Q3 2021 IDEXX Laboratories Inc Earnings Call
Yes.
Good morning, and welcome to the IDEXX Laboratories third quarter 2021 earnings Conference call. As a reminder, today's conference is being recorded participating in the call. This morning are James <unk>, President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John Raven.
Senior director of Investor Relations IDEXX would 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 statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website IDEXX Dot com.
During this call we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP.
A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which May also be found by visiting the Investor Relations section of our website and.
In reviewing our third quarter 2021 results. Please note all references to growth organic growth and comparable growth refer to growth compared to the equivalent period in 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 broad participation in the Q&A, we ask that each.
Limit their questions to one with one follow up as necessary. We appreciate you may have additional questions. So please feel free to get back in the queue and if time permits we'll take your additional questions I would now like to turn it over to Brian Mckeon.
Good morning, everyone. We're pleased to share another quarter of excellent financial results for IDEXX, driven by continued strong global momentum in our companion animal business.
In terms of highlights revenue increased 12% as reported and 10% organically compared to high prior year growth levels.
Quarter with third quarter results reflected 11, 5% organic growth in CAG diagnostic recurring revenues with double digit gains across U S and international markets.
Two year average annual organic growth for CAG diagnostic recurring revenue sustained at 16%.
The mid to high teens, two year average gains across our major modalities.
We also achieved a record third quarter level of premium instrument placements with strong global gains across our major platforms hi.
High revenue growth and sustained operating margins compared to high prior year levels supported delivery of $2 <unk> and earnings per share an increase of 12% on a comparable basis.
Momentum in our CAG business.
Has us on track to deliver 15, 5% to 16% organic revenue growth.
200 to 225 basis points in comparable operating margin gains at 26% to 27% comparable EPS growth in 2021 at the higher end of our previous guidance guidance ranges.
Walk through the details of our updated full year outlook later in my comments, let's begin with a review of our third quarter results and recent sector trends.
Third quarter organic revenue growth of 10% was driven by 13% CAG revenue gains and 13% growth in our water business.
These gains were moderated by a 23% organic decline in <unk> revenues compared to high prior year levels, which benefited from the ramping of African swine fever testing in China.
As well as by a $3 million year on year decline in human Covid Pcr testing.
CAG diagnostic recurring revenues increased 11, 5% organically compared to strong prior year growth levels, reflecting 10% gains in the U S and 14% growth in international regions.
On a two year basis average annual CAG diagnostic recurring revenue growth was 16% overall, reflecting 16% gains in both U S and international regions.
Strong CAG results were also supported by 15% organic growth in veterinary software services and diagnostic imaging revenues. In addition to benefits from our recent <unk> acquisition and 33% year on year growth in CAG diagnostic instrument revenues.
We continue to achieve very high levels of supply chain reliability across our business, reflecting the outstanding performance by our operating teams, enabling us to support continued high levels of growth and customer service.
Continued strong U S. CAG diagnostic recurring revenue growth was supported by year on year gains in U S clinical visits U.
U S clinical visit growth was 2% overall in Q3 with solid gains across wellness and non wellness categories.
This compared to a strong 7% gains in the third quarter of 2020, which included benefits benefits from pent up clinical demand, including very high growth in wellness testing.
On a two year basis U S same store clinical visit growth increased at a four 4% average annual rate sustaining above annual clinic visit growth trends heading into the pandemic.
The IDEXX U S. CAG diagnostic recurring revenue growth premium to U S. Clinical visits was approximately 850 basis points on a one year basis compared to very strong prior year growth levels for diagnostic testing, which supported a 500 basis point growth premium last year.
On an average two year basis, which helps to calibrate for year on year pandemic dynamics. The growth premium was approximately 200 basis points in the third quarter slightly higher than the two year trends in the first half of the year.
Expanding pet health care services, including continued solid increases in the utilization of diagnostics supported a 7% same store increase in overall veterinary clinic revenues in Q3.
Diagnostic revenues per practice increased 7% on a one year basis and 13% on average two year basis, consistent with recent two year growth trends.
IDEXX innovation and commercial engagement continues to build on positive health care demand trends driving high Q3 organic revenue gains across our major testing modalities globally.
IDEXX reference lab revenues increased 10% organically in Q3 with similar year on year gains in U S and international regions.
Global reference lab gains continued to be driven by high same store volume growth with strong gains across testing categories.
IDEXX vet lab consumable revenues increased 14% organically in the third quarter, reflecting double digit gains in the U S and continued high growth in international regions.
Gains continue to be supported by increases in testing utilization across regions high customer retention levels and expansion of our global premium instrument installed base.
IDEXX achieved a third quarter record of 4307 premium CAG instrument placements up over 100 units or 36% from constrained prior levels, reflecting strong gains across U S and international regions.
We saw a strong global placement gains across our platforms with catalyst of 22% premium hematology up 62% instead of you up 30%.
The quality of CAG instrument placements remains excellent reflected in 344 catalyst placements at new and competitive accounts in North America up 14% year on year.
And 1003, new and competitive placements in international regions up 17%.
We also benefited from 571 second catalyst placements driven by continued strong demand from high volume customers.
The global rollout of <unk> continues to support strong overall placement momentum with the majority of our prostate one placements in new and competitive accounts.
New instrument placements and continued very high customer retention levels supported a 14% year on year growth in our global premium installed base setting a foundation for continued high growth in IDEXX vet lab recurring diagnostic revenues.
Rapid assay revenues expanded 9% organically in Q3 compared to strong prior year demand levels that included benefits from pent up demand for wellness testing.
Growth in vector borne disease testing drove solid year on year volume gains in the U S. A global growth continues to benefit from double digit gains in international regions.
High CAG diagnostic recurring revenue growth remains primarily volume driven across our modalities with consistent overall net price gains of 2% to 3%.
In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 15% organically and 33% as reported including benefits from our recent easy that acquisition.
Strong growth in veterinary software services was supported by double digit comparable gains and pins placements and continued strong growth in related recurring services.
We also saw a continued high growth in diagnostic imaging system placements driven by our entry level image view, Dr 30 platform with nearly 80% of placements at competitive accounts.
We continue to see 20% plus growth and recurring digital service revenues, including expansion of web Pacs subscriptions align with our expanding cloud based capability.
Turning to other business segments water revenue increased 13% organically in Q3 compared to 4% organic declines in last year's third quarter. As this business continues to track back towards pre COVID-19 growth levels.
Business growth was supported by solid gains across compliance and noncompliance testing categories.
Livestock poultry and dairy revenue decreased organically, 23% in Q3 compared to 18% organic growth levels in Q3 of 2020.
Overall dynamics in our China, LPG and related expert testing businesses offset growth in other global regions.
As expected Q3 revenue growth was constrained by the lapping of high prior year demand for African swine fever testing and lower herd health screening levels.
We're now seeing additional constraints on China, LPG testing demand, reflecting a relaxation of local African swine swine fever disease management approaches in China.
And as we worked through impacts from low pork prices and changing government regulations related to livestock infectious disease testing programs.
Reflecting these factors we are planning for continued lower LPG revenues overall in upcoming quarters, which is factored into our 2021 financial outlook.
Turning to the P&L sustained high revenue growth supported double digit comparable operating profit and EPS gains.
Operating profit increased 32% as reported including benefits from the lapping of a $27 $5 million G&A charge related to an ongoing litigation matter, which is excluded from our comparable growth metrics.
On a comparable basis operating profits expanded 12% and operating margins increased 20 basis points compared to high prior year levels, which included benefits from pandemic related cost controls.
Gross profit increased 12% in Q3 in Q3, reflecting strong revenue gains.
Gross margins decreased modestly on a comparable basis as benefits from continued high recurring CAG diagnostic revenue growth and moderate net price gains were offset by business mix impacts from high CAG instrument revenue growth and lower LTV and human PCR revenues.
We also saw some gross margin impact from investments in our lab business to support high growth and customer service levels.
Operating expenses decreased 2% as reported and increased 10% on a comparable basis in Q3 as expected we saw a higher level of comparable opex growth as we advance investments in our global commercial innovation capability and onboard the easing of that acquisition.
Q2, Q3, EPS was $2 <unk> per share, including benefits of $4 million or <unk> <unk> per share related to share based compensation activity.
On a comparable basis Q3, EPS increased 12% foreign exchange added $2 million to operating profit and <unk> of the EPS in Q3 net of $2 million in hedge losses.
Free cash flow was $354 million in Q3 and $458 million for the first nine months of 2021.
On a trailing trailing 12 month basis, our net income to free cash flow conversion rate was 88%.
We increased our 2021 full year outlook for free cash flow conversion to 80% to 85% of net income, reflecting a refined capital spending estimate of approximately $150 million, including approximately $20 million in real estate purchases.
As we advanced plans for 2022, we expect an increase in capital spending levels to support additions to our manufacturing and distribution capacity aligned with their high growth profile.
Our balance sheet remains in a strong position we ended the quarter with debt to EBITDA leverage ratios of <unk> eight times gross and 0.7 times net of cash was $145 million in cash and no borrowings on our $1 billion revolving credit facility.
We allocated $184 million in capital to repurchase 275000 shares in the quarter.
Turning to our 2021 full year outlook, we are updating our projected range for overall revenue to $3 billion $185 million to $3 billion and $200 million.
Based on our continued strong momentum in Q through Q3, we're increasing the lower end of our organic growth outlook by 1%.
And maintaining the higher end of our growth outlook aligned with sustained high two year annual growth trends for CAG diagnostic recurring revenues.
Operationally this resulted in an increase of $10 million and our full year revenue outlook at midpoint is.
These improvements were offset by a $5 million FX headwind compared to our last outlook related to the recent strengthening of the U S. Dollar.
Our updated reported revenue growth outlook of 17, 5% to 18%, including approximately one 5% of full year growth benefit from FX and 0.5% of growth benefit from acquisitions.
Our updated overall organic growth outlook of 15, 5% to 16% reflects an estimated organic growth range of 17% to 17, 5% for CAG diagnostic recurring revenue.
Other elements of our revenue growth outlook and include continued expectations for lower year on your <unk> revenues in the second half and for a reduction in human Covid testing revenues year on year.
In terms of key financial metrics, we've refined our reported operating margin outlook for 2021% to 28, 8% to 29%, reflecting expectations for 200 to 225 basis points of full year comparable operating margin improvement at the high end of our last guidance rage.
Planning for moderately lower operating margins in Q4 compared to high prior year levels, driven by mix impacts and advancement of commercial and innovation investments and targeted projects spending aligned with their high growth profile.
We're raising our EPS guidance range by <unk> <unk> at midpoint to $8 30 to $8.38, reflecting 26% to 27% full year comparable EPS growth.
We now estimate FX will provide 16, a positive full year EPS benefit once out lower than earlier estimates net of established hedge positions.
We've also refined our overall effective tax estimate to 19%, including an updated estimate of 29 per share of tax benefit related to share based compensation activity.
We provided details on our updated estimates in the tables in our press release and earnings snapshot.
As we complete 2021, we're advancing our plans for 2022 aligned with sustaining our strong revenue growth.
We're confident we can maintain our excellent supply chain performance to support continued high growth and manage any inflationary impacts in our business while building on our strong 2021 profit results.
We look forward to providing specifics on our 2022 financial outlook on our Q4 earnings call.
That concludes our financial review I'll now turn the call over to Jay for his comments.
Thank you Brian good morning.
We're pleased to report another quarter of excellent results for IDEXX driven by sustained momentum in our CAG business, we delivered double digit organic revenue growth overall supported by 11, 5% organic CAG diagnostics recurring revenue growth.
The very strong prior year growth levels, two year average annual organic growth rates across testing modalities were in line with growth in the first half of 2021 with clinical visit trends sustaining above pre pandemic levels. These strong trends are evidence that veterinary practices worldwide continue to focus on elevating.
Standards of care by leveraging <unk> advanced product and service platforms.
Team is doing an outstanding job supporting continued high growth in customer service levels, putting us on track towards 2021 financial performance at the high end of our previous outlook.
Our long term goals.
Today, I'll highlight key areas of progress in our product and commercial initiatives that position us to deliver continued high growth and strong financial returns.
Let's begin with a brief update on sector trends.
Positive companion animal health care trends continued in the third quarter building on the accelerated demand levels achieved throughout the pandemic.
<unk> clinical visit growth was 2% in Q3 compared to strong 7% prior year third quarter growth levels, which included benefits from pent up demand to normalize for prior year Pedantic dynamics. We are monitoring two year average annual growth rates, which were four 4% in Q3.
Continuing above the pre pandemic levels of 2% to 3%.
Wellness clinical visit growth of 6% on a two year basis points to continued adoption of <unk>.
Preventive approach to pet health care.
The sustained underlying momentum reflects the continued strengthening of the pet owner bond the.
The benefit of stepped up growth in the pet population beginning early during the COVID-19 pandemic through early 2021.
And sustained focus and the veterinary clinic and medical services.
Around the world veterinarians passion for their work combined with Penn on their desire for excellent care have driven this focus on services as they remain extremely busy U S practice revenue growth in the third quarter advanced a healthy 7% versus the prior year and an even more impressive 9% on a two year basis supported by.
Two year average growth of 11% in clinical revenue and 13% of the diagnostic revenue customers.
Customers are clearly attracted to IDEXX its broad portfolio of products and services to support elevated levels of demand while also growing their practices at least <unk>.
<unk> dynamics are also true in our international region.
IDEXX is growth is sustaining at even stronger rate reflected in the 16% two year average annual growth in CAG diagnostics recurring revenues in Q3, a premium of nearly 200 basis points above two year average clinical visit growth rates.
High levels of execution and consistently strong sector trends reinforce our confidence in sustaining strong growth momentum.
We finished the year and build our plans for 2022.
Outstanding commercial execution has been a key driver of our business performance.
Our team continues to support our customers at a high level. This is evidenced by 36% year on year growth in premium instrument placements in Q3.
Record number of third quarter placements for the company Hi.
High growth across our catalyst procyte instead of your platform supported a 14% overall year over year increase in our premium installed base.
Veterinarians are using IDEXX diagnostic tools to build capacity and improve efficiency within the clinic to support future growth.
Which is also reflected in high levels of second catalyst placements and continued strong 16% gains in catalyst placements at new and competitive accounts.
Our strong global instrument placement momentum has long term benefits and gives us further confidence that future consumable streams will also support continued strong growth.
These results were achieved despite continued constraints on direct access to customers time for our customers is a scarce and valuable resource in person sales trends remain at approximately 60% in the U S and slightly lower in Europe and over 50%.
Despite these constraints our teams are high levels of connection to our customers to deliver exceptional results by leveraging their trusted long term relationships as highly relevant partners.
We continue to enhance our commercial capabilities the rolling country level expansion of our field sales force to build on these results and to address the significant opportunities ahead of US we've completed our expansion in Germany, France, and South Korea.
We're seeing significant positive traction in instrument placements and CAG recurring revenue growth in these countries as a result in.
In addition, we are expanding our footprint in three additional countries as noted on our last call with hiring Onboarding and training tracking well to our plants in those areas.
To be like at all second wave countries by the end of Q1 of next year.
In addition to our commercial footprint, we made progress in the past quarter and expanding our service footprint and capabilities in order to better support international business from customers. This included targeted investments to expand our European reference lab network and enhance our telemedicine services.
These capabilities will support our long term growth goals by ensuring we meet our customers' needs with a broad network and comprehensive portfolio of services.
Complementing our world class reference lab facility in <unk>, Germany.
These advancements support high growth across our testing modality as customers continue to take advantage of the flexibility offered by our customer centric programs such as IDEXX 360 to grow their businesses and elevate the standards of care around the world.
Innovative products like Procyte, one are helping to build on this momentum we have.
<unk> seen a very strong response to the prostate one having delivered over 1000 units worldwide since launch and on track for the approximately 4000 annual worldwide premium premium hematology placement pace, we shared during investor day feedback from customers of all sizes have been overwhelmingly positive as they rave about procyte once.
Ease of use while maintenance profile and excellent performance.
Our growth trajectory now reflects launches in all four of our major regions with a select number of country launches remaining in the fourth quarter of this year and into 2022.
<unk> provides a great opportunity for increased engagement with customers supporting strong adoption the platform globally and a broader expansion of our business relationships. As an example, almost 95% worldwide Procyte one placements at nearly 100% in North America have either included catalyst one.
Placed at a customer that already has a catalyst one demonstrating strong multiplier effect of this innovative product.
Our rapid assay business is another area, which provides an opportunity to expand relationships with customers around the globe.
Rapid assay test revenues grew solidly in Q3 compared to a very strong prior year.
<unk> thousand 14% on a two year basis with comparable gains in the U S and internationally.
Vector borne disease testing a critical component of the rapid assay business that wellness testing in the U S. More broadly what's the primary driver of this growth tick borne disease becomes more prevalent and regions around the U S.
<unk> growth continues to be supported by the snap pro instrument, which helps drive engagement and loyalty through enhanced insight accuracy and practice workflow benefits.
Double digit growth in the snap pro installed base in the U S and internationally in recent innovations like critical decision support, which AIDS increasingly busy veterinarian and making critical decisions when faced with a positive test have.
That helped drive excellent, 97% customer retention levels within the rapid assay business.
Our innovation strategy is also reflected in the expansion of our cloud based software capabilities, which benefited from the Q2 acquisition of easy that the integration of <unk> into our software portfolio is proceeding to plan with high customer does yet busy that acquisition helped drive 33% reported growth in veterinary.
<unk> services and diagnostic imaging systems revenue in the third quarter.
It was further supported by strong 15% organic growth in our core software and digital imaging products.
This growth reflects solid double digit year over year gains in our profitable recurring revenue software products. It also demonstrates the benefit.
Growing installed base of <unk>, an industry, leading low dust diagnostic imaging products.
Based offerings represent the majority of pimps placements at over 80% as cloud based offerings provide performance quality and lifecycle cost advantages and within diagnostic imaging recent updates to the web Pacs product include additional features important to specialty practices and deeper more seamless integrations with <unk>.
Systems with a growing installed base and very high retention levels IDEXX web Pacs has become an important part of our enterprise software ecosystem.
Enhancements like this and others aimed at making critical workflow and customer communications easier and more efficient and impactful example of how our technology for life approach is supporting busy practices.
Our commercial sales force and marketing teams continue to balanced product sales with advancing the IDEXX preventive care program, which provides a structure and incentive for our customers to continue driving wellness testing and raising the standard of care.
<unk> in this program in the third quarter, despite constrained in person discussions with customers sustained at a rate similar to the second quarter as we executed approximately 150, new preventive care enrollments and continue to track towards our goal of 10000 engage customers in the U S by 2024.
Yeah.
In addition to strong commercial execution, our consistent growth trajectory also reflects the resiliency and agility in our supply chain.
It has enabled us to weather the impacts of COVID-19, pandemic and meet the strong demand within our sector.
<unk> benefits from a number of factors related to our business, including strong long term supplier relationships near shoring and product standardization and inventory buffers. These factors and their proactive approach managing frontline operational processes have allowed us to achieve 99% customer product availability.
As the pandemic.
<unk> and high customer satisfaction and increased retention.
We believe we are well prepared to support sustained high growth and service levels in our business going forward, whether it may be relatively higher cost in certain areas to support our growth plans. We are confident we can manage these impacts effectively through our operational capability and focus while building on our strong financial performance.
Overall, we feel very positive about our continued strong business momentum as we engage with and support veterinarians around the world who are advancing the care standard.
Looking forward, we are proceeding with plans for sustained high growth aligned with our long term growth potential.
Current momentum positions us well to support investments in the infrastructure solutions and commercial capabilities necessary to achieve the significant opportunity ahead of us while delivering continued strong financial performance.
Finally, I'd like to thank our employees and our customers for their perseverance and flexibility. During these dynamic times I'm extremely proud of what we've accomplished together and look forward to continued excellence in the future.
That concludes my remarks, and we now have time for questions.
Thank you we'll now begin the question and answer session. If you do have a question press Star then one on your Touchtone phone.
If you wish.
Please press the pound sign or the hash key.
Once again, if you do have a question Star then one on your Touchtone phone.
And our first question is from Michael <unk> from Bank of America.
Okay.
Right.
Thanks for taking the question guys.
<unk> had a lot of comments in the prepared remarks on strong instrument placement trends.
Thank you on the CRO side, one is in the cross selling you have been able to see there.
Just wondering are you able to see sequential acceleration there.
An increased uptake of set of yields you could clarify that and just especially in some of those markets youre seeing incremental.
Competitive introductions by some of your peers I'm just wondering if you could talk on dynamic and what have you been able to see from others in the marketplace.
Yes.
Good morning, Mike.
Q3 was a record.
Really across all of our premium instruments hematology chemistry set of you.
We think in part what what's driving that is.
Pent up demand and more practices really investing.
And their practices because they're busy they're looking for technology that can support productivity and obviously greater greater patient flow with respect to prostate why do you recall.
<unk>.
The U S.
In late Q1, and then internationally.
Late Q2, and we see very rapid uptake.
The majority of the <unk>.
It was the vast majority of the <unk> either.
<unk> have gone into competitive accounts with with catalyst where it to existing catalyst accounts. So it's it's a real customer pleaser I think its delivered.
All aspects of that.
Branded product promise easiest performance great cost profile keep in mind. It's also part of our pay per run and auto replenishment.
Model so it's.
We're excited about the opportunity if you recall from Investor day, we identified almost 100000 placement opportunities globally.
Plus of that internationally. We're just in the early days of getting started on that so very very promising outlook for hematology with respect to <unk>, we continue to make excellent.
Progress.
<unk>, obviously, it's a replacement where high 30, 30% plus you saw a nice uptake in the U S. A nice sequential.
Yes internationally.
Yes.
Great. Thanks, if I could ask a follow up just on <unk>.
Trends you saw over the course of Q1 that we should think about <unk>. If we look at the snapshot in clinical visit growth and revenue.
Obviously, you have the much tougher comps from a year prior.
But that should continue going forward into <unk> next year.
As we look at the two year stack comps on.
Recurring CAG diagnostics and total CAG revenue growth are there any other dynamics, we should be mindful of as we think of going into <unk>. Besides the comp dynamics anything else you're seeing in terms of changes in the marketplace or.
This growth volume growth and stuff.
Good morning, Mike.
I think the bigger theme, we're highlighting is the the CAG diagnostic recurring growth trend on a two year basis really held up quite well.
In the third quarter I think we as you know you get into these year on year comparison.
Dynamics, so we're focusing a bit on the two year trend to calibrate and we saw the 16% to your.
Average annual growth level, both in U S and international and.
I think thats.
Also the premium on a two year basis held up very well as it was 200 basis points in Q3, So I think that is the.
The bigger trend that aligns with the higher end of our revenue growth outlook and that's informing our our posture heading into next year that we're really planning for sustained strong growth.
We're investing towards that ensuring that we have set high service levels. So.
In terms of broader trends I think Jay can provide some color, but I think the.
The clinical visit trend was moderated a bit from the first half on a two year basis, we may be seeing some plateauing of the incremental growth benefit we saw from the step up in new pets, although the pet population has expanded and sustained and perhaps it might be.
Reflective of clinics, just being quite busy but.
I think it was quite an overall modest in our own trends of.
We've held up quite well.
Just to build on that Mike all indications are that demand in the marketplace and the trends remain very strong clearly the one year growth rate.
Quite well if you if you think back to Q3.
In 2020, there was a lot of pent up demand there was increased patient visits. So we are really nice.
Growth across tough compares.
Two year clinical visit trends as we've talked about at four 4% is clearly above pre pandemic levels at 2% to 3% and then if you take a look at how we've translated that.
In our own business, 16% globally, CAG diagnostics recurring revenue U S and internationally, there's a two year to year figures, we've seen nice growth across all modalities, whether you look at it as a one year or.
Or two here and I think our execution as a company has been has been excellent.
No.
I think the growth momentum remains quite strong and despite an indicated we're really positioned to support.
Faster growth by expanding capabilities commercially innovation.
Oh really.
Adding the resiliency and capacity of our supply chain and manufacturing network.
Great. Thank you so much.
Our next question is from Nathan Rich from Goldman Sachs.
Hi, good morning, Thanks for the questions maybe following up on the last one Jr. Brian could you maybe.
How do you feel about like.
Vet practice capacity right now I don't know if you feel like there are any labor shortages that are impacting just overall volumes of vet clinics, but it'd be great to get your perspective on where.
Where do you think kind of the practices are kind of operating at this point.
Good morning that practices are clearly very busy day.
There are a number of things that they've done I think on a short term basis to be able to provide additional capacity a lot of practices are working.
Longer hours, they're hiring more staff.
On a short term basis, they can pick and higher let's say associate veterinary technicians and train them. The board trained higher level scaled staff, obviously takes a bit more time a number of practices.
Been able to really improve mix of workflow improvements and adjust capacity just by adding things like exam rooms, and things like that from the standpoint of what we can do as a company. There's another there's a number of really I think positive opportunities for us obviously, we provide.
Technologies analyzers total software.
That practices can invest them that help them perform both at a higher medical or clinical level, but also port productively, whether its communications Sir.
Currently our pet owners or.
Really improving staff productivity.
I think evidence of that as Sidney.
Very significant step up in <unk>.
<unk> that we've seen and very fast growth.
Software systems, and ancillary systems that work with pins.
Great that's helpful and maybe a follow up for Brian.
No.
How should we think about the rate like baseline level for operating margins as we head into next year. The cadence. This year, it's been a bit unusual with the elevated margins in the first half of the year I think the back half the guidance implies maybe around 26% maybe.
And maybe you talked about the investments, but could you maybe kind of flush out.
What you think the right.
Starting point is for as we think about the margin trajectory into 2022. Thank you.
Sure.
On a full year basis I think.
We said 28, 8% to 29% we do have some quarterly differences in margins normally I think Q2 tends to be our highest with just some of the.
The wellness testing that goes on rapid assay sales and things of that nature.
I think.
We feel good about.
The growth trajectory in the business, particularly the growth on the CAG recurring.
<unk> revenues.
A key driver for us and that really gives us the ability to two.
Reinvest into.
To build on the margin performance that we've had I think we are.
We are intending to invest we have been investing in growth aligned with the higher growth profile and we want to build on that we see that as a very high return area for us, particularly areas like commercial investment we get a very quick payback on that and we're really pleased with the progress we had in our initial wave of international <unk>.
And we'll look to do more with that next year or so.
We'll provide more clarity on that as we get into the year, but our goal is to build on the strong performance that we have this year and the strong growth trajectory in the business really gives us an opportunity to do that.
And our next question is from Jon block from Stifel.
Great. Thanks, guys good morning.
Brian maybe just to start at the gross margin trend down for the third consecutive quarter I know you called out some mixed headwinds ongoing investments, but just wanted to go back to the the big deck from the analyst day, you talked about gross margin I'll sort of frame it at that double.
The Green Arrow long term and so I'm just curious does that double up quickly narrowed take hold in 'twenty, two or should we think about some of these investments really spilling out into the next several quarters.
Yeah, John I think it's important.
Calibrate I'd just what were working through if you go back to last year.
Just looking at our numbers in.
Year over year improvement on a comparable basis, we were up over 200 basis points in Q2 Q3 last year.
We're comparing to some higher numbers in <unk>.
Terms of the two.
The levels, we were at last year, where we had really constrain cost conditions and.
I think that's a key factor we are investing back now and we're seeing that paying off in terms of high service levels and growth.
I think we've had some impacts from mix through the excellent instrument placement growth has a little bit of a mix headwind for us.
Those are factors, we're working through but I think.
The overall dynamics in margins are something that we believe we can build upon we will provide more insight into that as we get into into next year.
I think that that longer term trend. The key driver. There is there are strong CAG.
Diagnostic recurring revenue growth rates, and we are well positioned to build on that with the with the trends that we've seen in the business. So I think that the longer term story still holds for us.
Okay, and then just a follow up maybe just push you a little bit on the two trends in CAG recurring to the 16% CAGR, referring to your average it's been remarkably consistent for the first three quarters of 'twenty. One the guide implies a slight step down in the fourth quarter of 'twenty wallet in slide.
Slight deceleration the way to think about the CAG Dx two year slope as we head into 'twenty, two and maybe sort of layer on top of that is there an opportunity for you guys.
For price to play a bigger role in CAG Dx into 'twenty two just based on what we hear from some of the practices on their recent ability to realize price. Thanks guys.
So we didn't provide.
Specific guidance on Q4, better I can tell you that our are.
Our high end of our range is consistent with the trends that we've seen on a cheaper basis on CAG Dx recurring for the first three quarters. So that debt is reflected in the guidance. The overall organic growth just keep in mind, we're up against a little tougher compare on instruments in Q4. So.
It's not a change in trend is just we're working through some compares there but its again the high end is largely consistent with where we've been trending so.
I think that.
We're going to learn more on this as we move forward I think the.
We're really pleased with the execution in the business I think the momentum on our key initiatives, particularly things like instruments.
Give us a lot of confidence that we can build on.
The strong consumable growth and I think our execution to other modalities is very strong as well and.
We're watching the market trends and I think that it's very encouraging I think like I said, there may be some moderation in terms of the step up and things like.
That population growth and we've got to pay attention to capacity at clinics and things like that but those are those are good problems that we think we can help.
We can help our customers with so.
I think thats the key theme hopefully you hear today is that the the.
The trends of the business, we're very pleased with particularly in the CAG business and.
We're looking to invest and build on them.
And that price realization, Brian if I can just circle back on the sorry, do you think that was a bigger opportunity.
Sorry about that John So we've been in that 2% to 3% range I think that.
Look I think that is an area that we were going to continue to look at.
Pet owners are willing to pay more for services over time.
There may be some select inflationary pressures in the business here and things like.
Some input costs and labor and freight and so we're we're paying attention to that I think it is it is something we can look at over time, if we see some sustained impacts on those fronts and.
Like I said I think the market backdrop for the industry backdrop gives us.
An opportunity to look at that just given the.
The strength of the pet owner bond.
Perfect. Thanks, guys.
Our next question from Chris Schott from Jpmorgan.
Great. Thanks, So much just two from me I guess first on in person access I think you mentioned in person access now in the 50% to 60% range.
That number moves higher is that a meaningful benefit for your business or have you found that you were able to do pretty much everything.
To do given the axis as it is today and just had one follow up after that.
Yes, good morning, Chris.
Around 60% in the U S, 50% outside of the U S and we think that can grow yes that will be higher as we work through the hopefully what's the tail end of the pandemic.
We've gotten very good at really segmenting, what should be done or what is best done in person versus virtually.
We've been able to.
I think pretty much two Hollywood, we need to do virtually but there are some activities like whether you're introducing product tour visiting competitive accounts.
Building.
<unk>.
Strengthening relationships.
Our better done in person. So we think that we think that overtime that will.
We did increase it is not going to go back to a 100%.
It'll be something it'll be something less than that I think it will benefit our preventive care.
Where we do practices not only very busy but I think repeated access is helpful in being able to.
Shell and partnering with customers.
With that with that program when do we expect over time that.
Right step up.
Pre pandemic levels.
Okay, Great and then just come back to the topic of inflation.
We think about as kind of new inflationary environment are.
Are you seeing or do you expect to see in the near term any either gross or operating margin pressures due to this I think you mentioned that if this is more sustained there might be an opportunity with them on the price side to address but I'm just trying to get in the near term.
Is that something that's noticeable in the numbers or is there ability to offset that elsewhere in the business.
This is Brian.
We have seen some inflationary impacts in the business I think it's been more in areas like freight and distribution, which I think a lot of companies or <unk>.
Experiencing and for us, it's a relatively select on input costs.
Things like electronics and.
And resins, and we're paying attention to labor cost as well I think those are all.
Important areas for us.
We've been able to manage through those effects.
Well and we're really focused on sustaining high levels of service for our customers, particularly in this high growth market. So.
That's our focus and our intent and.
I think we're <unk>.
Confident that we can build on kind of the profit trends that we've had while managing through those kinds of effects on our business.
Thanks, so much.
Our next question is from Ryan Daniels from William Blair.
Hey, guys Nick speak out in for Ryan Thanks for taking my question.
I guess to start given kind of the lack of bandwidth that offices.
The constraints on capacity, how does that kind of affected the selling process.
Like product education, how has that affected us negatively at all or have you been able to kind of work around that.
Yes.
Yes.
Previously indicated practices are extremely busy and it has affected how we do.
Our sales calls.
You could you could get a fair amount of time with the veterinarian.
And her or his or her staff and I think we've.
Try to be very efficient and what previously we may have had 40 40 minutes 15 minutes.
That we were able to accomplish in 2020, so we've adjusted accordingly.
Don't have provided tools.
To our to our sales organization, so that they are productive and it can get to the point and we continue to provide a lot of training, including CE training virtually webinars to our customers so that they can.
They cannot get the training they need.
They have some free windows at the moment so.
Try to be obviously, respectful, but but very efficient when we call it practices because.
Both practice and practice owners consider is highly relevant to their success.
A large measure provide time.
When we meet with them.
I think with good results.
Great. Thanks, and then on the.
Capital instruments side of things.
Would you say you kind of work your way through most of the backfill and a lot of this growth is now kind of an incremental prices kind of realizing that they need. An addition of a growth side or the additional catalysts or that sort of thing.
Yeah I think.
Is that the capital performance, we've seen it's not pent up demand.
It really represents investments the practices, they're making in their capacity.
Got it.
Really.
<unk> capacity and productivity up there.
So I think it's just a solid reflection of.
Demand trends.
Great. Thanks.
Our next question is from Black card.
From Barclays.
Hi, good morning, and thanks for the questions.
Couple of them firstly.
Just saw that you did comment on increased testing for ASF I wanted to understand if you have visibility into what has led to this.
And see if there's any broader read through to ASF trend in other words can inquiries into things think know that ASF incidences of spiking up spiking game.
Secondly, I'm not sure events. This but have you seen any supply chain disruptions and retail segments.
<unk> would be could be most exposed to the global flight and.
Challenges.
And lastly began.
Can you just help us understand the cata dynamics that you are trying to correlate. These same store revenue growth, which is five percentage point about we did build up 2%. So eases all linked you'll higher utilization or was there any component of pricing, which is about normal trend. Thank you.
Why don't I take your first question on African swine fever the primary.
Dynamics, we've seen around our China business for LPG, we saw a significant step up in <unk>.
Program testing.
In support of addressing African swine fever to last year and that those trends have changed there are changes in the local.
Management of the disease in China, where there are now harvesting of the.
Local local farmers are allowed to harvest.
The animals, rather than so that's leading them to two.
Harvesting rather than treat the disease. So that's fine.
A decline in demand and raised some compares for us so for our business. That's that's been the primary impact of African swine fever, and we're anticipating that's going to be.
You need to be a challenge for us year over year for <unk>.
Some upcoming quarters.
I'll speak to the supply chain.
Resilient performance of the business, which has been which has been excellent.
As I previously indicated we have an excellent long term supplier relationships, we've been able to leverage us and make sure that we're really well well provided we also most of our manufacturing.
Almost all of our manufacturing is.
Local.
And we have a great deal of product standardization and maintain high inventory buffers. So we've been able to really support very high product availability throughout the throughout the pandemic.
Customers have clearly appreciated that and have rewarded us.
With their with their business. So we feel very positive about our ability to continue to do that going forward.
I believe your third question was on utilization at the clinic level and right.
We point out it is.
If that was correct.
On a year over year basis again, you get into these compares with last year, where you had a big step up in.
Wellness testing and pent up demand.
The big the bigger driver of growth in the third quarter year over year was utilization growth. So the utilization gains at the clinic level have remained quite strong and on a two year basis. Good one year growth and it was.
More than offset kind of flat frequency that was more related to the year on year kind of compares in terms of the testing.
The number of visits.
Okay.
That I would like to thank everybody for calling in I would also like to address the broader IDEXX team some of which are on the call and say. Thank you for for their continued extraordinary performance. Our employees have demonstrated an admirable commitment to our purpose and excellent ability to execute against that strategy and I truly appreciate all their efforts.
With that we'll conclude the call. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.