IDEXX Laboratories, Inc.

Good morning and welcome to the IDEXX Laboratory's first quarter 2021 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 that are subject to risk 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 earnings 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 sections 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. These include comparable gross profit growth, comparable gross margin gain or growth, comparable operating expense growth, comparable operating profit growth, comparable operating margin gain or growth, and comparable EPS growth. These non-GAAP financial measures exclude the impact of changes in foreign currency exchange rates and non-recurring or unusual items, if any. 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 website of our website. In reviewing our first quarter 2021 results, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent period in 2020 unless otherwise noted. During the question and answer session, if you have a question, please press star then one on your touch-tone 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 into the queue. And if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon.

Good morning, everyone. I'm pleased to take you through our first quarter results and to provide an update on our financial outlook for 2021. In terms of highlights, IDEX delivered excellent financial results in Q1, driven by continued strong global momentum in our CAG business. Revenue increased 24% as reported and 21% organically, supported by 23% organic growth in CAG diagnostic recurring revenues, reflecting continued high gains across U.S. and international markets. Operating profit gains were particularly strong in Q1, reflecting flow-through benefits from high CAG diagnostic recurring revenue growth and favorable comparisons to relatively higher prior year pre-COVID operating expense levels. These dynamics and a higher than expected 17 cents per share in stock-based compensation tax benefit enabled delivery of $2.35 in earnings per share, an increase of 73% on a comparable basis. Our strong start to the year has increased our confidence in achieving high revenue and profit gains in 2021. We're raising our full year revenue outlook ranged by $40 million to $3.105 billion to $3.160 billion, or reported revenue growth of 14.5% to 16.5%. This reflects an updated outlook for 13% to 15% overall organic revenue growth, 1.5% higher than our initial outlook. We're raising our organic growth outlook for CAG diagnostic recurring revenues to 14.5% to 16%, 2% higher at midpoint than our initial 2021 growth projections. Our full-year financial outlook now reflects a targeted 150 to 200 basis point improvement in operating margins on a comparable basis. These gains are projected to support EPS of 788 to 818 per share, reflecting 21 to 26% comparable EPS growth. We're planning to deliver these strong profit gains while advancing investments in our innovation and commercial capability to enable long-term accelerated global market development in our core CAG business. We'll discuss our updated 2020 outlook later in my comments. Let's begin with a review of our first quarter results in recent market trends. First quarter organic revenue growth of 21% was driven by 23% gains in CAG diagnostic recurring revenues reflecting 21% growth in the US and 28% growth in international markets. including some benefits from the lapping of prior year COVID impacts in late March. Strong CAG gains also reflected 27% organic growth in CAG diagnostic instrument revenues. Overall, Q1 organic revenue gains were supported by 9% growth in our LPD business, reflecting strong demand for African swine fever testing in China, as well as by approximately 1% of growth benefit from our OptiHuman COVID-19 PCR test initiative. The key driver of our financial model, CAG diagnostic recurring revenues, expanded at high growth rates across regions through the quarter. First quarter results were largely consistent with the very strong two-year growth trends we saw in the second half of 2020. On a two-year basis, CAG diagnostic recurring revenues increased at a 17% average annual organic growth rate. We'll be highlighting two-year growth trends selectively in the coming quarters as we calibrate the effect of year-on-year lapping of 2020 COVID impacts on our growth results. High CAG diagnostic recurring revenue gains were aided by continued high growth in clinical visits. Overall U.S. clinical visit growth was 12% in Q1, including some benefits from the lapping of prior year COVID impacts in late March. On a two-year basis, same-store clinical visit growth increased at an average 6% annual rate, slightly higher than our second half 2020 trends. The IDEXX-US CAG diagnostic recurring revenue growth premium to US clinical visits was 900 basis points in the first quarter, or approximately 1,000 to 1,100 basis points adjusted for equivalent day effects. Q1 US clinic visit growth reflected a sustained strong 9% growth in non-wellness visits and an increased 16% growth in wellness visits. These gains were supported by relatively higher benefits from growth in new patients, which we estimated added approximately 3% to overall clinical visit growth and 4% to wellness visit growth in the quarter. A continued focus on expanded pet healthcare services, including increases in the utilization of diagnostics, supported a 15% same-store increase in overall veterinary clinic revenues in Q1 and a 21% same-store increase in diagnostic revenues for practice. well ahead of 5% growth in overall visits to veterinary clinics in the quarter. Positive market dynamics, benefits from IDEC's commercial initiatives and technology to support higher standards of care, and continued very high customer retention rates drove strong Q1 organic revenue gains across our major testing modalities globally. IDEC's global reference lab revenues increased 22% organically in Q1, reflecting 20% plus organic gains in U.S. and international markets. Our international reference lab gains benefited from strong growth in Europe supported by our new German core lab capability, our expanded commercial presence, and growth in IDEXX 360 program agreements. Global reference lab gains continue to be driven by high-stain store volume growth with strong gains across testing categories. IDEXX VetLab consumable revenues increased 26% on an organic basis in the first quarter, reflecting continued 20% plus growth in the U.S. and 30% plus organic gains in international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium instrument install base. CAG instrument placements increased significantly in Q1 compared to constrained prior year levels, as clinics look ahead to supporting high growth and demand for diagnostics globally. Total premium placements increased 32%, reflecting 26% gains in North America and 36% growth in international markets. The quality of CAG instrument placements was excellent, reflected in 302 catalyst placements at new and competitive accounts in North America of 27%, and 805 new and competitive placements in international markets a year-on-year increase of 15%. We also benefited from 464 second catalyst placements driven by continued strong demand from high-volume customers. These new placements and high customer retention levels supported a 13% year-on-year growth in our global catalyst install base. We achieved 956 premium hematology placements, including our initial shipments of Prosite 1, supporting a 10% growth in our global premium hematology base compared to Q1 of 2020. We also placed 577 sedibus, including strong placement levels at international markets, leveraging IDEXX 360 agreements, which supported a 21% urinary global increase in our premium urine sediment install base. We're very encouraged by the momentum we're driving expanding our in-clinic install base as we prepare for continued improvement in sales access of veterinary clinics globally. and advanced the global launch of ProSite 1. Rapid assay revenues also expanded at a strong 20% organic growth rate in Q1, reflecting mid-teen gains in the U.S., supported by high demand for wellness testing, and accelerated growth in international markets. Of note, retention rates for U.S. rapid assay customers reached 97% in Q1, the highest level seen since the initiation of our U.S. Go Direct efforts in 2014. Overall, high CAG diagnostic recurring revenue growth remains primarily volume-driven across our modalities with consistent overall net price gains of 2% to 3%. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 9% organically overall. Double-digit gains in recurring software and digital imaging service revenues and solid growth in new software system placements were moderated by lower diagnostic imaging instrument revenue levels. impacted by a year-on-year reduction in earlier generation instrument platform sales. Turning to our other business segments, water business revenues declined 3% organically in Q1 compared to strong prior year results which included an estimated $2 million or 8% growth benefit from accelerated stocking orders. Adjusting for these impacts, water revenues increased solidly year-on-year as we continue to see relative improvement in non-compliance related testing volumes that have been constrained during the pandemic. Livestock, poultry, and dairy revenue increased 9% organically in Q1, driven by growth in our Asia-Pacific region. Q1 results saw approximately 2 million in favorability from shipment timing, which largely offset favorable shipment timing impacts of Q1 of 2020. LPD results benefited from strong demand for diagnostic testing programs for African swine fever and growth in core swine testing volumes in China supported by large producer efforts to rebuild swine herds. These gains more than offset lower herd health screening levels compared to strong prior year results. We expect to see some pressure in our LPD revenue growth rate moving forward, particularly in the second half of this year, as we begin to lap the benefits from high prior year demand for our African swine fever testing programs and see increased levels of local competition in China. Turning to the P&L, we had strong profit flow through in Q1 as we benefited from high CAG diagnostic recurring revenue gains and comparisons to relatively higher pre-COVID operating expense levels in the first quarter of 2020. Overall, operating margins expanded 830 basis points year-on-year on a comparable basis, driving an increase in operating profits of 72% as reported and 65% on a comparable basis. Gross profit increased 31% in Q1. Gross margins increased 320 basis points on a comparable basis, reflecting productivity improvement in our lab operations, supported by high organic revenue growth, favorable impacts from strong consumable sales, and benefits from moderate net price gains. We're planning for gross margin gains to moderate over the balance this year as we lap tightly controlled prior spending levels and increase reference lab staffing to support high revenue growth and service levels. Operating expenses in Q1 increased 4% as reported and 3% on a comparable basis. As noted, operating expense growth was moderated by comparisons to higher prior year pre-COVID spending levels, including much higher prior year first quarter travel, trade show, and sales meeting costs. Our 2020 financial outlook includes expectations for an increased rate of OPEX growth moving forward as we lap comparisons to control prior OPEX levels and invest to support our strong global growth momentum through enhancements to our commercial and innovation capability. We're also planning for year-on-year increases in costs in key areas, such as employee healthcare claims and travel costs, as we work through the year and pandemic-related restrictions are eased. Q1 EPS was $2.35 per share, including benefits of $15 million or $0.17 per share related to share-based compensation activity. On a comparable basis, Q1 EPS increased 73%. Foreign exchange added $10 million to operating profits and $0.09 to EPS in Q1, net of approximately $2 million in hedge losses. Free cash flow was $104 million in Q1. On a trailing 12-month basis, our net income to free cash flow conversion rate was 99%, including benefits from delayed capital spending and extension of tax payments. For the full year, we're maintaining a consistent outlook for free cash flow conversion of 80% to 90% of net income. Our balance sheet remains in a very strong position. We ended the quarter with leverage ratios of 1.0 times gross and 0.6 times net of cash, with $350 million in cash and no borrowings in our $1 billion revolving credit facility. We reinitiated share repurchases in Q1, allocating $154 million in capital to repurchase 305,000 shares. Turning to our 21 full-year outlook, we're increasing our projected ranges for overall revenue growth to 14.5% to 16.5% as reported. This reflects a 150 basis point increase in our projected organic revenue growth range offset by approximately $5 million in refinements to our FX assumptions, which now point to a positive 1.5% full-year growth benefit this year at the rate shared in our press release. Our updated organic, overall organic revenue growth outlook of 13% to 15% reflects an estimated organic growth range of 14.5 to 16% for CAG diagnostic recurring revenue. As noted, we've raised the CAG DX recurring revenue growth outlook by 2% at midpoint to reflect our strong Q1 results, trends that point towards a sustained high rate of US clinic visit growth, and confidence in our global CAG commercial execution which is driving strong momentum in our international regions. As a benchmark, our updated recurring revenue growth outlook aligns with the higher end of our earlier projections for 2% to 5%, same story U.S. clinical visit growth for the full year of 2021, and an expected premium of IDEC's U.S. CAG diagnostic recurring revenue growth to clinic visit growth of approximately 900 to 1,000 basis points. The increase in our CAG diagnostic recurring revenue growth outlook which results in over $50 million of operational revenue upside, is being moderated by relatively more conservative full-year projections for IDEX humid COVID testing. We estimate that we'll see approximately $10 million in lower humid COVID revenues year-on-year in the second half of 2021 as we lap the benefits of our prior year initiatives and plan for moderation in testing levels. We've also moderated our outlook for LPD growth to reflect increased local competition in China, including in our African swine fever testing business. Combined, these effects result in a 0.5% headwind compared to our earlier overall 21 organic growth outlook. Given the lapping of prior COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter, with continued expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're now targeting 150 to 200 basis points of annual comparable operating margin improvement in 2021, up 100 basis points from our initial outlook. This is reflected in a reported operating margin outlook for 2021 of 28.3 to 28.8%. Our EPS outlook incorporates updated projections for Port Exchange, which we now estimate will provide 15 cents of positive EPS benefit in 2021, net of established hedge positions. Our four-year outlook also includes an updated estimate of $0.19 per share of tax benefit related to share-based compensation activity, $0.09 per share higher than our initial projections. We've provided details on our updated estimates in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Thanks, Brian, and good morning. IDEXX had an excellent start to 2021 driven by continued strong market trends in our core CAG business and strong execution. This resulted in 21% quarterly organic revenue growth in the first quarter and high profit flow through, supported by 23% organic growth for CAG diagnostics recurring revenues. There were strong gains across all our market segments. Our business performance reinforces the tremendous long-term opportunity we see to develop the global market for companion animal health care and gives us confidence to raise our 2021 outlook to deliver 14.5% to 16% organic growth for CAG diagnostics recurring revenues and 21% to 26% gains in comparable EPS growth. Today, I'll provide an update on the trends we're seeing in our companion animal markets. and our approach to drive accelerated market growth, leveraging IDEC's innovation to raise the standard of patient care. I'll also provide an update on our product and commercial initiatives that will enable us to capitalize on market tailwinds and position the company to deliver continued strong financial returns. Let's begin with an update on market trends. Companion Animal Healthcare continues to see strong global market momentum. This is reflected, for example, in U.S. market data showing higher growth in clinical visits and continued high growth in services supported by expanded utilization of diagnostics. As Brian highlighted, we saw continued high U.S. clinic visit growth, up 12 percent in a quarter, with non-wellness visits up 9 percent and wellness visits up 16 percent, with strong growth seen across practices of all sizes. New patients continue to be a significant contributor to clinical visit gains. We estimate that new clinical patients added approximately 3% to overall clinical growth versus Q1 2020, up from 1% to 2% in the second half of 2020. And we continue to see record levels in progesterone testing, evidence of a continued step up in breeder activity. The growth in puppies and kittens and continued evidence of the deepening of the pet owner bond augmented by the growth in new pet parents can provide long-term tailwinds for our business. As a benchmark, we estimate that the average annual diagnostic revenue per senior or geriatric pet is double the amount we see per pet for puppies and kittens. If we do our job well with programs like preventive care, we can help to drive twice the level of annual visits in young well pets and continue to expand diagnostics usage through life stages. thereby helping advance standards of care. In looking at our US market data, we've seen an acceleration in the utilization of diagnostics. In our earnings snapshot, we shared annual data for the percentage of 2020 clinical visits including blood work. The percentage of clinical visits with blood work increased approximately 1% to 18% in 2020, double the historical rate of annual increase. Interestingly, the highest increases were in customer deciles doing more testing, with gains across wellness and non-wellness blood work utilization, reinforcing the point that even the highest users of diagnostics have significant potential for further growth. An increased focus on services and adoption of higher standards of care in areas like diagnostics are driving very strong overall growth in veterinary clinics. In the first quarter, same-store total practice revenues increased 15% versus the same quarter last year, reflecting a 19% growth in clinical revenue per practice and 21% growth in diagnostics revenues. Clearly, our customers are extremely busy. It's not surprising that they are looking for help from partners like IDEX to support their high levels of business growth through our customer-centric solutions offerings. We're particularly pleased with our commercial execution to support these customer needs, evidenced by 32% year-over-year growth in premium instrument placements globally, including strong growth in placements and new and competitive accounts. A key area of focus has been leveraging our integrated direct go-to-market model to accelerate international growth. We achieved 28% CAG diagnostics recurring organic revenue growth internationally in Q1, with strong gains across all our major regions, while driving a 36% year-over-year increase in premium instrument placements outside of North America, despite continued restrictions in sales access to clinics. IDEXX 360 continues to gain traction internationally, resulting in higher growth with customers, leveraging IDEXX technology across modalities. IDEXX 360 is helping to accelerate growth in our international reference labs in key markets like Europe, supported by our state-of-the-art new core lab in Kornwestheim, Germany, and our expanded commercial presence. The international commercial expansion efforts we've highlighted continue to progress the plan with the goal of completing onboarding of new sales teams in key markets in the first half of 2021. The outstanding growth momentum and long-term potential for IDEXX in international markets reinforces the high return from investments in our global commercial capability. Advancing international commercial expansions will continue to be a key strategy. Innovation is another key pillar in our growth strategy. In late March, we reached an exciting milestone when we began shipments of our next-generation hematology analyzer, ProSci1. I'm very proud of the extended team, including our Westbrook, Maine-based instrument manufacturing personnel. for delivering this world-class analyzer on schedule during a pandemic to the delight of our customers. Our first sales and installations were to U.S. clinics that participated in our customer experience trials, which is a testament to their highly positive experience with the analyzer. PearlSci1's exceptional simplicity and accuracy give our customers confidence in running the analyzer and in the patient results. This is helping to gain efficiencies and practices and is truly a best-in-class experience. ProSiteOne also represents the next step for IDEX in providing leading-edge technology integrated with information management, which enables clinical decision support and supports a wide range of veterinarian partners in providing the highest levels of care. We expect ProSiteOne to drive CAG growth as chemistry and hematology testing go hand-in-hand and as part of the IDEX360 program to help drive reference lab usage. This quarter, our commercial focus for ProSite 1 is on shipments to the clinics that took advantage of our pre-sales program while concurrently manufacturing and building volume to support our sales ramp through 2021, including the international rollout expected to begin in late Q2, early Q3. The SNAP Pro instrument is another investment in innovation that supports our customers at the point of care by providing workflow benefits, accurate reading of diagnostic results on the SNAP platform, and smart service connectivity. Our veterinary partners are busier than ever, so providing ease of information management within the practice is a key benefit to help them save precious time while maintaining accurate records. SNAP Pro provides a tool to address these needs, and has helped drive recent growth internationally for our rapid assay business. We see high engagement from international customers who are actively using SNAP Pro, and are connected to smart service, with growth and retention rates consistent with trends across US customers. We're also making excellent progress in expanding our installed base in key geographic markets like Europe, which helped to drive 20% organic growth in global rapid assay revenues in the first quarter. Our innovation agenda is also driving favorable business performance for our software portfolio, which had another excellent quarter. Record-breaking worldwide PIMS placements in the quarter grew 43% versus Q1 of last year, with two out of every three PIMS placements driven by cloud-based technology. My Next Webpack saw double-digit growth in subscribers, including improvements in customer retention levels to over 96%. We received consistent praise from subscribers about usability, value, and support to the Webpack system. important feedback as we look to expand this product into new markets. These integrated offerings together create a diversified technology stack that provides multiple customer benefits to help manage the growing productivity demands of veterinary clinics in a high-growth market. Through our PIMS tools and tools like SmartFlow, our focus is on improving clinic workflow by seamlessly connecting data between devices to streamline every step from patient admission to discharge. By bringing AI capability to tools like WebHacks, our platforms enable faster procedures while leveraging data to deliver insights and reduce efforts by clinic staff. Extending to the client, our communication applications are more compelling than ever, with clinics managing a significant portion of visits curbside. Connected software is critical for clinics in creating capacity to meet the increasing demands for veterinary services. IDEX is uniquely positioned to serve customer needs in this area, enhancing our value proposition and differentiation. In terms of our key initiatives, we continue to promote the advancement of preventive care and annual wellness testing through the IDEX preventive care program. In addition to increasing the standard of patient care, preventive care programs can help veterinarians improve practice capacity through more predictable schedule and level loading of practice staff. In the first quarter, the commercial team executed over 200 new enrollments, bringing total enrollments to over 5,000, which is an exciting milestone as we are more than halfway to our goal of 10,000 enrolled customers in the U.S. by 2024. As our customers enter the wellness testing season and wellness visits accelerate in the market, we are focused on continuing to capture the underdeveloped market opportunity in vector-borne disease testings. There are significant long-term opportunities to expand vector-borne disease testing in particular, given the current prevalence of heartworm-only testing in the U.S. Shifting this balance to a full vector-borne disease screening using 40X Plus not only enhances the standard of care, it represents a material opportunity for clinics to drive additional revenue. This focus and strong underlying market trends help to deliver double-digit revenue growth across all regions, led by increases in utilization of 40X Plus and feline retrovirus tests. As we look ahead, we're very excited about the opportunity to leverage our commercial capability, innovation, and partnerships with our customers to build on our strong growth trends. A key area of focus for us is to continue to invest in the infrastructure necessary to meet high levels of growth while maintaining top-notch service levels and prioritizing support for our workforce. Our employees and customers have shown high levels of adaptability and resiliency during continued COVID-related restrictions, and we look forward to a post-COVID-19 environment. We anticipate more flexibility in the future and leveraging new ways of working together with our colleagues and customers. I'd like to add that I'm extremely proud of the way that the IDEX team is executing. We're on track for a strong 2021. That concludes my opening remarks, and we now have time for some questions.