IDEXX Laboratories, Inc.

Good morning and welcome to the IDEXX Laboratory's fourth 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 fourth quarter 2020 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth refer to growth compared to the equivalent period in 2019, unless otherwise noted. During the question and answer session, if you have a question, please press star, then one, on your touchtone phone. To allow broad participation in the Q&A, we ask that each participant limit their questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back in 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. I'm pleased to take you through our fourth quarter and full year 2020 results and to provide an overview of our initial financial outlook for 2021. In terms of highlights, IDEX delivered excellent financial results in Q4, supported by expanding global demand for companion animal health care. Revenue increased 19% as reported and 17% organically, driven by 21% organic growth in CAG diagnostic recurring revenues. CAG diagnostics recurring revenue growth sustained at high levels across U.S. and international markets through the fourth quarter, reflecting continued strong clinical visit growth trends and increased utilization of diagnostics. Flow-through operating margin benefits from high CAG diagnostics recurring revenue growth supported achievement of $2.01 in EPS, which included a $0.25 non-recurring tax benefit and $0.13 in tax benefit from stock-based compensation activities. Strong CAG growth results and proactive cost controls support a delivery of outstanding full-year 2020 financial performance above our long-term goals. IDEX achieved 12% full-year organic revenue growth, driven by nearly 15% gains in CAG diagnostics recurring revenues. Full-year operating margins reached 25.7%, an increase of 340 basis points on a comparable constant currency basis. The combination of high revenue growth and operating margin gains supported delivery of full-year EPS of $6.71 per share, an increase of 31% on a comparable constant currency basis. Robust CAG market trends position us for continued strong financial performance in 2021. Today, we're providing our initial outlook for full-year revenue growth and key financial metrics in an expanded information table shown in our press release and snapshots. Highlights include an outlook for 11.5% to 13.5% overall organic revenue growth, supported by 12% to 14.5% organic growth in CAG-diagnostic recurring revenues. Our financial outlook reflects a targeted 50 to 100 basis point improvement in operating margins on a comparable constant currency basis, building on strong 2020 performance. These gains are projected to support 15 to 20% comparable constant currency EPS growth aligned with our long-term goals. We'll discuss our 2021 outlook later in my comments. Let's begin with a review of our fourth quarter and four-year results and recent market trends. Fourth quarter organic revenue growth of 17% was driven by 21% gains in CAG diagnostic recurring revenues, reflecting 21% growth in the US and 22% gains in international markets. Strong overall organic growth was also supported by 13% organic gains in our LPD business and approximately 10 million or 1.5% of growth benefit from our OptiHuman COVID-19 test initiatives. Overall organic growth was moderated by pandemic-related pressures, which constrained water revenue growth and contributed to a 10% year-on-year decline in IDEXX VetLab instrument revenues. As noted, CAG diagnostic recurring revenue gains sustained at high levels through the fourth quarter. CAG growth dynamics remain healthy across global markets with 20% or higher CAG diagnostic recurring organic revenue gains achieved in the North America, Europe, Asia Pacific, and Latin American regions. For the full year 2020, CAG diagnostic recurring revenue growth increased an impressive 15% in both U.S. and international markets. High U.S. CAG diagnostic recurring revenue gains continue to be aided by strong growth in clinical visits. Overall, U.S. same-store clinical visit growth reached 8% in Q4, up from 6% growth in Q3, reflecting sustained 10% growth in wellness visits and higher 10% growth in non-wellness visits. A factor continuing to support high clinical visit gains is an increase in first-time clinical patient visits, which we estimate added 1.5% to 2% to overall clinical visit growth and 2.5% to 3% to wellness visit growth in the quarter. An increased focus on healthcare services, including diagnostics, supported a 12% same-store increase in overall veterinary clinic revenues in Q4, well ahead of an improved 4% growth in overall visits to veterinary clinics in the quarter. These positive market dynamics and benefits from investments in IDAC's commercial capability, wellness program initiatives, and technology to support higher standards of care drove high Q4 and full-year organic revenue gains across our major testing modalities. IDEXX Global Reference Lab revenues increased 19% organically in Q4, led by nearly 20% organic growth in the U.S., and mid- to high-teen organic growth in international markets. Reference Lab gains continue to be driven by high same-store volume growth, with strong gains across testing categories, including support from high levels of wellness testing in the U.S., and benefits from the expansion of IDEXX 360 program agreements in international markets. For the full year 2020, Global Lab revenues increased 13% organically, reflecting mid-teen organic gains in the U.S. and approximately 10% growth overall in international markets. IDEXX VetLab consumable revenues increased 25% on an organic basis in Q4, reflecting high growth across U.S. and international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium install base. These dynamics supported 19% full-year growth in IDEXX VetLab consumable revenues in 2020. While CAG instrument placements continue to be constrained by pandemic impacts restricting sales access to vet clinics, trends have improved solidly over the second half of 2020. In Q4, CAG instrument revenues were $3 million below strong priority levels, representing a 10% year-over-year organic revenue decline. Overall, global catalyst placements in Q4 were 13% below strong prior year levels, which included high levels of international upgrades. While overall placement levels were constrained to a degree by the pandemic, the quality of CAG instrument placements remained high. Globally, placements at new and competitive accounts were down approximately 4% compared to strong prior year levels. These results reflected 414 catalyst placements at new and competitive accounts in North America and 1,092 new and competitive placements in international markets. We also placed 525 second catalysts globally to support high growth with our customers. New placements and continued high customer retention levels drove a 13% year-on-year increase in our global catalyst install base. We achieved 1,224 premium hematology placements in Q4 supporting a 10% year-on-year expansion in our premium hematology install base. We also placed 671 set-of-you analyzers, bringing our global set-of-you install base to nearly 10,700 instruments of 20% year-on-year. Rapid assay revenue increased 20% organically in Q4, driven by high growth in the U.S., aligned with broader gains in demand for diagnostic testing, including robust gains in clinical wellness visits. For the full year 2020, rapid assay organic revenue growth was 9%, reflecting strong volume gains for K9, 40X, T-line, and specialty testing. Overall CAG diagnostic recurring revenue growth remains primarily volume driven, augmented by consistent net price gains of 2% to 3%. We're planning for similar levels of net price improvement in CAG recurring revenues in 2021. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 1% organically overall in the fourth quarter. Double-digit gains in recurring service revenues and solid growth in new software system placements were moderated by lower diagnostic imaging system placement levels. For the full year 2020, veterinary software and diagnostic imaging revenues increased 3% organically overall. as strong gains in software services were offset by pandemic-related pressure on new imaging system placements. Turning to our other business segments, water business revenues posted modest organic growth in Q4, as solid gains in compliance testing were offset by pandemic-related pressure on non-compliance-related activity. These impacts contributed to a 2% organic decline in full-year 2020 water revenues. While recent trends in our water business have improved relatively, we're planning for uneven demand in non-compliance testing in 2021 as we continue to work through pandemic-related impacts. Livestock poultry and dairy revenue increased 13% organically in Q4, driven by continued strong growth in our Asia-Pacific region. Better-than-expected LPD results reflected high demand for diagnostic testing programs for African swine fever and gains in core swine testing volumes in China, supported by large producer efforts to rebuild swine herds. These gains offset lower herd health screening levels in export markets compared to strong prior year results. For the four year LPD revenues increased 11% organically. Looking ahead to 2021, we expect to see constraints on LPD growth rates as we lap the benefits of the 2020 step up in revenues from expanded African swine fever testing programs. Turning to the P&L, operating profit results were very strong in Q4, reflecting flow-through from high CAG diagnostic recurring revenue gains. As a reminder, prior year operating profit results were impacted by $13 million in CEO transition charges. Normalizing for these impacts, operating profits increased 43% year-on-year in Q4 on a comparable constant currency basis, reflecting 460 basis points of comparable operating margin improvement. Gross profit increased 24% in the fourth quarter. Gross margins increased 210 basis points on a reported basis and 270 basis points on a constant currency basis. These results reflected productivity gains in our lab operations supported by high organic lab revenue growth, as well as favorable net mix impacts from strong consumable sales and lower instrument revenues and benefits from moderate net price gains. Operating expenses in Q4 increased 4% on a reported basis and 10% on a comparable constant currency basis, excluding impacts from the 2019 CEO transition charges. Relatively accelerated operating expense growth reflected higher incentive compensation and healthcare costs, as well as increased investment in R&D and enhancement of our global CAG commercial capabilities. We anticipate sustaining a relatively higher rate of OPEX growth moving forward as we support our strong global growth momentum. For the full year 2020, operating margins reached 25.7% of 270 basis points as reported and 340 basis points on a comparable constant currency basis, reflecting high CAG diagnostic revenue growth and benefit from cost controls. As highlighted in our initial guidance for 2021, we're targeting to build on this strong performance as we advance high return investments aligned with our long-term growth strategy. EPS in Q4 was $2.01 per share, including $0.25 per share in non-recurring tax benefit, and $0.13 per share in tax benefit related to share-based compensation activity. For the full year 2020, EPS was $6.71, of 31% on a comparable constant currency basis. Full year EPS results also included $39 million, or $0.45 per share, in tax benefit related to share-based compensation activity, which provided 590 basis points of effective tax rate benefit and 22 million or 330 basis points of effective tax rate benefit from the non-recurring tax item. In terms of other factors impacting our reported results, foreign exchange effects have turned favorable given the recent weakening of the U.S. dollar. In Q4, FX added nearly 2 percent to revenue growth and 1 million to operating profit, net of Q4 hedge losses of approximately $2 million. For the full year 2020, foreign exchange rates decreased EPS by $0.06 per share, net of FX hedge gains of $1 million. Free cash flow was $541 million for 2020. Free cash flow conversion was 93% of net income, or 97% adjusted for our investments in our Westbrook headquarter expansion and German lab relocation, which are now complete. Our balance sheet is in a very strong position. We ended 2020 with leverage ratios of 1.1 times gross and 0.64 times net of cash, with $384 million in cash and no borrowings outstanding on our $1 billion revolving credit facility. We didn't allocate capital to share repurchases in the fourth quarter, but we have reinitiated share repurchases in Q1, reflecting confidence in our long-term growth strategy. Turning to our 2021 outlook, as noted, we've included a table in our press release and snapshot reflecting our initial outlook for revenue growth and other key financial metrics, recognizing that it remains a relatively dynamic environment in terms of financial forecasting. Our initial overall organic revenue growth outlook of 11.5% to 13.5% is centered on an estimated organic growth range of 12% to 14.5% for CAG-diagnostic recurring revenue. As a benchmark, this recurring revenue growth outlook aligns with projections for 2% to 5% same-store U.S. clinical visit growth for the full year 2021, building on strong 20 momentum, and a premium of IDEX-U.S. CAG-diagnostic recurring revenue growth to clinical visit growth of approximately 900 to 1,000 basis points, which is consistent with our strong growth trends heading into the pandemic. Our growth outlook range reflects our plans to drive continued high CAG diagnostic recurring revenue growth globally, while also recognizing year-in-year comparisons to very strong 2020 growth levels in the second half of the year. In terms of overall organic growth, we factored in an estimated 1% overall growth benefit from higher CAG-diagnostic capital instrument revenues, including net growth benefits from the ProSite One launch this year. These positive impacts are expected to be moderated by tougher comparisons in our LPD business and continued COVID-related growth pressures in certain areas, such as water noncompliance testing demands. Please note that given the lapping of prior year COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter, with expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're targeting 50 to 100 basis points of annual comparable constant currency operating margin improvement in 2021. This is reflected in a reported operating margin outlook for 2021 of 27.3% to 27.8%. We're planning for continued solid momentum from gross margin gains with some moderation of benefits related to product mix impacts and increased lab staffing to support high volume growth. Overall, we anticipate sustaining a relatively higher rate of OPEX growth moving forward as we support our strong growth trends. We also expect some relative year-on-year increases in costs in certain areas, such as employee health care costs, claims, and travel costs, as pandemic-related restrictions are eased. Our outlook incorporates projections for foreign exchange to be a net positive factor in 2021 at recent exchange rates. At the exchange rate shown in our press release, we estimate FX will provide a positive 1.5% to 2% revenue growth impact in 2021 and approximately 14 cents of EPS benefit net of established hedge positions. We've included an outlook for net interest expense that assumes maintenance of a relatively consistent net leverage ratio in 2021. Given reduced share repurchase activity in 2020, we're projecting more limited year-on-year EPS growth benefit from reductions in average shares outstanding. Our 2021 outlook includes an estimated $0.09 to $0.11 per share of tax benefit related to share-based compensation activity compared to a much higher than anticipated $0.45 per share of benefit in 2020. Our 2021 estimates reflect known option expirations and any established 10B51 plans. In terms of managing our 2021 financial performance, our focus will be on delivering strong full-year results while advancing our long-term growth strategy prudently in a dynamic environment. Given the strong momentum in our CAG business, we're inclined to lean in towards high-return, organic growth-oriented investments that while delivering continued improvement in operating margins aligned with our long-term goals. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Thanks, Brian, and good morning. IDEX had a strong finish to 2020, driven by exceptional CAG diagnostics recurring revenue growth. Strong CAG market trends continued through Q4, enabling us to deliver outstanding full-year performance. With 12% overall organic growth, significant expansion of our operating margins, 31% EPS growth on a comparable constant currency basis, and 55% return on invested capital. While managing through pandemic impacts, we deepened our connection with our customers, strengthened our global commercial capability, and advanced key elements of our innovation agenda. These steps position us well to build on our business momentum in 2021. Today, I'll provide an update on the trends we're seeing in our markets and some of the dynamics that are supporting the impressive growth rates we've achieved in our core business. I'll also provide an update on some of our key growth initiatives in areas of emphasis this year. Finally, I'll discuss how we plan to manage the business aligned with our initial financial outlook in what remains a dynamic macro environment. Let's begin with an update on market trends. We continue to see strong growth trends in companion animal health care, reflected in high growth in same-store clinical visits in the U.S., higher growth in new patients, and an accelerated expansion of care. We also saw sustained solid market recovery across international markets, despite pandemic impacts. As Brian noted, clinical visits were up 8% overall in the U.S. in Q4, led by wellness visit growth of 10%, and strong non-wellness same-store growth of 7%. For the full year, clinical visit growth was approximately 3%, consistent with the growth we have seen in recent years, though with wide variations by quarter due to pandemic effects. Solid U.S. market growth trends have continued into early 2021. Market feedback from veterinarians remains consistent. Clinics are very busy with sustained high levels of demand supported by higher growth in new patients. Our market data tracking in the U.S. indicates a 10% increase in new clinical patients in 2020 versus 2019 growth of 3%, which contributed an estimated 1.5% to 2% of incremental overall same-store clinical visit growth in Q4. There continues to be evidence reinforcing robust growth in the pet population. As an indicator, we've seen a 70% year-over-year growth in IDEX progesterone test revenue in the second half of 2020 in the U.S., as well as a significant step-up in new clinical patients with first-time pet parents. New patient growth has been augmented by the accelerated expansion of care. Overall revenue generated during clinical visits grew 15% per practice in the U.S. in Q4, driving 12% total revenue growth per practice. Diagnostics revenue is growing even faster at approximately 17.5% per practice in Q4 in the U.S., supporting full year 2020 same-store diagnostics revenue per practice increase of 12%, reflecting a significant step up in growth in the second half of the year. We saw a clear trend of veterinarians performing more diagnostics in 2020, with average diagnostics revenue per clinical visit with diagnostics up 5% for the year, There are a number of potential drivers for this, which we've noted in recent calls. Pet owners are spending more time with pets during the pandemic and may be more attuned to their health conditions and care. Curbside check-in procedures may also be helping, as pet owners pre-approve diagnostic test runs as required prior to the visit, helping veterinarians and their staffs to provide higher standards of care. And veterinarians continue to pivot to focus on delivering medical services as their core value proposition. We've leveraged the strong market backdrop into even faster growth for our business, enabled by our commercial capabilities, critical innovations, and customer-friendly marketing programs. For the full year in 2020, the CAG Diagnostics recurring revenue organic growth premium compared to clinical visit growth expanded to approximately 1,200 basis points in the U.S. up from the 900 to 1,000 basis point range heading into the pandemic. This is a healthy backdrop for our business in 2021. We're planning to support high growth in our CAG business, recognizing there continues to be significant unknown dynamics in the marketplace and the economy as we advance to the next phase of pandemic management. We believe our initial revenue growth outlook of 11.5% to 13.5% overall organic growth and 12% to 14.5% for CAG diagnostics recurring revenue growth represents a reasonable planning range in this context. There is considerable momentum in the market to continue expanding utilization of pet health care, and our strategy is to work with our veterinary partners through an expanded commercial presence to raise the standard of care through adoption of our testing innovations. A great example of our innovation focus is ProSite 1, our next generation hematology point of care instrument, which is now in its final stages before product launch. ProSciOne will support a global commercial strategy by unlocking broader opportunity and reach to the customer, especially internationally. Veterinarians want chemistry and hematology diagnostics together, and they are busier than ever, making diagnostic solutions delivered with a best-in-class experience highly relevant. Field trial customers are thrilled with ProSite 1's streamlined functionality in a compact footprint. With IDEXX 360, access to in-house hematology is easy and affordable, and our paper-run and auto-replenishment consumables model makes inventory and cash flow management hassle-free. Customer experience trials are proceeding well, and we anticipate beginning analyzer shipments in North America late Q1, but maybe early Q2. as we complete customer experience trials. We will follow with an international rollout beginning in Q2. Our expectation is to build volume throughout 2021. Pre-sale efforts led by our commercial and marketing organizations are raising awareness of our new hematology analyzer, as well as an increased appreciation of our existing world-class hematology portfolio. This is generating interest in in-clinic hematology solutions and driving strong hematology placements. Another key area of innovation leverage is urinalysis. Our commercial teams continue to raise awareness about our sedibu's enhanced capabilities, now with advanced bacteria detection. Determining whether bacteria are present or not is often the most important part of sediment analysis. Bacterial UTIs are, for example, a common diagnosis that is painful for pets and can be stressful for pet owners. With SETIview's advanced bacteria detection kit, veterinarians have access to real-time bacteria detection at the practice, providing early visibility to the absence or presence of bacteria. Customers highly value diagnostic solutions that help them practice better medicine, in this case, allowing them to make more informed decisions within the patient window. We also saw strong interest in our SETIview platform in international markets in 2020, driving a greater than 50% increase year over year in our installed base outside of North America. Innovations delivered through our Technology for Life strategy continue to drive greater adoption for our SIDV platform. Innovation can take many forms, and our digital cytology offering is an example of a new personalized service enabled through imaging technology and our global team of over 100 veterinary clinical pathologists. We are pleased with the exceptional feedback and world-class customer satisfaction ratings of Point of Care Digital Cytology following its launch in Q1 of 2020. Customers are realizing efficiency and clinical benefits in the integrated 24x7x365 service by opening additional appointments in their schedules and enabling same-day treatment plans. Patient results are integrated with major practice management systems with VECONIC+. as well as being available on any iPhone or Android mobile device with the VetConnect Plus app. It's a great example of how we uniquely support, in an integrated way, customer, clinical, and workflow needs. Most of the point-of-care digital cytology placements have been part of a program, and almost one-third were combined with premium IDEXX VetLab analyzers. Many placements were important factors in attracting new business for our reference labs. With some customers, we have seen instrument placements accelerate cytology utilization and support strong revenue growth in that category. We'll continue to watch these trends closely as placements expand and more practices fully adopt the instruments into their daily workflow. Now, let's transition to an update on our commercial accomplishments and initiatives. Our outstanding results couldn't be accomplished without disciplined commercial executions. which we have highlighted in the past as an essential pillar in our organic growth strategy. We see high returns and investments that allow us to spend more time with customers in person or virtually. As we've noted on the last call, leveraging a long history of U.S. expansions, we have made excellent progress with efforts to significantly expand our commercial footprint in three international country markets. We're on track to complete the expansion and have all new talent hired, trained, and onboarded in the first half of this year. We completed our latest U.S. Salesforce expansion about a year ago now, and the team has ramped productivity, building customer relationships and tenure against customer access pressured from the COVID-19 pandemic. Our team's performance was exceptional, and instrument placement levels continued to improve sequentially in Q4. They remain somewhat constrained due to restricted access to clinics and veterinary practice priorities, focused on supporting high patient demand. In North America, overall premium instrument placements reached prior year levels, and catalyst placements were up 14% year-over-year in Q4, including strong second catalyst placements. These results were achieved while access to practices in-person visits by our customer account managers sustained at Q3 levels, or 50% of in-person visits. In international markets, we hit high levels of new and competitive catalyst placements, almost reaching prior year levels, and second catalyst placements more than doubled prior year levels, despite a modest pullback in customer account manager in-person visits in Europe. IDEXX 360 continues to gain significant traction in major international markets, supporting customer acquisition and placements of full bedlock suites, as well as increased reference lab usage to support customer volume commitments. While we expect that sales professionals' access to veterinary clinics will likely continue to be challenged until social distancing policies and measures to combat the spread of COVID-19 are relaxed, we are very pleased with our high level of commercial execution. Our expanded global commercial resources position us well to pursue the vast opportunities we see in international markets and advance initiatives like preventive care in the U.S. We continue to see tremendous customer interest in establishing and expanding preventive care as an important category of pet healthcare as a practice. The IDEXX Preventive Care Program has never been more timely to help practices implement a customer-centered preventive care program to support the high levels of wellness visit growth and the growth of puppies and kittens we see in the market. Pandarians view preventive care as a means to both deliver better pet healthcare and build healthy relationships with new and existing pet owners. Program enrollments in Q4 were approximately 300 newly enrolled customers, more in line with pre-COVID run rates, bringing our total enrolled practice levels to now over 4,800. Our software portfolio also had an exceptional year, with a record-breaking number of PIMS placements globally, and over 20% growth in North America for the full year. The expansion of our PIMS installed base and cloud-based subscription customers supported strong double-digit growth in our software and services recurring revenues. Our cloud-based solutions, in general, continue to enjoy excellent momentum. For example, we now have over 5,300 customers utilizing our IDEX web packs offering an 18% increase year-over-year. We continue to center our software strategy on our customer workflow and clinical needs. And the COVID-19 pandemic has only increased the need for cloud-based, mobile-centric solutions that deliver deep data insights and tools to further elevate patient care and enable practice efficiency. Investing in high-quality workflow solutions will continue to be an area of focus for us. Next. I'd like to highlight the remarkable operational accomplishments of our supply chain and reference lab teams, supporting our customers in an uninterrupted fashion while keeping up with 20% plus organic growth in our CAG diagnostics recurring revenues in the second half of 2020. Take our reference lab business, for example. Throughout 2020, not only has the team focused on keeping approximately 2,800 on-site reference lab employees at 80 global lab sites safe, but did this while ensuring continuity and a positive customer experience in an operating environment where transportation and logistics networks were at times highly challenged. And they didn't miss a beat, opening our new Cord Westline facility. It has been open since May and is operating exceptionally well. Notably, it is achieving record number of lab accessions for our European business. Before I conclude today's remarks, I want to highlight our efforts to make positive and lasting impacts in the communities we serve. As we announced on the last call, we recently established the IDEX Foundation, a donor-advised charitable fund to support activities aligned with our purpose. Our mission is to create positive, lasting impact for people, animals, and the environment through inclusive and outcomes-focused initiatives. An area of focus is to support the advancement of diversity in the veterinary profession by providing access to learning opportunities. I'm proud to share our inaugural multi-year engagement with Tuskegee College of Veterinary Medicine, which has been recognized as the most diverse veterinary medical school in the U.S. and has educated more than 70% of the nation's African-American veterinarians. The IDEXX Tuskegee Scholars Fund will support nine fully funded scholarships, as well as well-being and mental health support programs for veterinary students. We are excited about this important initiative in support of our purpose and mission. Before we turn to Q&A, I wish to express my gratitude and thanks to our employees for a superb year in pursuit of our purpose. 2020 was a year like we've never experienced, a disruptive year that challenged all levels of the organization. We maintained the operating rhythm in the business while responding with agility as circumstances required. The team's resilience is a testament to the purpose driven and innovative culture at IDEXX. The organization stayed focused on serving our customers in an exceptional way while achieving a new high for employee engagement. I couldn't be prouder and more grateful for the teamwork, collaboration, and professionalism that resulted in record performance in the face of unknowable challenges. And that concludes my opening remarks. We now have time for some questions.

Thank you, and we'll now begin the question and answer session. If you have a question, please press star 1 on your phone keypad. If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please press star 1 on your telephone keypad. And from Bank of America, we have Michael Riskin. Please go ahead.

Hey, Jay, Brian. Thanks for taking the question. And congrats on the quarter, first of all. I want to start with your comments on the guide and sort of the outlook going forward because I think that's where we've had the most feedback from investors and where most of the attention is. If you think about what you guys said about, you know, clinical visit growth next year, other parts of the revenue bridge, you know, things like diagnostic utilization, they're more in line with 2020 as a whole but still a little bit of a step down sequentially just from what we're seeing in 3Q 2020, 4Q 2020 with clinical visits being up mid to high single digits. So I'm just wondering when we think about those components of the bridge, of the revenue bridge for next year, are you baking any conservatism in the second half? Or does this reflect a little bit of, you know, your views on something like we would revert to the pre-COVID landscape, especially once the vaccines are rolled out and we go back to normal? I guess my question is sort of what are your thoughts on these COVID tailwinds we've seen in the second half of this year and how that continues next year and beyond?

Yeah, Mike, why don't I start off, and then I'm sure Jay can weigh in on the broader trends. I think we feel we've got a very healthy growth range, as you know, for the full year on the CAGDX recurring of 12 to 14.5, and I think you have a higher end of the range on top of the growth rate we had this year we think is a very healthy outlook for our business. I think we do feel good about the momentum entering the first half. I think we'll have relatively stronger growth in the first half And I think you're highlighting the key question, which is sort of the comparison in the second half. There was a step up in the growth rate and, you know, driven by a number of factors, more pets, more testing, you know, some pent-up demand that they've carried over from the early COVID impact. So I think we're just recognizing that there'll be, you know, some year-over-year compare dynamics that go on that we'll learn more about as we go into the year. But I think we're... We feel very good about the momentum in the business. It was an amazing 2020, amazing recovery for the industry, and I think our high-growth outlook reflects that.

Yes, I would just add to that. The logic of our guidance is linked to the market data, so we are optimistic about the outlook that the benefits will sustain, and I think Brian aptly painted the parameters of that What we're seeing is we're seeing more pets in the marketplace. We're seeing those are driving more clinical visits, including first-time clinical visits with first-time pet parents. And veterinarians are providing more medical services beyond just the first-time clinical visits. And medical services are enabled by diagnostics. You have to first diagnose before you treat. So I think it's a very healthy backdrop, and as Brian said, It is still a dynamic environment, and we'll see how it plays out.

Okay, thanks. Can I ask a quick follow-up on that as well? You touched on the ProSide 1 launch, and you gave some color on the rollout in 1Q, 2Q. I'm just wondering, are you baking in any specific contribution from ProSite 1, from ImageView, from any of the product launches in 2021? And also just could you provide a little bit more color on feedback you may have gotten from sort of the pre-launch early customers as far as how that's affected your outlook for the full launch?

Sure. I'll describe the customer experience trials, and then I'll hand it off to Brian to talk about the impact. in terms of how we factored it into the forecast. The customer experience trials have gone extremely well. I think customers are thrilled with not just the compact footprint but the usability and the very ease of use of the analyzer. From that standpoint, it really is a breakthrough because hematology is a complicated diagnostic testing category. And by the way, these customer experience trials, It's something that is best in class in terms of the approach that we take. You can develop an amazing analyzer, but you have to put it out in real environments and environments that our customers use to get the type of feedback. We're also, you know, the other thing that it's driving is just that increased focus on hematology and the importance of hematology. We know many of our markets are hematology-first markets, meaning that they... place relative priority on hematology testing even before chemistry. So we're optimistic. We think it's going to be a winner for us. We think that there are over or approximately 100,000 placement opportunities on a global basis. So we're very excited about it. And Brian, why don't you describe how we factored it into our forecast?

Yeah, we're not breaking out specific numbers. projections by platform, but overall, Mike, we did highlight the 1% contribution to growth we expect to get from instrument revenues next year at CAG, instrument revenues, and that's a very healthy growth rate that would imply kind of 20% to 30% growth in instrument revenues, and that includes, obviously, benefits from the ProSite 1 launch. So we're looking forward to that to being a positive net contributor, and we think we've got that built in appropriately in our outlook.

Great, thanks so much, guys. Thank you. From Credit Suisse, we have Erin Wright. Please go ahead.

Great, thanks. You have some great data, obviously, on the market trends in the US. But I'm curious what you're seeing in international markets at this point in terms of clinical visits, new pet ownership, overall veterinary demand trends. Are you seeing the same level of resiliency there? And is it consistent with what you're seeing in the US? And what are some of the key differences between the two markets and how are the trends in the fourth quarter and what you're anticipating into 2021 on the international side?

Thanks.

I'll comment.

Go ahead, Jeff. I'll comment. I'll give you a general flavor for the international market and then Brian, I'd ask you to provide some specifics around some of the financials. The international markets continue to be quite healthy. Even with the pullback related subsequent waves, we've seen just a modest pullback in terms of our ability to visit customers in person. But the overall markets and the overall human-pet bond, we're seeing the same type of trends outside the U.S. as we are in the U.S. And on top of that, we continue to invest in international expansions. I mentioned three country markets that we're expanding in and those are going extremely well. We think that there's, you know, there continues to be just a great opportunity to be able to tap into, you know, the expansions. The other thing that we see is the IDEXX 360 program is being nicely adopted by our European customers. So the majority of our instrument placements are now through IDEXX 360 that's also having a nice impact on our reference lab services as part of the volume commitment aspect of that. So, Brian, would you like to add any flavor to that?

No, I think that captures it well. Aaron, as you know, we don't have the same kind of level of insight at the PIMMS level to some of the more granular data, but we did try to point out that we had basically the same level of CAG diagnostic recurring revenue growth, U.S. and internationally. Both overall regions were strong throughout the quarter. We had 20% CAG DX recurring revenue growth in Europe, Asia Pacific, and higher in Latin America. And we're basically hearing the same kind of trends and seeing the same kind of trends in our business in terms of just that clinics being being very busy and driven by underlying growth and utilization. So it's similar trends. I think the U.S. is particularly strong, and we have the benefit of more data and insight in the U.S., but I think it just reinforces the strong global momentum that we have in our business.

Okay, great. And then do you think that there's any sort of level of pent-up demand in instrument placements more broadly? Are you anticipating stepped-up instrument placements into 2021, or how should we be thinking about the trends on a quarterly basis as things potentially normalize throughout the year?

Yeah, so we've grown Q4 placements over Q3, Q3 over Q2. The clinics, we did see some initial changes restrained access to the clinics early on in the pandemic, and they have eased along with the social distancing policies. In effect, we're still, you know, modestly impacted by that. You know, the other thing to keep in mind is that the clinics themselves are really busy. There's just a lot of patient traffic through the clinics. So in those cases, they may not, they may desire an instrument or, you know, a new suite, but they'll want to take the time to have to interrupt practice and retrain. So there's some headwinds connected with that. But overall, I think that our customers are responding very favorably to instruments that can help them with both capacity and productivity as well as practicing better medicine.

One factor I'd point to, I think, to reinforce Jay's point on just the clinics being busy and the you know, demand being a driver for instruments that we feel good about going forward is just the second catalyst placements. If you see the high level of second catalyst placements in U.S. and international markets, that's reflective of clinics trying to keep up with the higher levels of diagnostic utilization. So I think that's a positive factor. And, you know, we're still working through some of the access headwinds, but I think the general trend has been positive for us.

Great. Thank you.

From Goldman Sachs, we have Nathan Rich. Please go ahead.

Good morning, Jay and Brian. Thanks for the questions. Maybe just to start on the CAGDX guidance, going back to I think it was the first question, and the spread that you expect this year kind of narrowing back to the 9% to 10% range from the 12% that you saw this year. You know, how much of that reflects potential conservatism, I guess? Because it seems like a lot of the trends that you saw driving, you know, frequency and utilization of diagnostics should continue. So are there any other factors that we should just kind of keep in mind as we think about that spread kind of going back towards the historical range?

Nate, I think it's primarily just the reflecting the lapping of the step-up in growth, particularly in the second half. If you look at the premium that we're trying to use these shorthand ways of looking at it, but in the U.S., the premium of CAGDX recurring growth, the clinical visit growth, it was about 1,600 basis points in Q3. It was about 1,200 basis points in Q4. And so I think there are you know, some of that, I think the Q3 benefited from pent-up demand. And so I think we're seeing some normalization from that dynamic. And as we get into 2021, we expect, we do have a very healthy clinical visit growth rate projected and continues to run growth. But I think, you know, just recognizing that we had some step-ups here in the demand, that I think is driving us. The $900,000 to $1,000 premium, we think, is a you know, an excellent premium and I think would position us very well for strong growth moving forward. But those are some of the factors we built in.

Makes sense. Thanks for the call. And then just, Brian, quickly, if I could follow up your comments on sort of the cadence of revenue growth in 2021. You know, understand it'll probably be stronger in the first half than the second. I guess if we think about sort of the current trend continuing into the first quarter, It seems like, you know, CAGDX recurring growth should be in that 20% range. That would mean sort of the back half of the year is, you know, high single digits to 10%. Is that roughly the right way to think about the cadence of growth between the first half and the second half of the year?

Yeah, without getting to specifics on projections, because we're not going to be doing quarterly projections, and there's going to be a lot of noise in the quarters, as you know, Nathan, that we had. you know, the beginnings of COVID in Q1 and more meaningful impacts in Q2. And so, and then, you know, things like the rebound at Q3. So I think year over year, the quarters are going to be a little bumpy. But directionally, yes, I think we're expecting, you know, that higher level of growth in the first half. And, you know, given the year over year step up in growth, more moderate growth rates in the second half is what's implied in our guidance range. And so we'll see how the world, you know, the – the markets play out. It's still a very dynamic environment, as you might imagine, to try to forecast in. There's a lot of unknowns here just with how the pandemic plays out and how those factors evolve as hopefully people get back to work and lives get back to normal. But I think that directionally, that's how we're thinking about it. Great. Thank you.

From Stiefel, we have John Block. Please go ahead.

Thanks, guys. Good morning. Maybe first one, Brian, just the CAG recurring acceleration, the acceleration of around 100 to 200 bps, I think it's 13.25 at the midpoint versus pre-COVID levels. They're just running some high-level math. It seems like another $30 to $40 million in incremental high-margin revenue. And so can you just talk about, you know, as specific as you're willing to get, where you're allocating the incremental gross profit dollars? You know, we talk a lot about the flow-through from the CAG recurring, and obviously we're seeing that Is that some of these U.S. and international investments? And if so, do you think it just sort of puts you guys in a stronger position as we look out in subsequent years? And then I've got to follow up.

Well, just to start, to your last point, John, I think if you've got high CAG recurring diagnostic revenue growth, that's a very good dynamic for a business from a profit point of view and a gross profit expansion point of view. And so that is interesting. clearly a key driver of our performance in recent years, and particularly in 2020. Just in terms of dynamics going into 2021, we do anticipate some investments in areas like lab capacity. We're trying to keep up with the very strong growth that we've seen. I'd point out that 2020 was an unusual year in that early on, when we really didn't know how this was going to play out, we erred on the side of caution and just being very tight with our cost controls last year and wanted to ensure that we had, you know, a healthy business model and ask people to make sacrifices. There were a lot that went into that. And so, you know, we're, we're trying to reflect that we've got year over year compares here to a year that we had, you know, a high level of cost control and we're going to have some investments that are coming back across the business. And we expect, um, try to highlight there's going to be things like healthcare costs and, and, uh, perhaps travel costs and things like that that come back later in the year, as well as just trying to re-engage in investing in areas that we held the line on in 2020 and had very high growth. So we've noted things like international commercial expansion as an area that we want to lean in. We want to continue to support our Indy agenda. And so the number of areas that are all aligned with our organic growth strategy that we're We're intending to support it, and that's reflected in our intent to have moderate operating margin gains on top of very strong performance. So we're committed to building on the performance but recognizing that we have some pent-up demand here, if you will, for investments in the business.

Okay, got it. Very helpful. And then second question, you know, it goes down the same road that I think Nathan went down and Mike as well, but I'll ask it a little bit differently, I think certainly differently. So you're guiding to an acceleration in the CAG recurring performance at 13.25 midpoint, and you've been around 11 to 12, but it seems that the acceleration for your commentary is a function of greater expectations around clinical visits versus your premium to the clinical, right? What's your premium to the clinical? You'd expect around that 900-bit to 1,000-bit premium. And so can you talk to that dynamic, guys? Because I would just think at a high level, the premium would be more in your control with the increased commercial investments, the innovation, driving utilization, versus that of trying to sort of guesstimate how the underlying clinical visit shakes out. So, you know, why one versus the other? You might end up in the same place, but I'm just curious why the premium would be unchanged and you feel more comfortable with the sort of heightened level of clinical visit growth. Thanks, guys.

Let me try to frame this out, John. So there's a number of different factors that I think are driving, you know, growth. First off, there's more pets. We've talked about that, and the majority being puppies and kittens, and that clearly has an impact. It's hard to get your arms around exactly what that impact is, but we've provided some guidance in the past. Then there's more clinical visits, even beyond... the new pets. And for these clinical visits, we know that there's more clinical visits that are being used to provide medical services that include both higher use and intensity of diagnostics. And I think to your point, that's the piece that we can control through innovation and our commercial strategies and customer-friendly marketing programs. So that's where our focus is on being able to really drive that awareness and education and adoption by the veterinary customer to deliver better medical care. And I think we've provided some ranges in terms of what that looks like, you know, and it's a very healthy market backdrop, and that's where our focus is.

I think we have time for one more question.

Yes, and our last question from J.P. Morgan. We have Chris Schott. Please go ahead.

Great. Thanks so much. Just two fairly quick ones here. Just on that topic of new pet growth, I think you referred to about 10% in 2020. How are you envisioning 2021 playing out? Is this another year of very healthy pet growth, or do you expect as we kind of go through the year, the world starts to normalize a bit, that we maybe moderate back down to that 3% or so rate that we've seen historically? And then my second one was, just given all the favorable trends that played out in 2020, are you making changes about how you think about promotion and commercial approach to lock in these dynamics? So I know you've got a lot of initiatives that you've talked about to continue to grow the business, but have you changed what you're emphasizing or how you're approaching the vet, just given what we learned about the kind of pet owner and willingness to spend over the last year or so? Thanks so much.

Yeah, so just to do answer, so the 10% was new pet clinical growth versus new total pet growth. in the marketplace. And we think that that's a healthy dynamic because they initially come into the practice as puppies and kittens. They may get their initial checkup, which includes diagnostic tests. And to speak to your second point, the two are really related. If we do our job well with preventive care programs and other programs, that those puppies and kittens, as they become dogs and cats, continue to get care on an annual basis or twice a year. So we think it's a healthy dynamic and plays into our strengths both as a commercial and marketing strategy. The programs we actually have in place are ideally suited to drive that. So if you think about the preventive care program that we have 4,800 plus customers enrolled in that, that's a great example of a driver of medical services and in turn diagnostics usage. So our programs are geared towards driving education and adoption of both wellness and non-wellness type care and testing. So we think we're very aligned and we think it's a trend that we can sustain and that's the plan to be able to do that. So I think that's the last question. I want to thank everybody for calling in. I know we have some employees who are also on the call and I just want to express my gratitude for their extraordinary performance during these challenging times. We run the company in a way that takes a long-term view of the opportunities ahead of us while still delivering the day. I couldn't be more appreciative of the IDEX team and the purpose which animates our work. And so with that, we'll conclude the call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining, and you may now disconnect at this time. Thank you.