Q1 2021 IDEXX Laboratories Inc Earnings Call
Good morning, and welcome to the IDEXX laboratories first quarter 2021 the earnings conference call as of.
A reminder, today's conference is being recorded.
Operating on the call of this morning are Jay and Lasalle Ski President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John <unk> Senior director of Investor Relations.
IDEXX would like the process the discussion today, where the caution regarding forward looking statements listeners are reminded that our discussion during the call will include forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today and.
Additional information regardless of the risks and uncertainties is available under the forward looking statements and orders in our earnings release issued this morning, as well as and 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 for IDEXX Dot com.
And during this call we'll be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
These include comparable gross profit growth.
Terrible gross margin gain of growth comparable operating expense growth comparable operating profit growth comparable operating margin gain of growth and comparable EPS growth. These non-GAAP financial measures exclude the impact of changes and foreign currency exchange rates and nonrecurring or unusual items if any.
Reconciliation of these non-GAAP financial measures for the most directly comparable GAAP measures is provided in the earnings release, which May also be found by visiting the Investor Relations website.
Of our web site.
And reviewing our first quarter 2021 of the results. Please note all references to growth organic growth and comparable growth refer to growth compared to the equivalent period and 2020, 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 the.
Rock participation and the Q&A, we ask that each participant and limit their questions to one with one follow up as necessary and we appreciate you may have additional questions. So please feel free to get back into the queue and if time permits we'll take your additional questions.
I would now like to turn the call over to Brian Mckeon.
Good morning, everyone.
I'm pleased to take you through our first quarter results and to provide and update on our financial outlook for 2021.
In terms of the highlights IDEXX delivered excellent financial results and Q1, driven by continued strong global momentum and our CAG business.
Revenue increased 24% as reported and 21% organically supported by 23% organic growth and CAG diagnostic recurring revenues, reflecting continued high gains across the U S and international markets.
Operating profit gains were particularly strong in Q1, reflecting flow through benefits from high CAG diagnostic recurring revenue growth and favorable comparisons to relatively higher prior year pre COVID-19 operating expense levels.
These dynamics and a higher than expected <unk> 17 per share and.
Stock based compensation tax benefits enable delivery of $2 35 and earnings per share and increase of 73% on the comparable basis.
Our strong start to the year has increased our confidence in achieving high revenue and profit gains in 2021.
And we're raising our full year revenue group outlook range by $40 billion to 3 billion and $105 to 3 billion wonder if the $60 million or reported revenue growth of 14, 5% of 16, 5%.
This reflects an updated outlook for 13% to 15% overall organic revenue growth, one 5% higher than our initial outlook.
We're raising our organic growth outlook for CAG diagnostic recurring revenues of $14, 5% to 16%, 2% higher at midpoint and our initial 2021 growth projections.
For full year financial outlook now reflects the targeted 150 to 200 basis point improvement and operating margins on a comparable basis.
These gains are projected to support EPS of $788 18 per share, reflecting 21% to 26% comparable EPS growth.
We're planning to deliver the strong profit gains, while advancing investments and our innovation and commercial capability to enable long term accelerated global market development and our core CAG business.
Well update or we will discuss our updated 2020 of outlook later in my comments, let's begin with the review of our first quarter results and recent market trends.
First quarter organic revenue growth of 21% was driven by 23% gains and CAG diagnostic recurring revenues, reflecting 21% growth and the U S and <unk>.
The 8% growth and international markets, including some benefits from the the lapping of prior year of COVID-19 impacts in late March.
Strong CAG gains also reflected a 27% organic growth and CAG diagnostic instrument revenues.
Overall Q1 organic revenue gains were supported by 9% growth and our LPG business, reflecting strong demand for African swine fever testing and China as well as by approximately 1% of growth benefit from our optic human COVID-19, and PCR test initiatives.
The key driver of our financial model CAG diagnostic recurring revenues expanded the high growth rates across the regions through the quarter.
First quarter results were largely consistent with the very strong two year growth trends, we saw and the second half of 2020.
On a two year basis CAG diagnostic recurring revenues increased at a 17% average annual organic growth rate.
We will be highlighting two year growth current selectively in the coming quarters as we calibrate the effect of year on year lapping of 2020 COVID-19 impacts on our growth results.
High CAG diagnostic recurring revenue gains were aided by continued high growth and clinical visits.
Overall U S clinical visit growth was 12% in the Q1, including some benefits from the lapping of prior year COVID-19 impacts in late March.
On a two year basis same store clinical visit growth increased at an average of 6% annual rate slightly higher than our second half 2020 trends.
And the IDEXX U S. CAG diagnostic recurring revenue growth premium to U S. Clinical visits was 900 basis points from the first quarter for approximately 1002 of 100 basis points adjusted for equivalent day effects.
Q1 U S clinic visit growth reflected the sustained strong 9% growth and non wellness visits and and increased 16% growth and wellness visits these gains were.
We're supported by relatively higher benefits from growth and new patients, which we estimated the added approximately 3% of overall clinical visit growth and 4% to wellness visit growth and the quarter.
The continued focus and expanded pet health care services, including increases and the utilization of diagnostics supported of 15% same store increase and overall veterinary clinic revenues in Q1 and of 21% same store increase and diagnostic revenues for practice.
Well ahead of 5% growth and overall visits to veterinary clinics and the quarter.
Positive market dynamics benefits from IDEXX commercial initiatives and technology to support higher standards of care and.
And continued very high customer retention rates drove strong Q1 organic revenue gains across our major testing modalities globally.
IDEXX Global reference lab revenues increased 22% organically in Q1, reflecting 20% plus organic gains in the U S and international markets.
Our international reference lab gains benefited from strong growth and Europe supported by our new German core lab capability for expanded commercial presence and growth and IDEXX 360 program agreements.
Global reference lab gains continued to be driven by high same store volume growth with strong gains across test and categories.
IDEXX lab consumable revenues increased 26% of inorganic basis, and the first quarter, reflecting continued 20% plus growth and the U S and 30% plus organic gains and international markets.
Gains continue to be supported by increases and testing utilization across regions high customer retention levels and expansion of our global premium instrument installed base.
CAG instrument placements increased significantly in Q1 compared to constrained prior year levels as clinics look ahead and supporting high growth of demand for diagnostics globally.
Total premium placements increased 32%, reflecting 26% gains and North America, and 36% growth and international markets.
Quality of CAG instrument placements was excellent reflected and 302 catalyst placements at new and competitive accounts and North America of 27% and 805, new and competitive placements in international markets of year on year increase of 15%.
We also benefited from 460 for second catalyst placements driven by continued strong demand from high volume customers.
These new placements and high customer retention levels supported of 13% year on year growth and our global catalyst installed base.
We achieved 956 premium hematology placements, including our initial shipments of Procyte, one supporting of 10% growth and our global premium hematology base compared to Q1 of 2020.
We also placed 577 and set of use including strong placement levels of international markets, leveraging IDEXX 360 agreements, which supported a 21% year on year global increase and our premium urine sediment install base.
We're very encouraged by the momentum, we're driving and expanding our in clinic install base as we prepare for continued improvement and sales access of veterinary clinics globally.
And advance the global launch of <unk> one.
Rapid assay revenues also expanded the strong 20% organic growth rate in Q1, reflecting mid teen gains and the U S supported by high demand for wellness testing and accelerated growth and international markets.
Of note retention rates for U S. Rapid assay customers reached 97% and Q1, the highest level seen since the initiation of our U S go direct efforts in 2014.
Overall high CAG diagnostic recurring revenue growth remains primarily volume driven across the modalities with consistent overall net price gains of 2% to 3%.
And other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 9% organically overall.
Double digit of gains and recurring software and digital imaging service revenues and solid growth and new software system placements were moderated by lower diagnostic imaging instrument revenue levels impacted by a year on year reduction and earlier generation instrument platform sales.
Turning to our other business segments water business revenues declined 3% organically in Q1 compared to strong prior year results, which included an estimated $2 million or 8% growth benefit from accelerated stocking orders.
Adjusting for these impacts water revenues increased solve the year on year as we continue to see relative improvement and non compliance related testing volumes that have been constrained during the pandemic.
Livestock poultry and dairy revenue increased 9% organically in Q1, driven by growth and our Asia Asia Pacific region.
Q1 results saw approximately 2 million of favorability from shipment timing, which largely offset favorable shipment timing impacts of Q1 of 2020.
The opening results benefited from strong demand for diagnostic testing programs for African swine fever, and growth and core swine testing volumes and China supported by large producer efforts to rebuild swine herds.
These gains more than offset lower herd health screening levels compared to strong prior year results.
We expect to see some pressure and our LCD revenue growth rate moving forward, particularly and the second half of this year as we begin to lap the benefits from high prior year of demand for African swine fever testing programs and the increased levels of local competition in China.
Turning to the P&L, we had strong profit flow through in Q1, as we benefited from high CAG diagnostic recurring revenue gains and comparisons to relatively higher pre COVID-19 operating expense levels and the first quarter of 2020.
Overall operating margins expanded 830 basis points year on year, and a comparable basis driving an increase in operating profits of 72% as reported and 65% on the comparable basis.
Gross profit increased 31% and Q1.
Gross margins increased 320 basis points on a comparable basis, reflecting productivity improvement and our lab operations supported by higher organic revenue growth favorable impacts from strong consumable sales and benefits from moderate net price gains.
We're planning for gross margin gains to moderate over the balance of this year as we lap tightly controlled prior year of spending levels and increased reference lab staffing to support high revenue growth and service levels.
Operating expenses in Q1 increased 4% as reported and 3% on the comparable basis.
As noted operating expense growth was moderated by comparisons to higher prior year pre COVID-19 spending levels.
<unk> much higher prior year first quarter travel trade show and sales meeting costs.
Our 2020 financial outlook includes expectations for an increased rate of Opex growth moving forward as we lap comparisons to control prior opex levels and invest to support our strong global growth momentum through enhancements to our commercial and innovation capability.
We're also planning for year on year increases and costs in key areas, such as employee health care claims and travel costs as we work through the year and pandemic related restrictions are eased.
Q1, EPS was $2 35 per share, including benefits of $15 million or <unk> 17 per share related to share based compensation of activity.
On a comparable basis Q1, EPS increased 73%.
Foreign exchange at a $10 million of operating profit of nine to EPS in Q1 net of approximately $2 million and hedge losses.
Free cash flow was $104 million and Q1 on a trailing 12 month basis, our net income to free cash flow conversion rate was 99% and.
Including benefits from delayed capital spending and extension of tax payments.
For the full year, we're maintaining a consistent the outlook for free cash flow conversion of 80% to 90% of net income.
Our balance sheet remains in a very strong position we ended the quarter with leverage ratios of 1.0 times gross and <unk> six times net of cash the $350 million and cash and no borrowings and our $1 billion revolving credit facility.
We re initiated share repurchases in Q1, allocating $154 million of capital to repurchase 305000 shares.
Turning to our 21 full year outlook, we're increasing our projected ranges for overall revenue growth to 14, 5% to 16, 5% as reported.
This reflects a 150 basis point increase and our projected organic revenue growth range offset by approximately $5 million and refinements to our FX assumptions, which and I'll point to a positive one 5% full year growth benefit this year at the rate shared in the press release.
Our updated organic overall organic revenue growth outlook of 13% to 15%, reflecting the estimated organic growth range of 14, 5% to 16% for CAG diagnostic recurring revenue.
As noted we've raised the CAG Dx recurring revenue growth outlook by 2% at midpoint to reflect our strong Q1 results trends that point towards a sustained high rate of U S clinic visit growth.
And confidence and our global CAG commercial execution, which is driving strong momentum and our international regions.
As a benchmark of our updated recurring revenue growth outlook aligns with the higher end of our earlier projections for 2% to 5% same store U S clinic clinical visit growth for the full year of 2021.
And and expected premium of IDEXX U S. CAG diagnostic recurring revenue growth the clinic because of growth of approximately 902000 and basis points.
The increase and our CAG diagnostic recurring revenue growth outlook, which results in over $50 billion of operational revenue upside is.
Being moderated by relatively more conservative full year projections for IDEXX EBIT COVID-19 testing.
We estimate that we will see approximately $10 million and lower human COVID-19 revenues year on year and the second half of 2021 as we lap the benefits of our prior year of initiatives and plan for moderation and testing levels.
We have also moderated our outlook for LPG growth to reflect the increased local competition in China, including and our African swine fever testing business.
Combined these effects resulted in a 0.5% headwind compared to earlier overall 21.
Organic growth outlook.
Given the lapping of prior year COVID-19 impacts there will likely be significant variability and year on year revenue growth rates by quarter with continued expectations for higher revenue growth and the first half of 2021.
In terms of key financial metrics as noted we're now targeting of 150 to 200 basis points of annual comparable operating margin improvement of 21.
And in 'twenty, one up 100 basis points from our initial outlook.
This is reflected in our reported operating margin outlook for 2021 of 28, 3% to 28, 8%.
Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide 15th of positive EPS benefit in 2021 net of established hedge positions.
Our full year outlook also includes an updated estimate of <unk> 19 per share of tax benefit related to share based compensation activity and <unk> per share higher dinner of initial projections.
We provided details of our updated estimates and the tables and our press release and earnings snapshot.
That concludes our financial review I will now turn the call over to Jay for his comments.
Thanks, Brian and good morning, IDEXX had an excellent start to 2021, driven by continued strong market trends and our core <unk> business and strong execution. This resulted in 21% quarterly organic revenue growth and the first quarter and high profit flow through supported by 23% organic growth for cash.
Ignostic recurring revenues there were strong gains across all of our market segments, our business performance reinforces the tremendous long term opportunity, we see to develop the global market for companion animal health care and.
It gives us confidence to raise our 2021 outlook just deliver 14, 5% to 16% organic growth for CAG diagnostics recurring revenues and.
21%, 26% gains and comparable EPS growth.
Good day I'll provide an update on the trends, we're seeing and our companion animal markets and our approach to drive accelerated market growth leveraging IDEXX innovation to raise the standard of patient care.
I will also provide and update on our product and commercial initiatives that will enable us to capitalize and mark <unk> and position the company to deliver continued strong financial returns.
Let's begin with an update on market trends.
Companion animal health care continues to see strong global and market momentum.
This is reflected and for example, and the U S market data showing higher growth and clinical visits and continued high growth and services supported by expanded utilization of diagnostics.
And as Brian highlighted we saw continued high use of clinic visit growth of 12.
<unk> percent and the quarter with non wellness visits up 9% and wellness visits up 16% with strong growth seen across practices of all sizes.
New patients continue to be a significant contributor at the clinical visit gains we estimate that new critical patients added approximately 3%. The overall critical growth versus Q1, 2020 up from 1% to 2% and the second half of 2020, and we continue to see record levels and for.
Gesture and testing evidence of the continued step up and breeder activity.
The growth and puppies and kittens and continued evidence of the deepening of the pet owner bond augmented by the growth and new pet parents can provide long term tailwind for our business.
As the benchmark, we estimate that the average annual diagnostic revenue per senior for geriatric pet is double the amount, we see per pet for puppies and kittens.
If we do our job well with programs like preventive care and could help to drive twice the level of annual visits and the young well pets and continue to expand diagnostics usage through life stages, and thereby helping advanced standards of care.
And looking at our U S market data, we've seen an acceleration and the utilization of diagnostics and our earnings snapshot, we shared annual data for the percentage of 2020 clinical visits including blood work.
The percentage of clinical visits with the Bloodwork increased approximately 1% to 18% and 2020.
Double the historical rate of annual increase.
Interestingly, the highest increases were and customer desk sales doing more testing.
With gains across wellness and non wellness bloodwork utilization reinforcing the point that EBIT the highest users of diagnostics has significant potential for further growth.
And increased focus on services and adoption of higher standards of care and areas like diagnostics are driving very strong overall growth and veterinary clinics and the first quarter same store total practice revenues increased 15% versus the same quarter last year.
Selecting a 19% growth and clinical revenue per practice, and 21% growth and diagnostics revenues.
Clearly our customers are extremely busy it's not surprising that they are looking for help from partners like IDEXX to support the high levels of business growth through our customer centric solutions offerings.
We're particularly pleased with our commercial execution to support these customer needs evidenced by 32% year over year growth in premium instrument placements globally.
Including strong growth and placements at new and competitive accounts.
A key area of focus has been leveraging our integrated direct go to market model to accelerate international growth we.
We achieved 28% CAG diagnostics recurring organic revenue growth internationally, and Q1 with strong gains across all of our major regions, while driving a 36% year over year increase and premium instrument placements outside of North America. Despite continued restrictions and sales access to clinics.
IDEXX 360, <unk> continues to gain traction internationally, resulting in higher growth with customers leveraging IDEXX technology across modalities.
IDEXX 360 is helping to accelerate growth and our international reference lab and key markets like Europe.
<unk> by our state of the art cornered lab, and core and West time, Germany, and our expanded commercial presence the.
The international commercial expansion efforts, we've highlighted continued to progress the plan with the goal of completing Onboarding of new sales teams in key markets and the first half of 2021.
The outstanding growth momentum and long term potential for IDEXX and international markets reinforces the high return from investments and our global commercial capability.
The advancing international commercial expansion will continue to be a key strategy.
Innovation is another key pillar of our growth strategy and <unk>.
Late March we reached an exciting milestone when we began shipments of our next generation and hematology analyzer Procyte water.
I'm very proud of the extent of team <unk>.
<unk> R Westbrook, Maine based instrument manufacturing personnel for delivering this world class analyzer on schedule during the pandemic to the delight, our customers or for our sales and installations, where the U S clinics and participated in our customer experience trials, which is a testament to their highly positive experience with the analyzer per site.
Lots of exceptional simplicity and accuracy give our customers confidence and running the analyzer and and the patient results.
This is helping to gain efficiencies and practices and this truly at best in class experience Press I want also represents the next step for IDEXX and providing leading edge technology integrated with information management, which enables clinical decision support and supports a wide range of veterinary and partners and providing the highest levels of care.
We expect pro side wanted to drive CAG growth S chemistry, and hematology testing go hand in hand, and as part of the IDEXX 360 program to help drive reference lab usage.
This quarter, our commercial focus for proceeds of one is on shipments of the clinics that took advantage of our pre sales program.
And currently manufacturing and building volume to support our sales ramp through 2021, Inc.
Clothing, the international rollout expected to begin in late Q2 early Q3.
The snap pro instrument, it's another investment and innovation that supports our customers at the point of care by providing workflow benefits accurate reading of diagnostic results on the snap platform and smart service connectivity.
Our veterinary partners are busier than ever so providing ease of information management within the practice is the key benefit to help them save precious time, while maintaining accurate and records snap pro provides the tool to address these needs and this helped drive recent growth internationally for our rapid assay business, we see high engagement from.
The international customers, who are actively using snap pro and our connected the smart service with growth and retention rates consistent with trends across the U S customers.
We're also making excellent progress and expanding our installed base and key geographic markets like here.
Which helped to drive 20% organic growth and global rapid assay revenues and the first quarter.
Our innovation agenda is also driving favorable business performance for our software portfolio.
<unk> had another excellent quarter record breaking worldwide pinch of placements and the quarter grew 43% versus Q1 of last year.
And with two out of every three tims placements driven by cloud based technology.
IDEXX web pacs saw double digit growth and subscribers, including improvements in customer retention levels for over 96%.
We receive consistent price from subscribers about usability value and support for the web Pacs system.
The important feedback and so we look to expand this product into new markets.
These integrated offerings together create a diversified technology stack that provides multiple customer benefits to help manage the growing productivity demands of vendor.
Free clinics and of high growth market.
Through our <unk> tools through our Perms and tools like smart flow. Our focus is on improving clinic workflow by seamlessly connecting data between devices. The streamline every step for patient admission to discharge.
By bringing AI capability to tools like Westpac's, our platforms and neighbor faster procedures, while leveraging data to deliver insights and reduce efforts by clinic staff.
Extending to the client or communication applications and more compelling than ever with the next managing a significant portion of visits curbside.
Connected software is critical for clinics and creating capacity to meet the increasing demands for veterinary services.
<unk> is uniquely positioned to serve customer needs and this area enhancing our value proposition and differentiation.
In terms of other key initiatives, we continue to promote the advancement of preventive care and annual wellness testing for the IDEXX preventive care program.
In addition to increasing the standard of patient care preventive care programs can help veterinarians improve practice capacity do more predictable schedule and level loading of practice staff and the first quarter. The commercial team executed over 200, new enrollments, bringing total enrollments to over 5000, which is an exciting and milestone.
We are more than halfway to our goal of 10000 enrolled customers and the U S by 2024.
As our customers enter the wellness testing season, and wellness visits accelerate and the market. We are focused on continuing to capture the underdeveloped market opportunity and vector borne disease testing.
There are significant long term opportunities to expand the vector borne disease testing in particular, given the current prevalence of heartworm only testing and the us shifting the balance to a full of vector borne disease screening using 40 ex plus not only enhances the standard of care it represents and material opportunity for clinics of.
Drive additional revenue.
This focus and strong underlying market trends helped to deliver double digit revenue growth across all regions led by increases and utilization of 40 X plus and feel.
Your line retrovirus tests.
As we look ahead and we're very excited about the opportunity to leverage our commercial capability innovation and partnerships with the customers to build on our strong growth trends.
A key area of focus for US is the continued to invest in the infrastructure necessary to meet high levels of growth, while maintaining top notch service levels and prioritizing support for our workforce.
Our employees and customers have shown high levels of the adaptability and resiliency and continue.
And COVID-19 related restrictions and we look forward to a post the COVID-19 environment.
We anticipate more flexibility and the future and leveraging new ways of working together with our colleagues and customers.
I'd like to add that I'm extremely proud of the way that the IDEXX team is executing.
We're on track for a strong 2021.
That concludes my opening remarks.
And we now have time for some questions.
Thank you and now begin the question and answer and you have a.
A question. Please press Star then one on your Touchtone phone.
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And our first question from Michael <unk> from Bank of America.
Hey, Thanks for taking the questions and congrats on the strong water dies.
To start I wanted to ask on <unk>.
And the focus on some of the the Opex side of things obviously.
Great quarter here.
And on the margin side and the coming out of the gate, but.
Ryan and Jay you, both had comments and your prepared remarks sort of on how to manage spend going forward.
Both from the fact that you're going to be lapping some easier comps, but also that you want to invest.
Into the growth and the business I think you mentioned, adding on some staffing and the reference lab side.
Could you expand on that a little bit and is there anything on the.
Tax deal based personnel and just sort of how should we think about reinvesting some of the gains of the business to support the growth for.
For the rest of the year.
Yes, Mike why don't I start by just kind of.
Framing the.
And the comparisons that we're trying to highlight as we move forward because that's a key dynamic we're just trying to reinforce quickly and we've had very strong.
The strong profit results and Q1.
We are going to start entering a period here, where we're going to be comparing ourselves to.
Kind of the controlled spending levels that we implemented last year. So if you recall we had.
$25 million of of Opex savings that we highlighted last second quarter, another $5 million of savings from lower health care costs, we really and the.
Early stages of the pandemic tried to be very mindful of how we are controlling labor costs in areas like the labs and so we're just trying to highlight as we move forward, we're going to we're going to see.
Some of those comparison effects moderate the margin gains the gross margin gains and we will see relatively higher opex growth again at the benchmark just in Q1.
Had over $7 million of cost reduction year on year from things like lower sales meeting costs, and TNT, which is about 7% of opex growth. So moving forward, we won't have those kind of favorability and so we're just trying to highlight that and we're also trying to highlight that.
We're advancing investment of the business some of the Jay can talk a bit of both of them. Yeah. Sure. So just a couple of things to build on and Bryan's comments, obviously, we're in a high growth environment and theirs.
The excellent opportunity to continue the support that growth, we do that obviously and areas like reference labs, and and production and field support and the other.
And the area of opportunity for US is just the international markets. We've identified this as being very attractive and.
And we continue to advance our expansions, where where it makes sense, we know that there's a pretty good short term return of those expansions. We have I think really optimized our ability to identify all of the right pieces you need to have in place including additional field.
Personnel reference labs, and information technology investments and those type of things. So we're very we're very optimistic about the opportunity of short term and longer term.
Markets U S as well as international and we will continue to advance as we see opportunities before us.
Great. Thanks, and then if I could throw and a follow up.
And sort of on some of the underlying segments and provide for market conditions.
And as the snapshot the very helpful in terms of visit growth and.
Revenue growth for practices I'm.
And I'm, just curious looking at it and one more granularity.
It seems like Youre actually seeing continued acceleration.
From <unk>.
On a raw number of spaces being with you adjust for some of the comp I think I guess I would say that we were expecting a little bit more moderation and maybe a gradual phase as you go through the year, but it seems like there is no indication of that is that is that a fair analysis of the data have you seen anything.
That would indicate that things are moderating a little bit and some of these.
Market sort of come out from COVID-19 and we're seeing some reopening of the economy. Just wondering if you could talk about sort of the underlying trends there.
Say overall, Mike the theme would be more consistency than change.
What we saw in 2020 was and improvement if you break down the drivers of things like <unk>.
CAG diagnostic revenue growth and the clinic we saw.
Higher levels of contribution from a frequency and utilization and.
And those of sustained if there was one thing that improved a bit and Q1, which we highlighted and the comments was the new patient contribution to clinical visit growth was was up about 100 basis points. So I think some of the.
The building of effect of the new puppies and kittens helped.
But.
Adjusting for that the two year growth rates for largely consistent with Q4.
It was it was more consistency and change we're entering a period now where we will have the the.
The COVID-19 compares.
The growth rate numbers are a little tougher to fall of so we're trying to highlight some of the two year trends and.
And I think we're encouraged that the two year trends are holding up well and the.
And that's factored into our outlook for the balance of the year.
I would just add to that Mike that the transfer.
Describe the broader level trends, we've described net loss.
Actually bid and tax so these are obviously the critical.
The business growth driven by new.
The new patients.
The majority of which are puppies, and kittens and higher usage and intensity of diagnostics and more of a pivot the services by the veterinarians for those that we have seen over the last.
Second half of 2020, we continue to see and Q1 and one thing I'd highlight in addition to the market trends as.
In terms of IDEXX is execution of our international teams are really doing an excellent job we had.
Excellent instrument placements growth and 360.
The global commercial model that we've been looking to to leverage and.
And build upon is really.
Really and a good place and we're very pleased with the international momentum. So I wanted to highlight the.
Our next question is from Erin Wright from Credit Suisse.
Great. Thank you and the incremental charge chocolate grew and the percentage of critical business, including the black weapon sales by one for some for that.
Acceleration from the prior to COVID-19.
The annual basis, but with the drug.
And mostly by the greater proportion of acute visits during the pandemic and how should we be thinking about that the acceleration continuing with potentially greater adoption of any of it.
The measures as well as other initiatives and it.
And in the cloud.
I'll make a couple of comments about that and so the the use of blood work is the growth rate is approximately doubled as we talked about a percent.
In 2020, and the versus about a 5% previous year and so there's a number of things that that are driving that.
<unk> seen a greater proportion of the higher users of <unk>.
Diagnostics continue to increase and we see that.
Optimistically as evidence that even for those who are at the higher range from a desktop standpoint of diagnostic users and feel like there's a lot more capacity. We also see.
As part of clinical visits greater use of diagnostics and then when there is a greater intensity has also gone up so all of those factors.
Are playing into it.
And we think that the sustained.
The three plus quarters.
Yes.
Okay, Great and Inc.
And can you provide and update on from traction guarantee and anticipate that accelerating throughout the year and how.
And how is that tracking relative to your internal expectations.
Yes.
Free excited and optimistic about the <unk>, it's been a very successful.
Rollout these things at the time and distance.
And to these as weak as we rollout the new analyzer in terms of building volume.
Production and create awareness and the.
Marketplace the.
And think about Procyte one is the the opportunity itself is very significant we think that there are 100000 plus.
The opportunities for placement and the hematology market, but there's also a nice multiplier impact where this hematology. There's chemistry. So we tend to place us together as part of IDEXX 360, theres pull through and.
In terms of.
The reference labs, and and rapid assay not just for the U S now, but but internationally and.
So the work we're excited by the opportunity I think our experience the customer experience trials have given us a lot of confidence that the.
Analyzer has hit the market both in terms of the usability and performance and we expect.
The growth throughout the year.
And especially sales internationally as we release.
Q2, early Q3 pending on things like regulatory approvals.
Great. Thank you.
Our next question is from non block from Stifel.
Thanks, Good morning.
Maybe two questions for me Brian the first one is a little long both for you I think the level of year over year gross margin expansion. I think you said you expect the year over year level of moderate but just to be clear does it stay in this low 60% range and then on the balance sheet. The leverage I think you called out of 0.6, and net now might be the lowest level.
I can remember since you came in the CFO and started of flex it a bit you've got a couple of big Capex build outs, that's now behind you and Germany and Westbrook. So just maybe if you can comment on how we think about cap deployment going forward and then I've just got a quick follow up.
And your first question on gross margin. We are we're seeing a really nice of flow through and obviously the the high CAG Dx recurring mix and just the strong growth for us helping.
We do anticipate John we're going to be adding back some some costs here to keep up with the growth, particularly in things like lab staffing and then we will have.
Some compares just to the to the.
And as I mentioned on the year over year basis, but we're still anticipating.
The high level of gross margin flow through and that's factored into our into our outlook and Don and leverage you're correct. We did.
And we're quite disciplined last year in terms of.
Pausing share repurchases and really controlling our capital spending of.
Capital spending on an annual basis was below kind of the the normal levels that we typically have and we deferred some projects and where you will see a step up and that as we move forward.
Now the changed fundamentally and our long term view, but just.
And catching up and some of the deferred capital spending.
And right now, we're just signaling maintaining the kind of net leverage ratios that you see we did initiate buybacks in Q1 and and feel good about sustaining those so.
But I'm not trying to signal any change to the leverage profile that this.
Okay got.
Got it very helpful and then.
June quarter, but we got and try to anticipate some of the potential push back and the only thing that I can try to identify as you mentioned the 900 basis point U S. CAG recurring premium to clinical visit growth.
And from the 600, 1200 premium and <unk> and <unk> 20, respectively. I think you said day adjusted it was closer to 1000 of 1100, bips, but any thoughts on why that slight moderation J maybe in light of the vets as you mentioned and still focusing a lot more on services that their practices and how do we think about the premium.
The forward is it still and that thousand Bip range. Thanks, guys.
Yes, Jonathan Theres always a little bit of.
Variability from quarter to quarter, and we think of that 900.
Plus premium is it's what we've seen over the last court last quarters of 2020, and we think the debt is sustainable I think it's the reflection of a couple of different things, obviously, the pivot to services, which if anything.
Accelerated as part of the.
The COVID-19 response in clinics, but it's also a response that our strategy is the company around innovation and <unk>.
Commercial partnership with our customers and bringing testing relevant testing.
The practices and so we think that that's a successful formula and it's supportive of what veterinarians and pet owners want to say in terms of better better patient care.
Higher standards of care for patients and.
And that will continue to be of focus for us from a commercial and innovation strategy standpoint, and Jonathan one thing I'd highlight too I know youre looking quarter by quarter, but Q3, I think you need to factor and there was some pent up demand likely effects and so I think the.
And the overall trends very healthy and set the higher end of our outlook, it's above where it was free COVID-19, we feel very good about the.
The growth and services trend as being sustainable something thats going to.
And enhance our growth profile.
Our next question is from Nathan Rich from Goldman Sachs.
Hi, good morning, Thanks for the questions I actually wanted to start with the follow up to John's question on the CAG Dx guidance.
Brian and thank you said it was up 2%.
Relative to the prior outlook I would just be curious to get some more details on the underlying assumptions.
Around the visit growth and increases and diagnostic utilization I think you had talked about kind of 2% to 5% visit growth for the year previously and then that 9% and 10% premium that was just referenced so I'd just be curious if you have any cash.
And of updated assumptions as we think about the balance of the year on those metrics share what did I start a little higher level with the global numbers, but made are our update of range the higher and of the CAG Dx recurring range basically assumes similar two year growth trends to what we saw in Q4 and Q1, so it's largely in line.
And with that and I think the.
That is the primary driver of the update I think is the gist.
More confidence coming through Q1 on sustainability of some of the trends and some positive dynamics with clinical visit growth and.
And so thats more of the headline we're still maintaining.
A level of range because that may moderate we may see some pullback we're going to be up against some compares here, but I think.
On balance we feel very good about the trends and if anything the <unk>.
Improved a bit and Q1.
And as a benchmark.
We do try to highlight that U S.
Clinical visit growth and and premium dynamic that you mentioned and our initial estimates for 2% to 5% for the full year for clinical visit growth of one year basis, and the 902 of 1000 basis point premium and I did mentioned that our updated outlook reflects that we're trending at the higher and on clinical visit.
And that we are reinforcing the premium outlook, which is right in line with where we were in Q1, So I think I think the.
Just the underlying market trends of sustained we feel we feel good about that and we are.
Seeing that globally and I think we feel very good about our execution and now of course have things like prostate wanted to.
As innovation initiatives that will that will help us build on that momentum.
Great that's helpful and if I could just ask a quick follow up on <unk> one.
Can you talk about I guess, maybe Jay the.
The placements that you've seen so far and maybe the orders that you're getting how many of those are in new or competitive accounts versus with the existing customers and can you. Maybe just talk about the opportunity to use kind of profile. One is maybe a lever to get into practices at IDEXX is and and currently.
Yes.
Early in the rollout, but we're very pleased so it's been a very successful Rob the very successful customer experience trials and not easy to do by the way and the middle of the.
Pandemic this is the.
Complex.
Instrument and.
It has world class user.
And performs at a very high level from <unk>.
And the accuracy staff.
Standpoint, we've identified the hematology opportunity is very significant for the company and keep in mind of lot of our international markets. Our hematology first markets and so what that means if they have the choice in terms of.
And if it's one instrument or not and they tend to choose hematology and the test with hematology, even before chemistry, even when they they have both so in terms of the opportunity itself. As earlier described it almost of 100000 placement opportunities two thirds of plus of which is internationally.
But EBIT EBIT more importantly, if I pivot just the higher level comment it's an important part of our overall and codecs solution, we tend to sell chemistry, and hematology increasingly sadieville together.
Having this type of this type of solution, which from a performance and cost profile standpoint.
The sweet spot of the market is obviously very attractive to us and the other thing that I would point out is that the increasingly the IDEXX.
IDEXX 360 program is just getting terrific traction internationally.
And as part of that capital placement pace is the is the anchor and theirs.
And there's pull through.
The reference labs and rapid assay.
Of delivering the underlying volume commitments. So we're excited by the overall CAG diagnostics opportunity.
The second one represents kind of half we think of very long tail.
Both of the duration.
Yes, as well as overall volume opportunity so more to come over time.
And our last question from a logic for spot from Barclays.
Your line of logic.
And so you get the interest costs.
Thanks, Neil Thanks for the questions just two follow up questions for me.
One of them pretty broad level, one trying to understand the technical if any.
And I meant of.
Gulf coming through market share gains and this quarter or was it all what we could pursue belt of industry growth led by visits and increasing utilization and <unk>.
Lee.
Vince Survey indicated a 200 basis points jump in Y O Y and revenue contributions for clinics from diagnostics does that sound right and are aligned with your internal tracking thank you.
And so on.
Markets rockets of very competitive they have always been very competitive.
We're pleased with what we've been able to advancing our commercial agenda.
We share some data out of new and competitive placements with with catalyst of both in North America as well as international. So you can make your own assumptions in terms of what that means our focus is just continuing to support and serve our customers.
And with IDEXX solutions, we do that both of the instrument side, obviously the broader.
The diagnostic solutions and <unk>.
<unk> and what we find is when customers use all of our solutions.
Grow faster they tend to stay with us longer and they find it supports the practice needs in terms of the survey of you're mentioning I'm not familiar with that so I'm just going to withhold comment not knowing the underlying methodology.
Fair enough. Thank you and maybe a specific comment if you could throw some light on what youre seeing with the since the launch of <unk> in Q4 and <unk>.
And if it is disrupting the market and the what are you seeing on the clinic.
Cleaning side in terms of comments.
Yes.
The key question and more generally about the.
The fecal fecal detection and.
And our belief is that the fecal antigen tests that we offer at the reference lab.
Best of class.
If the tax up to two times as much and traditional benefits like like <unk> and <unk>.
They're interested and number of challenges and doing fecal within the clinic first and for US for first and foremost is the sample prep.
And Thats very time consuming and continues to be messy.
And then you can you can develop and algorithm that the techs eggs.
Yes.
And as part of the parasites worms, but at the end of the day they have to be available that you have to be able to initially see them the benefit and bank.
The <unk> able to detect the of antigen testing.
Yes.
You are able to see them and the prepayment period, which is between four and six weeks earlier and physically when the ex of apples. So you get better detection piece and so we like our solutions, we think our customers appreciate the fecal antigen at the reference labs and that's why we continue to support them.
Thank you I'll now turn it back over to Jay for final remarks.
Thank you I want to thank everybody for calling in and I want to express my gratitude for the IDEXX team for their ongoing extraordinary performance. During these challenging times, we have and amazing purpose and the opportunity as a company and I couldn't be more appreciative of the IDEXX team and how they live our mission every day and so with that well for the call and thank you.
Thank you ladies and gentlemen that concludes today's conference. Thank you for participating and you may now disconnect.