IDEXX Laboratories, Inc.

Good morning, and welcome to the IDEXX Laboratory's third 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 four 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 third 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 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 it over to Brian McKeon.

Good morning, everyone. We're pleased to share another quarter of excellent financial results for IDEXX. driven by continued strong global momentum in our companion animal business. In terms of highlights, revenue increased 12% as reported and 10% organically compared to high prior year growth levels. Third quarter results reflected 11.5% organic growth in CAG diagnostic recurring revenues with double-digit gains across U.S. and international markets. Two-year average annual organic growth for CAG diagnostic recurring revenues sustained at 16%. reflecting mid- to high-teens two-year average gains across our major modalities. We also achieved a record third-quarter level of premium instrument placements with strong global gains across our major platforms. High revenue growth and sustained operating margins compared to high priority levels supported delivery of $2.03 in earnings per share, an increase of 12% on a comparable basis. Momentum in our CAG business has us on track to deliver 15.5% to 16% organic revenue growth, 200 to 225 basis points in comparable operating margin gains, and 26% to 27% comparable EPS growth in 2021 at the higher end of our previous guidance ranges. We'll walk through the details of our updated four-year outlook later in my comments. Let's begin with a review of our third quarter results and recent sector trends. Third quarter organic revenue growth of 10% was driven by 13% CAG revenue gains and 13% growth in our water business. These gains were moderated by a 23% organic decline in LPD revenues compared to high priority levels, which benefited from the ramping of African swine fever testing in China, as well as by a $3 million year-on-year decline in human COVID PCR testing. CAG diagnostic recurring revenues increased 11.5% organically compared to strong priority growth levels reflecting 10% gains in the U.S. and 14% growth in international regions. On a two-year basis, average annual CAG diagnostic recurring revenue growth was 16% overall, reflecting 16% gains in both U.S. and international regions. Strong CAG results were also supported by 15% organic growth in veterinary software services and diagnostic imaging revenues, in addition to benefits from our recent EasyVet acquisition, and 33% year-on-year growth in CAG diagnostic instrument revenues. We continue to achieve very high levels of supply chain reliability across our business, reflecting outstanding performance by our operating teams, enabling us to support continued high levels of growth in customer service. Continued strong U.S. CAG diagnostic recurring revenue growth was supported by year-on-year gains in U.S. clinical visits. U.S. clinical visit growth was 2% overall in Q3, with solid gains across wellness and non-wellness categories. This compared to strong 7% gains in the third quarter of 2020, which included benefits from pent-up clinical demand, including very high growth in wellness testing. On a two-year basis, U.S. same-story clinical visit growth increased at a 4.4% average annual rate, sustaining above annual clinic visit growth trends heading into the pandemic. The IDAC's U.S. CAG Diagnostic Recurring Revenue Growth Premium to U.S. clinical visits was approximately 850 basis points on a one-year basis compared to very strong prior-year growth levels for diagnostic testing, which supported a 1,500 basis point growth premium last year. On an average two-year basis, which helps to calibrate for year-on-year pandemic dynamics, the growth premium was approximately 1,200 basis points in the third quarter, slightly higher than the two-year trends in the first half of the year. Expanding pet healthcare services, including continued solid increases in the utilization of diagnostics, supported a 7% same-store increase in overall veterinary clinic revenues in Q3. Diagnostic revenues per practice increased 7% on a one-year basis and 13% on an average two-year basis, consistent with recent two-year growth trends. IDAX innovation and commercial engagement continues to build on positive healthcare demand trends driving high Q3 organic revenue gains across our major testing modalities globally. IDEXX Reference Lab revenues increased 10% organically in Q3, with similar year-on-year gains in U.S. and international regions. Global Reference Lab gains continue to be driven by high same-store volume growth with strong gains across testing categories. IDEXX Vet Lab consumable revenues increased 14% organically in the third quarter, reflecting double-digit gains in the U.S. and continued high growth in international regions. 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. IDEX achieved a third-quarter record of 4,307 premium CAG instrument placements, up over 1,100 units, or 36%, from constrained prior levels, reflecting strong gains across U.S. and international regions. We saw strong global placement gains across our platforms, with catalysts up 22%, premium hematology up 62%, and set of you up 30%. The quality of CAG instrument placements remains excellent, reflected in 344 catalyst placements at new and competitive accounts in North America, up 14% year-on-year, and 1,003 new and competitive placements in international regions, up 17%. We also benefited from 571 second catalyst placements driven by continued strong demand from high volume customers. The global rollout of ProSite 1 continues to support strong overall placement momentum with the majority of our ProSite 1 placements in new and competitive accounts. New instrument placements and continued very high customer retention levels supported a 14% year-on-year growth in our global premium install base setting a foundation for continued high growth in IDEXX VetLab recurring diagnostic revenues. Rapid assay revenues expanded 9% organically in Q3, compared to strong prior year demand levels that included benefits from pent-up demand for wellness testing. Growth in vector-borne disease testing drove a solid year-on-year volume gains in the U.S., and global growth continues to benefit from double-digit gains in international regions. 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 15% organically and 33% as reported, including benefits from our recent EasyVet acquisition. Strong growth in veterinary software services was supported by double digit comparable gains in PIMS placements and continued strong growth in related recurring services. We also saw continued high growth in diagnostic imaging system placements driven by our entry-level ImageView DR30 platform with nearly 80% of placements at competitive accounts. We continue to see 20% plus growth in recurring digital service revenues, including expansion of Webpack subscriptions aligned with our expanding cloud-based capability. Turning to other business segments, water revenue increased 13% organically in Q3 compared to 4% organic declines in last year's third quarter, as this business continues to track back towards pre-COVID growth levels. Business growth was supported by solid gains across compliance and noncompliance testing categories. Livestock poultry and dairy revenue decreased organically 23% in Q3 compared to 18% organic growth levels in Q3 of 2020. Overall dynamics in our China LPD and related export testing businesses offset growth in other global regions. As expected, Q3 revenue growth was constrained by the lapping of high prior year demand for African swine fever testing and lower herd health screening levels. We're now seeing additional constraints on China LPD testing demand reflecting relaxation of local African swine fever disease management approaches in China. And as we work through impacts from low pork prices, and changing government regulations related to livestock infectious disease testing programs. Reflecting these factors, we're planning for continued lower LPD revenues overall in upcoming quarters, which is factored into our 2021 financial outlook. Turning to the P&L, sustained high revenue growth supported double-digit comparable operating profit and EPS gains. Operating profit increased 32% as reported, including benefits from the lapping of a $27.5 million G&A charge related to an ongoing litigation matter, which is excluded from our comparable growth metrics. Our comparable basis operating profits expanded 12% and operating margins increased 20 basis points compared to high priority levels, which included benefits from pandemic related cost controls. Gross profit increased 12% in Q3, reflecting strong revenue gains. Gross margins decreased modestly on a comparable basis as benefits from continued high recurring CAG diagnostic revenue growth and moderate net price gains were offset by business mix impacts from high CAG instrument revenue growth and lower LPD and human PCR revenues. We also saw some gross margin impact from investments in our lab business to support high growth and customer service levels. Operating expenses decreased 2% as reported and increased 10% on a comparable basis in Q3. As expected, we saw a higher level of comparable OPEX growth as we advanced investments in our global commercial innovation capability and onboard the EasyBet acquisition. Q3 DPS was $2.03 per share, including benefits of $4 million or $0.05 per share related to share-based compensation activity. On a comparable basis, Q3 DPS increased 12%. foreign exchange added $2 million to operating profits and 2 cents to EPS in Q3, net of $2 million in hedge losses. Free cash flow was 354 million in Q3 and 458 million for the first nine months of 2021. On a trailing 12-month basis, our net income to free cash flow conversion rate was 88%. We increased our 2021 full-year outlook for free cash flow conversion to 80% to 85% in net income, reflecting a refined capital spending estimate of approximately $150 million, including approximately $20 million in real estate purchases. As we advance plans for 2022, we expect an increase in capital spending levels to support additions to our manufacturing and distribution capacity aligned with our high growth profile. Our balance sheet remains at a strong position. We ended the quarter with debt-to-EBITDA leverage ratios of 0.8 times gross and 0.7 times net of cash, with $145 million in cash and no borrowings on our $1 billion revolving credit facility. We allocated $184 million in capital to repurchase 275,000 shares in the quarter. Turning to our 2021 four-year outlook, we're updating our projected range for overall revenue to $3,185,000,000 to $3,200,000,000. Based on our continued strong momentum in Q3, we're increasing the lower end of our organic growth outlook by 1% and maintaining the higher end of our growth outlook aligned with sustained high two-year annual growth trends for CAG diagnostic recurring revenues. Operationally, this results in an increase of $10 million in our four-year revenue outlook at midpoint. These improvements are offset by a $5 million FX headwind compared to our last outlook related to the recent strengthening of the U.S. dollar. Our updated reported revenue growth outlook is 17.5% to 18%, including approximately 1.5% of full-year growth benefit from FX and 0.5% of growth benefit from acquisitions. Our updated overall organic growth outlook of 15.5% to 16% reflects an estimated organic growth range of 17 to 17.5% for CAG-diagnostic recurring revenues. Other elements of our revenue growth outlook include continued expectations for lower year-on-year LPD revenues in the second half and for a reduction in human COVID testing revenues year-on-year. In terms of key financial metrics, we've refined our reported operating margin outlook for 2021 to 28.8% to 29%, reflecting expectations for 200 to 225 basis points of full-year comparable operating margin improvement at the high end of our last guidance range. We're planning for moderately lower operating margins in Q4 compared to high prior year levels driven by mixed impacts and advancement of commercial and innovation investments and target project spending aligned with our high growth profile. We're raising our EPS guidance range by $0.06 at midpoint to $8.30 to $8.38, reflecting 26% to 27% full year comparable EPS growth. We now estimate FX will provide 16 cents of positive full-year EPS benefit, one cent lower than earlier estimates, net of established hedge positions. We've also refined our overall effective tax estimate to 19%, including an updated estimate of 29 cents per share of tax benefit related to share-based compensation activity. We've provided details on our updated estimates in the tables in our press release and earnings snapshot. As we complete 2021, we're advancing our plans for 2022 aligned with sustaining our strong revenue growth. We're confident we can maintain our excellent supply chain performance to support continued high growth and manage any inflationary impacts in our business while building on our strong 2021 profit results. We look forward to providing specifics on our 2022 financial outlook on our Q4 earnings call. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Thank you, Brian. Good morning. We're pleased to report another quarter of excellent results for IDEX, driven by sustained momentum in our CAG business. We delivered double digit organic revenue growth overall, supported by 11.5% organic CAG diagnostics recurring revenue growth, compared to very strong prior year growth levels. Two year average annual organic growth rates across testing modalities were in line with growth in the first half of 2021. with clinical visit trends sustaining above pre-pandemic levels. These strong trends are evidence that veterinary practices worldwide continue to focus on elevating standards of care by leveraging IDEX's advanced product and service platforms. The IDEX team is doing an outstanding job supporting continued high growth in customer service levels, putting us on track towards 2021 financial performance at the high end of our previous outlook and above our long-term goals. Today, I'll highlight key areas of progress in our product and commercial initiatives that position us to deliver continued high growth and strong financial returns. Let's begin with a brief update on sector trends. Positive companion animal healthcare trends continued in the third quarter, building on the accelerated demand levels achieved throughout the pandemic. U.S. clinical visit growth was 2% in Q3. compared to strong 7% prior year third quarter growth levels, which included benefits from pent-up demand. To normalize for prior year pandemic dynamics, we are monitoring two-year average annual growth rates, which were 4.4% in Q3, continuing above the pre-pandemic levels of 2% to 3%. Wellness clinical visit growth of 6% on a two-year basis points to continued adoption of a preventive approach to pet healthcare. The sustained underlying momentum reflects the continued strengthening of the pet-pet owner bond, the benefit of stepped-up growth in the pet population beginning early during the COVID-19 pandemic through early 2021, and sustained focus in the veterinary clinic on medical services. Around the world, veterinarians' passion for their work, combined with pet owner desire for excellent care, have driven this focus on services, as they remain extremely busy. U.S. practice revenue growth in the third quarter advanced a healthy 7% versus the prior year, and an even more impressive 9% on a two-year basis, supported by two-year average growth of 11% in clinical revenue and 13% in diagnostic revenue. Customers are clearly attracted to IDEX's broad portfolio of product and services to support elevated levels of demand while also growing their practices. These positive dynamics are also true in our international region. IDEXX's growth is sustaining at an even stronger rate, reflected in the 16% two-year average annual growth in CAG diagnostics recurring revenues in Q3, a premium of nearly 1,200 basis points above two-year average critical visit growth rates. High levels of execution and consistently strong sector trends reinforce our confidence in sustaining strong growth momentum as we finish the year and build our plans for 2022. Outstanding commercial execution has been a key driver of our business performance, and our team continues to support our customers at a high level. This is evidenced by 36% year-on-year growth in premium instrument placements in Q3, a record number of third-quarter placements for the company. High growth across our Catalyst, ProSite, and SETIview platforms supported a 14% overall year-over-year increase in our premium install base. Veterinarians are using IDEX's diagnostic tools to build capacity and improve efficiency within the clinic to support future growth, which is also reflected in high levels of second Catalyst placements and continued strong 16% gains in Catalyst placements at new and competitive accounts. Our strong global instrument placement momentum has long-term benefits and gives us further confidence that future consumable streams will also support continued strong growth. These results were achieved despite continued constraints on direct access to customers. Time for our customers is a scarce and valuable resource. In-person sales trends remain at approximately 60% in the U.S. and slightly lower in Europe at over 50%. Despite these constraints, our teams are in high levels of connection to our customers to deliver exceptional results by leveraging their trusted long-term relationships as highly relevant partners. We continue to enhance our commercial capabilities through rolling country-level expansions of our field sales force to build on these results and to address the significant opportunities ahead of us. We've completed our expansions in Germany, France, and South Korea and are seeing significant positive traction in instrument placements and CAG recurring revenue growth in these countries as a result. In addition, we are expanding our footprint in three additional countries, as noted on our last call, with hiring, onboarding, and training tracking well to our plans in those areas. We expect to be live in all second wave countries by the end of Q1 of next year. In addition to our commercial footprint, We made progress in the past quarter in expanding our service footprint and capabilities in order to better support international business and customers. This included targeted investments to expand our European reference lab network and enhance our telemedicine services. These capabilities will support our long-term growth goals by ensuring we meet our customers' needs with a broad network and comprehensive portfolio of services, complementing our world-class reference lab facility in Kornwestheim, Germany. These advancements support high growth across our testing modalities as customers continue to take advantage of the flexibility offered by our customer-centric programs, such as IDEXX 360, to grow their businesses and elevate standards of care around the world. Innovative products like ProSight 1 are helping to build on this momentum. We've seen a very strong response to ProSight 1. having delivered over 1,000 units worldwide since launch and on track for the approximately 4,000 annual worldwide premium hematology placement pace we shared during Investor Day. Feedback from customers of all sizes have been overwhelmingly positive as they rave about ProSite 1's easy use, well-maintenance profile, and excellent performance. Our growth trajectory now launches in all four of our major regions. with a select number of country launches remaining in the fourth quarter of this year and into 2022. ProSciOne provides a great opportunity for increased engagement with customers, supporting strong adoption of this new platform globally and a broader expansion of our business relationships. As an example, almost 95% of worldwide ProSciOne placements and nearly 100% in North America have either included a Catalyst One or been placed at a customer that already has a catalyst one, demonstrating the strong multiplier effect of this innovative product. Our rapid assay business is another area which provides an opportunity to expand relationships with customers around the globe. Rapid assay test revenues grew solidly in Q3 compared to a very strong prior year, and 14% on a two-year basis with comparable gains in the U.S. and internationally. Vector-borne disease testing, a critical component of the rapid assay business and of wellness testing in the U.S. more broadly, was the primary driver of this growth as tick-borne disease becomes more prevalent in regions around the U.S. This testing growth continues to be supported by the SNAP-Pro instrument, which helps drive engagement and loyalty through enhanced insight, accuracy, and practice workflow benefits. Double-digit growth in the SNAP-Pro installed base in the U.S. and internationally and recent innovations like critical decision support, which aids increasingly busy veterinarians in making critical decisions when faced with a positive test, have helped drive excellent 97% customer retention levels within the rapid assay business. Our innovation strategy is also reflected in the expansion of our cloud-based software capabilities, which benefited from the Q2 acquisition of EasyVet. The integration of EasyVet into our software portfolio is proceeding to play out with high customer enthusiasm. BZVet acquisition helped drive 33% reported growth of veterinary software, services, and diagnostic imaging systems revenue in the third quarter, which was further supported by strong 15% organic growth in our core software and digital imaging products. This growth reflects solid double-digit year-over-year gains in our profitable recurring revenue software products. It also demonstrates the benefit with a growing installed base of PIMs in industry-leading low-dose diagnostic imaging products. Cloud-based offerings represent the majority of PIMs placements at over 80%, as cloud-based offerings provide performance, quality, and lifecycle cost advantages. And within diagnostic imaging, recent updates to the WebPAC's product include additional features important to specialty practices and deeper, more seamless integrations with PIM systems. With a growing installed base and very high retention levels, IDEX WebPacks has become an important part of our enterprise software ecosystem. Product enhancements like this and others aimed at making critical workflow and customer communications easier and more efficient are an impactful example of how our technology-for-life approach is supporting busy practices. Our commercial sales force and marketing teams continue to balance product sales with advancing the IDEX preventive care program. which provides a structure and incentive for our customers to continue driving wellness testing and raising the standard of care. Enrollments in this program in the third quarter, despite constrained in-person discussions with customers, sustained at a rate similar to the second quarter as we executed approximately 150 new preventive care enrollments and continue to track towards our goal of 10,000 engaged customers in the U.S. by 2024. In addition to strong commercial execution, our consistent growth trajectory also reflects resiliency and agility in our supply chain. This has enabled us to weather the impacts of the COVID-19 pandemic and meet the strong demand within our sector. IDEX benefits from a number of factors related to our business, including strong long-term supplier relationships, near-shoring and product standardization, and inventory buffers. These factors and our proactive approach managing frontline operational processes have allowed us to achieve 99% customer product availability through the pandemic, resulting in high customer satisfaction and increased retention. We believe we are well prepared to support sustained high growth and service levels in our business going forward. While there may be relatively higher costs in certain areas to support our growth plans, We are confident we can manage these impacts effectively through our operational capability and focus while building on our strong financial performance. Overall, we feel very positive about our continued strong business momentum as we engage with and support veterinarians around the world who are advancing the CARE standard. Looking forward, we are proceeding with plans for sustained high growth aligned with our long-term growth potential. as current momentum positions as well to support investments in the infrastructure, solutions, and commercial capabilities necessary to achieve the significant opportunity ahead of us while delivering continued strong financial performance. Finally, I'd like to thank our employees and our customers for their perseverance and flexibility during these dynamic times. I'm extremely proud of what we've accomplished together and look forward to continued excellence in the future. That concludes my remarks, and we now have time for questions.