IDEXX Laboratories, Inc.

Good morning and welcome to the IDEX Laboratories' second quarter 2019 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, interim president and chief executive officer, Brian McKeon, chief financial officer, and John Ravis, senior director, investor relations. IDEX 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 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, idex.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAP. A reconciliation of these non-GAP financial measures to the most directly comparable GAP 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 2019 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth referred to growth compared to the equivalent period in 2018 unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit his or her 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, everyone. IDEX delivered continued strong financial performance in the second quarter. In terms of highlights, Q2 revenues of $620 million grew 7% on a reported basis or 9% organically. Results were driven by continued strong 11% organic gains in CAG diagnostic recurring revenues, net of a combined .5% growth headwind related to Brexit order timing and equivalent day impacts. The quality of our growth was excellent in the quarter, reflected in strong U.S. CAG diagnostic recurring revenue gains across our major modalities and 39% growth in new and competitive catalyst placements in international markets which supported solid global EBI gains and continued high growth in consumable revenues. Profit performance continued at a strong pace in Q2 supported by continued high CAG diagnostic recurring revenue growth and high profit flow through. EPS was $1.43 per share, an increase of 19% on a comparable constant currency basis, reflecting a better than projected 120 basis point improvement in constant currency operating margins. In addition to strong operating profit gains, Q2 EPS results also benefited from $0.04 per share and upside related to share-based compensation tax benefits. While our CAG diagnostic recurring organic revenue growth remains strong and on track with our full year 11% to 12% growth goals, our overall Q2 organic growth of 9% was at end of our projected growth range for the quarter, impacted by a few select factors. We fell short of our goals to build on very high prior year international chemistry upgrade levels with the majority of our Q2 upgrade placement shortfall in China. We also saw increased pressure on China LPD revenues in Q2 driven by the African swine fever outbreak as well as a relatively higher than projected impact from Brexit and equivalent day effects in the quarter. These factors were largely specific to the second quarter. We refined our full year revenue outlook to incorporate these effects while raising our full year EPS guidance reflecting continued benefits from high CAG diagnostic recurring revenue growth and disciplined P&L management. In terms of our full year revenue outlook, we're maintaining our guidance for 11% to 12% organic growth and CAG diagnostic recurring revenues. We're refining our overall organic growth guidance to .5% to 10.5%, lowering our high end growth outlook by 0.5%, incorporating our second quarter results. Our updated full year revenue guidance is now ,000,000 to ,000,000, 10 million below our prior midpoint revenue range reflecting $5 million in operational refinements and approximately $5 million of impacts related to updated FX estimates. We're raising our 2019 EPS guidance range by $0.05 per share at midpoint to $4.82 to $4.92 or 17% to 20% growth on a comparable constant currency basis. This outlook reflects $0.02 in EPS benefit at midpoint related to higher expectations for operating performance driven by a raised outlook for 100 to 125 basis points in full year constant currency operating margin improvement and lower projected interest expense. Our guidance builds in a $0.04 per share increase from updated projections for share-based compensation tax benefits, incorporating Q2 upsides offset by a one-set negative impact related to updated FX assumptions. We'll review our updated 2019 outlook later in my comments. Let's begin with a review of our Q2 performance by segment and region. Q2 results reflect a continued strong performance in our companion animal group. Global CAG revenues were $547 million, up 10% organically, driven by 11% growth in CAG recurring revenues, including strong global gains across our major modalities. As noted, our CAG diagnostic recurring revenue growth in the quarter was net of a .5% headwind from Brexit order timing and equivalent day effects, which were relatively greater than anticipated impacted by the timing of European holidays. -to-day CAG diagnostic recurring revenues increased .4% in line with our full year goals. Veterinary software services and diagnostic imaging systems revenues increased 9% overall and 7% organically in Q2, driven by double-digit organic gains in VSS revenues. We saw continued strong sales results across our practice management platforms and growth in recurring software services on our expanding PIMS and application install base. Our diagnostic imaging business also continues to achieve high levels of digital radiography instrument placements and growth in recurring services, although organic revenue gains in the quarter were moderated by comparisons to high prior year instrument placement levels. Our water business revenues grew 10% organically in the second quarter to $35 million, with consistent -single-digit growth in the U.S., augmented by high growth in Asia and Latin America, aided by our expanded direct sales presence. Livestock poultry and dairy revenue in Q2 was $33 million, reflecting relatively flat organic growth. Strong organic growth and health-herd screening revenues, aided by a favorable prior year comparison in the quarter, and solid gains in poultry and pregnancy testing, were offset by -than-projective pressure on swine diagnostic testing revenues related to impacts from the African swine fever epidemic in China, as well as moderate declines in European disease eradication program revenues. By region, U.S. revenues are $389 million in the quarter, of 9% organically, driven by an 11% organic increase in CAG diagnostic recurring revenues. U.S. recurring revenue gains were supported by double-digit growth in U.S. reference labs and consumables, and high single-digit gains in rapid assay sales. U.S. CAG recurring diagnostic growth continues to be primarily volume-driven, with net price gains continuing to trend in the 2% to 3% range across our major modalities. IDEX growth continues to outpace broader market trends. In Q2, total visits per practice growth was .7% -on-year, with clinical visits per practice growing at a greater amount, at 2.1%, and overall revenue per practice increasing 4.4%. Market growth results were slightly moderated from Q1 levels, which were refined following our latest data set refresh. Note that these metrics are on the same store basis and don't include growth benefits from incremental practice formation, which we estimated approximately 1% annually. International revenues in Q2 were $230 million, of 9% organically, driven by 11% organic gains in CAG diagnostic recurring revenues. As noted last quarter, we saw benefits in Q1 related to advanced ordering ahead of the previous Brexit deadline. These effects reversed in the second quarter, which along with an unfavorable impact related to the timing of European holidays, reduced overall international CAG diagnostic recurring revenue gains by approximately .5% and consumable gains by over 90%. Adjusting for this dynamic, international consumable gains were nearly 20% in Q2, supported by our commercial executional focus in expanding our global catalyst install base. International CAG diagnostic revenue gains were moderated by consistent -single-digit revenue gains in our reference lab business. This is an area targeted for improvement in the second half of 2019, aided by relatively more favorable -on-year comparisons and benefits from our expanding veterinary diagnostic consultant business model. In terms of segment performance, our Q2 results reflected strong global gains across CAG diagnostic testing modalities and continued progress in expanding our premium installed equipment base globally. Globally, EBI was up solidly in Q2 compared to very strong prior levels driven by growth and high-quality catalyst placements. In North America, we placed 319 catalysts at new and competitive accounts as well as 159 second catalysts at larger IDEX accounts. Second catalyst placements are supporting continued strong consumable growth and high customer retention rates, aided by steadily expanding 360-degree program and other long-term contract commitments. These results compared to strong prior year new and competitive catalyst placement levels of 346 units and 95 second catalyst placements. Along with limited vet test upgrades, total North American catalyst placements were 486 in the quarter, up 8%, supporting a 15% -on-year growth in a North America install base, including approximately 5% of growth benefit from upgrades completed in the second half of 2018 at Manfield. In international markets, we placed 761 catalysts at new and competitive accounts, or 66% of total placements, up 213 units, or 39% compared to the prior year. Total international catalyst placements of 1,149 units were down 4% compared to very strong prior year levels, which had high levels of vet test upgrades in Asia Pacific markets. As noted, while our new and competitive catalyst results were excellent, we did follow the shortfall of our goals in Q2 to build on our high priority levels of upgrades in expansion markets such as China, which contributed to a shortfall to our quarterly instrument revenue goals. Despite these dynamics, our international catalyst install base reached nearly 21,000 units in Q2, up 28% -on-year and over 5% compared to ending Q1 levels. Overall, we placed 3,171 premium analyzers in Q2, down 2% -on-year. Total catalyst placements were 1,635, down 1%, reflecting the tough compared to high prior year vet test upgrade levels. We achieved 602 -of-view placements in Q2, down 16%, compared to very strong prior year levels, which benefited from a high percentage of our early 360 degree program agreements, including 7-2, compared to a more recent mixed shift, which has included relatively more catalysts as part of our 360 program commitments. We placed 934 premium hematology instruments globally in the quarter, up 7%, with a continued high attach rate with new and competitive catalyst placements. In addition to these strong premium instrument results, we placed a record 2,663 Snap Pros in Q2, expanding our Snap Pro install base to over 30,000, with over 27,000 installed in North America, helping to support increasing retention rates in our rapid assay business. CAG diagnostic instrument revenues in Q2 were 32 million, a decrease of 7% organically off a strong compare in 2018, which included mixed benefits from very strong placements of higher price -of-view instruments. Benefits from a growing instrument-based test and software innovation and expanded direct commodity ability continue to drive strong recurring CAG diagnostic revenue gains across our major modalities. Instrument consumable revenue of $107.5 million grew 13% organically in Q2, net of a 1% growth headwind related to Brexit order timing and equivalent day impacts. Results reflect double-digit gains in the U.S. and normalized growth in nearly 20% in international markets. High volume-driven consumable gains were supported by continued expansion of -of-view and estimated revenue gains in Q2. The U.S. lab momentum continues to be very strong, reflected in -mid-teen, volume-driven organic reference lab revenue gains and sustained high customer retention levels. Overall lab growth was moderated by consistent -single-digit organic lab growth in international markets. Rapid-asset revenues of $69 million grew 9% organically in Q2, reflecting continued expansion of 40X Plus specialty and first-generation products, supported by planned promotional programs and high customer retention levels, aided by our expanded SNAP Pro install base. Rapid-asset gains continue to be primarily volume-driven, augmented by moderate net price gains. Turning to the P&L, operating profit in Q2 was $164 million, of 13% as reported or 14% on a constant currency basis, supported by operating margin gains across our CAG, water, and LPD segments. Operating margins were .5% of 120 basis points on a constant currency basis or 140 basis points as reported, reflecting moderate gross margin gains and -than-projected operating expense leverage. Gross profit was $358 million in Q2, of 8% as reported or 9% on a constant currency basis. Gross margins of .7% increased 30 basis points on a constant currency basis, supported by product margin gains, reflecting benefits from moderate net price increases and strong consumable and rapid-asset growth. These gains in scale and productivity benefits in our U.S. lab business were offset by planned investments in lab capacity and systems, as well as incremental -on-year costs associated with expanded software field service resources. Foreign exchange hedge gains, which were reflected in gross profit, were approximately $2.5 million in Q2. Operating expenses in Q2 were up 4% or 6% on a constant currency basis, resulting in 90 basis points of positive operating margin leverage. Constant currency operating expense increases were driven by growth in R&D spending, and increased costs related to our expanded global commercial infrastructure, with some favorability related relative to our expectations for the quarter relative to the ramping of cost growth in these areas. Overall operating expense growth was moderated in Q2 by relatively limited constant currency growth in G&A costs, reflecting low -on-year corporate function and benefit cost growth and LPD cost controls. EPS in Q2 was $1.43 per share, an increase of 16% as reported, and 19% on a comparable constant currency basis. Foreign exchange net of hedge impacts in Q2 2018 and 2019 decreased operating profit by $2 million and EPS by $0.01 per share. Our effective tax rate was .5% in Q2, including benefits of approximately 3% to our tax rate, or $0.05 per share related to share-based compensation activity, which is approximately $0.04 per share higher than projected. Free cash flow is $99 million for the first half of 2019. We continue to expect free cash flow of 60 to 65% of net income for 2019, reflecting a consistent full-year outlook for capital spending of $160 million to $175 million. This includes approximately $70 million of combined incremental capital spending related to our Westbrook, Maine, Hedgwood expansion and our German core library location, or about 20% of net income. We allocated $50 million in capital to repurchase 86,000 shares in Q2. To date, we have repurchased 353,000 shares for $74 million, or an average price of $210 per share. Our balance sheet remains strong. We ended Q2 with $956 million in debt, $111 million in cash, and $597 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.49 times gross and 1.31 times net of cash and investment balances. We're refining our 2019 full-year outlook for a reduction in average shares outstanding from stock repurchases of approximately 1%, which reflects more recent stock price trends and assumes that we maintain net leverage ratios at current levels. We now project annual interest expense of approximately $34 million and improvement of $2 billion, more than offsetting these impacts. In terms of our update of P&L outlook for 2019, our full-year reported revenue guidance is now $2 billion, $380 million to $2 billion, $410 million, reflecting refined expectations for .5% to .5% overall organic growth and consistent 11% to 12% organic growth and CAG diagnostic recurring revenues. Our reported revenue outlook reflects a projected .5% to 2% full-year FX revenue growth headwind at the rates assumed in our press release. As noted, we're raising our 2019 full-year EPS guidance $0.05 per share at midpoint to $4.82 to $4.92, reflecting an outlook for 17% to 20% comparable constant currency EPS growth. Refinements to our revenue outlook are more than offset by increased expectations for full-year operating margin improvement, now projected at 100 to 125 basis points, generating $0.02 of operational benefits, including net upsides from revised projections for full-year interest expense and share account reduction. Our EPS guidance assumes a 2019 effective tax rate of .5% to 20%, a 50 basis point improvement compared to earlier guidance, netting $0.04 of reported EPS upside. This tax rate includes an estimate of $12 to $14 million, or approximately .5% in projected full-year tax rate benefit from exercise of share-based compensation. At midpoint of our guidance estimates, this equates to about $0.15 per share in full-year benefit. We now estimate that foreign exchange rate changes will decrease EPS, reported EPS, by $0.04 per share, one cent greater impact than our last outlook, ahead of approximately $11.5 million in projected hedge gains. For the third quarter outlook, we expect reported revenue growth of 9% to .5% and organic revenue gains of .5% to 12%, including 1 to .5% equivalent day growth benefit. We expect Q3 2019 operating margins to increase 50 to 100 basis points above prior year Q3 levels on a constant currency basis. And we expect our effective tax rate in Q3 to be approximately 21%, including projected benefits from share-based compensation exercise activity. That concludes the financial review. Our business momentum remains strong, and we're on track to deliver our 2019 financial performance aligned with our long-term goals. Let me now turn the call over to Jay for his comments.

Good morning and thank you, Brian. IDEX's second quarter results build on our strong start to 2019 and reflect the strength of our recurring revenue business model, keeping us on track towards excellent full-year results aligned with our long-term goals. Our performance was led by solid 11% organic growth in our CAG diagnostics recurring revenues, or .5% normalized for Q1 Brexit pull-in and equivalent day impacts. This expanding, highly durable annuity contributed 77% of IDEX's total revenues in Q2. Let me start with a few reflections on the quarter. We were especially pleased with the strength of our U.S. performance in Q2, where we drove 11% recurring CAG growth, reflecting strong gains across all CAG recurring diagnostic modalities. We saw continued momentum in our U.S. reference lab business, whereas previously communicated, we continued to invest in operational enhancements such as new courier routes, new day labs, and weekend service. These investments provide service level and results turnaround improvements, both of which support customer retention and new customer acquisition. In our North American vet lab business, catalyst placements were up 8%, including second catalyst placements of high testing volume accounts, which also support customer retention and help drive continued double-digit consumable gains. Of note, the rapid assay business grew at 9% organically, benefiting from superior clinical accuracy, effective promotional programs, and improving customer retention. The business was also aided by our expanding SNAP Pro installed base and increasing leverage of IDEX multimodality testing capability. Reinforcing our long-held premise that -and-begets testing, we're seeing strong evidence of faster rapid assay 40x plus growth at IDEX practices that also use our lab services and are adopting preventive care protocols. Globally, instrument placements were solid during the quarter, considering tough compares at overall quality, with notable strength in international competitive catalyst placements, which were up 39%. Our premium installed base continues to expand nicely, and we don't see a change in the competitive environment. These placement gains, along with ongoing increases in testing utilization, grow continued strong growth in international consumables. International consumable sales were up nearly 20%, normalized for the impact of Brexit order timing and equivalent days, aligned with our strategy to develop the significant in clinic opportunity in international markets. Continued solid momentum across our business is keeping us uptrack for 11 to 12% CAG diagnostics recurring organic revenue gains this year and comparable constant currency EPS gains at the high end of our long-term goals. Let me share some additional highlights related to progress on key fronts in our growth strategy. We continue to make solid progress advancing IDEX preventive care. Our high same-store sales growth at the practice level in our U.S. labs business is being driven in part by the adoption of preventive care diagnostics, what we call IDEX preventive care. To date, through Q2, over 3100 practices have enrolled in the preventive care program since its inception, with 370 new practices enrolled in the quarter, a quarterly high for first-time enrollees. IDEX preventive care practices are growing CAG diagnostics recurring revenue at approximately 14% on a trailing 12-month basis versus the 11% growth for IDEX's U.S. customer base over the same period. Virtually, our entire VDC population in the U.S. has now successfully partnered with customers in their territories to deliver IDEX preventive care. In fact, the top 50% of our VDC population, as ranked by their engagement in preventive care, exceeded their first half territory revenue goals by approximately 200 basis points. It's a great example of how we create market growth. We always start with the customer and patient need to understand where appropriately applying IDEX diagnostics, like fecal antigen and IDEX SDMA, can uncover more underlying disease. In the case of preventive care, we bring the relevant tests together to create preventive care protocols that closely align with how customers consume diagnostics testing, along with compliance-driven pricing that support the practice of best medicine. We leverage big data to raise awareness and practice standards, showing the medical benefits of applying appropriate diagnostics testing for preventive care to all pets, not just older dogs and cats. Our field organization also plays an important role in customer success and market growth, representing a key reason we went to a high-frequency trusted advisor model. We're able to invest time and resources to help customers achieve their patient and business goals. In early Q3, we introduced our IDEX Anywhere Urinalysis Bundle, available exclusively to IDEX preventive care customers. This offering combines the convenience and pricing of preventive care diagnostics run at the reference lab with all the clinical advantages of fresh urine run in-house on the CityView. This innovation is enabled by our unique integration capabilities between the IDEX VetLab station, practice management software, and the IDEX reference lab, providing to customers a seamless ordering and billing experience across modalities. We believe this multi-modality, customer-friendly solution could help further accelerate our preventive care momentum and help support CityView placements and associated utilization. We continue to have exceptional performance with our Snap Pro placements of over 2,300 placed in the second quarter in the U.S. alone, up 100% year over year. We continue to methodically transform our RapidASA customer base into a razor and blade business model, as the Snap Pro mobile instrument brings significant workflow and charge capture value to the veterinary practice. We see higher growth and RapidASA loyalty when customers adopt the Snap Pro active and connected workflow. With the placements in Q2, we are now just a bit south of 65% of our Snap 40x plus revenue coming from these active and connected Snap Pro customers. I'd also like to provide an update on the status of our international Salesforce expansion. Our international business performance is strong, as evidenced by the continued high growth in the economic value of instrument placements and international CAG recurring growth at .5% in Q2, adjusted for approximately a 0.5 combined headwind for Brexit order timing and equivalent day impacts. We've now completed the second full quarter within the expanded model, and the commercial teams are responding well. Having had responsibility for three such initiatives in the US, there's a time and distant element to building out an expansion as we onboard new sales professionals, develop their expertise and diagnostics in our product offering, and grow their customer relationships. We track key metrics on our progress, like tenure, which dropped nicely in Q2. Since experience correlates well with effectiveness, we expect to see further business benefits of these efforts in the second half, consistent with our experience in the US, where field effectiveness increased every quarter with tenure and deeper customer relationships. Moving to the veterinary software portfolio, Q2 was another very strong quarter for global placements at Cornerstone, NEO, and Onomatisystems. In North America, practice management software placements grew 44% year over year for the quarter. NEO recently launched in Canada and Australia, complementing Cornerstone in both of those markets. Speaking of Cornerstone, we continue to see an unprecedented pace of Cornerstone upgrades to version 9.1, driven by customer excitement for the modernized user interface and improved easy use. We have upgraded close to 2,000 Cornerstone users in less than four months, a record, a testament to customer enthusiasm, and a place to share that we achieved a critical technical milestone in the development of Cornerstone Cloud, currently in field testing, which we will make available in the future and will bring the many benefits of the cloud to customers that value Cornerstone as the go-to high-end practice management system. Q2 is also a strong quarter for WebEx, one of our nine cloud-based software as a service offerings, which experience the 34% year over year increase in enrollments. Other software offerings for MyDex are advancing nicely, including the development of an enterprise management and analytics platform for corporate customers. In summary, we feel very good about our business progress across a range of strategic fronts and believe we are well positioned to sustain strong, recurring CAG diagnostics revenue growth and EPS gains aligned with our goals. We look forward to sharing more about the enduring growth potential we see for our business and our long-term strategy to capture this potential at the upcoming Investor Day later this month. Before I conclude, I wanted to extend our best wishes to John Ayers as he works through his rehabilitation process. The strong results we continue to deliver reflect the deep and talented team that John has developed at IDEX, and I know he has great confidence that all IDEXs will keep delivering against our purpose and potential. And with that, we'll open it up to Q&A. Cynthia?

Thank you, and ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, for any questions or comments, press star and then one, and we will go to the line of Michael Reiskin with Bank of America. Your line is open.

Hey, guys. Thanks for taking the call. I want to start on the reference lab. The overall numbers, I mean, that was one area that came in a little bit later, relative to expectations, and talked a little bit about the U.S. performance and how well that held in. But international, it seems, continues to lag just a little bit. I wonder if there's anything going on there. I mean, we've talked in the past about the EVI and the focus on the point of care offering, but I want to see if the dynamic changed at all. I wonder if there was any impact of the heatwave in Europe like we've seen in the past or anything like that.

Yeah, Mike, why don't I just kind of clarify the numbers. But the reference labs trends in Q2 were very consistent with what we saw in Q1. I think we have some normalization going on, but the U.S. was, the Q1 was 14 percent. It was like 13 percent normalized in Q2, and we had very consistent -single-digit gains in international. So we didn't have a change in trend. And Jay can talk more to this, but as you know, we've been sort of signaling targeted improvement as we work through the year on the international labs, and we'll have some more favorable compares that Jay can expand on that.

Yeah, just some additional context setting. Our overall business performance internationally was quite strong. We saw the 12.5 percent normalized, CAD recurring growth performance. And as, you know, Brian indicated in his remarks, really strong competitive and new placements associated economic value with the international consumables growth at nearly 20 percent normalized. So overall, very good performance. As I indicated, we're still in the process of building out the VDC expansion. And, you know, it takes time as our VDCs continue to build relationships with their customers in the markets, and we know what time comes additional effectiveness. You know, keep in mind that, you know, we start with very strong country organizations. You know, a lot of our sales professionals and country managers in international have been with the company. They had no diagnostics for a decade or two decades. So that's the base work we're building off of. You know, in addition, they're representing, you know, a phenomenal product line across the, you know, broad-based diagnostics offering. So we're feeling good about where we are and, you know, expect to continue to build off that capability in the second half.

And just to reinforce something, Mike, on performance versus expectations, we felt very good about the recurring CAD growth in the quarter. If you'd normalize for the effects we highlighted, it was 11.5 percent. That's where we are year to date. That's right in range with what we're trying to achieve for the full year. So relative to what we were targeting, this was an area that was right on line with what we're hoping to achieve.

All right. That's helpful. And a quick follow-on, if I could. I've gotten a flurry of questions since you brought up the comments on China. That was a little bit surprising. Could you just walk us through what happened there, what you saw in the quarter, what your expectations are for the rest of the year?

Yeah, we had a couple of effects that were related to China. Let me break them down. Maybe LPD is the easier one to start with, but we've been working through the African swine fever impact. As you know, China is not a big part of our overall company revenues. It's 2.6 percent last year, roughly evenly split between LPD and CAG. But within the LPD business, the swine testing business in China is a meaningful part of our LPD revenues. We saw an acceleration and decline on African swine fever from the Q1 levels. It's a business that's a little tougher to predict. We sell into larger laboratories, and so it's a little less visibility than some other aspects of our business. But that was a couple million below what we were expecting to achieve in the quarter. We feel like we've got that reasonably calibrated. We've got some other initiatives we're advancing to mitigate that. We've got some promising trends in other parts of the business, the health and health screening that we feel good about. So I think we've got that factored in, but that wasn't surprising to you, too. On instrument placements, we had excellent competitive instrument placements in China. The challenge that we had was we had very strong prior year vet chest upgrades as well. I think in retrospect, we probably had overly aggressive goals going into this year to both do make progress on the new competitive front and to build on those strong upgrades. It's always been a competitive market. It wouldn't necessarily relate it to softness in the market per se. I think it was more, as I mentioned, retrospect that we probably had aggressive goals here. But I think that's another point of contact. So China's smaller for us overall, but I think in the quarter had some impacts. But we feel we've got that calibrated in the updated outlook.

That's really helpful.

Thank you. Our next question will come from the line of Ryan Daniels with William Blair. Your line is open.

Hey, guys. Thanks for taking the questions. And I'll also start by wishing John the best in his rehabilitation. Jay, maybe one for you. You talked about the record enrollment of, I think, 370 practices in the IDEX preventive care program. Can you speak a little bit towards what's driving that? It seems a little bit unique. I think we typically see kind of a rapid growth in early adopters and then slowly in the vet space. So what's driving such strong momentum there for your business?

Sure. Thank you, Ryan, for the question. You know, we think it really starts with the fact that there's a very sizable market opportunity. And I'm going to refer my comments specifically to North America and the U.S. You know, we think the U.S. preventive care market, addressable market is about $3 billion. We're sold about a billion of that is served, and we have about a third of that. So we're still in the early stages of being able to develop this marketplace. And then you look at just sort of benchmark and provide some background context on the opportunity. You know, a fairly small percentage of companion animals are getting tested today. You know, we've cited statistics and data in the past that about 15% of, you know, of dogs coming to a practice for clinical visits undergo a chemistry test. So only 15% on the vector-borne disease side, a little over a third. So 36% canines in any given year get some form of vector-borne disease screening. This could be something as, you know, basic as heartworm. Only 15% are getting the full vector-borne disease screen for 40X. So it starts with there's a very sizable opportunity. And then from a programmatic standpoint, the IDEX preventive care program, I think really hits a sweet spot, you know, in the marketplace. We have care protocols designed, you know, specifically for preventive care or wellness screening. It's priced to really drive compliance with the, you know, with the client. We are able to provide tools and training for the practices and repeat follow-ups. So from the standpoint of operationalizing or implementing a concept that our customers are quite interested in to begin with but have struggled in the past to be able to get good traction with this, you know, we think we have really hit the sweet spot and our field is trained and excited by it and consequently driving growth with

it. Super helpful, Clarence. Then just as a follow-up on a different topic, the operating margin performance continues to display upward pressure despite the investments you're making. Can you maybe highlight what some of the key deltas are between prior expectations versus kind of the expectations you had going into the year? What are really the major upside drivers there? Yeah,

I think a couple of factors. I think we always benefit from good execution on growing the CAG recurring diagnostic revenues. I think the incremental flow through from that growth is a high gross margin for us and I think that always, if we're executing well, which we have, then supports a good P&L profile. We have had, as I mentioned in my comments, somewhat slower than anticipated ramp in some of the growth we were projecting for R&D and sales and marketing. Nothing to be concerned about. We're in a world where there's a lot of competition for talent. We don't have all our positions filled the way that we had originally projected and we're confident we can get on that track, but we had some upside related to that. We've had good G&A management. We've been disciplined in the corporate functions. We had better than expected benefit costs, which is something that we have. Our HR team does a tremendous job of managing that area and I think we're seeing good results as a company from that. That's been favorable. Those are some of the drivers. I think it's broadly, Ryan, more just reflective of the health of our business model when we're growing the recurring CAG revenue as well that has good favorability for us.

Thanks, Lea Coller.

Thank you. Our next question will come from the line of Erin Wright, Rd. Credit Thrice. Your line is open.

Great. Thanks. I do wish John all the best in his recovery as well. We're all thinking about him here. Thanks for taking my questions as well. I guess a follow-up to the last question there kind of on the profit experience, it obviously was pretty strong. Were there any timing dynamics? Were you saying that some of the costs were potentially pushed out to the outer quarters or how should we be contemplating that quarterly cadence in terms of the profit dynamics for the balance of the year?

Somewhat more modest, I would say, in terms of pushing out timing. I think it's more the ramp of the costs, Erin. So we're a little favorable in Q2 and we're anticipating we'll be back on track in the back half of the year. And that's reflected. We shared a 50 to 100 basis point constant currency improvement in Q3, so that reflects that we're seeing the cost growth, particularly in R&D and international sales and marketing, kind of ramping as we work through the year. So that, I would say, is the bigger driver. And we have some specific benefits just in terms of things that we've been managing effectively in the quarter. But we feel comfortable with it. Effectively, we have an outlook for the second half that's more 50 to 100 basis points, which is in line with our longer-term trends and goals.

Okay, great. Thanks. And then on the preventative care side, what could adding set of you or urine analysis to the program add for you? Is this significant in terms of financial contributions or placement trends or how much of your existing kind of preventative care users are actually already incorporating urine analysis in their program? I'm just curious what this could add.

Thanks. Yeah, so we, thank you, Erin, for the question. We think over time that it will help support the preventive care momentum. You know, over, there's a majority of customers who already use urine as part of the testing panel for preventive care. And one of the requests, you know, from customers is they wanted to use fresh urine because it's more clinically relevant. So being able to provide a multi-modality screen for customers was extremely well received in the marketplace. We're enthusiastic about it. And we think it will also, by the way, help with set of you placements over time.

Thank you.

Thank you. Our next question comes from the line of John Block with Stiefel. Your line is open.

Great. Thanks, guys. Good morning. Maybe two questions on some similar themes that were already touched upon. But just to go to preventive care, I think, Jay, you might have mentioned roughly a 300 basis point premium growth rate from those called PCC adopters versus the non-adopters. And maybe if you can elaborate on that a little bit, do you think we see that delta widen further over time? And maybe if you were to isolate the practices that did adopt PCC, where were they previously? In other words, were they 7% or 8% and jumped to 14% or 15%? Any more granularity would be helpful. Thanks.

Yeah. So, you know, just in terms of that 300 basis point, you know, improvement, we think that those customers are using more diagnostics that they have got from, you know, largely testing geriatric patients, testing adult and senior patients and incorporating diagnostics in their panels. I think what the data shows is that they had, you know, perhaps assumed that if a dog or cat was well and was an adult that they didn't do diagnostics testing. They didn't need to do it. And what the data is showing is that, you know, they're very significant. We're able to uncover a very significant number of abnormalities that require follow-up in doing testing. So we think that it's just a classic case of being able to demonstrate that the clinical benefit of doing testing more broadly across the population of patients. In terms of how that plays out differentially, in terms of growth over time, you know, we'll see. We expect to continue to see benefits, but that's a function of... And, John, we'll share more

on that at Investor Day. You know, that's obviously part of the long-term strategy, and we'll share how we're thinking about that.

Okay. Great. And then sort of a quick follow-up, two small ones. First on new products, you know, you've got that animal estate coming up, Ryan, as you just mentioned. I'm sure you've got a lot to discuss. But is the belief that new product introductions are more of calling an industry conference event rather than a Wall Street event? And the other small one would just be on the 5 million inorganic revs coming down. It certainly seemed like it did not occur in CAG recurring. So if we were to isolate it, Brian, is it sort of 50-50 between call it LPD and the instrument side? Thanks, guys.

Yeah, two questions. Just on the first one, when I handle this, is we intend to have discussions in new products when we're ready to bring them to market. So I think we're... You should anticipate, you know, we'll have those discussions, you know, close to when we're ready to bring products to market and we're not going to be trying to time it around investor events, if you will. No offense, but, you know, I think we want to have this lined up as best we can in terms of executing with our business. And in terms of the dynamics versus... Deltas versus our expectation in the quarter, John, it was... That was pretty much it. It was three things. It was the international upgrades where we, you know, we had great competitive placements, but we were probably a little aggressive on trying to do that and build on the upgrades It was LPD, China, specifically African Sly Fever effects. And to a degree, we underestimated the day's impacts in Europe somewhat. You know, we didn't flag that .5% impact heading into the quarter. And, you know, we knew there was some impact, but that turned out to be just where the days fell a little bit more significant than we anticipated. But, you know, some total, that was about five, six million delta to where we thought we'd come in. And we're basically just flowing that through what we think is largely second quarter. And we calibrated effectively and feel very good about the year. And as you pointed out, the recurring CAG right on track and healthy year to day trends right in line with what we're hoping to achieve for the full year. Perfect. Thanks for your time, guys.

Thank you. And as a reminder, for any questions or comments, press star and then one. We will go to the line of Mark Massaro with Kinnick Ordinuity. Your line is open.

Hey, guys. Thank you. And I also want to send my best regards to John in his recovery. I guess my first question is just on the how you guys are thinking about, I know you're not ready to guide for 2020, but you've posted some really strong growth and premium instruments as you've talked about in recent quarters. And you are going up against a difficult compare as we think about our models for next year. Recognizing that instruments are only 6% of your revenue, how do you think about, you know, growth rates and instruments going forward given difficult compares?

We intend to continue to build on our rate of placements. I think that the more important metrics to kind of focus on are broader than just placement growth. We're obviously, as we're growing our placements, expanding our install base that's supported by improving retention. So we pointed out in this quarter the 15% -on-year growth in the North American catalyst install base, about five points of that is the Banfield expansion and 28% internationally. So we're, you know, this is a business where if we're adding more instruments and doing a better job retaining our customers, that install base continues to grow. It's the flywheel effect. And that forms the foundation for additional drivers of growth, right, in terms of, you know, expanding adoption of our innovations on this platform, on our platforms, adding new innovations as we've done in recent years as well. And that's all supported by the enhanced commercial capability that we have, the VDC model, and that all flows into the strong double digit, you know, recurring CAD growth we're delivering and we intend to deliver in the future. So it's one metric. As you point out, you know, we're building on bigger numbers. We want to keep growing on that. But there's a broader model here in terms of driving increased utilization and innovation on these platforms that grow in capability over time that support the double digit growth. Yeah,

and just to add some, some coward to Brian's remarks, the key element of our strategy mark is to be able to continue to drive menu expansion, which in turn supports the CAD Diagnostic Revenue Growth. So if you take a look at Catalyst, for example, we have a technology for life type philosophy, seven new assays as part of the menu in seven years, the latest being Progesterone. It's a great example of bringing a real time care measurement to the clinic. As you know, the insemination event, there's a tight window in the vet area and wants to be able to advise the breeder in terms of, you know, the optimal time. And you're able to do that in a real time basis with Catalyst in the clinic that drives serial testing. In the case of Santa View, another great example, with Santa View, the Neuro Network 4.0, which we released earlier in the year based on 175 million images, more geared towards in the 4.0 release liver function, bilirubin and ammonium firing. So we've got excellent customer feedback on that. We continue to drive through menu expansion, more testing utilization. So that's a key element of our strategy.

Excellent. And I also want to just ask about the end market. Trends look strong to us. You know, your reported clinical visits grew 2.1 percent this quarter. Do you expect clinical visits to hover in that, call it 2 percent growth rate? And then I also wanted to ask about how you're thinking about competitive dynamics for next year, given Zoetis expecting to complete their integration of access on their SAP.

Yeah, so from a market performance standpoint, top line practice revenue growth was 4.4 percent. The clinical piece, as you indicated, was 2.1 percent. We think that's the relevant piece, at least for our business, because that's where the diagnostic testing occurs as part of those visits, and pretty much in line with what we've seen in the past as a little bit of variability quarter to quarter. But we think it was a strong quarter. It supports the CAG diagnostics recurring growth profile that we achieved in the quarter and that we've indicated from an outlook standpoint with that going forward. And I also think that when you take a look at some of our market development activities like preventive care, that'll continue to drive the market. Part of what we do is we create markets, we manufacture our own growth. In terms of your second question on competitive dynamics, we haven't up to now seen a change, more broadly speaking, in the competitive landscape. We're always looking and anticipating that. But our focus is really on our customers and servicing our customers with solutions that address both their and their business needs.

Thank

you. Thank you. Our next question comes from the line of David Westenberg with Guggenheim Securities. Your line is open.

Thank you for taking the question, and my best to Jon as well. So can you give us an update qualitatively or quantitatively on SDMAN, a slide? Is it running above, below, or at expectations in terms of contributing to growth? And how do you see this as a kind of a multi-year growth driver? Thank you.

Yeah, thank you, David, for the question. We're very pleased with the progress that we've made on catalysts, SDMA. In fact, close to 60% of customers in the second quarter actually used SDMA on catalysts. That's a global number since introduction. Close to 70% of customers have actually purchased SDMA for catalysts. Another benchmark connected with that is we've now run over 2 million SDMA tests on catalysts since its introduction. Now, that's on top of the 22 million tests, plus, 22 million plus tests that we've run at the global reference labs since introducing that test on the reference lab. So we think from a customer perspective, customers have really accepted SDMA as an essential element of the chemistry panel. They see significant clinical value, not just for sick patient visits, but also well-visit testing. One study that we'll share more of this at Investor Day is looking at well-patient testing when we move from just a basic preventive care stream. So chemistry, CBC, the one that includes SDMA. We see a 40% increase in profiles that indicate the need for further action. So really clinically powerful. I think our customers appreciate that. And we're seeing the type of uptake in the metrics I shared with you that support it.

Got it. All right. Thank you. And then just moving maybe to around consolidators and corporate clients, can you talk about changes in demand around software, middleware, RVET links, SmartFlow? Are these good conversation starters? Are these revenue drivers? Are they kind of maybe cross-selling opportunities? Can you just walk us through the more the software part element of the corporate customer base?

Thank you. I'd be glad to, Dave. So just as a background, keep in mind that the whole notion of corporates and consolidation, it's not a new dynamic in the marketplace. IDEX has quite a successful track record in partnering and growing with corporate accounts over time. But when you talk to the corporate account CEOs, they generally identify commonly three top issues. One is staff engagement and retention. The second one that you pointed out is really this notion of enterprise scale in IT and software. And the third is they want to continue to drive or improve profitable growth in their corporate practices. And we address all three as a company. It starts with diagnostics, because diagnostics is connected to the information management piece. And they, I think, recognize diagnostics as a profit center. It drives the care envelope. It's an important part of their practices that isn't subject to some of the same headwinds that they may see in product sales, whether it's food or therapies. And, you know, there's a lot of evidence that when we provide these type of solutions to them, their staff who desire to practice best medicine remain more highly engaged. From an information management standpoint, now getting specifically to the core of your question, you know, our customers, our corporate customers, place a very high premium on integration and helping them out with workflow and workflow optimization. And, you know, the type of solutions that support that are, you know, cornerstone or PIM solutions, SmartFlow, Vekonek Plus, you know, enterprise management and analytics packages that we come up with. SmartFlow is a great example where they have, are really resonating with an application that works with our PIMs and other third-party PIMs that provide, you know, embedded connectivity that helps up with workflow optimization and communication in the staff. It automatically captures charges. If they desire to go paperless or paperless light, it has electronic forms. So these are the type of things that they are looking for and highly responsive to.

Great. Thank you.

Thank you. Next we'll go to the line of Andrew Cooper or Raymond James. Your line is open.

Hi. Thanks for the question. A lot has already been asked, so I'll keep it quick. But just as we think about kind of IDEX 360 and, you know, more conversations about leveraging the multimodality approach, how has that evolved relative to kind of layering in urine, like you mentioned, and some of the dynamics competitively? Has there been any change there, and how do you continue to drive that as really a competitive advantage for IDEX relative to what, you know, others in the space can't replicate?

Yeah. So, you know, we obviously have differentiation because we have multimodality solutions and have the ability, like we've just shown with the IDEX Anywhere Year analysis bundle, to be able to provide the best clinically from a solution standpoint, wherever it makes sense to be tested. So I think it's largely supportive of helping them practice the way they want to.

And Andy, I'd point out, we've seen steadily increasing rates of growth in cross-CAG agreements with our customers. And that's been a trend that's been ongoing but really has accelerated with concepts like 360 and the advancements that we continue to make and just bringing together broader capability through our information management innovation. And so to your point, it's an area that's building momentum, and you see that in the strong growth in EVI, and as well as increasing retention rates across modalities. So it's definitely been core to IDEX's strategy for a long time, and we're executing very well against it in programs like 360 just to help to reinforce that.

Great. And then just one more quick one, I think, following up on a question that I think John asked. But when we think about preventive care and the uptick in growth relative to the base, can you help us think about sort of the ramp of how fast from what an account says, all right, we want to layer it in with the pricing you suggest, et cetera, et cetera, to seeing that outcome, what the sort of the ramp looks like and how, if there's any kind of color we should be thinking about, or you think about the tail to that as we get out further from the first year, the second year. I know it's still early, but any color there would be great.

Yeah, I mean, just keep in mind from a background standpoint that it takes time. It's a change management event in the practice. It's not just the veterinarians, but the veterinary tax receptionist. The whole practice has to change focus from into a new testing category or approach. So it takes time. We'll share some insights at Investor Day in terms of what that looks like, but there's no one rule that fits all.

Very good progress, and it's supporting our high reference lab growth, and, you know, we're seeing benefits across the business. So it's something that will build over time, and like many of the things that we have in our business, there's a very long runway for development which bodes well for sustaining high growth for the long run. We have time for one more question.

That will be a follow-up from the line of Michael Reifkin with Bank of America. Your line is open.

Hey, thanks for squeezing in for the follow-up. I just want to confirm something. I mean, from the prepared remarks, I thought I heard you say that the third quarter organic guide was 10.5 to 12% for the total company. I recognize you've got the extra selling day, and that should be a sizable 100 to 150-whips tailwind, but that's still just trying to look at the comps from prior year. You still have a much tougher comp, 3Q versus 4Q. So I was wondering if there's anything going on in pacing between third quarter and fourth quarter as you go through the year, and also how you think about some of the – you called out the guide for second quarter. OUS instrument placements may have been too aggressive. I just want to get a sense of how the aggressive guidance in 2Q factored into your outlook for third quarter and beyond.

So just on the third quarter, we talked about, to restate, 9.5 to 10.5 overall organic and 10.5 to 12% recurring with the -to-day and a half. And I think the day benefit is a little bit higher on the recurring piece, Mike. So it's largely reflective of the -to-day trends adjusting for the days, and we feel very good about our momentum and our ability to deliver that. So it's not anything specific to Q3 timing other than the day change.

Okay, gotcha. I think I heard you wrong on the overall number then. And

I was saying on the instrument – look, we're – as you know, we've got – we're always trying to build off of a high base, and we're executing very well on driving EVI gains and expanding our catalyst and stall base, and we think we've got our full year and back half outlook appropriately calibrated. Thanks. Thank you.

Okay. Thank you all. With that, we'll conclude the call. I want to thank our employees for the very strong progress and performance in Q2 and the advancement of our purpose, which is enhancing the health and well-being of pets, people, and livestock around the world. I'm also – and also I'm grateful for the confidence that our investors have in IDEX and our business model. We look forward to being able to share our work with investors and seeing all of you in person or through a Reg FD presentation at our investor day in a couple weeks. So thank you very much for calling in. And, Cynthia, that's it.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation. That was an AT&T Executive Teleconference Service. You may now disconnect.