IDEXX Laboratories, Inc.

Good morning and welcome to the IDEXX Laboratory's first quarter 2020 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelski, President and Chief Executive Officer, Brian McKeon, Chief Financial Officer, and John Ravis, Senior Director, 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 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 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 first quarter 2020 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth refer to the growth compared to the equivalent period in 2019, 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 Jay Mazelski.

Thanks and good morning, everyone. Welcome to the call. Today, we're pleased to report strong Q1 results, despite late quarter impacts from the COVID-19 crisis. As we'll discuss, the COVID-19 pandemic is impacting our CAG customers in unusual ways, given broad-based social distancing efforts, which are changing the ways veterinarians are prioritizing and providing care. We're working through these near-term dynamics, ensuring that we're fully supporting these essential health services in a way that prioritizes our customers' needs. We're doing this while we continue to advance our business strategy. Today, Brian will review our Q1 results and provide an update on current trends that we're seeing in our markets and our business. He will also describe the steps we're taking to mitigate near-term impacts and position ourselves for a strong and sustained recovery in the highly attractive pet healthcare market. I will then talk more about how we're seeing trends evolve in the market and how we're managing our business for the near-term and the long-term in this context. Now, I'll turn the call over to Brian.

Thanks, Jay, and good morning, everyone. We'll be using a somewhat different format for today's financial review. I'll begin with an overview of our first quarter financial results, which resulted in solid revenue and profit gains despite late quarter impacts related to the COVID-19 pandemic. We'll then spend time discussing the near-term dynamics that we're seeing in the companion animal health care market, including evolving impacts from COVID-19 containment approaches on clinical visits and diagnostic testing levels. We'll review how we plan to manage in this environment and highlight the steps we've taken to mitigate near-term P&L impacts and strengthen our balance sheet and flexibility to position our business for a strong recovery. While we're optimistic about the ability of the pet healthcare market and IDEX's business in particular to rebound strongly from near-term COVID-19 effects, We're withdrawing our full-year financial guidance as we work through these dynamics. As such, we won't be providing an update on that front today. Let's start with an overview of our Q1 results. IDEX delivered 9 percent organic revenue growth in the first quarter, supported by 10 percent growth in CAG diagnostics recurring revenues, reflecting double-digit gains across both U.S. and international markets, as well as solid gains in our water and LPD businesses. Overall organic revenue growth benefited by less than 1% from accelerated stocking orders in our water and LPD businesses related to the COVID-19 pandemic. Through early March, Globe Cag Diagnostics' recurring revenue gains were trending very strongly, above the high end of our four-year goals for 11% to 12% organic growth. We were also tracking towards an excellent instrument placement quarter, driven by continued momentum and new and competitive catalyst placements globally. These gains were against a backdrop of improved market trends, reflected in 4% same-store growth and U.S. clinical visits through this period. As social distancing policies advanced more broadly in Europe and the U.S. through March, and as vet clinics adapted to prioritize healthcare procedures to align with industry and government guidelines, we saw significant declines in clinical visit activity and restriction on access to vet clinics, which moderated our Q1 revenue gains. Despite these impacts, our business momentum enabled strong overall Q1 organic revenue growth across our modalities. Global reference lab revenues increased 9%, reflecting 8% organic gains and approximately 2% growth benefit from acquisitions, offset by a 1% FX headwind. Through early March, global lab organic growth rates were excellent, driven by continued mid-teen organic revenue growth in the U.S. and high single-digit gains in international markets. For Q1 overall, late-quarter social distancing impacts constrained U.S. lab organic growth to high single-digit rates and international lab organic growth to the low- to mid-single-digit range. IDAC's VetLab consumable revenues increased 14% on an organic basis despite late-quarter COVID-19 impacts, reflecting low double-digit gains in the U.S. and mid-teen growth in international markets. Our consumable revenue growth results through early March were also very strong, benefiting from an expanded premium instrument install base, sustained high levels of customer retention, and continued gains in testing utilization. The quality of CAG instrument placements remained high in Q1, reflected in 238 catalyst placements at new and competitive accounts in North America and 698 new and competitive placements in international markets. We also benefited from 273 second catalyst placements driven by momentum with North American customers. These gains and sustained high customer retention levels supported a 17% year-on-year growth in our global catalyst install base. We also achieved 760 premium hematology placements and 408 set-of-view placements, bringing our global set-of-view install base to over 9,300 instruments, up 32% year-on-year. Restriction on access to vet clinics in late March led to deferrals of quarter end placements, however, which contributed to year-on-year instrument organic revenue declines of 16% overall in the first quarter. Rapid assay revenues increased 6% organically in Q1 despite late quarter COVID-19 impacts, supported by solid volume growth in SNAP 40X+, first-generation and specialty products, and moderate net price gains. First quarter results reflected normal promotional and customer stocking activity, which supported volume gains ahead of the peak testing season. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues achieved 11% organic growth, supported by continued strong gains in recurring service revenues, as well as sustained solid sales of new cornerstone and digital imaging systems and strong growth in our NEO and SmartFlow cloud-based software offerings. Overall gains were also constrained by COVID-19-related impacts on vet clinics late in Q1, which led to deferral of new software and digital system installations. Turning to our other business segments, we saw strong performance in our water and LPD businesses in Q1. Water revenues increased 15% organically, including an estimated $2 million or 8% growth rate benefit from accelerated stocking orders. Overall, our water business demand has remained solid globally as drinking water testing remains an essential service and priority for local governments and utilities. Livestock, poultry, and dairy revenue increased 12% organically in Q1, including approximately 3 million or 9% of growth rate benefit from accelerated stocking orders. LPD results benefited from demand for diagnostic testing programs for African swine fever and improvement in core swine testing volumes in China. We're also seeing continued solid growth for poultry testing. Overall LPD gains were constrained in Q1 by lower herd health screening levels compared to strong prior year results, impacted by the rebuilding of herd populations in key Asia Pacific markets, which is reducing export supply. Livestock diagnostics are also considered essential services, supporting continued demand for LPD products. Turning to the P&L, profit results were strong in Q1, benefiting from solid revenue gains and controlled operating expense growth. Operating profit in Q1 increased 8 percent as reported and 11 percent on a constant currency basis, driven by solid operating profit growth across our CAG, water, and LPD segments. Operating margins increased approximately 30 basis points on a constant currency basis, reflecting operating expense leverage and strong revenue gains. Gross profit increased 8 percent as reported or 10 percent on a constant currency basis in Q1. Gross margins were relatively flat year-on-year on a constant currency basis as benefits from strong consumable and water growth and continued moderate net price gains were offset by relatively lower margins in our reference lab business, reflecting late quarter pressure on lab revenues related to COVID-19 impacts, lab capacity investments advanced in 2019, and effects from the integration of the Marshfield acquisition. Operating expenses in Q1 increased 9% as reported and on a constant currency basis. Operating expense increases were driven by costs related to the expansion of our global CAD commercial capability advanced in 2019 and growth in corporate, general, and administrative costs, including the onboarding of our Westbrook, Maine headquarters expansion. During the quarter, we benefited from early efforts to prioritize investments and control discretionary spending to mitigate emerging COVID-19 impacts. EPS in Q1 was $1.29 per share, including tax benefits of $6.6 million, or $0.08 per share, related to share-based compensation activity. On a comparable constant currency basis, EPS increased 13%. Overall, we're pleased to have delivered strong financial results in Q1, despite late quarter headwinds related to the COVID-19 pandemic. Let's now spend some time discussing how social distancing policies and associated restrictions on business activity are impacting veterinary clinic visits and our CAG business in the near term. Clinical visits have been impacted significantly by the COVID-19 pandemic through the implementation of social distancing protocols, as well as industry guidelines for the prioritization of sick patient and emergency procedures at vet clinics. These dynamics can be seen in U.S. vet clinic tracking data, which is shown in the earnings snapshot on our IR website. We've added weekly tracking data for 2020 clinical visits extended through the week ended April 24th in the snapshot, as well as detail for wellness and non-wellness visits. As shown in this data, for the first quarter through early March, on a same-store basis, clinical visits were up approximately 4% in the U.S., a solid improvement from 2019 trends. As social distancing procedures expanded in March, we saw a sharp correction in these trends, with same-store U.S. clinical visits declining approximately 25% for the weeks added March 27th through April 10th, with 15% to 20% year-on-year declines in sick patient visits, and 35 percent to 40 percent declines in wellness visits during this period. We saw similar dynamics in European markets with more significant declines in severely impacted regions like Italy and Spain, as well as markets which implemented more restrictive stay-at-home policies like the U.K. In addition to this clinical visit data, we've been monitoring rolling weekly averages for chemistry slide run volumes and rapid assay runs through our global smart service connectivity. as well as rolling weekly trends for accession volumes in our reference labs. In the late March through the early to mid-April period, we saw meaningful pressure on diagnostic testing levels associated with restrictions on veterinary clinical activity. These initial impacts were relatively more significant in our reference lab and rapid assay businesses, with average weekly volume declines of approximately 30 percent in the US and approximately 35 percent in Europe during this period. with more moderate impacts in Asia-Pacific markets. Testing volume in these modalities were impacted in part by the de-emphasis of wellness testing at clinics as part of the pandemic response, consistent with industry guidelines. VetLab in-clinic chemistry run volumes were relatively less effective during this initial period, reflected in approximately 20% run declines in the U.S. and 25% declines in Europe. These metrics reflected lower test utilization levels as well as moderate reduction in the number of clinics actively operating during this initial high-impact period. Over the last two weeks, we've seen significant improvement in clinical visit and diagnostic testing trends. These changes reinforce the high resilience of demand for companion animal health care and may indicate that we've worked through the bottom of near-term COVID-19 effects on veterinary care. For the most recent week, ended April 24th, Overall, U.S. clinical visits declines have moderated to 15% year-to-year, with only 9% year-to-year declines for sick patient visits and 24% year-to-year declines for wellness visits, with steady improvement across U.S. regions week by week. We're seeing similar indications of improvement in European markets and in Asia regions, which were impacted at an earlier stage by the pandemic. In terms of our business, we continue to see pressure on diagnostic testing levels, However, these impacts have improved meaningfully. In the U.S. and Europe, on a rolling seven-day basis, IDEXX VetLab chemistry run declines have now moderated to approximately 5 percent year-on-year, and reference lab accession volume declines have moderated to 10 to 15 percent overall, with continued steady weekly improvement across regions. Chemistry slide runs in leading-edge markets like China have actually returned to double-digit growth over the last eight weeks, following significant initial impacts on clinical activity. These changes vary by region and may change depending on region-specific dynamics related to the COVID-19 pandemic, but overall recent trends have been very encouraging. As we track data on COVID-19-related impacts over time, some insights are emerging. One insight is that most veterinary practices have sustained operations as an essential service through this initial high social distancing period, positioning the market for a strong recovery. In the U.S., our tracking of the number of customers doing chemistry runs only declined to about 90% to 95% of prior year levels during the peak pressure period in early April and has now returned to prior year levels over the last two weeks. Active customer tracking metrics have also rebounded strongly in Europe, where we saw a more meaningful reduction in active clinic levels earlier in the COVID-19 expansion in lockdown regions like Italy and Spain. We're seeing the same structural market strength in Asia-Pacific regions as well. A second insight is that the effects on diagnostic testing levels appear to be heavily influenced by the stage of development of COVID-19 case management and the associated stage of stay-at-home and social distancing procedures. There's a significant variation in the level of decline in diagnostic testing volumes by region. Regions with higher relative COVID-19 cases and expanded lockdown policies have experienced much more significant clinical visit and diagnostic testing volume declines. As an example, clinical visits in the northeast U.S. declined approximately 35% in late March to mid-April, while southern U.S. regions declined approximately 20% during this period, with more recent data from southern U.S. regions showing year-on-year declines of less than 10% overall. Internationally, near-term pressure on lab accession volumes in regions like Germany have been much more moderate compared to markets with extended lockdown conditions like the U.K. and Canada. In Asia Pacific markets, we're also seeing moderated impact in regions that are farther along in terms of managing pandemic effects, including recent solid growth in IDEXX lab chemistry runs in markets like Australia, which has less restrictive social distancing controls. This dynamic will continue to monitor and which is challenging to predict. Overall, it does appear that as regions move past peak levels for COVID-19 cases and adjust stay-at-home and social distancing procedures, near-term pressures on clinical visit activity and related diagnostic testing lessened significantly. While we remain very optimistic about the health care market and IDEX's ongoing growth opportunity reinforced by recent encouraging trends, COVID-19 pandemic effects will pressure our near-term revenue results. Given the high gross margin of our IDEX VetLab and rapid assay products, and our intent to sustain our reference lab operating and service capability to position ourselves for recovery and demand as market restrictions are lifted, we anticipate a high level of gross margin flow-through impact from near-term CAG diagnostic recurring revenue pressures. To mitigate these impacts, we've advanced prudent steps to reduce planned operating expenses by approximately $25 million on a quarterly basis compared to the original plan levels. This includes temporary reductions in salaries of 30% for the CEO, 20% for officers and senior executives, and 10% for the majority of other salaried employees, which we plan to cease over time as business conditions improve, as well as temporary freezing of 401k matching contributions and suspension of cash compensation for IDEX's Board of Directors. Our balance sheet is in a very strong position, and we've taken additional steps to strengthen our liquidity and flexibility to advance our business strategy and market position during this period. We ended Q1 with leverage ratios of 1.70 times gross and 1.59 times net of cash, with $81 million in cash and $362 million in capacity available on our then $850 million revolving credit facility. In April, we increased committed financing availability by $350 million by expanding our credit facility to $1 billion under new three-year agreement and by issuing $200 million of 10-year 2.5% fixed rate notes. In the current environment, we've prioritized funding of our business operations and have suspended our stock repurchase program. Overall, we're very pleased with the strong momentum demonstrated in our business in Q1. We've got a great business model, and we're confident we can manage effectively through near-term impacts from COVID-19 in our CAG business, while positioning ourselves for a strong recovery in the highly attractive and resilient companion animal health care market. That concludes our financial review. I'll now turn the call over to Jay for his comments.