Q2 2021 IDEXX Laboratories Inc Earnings Call
Good morning.
And welcome to the IDEXX Laboratories second quarter 2021 earnings Conference call. As a reminder, today's conference is being recorded.
Participating on the call. This morning are James <unk>, President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John <unk> Senior director of Investor Relations IDEXX.
And I'd like to preface the discussion today with a 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 additional information.
Information regarding these risks and uncertainties is available under the forward looking state.
<unk> noticed in our press release issued this morning, as well as and our periodic filings with 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 accordance with generally accepted accounting principles or GAAP.
IDEXX 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 reviewing our second quarter 2021 results. Please note all references to gross 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 1 on your Touchtone phone to allow broad participation in the Q&A, we ask that each participant limit their question to 1 with 1 follow up as necessary. We appreciate you may have additional questions. So.
So please feel free to get back in 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 second quarter results and to provide an update on our full year financial outlook for 2021.
In terms of highlights IDEXX delivered another quarter of outstanding.
And in financial results supported by continued strong global momentum and our companion animal business.
Revenue increased 30% as reported and 25% organically.
Courted by 26% organic growth and CAG diagnostic recurring revenues, reflecting continued high gains across U S and international regions.
As we.
Comparisons to prior year, Covid impacts will be highlighting select 2 year average annual revenue growth metrics and calibrate our business trends and.
And the second quarter average annual 2 year organic growth for CAG diagnostic recurring revenues was 16% in line with the strong 2 year growth trends in Q4 and Q1.
Opera.
<unk> increased 30% on a comparable basis and the second quarter, reflecting benefits from high revenue growth and moderate operating margin gains.
And we begin to lap the tight cost controls introduced during the initial phase and stages of the pandemic and 2020.
Hi, operating profit gains enabled delivery at $2.34 and earnings per share.
Share and increase of 33% on a comparable basis.
Continued strong momentum and our CAG business has us on track to deliver high revenue and profit gains in 2021.
And we're raising our full year revenue growth outlook range by $55 million at midpoint to 3 billion and $170 million to 3 billion.
And probably $105 million.
This reflects an outlook for reported revenue growth of 17% to 18, 5%.
Including favorable impacts from FX changes and benefits from our recent acquisitions.
Our updated full year outlook is for $14.5 per cent to 16% overall organic revenue.
And 2 and 16% to 17, 5% growth and CAG diagnostic recurring revenues.
These organic growth ranges are 1% to 1.5 per cent higher than our last outlook, reflecting expectations for sustained strong performance and our CAG business globally.
Our full year financial outlook reflects a targeted.
And to grow 175 to 225 basis point improvement and operating margins on a comparable basis of 25 basis points from our last outlook.
As we advanced increased investments and our CAG innovation and commercial capabilities.
We're increasing our EPS outlook to $8.20 to $8.36 per share of 25 cents.
Per share at the midpoint, reflecting 25% to 27% full year comparable EPS growth.
We will discuss our updated 2021 and financial outlook later in my comments.
Let's begin with a review of our second quarter results and recent sector trends.
Second quarter organic revenue growth of 25%.
<unk> was driven by 27 per cent CAG revenue gains and 27% growth and our water business benefited from the lapping of prior year pandemic impacts.
As noted CAG diagnostic recurring revenues increased 26% organically, reflecting 24% growth and the U S and 30% growth and international regions.
And 2 year basis average annual CAG diagnostic recurring revenue growth was 16% overall, reflecting 16% gains and the U S and 18% growth and international.
Strong CAG results were also supported by 78% organic growth and CAG diagnostic instrument revenues compared to constrained prior year levels.
Q2 growth and U S. CAG diagnostic recurring revenues was aided by high year on year gains and U S clinical visits better.
[noise] fitting and part from comparisons to lower visit levels in April and day of 2020.
U S clinical visit growth was 13% overall in Q2 with strong gains across non wellness and wellness visit categories.
On an average 2 year basis same store clinical visit growth increased debt of 4.8% annual rate down modestly from strong Q1 results the.
And the IDEXX U S. CAG diagnostic recurring revenue gross premium to U S. Clinical visits was approximately 1100 basis points and the second quarter up moderately and on track with our full year outlook.
Expanding pet health care services, including continued solid increases and the utilization of diagnostics.
Supported a 16% same store increase and overall veterinary clinic revenues in Q2.
Diagnostic revenue per practice increased 15% on a 1 year basis, and 12% and an average 2 year.
Year basis in Q2.
Looking ahead to the second half of 2021 as noted on our last call. We expect to see lower levels of 1 year growth and U S clinical visits and CAG diagnostic.
Revenue gains as we lap the significant step up and demand, we saw and the second half of 2020.
These dynamics are factored into our revenue.
And switch project sustained strong tier growth and CAG diagnostic recurring revenues and H 2.
IDEXX innovation and commercial initiatives continue to build continue to build on positive health care demand trends driving high Q2 organic revenue gains across our major testing modalities globally.
IDEXX Global reference lab revenues increase.
<unk>, 25% organically in Q2, reflecting 20% plus organic gains and the U S and approximately 30% growth and international regions.
Our international reference lab gains continue to benefit from strong growth and Europe supported by our new German core lab capability, our expanded commercial presence and growth and IDEXX 360.
The program agreements.
Global reference lab gains continue to be driven by high same store volume growth with stronger and get strong gains across testing categories.
IDEXX vet lab consumable revenues increased 26% on organic and inorganic basis and the second quarter also reflecting continued 20% plus growth and.
The U S and approximately 30% organic gains and international.
<unk> continued to be supported by increases and testing utilization across regions.
Customer retention levels and expansion of our global premium instrument installed base.
CAG instrument placements increased significantly in Q2 compared to constrained prior year levels.
<unk> total.
Total premium placements reached 3000, and 756 units up over 400 units from strong Q1 results and double the placement levels seen last year.
The quality of CAG instrument placements remains excellent and reflected in 308 catalyst placements at new and competitive accounts and North America.
80.
And 1% year on year, and 938, new and competitive placements in international regions up 75 per cent.
We also benefited from 571 second catalyst placements driven by continued strong demand from high volume customers.
And placements and high customer retention levels supported a force.
87% year on year growth and our global catalyst install base.
We achieved 1119 premium hematology placements, including hundreds of Procyte, 1 installs as we advance our global rollout schedule.
Supported 11% growth and our global premium hematology installed base compared to Q2 of 'twenty.
2020.
We also placed 662 set of use including strong placement levels and international regions under IDEXX 360 agreements, which supported a year on year global increase and our premium your urine sediment installed base by 24%.
We're looking forward to building on this momentum as we gain increased direct.
14 persisted and veterinary clinics globally and support strong demand for diagnostic testing.
Rapid assay revenues also expanded at a strong 28% organic growth rate in Q2, reflecting 20% gross gains and the U S supported by high demand for wellness testing and accelerated at 30% plus growth and international geographies.
Geography.
Of note core vector borne disease retention rates per U S rapid assay reached 97% and the quarter and.
Aligned with sustained high IDEXX retention rates across our major modalities.
Hi, CAG diagnostic revenue and road remains primarily volume driven across our modalities with consistent overall debt.
Check out gains of 2 percentage of 3%.
And other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 26% organically and 33% as reported including initial benefits from our recent easy vet acquisition.
We saw high growth and diagnostic imaging system placements driven.
Net price favorable customer response to our entry level image viewed your 30 platform with approximately 80 per cent of placements at competitive accounts.
We also continue to see 20% plus growth and recurring digital service revenues, including expansion of web Pacs subscriptions align with our expanded cloud based capability.
And by our veterinary software services business, we posted double digit organic revenue gains driven by growth and cornerstone and neo placements and strong growth and recurring services.
As Jay will discuss we expanded our cloud based software capability to our recently announced acquisition of EZ debt, which closed in June.
We estimate easy bit will contribute approximately.
$15 million to full year, 2021 revenues, which is factored into our updated outlook.
Turning to our other business segments water business revenues increased 27% organically in Q2 compared to 16% declines and last year's second quarter, driven by early pandemic related impacts.
We continue to see.
And as solid recovery and demand for water testing as economies reopen including recovery of noncompliance related testing volumes that have been more constrained during the pandemic.
Livestock poultry and dairy revenue decreased 2% organically in Q2.
Gross results were constrained by the lapping of high prior year demand in key areas, such as African swine fever testing.
Revenue growth was also impacted by relatively lower herd health screening levels, reflecting reduced exports, including effects from restrictions on live animal imports into China.
We're planning on reduce the LPT revenues year on year, and the second half of 2020.1 as we continue to lap the benefits from high prior year demand per ASF programs.
Manage through expected pressure on our China, <unk> business from rebuilding swine herds low pork prices and changing government requirements related to livestock infectious disease programs.
Turning to turning to the P&L, we had another quarter of strong profit gains and Q2, driven primarily by benefits from higher year on year CAGR.
And gossip recurring revenue gains.
We're now starting to work through comparisons to control cost levels and the prior year there were implemented as part of our pandemic contingency event contingency management efforts.
Spite these dynamics are strong revenue growth supported a solid 110 basis point expansion of our operating margins on a comparable basis.
Helping.
And to drive an increase in operating profits of 34% as reported and 30% on a comparable basis.
Gross profit increased 29% and Q2 driven by high revenue gains.
Gross margin decreased moderately modestly on a comparable basis, reflecting mix impacts from higher instrument revenue and moderated lab gross margin.
<unk> gains as we lap tightly control prior year cost levels and key areas such as lab operations.
Gross margin gains continued to benefit from strong CAG diagnostic recurring revenue growth, including positive impacts from moderate price gains.
We're planning for constrained gross margin gains over the balance of this year as we continue to lap tightly controlled.
We're spending levels and see impacts from increases in reference lab staffing and capacity and aligned with supporting high revenue growth.
Operating expenses in Q2 increased 24% as reported and 20% on a comparable basis and.
And Q2, and 2020, we advanced approximately $25 million of cost reductions related to planned levels.
<unk>, including temporary reductions and salary and benefits and also saw a significant cost reductions and other areas such as employee health care costs or calls.
The higher operating expense cost growth and Q2 reflects lapping these dynamics as well as the advancement of investments and our global commercial and and innovation capability aligned with our.
Accelerated revenue growth profile.
We anticipate operating expense growth will be higher than revenue growth and the second half of 2021as these investments and the integration of the easy Verde acquisition and advance.
We also expect to see relative increases in costs, such as employee health care claims and travel as pandemic related restrictions.
<unk> raised.
Q2, EPS was $232.34 per share, including benefits of 6 million or 7 cents per share related to share based compensation and activity.
On a comparable basis Q T E EPS increased 33%.
Foreign exchange added 8 million to operating profits and 7.
To EPS in Q2 net of $3 million and hedge losses.
Free cash flow was 211 million and the quarter and 316 million for the first half of 2021.
On a trailing 12 month basis, our net income to free cash flow conversion rate was 95%, including benefits from delayed capital spending and expenses.
Extension of tax payments last year.
We're increasing our outlook for full year, 2021 capital spending to $150 million into $160 million to reflect additional investments to support manufacturing and just your distribution growth capacity, including approximately $20 million in real estate purchases.
With this.
This higher level of projected spending we are updating our free cash flow conversion outlook for the full year to approximately 80% of net income.
Our balance sheet remains in a very strong position, we ended the quarter with debt to EBITDA leverage ratios of 0.9 times gross and 0.7 times net of cash with $232 million and cash and notebooks.
No borrowings on our $1 billion revolving credit facility.
We allocated 188 million and capital to repurchase 341000 shares and the quarter.
Turning to our 2021 full year outlook, we're increasing our projected revenue range for overall revenue to 3 billion and $170 million to 3.
Billy and $205 million.
At midpoint this reflects approximately $30 million and our organic operational improvement.
From a 10 million benefit from updated FX assumptions and approximately $15 million and increased full year revenue benefit from acquisitions.
Our updated revenue outlook is 17 to 18.
18, 5% as reported.
<unk> approximately 2% of full year growth benefit from FX and approximately 0.5 per cent benefit from acquisitions.
Our updated overall organic revenue growth outlook of 14, 5% to 16% reflects an estimated organic growth range of 16% to 17.
75% per CAG diagnostic recurring revenue.
The high end of our CAG diagnostic recurring revenue growth outlook range reflects 2 year average annual growth rates in line with strong H, 1 and performance levels.
As noted on our 1 year growth basis, we expect to see moderation and age 2 from very high year on.
And your growth rates seen in the first half of this year as we work through the acceleration and.
Comparisons to the acceleration and growth that we saw and the second half of 2020, including fulfillment of pent up demand and last years third quarter.
Other elements of our revenue growth outlook include expectations for lower year on year, LGD revenues and the second half.
And for a reduction and human human Covid testing revenues year on year as we lap the benefits of our prior year initiatives and planned for lower human PCR testing levels.
In terms of key financial metrics, we're increasing our reported operating margin outlook for 2021% to 28, 6% to 29, 1% reflect.
Increased expectations for 175 to 225 basis points of full year comparable full year annual full year comparable operating margin improvement.
Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide 17, a positive full year EPS benefit.
Net of established hedge positions.
Our full year outlook also includes an updated estimate of 25 per share of tax benefit related to share based compensation activity 6 cents per share higher than our prior projections.
We provided details on our updated estimates of the tables and our press release and earnings snapshot.
That concludes our financial.
Overview I'll now turn the call over to Jay for his comments.
Thanks, Brian and good morning today, we're pleased to report another quarter of strong results supported by continued favorable trends and our core CAG business and excellent execution by the IDEXX team has noted we delivered 25% organic revenue growth and the.
Quarter.
Courted by high organic CAG diagnostics recurring revenue growth.
They were strong gains across all CAG business segments, and testing modalities, representing a continuation of the accelerated growth trends, we've seen since the second half of 2020 strong sector growth and outstanding execution by the IDEXX team.
It gives us confidence to raise our 2021 financial outlook as we continue to invest towards their significant long term growth opportunity.
Today I'll provide a brief update on the trends, we're seeing in key regions and our companion animal sector and discuss the status of our initiatives to strengthen our international commercial capabilities.
And I'll also share an update on our Procyte, 1 much and growing software portfolio, including the easy debt acquisition, which will better position us to capitalize on favorable tailwind further enhance practice productivity and raise the standard of patient care.
Let me start with an update on sector trends.
Global sector trends remain favorable.
And the second quarter reflected for example, and sustained high U S. Clinical visit levels that support continued strong increases and veterinary service revenue, including diagnostics as Brian noted U S clinical visits increased 13% and the quarter and 4.8% and a 2 year average annual basis with continued strong.
Gains across wellness and non wellness categories. This growth was supported by growing pet population and veterinarians and focus on medical services, which are sustained even S pandemic and restrictions have eased.
The solid trends, we're seeing across all global regions from Q2, our strong commercial execution is building on this momentum.
Okay, and IDEXX CAG diagnostics organic recurring revenue growth of 26% on a 1 year basis, and 16% and a 2 year average annual basis.
Within the clinic veterinarians and their teams continue to rise to the challenge of increased demand and working hard to keep up with industry growth, while also delivering excellent patient.
Care to ever more engaged pet parents.
IDEXX is well positioned to provide them the tools and services necessary to meet these demands supporting 15% diagnostics revenue growth per practice and even faster growth for IDEXX revenues.
Overall, we feel very positive about the strong sector background, our strategy to bring testing.
Testing and information management and innovation for the practice and our team's level of execution, which is reflected in our raised full year revenue outlook.
In terms of execution, our commercial team continues to deliver exceptional results. Despite continued constrained clinic axis and.
The replacement showed increases.
And the second quarter with over 3007 hundred 50, total premium placements up solidly from a strong Q1, and helping to drive 14% growth and our premium worldwide installed base for the quarter.
This included double digit growth and premium chemistry, hematology, and urinalysis and salt basis as well as continued.
Kris and with growth and new and competitive accounts and veterinary customers are extremely busy due to high visit volumes and they're investing and IDEXX instruments diagnostics and tools to support practice growth patient care and staff productivity.
Our digital cytology solution is an excellent example of this point and innovative service that extends that.
And that capability and reach of the practice by providing cytology testing results and the U S. With a report authored by expert pathologists and another 2 hours at any time during the day a week 365 days a year veterinarians are able to provide a higher standard of care to their patients improve staff and clinical productivity and drive.
Appropriate testing and practice revenues.
Validating this medical value proposition, we saw strong customer interest and orders for digital cytology solution and Q2.
We also continued to advance key programs like IDEXX preventive care that help clinics raise the standard of care aligned with higher levels of pet owner engagement.
Q2, we executed 150, new preventive care enrollments as we continue to advance towards our goal of 10000 and engage customers and the U S by 2020.4.
In terms of customer access we continue to operate and a hybrid model with access to a limited, but improving and both the U S and international regions.
And the U S. Approximately 60% of customer visits were in person and Q2, whereas it was approximately 50% and Europe is.
And impacted our ability to deliver outstanding results as both new innovations and the excellent relationships, we have with customers and have driven significant growth across all regions and.
The deep cut.
<unk> relationships with our sales professionals have only been reinforced and strengthened by the best in class support we provided to customers throughout the pandemic.
Of note.
And we're particularly pleased with our high levels of execution and regions like Europe, where we are expanding the successful go to market approaches we've applied and the U S. This.
This was reflected in 400 catalyst placements at new and competitive accounts outside of North America with half of these placements under IDEXX 360 agreements the expansion to the IDEXX 360 program is also supporting sustained strong gains and 11 lab revenues and Europe, accelerating new account acquisition and helping to inspire faster.
Our customer growth and IDEXX 360 customers.
A key focus of our strategy and this context is on developing the long term international revenue opportunity through and expansion of our direct commercial presence. We've completed the commercial expansions first announced in Q3 of last year, which were focused on 3 countries.
Germany, France, and South Korea.
Doubling our commercial footprint in these countries, we have appreciably increase the frequency and intensity of our calling activities with existing customers and competitive accounts.
Our experience is that when we do this our customers grow faster as they adopt our innovation.
And so do we.
And we additional countries had been targeted at the next stage for expansion over the remainder of 2021 and into 2022, we're excited to share with you our broader commercial approach at the upcoming Investor day.
Our expanding global commercial capability will support the adoption of key innovations like Procyte 1.
Following.
U S shipments in late March per site once international launch began in June with installations, and presale customers, and France, Germany, U K and and southern Europe.
Many of our international geographies are hematology focused meaning customers prioritize C. B C for patient health assessment not surprised.
<unk>, we've seen and extremely positive reaction to the Procyte, 1 introduction and international regions.
Customers applauded simplicity and small footprint, while still delivering the excellent accuracy usability and reliability profile veterinarians and their staff price so highly.
Additionally, we expect a multiplier impact from price.
Site, 1 is chemistry, and hematology test and go hand in hand, with the additional potential to inspire reference lab and rapid assay business and placed as part of the IDEXX 360 program.
Speaking of rapid assay and we're very pleased with the strong momentum we continued to drive it and this business globally, we achieved 20%.
Plus organic growth and the U S and Q2, while raising customer retention levels and 97% supported by innovation like snap pro.
We now have over 80% of snap 40, ex customer volume and gauged on this platform, which enhances insights and supports practice workflow.
Snap pro is also helping to achieve et.
And that growth and international regions in Europe after installing our clinics first snap pro and we see a significant expansion and testing volumes.
We look forward to building on the strong momentum supported by continued IDEXX innovation.
We're also excited with the progress, we're advancing and our cloud based software capability.
Salary and we had another excellent quarter of new software installations, with cornerstone and neo placements growing 21%, while cloud based offerings continue to represent the majority of <unk> placements.
As we continue to expand our installed base. We also continue to drive expansion of profitable recurring services, such as credit card processing.
<unk>, which grew at strong double digit rates organically.
Software solutions have taken on significant importance through the effective management of the veterinary practice practices have never been busier and IDEXX integrated easy to use software solutions support patient care and workflow staff productivity and communications amongst the care.
Her team and with our client. Moreover, IDEXX diagnostic solutions are seamlessly integrated into both our and third party solutions enable and practices to capture and invoice cause a full range of activities the vendor and for liver, we know that IDEXX customers, who use all of our solutions have a higher customer experience and tend to test.
And grow faster.
Related to the growing importance of practice software solutions cloud based technologies have the potential to make important contributions to the overall software experience to the veterinary clinic. For example practice owners are freed from the challenges and supporting on premise solutions that include frequent hardware.
<unk> update Moreover providers of cloud based solutions like IDEXX could provide frequent seamless updates and an environment that offer security advantages.
Our software and capabilities were augmented and Q2 with the acquisition of easy debt a fast growing innovative practice information management system that is native cloud.
And more used by advanced general practices as well as specialty emergency and large corporate groups worldwide.
This acquisition complements our pins portfolio by providing additional options to practices with more complex needs and enterprise functionality.
Customers appreciate easy that software for its ease of use and rich features in.
And because usually that is the number 1 rated full feature practice management solution with 94% customer satisfaction. According to kept Terra and the industry standard business software customer review site.
Bringing easy that into the IDEXX family also gross our cloud development talent, enabling us to capitalize on the evolving nature.
In fact veterinary clinic software product.
With that I'd like to welcome the easy that team to IDEXX, we look forward to working together with you to continue to develop best in class software products.
We're also excited about the progress, we're driving and our diagnostic imaging business, we saw very strong growth and digital imaging placements in Q2.
<unk> and strong growth and our backlog, reflecting a continued appreciation of our focus on providing a full range of premier low dose imaging solutions.
Growth and these placements also supports the expansion of recurring services, including cloud based services like web Pacs or web Pacs subscriptions grew at high teens rates.
And if it's much faster growth and premium and unlimited subscription tiers, reflecting the high value and diagnostic insight Politians drive from IDEXX software solutions.
Overall, we're very pleased with our business momentum and.
And optimistic as we continue to respond to the reopening of economies globally.
Of IDEXX.
And specific plans and we're excited to advance plans to bring more IDEXX is back to the office safely and in ways that ensure business continuity, we anticipate maintaining a more hybrid working environment and appreciate our employees flexibility and adapting to new ways of working while continuing to deliver high growth provide top notch customer service and.
And support our world class product portfolio.
Before I wrap up my remarks, I'd like to publicly welcome and do leader to IDEXX as Dr. Martin Smith will be joining my leadership team and August as executive Vice President and Chief Technology Officer.
Martin brings 30, plus years of experience and life Sciences industry.
And most recently as Chief Technology Officer, and Sativa, and Pall Corporation, both subsidiaries of Danaher.
He has a strong track record of driving R&D strategy in concert with enterprise strategic initiatives and commercial efforts and we look forward to Martin, leaving our World Class R&D organization and welcome Martin.
With that I'd like to add that I'm extremely proud of the way the entire IDEXX team is executing as we are on track for another strong year in 2021 with financial performance aligned with our long term goals, our growth and performance reflect a consistent business strategy focused on opportunity development within our core businesses and our employees.
<unk> continued to execute against this strategy daily.
I look forward to share and good morning, our strategy and long term potential at our upcoming Investor day on Thursday August 12.
The event remains virtual due to the evolving nature of COVID-19, and we invite you to register on the Investor Relations section of our website.
Participating will be members of my senior management team, including Brian Mckeon Executive Vice President and CFO, Dr. Peter <unk> Executive Vice President and General manager for point of care diagnostics and worldwide operations, Mike Lane Executive Vice President and GM for reference laboratories and information management.
And Pablo I check executive.
And the Vice President and Chief Commercial Officer, Kari Bennett Senior Vice President of corporate strategy, and advanced analytics, and Michael Shrek Senior Vice President of veterinary software and services.
The event will last approximately 3 hours and we'll conclude with a Q&A session.
That concludes my opening remarks, we now have time.
And for questions.
Thank you we will now begin the question and answer and.
If you do have a question from northern 1 on your Touchtone phone.
If you wish to byram and from.
From the queue. Please press the pound sign or the heartbeat.
And speaker phone you may need to pick up the handset first before pressing and number.
And once again if you.
And press Star then 1 on your Touchtone phone.
And our first question is from Michael price can from Bank of America.
Hey, Hey, guys. Thanks for thanks for taking the question and.
Congrats on the quarter.
I guess.
You have a quite first question would be on some of the the updated guide and the outlook for the second half of the year.
And mostly I want to focus on the P&L I shouldn't make sure we have all the all the moving pieces it.
It seems like you're expecting some incremental spend and CME coming back.
And I hope your Costco and higher could you walk us through the <unk>.
Cadence of that and how we expect that to come back and is that really just tied to sort of going back to prior ways of doing business pre COVID-19 is that some incremental spend on top of that what are the investment areas and how that should roll in and the second half and sort of what's the plan there going forward as.
As far as the effect of the Ahmad.
Sure. Thanks, Mike.
For your question on Opex.
And were.
Transitioning into a period now where we're comparing to more control cost levels from the prior year I think you saw that and the second quarter, where the comparable Opex was up 20% and we are starting to see some cost come back things like.
Per accruals were up.
And the second quarter, we expect that to continue and.
As the pandemic condition.
Conditions, hopefully continue to get eased, we expect to see some <unk> come back.
As well, we're advancing investments we've talked about the commercial investments, particularly in areas like international and our R&D organization.
Asian, we're leaning into the positive growth and overall, we think that will create an environment, where we've got sustained higher opex growth year on year and.
It will be above the revenue growth, which is now up against.
Tougher compare so.
That's really the dynamic that we're working through I think it is.
All very healthy we think we're on track for very good full year performance in terms of margin improvement and look forward to building off that going forward, but.
Second half will be working through those dynamics.
And are you seeing any incremental issues freight cost transportation cost.
Any other inflation.
Factors, whether it's raw materials side on that the human and.
The capital side.
And the market.
Selectively I wouldn't say, it's been a big impact and our business I think.
And we're just managing through keeping up with the high demand.
It has been the bigger challenge.
For.
And I think we've been able to manage those.
Those dynamics.
<unk> well so.
Isn't been as bigger factor for us to date.
Okay and.
As far as some of the new products, you called out and as a pro site.
Can you give us an update on.
And sort of how vets are interacting.
Interacting with the sales force and how some of the new launches are going and realize its been a very different environment launching something during COVID-19 and traditionally I'm. Just wondering if you could speak to a willingness to uptake and sort of expand.
And the menu offering versus sort of rely on attrition.
And the business traditional tools.
Yes, good morning, Mike, Yes, as we indicated and remarks practices are incredibly busy at this point, maybe never ever busier and so.
They certainly welcome I think new menu and new tools from us that 1 specifically that helps.
And all with productivity.
The reception and outstanding we see and the key.
So the U S about 60% of our visits are now and person internationally, it's about 50% or sales say really welcome the opportunity.
Reengage.
And what they consider to be trusted advisers.
And partners in the field and they.
And more and more and they're looking to you know.
IDEXX to be able to provide the analyzers and software solutions and really help them from the standpoint of not just increasing patient care, which has always been the case, but also really driving staff productivity and and communication.
And within the practice and with their clients. So overall very very positive and we think that there is.
Really and exceptional long term opportunity not just in hematology with per site, 1, but the entire inc.
That last week, because as you know hematology and chemistry are also.
Very often.
And then.
Best majority of cases used together.
Thanks, Thanks, guys I'll get back in the queue.
Our next question from Erin Wright from Credit Suisse.
Great. Thanks, and curious what you're seeing or you mean and your.
And in terms of and sustainability of growth and clinical visit and.
And just overall veterinary demand trends what are you seeing on a monthly basis.
And also quarter to date and just curious if the recurring CAG momentum here is holding up on a 2 year stack basis and.
And if theres any sort of seasonal dynamics as well to consider here.
Yeah, why don't I start and I think Jake and.
And I hope with color on what we're seeing at the clinic level the.
The trends.
And in the sector and and our growth had held up very well and the second second quarter.
The CAG Dx recurring it is.
And as you note.
On a 2 year stack basis Thats the way, we like to track it as we're working through some of these compares was.
A little above 16% was pretty much in line with what we saw in Q1 and Q4 and.
And and so thats very encouraging I think we're we're benefiting from continued solid.
Market trends.
And at the clinic level in.
And the the visit number was down a bit Q4 to Q1, but the.
And the diagnostic revenue growth on a.
And.
A 1 year and a 2 year stack basis sustained at very good rates. So all indications are demand is holding.
Solid.
Very well and that's informing our our full year outlook the higher end of our outlook ranges for the 2 year trends to continue and the second half for CAG Dx recurring.
And we obviously have a range because there may be some other dynamics that we don't anticipate that go on and we're going to learn more.
More as we're working through hopefully dependent.
The economies continue to open but I think we're very encouraged by the strong trends.
And just.
Just to build on that but definitely the demand trends remain and <unk>.
<unk> and I think the yeah, the execution and our ability debt.
To be able to build on that.
It has also been very strong we saw as Brian indicated 60%.
Global 2 year CAG diagnostics recurring revenue and if you break it down by region and was 15, 5%.
And the U S and in international and really across all modalities and so the in clinic rapid assay.
And the reference lab business that I think that really.
Positive thing on top of that was to see and some replacements really strong growth coming off of a strong Q1 and compare to a depressed level last year.
Practices reported as I indicated earlier being extremely.
Greenlee busy.
It's not surprising given the given the.
I think a lot of the factors we've talked about in the past and they are looking more and more to be able to really partner with IDEXX and helping them increase the productivity of care workflow as well as the business itself.
Okay, Great and then just given some of the stepped up investments internationally are you seeing any changes and the competitive landscape, there and and it goes back operating my bigger question I guess that people have and what's the right size for the commercial effort overall, it sounds like youre seeing the growth to justify it right and.
How are you thinking about in terms.
And the optimal goal there.
Sure. So we'll talk a bit about that at Investor day in terms of how we're thinking about the international market and sort of what the and status and and what the footprint should look like what what I will say is that the you know our international investments we're doing.
And this on a rolling basis as I indicated.
And 3 countries are behind us and 3 countries and now and the dock and lots of I think there's the markets internationally very robust. The veterinary practices are also busy and it and we know that you know from.
From a standpoint, though.
And here.
Yes.
Most optimized loading we're still far off from where we are in the U S. Just by way of a benchmark, where we have about 120 accounts ourself for per account manager internationally. It's a lot less so we think that the investments internationally offer really.
Really good return.
A lot of you know I think there's a lot of market development still before us and that you know again, we'll provide a little more specific need on a bond when we meet and a couple of weeks.
Okay, great. Thank you.
Yeah.
Our next question.
Non block from Stifel.
Thanks, guys.
Good morning, first question was centered on capacity and the snapshot and the wellness clinical growth decelerated and a 2 year stack basis.
Roughly 8.5% and it had been 12% to 13% stacked again the wellness the prior 3 quarters and.
And I feel sometimes wall Street takes for granted and they sort of the ability of and the industry to absorb all of the additional demand we've actually anecdotally heard of some practices turning away new customers. So as market leaders I love to get your thoughts what are you guys hearing are there any capacity constraints going on and the industry.
And that's pushing off wellness tests and this might be a slight headwind for the industry as we think about the next handful of quarters.
Yes, John I'll take that day.
And veterinarians will tell you that they are extremely busy and.
Debt and that's a good thing.
And you know they at times.
Okay.
Themselves fatigued or not being able to take on.
And the clients and that's to be expected, having said that I think they're very creative.
And at being able to increase the capacity within the practices and doing things like adding staff and that sometimes takes time.
Increasing the number of exam.
And so I think they're investing in software and diagnostics and other tools that help them be more productive and so there's lots of things that they can do.
And yes short term as well as intermediate term to be able to increase capacity extending hours using reference lab services, which takes.
Some of the pressure.
And aerie technicians, and so you know I think it's largely a good thing.
And up and we're seeing some.
The markets work in terms of dynamically being able to react to the increased demand.
And maybe just part b to that 1 a follow up are you seeing that translate from the veterinarians perspective.
Using prices to the pet parent and other words of demands there and they are actually pushing through price and and.
Does that give you guys and opportunity when we think about 2% to 3% annual price increases to maybe bump that up and then I'll just ask my second question. If that's okay.
Yeah, So I mean.
Net situational we don't have.
And I'm on record visibility in terms of how they're pricing.
Their clients, we obviously.
Please tell them, yeah diagnostic solutions, they mark up on net and so far as you know they may be paying their staff more I think what is true is the their end markets are very robust and debt there.
Hey.
And do you have room to increase prices without necessarily negatively.
Impacting patient demand, but I think that's you know that's a case by case I think it's both practices are taking a long term view and and.
They're very loyal and have very good relationships with pet owners and I.
They want to obviously.
<unk> maintained knows and there.
And where they have to raise prices I guess bottom line is day, they do but in most cases, what we're saying is it's pretty moderate.
Okay and then my second question, Brian for you I think I've got these numbers right, but your raise EPS from <unk> to <unk> the midpoint by 25 show and so I think stock comp tax.
Tax and FX was 12 cents on the button and then I'm guessing easy might've been another nickel, but can you talk about the flow through on that remaining $30 million a core revenue increase and it just seems like the incrementals on that $30 million, if I run through the math isn't too dissimilar from corporate average is is that true and maybe is that reflect.
Reflective of what Youre alluding to have some of the reinvestments and the business and the back part of the year. Thanks.
Yes, I think you're a bridging mass.
And we did have a couple of cents from FX.
<unk> comp was 6 from where we were so that was about 8 of the 25.
And the stock office.
The tax effect.
And I would note easy that is not something that were.
And in fact, that's a bit of a headwind for us as we integrate that acquisition.
So the flow through.
The flow through was quite good in terms of the day increase on the on the full year, it's not fundamentally different and the outlook.
And that we had before I think we're.
And we're very pleased to be able to raise the revenue number operationally.
And and the EPS number operationally and <unk>.
Just building on the strong trends that we have and the business and that allows us to also continue to invest towards the.
The future growth opportunities that we try to highlight.
Right.
And I think we're.
We are very encouraged with the strong growth and our international business is reinforcing and that's a great place to invest and can really set us up to sustain that.
Loan growth going forward.
Perfect. Thanks, guys.
Our next question is from.
And rich from Goldman Sachs.
Good morning, Thanks for the questions, Brian maybe going back to your comments on margin. There's obviously been a lot of variability last year and in the first part of this year just given the different pandemic effects that you guys have felt.
So I guess like when we think about operating margins for 2022 and beyond.
Should we kind of frame the right jumping off point I'm kind of assuming that these pandemic effects normalize I guess whats sort of the right baseline type margin as we think about the business going forward.
And we will share more and that.
At Investor Day, I think it.
It'll be a similar discussion to have dialogues we've had in the past we think that we can build off the improvements that we've been able to drive and will continue to target sort of that 50 to 100 basis points.
Annual comparable improvement.
And over time.
The drivers there are the strong CAG diagnostic recurring revenue growth.
Enables us to do things like continue to improve our lab productivity and.
And that's a positive drive for those who still we think we've got ongoing runway to improve our gross margins.
And it enables us to reinvest towards.
Expanding the day annuity and air business over the long term, which has been very high return on investment for us and we can we try to calibrate that appropriately based on how we can execute and and.
And ensuring that we're delivering good financial performance annually, but.
We look forward to.
And on this progress I think we're going to have some.
As we noted some specific dynamics, we're working through here more just related to compares to the pandemic and some.
Some of the cost controls we have in place, but that's that's that's a near term dynamic debt that we're confident we can manage.
Great and then just a couple of.
Bill follow ups.
And I think if I caught the number right you said that in the second quarter, you were lapping I think $25 million of cost reductions did I catch that right and do you have a comparable number for <unk> and <unk> as we think about.
Cycling and the temporary cost reductions from last year.
We implemented.
Quick the.
At the height of the kind of early phase of the pandemic.
Spread.
Salary and benefit freezes and and number of other actions and that was a $25 million reduction.
To the to the planned levels.
And.
But that it gets a little noisy as we work through the year, we started reinstating aspects of that but we basically kept.
Headcount controls in place and benefited from pretty significant year on year reductions and things like <unk>, and <unk> and health care costs. So.
Yeah.
Continue to see dynamics from that I think it was.
Meaningful and Q2.
Relatively more than the balance of the year, but still saw something that'll that'll play out over the next couple of quarters and we will try to help you understand that dynamic as we as we reported our results.
Great and if I could just sneak 1 more in.
You've continued to see the premium or the spread between.
Clinical visits and the CAG Dx growth above that 9% to 10% range that I think had been assumed in guidance at the beginning of the year.
Is that still roughly the right range to use for the full year overall or just given what you've seen and develop and the first half do you think that you could continue to see that slightly higher spread and what you've seen historically.
A good.
I think we're very pleased with that it was it was about 11.100 basis points and Q2 and it.
It was 900 and Q1 normalized it was about 1200.1100, if I recall, we had some days effects in there. So we feel quite good about that.
<unk>.
I think we've factored that thinking into R.
Question on our guidance range and as we noted earlier the high and is really sustaining those kind of trends and a strong 2 year growth trends for the back half. So that's.
And clearly a factor that helps to drive our confidence and that number yes.
The way, we tend to think about that.
Yes. It is.
I think directly related.
Our execution, which has been excellent both from an innovation standpoint, we have lots and lots and and stuff like <unk> and digital cytology and and software solutions like easy debt and also our commercial expansion.
The market is doing 1 thing and it's a very strong market backdrop, and then our execution and.
Ability.
And that develop these markets is the other factor and.
I think we've demonstrated.
And a very strong execution and being able to do that.
We're optimistic.
Great really appreciate the comments.
Our next question is from Chris Schott from Jpmorgan.
Alright this.
And this is a catarina on for Chris and I. Thank you so much for taking our questions and so the first question is from innovation and we've obviously seen some very healthy pet ownership and standard of care trends over these past several quarters.
And you think any differently about R&D and the type of tests that youre developing something that perhaps and you make economic sense for the better.
And our previously if it makes sense just given the higher willingness to pay and then the.
Second question is outside of the U S talk a bit about the regional differences you're seeing in both visits and testing utilization as countries are exiting the pandemic and other countries, where youre seeing better or worse trends and how do you see that evolving through the year. Thank you.
And I'll talk about the innovation piece.
We.
Our investment.
And appetite for innovation and has always been very high we pick that innovation at the end of the day.
<unk> produces differentiation and solves really challenging customer problems.
Politically and from a business standpoint, so if you'd look at.
2020 last year, we came out with 7 I think significant product and service introductions.
And.
And that we're all extremely well received by our <unk>.
Customers and adopted so.
We continue to invest in innovation will talk at the Investor day about our.
Our approach and the framework in terms of how we think about it it involves platforms and instruments and assays and.
And obviously software as we've talked about but also innovation in terms of just.
Both class models and I reference lab network.
And that's alive and well and continues to be a real focus area for us in terms of your question surround regional differences and testing.
Elevation and as indicated we've seen really strong growth across the across the board.
The.
And the U S and North America it has much higher.
Use of diagnostics and that's something that we think.
Over time, we can drive increase.
Market adoption internationally.
The Tam is about 2 ex from a potential opportunity standpoint relative to the U S.
That's a function of more than just commercial expansion and its a function of.
Putting in place reference lab network like we've done and cord West time, yeah, the centres of excellence and and broader set of solutions that customers value.
Much.
And you see some.
I would say modest differences just by country in terms of how they're reacting.
And the pandemic, so we've seen a little bit lower in person visits in Europe relative to the U S U S and about 60%.
Europe for example was it was 50% but the.
Our ability to continue.
Port our customers and customers try.
And transacting business hasn't really changed as a result of that I think they've adopted.
Well to the changing environment and.
And they're saying a lot of traffic just like we're seeing and the U S.
Thank you.
And our next question from Ryan Daniels from William Blair.
Hey, guys and they speak out in for Ryan and thanks for taking the questions and congrats on the solid quarter again.
It earlier and your comments you mentioned that about 60% of your business.
And the U S and lease right now or in person and I'm.
We're talking about your sales visits and.
And then if so how is that kind of been tracking over.
And the last quarters and it had been kind of steadily going.
Going up.
Right, 60% does refer to are customer facing.
Sales and.
Debt has gone up from.
What's plateau at about 50%.
Thereabouts at sort of the height of last year.
Little bit below.
50%, but we we adapted very quickly to the changing environment and obviously, it's a function of how things.
Play out going forward, whether that opinion is that increase in terms of the delta Varian.
And then some of the you know some of the procedures and local governments have put in place and addition to see D C. But we expect as the pandemic receipts debt you.
We'll continue to increase.
And in person visits and but to be determined.
Yes.
Is that a number that you know say like a play and a post COVID-19 era ever return to 100% or are you you know kind of realizing some of the benefits from you know kind of a virtual sales process such that youll kind of keep that going on at least you know for a little bit going going forward.
I think theres been some great takeaways in terms of what.
What what visits where it should be done and person versus where you can support.
To support the customer virtually it's I think from the standpoint of getting those benefits from productivity standpoint.
I don't think we'd go back to.
100%, you know, having said that I think what our customers.
We'd like.
To say you know given how busy they are good.
More efficient visits and so you know at 1 point.
David Inc.
You don't have time for 45 minutes or an hour and now they'd like to be able to get them. The same amount of work and and conversation 2020 minutes and 25 minutes. So we think that's.
Great opportunity, they're attached to help them and to increase productivity on both sides of the partnership.
Oh, great. Thank you and that's definitely helpful and then.
I guess on the under visit and practice revenue front. It looks like there was a little.
Variability and and what would be a revenue per visit quarter over quarter. I was wondering if there was any dynamics to kind of call out.
On that front.
Held up well I think there's always a bit of quarter to quarter variability.
Nothing really specifically, we're trying to highlight.
Kind of trends, where we're quite good I think that's a very busy I think that's 1 thing that we hear consistently so that could be a dynamic but overall I think the bigger theme is continued strong growth and we're feeling good about our outlook.
Okay I want to thank everybody for calling in and I also want to express.
Highlight of my gratitude to the IDEXX team for their continued exceptional performance.
And amazing purpose as a company and our employees represent our values every day and couldn't be more appreciative of their efforts and and what we accomplished this past quarter with that we'll conclude the call and thank you.
Yes.
Thank you ladies and gentlemen, this concludes today's call.
Thank you for participating and you may now disconnect.
Okay.