Q3 2022 IDEXX Laboratories Inc Earnings Call
Good morning, and welcome to the IDEXX Laboratories third quarter 2022 earnings Conference call. As a reminder, today's conference is being recorded participating in the call. This morning are Jean Michel Ski President and Chief Executive Officer, Brian Mckeon, Chief Financial Officer, and John <unk>, Vice President Investor relate.
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.
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 dotcom.
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 be also found by visiting the Investor Relations section of our website.
In reviewing our third quarter 2022 results. Please note all references to growth organic growth and comparable growth refer to growth compared to the equivalent period in 2021, unless otherwise noted to allow broad participation in the Q&A, we ask that each participant 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 into the queue and if time permits we'll take your additional questions I would now like to turn the call over to Brian Mckeon.
Good morning, and welcome to our third quarter earnings call.
In terms of highlights IDEXX achieved solid organic revenue and profit growth in Q3 building on strong prior year results.
Overall, IDEXX revenues increased 8% organically supported by 9% organic growth in CAG diagnostic recurring revenues.
Key execution metrics remained strong this is reflected in record Q3 premium instrument placements double digit growth in veterinary software and digital imaging revenues and 10% organic growth in U S. CAG diagnostic recurring revenues.
Operating profits and EPS increased 12% and 13% respectively on a comparable basis, reflecting.
Putting solid gross margin gains and controlled operating expense growth.
Outstanding execution in the quarter has us on track to deliver strong full year financial performance aligned with our updated guidance range.
In terms of our full year operational outlook, we've incorporated our Q3 organic growth results and maintained a similar midpoint estimate for EPS performance supported by strong second half comparable operating profit gains.
We've also adjusted our reported revenue and EPS outlook to reflect updated estimates for foreign exchange impacts.
Well walk through the details of our full year outlook later in my comments, let's begin with a review of our third quarter results.
Third quarter organic revenue growth of 8% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 12% organic growth in water and 7% organic growth in <unk> revenue.
CAG diagnostic recurring revenue increased 9% organically in Q3 compared to strong prior year levels, reflecting 10% gains in the U S and.
6% growth in international regions net of a 1% equivalent day growth headwind.
We achieved double digit organic growth benefits from key execution drivers, including expansion of our premium instrument base.
And new business gains sustained high customer retention levels and solid expansion of diagnostic revenues for clinical visits including benefits from higher net price realization.
These gains helped IDEXX delivered continued solid CAG recurring revenue growth.
Setting near term headwinds related to year on year declines in clinic visit levels globally.
Including effects from a pullback in fact clinic capacity this year and macro impacts in the international markets.
Overall organic revenue gains were also supported by 15% organic growth in veterinary software and diagnostic imaging revenues.
CAG instrument revenues was down modestly compared to high prior year levels, a strong placement gains were moderated by mix effects.
In terms of CAG sector demand drivers continued healthy trends supported solid increases in diagnostic revenues at U S clinics.
Diagnostic revenue increased 7% on a same store basis in the U S. In Q3 or approximately nine 5% on a per visit basis, reflecting continued solid gains in diagnostic frequency and utilization, including benefits from higher net price realization at the practice level.
Clinical visit levels in Q3 were down two 4% a slight improvement from Q2 trends as we continue to work through impacts from reductions in vet clinic capacity from peak levels and the lapping of the significant step up in demand for pet health care during the pandemic.
We anticipate year on year visit growth headwinds will continue in the fourth quarter, which is factored into our outlook.
IDEXX is U S CAG diagnostic organic recurring revenue growth of nine 6% in Q3, which included a 1% equivalent days growth headwind continues to outpace sector growth trends.
This strong performance was supported by a 1300 basis point normalize growth benefited from IDEXX execution drivers.
This included consistent growth benefits from idec utilization and innovation games and customer additions.
And an estimated 6% net price benefit in the U S supported by our second half price initiatives.
Globally, IDEXX achieved solid organic revenue growth across our modalities in Q3.
I'd actually consumed.
Consumables revenues increased 9% organically, reflecting solid gains across U S and international regions.
Consumable gains were supported by 14% year on year growth in our global premium instrument installed base, reflecting double digit increases across our catalysts premium hematology instead of your platforms.
We placed 4737 CAG premium instrument placements in Q3, an increase of 10% year on year.
Building on our record placement levels achieved in the third quarter of 2021.
The quality of our instrument placements continues to be excellent, reflecting 13% growth in new and competitive catalyst placements compared to strong prior year levels.
One momentum also continues to build globally supporting a 26% year on year increase in premium hematology placements in the quarter.
Global rapid assay revenues expanded 7% organically in Q3 compared to high prior year demand levels supported by benefits from net price increases.
Global lab revenues increased 8% organically in Q3 as double digit growth in the U S was moderated by modest organic revenue growth in international regions reflected pressure on same store clinic visit growth in Europe , including macroeconomic impacts.
We continued to achieve solid new business momentum and sustained high customer retention levels across our major modalities.
Porting sustained solid volume growth.
CAG recurring revenue growth included net price benefits in the range of 5% to 6% to worldwide CAG diagnostic recurring revenues in the quarters, reflecting product and service enhancements and coverage of inflationary impacts.
In other areas of our CAG business veterinary software and diagnostic imaging revenues increased 15% organically.
Results were supported by double digit organic gains in recurring software and digital imaging revenues and continued strong momentum in cloud based software placements.
Water revenues increased 12% organically in Q3, reflecting strong performance across our major regions.
Including benefits from solid volume gains and net price improvement.
We completed the acquisition of Tectum, PBS in the quarter and automated microbiology testing platform, which complements our existing water offering and expands our capabilities in this highly attractive business segment.
Livestock poultry and dairy revenue increased 7% organically in Q3.
Our results benefited from growth in herd health screening and improved results in China, where we worked through comparisons to high prior year revenue levels for African swine fever core swine testing.
Turning to the P&L Q3 profit results were supported by solid gross profit gains.
Gross profit increased 7% in the quarter as reported and 10% on a comparable basis.
Gross margins were 62% up 120 basis points on a comparable basis.
Benefits from net price gains lab productivity initiatives improvement in software service gross margins and business mix offset inflationary cost effects.
Operating expenses increased 6% year on year as reported in the third quarter and 9% on a comparable basis.
As planned operating expense growth was more in line with revenue gains as we prioritized investments and gains leverage from our prior commercial expansions.
EPS was $2 15 per share an increase of 13% on a comparable basis.
Q3, EPS results did not include tax benefits related to share based compensation, which were down <unk> <unk> per share from high prior year levels.
Foreign exchange reduced operating profits by $8 million and EPS by <unk> <unk> per share in Q3 net of $9 million in hedge gains.
Free cash flow was $151 million in the third quarter on a trailing 12 month basis, our net income to free cash flow conversion rate was 67%.
For the full year, we've updated our estimate of free cash flow conversion to 60% to 65%.
Corporate expectations for continued higher inventory levels aligned with sustaining high product availability.
The full year outlook reflects approximately 20% of free cash flow conversion impact this year from discrete R&D investments higher inventory levels.
Deferred tax assets driven by increased R&D tax credits and an investment in a major facility expansion.
We've updated our full year outlook for capital spending to approximately $165 million, including $40 million to $50 million in 2020 to spending for our new manufacturing and warehouse project.
Our balance sheet remains in a strong position we ended the quarter with leverage ratios of one four times gross and one three times net of cash.
We increased our financing flexibility with the recently completed credit facility Amendment, which provides for a $250 million term loan under attractive terms with proceeds applied to reducing our revolving credit balance.
In Q3, we allocated $167 million of capital to repurchase 453000 shares.
Capital allocation to share repurchases supports our projected 2% full year reduction in share count this year.
Turning to our 2022 full European outlook, we're narrowing the organic revenue growth range to incorporate our solid Q3 performance and a consistent outlook for Q4 organic revenue growth.
With the midpoint of our prior second half guidance.
We're also maintaining our full year outlook for comparable operating margins, which sustained strong prior year levels adjusting for the impact of the discrete $80 million R&D investment recorded in Q2.
We're updating our reported revenue EPS outlook to reflect the recent strengthening of the U S dollar.
Which we estimate will reduce 2022 revenue by $10 million and EPS by <unk> <unk> per share compared to our last outlook.
We're also factoring in a <unk> <unk> per share adjustment for projected changes in interest rates.
Overall, our updated full year revenue growth range of $3 billion $325 million to $3.365 billion is consistent at midpoint with earlier estimates as FX impacts offset improvements to our operational outlook.
We now project FX will reduce year on year revenue growth by 4% for the full year with approximately 6% of year on year headwinds expected in Q4.
Our updated full year organic revenue growth outlook is now six 5% to seven 5%.
<unk> full year, CAG diagnostics organic recurring revenue growth outlook of seven 5% to eight 5%.
Our updated CAG diagnostic recurring revenue outlook implies fourth quarter organic gains of 5% to 10%.
Aligned with our earlier estimates, which factors in a two 5% organic growth risk estimate at the low end of the range for potential macroeconomic impacts on demand.
We've updated our estimated full year operating margins to 26, 3% to 26, 8%.
Reflecting the consistent operational outlook at midpoint.
Estimated 10 basis points year on year net margin impact from updated foreign exchange estimates.
This outlook reflects a projected 230 to 280 basis point decrease on a comparable basis compared to strong 2021 performance, including approximately 230 basis points of operating margin impact related to the discrete R&D investments.
Our updated EPS outlook is $7 74 census year to $7 98 per share, including the 70 <unk> impact from the discrete R&D investments.
This represents a decrease of approximately 5% per share at midpoint, reflecting updated estimates for FX and interest rate impacts.
For the full year, we estimate foreign exchange will reduce full year operating profit by approximately $28 million and EPS by <unk> 25 per share.
This is net of an estimated $29 million or 26 cents per share benefit from projected 2022 hedged gains.
Our outlook factors in no EPS impact from stock based compensation tax benefits in the second half.
We provided details on our updated outlook in the tables in our press release and earnings snapshot.
Looking forward, we're advancing our planning processes for 2023.
We're targeting sustained strong execution that supported delivery of solid organic revenue and comparable profit growth building on substantial financial gains IDEXX achieved through the pandemic.
Given the significant strengthening of the U S. Dollar this year in 2023, we estimate that foreign exchange will reduce reported revenue growth by approximately 3%.
Reported operating margins by approximately 70 basis points and EPS by approximately 45 per share at the rates assumed in our press release with current hedge positions.
We will provide updates on these estimates as we share our 2023 guidance of the year end conference call.
That concludes our financial review I will now turn the call over to Jay for his comments.
Thank you, Brian and good morning.
Sure that IDEXX delivered strong results in the third quarter as teams across the company continued excellent execution to advance our strategic priorities demand for companion animal health care remains high.
Building a stepped up level during the pandemic and supported by our continued focus on service within veterinary clinics veterinarians are looking for partners to support their growth while they provide high levels of care in an efficient manner.
These professionals continue to turn to IDEXX for their support in the third quarter. This was reflected in yet another quarter of record placements of premium capital instruments strong momentum in permanent placements. It missed its continued desire for cloud native products, consistent new business gains and sustained high customer retention levels piece.
Continued trends demonstrate that veterinarians appreciate IDEXX is integrated ecosystem and the layers of innovation support and improve each step of clinical workflows.
<unk> with expansion across IDEXX execution growth drivers, including relatively higher net price realization, which drove IDEXX CAG diagnostics recurring revenue growth to significantly outpace clinical visit growth.
This supported solid same store diagnostics revenue growth in the U S. Despite moderating impacts from reductions and connect capacity levels. This year.
This morning, I'll highlight how IDEXX continued to advance our key strategic initiatives in the quarter, while delivering strong financial results I'll.
I'll begin with a review of recent trends in the companion animal sector.
Third quarter CAG sector trends were supported by solid global demand for veterinary services building on a significant step up in pet ownership and patient visits during the pandemic.
Same story diagnostics revenues grew 7% per practice during the third quarter.
<unk> increase for the prior quarter and well above total same store practice revenue growth of 4% in the quarter.
Services remain a key focus for veterinarians and within services diagnostics is a key component providing valuable healthcare insights supporting practice economics and driving revenue growth.
With trends this year diagnostics revenue growth at the practice level continues to be driven by increases in both the frequency and utilization of diagnostics.
<unk> at nine 5% growth in diagnostics revenue per visit for the quarter.
Building on the strong gains seen through the pandemic.
IDEXX growth overall U S CAG diagnostics recurring revenue at approximately 10% normalized <unk>.
Fight recent clinic visit growth headwinds as we benefit from decades of focus and investment which brings differentiated value to our customers as Brian noted IDEXX execution drivers contributed approximately 1300 basis points to U S growth in Q3 on a normalized basis. This reflects benefits from continued.
Expansion of our premium instrument installed base adoption of IDEXX innovation consistent business gains record retention levels and increased price realization.
On a multiyear basis clinical visit growth was healthy in the quarter with solid growth in both wellness and non wellness visits three year CAGR wellness visit growth in particular was in line with historic trends of 2% to 3% demonstrating the U S. Pet owners are continuing to prioritize pet health care.
<unk> continues to be supported by IDEXX is turnkey preventive care program, which included approximately 200, new U S enrollments in the quarter.
This is the second quarter of year over year increased enrollments showing that customers continue to appreciate the simple if comprehensive testing and pet owner communication tools and put it in this program.
This program is just one example of how we are engaging with our customers to support them through near term challenges related to managing clinic capacity in meeting growing demand for health care services. We are building on our strong customer relationships to drive continued solid organic growth in our CAG business.
With that let's now turn to discuss <unk> strong progress against our key strategic growth initiatives.
As mentioned excellent execution across the IDEXX organization supported strong performance during a dynamic third quarter with commercial teams delivering the day, while also building the foundation for long term growth across regions.
Quarterly placements of premium instrument supported another quarter of double digit growth in our worldwide premium instrument installed base.
Mobile premium instrument placements grew 10% in the quarter and placements at new and competitive accounts grew even faster at 13% supporting strong evi gains across regions.
These results combined with continued sustained new business gains and 98% catalyst customer retention rates.
Port future recurring revenue growth aligned with our long term financial framework shared at our recent Investor day.
Sustained high levels of commercial performance were aided in part by continued improvement in the rate of in person visits per cap managers up to 75% in the U S and nearly 70% in Europe IDEXX sales Representatives are welcome into clinic as trusted advisors to their customers, adding value by helping customers provide.
High standards of medical care drive strong practice economics and improved practice efficiency.
These results are also supported by our World class innovative products like Procyte, one and customer friendly marketing programs that help support the adoption of IDEXX innovations.
<unk> provides customers with an efficient lower cost hematology platform at the point of care and then especially sought after in international regions, where veterinarians have been trained to do hematology testing first when do we get a basic workup on a patient.
This platform is integral to our strategy to address the approximately 230000 long term global instrument placement opportunity that Dr. Tina Hunt shared at Investor Day, and third quarter results continue to be very encouraging.
<unk> was a key driver of 26% growth in premium hematology placements in the quarter.
With international regions, representing approximately 75% Procyte, one placements and more than 60% of its installed base attach rates for prostate wasn't our consistently high.
Over 95% Procyte, one customers overall and more than 80% of competitive customers also utilize our chemistry platform demonstrating the excellent placement quality and strong multiplier benefit of this platform.
These results are further supported by benefits from investments we have made to expand our global commercial organization, where we are seeing positive reached a revenue trends deeper customer relationships customer survey work in Germany, and France demonstrates that customers have had an overwhelmingly positive experience during the first year.
The new commercial ecosystem over 90% of customers in Germany. For example indicate that their commercial experience at the same or better than a year ago with the highest satisfaction rates practices, who received continuous commercial engagement. This feedback highlights the benefit of our high touch commercial model with diagnostic subject matter experts.
<unk> partnered with practice centers and staff to drive practice patient care and business objectives.
Our commercial and operational teams in the Asia Pacific Region are also driving successful execution against fixed strategic plans Asia Pacific premium instrument placements are at a record high and were delivered while hiring and Onboarding new sales professionals in Japan, and opening a new reference lab in Brisbane, Australia during the quarter.
Concurrent seamless execution of our commercial investments across multiple regions, it's not easy to do it to do so while also delivering against our business calls this demonstrates the value of the investments. We've made in these teams, which will continue to benefit us as we work to address the significant long term addressable opportunity outside the U S.
In addition to these excellent commercial results. We also delivered multiple new technologies to our customers during the quarter since via mix in January we have announced eight new product service and software solution enhancements across IDEXX modalities, each of which add value to the relationship with customers have with IDEXX, while demonstrating our commitment.
To a technology for life strategy.
Five eight of these projects were launched in the third quarter. These are number one expanding the comprehensiveness of our fecal antigen reference lab tests by adding a fleet tapeworm assay, which now takes up to five times more than traditional methods number two providing faster access to PCR results for North American customers by opening.
Next day PCR lab in Louisville number three improved veterinary insight into the treatment of feline chronic kidney disease by adding and improved disease marker FGF 23 to a reference lab menu number for improving the efficiency convenience and sustainability of the catalyst S. TMA test by reformulated.
The test to include onboard reagents, and number five delivering enhanced accuracy and longer room temperature storage and our best in class for the X plus past.
The rollout of these new product and services plus enthusiastically received by our customers and highlighted the IDEXX teams ability to deliver high quality, new products, which will help increase standards of animal health care and develop our sector. While also providing very high customer service levels.
Another strategic area of innovation is IDEXX is software and diagnostic imaging businesses, which include a full suite of software product offerings to create a connected ecosystem within the clinic that supports each step of clinic workflow because of patient appointments.
Practice information management system, and its easily update able customer friendly front end interface is the center of the solution.
Record third quarter pins placements highlight strong customer interest in our whole product solution that IDEXX offers Furthermore, the shift to cloud based products that we highlighted at Investor day continued in the quarter is over 90% of placements with cloud based subscriptions, reflecting 50% growth in cloud based placements compared to the prior year.
And demonstrating the value that last year's easy vet acquisition continues to bring to the business.
Strong results.
Across this business in the quarter were not limited to <unk> products diagnostic imaging systems placements web Pacs subscriptions.
<unk> application adoption like payment processing and fat connect plus with clinical decision support engagement all advanced at healthy levels in the quarter.
Veterinarians are looking for ways to obtain understand and communicate diagnostics insights and a digital and streamlined way and our software portfolio is well positioned to provide them with the solutions. The benefits of these products and solutions to IDEXX and their customers are compelling we have highly favorable economics, given the recurring nature of their revenue stream.
And high incremental gross margins. They also drive customer engagement, which supports our high levels of retention shouldn't say improve our customer's productivity and overall experience.
IDEXX is innovation agenda also extends beyond our companion animal business.
We recently took the opportunity to advance our water business by acquiring <unk> pathogen detection system with an automated microbiology detection platform that uses patented technology to automate the incubation reading and results notification for E coli and total coliform testing and drinking water supplies.
This application provides an automated data enabled instrument, an EPA approved California testing solution that complements our core water solutions by providing value for customers operating under rush conditions.
We're excited to be able to invest in the attractive area of water testing and beverage commercial resources the scale of this new technology.
This innovation agenda demonstrates our relentless focus on providing our customers with world class products that increase in value overtime products not only provide them with important insights, but also help increase workflow efficiency and effectiveness. In addition to these top notch products, our customer focus supported by extremely high.
High service levels to ensure customers have a wonderful experience with IDEXX, allowing us to earn their business every day.
Frontline supply chain and customer service teams continue to deliver high levels of service.
Reflected in another quarter of approximately 99% product availability despite ongoing challenges in the external environment.
<unk> performance Leverages years of investment in our supply chain and customer support resources as we continued to deliver on the operational needs of our customers.
That concludes our review I'm proud to report another quarter of strong results as IDEXX remains well positioned to deliver solid growth and financial results over the longer while also delivering on our mission to create a better future for animals people and our planet.
Our performance reflects the commitment and talent of our IDEXX team.
The management team I'd like to thank our more than 10000 colleagues for their passion and engagement they bring to our purpose and strategy every day.
Making a meaningful difference to the health and wellbeing of pets people and livestock around the world.
So now we will end the prepared section of the call and open the line for Q&A.
Thank you.
We will now begin the question and answer session.
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And our first question.
It comes from the line of Chris Schott of Jpmorgan. Please go ahead.
Great. Thanks, so much for the question I was trying to get a little bit more color on how youre thinking about that is it growth dynamics as we look out to 2023 I don't if it's premature to get a view there, but maybe just qualitatively can you just elaborate on what you think needs to happen for that visit growth to start growing again, and I guess where are we.
We are in that process as were trying to get to spur hands around kind of the trajectory of the business as we look out to next year. Thank you.
Yeah sure. Good morning, Chris We expect we will work through the impacts of the pullback in capacity this year.
2023.
The overall click clinical visit growth as you indicated.
Outlook still remains fairly dynamic there's a lot of external factors like macro impacts.
The labor supply dynamics that we've talked about and even potential impacts from further COVID-19 outbreak. So we'll be monitoring the macro impacts as a tech.
Pet owner behavior and.
Yeah, really really factor that into our outlook.
What I would point out is that our focus is on.
Those things that we can control from an execution standpoint, both innovation and commercial engagement with with our commercial teams and we continue to do extremely well and being able to support customers with technology, whether its <unk> system software, which help their productivity and support their efficiency.
Clinic instrument placements in clinic instrument placements were at record levels. So I think that reflects.
Yeah.
The basic level there its very positive outlook on the industry and their willingness to invest in it really support growth we take that for me.
Overall dynamic standpoint, Europe's a little bit different but in the U S capacity constraints.
The primary factor.
<unk> clinical visits versus end customer.
Customer demand in Europe , we're seeing some impacts from just the macro factors.
We'll see how that plays out and whether that continues going forward.
Thank you.
Our next question comes from the line of Michael Riskin of Bank of America Global Research. Please go ahead.
Hi, This is wolf on for Mike Thanks for taking questions.
It looks like you as you mentioned.
So its were a bit softer this quarter I was wondering if you could just go a little deeper into what you're seeing internationally and your expectations for how trends will look there going forward versus the U S.
Yes.
Thanks for your question.
In international markets, where we're seeing similar dynamics in terms of IDEXX execution. So the.
We highlighted in our comments, we think we've got a 1300 basis point benefit from the combination of things like.
New business gains and expansion of our premium instrument installed base.
Price utilization and.
We actually think our numbers are roughly in a similar zone and international market. So I think what we're seeing more in international markets with some pressure on the clinical visit growth levels, you can see that in our lab growth, which was up modestly in the quarter. Despite these new business gains and solid price gains so.
I think international market has been relatively more impacted by the macro dynamics, particularly in regions like Europe .
And we are we've been seeing that really going back to Q4 of last year. So that's been a relatively more meaningful headwind, but the progress that we're making and the very strong instrument placement gains and.
Continued high retention level is excellent.
Excellent engagement with our customers is allowing us to deliver solid continued growth.
Just just to add to that.
The fit of our in clinic instruments now with the peso one is outstanding for these international markets. We saw we saw Procyte one grew 26% as I indicated in my in my comments and so from a footprint price performance connectivity ease of use standpoint, it really.
Fits of international markets very well.
B B.
The international customers it depends based on.
Country or region, but they tend to test hematology first so it's a really important.
Solutions for these customers and it's a big multiplier impact is very often when we sell it.
<unk>, we also sell it with our chemistry analyzer and in some cases it even.
Even the <unk>. So we feel very positive about our solutions and our ability to help customers achieve their objectives certainly there's some macro factors that we've talked about in the past including.
Russia, Ukraine conflict in energy prices.
It will just continue to monitor that and see how that plays out over time.
Much appreciate it.
Our next question comes from the line of Erin Wright of Morgan Stanley . Please go ahead.
That relative to what you were disclosing last quarter, and then and are there further price increases I guess embedded for the remainder of the year and then how should we think about your ability to take incremental price in 2023 and are you seeing any pushback from customers.
Thanks for your question Erinn, our price realizations is very much in line with what we shared at Investor day. So the.
Roughly 4% price realization coming out of the second quarter.
We're advancing some additional price increases in the second half.
As I mentioned globally, we were in the 5% to 6% range in Q3 was at the higher end of that for the U S.
And thats very much in line with the five 5% to 6% year on year benefit.
What's implied in our outlook for the second half and that equates to 5% for the full year. So as we head into 2023, we will have.
Carryover benefits from the pricing that we've achieved this year, including the second half initiatives.
Our plan is to have a normally timed price increase so we'll have an additional increase at the beginning of the year.
And we will share more of the detail details on that as we roll that out but that will incorporate.
The conditions that we're seeing in terms of the value that we're adding and also inflationary impacts in the business.
I would just add to that that from a customer perspective, what what customers are most interested in and the message we keep hearing back from them and they want to make sure that from a product testing continuity standpoint supply chain.
How we support them and all of those pieces are in place.
I realize that given the current environment, it's a little bit more expensive.
To run the business and they want us to invest in being able to support them.
We see that reflected in very high customer retention rates really globally across the world, We think thats, an important input or input into the into the growth formula.
The company. So that's an area, we're going to continue to invest in and as Brian indicated we.
We take our pricing approaches <unk>.
On balance very very reasonable given the current environment.
Okay. Thanks, and then on 2023.
FX dynamics here are understandable given the environment that we're in but how are you thinking about CAG recurring organic growth in 2023, just given the price realization that you are seeing and the ability to kind of assume a more potentially stable that clinic growth as you kind of lap some of the labor day.
Now makes assuming that those don't get force, but don't get better either I guess is high single digit CAG recurring growth the right way to think about 2023 or what are some of those dynamics as we think about the headwinds and tailwind into 2023.
I think that what.
We will share more on that obviously as we get further along here pointing out some positive factors that I think will be helpful for us heading into next year I think the.
Price realization is higher than we've achieved historically, who thinks is appropriate in the current environment and that'll be a positive dynamic and as Jay mentioned, we do think we'll work through some of the headwinds related to the capacity pullback.
That we saw this year I think it's early for us to to talk about the.
Trajectory into next year, just given the macro backdrop, we'll gain more insight here and focus on what we can do which is to execute well and we think that will position us for continued solid growth and we'll share more details as we complete our plans and.
And give you an update on the year end call.
I think whats just just to add to Brian's comments, what's been very gratifying is the the residents.
I think interest amongst our customers of our solutions I talked about.
Software, but our customers.
Pretty much across the board are feeling pressure.
It may be capacity pressures or <unk> staff.
Pressures within their practices and trying to run a business delivering excellent medical care, but also.
Sensitive to the economics, and making sure they've got a healthy business and Theyre looking to software solutions. So we see this with our Perm solutions cloud based <unk> solutions and their enthusiasm around really upgrading software within their practices that help support workflow optimization staff productivity client communications all the things that they have been.
Looking for it so I think we have the right solutions at the right time, given the market circumstances, we're seeing that in clinic pretty much across the board across all of the solutions and even had reference lab had very nice growth, especially in the in the U S.
As we look to.
We've expanded our menu we've improved our service offerings and a case in the case of.
PCR, adding Louisville, which is next day, if customers would like that and they're using that as an extension of their own practice.
We're opt.
Optimistic that for those things that we can control we will do a good job in that.
Customers are highly enthusiastic about these solutions.
Okay, great. Thank you.
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And our next question comes from the line of Jon Block Stifel. Please go ahead.
Thanks, guys good morning.
I'll start with clinical visits they were down two 4% year over year, but.
It looks like wellness performed a bit better than emerging and that just seems at odds with just capacity issues in the U S.
Which would you know I'm thinking would be more acute on the wellness side of the equation. So can you guys just talk about.
What youre seeing out there and why this is weighing more on.
And why were not seeing sort of the capacity issues at emergent more right. Why why is the well is performing better and then just maybe your thoughts is this just also a return to work dynamics right people going back to work may be noticing less things about their dog or cat and Thats just crimping the the <unk>.
Merchant volume a bit around the edges.
Yes, John John .
Balance.
Balance there.
There is some variability within any given quarter, but if you look at over a two three year.
CAGR rate there.
It's what you would might expect so I don't think theres anything specifically related.
The capacity the capacity speaks to see.
And getting an appointment with existing.
Pet owners must buffet variants arent, turning does fluctuate whether its a wellness visit or a sick business. So you wouldn't necessarily expect to see.
Any dynamic related to that piece of it.
We know that people are going back to work at least in hybrid fashion, we haven't been able to pull out anything specifically related to return to work, whether it's two or three days a year.
We do see is capacity pullback, especially.
Weekends has gone down some.
Over the over the year and we think that just reflects practices.
May be short of staff and trying to balance.
They're working environment better better for their in place, but nothing specific that I think we can call out or point to.
Okay, I guess I could just follow up with you offline for more color. There just to move on I think I have some of these numbers correct, but you mentioned the 4700 and change premium instruments.
That was up 10% year over year, but the vet instrument revenue was down 5% organic if I've got that correct and so a lot of those premium instruments are the relatively new procyte, one, which I think would have a solid ASP.
Can you just talk about the discrepancy between call. It the premium placement instruments. The gross I think again up 10% the organic instruments down 5%.
And then what that Delta means are you getting just a little bit more aggressive in terms of some of the selling programs I mean, thats, an IDEXX 360, and the tradeoff there is sort of in return for longer term commitments from some of those customers. Thanks, guys, Yes, John it's primarily related to both geographic mix, we're selling them more internationally and then product mix more.
<unk>, which have a lower au pay debt procyte.
So first of all I want to grow 26% to lower A&P, yes, the international.
Mix was was higher and so that I think that accounts for the 5% drop in revenue on a very very strong placement rate.
Got it got to the 500 basis point Delta between up 10 and down five no selling programs have evolved.
But there are impacts from selling programs as well, but I think we feel very good about the expansion of 360.
We've seen very high attach rates of placing procyte ones were replacing catalysts.
And that's really the multiplier benefit that we've tried to highlight in that gets folded into.
The $3 60 type agreement so.
That's part of the dynamic as well, but largely.
The factors that Jay was highlighting.
The bulk of our growth is in international markets and that's that's a meaningful driver of some of their relative revenue changes and but on balance the the overall growth in our base is very strong our evi metric for us at high levels.
Mobile games are strong the B instrument base expansion is a big driver of our execution.
Growth benefits, so we feel really good about the instrument performance.
We we focus on from a just a quality of instrument placements at new and competitive catalyst because that drives outsized portion of the consumables revenue in the in clinic business and that was up 13% and so that's a reflection of just I think the focus of our commercial organization.
The importance of chemistry consumable for the business.
Good color thanks, guys.
Thank you.
Our next question comes from the line of Nathan Rich of Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for the questions.
I wanted to follow up on the price realization I guess, how are you thinking about.
Customer sensitivity to price increases in this market I guess, given the 300 basis point normalized spread that you referenced it doesn't appear to have had an impact on volumes, but could you maybe just elaborate on any potential impacts on demand that you might see as we move forward.
Yes.
Hey, good morning, Pete.
Our customers see this see our pricing.
Reasonable given the current environment. They know it's more expensive for them to run their businesses I think they see.
So continue to see really good end customer demand within the within the clinics and their focus is really on they want to make sure. They get the support from our product continuity testing results on time engagement that we provide with the customer technical support organization. So their primary focus is.
Net pricing the flip side of pricing is the value that we deliver and we continue to deliver extremely high value. We've had heat product introductions enhancements. This year just five in Q3 alone.
Across the business and software at reference labs.
Clinic businesses.
So that helps them from the.
The standpoint of delivering.
Better patient care, but also productivity and efficiency within the practice and I appreciate that.
From the standpoint of their own.
They have the ability from an end customer pet owner pricing standpoint.
Increased prices they've done that I think diagnostics is a small piece of their overall cost envelope, but it drives the all important.
Health care services envelope for their practice so they see this as a.
A core enabler to what.
They do.
Thanks, and for my follow up I wanted to ask on the <unk> CAG Dx guidance, Brian I think you had said 5% to 10% could you maybe just talk about what factors would put you at the high end versus low end of that range.
And the midpoint is about 100 basis points below what you did this quarter I was a little surprised just given I know I know you face a tougher compare but I'd assume there's maybe some incremental price realization. So could you maybe just talk about your expectations for 14, a little bit more detail.
Yeah. Thanks Nate.
Thought it was appropriate to maintain a similar outlook to what we had shared for the second half I think we're very pleased with our third quarter execution and performance.
I think the.
The on the clinic visit growth trend side, I think that that was.
Relatively favorable factoring in Q3, but we're not calling that out as kind of a longer term trend. We think the trends that we've seen kind of in the last two months are appropriate kind of to plan off of it.
And our pricing execution in line with their plans so we thought.
We really focus on the midpoint of the range. We think that's the appropriate place to be the lower end of the range is really reflective of potential macro risks that we think is appropriate to build in and of course, the higher end would be if we can continue to execute well in.
We see some improvement in the underlying visit trends, but I think the we.
We think on balance it's a consistent outlook and we think that's appropriate in the current environment.
Helpful. Thank you.
Our next question comes from the line of David Western Book Piper Sandler. Please go ahead.
Hi.
Can you for taking my question. So I wanted to talk about the percent of your platform that might be using learned staff versus unlevered and staff and is there a means of kind of using your sales force to accelerate training and training of these kind of programs, while we're in a AA.
<unk>.
Supply or veterinarian supply constraint environment, and VAT tax and then just as a kind of a follow up to that can you help us reconcile the constraints and labor with kind of easing them into new platform. So if we are in an environment, where they can't really fully fully capture all the all the all the clientele do they.
Have capacity to stay try new cornerstone or.
Try new platforms and that's all the questions I have thank you.
Yes.
Dan Good morning.
Yes.
We have a multi faceted strategy to really support the efficiency within within practices I mentioned the portfolio piece, including software.
To answer.
Part of your question directly.
Practices are taking the time to implement.
Tim systems, specifically easy that they see a very good return on that.
<unk>.
They're enthusiastic about moving to cloud based systems and in some cases modifying for optimizing core flow if it if it helps them specifically around the questions around training, we have a number of different platforms to be able to support.
The training needs.
Knowledge needs our practices some of it is clear to call. Some of it is business and workflow optimization of both online and in person we have a very significantly sized field service representative.
The organization as well as professional service heads for more in peer to peer it does both in person.
Through our internal medicine growth over the over the phone.
We've seen.
Nice nice growth and engagement.
Pulse and IDEXX to help support them.
Lots of lots of I think avenues open to customers for training and practice efficiency support.
Thank you.
Our next question comes from the line of Ryan Daniels of William Blair. Please go ahead.
Hey, guys. Thanks for taking the questions, obviously rightfully a lot of airtime on the CAG business, but I'm, hoping you could go into a bit of color on the water LPG in particular kind of what the growth outlook is there. If we continue to see macro headwinds both in the U S.
Recurring is that versus somewhat sensitive to the consumer overall macro environment.
Thanks for your question Ryan, Let me start with the water business say the water business is.
Probably our highest recurring revenue business in terms of our customer relationships are very.
Much embedded with the ongoing workflow for water safety testing and.
We feel very good about the momentum in that business as we reported 12% organic growth in the quarter.
And so I think the backdrop there is it's a strong global growth could growth across regions.
Have solid net price realization as well and.
We highlighted an acquisition this quarter, which which complements our our product offering and so feel very good about the momentum in that business.
Building building off the progress that we've made recently.
L. P D. As you reported had positive growth 7% in the quarter.
We were.
We have worked through the tough compares that we've been facing in recent quarters in China and actually we are up against an easy compare ushering in China was probably our toughest.
In the year. So we've worked through that and we saw a positive benefit from from herd health screening as a driver and.
Overall could have modest growth water growth in there.
And our testing areas I think it is an area that we're paying attention to in terms of macro backdrop, but I think we've we've worked through the tougher compares here and feel that we're positioned for positive growth moving forward.
Okay, Perfect and then my follow up a little bit different just a preventive care program. Obviously continues to rollout nicely can you remind us the status of that O U S.
Given the investments you've made or is there potential to push that more and trying to make that even more recurring in the face of a potentially weak macro environment. Thanks.
Yeah. Thanks, Ryan Good morning, Yeah, we definitely are expanding preventive care beyond the U S. We see a select number of markets and especially corporate accounts outside the U S are very interested in preventative care, it's a little bit earlier stages from the standpoint of.
Interest in adoption.
In some of our <unk>.
International.
Country country regions, but the same I think thats the same level of interest it just may not be as much.
Knowledge in terms of.
From a workflow standpoint, Dan and customer education work that still needs to be done. So we're making I think we're making progress I would just say it's more embryonic in we think represents a.
Solid long term opportunity.
Our next question comes from the line of Elliot Wilbur of Raymond James. Please go ahead.
Thanks, Good morning, I want to go back to the subject matter of clinical visit trends and thinking about the sequential improvement.
Down three 1% in the second quarter and improving it down to 4%.
<unk> just wondering if you could comment on the cadence of improvement over the course of the quarter.
Or not.
Full quarter rate is indicative of the of the actual exit rate.
And then as a follow up in thinking about the trend in clinic visit trends despite the.
Continued declines over the last couple of quarters.
Been offset by relatively favorable diagnostic frequency per visit metric, which has been up 100 basis points. The last two quarters and I think that compares to positive 50 basis points in <unk>.
Longer term average of 50 50 basis points I'm wondering if you think that that relatively higher.
Dx frequency per visit metric is sustainable if in fact, we see clinic visit trends we've heard.
Two positive.
Trends in early 2023, just sort of getting into the idea that maybe the.
Declining in clinic visit trends this is more related to the loss of pet.
Pet owners.
Who have perhaps a little bit more or less propensity to spend so it maybe a little bit lower quality customer has sort of been lost and that.
And that is reflected in kind of that more favorable dx frequency number. Thanks.
Yeah.
Elliot the a couple of different I think question you're getting at so we saw.
As you indicated negative two 4% clinical visit declines in the quarter and this was a modest sequential improvement compared to Q2, but we don't really see this as a fundamental change in the trend. We continue to expect near term impacts from reductions in capacity and obviously the background.
Environment remains dynamic we are pleased as we've talked about the overall diagnostics.
Revenue per practice visits that's both a function of adoption as well as utilization does two pieces I think are performing extremely well through the first three quarters of this year relative to relative to historical rates and that's I think a reflection again getting back to the execution drivers in the business.
<unk> really driving commercial engagement and innovation type of things that I.
I think our customers want and that supports.
Medical services within the practice and things that are important.
Delivering exceptional patient care and so with with that that will conclude the Q&A portion I'd like to thank everybody on the phone for their participation. This morning, I know, we have lots of IDEXX employees listening and I'd like to just say. Thank you for your continued commitment to our purpose and your focus and execution against that strategy.
<unk> continued engagement in the midst of what we all know it's dynamic external factors I think helped deliver another excellent quarter and excellent execution. So I'm thankful for all your work and look forward to finishing 2022 on strong left and so with that we'll conclude the call and again. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect speakers. Please standby for your database.
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