recurring revenues, reflecting 21% growth and the U S and 22% gains and international markets.
Strong overall organic growth was also supported by 13% organic gains and our LPG business and.
Approximately $10 million or one 5% of growth benefit from our after human COVID-19 test initiatives.
Overall organic growth was moderated by pandemic related pressures, which constrained water revenue growth and contributed to a 10% year on year decline and IDEXX debt lab instrument revenues.
As noted CAG diagnostic recurring revenue gains and sustained at high levels through the fourth quarter cash.
And growth dynamics remain healthy across global markets, with 20% or higher CAG diagnostic recurring organic revenue gains.
<unk> and the North America, Europe, Asia Pacific and Latin American regions.
For the full year 2020, CAG diagnostic recurring revenue growth increased an impressive 15% and both U S and international markets.
Hi, U S. CAG diagnostic recurring revenue gains continued to be aided by strong growth and clinical visits.
Overall U S same store clinical visit growth reached 8% and Q4 up from 6% growth and Q3, reflecting sustained 10% growth and wellness visits and higher 10% growth and non wellness visits.
A factor continued to support high clinical visit gains as an increase and first time clinical patient visits, which we estimate added one 5% to 2% to overall clinical visit growth and.
And two 5% to 3% to a wellness visit growth and the quarter.
And increased focus on health care services, including diagnostics supported a 12% same store increase and overall veterinary clinic revenues in Q4, well ahead of and improved 4% growth and overall visits to veterinary clinics and the quarter.
These positive market dynamics and benefits from investments and IDEXX commercial capability wellness program initiatives and technology to support higher standards of care drove high Q4, and full year organic revenue gains across our major testing modalities.
IDEXX Global reference lab revenues increased 19% organically in Q4 led by nearly 20% organic growth and the U S and mid to high teen organic growth and international markets.
Reference lab gains continued to be driven by high same store volume growth with strong gains across testing categories, including support from high levels of wellness testing and the U S and benefits from the expansion of IDEXX 360 <unk>.
Program agreements and international markets.
For the full year 2020, global average global lab revenues increased 13% organically, reflecting mid teen organic gains and the U S and approximately 10% growth overall and international markets.
IDEXX debt lab consumable revenues increased 25% on an organic basis in Q4, reflecting high growth across the U S and international markets.
Gains continued to be supported by increases and testing utilization across regions and high customer retention levels and expansion of our global premium installed base.
These dynamics supported 19% full year growth and IDEXX wet lab consumable revenues in 2020.
While cash instrument placements continued to be constrained by pandemic and backs restricted restricting sales access to vet clinics.
Trends have improved solidly over the second half of 2020 and.
Q4, CAG instrument revenues were $3 million below a strong prior year levels, representing a 10% year over year year over year organic revenue decline.
Overall global catalyst placements in Q4 were 13% below strong prior year levels, which included high levels of international upgrades.
While overall placement levels were constrained to a degree by the pandemic the quality of CAG instrument placements remained high.
Globally placements at new and competitive accounts were down approximately 4% compared to strong prior year levels.
These results reflected 414 catalyst placements at new and competitive accounts, and North America, and 1092, new and competitive placements in international markets.
We also placed 525 second catalyst globally to support high growth with our customers.
<unk> placements and continued high customer retention levels drove a 13% year on year increase and our global catalyst install base.
And we achieved 1224 premium hematology placements in Q4, supporting a 10% year on year expansion and our premium hematology installed base.
We also placed 671 set of you analyzers, bringing on a global set of your installed base to nearly 10007 hundred instruments up 20% year on year.
Rapid assay revenue increased 20% organically in Q4, driven by high growth and the U S aligned with broader gains and demand for diagnostic testing, including robust gains and clinical wellness visits for.
For the full year 2020 rapid assay organic revenue growth was 9%, reflecting strong volume gains for canine and 40 X T line and specialty testing.
Overall CAG diagnostic recurring revenue growth remains primarily volume driven augmented by consistent net price gains of 2% to 3%.
We're planning for similar levels of net price improvement and CAG recurring revenues and 2021.
And other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 1% organically overall and the fourth quarter.
Double digit gains and recurring service revenues and solid growth and new staff and new software system placements were moderated by lower diagnostic imaging system placement levels.
For the full year 2020, veterinary software and diagnostic imaging revenues increased 3% organically.
Strong gains and software services were offset by pandemic related pressure on new imaging system system placements.
Turning to our other business segments water business revenues posted modest organic growth and Q4.
Solid gains and compliance testing were offset by pandemic related pressure on noncompliance related activity.
These impacts contributed to a 2% organic decline and full year 2020 water revenues.
While recent trends and our water business have improved relatively we're planning for uneven demand and non compliance testing and 2021 as we continue to work through pandemic related impacts.
Livestock poultry and dairy revenue increased 13% organically in Q4, driven by continued strong growth and our Asia Pacific region.
Better than expected LPT results reflected high demand for diagnostic testing programs for African swine fever, and gains and core swine testing volumes in China.
Sorted by large Purdue producer efforts to rebuild swine herds.
These gains to offset lower herd health screening levels and export markets compared to strong prior year results.
For the full year L. P D revenues increased 11% organically.
Looking ahead to 2021, we expect to see constraints on LPG growth rates as we lap the benefits of the 2020 step up and revenues from expanded African swine fever testing programs.
Turning to the P&L operating profit results were very strong and Q4, reflecting flow through from high CAG diagnostic recurring revenue gains.
As a reminder, prior year operating profit results were impacted by $13 million and CEO transition charges.
Normalizing for these impacts operating profit increased 43% year on year and Q4 on a comparable constant currency basis, reflecting 460 basis points of comparable operating margin improvement.
Gross profit increased 24% and the fourth quarter gross margins increased 210 basis points on a reported basis and 270 basis points on a constant currency basis.
These results reflected productivity gains and our lab operations supported by high organic lab revenue growth as well as favorable net mix impacts from strong consumable sales and lower instrument revenues and benefits from moderate net price gains.
Operating expenses in Q4 increased 4% on a reported basis and 10% on a comparable constant currency basis, excluding impacts from the 2019 CEO transition charges.
Relatively accelerated operating expense growth reflected higher incentive compensation and healthcare costs as well as increased investment and R&D and enhancement of our global CAG commercial capability.
We anticipate sustaining a relatively higher rate of opex growth moving forward as we support our strong global growth momentum.
For the full year 2020 operating margins reached 25.
7% up 270 basis points as reported and 340 basis points on a comparable constant currency basis, reflecting high CAG diagnostic revenue growth and benefit from cost controls.
As highlighted in our initial guidance for 2021 were targeting to build on this strong performance as we advanced high return investments aligned with our long term growth strategy.
EPS in Q4 was $2 <unk> per share, including 25 cents per share and nonrecurring tax benefit.
13 cents per share and tax benefit related to share based compensation activity.
For the full year 2020, EPS was $6 71 of 31% on a comparable constant currency basis.
Full year EPS results also included 39 million or <unk> 45 per share and tax benefit related to share based compensation activity, which provided 590 basis points of effective tax rate benefit and.
And $22 million or 330 basis points of effective tax rate benefit from the nonrecurring tax items.
In terms of other factors impacting our reported results foreign exchange effects have turned favorable given the recent weakening of the U S dollar.
And Q4, FX added nearly 2% to revenue growth and $1 million to operating profit net of Q4 hedge losses of approximately $2 million.
For the full year 2020 foreign exchange rates.
Decreased EPS by <unk> <unk> per share net of FX hedge gains of $1 million.
Free cash flow was $541 million for 2020 free cash flow conversion was 93% net of net income or <unk>, 97% adjusted for our investments and our Westbrook headquarter expansion and German lab relocation, which are now complete.
Our balance sheet is on a very strong position. We ended 2020 with leverage ratios of one one times gross and six four times net of cash.
With $384 million and cash and no borrowings outstanding on our $1 billion revolving credit facility.
We did and allocate capital to share repurchases and the fourth quarter, but we have already initiated share repurchases in Q1, reflecting confidence and our long term growth strategy.
Turning to our 2021 outlook as noted we've included a table on our press release and snapshot, reflecting our initial outlook for revenue growth and other key financial metrics recognizing that it remains a relatively dynamic environment in terms of financial forecasting.
Our initial overall organic revenue growth outlook of 11, 5% to 13, 5%.
Is centered on and estimated organic growth range of 12% to 14, 5% for card CAG diagnostic recurring revenue.
As a benchmark this recurring revenue growth outlook aligns with projections for 2% to 5% same store U S clinical visit growth for the full year 2021 building on strong 2000 and momentum.
And a premium of IDEXX U S. CAG diagnostic recurring revenue growth to clinical visit growth of approximately 900 to 1000 basis points.
And is consistent with our strong growth trends heading into the pandemic.
Our growth outlook range reflects our plans to drive continued high CAG diagnostic recurring revenue growth globally.
And while also recognizing each year on year comparisons to very strong 2020 growth levels and the second half of the year.
In terms of overall organic growth, we factored and an estimated 1% overall growth benefit from higher CAG diagnostic capital instrument revenues.
Including net growth benefits from the Procyte one launch this year.
These positive impacts are expected to be moderated by tougher comparisons and our LPG business and continued COVID-19 related growth pressures in certain areas such as water noncompliance testing demand.
Please note that given the lapping of prior year Covid impacts there will likely be significant variability and year on year revenue growth rates by quarter with.
And with expectations for higher revenue growth and the first half of 2021.
In terms of key financial metrics as noted we are targeting 50 to 100 basis points of annual comparable constant currency operating margin improvement and 2021.
This is reflected in our reported operating margin outlook for 2021 of 27, 3% to 27, 8%.
We're planning for continued solid momentum from gross margin gains with some moderation and benefits related to product mix impacts and increased lab staffing to support high volume growth.
Overall, we anticipate sustaining a relatively higher rate of opex growth moving forward as we support our strong growth trends.
We also expect some relative year on year increases and costs in certain areas, such as employee health care costs claims and and travel costs as pandemic related restrictions are eased.
Our outlook incorporates projects and for foreign exchange to be a net positive factor in 2021 at recent exchange rates.
And the exchange rate shown on our press release, we estimate FX will provide a positive one 5% to 2% revenue growth impact in 2021, and approximately <unk> 14 of EPS benefit net of established hedge positions.
We've included and outlook for net interest expense that assumes maintenance of relatively consistent net leverage ratio in 2021.
Given our reduced share repurchase activity in 2020, we're projecting more limited year on year EPS growth benefited from reductions and average shares outstanding.
Our 2021 outlook includes an estimated nine to 11.
Per share of tax benefit related to share based compensation activity compared to a much higher than anticipated 45 per share benefit in 2020.
Our 2021 estimates reflect known option explorations and any established and he established <unk> one plans.
In terms of managing our 'twenty and 'twenty, one financial performance, our focus will be on delivering strong full year results, while advancing our long term growth strategy prudently in a dynamic environment.
Given the strong momentum and our CAG business, we're inclined to lean and towards high return organic growth oriented investments, while delivering continued improvement and operating margins aligned with our long term goals.
That concludes our financial review I'll now turn the call over to Jay for his comments.
Thanks, Brian and good morning, IDEXX had a strong finish to 2020 driven by exceptional CAG diagnostics recurring revenue growth.
So on CAG market trends continue through Q4, enabling us to deliver outstanding full year performance with 12% overall organic growth significant expansion of our operating margins, 31% EPS growth on a comparable constant currency basis, and 55% return on invested capital.
While managing through a pandemic impacts we deepened our connection with our customers strengthened our global commercial capability and advanced key elements of our innovation agenda. These steps position us well to build on our business momentum and 2021 today.
Today I'll provide an update on the trends, we're seeing and our markets and some of the dynamics that are supporting the impressive growth rates, we've achieved and our core business.
I'll also provide and update on some of our key growth initiatives and areas of emphasis this year. Finally, I'll discuss how we plan to manage the business aligned with our initial financial outlook and what remains a dynamic macro environment.
Let's begin with an update on market trends, we continue to see strong growth trends and companion animal health care reflected and high growth and same store clinical visits and the U S higher growth and new patients and and accelerated expansion of care. We also saw sustained solid market recovery across international markets.
Site pandemic impacts us.
As Brian noted clinical visits were up 8% overall and the U S and Q4 debt by wellness visit growth of 10% and strong non wellness same store growth of 7% for the full year clinical visit growth was approximately 3% consistent with the growth we have seen in recent years, but with wide variations by quarter.
<unk> due to pandemic effects.
Solid U S market growth trends have continued into early 2021.
Market feedback from veterinarians remains consistent.
Clinics are very busy with sustained high levels of demand supported by higher growth and new patients.
And our market data tracking and the U S indicates a 10% increase and new clinical patient and 2020.
Versus 2019 growth of 3%, which contributed an estimated one 5% to 2% of incremental overall same store clinical visit growth and Q4.
There continues to be evidence reinforcing and robust growth and the pet population as an indicator we've seen a 70% year over year growth and IDEXX progesterone pest revenue and the second half of 2020 and the U S.
And that's why it's a significant step up and do critical patients with first time pet parents.
New patient growth has been augmented by the accelerated expansion of care.
Overall revenue generated during clinical visits grew 15% per practice and the U S and Q4.
Driving 12% total revenue growth per practice.
Ignostic revenue is growing even faster at approximately 17, 5% per practice and Q4 and U S.
Supporting full year 2020, same store diagnostics revenue per practice increased 12%, reflecting a significant step up and growth and the second half of the year.
We saw a clear trend veterinarians performing more diagnostics and 2020 with average diagnostics revenue per clinical visit with diagnostics up 5% for the year.
There are a number of potential drivers for this which we have noted in recent calls pet owners are spending more time with pets during the pandemic and maybe more attuned to their health conditions and care.
Curbside check and procedures may also be helping us pet owners preapproved diagnostic test runs and that's required prior to the visit helping veterinarians and their staff to provide higher standards of care and.
<unk> continue to pivot to focus on delivering medical services as a core value proposition.
We leveraged the strong market drop backdrop and to even faster growth for our business enabled by our commercial capabilities critical innovations and customer friendly marketing programs for the full year and 2020, the CAG diagnostics recurring revenue organic growth premium compared to clinical visit growth expanded.
Approximately 200 basis points and the U S.
From about 900 to 1000 basis point range heading into the pandemic.
This is a healthy backdrop for our business and 2021.
We're planning to support high growth and our CAG business, recognizing that continues to be significant and non dynamics and the marketplace and the economy as we advance to the next phase of pandemic management. We believe our initial revenue growth outlook of 11, 5% to 13, 5% overall organic growth.
And 12% to 14 and 5% for CAG diagnostics recurring revenue growth represents a reasonable planning range and this context.
And there is considerable momentum and the market to continue expanding utilization of pet health care and our strategy is to work with our veterinary partners grew and expanded commercial presence to raise the standard of care through adoption of our testing innovations.
A great example of our innovation focus is pro side, what are next generation hematology point of care instrument, which is now and its final stages before product launch per site, while we will support our global commercial strategy by unlocking broader opportunity and reach to the customer, especially internationally.
Veterinarians, who on chemistry, and hematology diagnostics together and.
They are busier than ever making diagnostic solutions delivered with a best in class experience highly relevant.
Field trial customers are thrilled with Procyte, one streamlined functionality and a compact footprint with.
And with IDEXX 360 access to in House, Hematology is easy and affordable and our pay per run and auto replenishment consumables model makes inventory and cash flow management hassle free cash.
And our experienced trials are proceeding well and we anticipate getting analyzer shipments in North America late Q1, but maybe early Q2 as we complete customer experience trials, we will fall with an international rollout beginning in Q2, our expectation is to build volume throughout 2021.
Pre sell efforts led by our commercial and marketing organizations and raising awareness of our new hematology analyzer as well as and increased appreciation of our existing world class Hematology portfolio. This is generating interest and in clinic hematology solutions and driving strong hematology.
<unk>.
Another key area of innovation leverage as your analysis and our commercial teams continued to raise awareness about our <unk> enhanced the capabilities now with advanced bacteria detection determining whether bacteria are present or not is often the most important part of sediment analysis bacterial Ut ISR for example.
A common diagnosis that is painful per paths and could discuss halt for pet owners with that it is advanced bacteria detection kit and.
And areas have access to real time bacteria detection at the practice, providing early visibility to the absence or presence of bacteria.
Customers highly value diagnostic solutions that help them practice better medicine in this case, allowing them to make more informed decisions within the patient window.
We also saw strong interest and our set of your platform and international markets, and 2020, driving greater and 50% increase year over year and our installed base outside of North America.
Innovations delivered through our technology for life strategy continued to drive greater adoption for our <unk> platform.
Innovation can take many forms and our digital cytology offering is an example of a new personalized service enabled through imaging technology and our global team of over 100 veterinary clinical pathologists were placed with the exception of paid back and world class customer satisfaction ratings point of care digital sites.
<unk> following its launch and Q1 of 2020 customers are realizing efficiency and clinical benefits and the integrated 24 by seven by 365 service by opening additional appointments and their schedules and enabling same day treatment plans and patient results are integrated with them.
Major practice management systems, with <unk>, plus as well as being available on any iPhone or Android mobile device with the VAT connect process.
It's a great example of how we uniquely support and and integrated way cusp.
Customer clinical and workflow needs.
Most of the point of care and digital cytology placements have been part of our program.
And almost one third were combined with premium IDEXX debt lab analyzers. Many placements were important factors and attracting new business for our reference labs.
And with some customers, we have seen instrument placements and accelerate cytology utilization and support strong revenue growth and that category will continue to watch these trends closely and placements expand and more practices fully adopt the instruments into their daily workflow.
Now, let's transition to an update on our commercial accomplishments and initiatives.
Our outstanding results couldn't be accomplished without disciplined commercial execution, which we have highlighted in the past is an essential pillar in our organic growth strategy.
We see high returns and investments that allow us to spend more time with customers and person or virtually as we've noted on the last call leveraging our long history of U S. Expansions, we have made excellent progress with efforts to significantly expand our commercial footprint and three international country markets.
And on track to complete the expansion and have all new talent hired trained and on boarded and the first half of this year.
We completed our latest U S sales force expansion and about a year ago now and the team has ramped to productivity and customer relationships and tenure against customer access pressured from the COVID-19 pandemic. Our teams performance was exceptional and instrument placement levels continued to improve sequentially in Q4.
They remained somewhat constrained due to restricted access to clinics and veterinary practice priorities focused on supporting high patient demand.
And North America overall premium instrument placements reached prior year levels.
And catalyst placements were up 14% year over year, and Q4, including strong second catalyst placements.
Results were achieved while access the practices in person visits by our customer account managers sustained at Q3 levels or 50% of in person visits.
And international markets, we had high levels of new and competitive catalyst placements almost reaching prior year levels and second catalyst placements more than doubled prior year levels. Despite a modest pullback customer account manager in person visits and Europe.
IDEXX 360 continues to gain significant traction and major international markets supporting customer acquisition and placements of full fat lab suites as well as increased reference lab usage to support customer volume commitments.
While we expect net sales professionals access to veterinary clinics will likely continue to be challenged until social distancing policies and measures to combat the spread of COVID-19, and relax. We are very pleased with our high level of commercial execution, our expanded global commercial resources positions us well to pursue the vast opportunities we see and <unk>.
International markets and advance initiatives like preventive care and the U S.
We continue to see tremendous customer interest and establishing and expanding preventative care is an important category and pet health care to practice. The IDEXX preventive care program has never been more timely Dow practices implemented customer centric preventive care program to support the high levels of wellness visit growth and the growth of puppies and kittens.
And our market share.
And <unk> preventive care as a means to both deliver better pet health care and belt healthy relationships with new and existing pet owners program enrollments in Q4 were approximately 300 newly enrolled customers more aligned with pre COVID-19 run rates, bringing our total enrolled practice levels to now over 4800.
Our software portfolio also had an exceptional year with a record breaking number of pins placements globally and over 20% growth and North America for the full year the expansion of our <unk> installed base and cloud based subscription customers supported strong double digit growth and our software and services recurring revenues.
Our cloud based solutions in general continue to enjoy excellent momentum.
For example, we now have over 5300 customers utilizing our IDEXX web pacs offering and 18% increase year over year, we continue to center on our software strategy on our customer workflow and clinical needs and the COVID-19 pandemic has on the increase the need for cloud based mobile centric solutions.
That deliver deep data insights and tools to further elevate patient care and enable practice efficiency.
Investing in high quality work flow solutions will continue to be and area of focus for us.
Next I'd like to highlight the remarkable operational accomplishments of our supply chain and reference lab teams supporting our customers and an uninterrupted fashion.
Keeping up with 20% plus organic growth and our CAG diagnostics recurring revenues and the second half of 2020.
Take our reference lab business for example throughout 2020, not only has the team focused on keeping approximately 2800 onsite reference lab employees at 80 Global lab site safe.
But did this while ensuring the continuity and a positive customer experience and and operating environment.
Our expectation and logistics networks, where at times highly challenged.
And they didn't Miss a beat opening our new card Westlb facility. It has been opened since may and it is operating exceptionally well and notably it is achieving record number of lab sessions for our European business.
Before I conclude today's remarks, I want to highlight our efforts to make a positive and lasting impacts of the communities we serve as.
And so we announced on the last call. We recently established the IDEXX Foundation and donor advised charitable fund to support activities and aligned with our purpose.
Our mission is to create positive lasting impact for people animals and the environment.
And outcomes focused initiatives.
And area of focus this will support the advancement of diversity and the veterinary profession by providing access to learning opportunities.
And I'm proud to share our inaugural multiyear engagement with Husky College of Veterinary medicine, which has been recognized as the most diverse veterinary and medical school and the U S and as educated more than 70% of the nation's African American and veterinarians.
The IDEXX Tuskegee scholars fund, who will support nine fully funded scholarships as well as wellbeing and mental health support problems for veterinary students. We are excited about this important initiative and support of our purpose and mission.
Before we turn to Q&A and wish to express my gratitude and thanks to our employees for a superb year and pursuit of our purpose.
2020 was a year like we've never experienced a disruptive year that challenged all levels of the organization. We maintained the operating rhythm and the business, while responding with agility and circumstances required. The team's resilience is a testament to the purpose driven and innovative culture at IDEXX the organization and stay focused on.
On serving our customers and and exceptional way, while achieving a new high for our employee engagement and couldn't be prouder and more grateful for the teamwork collaboration and professionalism that resulted in record performance and the pace of unknowable challenges.
And that concludes my opening remarks.
Now it's time for some questions.
Thank you and we'll now begin the question and answer session. If you have a question. Please press star one on your phone keypad, if you'd like to be removed from the queue. Please press the pound side or the hash key if you're under a speakerphone. Please pick up your handset first before dialing.
And once again, if you have a question. Please press star one on your telephone keypad.
And from Bank of America, we have Michael risking. Please go ahead.
And Hey, Jay Brian Thanks for taking the questions and congrats on the quarter first of all.
I want to start with your comments on the guide and sort of the outlook going forward and that's why we've had the most feedback from investors and where most of the attention is.
If you think about what you guys said about clinical visit growth next year.
Other parts of the revenue bridge and I think the diagnostics utilization, they're more in line with 2020 as a whole, but still a little bit of a step down sequentially. Just on what we're seeing and three Q2 2014 2020 with clinical visits being up mid to high single digits.
So I'm just wondering when we think about those components of the bridge of the revenue bridge for next year are you baking any conservatism on the second half.
Or does this reflect a little bit.
And your views on something like we would revert to pre COVID-19 landscape, especially once the vaccine, but rolled out and then you go back to normal I guess my question and sort of what are your thoughts on.
On these COVID-19 tailwind we've seen on the second half of this year and how that continues on next year and beyond.
Yeah, Mike why don't I start off and and I'm sure Jay can weigh in on the on the broader trends I think we we feel we've got a very healthy growth range as you know for the full year on the CAG Dx recurring of 12.
12% to 14, and a half and I think.
The higher end of the range on top of the growth rate. We had this year and we think there's a very healthy.
Well for our business I.
I think for we do feel good about the momentum and are entering the first half I think we will have relatively stronger growth and the first half and.
And I think youre, highlighting the key question, which is sort of debt.
The comparison and the second half there was a step up and the growth rate and.
Driven by a number of factors.
More pets more testing.
And there's some pent up.
Demand that carried over from the early Covid impacts so I think we're.
Just recognizing that there'll be some year over year compare dynamics that go on debt, we'll learn more about it as we go into the year, but I think we are.
We feel very good about the momentum and the business. It was an amazing 2020 amazing recovery for the industry and <unk>.
And I think the.
Our high growth outlook reflects us.
Yes, I would just add to that.
The logic of our guidance is linked to the market data. So we are optimistic about the outlook.
The benefits will sustain and I think Brian.
Halfway painted the parameters of that what we're saying is we're saying more pets and the marketplace. We're seeing that as a driving clinical visits including first time critical visits with first time pet parents, and veterinarians and providing more medical services beyond just the first time.
Clinical visits and medical services are enabled by diagnostics you have to first diagnosed before you trade. So I'd say I think it's a very healthy backdrop and as Brian said, it is still and dynamic environment and and we will.
See how it plays out.
Okay. Thanks can I ask a quick follow up on that as well is you touched on the pro side, one launch and give some color on sort of the rollout on <unk> I'm. Just wondering are you baking in any any specific contribution from pro side. One from image of you from any of the product launches and 2021 and also just could you.
And a little bit more color on feedback you may have gone from sort of the pre launch early customers as far as.
And how that's how that's affected your outlook for.
For the full launch.
Charles I'll describe that customer experience trials and they are now.
And hand, it off to Brian to talk about the impact in terms of how we factored it into the to the forecast the customer experience trials have gone extremely well I think customers are thrilled with not just the compact footprint, but the usability.
And the very ease of use of the analyzer from that standpoint. It really is a breakthrough because hematology is a complicated diagnostic testing category and by.
The way that these customer.
Spirit trials and it's a it's something that is best in class in terms of the approach that we take you can you can develop it amazing analyzer, but you have to put it out and real environments and environment and set our customers he has to get that.
The type of feedback where also the other thing that it's driving is just that and increase focus on hematology and the importance of hematology. We know many of our markets are hematology first markets.
And meaning that they have.
And relative priority on hematology testing EBIT before chemistry. So we're optimistic we think its a.
And it'd be a winner for US we think that there are over.
Approximately 100000 placement opportunities on a on a global basis that we're very excited about it and try and why don't you describe how we factored it into our forecast.
Yeah, we're not breaking out specific.
Projections by platform, but overall, Mike we did highlight the 1% contribution to growth we expect to get from instrument revenue next year CAG instrument revenues and.
Yeah, that's that's a very healthy growth rate that would imply kind of a 20% 30%.
Growth and instrument revenues and that includes obviously benefits from the prostate one launch. So we're looking forward that to being a positive net contributor and we think we've got that built and appropriately on our railroad.
Great. Thanks, so much guys.
Thank you.
And from Credit Suisse, we have Erin Wright. Please go ahead.
Thank you and you have been great data on <unk>.
The market trends and your accident curious, what youre seeing and international markets at this point and kind of the clinical visits and P. C.
R&D pet ownership.
Overall veterinary demand trends are you seeing the same level of resiliency there and.
And with what Youre seeing and the U S and what are some and the key differences and the <unk>.
And the two markets and.
And how are the trends in the fourth quarter, and what you're anticipating into 'twenty and 'twenty one on the International Inc.
Yes, I'll comment on Thanksgiving.
Go ahead, Jeff.
And I'm, just kind of come I'll comment and I'll give you a general flavor for the international market and then Brian I'd ask you to provide some specifics around.
Some of the financials the international markets continue to be quite healthy.
Even with the.
The pullback related subsequent waves.
Just a modest pullback in terms of our ability to visit customers in person, but the.
But the overall market and the overall.
Okay, human and pet bond has.
We're seeing the same type of trends outside the U S. As we are in the U S and on top of that.
And.
Continue to invest and international expansion as I mentioned.
Free cash.
Country markets that we're expanding in and those are going extremely well, we think that there is.
It continues to be just a great opportunity to be able to tap into.
The expansions and the other thing that we see as the IDEXX.
360 program is being.
Nicely adopted by our European customers.
Majority of our instrument placements are now through IDEXX 360 day, that's also having a nice impact on our reference lab.
Our services as part of the volume commitment aspect of that so Brian would you like to add any flavor to that.
And I think that captures it well Aaron as you know we don't have the same kind of level of insight at the HIMSS level to some of the more granular data, but I would we didn't try to point out that we had basic.
Basically the same level of CAG diagnostic recurring revenue growth our U S and internationally both are.
Overall regions were strong throughout the quarter.
And at 20% CAG Dx recurring revenue growth and Europe, Asia Pacific and higher and Latin America, and we are basically hearing the same kind of trends and seeing the same kind of trends and our business in terms of just vet clinics being being very busy and just and driven by underlying growth and utilization.
And it's.
Similar trends I think the U S is particularly strong and weight and we have the benefit of more data and insight and the U S. But.
And I think it just reinforces the strong global momentum that we have on new business.
Okay, Great and then can you do.
And that there's any sort of level of pent up demand and instrument placement and more broadly are you anticipating that that instrument placements into 'twenty and 'twenty, one and how should we be thinking about the change on a quarterly basis.
Inc.
And potentially non life block.
Yeah.
Yes.
Gross Q4 placements over Q3 Q3 over Q2.
And the clinics.
We did see some initial restrained access debt of clinics early on and the pandemic and.
These along with that.
And that social distancing policies in effect, we're still modestly impacted by that and the other thing to keep in mind is that the clinics themselves.
And it really busy there's just a lot of there's a lot of patient traffic through the clinic. So in those cases, they may not they may desire and instrument or a new suite, but don't want to take the time to have to interrupt practice and and retrained.
There are some headwinds connected with that.
But overall I think that yeah.
And our customers are responding very favorably day instruments that could help them with both capacity and productivity as well as practicing better medicine.
Yeah, and one factor I'd point to I think two.
To reinforce Joe's point on just the the clinics being busy and the.
Demand being a driver for instruments that we feel good about going forward is just the second catalyst placements. If you see the high level on a second catalyst placements and U S and and and international market. That's reflective of some clinics trying to keep up with the higher level. So diagnostics utilization. So I think that's a.
That is a positive factor and we're still working through somebody acts as headwinds, but I think the general trend has been positive force.
Great. Thank you.
From Goldman Sachs, We have Nathan Rich. Please go ahead.
Good morning, Jay and Brian and thanks for the questions.
Maybe just to start on the CAG Dx guidance.
And back to I think it was the first question.
And the spread that you expect this year kind of narrowing back in the 9% and 10% range from 12% that you saw this year.
And how much of that.
Reflects potential conservatism I guess.
Because it seems like a lot of the trends that you saw driving frequency and utilization and diagnostics should continue so are there any other factors that we should just kind of keep in mind as we think about that spread kind of going back towards the historical range.
And Nate I think it's primarily just day, reflecting the lapping of the step up and growth, particularly in the second half.
If you look at the premium.
And that we're trying to use the shorthand ways of working out and put in the U S.
Premium CAG Dx recurring growth the clinical visit growth that was about 60, and 100 basis points and Q3. It was about 200 basis points and Q4.
And so I think there some of that I think the Q3 benefited from.
Pent up demand and so I think we're seeing some normalization and normalization from that dynamic and.
As we get into into 2021, and we expect we do have a very healthy clinical visit growth rate projected and and continued strong growth, but I think.
Just recognizing that we had some step ups here and the demand and that's that I think is driving us the 900 to 1000 premium with it because.
And excellent premium and I think would would position us very well for strong growth.
Moving forward, but those are some of the factors we bolt on.
Makes sense. Thanks for the color and then just Brian quickly if I could follow up.
Comment on sort of the cadence of revenue growth and 2021.
Understand it will probably be stronger and the first half and the second I.
I guess, if we think about sort of the current trend continuing into the first quarter. It seems like.
<unk> Dx recurring growth should be and that 20% range.
That would mean sort of the back half of the year.
And with digits, the 10% is that roughly the right way to think about.
The cadence of growth between the first half and the second half of the year.
Yeah without getting to specifics on projections, because we're not going to be doing quarterly projections, and there's going to be a lot of noise and the quarters as you know Nate and then we had.
And the beginnings of Covid, and Q1 and more meaningful impacts in Q2, and and so and then you know things like that.
And the rebound in Q3, so I think year over year, the quarter or is it going to be a little bumpy, but directionally, yes, I think we're we're expecting.
The higher level of growth and.
And the first half and given.
Given the year over year step up and growth.
Moderate growth rates and the second half is what's implied in our guidance range and so we'll we'll see how the world.
The markets play out it's still a very dynamic environment as you might imagine to try to forecast and Theres a lot of unknowns here just with the other pandemic plays out and how those factors evolve as hopefully people get back to work and.
And let us get back to normal, but I think directionally, that's how we're thinking about it.
Great. Thank you.
From Stifel, We have John block. Please go ahead.
Thanks, guys good morning.
Maybe first one Brian and just the CAG recurring acceleration and acceleration of around 100 to 200 bps I think it's 13, two five at the midpoint versus pre COVID-19 levels, they're just running some high level math it seems like another.
$30 million to $40 million incremental high margin revenue and so can you just talk about specific as you're willing to get.
Youre allocating the incremental gross profit dollars, we talk a lot about the flow through from the CAG recurring and obviously, we're seeing that.
Some of these U S International investments and if so do you think and just sort of puts you guys on a stronger position as we look out and subsequent years and then I've got a follow on.
Well just to start it too to your last point, John I think you've got high CAG recurring diagnostic revenue growth. That's that's a very good dynamic for our business from a profit point of view and a gross profit expansion point of view and so that is clearly a key key driver of our performance in recent years and particularly in 2020.
Just in terms of dynamics going into 'twenty and 'twenty. One we do we do anticipate some investments in areas like lab capacity, we're trying to keep up with the.
The very strong growth that we've seen.
And I'd point out that 22020 was an unusual year and that.
Early on when we really didn't know how this was going to play out we.
And we erred on the side I would say on a caution and just being very tight with our cost controls last year.
And wanted to ensure that we help.
A healthy business model and asked people to make sacrifices they realized that went into that and so.
We're trying to reflect that we've got year over year compares here too a year debt we had.
A high level of cost control and we're going to have some investments that are coming back across the business and we expect.
Tried to highlight there is gonna be and things like health care costs and.
And perhaps travel costs and things like that and to come back later and the year and.
As well as just trying to.
Reengage and investing in areas that we hold the line on in 2020 and.
And had very high growth so.
We've noted things like international commercial expansion is an area that we want to lean and we.
On a continuing to support our R&D agenda and so the number of areas that are all aligned with our organic growth strategy.
We're intending to support it and that's reflected in our.
Intent to to have.
Moderate operating margin gains on top of very strong performance. So we're committed to building on the performance, but recognizing that we have some some pent up demand here, if you will for investments and the business.
Yes, Okay got it very helpful and then.
Second question. It goes on the same way that I think Nathan and went down and Mike as well, but I'll ask it a little bit differently I think certainly differently. So youre guiding to an acceleration on the CAGR occurring at 13, five mid point and you've been around 11 to 12, but it seems that the acceleration per your commentary as a function of greater expectations.
Around clinical visits versus your premium to the clinical right. What's your premium to the clinical you expect around that 900 bps to 1000 debt premium and so can you talk to that dynamic guys. Just I would just think at a high level the premium would be more on your control with the increased commercial investments.
He shouldn't drive and utilizations versus that and trying to sort of guesstimate, how the underlying clinical visits shakes out. So you know why one person here and you might end up and the same place and I'm. Just curious why sort of premium would be on change and you feel more comfortable with the sort of heightened level of clinical visit growth. Thanks, guys. So let me try to frame that.
Touch on salt.
Number of different factors that I think are driving.
Growth first half Theres more pets, we've talked about that and the majority being pop.
Puppies and kittens and that clearly has an impact it's hard to get your arms around exactly what that impact is but we've provided some guidance on the past and theres more clinical visits even beyond the new pets and for these clinical visits weighed out debt. There is more critical visits et cetera.
He used to provide medical services that include both higher use and intensity of diagnostics and I think debt to your point that that's the piece that we can control to innovation and our commercial strategies and.
Customer friendly marketing program and so that's why it and that's why our focus is on being able to really drive that awareness and education and adoption by the veterinary customer.
To deliver better better medical care and I think we provided some ranges in terms of what that looks like and.
And to take its a very healthy market backdrop, and and that's where our focus is.
I think we have time for one more question yes.
And our last question from J P. Morgan and we have Chris Schott. Please go ahead.
Great. Thanks, so much just two fairly quick ones here just on the topic of new pet growth I think you referred to about 10% from 2020.
How are you envisioning 2021, playing out is this another year of very healthy pet growth or do you expect as we kind of go through the year. The world starts to normalize a bit that we may be moderate back down to that 3% or so rate that we've seen historically.
And then my second one was.
Given all the favorable trends that played out in 2020 are you, making changes about how you think about promotion and commercial approach to to lock in these dynamics. So I know you've got a lot of initiatives that you've talked about continued growth of business, but have you changed what you're emphasizing or how you are approaching the vet just given what we learned.
About the kind of pet owner and willingness to spend over the last year or so thanks, so much.
Yeah. So just to do on tariffs, so that 10% with new pet clinical growth versus new.
Total pet growth and.
And the marketplace.
And we think that that's a healthy dynamic because they initially come into the practice as puppies and kittens and state they may get.
And their initial checkup, which includes diagnostics tests.
And.
To speak to your second point. The two are really related if we do our job well with preventive care programs and other programs that those puppies and kittens as they become dogs and cats and continue to get care on an annual basis or twice a year. So we think it's a healthy dynamic and plays into our strength, both commercial and marketing strategy.
Programs, we actually have in place are ideally suited to drive that so if you think about the preventive.
Care program that we have 4800 plus.
And customers enrolled and that that's had.
And that's a great example of a driver of medical services and in turn diagnostics usage and so our programs are geared towards driving education and adoption.
Both wellness and and non wellness.
Type type care and testing. So we think we're very aligned and we think it's you know it's a trend that we can sustain and.
That's the that's the plan to be able to do that.
And I think that's the last question I want to thank everybody for calling in and I know we have some employees who are also on the call and I just want to express my gratitude for their extraordinary performance. During these challenging times and we run the company and a way that takes a long term view of the opportunities ahead of us while still delivering today.
Couldn't be more appreciative of the IDEXX team and the purpose, which animates our work and so on what that will conclude the call. Thank you.
Yeah.
Thank you.
Ladies and gentlemen. This concludes today's conference. Thank you for joining and you may now disconnect at this time. Thank you.