Q2 2024 IDEXX Laboratories Inc Earnings Call

Good morning, and welcome to the IDEXX Laboratories second quarter 2024 earnings conference call.

Operator: 2nd Quarter 2024 Earnings Conference Call. As a reminder, today's conference is being recorded.

Brian Mckeon: Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer, Brian McKeon, Chief Financial Officer, and John Ravis, Vice President, 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 regarding these risks and uncertainties is available under the forward-looking statement 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.com

Speaker Change: As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer, Brian McKeon, Chief Financial Officer, and John Ravis, Vice President, Investor Relations.

Speaker Change: IDEXX would like to preface the discussion today with a caution regarding forward-looking statements.

Speaker Change: 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 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.com.

Brian Mckeon: 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. In reviewing our second quarter 2024 results and updated 2024 guidance, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent prior year period, unless otherwise noted.

Speaker Change: 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.

Speaker Change: In reviewing our second quarter 2024 results and updated 2024 guidance, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent prior year period unless otherwise noted.

Brian Mckeon: 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. Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Brian McKeon.

Speaker Change: 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.

Speaker Change: Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Brian McKeon.

Brian Mckeon: Good morning and welcome to our second quarter earnings call. Today I'll take you through our key two results and review our updated financial outlook for 2024, including the future benefits that will flow from IDEXX innovation, we factored in expectations for continued pressure from lower U.S. clinical visits in the second half of 2024 and our updated full-year organic growth outlook. Our updated reported revenue outlook includes a favorable $15 million adjustment related to more recent foreign exchange estimates.

Brian Mckeon: Good morning and welcome to our second quarter earnings call. Today I'll take you through our key two results and review our updated financial outlook for 2024.

Brian Mckeon: IDEXX delivered solid organic revenue growth and strong comparable profit gains in the second quarter.

Brian Mckeon: In terms of highlights, overall revenues increased 7% organically, supported by 7% organic growth in CAG diagnostic recurring revenues and 10% organic gains in our water business.

Brian Mckeon: Solid CAG revenue growth was driven by global benefits from IDEXX execution drivers reflected in sustained solid new business gains, record second quarter premium instrument placements, and double-digit growth in recurring veterinary software and diagnostic imaging revenues.

Brian Mckeon: Partially offsetting these benefits, CAG diagnostic recurring revenue growth in Q2 was constrained by impacts from near-term macro and sector headwinds, which contributed to a 2% decline in U.S. same-store clinical visit growth levels in the quarter.

Brian Mckeon: IDEXX's operating performance, reflected in solid, comparable operating profit gains, continued to be strong in Q2.

Brian Mckeon: EPS in the quarter was $2.44, down 9% as reported, including a $0.56 per share impact from a $62 million discrete expense accrual related to an ongoing litigation matter.

Brian Mckeon: Comparable EPS growth was 15% in the quarter, ahead of our expectations, supported by solid gross margin gains and benefits from lower net interest costs and shares outstanding.

Speaker Change: IDEXX continues to make progress expanding our business, advancing our innovation agenda, and delivering strong comparable profit gains as we work through near-term macro and sector headwinds that continue to pressure clinic visit levels.

Speaker Change: We've updated our 2024 financial outlook to incorporate recent sector trends, which we estimate at midpoint will constrain overall organic revenue growth to the lower end of our original organic growth guidance for 2024.

Speaker Change: Our updated P&L guidance maintains our outlook for solid comparable operating margin gains this year and incorporates favorable adjustments for updated foreign exchange, net interest expense, and effective tax rate estimates.

Brian Mckeon: We'll review our updated guidance detail later in my comments. Let's begin with a review of our second quarter results.

Speaker Change: Second quarter organic revenue growth of 7% reflected 7% organic CAD gains, 10% organic growth in water, and improved 3% organic growth in our LPD business.

Brian Mckeon: CAG organic revenue growth was supported by 8% organic gains in veterinary software and diagnostic imaging revenues, driven by 12% organic growth and recurring revenues.

Speaker Change: CAG instrument revenue increased 5% organically, building on high prior year placement levels.

Speaker Change: CAG Diagnostic Recurring Revenue increased 7% organically in Q2, supported by average global net price improvement of 5% to 5.5%, with U.S. net price realization at the lower end of this range.

Speaker Change: CAG diagnostic recurring revenue growth in Q2 was supported by 10% international organic gains, including approximately 1% of growth benefit from equivalent days effects in international regions.

Speaker Change: Strong international growth reflects benefits from net price realization and continued solid volume gains.

Speaker Change: International growth continues to be driven by IDEXX execution, reflected in strong new business gains and high premium instrument placements, which supported the double-digit year-on-year expansion of our global premium instrument install base.

Speaker Change: U.S. CAG diagnostic recurring revenue growth was 5.2% in Q2, net of a 0.5% U.S. equivalent day growth headwind in the quarter.

Speaker Change: IDEXX growth was supported by solid new business gains, sustained high customer retention levels, and benefits from net price utilization.

Speaker Change: IDEXX growth continues to expand at a high premium to U.S. same-store clinical visit growth levels, which declined 1.8% in Q2.

Speaker Change: In the U.S., diagnostic utilization per clinical visit continues to expand solidly at the clinic level.

Speaker Change: This is reflected in a 7.5% year-on-year increase in diagnostic revenue dollars per clinical visit, including diagnostics.

Speaker Change: While diagnostic frequency per clinical visit declined modestly in Q2, diagnostic frequency per wellness visit expanded 100 basis points.

Speaker Change: This partially offset lower diagnostic frequency per non-wellness visit.

Speaker Change: The decline in diagnostic frequency for non-wellness visits may reflect recent growth in fall clinical visits for pain management drug treatment, which may not include diagnostics.

Speaker Change: Adjusting for these effects would imply relatively softer comparable U.S. clinical visit trends and a relatively higher IDEXX growth premium.

Speaker Change: Overall, IDEXX continues to achieve solid organic revenue growth in CAG diagnostic revenues as we work through headwinds from broader cumulative macro impacts on consumers which are likely pressuring near-term U.S. clinical visit growth levels.

Speaker Change: While we remain highly confident in the positive long-term drivers of demand for diagnostics,

Speaker Change: including the future benefits that will flow from IDEXX innovation, we factored in expectations for continued pressure from lower US clinical visits in the second half of 2024 and our updated full-year organic growth outlook.

Speaker Change: IDEXX Execution Drivers supported solid, organic revenue growth across our modalities in Q2.

Speaker Change: IDEXX Vet Lab consumable revenues increased 8% organically, reflecting solid gains in the U.S. and double-digit growth in international regions.

Speaker Change: Consumable gains were supported by 11% year-on-year growth in our global premium instrument install base, reflecting strong gains across our catalysts, premium hematology, and set of heat block homes.

Speaker Change: We achieved the Q2 record 4,952 CAG premium instrument placements, an increase of 4% year-on-year compared to high prior year levels.

Speaker Change: These results were supported by continued strong growth in premium hematology and CETAVU placements.

Speaker Change: ProSight I momentum continues with the global ProSight I install base increasing to over 17,000 instruments.

Speaker Change: Global catalyst placements decreased year on year in the quarter, reflecting comparisons to high prior year placement levels and placement mix in international regions.

Speaker Change: Global Rapid Assay Revenue has expanded 6% organically in Q2, driven by solid gains in the U.S., including benefits from higher net price utilization.

Speaker Change: Global lab revenues also increased 6% organically, reflecting solid U.S. gains and high single-digit growth in international regions.

Speaker Change: Veterinary software and diagnostic imaging revenues increased 12% as reported, including benefits from our recent GreenLine software and data platform acquisition.

Speaker Change: 8% overall organic revenue gains were driven by 12% organic growth in recurring revenues, reflecting benefits from ongoing momentum in cloud-based software placements.

Speaker Change: Water revenues increased 10% organically in Q2, driven by double-digit gains in the U.S. and continued solid growth in Europe .

Speaker Change: Livestock, poultry, and dairy revenues increased 3% organically. Continued solid gains in the U.S. and Europe offset lower Asia-Pacific revenues, including impacts from reduced swine testing in China and lower herd health screening revenues.

Speaker Change: Turning to the P&L, Q2 profit results were supported by gross margin gains.

Speaker Change: Gross profit increased 8% in the quarter as reported and 9% on a comparable basis.

Speaker Change: Gross margins were 61.7% of 90 basis points on a comparable basis.

Speaker Change: Gross Margin Gains Report Benefits from Net Price Realization Offsetting Inflationary Cost Impacts

Speaker Change: Software Service Margin Gains and Favorable Business Mets.

Speaker Change: On a recorded basis, operating expenses increased 28% year-on-year, including 22% of growth impact related to the $62 million discrete litigation expense accrual recorded in G&A.

Speaker Change: Excluding this impact, Q2 OPEX growth was in line with overall revenue growth, driven by increases in R&D spending aligned with advancing our innovation agenda, including new platform development.

Speaker Change: On a reported basis, operating margins were 26.3% in the quarter, including a 610 basis point impact from the discrete litigation expense accrual.

Speaker Change: On a comparable basis, excluding this impact, operating margins increased approximately 110 basis points year-on-year in the quarter.

Speaker Change: EPS was $2.44 per share in the quarter, a decrease of 9% as reported, including the $0.56 per share impact related to the discrete litigation expense accrual.

Speaker Change: EPS increased 15% on a comparable basis.

Speaker Change: For an exchange, reduce revenues by approximately $7 million, operating profit by approximately $3 million, and EPS by approximately $0.02 per share in the quarter, net of a $2 million hedge gain.

Speaker Change: Free cash flow is $215 million in Q2. On a trailing 12-month basis, our net income to free cash flow conversion ratio was 99%.

Speaker Change: For the full year, we're maintaining our outlook for pre-cash flow conversion of 90% to 95%, reflecting estimated capital spending of approximately $180 million.

Speaker Change: Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.7 times gross and 0.4 times net of cash as we continue to manage our balance sheet conservatively.

Speaker Change: We allocated $208 million in capital to share repurchases in the second quarter, supporting a 0.7% year-on-year reduction in diluted shares outstanding.

Speaker Change: Turning to our 2024 guidance, we've updated our full-year organic growth outlook to reflect expectations for continued pressure on U.S. clinical visit trends in the second half of 2024.

Speaker Change: Our P&L outlook reinforces our four-year goals for solid, comparable operating margin improvement and incorporates favorable adjustments to estimates for foreign exchange impacts, net interest expense, and our effective tax rate.

Speaker Change: Our updated full year guidance for reported revenues is $3,885,000,000 to $3,945,000,000.

Speaker Change: A reduction of $15 million at midpoint.

Speaker Change: Our updated reported revenue outlook includes a favorable $15 million adjustment related to more recent foreign exchange estimates.

Speaker Change: We've updated our four-year guidance for overall organic revenue growth and CAG diagnosed that organic recurring revenue growth to 6.2% to 7.8%, or approximately 7% at midpoint.

Speaker Change: Our outlook for overall organic revenue growth continues to reflect expectations for solid CAG diagnostics for current revenue gains supported by IDEXX execution.

Speaker Change: This includes consistent expectations for 4-year global net price improvement of approximately 5%.

Brian Mckeon: Our updated organic growth outlook at midpoint assumes IDEXX execution growth benefits will be partially offset by continued pressure on U.S. clinical visit levels in the second half of this year. This reflects a consistent 40 basis point improvement and comparable operating margins at midpoint, net of a negative 40 basis point impact related to the lapping of the Q1 2023 customer contract resolution panel.

Speaker Change: Our updated organic growth outlook at midpoint assumes IDEXX execution growth benefits will be partially offset by continued pressure on U.S. clinical visit levels in the second half of this year, similar to first-half trends.

Speaker Change: We expect our H2 organic revenue growth results will benefit by approximately 0.5% overall from equivalent days effects.

Speaker Change: reflecting 1% to 1.5% organic growth rate benefits in Q3.

Speaker Change: In terms of our profit guidance, our updated outlook incorporates impacts from the Discrete Litigation Expense Accrual, which we estimate will reduce full-year reported operating margins by approximately 160 basis points and EPS by 56 cents per share.

Speaker Change: We will normalize for the effects of this accrual in setting our 2025 financial performance goals.

Speaker Change: Incorporating these impacts, our updated reported operating margin outlook is 28.7% to 29.0%.

Speaker Change: This reflects a consistent 40-basis-point improvement in comparable operating margins at midpoint, net of a negative 40-basis-point impact related to lapping of the Q1 2023 Customer Contract Resolution Payment.

Speaker Change: Our updated full-year EPS outlook at $10.31 to $10.59 per share is down $0.56 per share at midpoint, reflecting the impact from the discrete litigation expense accrual.

Speaker Change: Adjustments to our organic revenue growth outlook reduced our operational EPS estimates by approximately $0.08 per share at midpoint, which is offset by approximately $0.04 in favorable foreign exchange adjustments and positive below-the-line benefits from refinements to our net interest expense and effective tax rate outlook.

Speaker Change: We now estimate foreign exchange will reduce full-year revenue growth by approximately 0.5% and EPS by approximately 5 cents per share.

Speaker Change: In terms of our outlook for Q3, we're planning for reported revenue growth of 6% to 8% net of an estimated 1% growth headwind from foreign exchange and incorporating approximately 0.5% in growth benefits from our recent software acquisition.

Speaker Change: This outlook aligns with an organic revenue growth range of approximately 6.5% to 8.5%, including approximately 1 to 1.5% of growth benefit from equivalent days effects.

Speaker Change: We're planning for reported operating margins of 29.5% to 30.0% in Q3, down moderately on a comparable basis.

Speaker Change: This factors in year-on-year comparisons to relatively lower prior sales and marketing expense levels, and projections for continued high year-on-year growth in R&D spending, including support of new platform advancement.

Speaker Change: That concludes our financial review. I'll now turn the call over to Jay for his comments.

Jay Mazelsky: Thank you, Brian , and good morning. IDEXX delivered excellent performance against our strategic priorities and strong operational results in the second quarter as we drive development of the companion animal diagnostic sector through a new wave of innovation and high-quality customer engagement.

Jay Mazelsky: These outcomes reflect high levels of execution and position IDEXX to benefit from long-term growth tailwinds.

Speaker Change: Including growth in a pet population, increased pet life spans, and an ever-strengthening bond between pet owners and their pets. These enduring dynamics combine to elevate the importance of medical services and drive global expansion of companion animal diagnostics and software.

Jay Mazelsky: As an innovation leader, IDEXX's growth continues to outpace the sector as we help our customers grow faster.

Speaker Change: Our progress is reflected in solid second quarter CAG diagnostics recurring revenue growth.

Speaker Change: Supported by key execution drivers. This includes continued solid new business gains, sustained high 97% plus customer retention rates, and solid net price realization aligned with the value we deliver.

Jay Mazelsky: IDEXX's focus on innovation in companion animal diagnostics has resulted in a highly compelling portfolio of products and services for our highly capable commercial teams to support our customers.

Jay Mazelsky: This combination helped drive record second-quarter global premium instrument placements and double-digit growth at our installed base of premium instruments in five consecutive quarters of double-digit CAG diagnostics recurring revenue growth in Europe .

Brian Mckeon: We're delivering this performance as we work through some transitional growth headwinds that continue to pressure clinical visit growth models. IDEXX's commercial success reflects our long-term focus on bringing a high-touch, direct commercial model that includes a broad set of complementary roles, including account managers, professional service veterinarians, and the largest in-person field service workforce in the industry. I'm excited to provide more updates on InViewDX and IDEXX's broader innovation agenda at our upcoming Annual Investor Day later this month. Tachyarteritis is a common and treatable disease among cats and dogs, which can prove fatal if not caught early.

Speaker Change: We're delivering this performance as we work through some transitional growth headwinds that continue to pressure clinical visit growth models.

Speaker Change: This includes ongoing staffing and productivity challenges, as well as broader impacts on pet owners in the current macro environment.

Jay Mazelsky: As we work through these dynamics, we're continuing to deliver solid growth ahead of sector levels. Our customer engagement is helping to support gains in diagnostics frequency and wellness visits and continued expansion of diagnostics utilization per clinical visit.

Jay Mazelsky: Our customers increasingly appreciate that healthy and sustainable clinic growth begins with diagnostics.

Jay Mazelsky: You can't assess basic health status or treat sick patients without first diagnosing.

Jay Mazelsky: and treatments then require follow-up monitoring. This has been our long-term focus and we see significant underserved demand for an expanding pet population that will support long-term growth for our customers in support of their mission.

Speaker Change: Today I'll give an update on IDEXX's commercial execution and progress against our innovation strategy.

IDEC: IDEXX commercial teams delivered record second quarter global premium instrument placements, growing off high prior year levels.

Jay Mazelsky: A key driver of this growth was high interest in IDEXX products in international regions.

Jay Mazelsky: Continued, solid, new and competitive catalyst placements and strong placement growth of ProSight and CetiView analyzers, coupled with high levels of retention and an excellent customer experience, help deliver double-digit growth in our worldwide premium instrument installed base.

Jay Mazelsky: Growth of our loyal installed base forms the foundation for our future recurring revenues, and a significant long-term opportunity for growth in CAG diagnostics recurring revenues.

Jay Mazelsky: ProSight is a great example of our continued momentum in expanding our customers' businesses through innovation. IDEXX sales professionals continue to support customers looking to upgrade from our legacy laser sight system to ProSight I in order to realize multiple benefits.

Jay Mazelsky: From load-and-go reagents that simplify workflow, to a smaller footprint that frees up valuable benchtop space and inventory benefits due to its paper-run model with automated fulfillment by IDEXX.

Jay Mazelsky: In addition to driving a better customer experience, IDEXX benefits from these upgrades in a form of increased loyalty and higher CAG diagnostics recurring revenues of customers who upgrade.

Speaker Change: While we are gratified by the consistent high levels of placements that our commercial teams deliver, we also focus on quality placements that will drive the most incremental value to IDEXX in the form of future recurring revenues.

Jay Mazelsky: Customers are praising the usability of InView, with all sites commenting that the workflow is intuitive and simple, and the results are consistent, which will help them see more patients that drive clinic visit volume growth.

Jay Mazelsky: We're also on track to launch the recently announced Catalyst Pancreatic Lipase Test in the U.S. in the third quarter and globally in Q4. The Catalyst Pancreatic Lipase Test, a single slide solution for canine and feline patients suspected of pancreatitis.

Brian Mckeon: Therefore, equipping veterinarians with quantitative results during the patient visit enables them to confidently diagnose and define the treatment envelope while the pet parent is still in the examination room. Our technology-for-life approach and the cloud-enabled in-clinic analyzers allow us to quickly ramp this highly relevant test to our more than 70,000 global catalyst installed base. These higher standards of care reflect the sector development that is at the center of our long-term organic growth strategy. And as the sector grows, we expect IDEXX in turn to grow even faster, disproportionately benefiting us as the leader in the space.

Jay Mazelsky: Therefore, equipping veterinarians with quantitative results during the patient visit enables them to competently diagnose and define the treatment envelope while the pet parent is still in the examination room.

Jay Mazelsky: Our technology-for-life approach and the cloud-enabled Inclinic analyzers allow us to quickly ramp this highly relevant test to our more than 70,000 global catalyst installed base.

Jay Mazelsky: In addition to the new Catalysts LiPase test, we will begin shipping the Catalysts Smart QC Clip in Q4. Customers are thrilled by the ability to run monthly QCs with the plug-and-go solution in under 15 minutes.

Jay Mazelsky: IDEXX software solutions are another area that delivers innovation-driven growth that addresses solutions that both improve clinic workflows and support greater utilization of diagnostics.

Jay Mazelsky: Demand for intuitive cloud-based software solutions remains high among a customer base that is increasingly reflective of younger generations who are digitally native.

Jay Mazelsky: By leaning into this trend, IDEXX is well-positioned to continue to deliver a seamlessly integrated software ecosystem that provides efficiency gains through workflow and communication solutions.

Jay Mazelsky: Q2 practice management orders were almost entirely cloud-based, building the foundation for strong, future growth of economically attractive recurring revenues.

Jay Mazelsky: IDEXX's attractive cloud-based solutions extend further, benefiting many areas of the practice. Facilitating payments, delivering digital workflow tools, and delivering an integrated pet-owner engagement solution are just a few examples.

Jay Mazelsky: of how we're providing a robust software stack that is a win-win, delivering improved clinic productivity while driving incremental recurring revenues to IDEXX.

Jay Mazelsky: For example, our recent launch of Velo, a pet owner engagement application, provides a first-of-its-kind pet owner engagement tool that is natively integrated into the practice management system.

Jay Mazelsky: High interest in Velo is helping fill the sales pipeline and driving a solid increase in active customers in the first full quarter since launching the product.

Jay Mazelsky: These customers are experiencing the benefits we saw in our early beta testers.

Jay Mazelsky: from reduced no-shows to better compliance during clinical visits. As this customer base grows over the long term, we see significant opportunity for Velo to help address the productivity challenges that exist at so many busy veterinary clinics, which is a meaningful benefit to our sector.

Jay Mazelsky: We're building on the robust features of our customer engagement solution by integrating GreenLine into our portfolio. Acquired in the first quarter, GreenLine PET is a leading digital platform that provides easy practice workflow solutions for coupon and rebate redemptions.

Jay Mazelsky: The tool provides veterinary clinics with the ability to connect their customers with leading animal health pharmaceutical and nutrition providers, making it easier for pet owners to take exceptional care of their pets.

Jay Mazelsky: These higher standards of care reflect the sector development that is at the center of our long-term organic growth strategy, and as the sector grows, we expect IDEXX in turn to grow even faster, disproportionately benefiting us as the leader in the space.

Jay Mazelsky: Your contributions are essential to the progress we've made against our organic growth strategy and to delivering another quarter of strong financial performance.

Jay Mazelsky: Thanks to your efforts, IDEXX is well positioned to build on this momentum through the second half 2024 and well beyond, as we continue to lead the development of the companion animal diagnostic sector.

Jay Mazelsky: Participating will be members of my senior management team.

Jay Mazelsky: including Dr. Tina Hunt, Executive Vice President, Strategy, Sector Development, and Global Operations.

Speaker Change: Dr. Mike Erickson, the Executive Vice President and General Manager, Point of Care Diagnostics and Telemedicine.

Speaker Change: Mike Lane, Executive Vice President and General Manager, Reference Laboratories and Information Technology Michael Schreck, Executive Vice President and General Manager, Veterinary Software and Services George Fettel, Senior Vice President, Chief Revenue Officer

Speaker Change: and Brian McKeon, Executive Vice President and CFO . The event will last approximately four hours and will conclude with a Q&A session.

Speaker Change: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad.

Jay Mazelsky: Again, you may press star 1 to ask a question.

Speaker Change: We'll take our first question from Chris Schott with J.P. Morgan. Please go ahead.

Chris Schott: Great. Thanks so much for the question. I said a kind of a two-parter around VET visits. I guess first is, what do you think, in your view, is the biggest delta between the outlook you gave in 1Q and the outlook you gave today in terms of what's happened to the market over the past few months?

Speaker Change: And the second part of that is probably more forward-looking, are you still confident in I guess the more traditional kind of two or three percent that visit growth rate as being an appropriate target over time? And maybe just help bridge us from what we're seeing today to what needs to happen to get back to that more traditional growth. Thank you.

Brian Mckeon: Thanks for your question, Chris. I think just revisiting the outlook that we had given earlier in the year, we saw roughly 150 basis points of headwind coming out of the first quarter and carried that through our assumptions in the second quarter in the U.S. in terms of clinical visits. Very positive long-term drivers for growth and demand in pet health care, including visit trends. And so we'll talk more about that at Investor Day, but we continue to have a very optimistic long-term outlook for the growth potential in this sector.

Speaker Change: Thanks for your question, Chris. I think just revisiting the outlook that we had given earlier in the year, we saw roughly

Speaker Change: 150 basis points of headwind coming out of the first quarter and carry that through our assumptions in the second quarter of the U.S. in terms of clinical visits.

Speaker Change: and highlighted, as we had coming out of 2023, that we thought there'd be a flattening of trends over time. We had anticipated seeing some normalization of the staffing effects and...

Speaker Change: Working through some of those dynamics and thought that.

Speaker Change: The Clinic Outlook would flatten. I think that as we work through Q2, we continue to see

Speaker Change: level headwinds. I think we're acknowledging that there may be some macro dynamics going on here that we're working through.

Speaker Change: and trying to capture that in the second half outlook. So that's the principal change. I'll let Jay talk more about the long term drivers, but we we continue to see a number of

Jay Mazelsky: We're very positive long-term drivers for growth and demand in pet healthcare, including visit trends. So we'll talk more about that at Investor Day, but we continue to have a very optimistic long-term outlook for the growth potential in this sector.

Jay Mazelsky: Good morning, Chris. Just a couple words about the long-term trends. As Brian said, we continue to be very optimistic about that. You know, all the longer-term sort of secular tailwinds, we believe, are intact. It obviously starts

Speaker Change: With the overall humanization of pets and and that continues to strengthen it, you know appreciably

Speaker Change: Increasingly among the younger household-owning pets, from a demographic standpoint,

Speaker Change: What they've shown, both in terms of intent and actual actions, is willing to spend more and prioritize.

Speaker Change: These would be categories like travel, entertainment, going out. There's obviously a lot more pets, so from a net adoption standpoint, if you take a look at it, this is really a global phenomenon.

Speaker Change: They're more in aging, and we know that as they age, you know, more is generally spent from both a health care, overall health care standpoint, as well as

Speaker Change: Diagnostics. Longer lifespans, we'll provide an update on that, but we know both dogs and cats are living longer and that's a good thing for both the pets.

Speaker Change: As well as the overall spend, you know, and again, back to the prioritization. We think that this is a very resilient market that Fed owners are willing to spend.

Speaker Change: Prioritize for the care and well-being of their pets. You know, maybe on a shorter-term basis, just a couple comments based on a number of

Speaker Change: Ongoing conversations we have with veterinary practices there.

Speaker Change: Very optimistic.

Speaker Change: In terms of, you know, demand and the work that they're doing, they think they've made progress coming out of the pandemic around really

Speaker Change: Retaining their staff, creating a more sustainable environment for both veterinarians and the veterinarians.

Speaker Change: Technicians amongst their team. They continue to invest in technology. We've seen that both from a software standpoint as well as point-of-care record placements.

Speaker Change: In Q2, as we said in our commentary, there are some high-level macro impacts that are affecting, likely at the margin, some moderation in clinical visits, but we're confident.

Speaker Change: That we'll work through it, that we're working through it effectively as our customers.

Speaker Change: We'll move to our next question from Michael Ryskin with Bank of America. Your line is now open. Please go ahead.

Unknown Attendee: Hey, thanks, guys. Kind of want to follow up on that topic, but take it from a different perspective. Brian J., during your prepared remarks, you talked about maybe shifting vet dynamics, and you highlighted some of the diagnostics utilization trends in wellness visits versus non-wellness. I think you were kind of calling out that you were seeing less diagnostic in non-wellness because pain management, you know, we assume Lybrella is rampant. There's visits where people come in, just get the shot, and then walk out without any diagnostics tied to that. As part of that trend, I'm just wondering if maybe we could be seeing a broader shift in

Michael Riskin: Hey, thanks guys. I kind of want to follow up on that topic, but take it from a different perspective.

Michael Riskin: Brian Jay, during your prepared remarks you talked about maybe shifting that dynamics and you highlighted some of the diagnostics utilization trends and wellness visits versus non-wellness.

Speaker Change: I think you were kind of calling out that.

Speaker Change: You are seeing less diagnostic in non-wellness because...

Speaker Change: Pain Management, we assume Library, is ramping through visits where people come in, just get the shot and then walk out without any diagnostics tied to that. As part of that trend, I'm just wondering if maybe we could be seeing a broader shift in...

Speaker Change: that channel dynamics, you know, the pain management issue you mentioned. There's also a continuing shift to the online marketplace for therapeutics. All this can kind of lead to potentially less opportunity for diagnostics in the clinic's office because

Speaker Change: Pet owners are getting their care elsewhere. I'm just wondering how you see that.

Speaker Change: That care delivery channel evolving and whether that could be having an impact in

Speaker Change: to the growth profile.

Speaker Change: And then I'll throw in my follow-up question at the same time, you know, you've updated the guide for this year to 7% organic, you know, you did...

Speaker Change: Rounding nine last year and seven and a half the year before. So this is now kind of a three-year trend of.

Speaker Change: Pretty far below the LRP of 10% plus, you know, we talked about that visits. There was a point where there was a lot of concern on

Speaker Change: Vets supply in terms of insufficient vets and technicians out there, but it just seems like this macro headwind

Speaker Change: I'm just wondering, outside of price, what levers do you have to regain that 10% plus LRP and just confidence that you'll be able to get back there in 2025? Thanks.

Speaker Change: Yeah, why don't I start with your final question because I think that'll help to center the discussion around visit trends, which I think you know was

Speaker Change: The first part of your question related to Mike, just in terms of the growth trends for the company, I think it's important to put them in the context of this post-pandemic period. I mean, we had a 33% expansion of the business between...

Speaker Change: 2020 and 2021.

Speaker Change: I would say the dynamic in 2022 that kind of played into the first half of 2023 was this capacity pullback effect.

Speaker Change: at the clinics where they had trouble keeping up with the expanded demand. And it was fundamentally an impact on clinical visits. So we went from a positive 5% clinical visit environment to a minus 3% environment in a relatively short period of time.

Speaker Change: And I think that that was not foundational to the demand in the industry. I think it was this capacity dynamic and this transition from this extraordinary period of growth.

Speaker Change: And I think as we've moved forward from that, I think they're, they're, um...

Speaker Change: There has been an ongoing dynamic, again, in this post-pandemic period related to staffing challenges and what has become a cumulative inflation impact on consumers broadly that's causing global trade-off, and all paths lead back to the fundamental dynamic that's changed as business.

Speaker Change: and I think our premium has been quite healthy or...

Speaker Change: Placements, Net New Business Gains, Customer Retention

Speaker Change: All the dimensions that we look at in terms of how we're executing the business.

Speaker Change: We feel very good about, and we feel great about our innovation pipeline, so I think there are, as we look forward, and the question you had about moving ahead, I think we

Speaker Change: We see positive long-term drivers in terms of sector trends and things that we're doing to drive demand in the business as well. So we feel very good about that.

Speaker Change: Well, acknowledging that we've been working through a clinical visit issue, so, you know, getting to some of the specifics that we highlighted this morning, I think one of the things we were trying to peel apart here on the visits was...

Brian Mckeon: As you know, we look in the U.S. at visit changes on the Sankster level, diagnostic frequency, and diagnostic utilization, and I think we do see some level of an impact on these metrics related to pain meds. We try to pull this apart and look at frequency of wellness visits. They're actually up here on your 100 basis points, and that's actually a trend we've seen for several quarters now. So a very healthy dynamic. When pet owners come into the clinic, they're usually doing more diagnostic testing.

Speaker Change: You know, as you know, we look in the U.S. at the visit changes on the same level of diagnostic frequency, diagnostic utilization.

Speaker Change: I think we do see some level of an impact on these metrics related to the pain meds. We try to pull this apart and see.

Speaker Change: On wellness visits, they're actually up year-on-year, 100 basis points, and that's been actually a trend we've seen for several quarters now. So a very healthy dynamic. When pet owners are coming into the clinic, they're doing more diagnostic testing.

Speaker Change: On non-wall assessing, those metrics were holding up through last year, and what we started to see was change in those metrics beginning in.

Speaker Change: Q4, and into the first half of this year, which aligns with the Labrella kind of launch and kind of penetration. And so NetNet, we didn't quantify this specifically, but basically the frequency metric, which had built off of that high base, expanded base in the pandemic.

Speaker Change: We think when you adjust for these type of dynamics, the pain med dynamics, it's probably sustained, you know, continue to expand, and it might indicate there's a bit more weakness on the clinical visit front.

Speaker Change: Particularly in non-wellness, and I think that's indicative of the macro headwinds that we've been highlighting. So, again, I think this is, from our view, not foundational to our strategy or execution, but more reflective of just the macro and the sector environment we're in at the moment.

Unknown Executive: Mike, let me address a couple of...

Speaker Change: Other questions you had embedded in there. First, around the alternate channels of care, you know, what we see from an alternate channel venue standpoint is it's largely complementary. I'm referring to some of the bricks-and-mortar places like Tractor Supply or...

Speaker Change: Well practiced capacity challenge as well as the macro impact.

Speaker Change: We believe that the growth prospects are excellent for the company.

Speaker Change: Well move to our next question from Erin Wright with Morgan Stanley. Your line is now open. Please go ahead.

Erin Wright: Great. Thanks, if you can speak to it and I guess, what was the nature of the legal charge and in what ongoing there is that a customer related relationship is there more to come on that front and then and then your your ability though to control costs here.

Speaker Change: He is impressive and that's obviously, excluding the legal charge.

Speaker Change: In the quarter, but can you talk about the levers you have to control costs.

Speaker Change: And in your ability to do that until what we see.

Speaker Change: Until we see kind of normalized from a market perspective.

Speaker Change: Great. Thanks for your question Erinn.

Speaker Change: Regarding the ongoing litigation matter as we noted we had a.

Speaker Change: $62 million discrete expense accrual in the quarter.

Speaker Change: As a policy we don't comment on ongoing litigation matters. We did include disclosures in the footnotes of the press release, and we have or as well disclosures that you referred to in our first quarter 10-Q, and our and in our second quarter 10-Q in terms of the nature of this but this was a.

Speaker Change: A an issue related to a royalty payments over time and we are.

Speaker Change: What we've updated is our best estimate of the probable loss for that matter.

Speaker Change: In terms of your question on operating expense leverage I think.

Speaker Change: Adjusting for these items I think you can see that we've.

Speaker Change: You need to do a good job of adapting our R.

Speaker Change: Our business.

Speaker Change: Financial performance to the growth.

Speaker Change: <unk> that we're working through in terms of some of the sector headlines for delivering strong execution.

Unknown Executive: PRESENTATION Well we've seen some strong under-lying comparable operating margin gains. We had an expense group that was basically in line with their revenue growth and too are much focused on the things that were going to drive future growth, the R&D Agenda and our commercial investments. So we, as we've done consistently in the past we have the ability to adapt. Make sure we're prioritized against our long-term growth while delivering good financial performance, and we're able to do that again. And the first half, then, that's reinforced in our fully-routed, couple.

Speaker Change: Strong underlying comparable operating margin gains we had.

Speaker Change: We had expense growth that was basically in line with our revenue growth and very much focused on the things that we're doing to drive future growth through R&D agenda, and our our commercial investments. So we are as we've done consistently in the past we have the ability to adapt and <unk>.

Speaker Change: Sure were prioritized against our long term growth, while delivering good financial performance and we're able to do that again in.

Speaker Change: The first half and that's reinforced in our full year outlook as well couple of things.

Speaker Change: Just a couple of words that they add to Brian's comment around the overall cost management.

Speaker Change: We need to invest.

Speaker Change: Very heavily in those areas that we think are important to the long term growth.

Speaker Change: Company R&D, obviously, we're working through.

Speaker Change: <unk>, new innovations and so we don't want to starve that then we'll see the net where there are commercial investments from territory expansion standpoint, we're obviously very excited to be able to invest in those areas. We see a very good return.

Speaker Change: What I would also say from a business and business model standpoint. These are businesses that have scale and that lend themselves the productivity and the investments from an automation and Digitization standpoint, and just overall network standpoint, whether you look at it.

Speaker Change: Obviously, the software business for us and say.

Speaker Change: Yeah, that's fair.

Speaker Change: Just growing business with with very good drop through and so that's you know that's another lever that we have.

Speaker Change: But we're disciplined we're able to adjust our expense and expense profile whatever environment. We're in.

Speaker Change: And then my follow up is on innovation can you just remind us what's embedded in your guidance as it relates to any new contribution this year.

Speaker Change: It sounds like you're still on track in terms of your timing, but also F. N. A when you anticipate that lines and then also the timing or where you stand in terms of your other platform launch I guess should we expect to hear something about that potentially at your investor day. Thanks.

Speaker Change: Alright, just to your point on the guidance we've captured the.

Speaker Change: The expectations for the Q4 launch of <unk> and.

Speaker Change: It's principally an instrument introduction.

Speaker Change: Introduction of at that point, the recurring revenue build over time.

Speaker Change: Yeah.

Speaker Change: As is our policy, we will talk about innovations as we get closer but the last week look forward to Investor day, and we'll just provide an update.

Speaker Change: In terms of the overall company strategy and where we are from an innovation agenda standpoints I look forward to having that conversation.

Speaker Change: Well move to our next question from Jonathan Block with Stifel. Your line is now open. Please go ahead.

Jonathan Block: Thanks, guys. Good morning, I'll just break apart my question I guess, Brian Jay.

Jonathan Block: Get the ongoing headwind from clinical visits, but when we isolate.

Speaker Change: The U S IDEXX CAG Dx recurring premium that we've laid out a bunch of times in other words.

Speaker Change: The growth X visits X price.

Speaker Change: I get a premium of around 250 basis points this quarter.

Speaker Change: The lowest I can remember it looks like an ongoing deceleration for roughly the past 10 quarters. So can you talk to that trend and what might be behind it and then importantly should we see that trend start to reverse course, arguably in 'twenty five and the earlier days of the <unk> launch and then I'll ask my follow up thanks.

Speaker Change: Yeah. Thanks. Thanks for your question John I think the.

Speaker Change: We've.

Speaker Change: Increasingly kind of broken down in these metrics.

Speaker Change: On an adjusted basis.

Speaker Change: We have a similar number to what you have if you're taking a price in the days effects and.

Speaker Change: Comparing two clinical visits about 250 basis points I think one item, we noted which I know you've been noting in your research is there is this dynamic of the pain med.

Speaker Change: A follow up visits, which we capture and our visit number and so I think.

Speaker Change: Could you know, particularly in the first half of this year or be indicate that the underlying visits themselves may be a bit softer relative to visitors that would have diagnostics.

Speaker Change: And the premium might be that much stronger so I think that the.

Speaker Change: The net of that is the premiums held up quite well from our from our lens I think that we feel good about the.

Speaker Change: The key things that drive that the net new business gains customer retention levels.

Speaker Change: Obviously, you had solid net price realization aligned with the value, we're delivering and so I think we're.

Speaker Change: You don't feel positive on that front and I you know factors like introduction of innovation are critical to helping.

Speaker Change: Helping to increase engagement with our customers to.

Speaker Change: Get the multiplier benefits that come from from IDEXX innovation and leverage of our ecosystem and so I think we're looking forward to the <unk> launch and the other the other initiatives that Jay highlighted and.

Speaker Change: That is something that can be.

Speaker Change: They tend to be a positive long term driver for us I'd also highlight just the solid performance internationally as well for the company. So it was.

Speaker Change: 10% overall growth organically CAG Dx recurring there was a lot of days.

Speaker Change: Seven days had a benefit but very solid growth volume growth continues to be very positive and we have excellent progress on instrument placements, which will be a strong indicator of our long term growth potential. So I think we're we're feeling very good about the execution metrics and as we work through some of the visit headwinds that we've isolated.

Speaker Change: That was great color. Thanks, Brian for my second one well if you guys have done a great job.

Speaker Change: This year holding EPS in light of the lighter revenue in some tax and some interest expense how do we view that Brian is it just better call. It overall efficiency from the company or do we think about any projects or initiatives that might come out of 'twenty four and go into 25, and then the second sort of tack on question would be.

Speaker Change: Jay just taking a step back and this goes back to sort of that pain.

Jay Mazelsky: Thesis that we had a little bit.

Speaker Change: But is there anything concerning about call it like a wallet share battle right. I mean, just the fact that a pet owner might be spending $1000 in cash on pain maps per ad or atopic dermatitis per annum and when we think about some of the potential accompanying diagnostic testing that that might suffer.

Speaker Change: The edges. Thanks for your time guys.

Speaker Change: Yeah. So let me answer your second.

Speaker Change: <unk> first and then I'll turn the.

Speaker Change: The front end part of the question.

Speaker Change: Brian.

Speaker Change: We aren't concerned about that from a diagnostics utilization standpoint, we think it remains.

Speaker Change: It's remained pretty constant from the launch of the pain that's themselves primarily.

Speaker Change: Ah patient visit growth phenomenon that we spoke to are related to some of the capacity challenges that practices are working through that as well as the macro economic impacts when you take a look at wellness you know for example, we've seen.

Brian: The diagnostic and quotient up up 100 basis points and Brian spoke to the south.

Brian: The effect of payment on the non wellness.

Brian: Where we catalog or characterize that so when they are coming into the practice, they're using diagnostics and they're using diagnostics both for wellness and non wellness. So we haven't seen any evidence of that cannibalization impact.

Speaker Change: Hey, Jon on your question on margins, if I got that right I think the the underlying performance that we've had this year reflects.

Speaker Change: Solid gross margin.

Speaker Change: Momentum there are a number of drivers there I think we've had.

Speaker Change: Ongoing benefits from cost management things like a lot of productivity initiatives.

Speaker Change: Software business is growing is really helpful to us.

Speaker Change: Our business mix overall, just solid growth in CAG diagnostic recurring revenues and growth in clinic revenues as a positive factor.

Speaker Change: So and just ongoing productivity in our operations functions you have coming off a period, where there was relatively more inflation. So I think we feel that that's been a consistent driver for us as a company and.

Speaker Change: We look forward to building on that is the foundation of how we can continue to improve our our comparable operating margin performance.

Well move to our next question from David Westenburg with Piper Sandler. Please go ahead.

David Westenburg: Hi, Thank you for taking the question I'm kind of again again continue the theme about.

David Westenburg: Opex management, and maybe slower growth relative to <unk>.

David Westenburg: History. So just as we look I mean I've tracked to your market share gains over the last 10 years and in.

Speaker Change: In reference lab, I think I've seen from like 40 days into the fifties.

Speaker Change: In terms of market share gains do you think that we still have a lot of that last or do you think that most of the growth is going to have to come via innovation and maybe just creating growth in new markets and really work on utilization in clinic.

Speaker Change: And then I'll just ask my second question upfront I, usually when I look at gross margins you did beat me by 770 basis points I, usually look at consumables and reference lab as being the big drivers.

Speaker Change: I think one of the only one of those beat me. So just in terms of how you kind of got to them to that gross margin leverage. Thank you.

Speaker Change: I'll take the front end of your question and have Brian address the gross margin piece.

Unknown Executive: I'll take the front end of your question and have Brian address the gross margin piece. You know, David, if you take a look through the years, most of our growth has actually come through same-store sales. So, you know, we do very well competitively.

Speaker Change: David.

Brian: Take a look through the three years most of our growth has actually come through.

Brian: Same store sales. So you know, we do very well competitively, we're pretty transparent in terms of disclosing placements and and the progress we make.

Unknown Executive: We're pretty transparent in terms of disclosing placements and progress we make. But, you know, we look from a growth algorithm standpoint to drive diagnostics utilization. Now, a lot of that happens through innovation. There's also a big technology-for-life component to it. If you think about Catalyst, for example, you know, 10 new parameters, 10 new slides over the last 12 years.

Brian: You know, we look from a growth algorithm standpoint to drive diagnostics utilization now a lot of that happens through innovation, but it's also a big technology for life component of it if you think about catalysts for example.

Brian: Tend to endo parameters tenders slides over the last 12 years. So we know customers are just using more of that as more value connected with it.

Unknown Executive: So we know customers are just using more of that because there's more value connected with it. And that feeds into the, you know, growth profile of the company. From a reference lab standpoint, the same phenomenon. You know, if you think about Fecal Imaging as an example, it's a quick-growing category within our reference lab business, a very important foundational part of wellness, and we continue to expand that with new tapes. And more recently, just as I saw Espresso, it's used more because it has more critical value. That's how we think about it. Obviously, new platforms open up completely new...

Brian: That fits into the you know the <unk>.

Brian: The profile of the company.

Brian: From a reference lab standpoint same phenomenon. Yeah. If you think about particular imaging is an example of that.

Brian: Quick growing category within our reference lab business very important foundational part of wellness, we continue to expand that menu tapes and more recently Cisco I saw espresso of use more because it is more critical value. That's how we think about it obviously new platforms open up.

Brian: Lately new.

Brian: Greenfield Greenfield space for us so that's another element of our growth algorithm and debt.

Brian: Yesterday, Brian always you.

Brian: He always dissect start to put some of the pieces together show where that growth comes from U S and internationally.

Brian Mckeon: Yeah, David, on your margin question, I think in the quarter we highlighted that we had benefits from net prioritization that offset inflationary cost impacts, software service margin gains, and favorable business mix, which is driven by solid vet lab growth. I would highlight, I think we had strong lab margins in the prior year, and part of that was we were ramping staffing. So I think some of the lab margins to the underlying productivity is very good. It was muted by a bit of a compare dynamic, but I think overall feel very good about the gross margin performance.

Brian: Yeah, David on your margin question I think in the quarter, we highlighted that we.

Speaker Change: We had benefits from net price utilization that offset inflationary cost impacts a software service margin gains and favorable business mix, which was driven by solid vet lab growth I would highlight I think we had strong lab.

Speaker Change: Margins in the prior year and part of that was we were we were.

Speaker Change: Ramping staffing so I think some of the the the lab margin. So the underlying productivity is very good it was muted.

Speaker Change: Muted by a bit of a compare dynamic, but I think overall feel very good about the gross margin performance now.

Operator: Now we'll conclude the Q&A portion of the call. Thank you to everyone on the phone for your participation in this morning's event. I'm very pleased. And so with that, we'll conclude the call. We look forward to seeing many of you at INVESTigate. Thank you.

Speaker Change: That will conclude the Q&A portion of the call.

Speaker Change: To everyone on the phone for your participation in this morning's event and very pleased with.

Speaker Change: Sure another quarter of solid financial results as we continue to advance our strategy to drive development of the companion animal diagnostic sector.

Speaker Change: And unwavering focus on innovation and our customers looking ahead, we remain excited about the significant long term opportunity to enhance standards of care for companion animals.

Speaker Change: And so with that we'll conclude the call. We look forward to seeing many of you at Investor day. Thank you.

Speaker Change: This concludes today's call. Thank you again for your participation you may now disconnect and have a great day.

Speaker Change: [music].