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.

Thank you, Brian, for your comments on Q1's financial performance. We're pleased with our solid Q1 results, despite late quarter impacts from the COVID-19 crisis. We went into the year with strong momentum, and through early March, global CAG diagnostics recurring revenue gains were trending above the high end of our full-year goals for 11% to 12% organic growth. We were still able to deliver 10 percentage points CAG diagnostics recurring organic growth in Q1, supported by double-digit growth in the U.S. and international. In spite of impacts from China in the early part of the quarter, from Italy in early March, and then for much of Europe and North America shortly thereafter. Instrument placements were excellent in Q1, resulting in sustained year-over-year levels of Catalyst EVI. Our Catalyst installed base grew 10% in North America and 25% internationally, with the overall premium instrument installed base increasing 15%. We developed a new remote installation process for instruments, which also supported placements in impacted regions. The IDEXX Preventive Care Program enrollments also achieved record levels with approximately 400 new enrollees and more than 4,200 cumulative enrollments since program inception. This was accomplished despite late quarter impacts from COVID-19. Customers continue to embrace the IDEXX Preventive Care turnkey solution at record numbers and increasingly view it as a foundational element of their care offering. Though we expect in some cases for implementation to take a bit longer due to COVID-19 impacts, The IDEXX Preventive Care Program will be a key element of what we and our customers see as our Recover Together plan for North America. Our product innovations announced at VMX were launched on schedule and were enthusiastically greeted by customers. Our digital cytology placements starting in early March were primarily sold to larger IDEXX customers via our IDEXX 360 program. Customers are enthusiastic about our test promise of results and expert interpretation in under two hours. 24 hours a day, 7 days a week, 365 days a year. Catalyst Bioacids, with reference lab quality performance, was also launched in a quarter. We're pleased with adoption to date with over 340 customers. CityView Neural Network 5.0 updates began rolling out in March, and advanced bacteria detection kits started to ship in April. Our innovation highlights also included the announcement in Q1 that we would begin monitoring clinically symptomatic pets for COVID-19 infections. We then announced in April that we would offer this test commercially throughout the world based on a small number of confirmed COVID-19 cases in cats, experiments that demonstrated the susceptibility of cats and ferrets, and veterinarian demands for a testing option. We expect this veterinary test to not have an impact on human COVID-19 testing or test availability. Additionally, the company's human health business, OptiMedical Systems, is advancing support of human COVID-19 testing with a validated PCR test kit, enabled by IDEXX's expertise in livestock PCR test development and manufacturing. It is intended for limited initial distribution to existing customers, including labs serving animal production needs that have been repurposed for human COVID-19 testing. Moving to software, we saw excellent ongoing momentum in our software business, which I'll speak to later, with over 10% growth in PIMS placements in North America, record orders for SmartFlow, and with now over 4,800 customers on Webpack subscriptions. Moving to a quick update on our European core lab located in Kornwestheim, Germany. We've begun testing, and it remains on track to transition by the end of Q2. We're excited by the world-class capabilities this facility, which is 50% larger than our next biggest lab, will bring to our European reference lab customers Our team has done an amazing job to stay on track despite the pandemic. Finally, our water and livestock poultry and dairy businesses both performed solidly in Q1. Demand for livestock diagnostics testing is also considered essential, and we're seeing sustained solid demand in our LPD business. Brian highlighted some of the dynamics we're seeing in the market in our testing volumes from COVID-19. Next, I'll discuss how we're managing in this environment helping our customers and positioning ourselves for the future. Let's start with how the COVID-19 pandemic is impacting the IDEX workplace and employee safety. Approximately 60% of our employees are now working from home. We've invested heavily in telephony and IT infrastructure over many years so that we were able to transition a majority of our employees home without missing a beat. Still other jobs require employees to be on site, like those in manufacturing, distribution, and the reference labs. We've instituted practices at these locations that minimize risk, like staggered shifts, more frequent and deeper cleaning, and local social distancing procedures. Our teams continue to stay highly engaged and productive. Not only have we launched products on schedule, like the previously mentioned digital cytology service, catalyst bile acids, and advanced bacteria detection for Cetiview, but we continue to advance our product pipeline as our teams are adapting to the new circumstances in highly creative ways. Moving to how veterinary practices are being impacted, they're experiencing similar challenges as other businesses based on client visits. The good news is that veterinary practice has been designated as essential businesses throughout the US and in almost all countries. The vast majority are open and operating, and we're still performing essential services for their clients, caring for sick and injured pets in need of attention. Demand for other services, including wellness visits and elective activities, half slow due to government policies and guidance from veterinary organizations designed to control COVID-19 spread. Though our veterinary customers are consequently seeing fewer patient visits at this point, volumes impacted are aligned with the aggressiveness of social distancing procedures. Many services are only deferred, and we believe we'll return relatively quickly, as in past downturns, once the recovery begins. We believe the bond between people and their companion animal family members is as strong as ever. As Brian noted, we have seen dampened demand relatively more in our reference lab business versus testing in the clinic. This is related in part to fewer preventive care visits versus those involving a sick patient. Further, practices like all businesses are also concerned with workplace and employee safety. They've instituted practices like curbside drop-off and pickup, remote check-in, and bill pay, along with the creation of modified shifts for veterinary staff to ensure care team well-being and continuity for clients. Our field service organization has played an important role helping customers make these required adjustments to their practice workflow in this new COVID-19 environment. IDEC sales professionals have also adjusted well to this dynamic, continuing to generate demand for our products and services. Virtual visits, though now standard, can be highly sophisticated. Our sales professionals are using tools like WebEx for demos and DocuSign to bring pipeline deals across the line. We also continue to visit practices when requested by a customer and with an appointment, abiding by necessary safety procedures. Our in-person availability has been welcomed by customers and in April constituted about 25% of total U.S. visits. Bannerians look to business partners in all times, but even more so now to have sufficient product supply on hand and be able to supply services like reference lab testing in an uninterrupted manner. They want to focus on their businesses and know that their partners can handle theirs. IDEX has performed exceptionally well in this regard, and we have high confidence that we can continue to do so in the future. Our manufacturing operations are largely based in the U.S., and we have excellent visibility to secondary suppliers for key components and products that we do not directly manufacture. Our reference lab performance has been especially noteworthy. and lighted the disrupted flight schedules, challenging logistics, and more complex workplace procedures to keep lab employees safe. With over 80 labs worldwide, not unexpectedly, there have been a handful of instances where we've needed to temporarily shut a facility for a short time due to an employee being or suspected of being infectious. Because of our network lab capability across regions and geographies, we were able to seamlessly toggle to an alternative lab without service disruption or deterioration. These capabilities are unique in the industry and only possible because we have made significant investments over a very long period of time in lab density, common labs information management systems, and courier route and logistics capability. We also deployed a global lab digital cytology service in the middle of all this. Another example of global agility and advantage. Our commercial execution also continues to be noteworthy. Our expansion in the U.S. was completed going into Q1, and the team seamlessly settled into their new territories and account assignments. Our account managers continue to call on customers with similar frequency, but now the majority of visits are virtual. Our European commercial team continues to mature in the VDC model and is also performing at a high level. We entered into the year with record customer loyalty across modalities. and all actions taken to date have been taken with a long-term view to continue to earn this loyalty for years to come. IDEX veterinary software and services are also playing an important customer-enabling role in this pandemic. Right now, customers are being forced to rethink how they deliver patient care, and IDEX has software solutions, both new and existing, to help them adapt. The IDEX telehealth offering includes multiple third-party telehealth integrations into our global PIMS offering, 90-day free secure remote access for all Cornerstone customers, the ability to use SmartFlow through an iPad from their parking lot for curbside check-in, and contactless payment processing integrated with their IDEX PIMS. These capabilities enable customers to deliver remote care as well as continue to see patients in their practices while abiding by social distancing guidelines. We also believe that in the medium term, telehealth can expand demand for diagnostics. through deeper pet owner-client connections, enabled by real-time, convenient communications that millennial pet owners expect and pet owners of all ages appreciate. Further, telehealth has the potential to expand patient access, especially for cats, who comprise only approximately 20% of practice visits today. Next, I'll share a snapshot view of the health of the business. There are broad macroeconomic uncertainties as to the depth and length of the impacts from COVID-19. Consequently, our focus has been on what we can control in our plans for recovery. We took quick and deliberate action to prudently control costs, while leaving us well-positioned for future growth. These included temporary salary reductions, reductions in non-essential business and capital expenses, and the cessation of stock buybacks. Our intent is to cease those reductions that are temporary, like salary reductions, as conditions improve. Critically, these actions were taken in ways that allow us to preserve the considerable strategic advantages of talent and organizational engagement we have as a company. Our financial strength has allowed us to support veterinarians at a time when they need us most, and I believe they will reward our approach with their business long into the future. We have taken practical actions which extend payment terms for customers who need it, as well as to provide near-term flexibility for minimum commitments while maintaining these long-term diagnostic partnership agreements with customers. Customers have given us and will continue to give us as much testing volume as possible. Our focus is therefore to support the health of their practices and allow them to focus on delivering excellent medical care in a challenging environment. And when the time comes, support them as they quickly rebuild client traffic. We participate in great markets. Nothing has changed in this regard due to COVID-19 social distancing practices. that have temporarily limited veterinary visits. If anything, pet owners have become even more attached to their companions as they spend even more time with them at home. Pet adoptions and fostering at an all-time high, and breeders in many instances report waiting lists of 12 or more months. And most importantly, pets still need to go to the veterinarian, and most pet owners do not consider these visits to be discretionary. Diagnostics will continue to play a central and growing role in the care of the patient as well as practice health. Many practices have seen accelerated impacts from e-tailors gains in online sales of food and medicine. This is business that is not likely to come back at the same levels. Veterinarians will continue to look for practice categories like diagnostics that are medically necessary, drive the care envelope, and almost always best done in the practice. Our belief is that as a result of pent-up demand from COVID-19, which has constrained care that is desired and needed, though perhaps not time critical, veterinary practices might experience a stronger V-shaped recovery than the vast majority of other market segments. We see some early evidence of this in select markets like China and Australia and regions within the U.S. where these markets have begun to relax strict shelter-at-home policies. Practices will be in good shape to meaningfully take up where they left off. Though they have reduced hours and furloughed employees in some instances, we believe that there isn't structural damage to the industry or the balance sheet of practice owners. As practices rebuild client traffic with a focus on wellness care, we'll be there with our strategic advantages fully intact. We're using this time wisely, continuing to advance our product pipeline, strengthen relationships, and provide exceptional day-to-day service. Unique capabilities that we bring are now even more widely appreciated. And keep in mind that this is a highly resilient business with a history of outperforming in economic recovery periods. While these are difficult times, they're an important reminder of our company purpose and that what we do makes a big difference in the lives of pets, people, and livestock. I'd like to express my deep appreciation and thanks to the team for their extraordinary support during this period. Now, we'll take questions.

Ladies and gentlemen, as a reminder, our process for questions have changed. Please press 1, then 0 on your touchtone phone. You'll hear an indication that you've been placed in queue, and you may remove yourself from that queue by pressing the 1, then 0 command again. If you're using a speakerphone, please pick up your handset before pressing any buttons. Again, for questions, press 1 then 0 at this time. Our first question will be from Michael Ricekin with Bank of America. Go ahead, please.

Thanks for taking questions, guys. I want to talk about some of the steps you just touched on, Jay, the cost cuts and the salary reductions you implemented early in the quarter. Can you talk us through the rationale of that move? It seemed like it happened a little bit sooner and was more significant than initially expected. You talked about the V-shaped recovery and the sharp recovery. rebound, and yet those are somewhat meaningful cuts. Is there any concern that you could see increased employee turnover potentially to some of your competitors as a result of this? And what criteria are you using to determine when you lift some of these measures, given the improvements you've noted in some of the end markets?

Sure. I'll cover some of the high-level thinking and philosophy behind us, and then Brian may want to talk through some of the specifics in terms of how we were thinking about them. We have a great business. We have a great organization. We really approach this with the idea that we're going to come out of this, that we're going to come out of this strong, that the market, that pet owners love their pets, that they believe that taking their pets to veterinarians and getting testing is the right thing to do. We know that veterinarians believe that testing is good medicine and uncovers disease. And so we wanted to approach this in a way that allows us to maintain all of our strategic advantages. You know, these are advantages that we built up, not just a year or two, but over decades. You know, if you take a look at the reference lab, for example, you know, 80 plus reference labs, common labs, information management systems, courier routes, service levels that are exceptional, including weekends. We don't want to lose any of that capability. We don't want to, we want to be able to continue to execute our product roadmap, maintain high engagement in the organization, continue to deliver exceptional service levels, make sure that we have supply when customers need it. And most importantly, if you take a look at our customer-facing organizations, maintaining full staff levels and being able to continue to serve customers is even more important. So we did this in a way that we think was prudent, that maintains engagement, that the organization maintains understands and responded to positively, and so that as we come out of this, all these strategic advantages, organizational capability, and engagement remains intact. So, Brian, did you want to address any of that?

Yeah, Mike, I think we, as I mentioned in some of the commentary we provided early on in this, I think the stay-at-home policies and that were being implemented late March, very early April, we were seeing significant impacts, and we didn't have clarity on how that might evolve and thought it was prudent to get out in front of that. And as Jay highlighted, we had a goal of protecting employment and trying to find ways to mitigate what we were expecting in terms of some near-term impacts without damaging our underlying ability to advance our business strategy or serve customers, and I think the intent was to cease those cuts when it made sense. I think we're very encouraged by the recent trends. It's improving significantly day by day, and so I think we'll keep an eye on this, but I think that was the intent. The changes were implemented at a time where I think the depth of the impact from the social distancing policies was more significant.

Our next question will be from the line of Erin Wright with Credit Suisse. Go ahead.

Great, thanks. Are you seeing any sort of changes in the competitive landscape at this point? Can you take advantage of any competitor disruption on either the point-of-care side of the business or reference labs, given that you can withstand this sort of volatility and be a little bit more nimble in this environment?

Thanks for the question, Erin. Yeah, we've always said that our markets, you know, have historically been very competitive. It's no different now, even if it's, you know, within the COVID-19 environment. They continue to be very competitive. You know, we're very pleased with the inroads that we continue to make in terms of, if you take a look at the competitive catalyst placements globally, we were up 17% premium installed base year over year. You know, 15%, we continue to expand globally. reference lab testing. You know, the point-of-care solutions like VetLab have held up relatively well in the COVID-19 environment. Now, part of that is due to the fact that they support more sick patient testing with real-time results. You know, if you take a look at the reference lab, for example, before the COVID-19 impact, we were the solid middle teens in the U.S. from a growth standpoint, high single digits internationally. So we did see some drop-off in volume in line with the visits and prioritizing case management, as Brian described it. But we've also seen, even now, with the drop-off and the beginnings of a recovery, that customers have a new appreciation, a far deeper appreciation for what we're bringing in terms of service levels, lab network, density, courier logistics, all of those things. And I think what they're seeing from from some other participants in the marketplace is they don't have that capability and that footprint to be able to provide that level of service.

Okay, great. And then can you remind us of the sustainability of pricing across your business and prior economic downturns? And can you also speak to how minimum purchase agreements associated with consumables are impacted from the COVID disruption as well? Thanks.

Yeah, so, you know, in Q1, we continue to realize that you know, modest price realization of between 2 and 3 percent. You know, relative to future pricing dynamics, we're clearly not going to forecast, you know, that today. The thing that I would point out is that, you know, customers don't just think about price per se. They look at price within the context of overall value from what they get. We're always pressure testing the economics within that, you know, value construct. In terms of actually, you know, the programs themselves, You know, we do have volume-based commercial programs, and in some cases we're making allowances for rebalancing obligations with programs just to, I think, reflect the reality that there's some reduced client traffic and testing volumes and, you know, want to be able to support our customers through that.

And our next question will be from the line of John Block with Stifel. Go ahead.

Thanks, guys. Good morning. You know, maybe for Jay or Brian, is there a way to think about, call it like sort of loss versus deferred revenue? You know, in other words, your growth has been so consistent and durable every year around 10 to 12% organic. If the growth, just to throw out a number, is up low single digits this year, you know, when we think about 2021, do we sort of go back to that 10 to 12 off of that low single digit number? Or is there a chance for, call it, you know, been a big acceleration mid-teens growth as we think about the deferred coming back. And I think that's just an important area that everyone's trying to get their arms around. I'm defaulting to lost revenue because an emergency would have occurred. I don't think you do two wellnesses in 1H21, but maybe if you can go ahead and talk to that, that'd be helpful.

Yeah, I think as you point out, John, it's a little difficult to estimate at the moment. I think our feeling is that there will be a level of pent-up demand here for care that will come back as people are able to access vet clinics. It is likely that there's a level of, you know, kind of sick patient care that is just going to be lost, you know, in terms of the impacts at this time. And It's just until we kind of work through this and kind of get back to what we think is going to be a rebound to a good place in terms of the industry's health, it's a little tough to project that out, which is why we're moving away from guidance at the moment. But I think we feel the underlying fundamentals of the industry are very sound. We think that working through the dynamics with our customers will only reinforce the advantages that we have as a business, and I think we'll be very well positioned to grow as we come out of this.

Yeah, I'll share with you, John, a couple things we're hearing from veterinarians. Let me focus on wellness, because to your point, you know, if the patient is sick or needs a surgery, they obviously still have the opportunity to do that. You know, if you take a look at Q1, we had a record number of preventive care enrollments in the first quarter, 400. So that puts the overall program at 4,200 to date, as I indicated earlier. But, you know, the important thing about preventive care, just as a category, is pet owners see that as something that's not discretionary, something that they truly prioritize for their pet. And, you know, more and more what practice owners and veterinarians are telling us is not only do they consider this good medicine because it uncovers more and drives the care envelope, it's important to their practice economics, it's important to client engagement. They see it from both a medical necessity and practice health standpoint. So they're chomping at the bit. That speaks to what Brian had indicated where we are relatively optimistic around sort of this pent-up demand and more of a V-shaped recovery. It's going to be part of our recovery strategy, recover together strategy to emphasize that. There's still tons of work to do on sick patient testing in addition to preventive care. So we're relatively optimistic.

Okay. And, Jay, maybe just to follow up on that last point, you know, one thing that we're hearing about COVID-19 is just the change of workflow within the practice. You know, curbside pickup, sort of spacing out the visits more. At the end of the day, it's reducing the overall number of visits just from a workflow perspective. And I think it's unclear how long this hangs around, right, how it plays out over time. You talk about this V-shaped recovery, but do you have any concerns that this altered workflow has a lasting impact, sort of which results in a more protracted return to normal for the industry? Thanks, guys.

Yeah, I mean, just a couple of observations. You know, the first couple weeks, veterinary practices, they struggled to adapt workflow. I mean, partly it was drop-off and visits, but partly, as you described it, they had to extend appointment blocks regularly. and it was more challenging for them. Now, we worked with customers through our field service organization to be able to help them design new workflows in terms of curbside drop-off and pickup and remote check-in and contactless payment processes. They've gotten much better at it, just like you'd expect that over time you begin to optimize your processes. So different states, different regions are in different stages of recovery. And so initially it was You know, only from the parking lot, I think over time, we will see that relaxation. The other point that I would make, just tying together your two questions, is that when you take a look at what's happened within the practices with the e-towers and a lot of product sales, both food and medicines, you know, going online, a lot of that business is not going to return, at least at the same levels that they experienced before. That's going to put even more focus on, you know, getting... the patient into the practice, having checkups, using diagnostics. So again, we'll see how this develops over time, but I think all the trends are positive. Okay.

Thanks for the call, guys.

We have a question in queue from the line of Ryan Daniel with William Blair. Go ahead.

Yeah, guys. Thanks for taking the questions. Jay, can you talk a little bit more about Recover Together? It sounds like you've developed a specific blueprint for kind of the bounce back. So I'm curious what that involves and how you're marketing that.

Yeah, I mean, it really comes down to the fact that even within this COVID-19 environment, we're still highly engaged with our customers. Our customer-facing folks are visiting customers, 75%. Just take the U.S., for example, is virtual, but 25% when requested were present and fully decked out and It's safety gear. So there's a high level of engagement. We're building pipeline. We're working with our customers in terms of developing strategies that as we recover, they rebuild client traffic. You know, we saw coming out of the Great Recession in 2009 that a lot of really good clients or pet owners returned almost immediately. Where the veterinarians, I think, needed some help and assistance was is for those relatively newer clients to help build the muscle memory of semiannual or annual visits. So we're looking at programs that we have. For example, our preventive care program is perfect for that. And even though sick patient visits are allowed or advised, there's still some things that people are likely, pet owners are likely deferring. So we're looking at all of our programs to be able to support that. Just one word on IDEX 360, because it's really tailor-made for this type of environment. If you think about IDEX 360, you're able to get capital purchases with zero money down. So if you're veterinary practice, if you're in this constrained environment from an economic standpoint, you can still purchase instruments, and you pay on a monthly basis, and you're able to match invoicing to the customer with testing volumes. So in some ways, it's really tailor-made to task for this type of environment. So we're looking at all of those things in terms of how to support customers.

Okay, that's very helpful. Thank you. And then a little bit more color on OptiMedical. I know that doesn't get a lot of airtime, you know, an acquisition you did to benefit the companion animal business. But what's the potential for that if you get FDA approval and kind of how will that process go? I assume you'll have a distribution partner for that in the human market. So any color there. Thanks, guys.

Yeah, so we've developed and validated a human real-time PCR test for COVID-19. And really, to your question, we leverage the capability we have at Opti, which is our human health business from a regulatory standpoint and channels, but also our experience in developing and manufacturing livestock infectious disease kits in our current business. So this is a test. It's a PCR test. It is highly effective in terms of sensitivity and specificity from a performance standpoint. You know, results, you typically get results in well under four hours, so it's fairly quick. And we've used, OPTI's used, or is in the process of using the FDA's emergency use authorization process. We're waiting for approval as well as we've applied for a C mark in the European Union. And so we're advancing our ability to manufacture these in our livestock, poultry, and dairy industry. business and really targeting for initial distribution existing IDEX customers, so not necessarily using external channels. So these include things like livestock laboratories, public health laboratories, state CDC labs, you know, stuff, entities like that.

For our next question, we will go to Nathan Rich with Goldman Sachs. Go ahead.

Hi, good morning. Thanks for the questions. I guess to start, you know, I think, you know, Jay, you mentioned, you know, vet services that tended to be pretty resilient, you know, during past downturns. Obviously, consumers are going to be facing kind of uncertain economic conditions coming out of this. You know, I guess I'd be curious, just, you know, when you look at, you know, wellness visits in recent weeks, I mean, has there been any change in you know, metrics like the percentage of those that include blood work or the number of test orders that might provide an indication of the consumer's ability to spend on diagnostics for their pets.

Yeah, so let me, I'll answer that question at a couple levels because you had mentioned, you know, recessionary environment and, you know, the resilience of the business, which is absolutely true. You know, when you take a look at the Great Recession in 2009, we performed extremely well, growing 5% coming out of the trough of that. And if you now race ahead 10 years later, we're even, I think, better positioned to be able to, you know, perform strongly in a V-shaped recovery. So you think about the business as a whole. We're extremely well diversified, geography across businesses like CAG, water, livestock, poultry, and dairy across different modalities, and plus lots of shades. So just a couple things that I would emphasize, which includes our commercial organization. If you take a look at a decade ago, we were represented primarily through distributors, and now we have more direct representation, and so we're not reliant on others. I think the fact that Our portfolio is far broader and includes sick and some of the wellness pieces that you emphasized. And I think the role of diagnostics is far more appreciated in how important it is and really how it feeds into not only good medical care, but practice health. You know, in terms of the component of diagnostics over the recent couple weeks and what that looks like, not sure we have visibility to that data yet. That's something that we'll continue to look at on a weekly basis in terms of both lab sessions as well as through smart service, what the testing piece is, but still too early to comment specifically on that question.

Yeah, I would highlight, I think, as we're looking at this data day by day, literally, it's very encouraging to see how quickly it's coming back. So I think it's, you know, we... I think that's reinforcing the willingness that we've seen for a long time of the pet owners on critical care and for what is now a member of their family. I think this is even more powerful than it was over 10 years ago with the last great recession. So early indications we're very encouraged by, and those areas we'll continue to monitor.

Great. Thanks. Just a quick follow-up. You've seen restrictions start to ease in some areas. Have you also, you know, seen kind of rep visits picked back up? I'm just curious to know if, you know, there could maybe be a more prolonged impact there, you know, if vets kind of want to limit the number of sales reps that they see in the clinic just due to their concerns around COVID.

I'm sorry. I missed that part where you said the number of... What visits pick back up?

Well, I'm sorry. Have your sales reps, I guess, been able to start to go call on customers in areas where restrictions have eased? And could that have a more prolonged impact on just their ability to kind of get back in and see customers?

Yeah, okay. I get it. Absolutely. You know, the way we conduct visits today is when customers ask us to be present, were present. That differs than a lot of other companies out there that have essentially 100% virtual visit policy. So if you take a look at April, for example, 25% of the visits of the field organization was actually physically visiting the practice. Now, if you break that down by states and regions, it did differ based on how strict the social distancing procedures were in the practice and What we saw in places like Texas and the South, relatively more visits, relatively higher visit levels in terms of clients and more testing. Higher impacted regions like the Northeast and the Great Lakes, for example, a bit lower. So very much in line and proportional to what the local guidelines are per state, per region.

Thank you. We have a question in queue from the line of David Westenberg. Just one moment, please, while we open his line.

Thank you for taking the question. So I'm just going to layer on some of the questions that have already been asked. Can you talk about your balance sheet right now, some of the rationale between taking on the additional debt? Is that at an offense? Can we expect at the practice level maybe there's some liquidity needs and right now it's your opportunity to help those practices that need to preserve cash? And then just related to that, do you think that they're going to be more likely to avoid the cash flow and sign the contract? Or do you think there might actually be some hesitancy on that contract? And then as a follow-up on the near term, can you quantify the pent-up demand? I know VCA used to say in their practice they have an 80% recovery rate in a snowstorm kind of environment of those appointments. Is that a good way to think about it in terms of when social distancing ends? And I'll take these questions offline. Thank you.

Thanks, David. Just on your balance sheet question, I think we had some of the work that we highlighted was in-flight before the pandemic really started impacting the business. We were in the process of securing some of the terminal financing at low rates, and we were able to execute that effectively. And our revolver was up for renegotiation recently. this year regardless. So I think we just advanced that and were able to extend it and actually upsize it. And I think we were in an excellent position. We're in an even better position. And I think you raise a very good point. It enables us to continue to be highly supportive of our customers. We are helping independent practices in the U.S. and Europe with some with some payment term dynamics in the near term and trying to be as helpful as we can. As Jay mentioned, I think our programs are very well-suited to helping people through, if they have near-term concerns about cash flow management, to continue to advance their businesses. And we'll continue to be leaning in on that front and helping practices in ways that make sense for us all to move back to normal over time together.

I would just also, again, reemphasize the IDEXX 360 program is ideal in many respects for new customer acquisition in this environment. No cash outlays, matching customer invoices with the use of consumables. And the other thing, David, is we're able to calibrate future commitment expectations for customers in terms of how we use this. So I think we all recognize that this is a unique environment and we can highly configure you know, these type of volume commitment programs for that environment.

Oh, and then if I could just get on the recovery rate, if there's any way to quantify, like, if VCA is 80% recovery on weather-related thing that they used to give, you know, five years ago when they were public, but if that's still a good way to think about it.

You know, if we don't have benchmarks like that, you know, I'm not sure snowstorm is the best analogy, you know, in the moment. This is, you know, it's very dynamic region by region, but I think as a theme, We're very encouraged by how quickly we see demand coming back as policies are less restrictive, and we're optimistic about how this will play out over time. Thank you.

We'll go next to the line of Andrew Cooper with Raymond James. Go ahead, please.

Hey, everybody. Thanks for the questions. A lot's been covered, so I'll maybe just ask one kind of attacking something a little bit differently, but As we think about the transition to virtual visits, and obviously you're still doing a number in person, but when we think about installs, you've done a lot of second instruments and things like that as a portion of your growth. When we think about demand for that, obviously it's a little bit different than sort of a net new competitive placement, but how do we think about exiting when clinics aren't necessarily seeing the same volumes that they were Does that delay that need or potentially are clinics that are well capitalized sitting there saying, hey, we can get an install in without really disrupting as busy of a day where we're kind of working at full capacity as it is? Any comment there just kind of on the pace of instrument installations would be great as you come out of this.

Yeah, so let me, there's a couple of questions in there. Let me just address the question around or the point you made around second catalyst placements and practices. You know, these tend to go to higher volume customers. So it's not like we're placing a second catalyst and it's just sitting there. I mean, the reason they may want a second catalyst is they're growing their practice, they're growing client visits. It's a highly modular system. So this represents a real volume-driven decision on the part of customers. We think from a recovery standpoint as well as longer-term trends, Yeah, diagnostics utilization will continue to be, you know, robust, both sick patient preventive care, you know, menu offering our product roadmap and the different assays we're launching continue to drive usage, continue to drive utilization, though it's, you know, it's somewhat lower now because of this environment. You know, we think that all the dynamics and all the, you know, sort of the value drivers are still intact. So we don't expect through the recovery for that to change.

We have time for one more question. I'll stop there if anybody else is in the queue. Thank you.

That will come from the line of Michael Reiskin with Bank of America. Go ahead, please.

Hey, guys, thanks. I think I dropped after the initial one. Thanks for the follow up. Just real quick. I want to go back to some of my concerns sort of longer term about the vet dynamic as we think through this impact. So what's forefront of my mind is that vets are going to be economically challenged here and potentially for an extended period of time. both from economic recession and potentially some tail risk here in terms of volumes. So how do you think about vets being a little bit more price sensitive around their offerings? I mean, we know that IDEX is definitely the premium brand in the space in terms of pricing compared to Hesca and Abaxis and the cheaper alternatives. Are you concerned that while diagnostic utilization overall and visits may hold them pretty well, due to that economic challenges and some of the pressures on them, they may trade down to some of the cheaper offerings?

Here's how at least we think about it. Customers have always been concerned with the economics of the solution. you know, that hasn't changed. Price is a component of it. The value that we deliver is the other component of it. And as I indicated, you know, we're always testing to make sure that the value and economics, you know, line up. And, you know, from a customer standpoint, what we work to do through our programs is to make sure that based on their environment and based on the circumstances, we provide the appropriate program that allow them to purchase what they think are the best tools and allow them to deliver the best medicine. From that standpoint, nothing's changed, you know, in terms of our solutions and what they perceive to be, you know, the best solutions for their needs. And as I, you know, indicated, we have programs that allow them to get the products, get the service offerings they want, and do it in a way that works for them, works from an economic standpoint and matches and aligns you know, the invoices that they collect or charge to the client and what they have to in turn pay us. So we're confident that we can continue to meet their needs and do it in a way that's economically sensitive to the environment.

Great. Thanks so much.

And with that, I want to thank everybody for calling in. I know we have some employees who are also on the call. and I'd like to express my gratitude for their extraordinary performance during these unsettling times. We run the company in a way that both delivers the day and takes a long-term view designed to maintain and grow the strategic advantages of our business. I couldn't be more proud of the IDEX team and the purpose which animates our work. And so with that, we'll conclude the call. Thank you.

Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.