IDEXX Laboratories, Inc.

Q4 2021 Earnings Conference Call

2/2/2022

spk01: Laboratories' fourth 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, Vice President, Investor Relations. IDEX 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 four 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 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. 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.
spk08: Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2021 results and to provide an overview of our financial outlook for 2022. In terms of highlights, IDEX delivered excellent financial performance in Q4, driven by double-digit top-line gains compared to very strong prior year results. Revenue increased 11% as reported and 10.5% organically, supported by 13% organic growth in CAG diagnostics recurring revenues. Two-year average annual organic growth for CAG diagnostic recurring revenues was approximately 17% across U.S. and international regions, consistent with the accelerated two-year growth trend seen throughout 2021. We achieved record premium instrument placements in Q4 with strong gains across our major platforms, supporting a 14% year-on-year expansion of our global premium instrument base. Strong revenue growth enabled delivery of $1.89 in EPS, up 12% on a comparable basis as we advanced planned investments and our commercial and innovation capability. Flow-through benefits from high organic revenue growth in 2021 drove outstanding full-year financial performance above our long-term goals. IDEXX achieved 16% overall organic revenue growth for the full year, driven by 18% gains in CAG Diagnostics recurring revenues. Full-year operating margins reached 29%, an increase of 220 basis points on a comparable basis. And we delivered full-year EPS of $8.60 per share, up 29% on a comparable basis. We're well positioned to build on this strong financial performance in 2022. We're targeting revenue gains at the higher end of our long-term goals reflected in our outlook for 10 to 12% overall organic revenue growth and 12 to 14% organic growth in CAG diagnostics recurring revenues. We're also targeting a 50 to 100 basis point improvement in operating margins on a comparable basis, building on the strong profit gains through the pandemic. as we continue to invest towards the long-term development of companion animal healthcare globally. Our EPS outlook of $9.27 to $9.59 per share reflects 12 to 16% comparable EPS growth, including an estimated 15 cents per share or 2% EPS growth impact related to higher projected international tax rates. We'll discuss our 2022 financial outlook later in my comments. Let's begin with a review of our fourth quarter and full year results. Fourth quarter organic revenue growth of 10.5% was driven by 13% overall CAG gains and 13% growth in our water business. These gains were moderated as expected by a 19% organic decline in LPD revenues, reflecting comparisons to high prior year results that benefited from the ramping of African swine fever testing in China, as well as by a $5 million year-on-year decline in human COVID PCR testing revenues. Strong CAG-diagnostic recurring revenue growth reflected 13% organic gains across U.S. and international regions compared to 21% organic growth levels in the fourth quarter of 2020. Strong Q4 CAG results were also supported by 21% gains in IDEXX VetLab instrument revenues and 13% organic growth in veterinary software and diagnostic imaging revenues, in addition to benefits from our recent EasyVet acquisition. For the full year 2021, overall CAG revenues increased 19% organically, driven by 18% organic growth in CAG diagnostic recurring revenues, reflecting high gains across our major modalities and regions. Strong U.S. CAG diagnostics recurring revenue growth in the fourth quarter was aided by solid year-on-year gains in clinical visits and continued positive demand trends, which are supporting high levels of clinical revenue growth at the practice level. Same-store U.S. clinical visit growth was 2.2% in Q4 compared to high prior year growth levels. On a two-year basis, U.S. same-store clinical visits increased at 5.5%, with solid gains across wellness and non-wellness categories. An increased focus on healthcare services, including diagnostics, supported an 8% same-store increase in overall veterinary clinic revenues in Q4 and nearly 10% gains in clinical diagnostic revenues, which increased 14% on an average two-year basis. Expanding demand for clinical services and benefits from IDEC's innovation and commercial engagement supported a 1,050 basis point premium of IDAC's US CAG diagnostic recurring revenue growth to US clinical visit growth in the quarter. In terms of practice level trends, we did see some modest impact from the recent Omicron wave on clinical testing volumes in international regions in Q4, which has continued in early 2022. We've also seen some moderation in clinic visit growth in January in the U.S., including near-term impacts from higher COVID cases on practice-level staffing. We're monitoring these dynamics, which we don't see as indicative of changes in strong underlying demand trends. Globally, IDEXX achieves strong organic gains across our major testing modalities in Q4, resulting in exceptional four-year growth results. IDEXX Global Reference Lab revenues increased 12% organically in Q4, reflecting double-digit gains in the U.S. and high single-digit organic growth in international regions compared to strong prior year growth levels. Reference Lab gains continue to be driven by solid same-store volume growth, including benefits from the expansion of IDEXX 360 program agreements. For the full year 2021, Global Lab revenues increased 70% organically, reflecting consistent high gains across U.S. and international regions. IDEXX VetLab consumable revenues increased 15% on an organic basis in Q4, reflecting double-digit gains across U.S. and international regions. Strong consumable growth reflects increases in testing utilization, sustained high customer retention levels, and expansion of our global premium instrument install base. These dynamics supported 20% four-year organic growth at IDEXX VetLab consumable revenues in 2021. IDEXX had another quarter of outstanding instrument placements, building on this momentum. We achieved 5,258 premium instrument placements in Q4, up 29% from prior year levels, reflecting robust gains across U.S. and international regions. We achieved strong global placement growth across our major platforms year-on-year, with Catalyst up 8%, SETAview up 20%, and Premium Hematology up 72%, supported by the continued global rollout of ProSite 1. The breadth and quality of CAG instrument placements supported strong gains in our economic value metric. New instrument placements and continued very high customer retention levels drove a 14% increase in our global premium instrument install base in 2021, setting a foundation for continued strong consumable growth as we move forward. Rapid assay revenue increased 10% organically in Q4, reflecting continued solid gains in the U.S., aligned with broader increases in demand for diagnostic testing and high growth in international regions. For the full year 2021, rapid assay organic revenue growth was 17%, supported by high volume gains for canine 40X, feline, and specialty testing. CAG diagnostic recurring revenue growth remains primarily volume-driven, augmented by moderate net price improvement of approximately 3% in key regions like the U.S. Looking ahead to 2022, we're planning for net price improvement in the range of 3% to 4%. reflecting higher list price increases to reflect higher service costs and continued investment in service quality and product innovation. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 13% organically and 30% as reported in Q4, including benefits from the EasyVet acquisition. Continued strong gains in recurring software and diagnostic imaging services and high comparable growth in PIMS placements were moderated to a degree by tough compares related to strong prior year diagnostic imaging placements. For the full year 2021, veterinary software and diagnostic imaging revenues expanded to over 200 million of 15% organically and 27% as reported as we continue to advance integration of information technology and insight as a key feature of our diagnostic solutions. Turning to other business segments, water revenues increased 13% organically in Q4 compared to flat organic growth in last year's fourth quarter, as this business continues to track back towards pre-COVID growth levels. Business growth was supported by solid gains across compliance and non-compliance testing categories. For the full year 2021, water revenues increased 12% organically, compared to a 2% organic decline in 2020. Livestock, poultry, and dairy revenues decreased 90% organically in Q4, compared to 13% organic growth levels in Q4 of 2020. As expected, dynamics in our China LPD business, including the lapping of high priority demand for African swine fever testing, offset growth in other global regions. For the full year 2021, LPD revenues declined 9% organically compared to 11% gains in 2020. We're planning for continued challenging year-on-year comparison LPD revenues in the first half of 2022, which is factored into our overall revenue outlook. Turning to the P&L, sustained high revenue growth drove solid operating profit gains compared to strong prior year levels as we advanced plan investments aligned with our growth strategy. Operating profits increased 8% as reported and 9% on a comparable basis in Q4, driven by continued solid gross profit gains. Gross profit increased 12% in the quarter, reflecting strong revenue growth and a modest overall increase in gross margins. We benefited from continued high CAG diagnostic recurring revenue growth, moderate net price improvement, and higher veterinary software margins, including positive impacts from our expanding SAS customer base. These factors were moderated by business mix impacts from high CAG instrument revenue growth and lower LPD and human PCR revenues. Operating expenses increased 15% on a reported and comparable basis in Q4. As planned, we saw relatively higher levels of operating expense growth as we advanced investments in R&D, enhanced our global CAG sales and marketing capability, and integrated the EasyVet acquisition. We anticipate sustaining a relatively higher rate of OPEX growth in 2022, aligned with our strong global growth momentum. Operating expense investments drove a 70 basis point contraction in comparable operating margins in Q4. For the full year 2021, our operating margins reached 29% of 220 basis points on a comparable basis for the year and up approximately 560 basis points on a comparable basis from pre-pandemic levels in 2019. We're targeting to build on the strong performance in 2022 as we invest towards the high return long-term growth potential in our business. Q4 EPS was $1.89 per share, including $0.08 per share in tax benefit related to share-based compensation activity. For the full year 2021, EPS was $8.60, up 29% on a comparable basis. Full year EPS results included $32 million, or $0.38 per share, in tax benefit related to share-based compensation activity, which provided 360 basis points of effective tax rate benefits. Foreign exchange FX reduced revenue growth by approximately 1% in Q4, resulting in a 2 cent per share profit impact, net of a hedge loss of approximately $500,000. For the full year of 2021, foreign exchange rate changes increased EPS by 16 cents per share, net of foreign exchange hedge losses of 7 million. Given the recent strengthening of the US dollar, we're planning for a 1.5% FX revenue growth headwind in 2022, with approximately 2% to 2.5% year-on-year growth headwinds in the first half. While previously established hedge positions will mitigate these impacts on profits, our initial 2022 outlook incorporates an estimated $0.08 net unfavorable EPS impact from FX at the rates noted in our press release. Free cash flow was $636 million for 2021, or approximately 85% of net income reflecting $120 million in capital spending, including $18 million in real estate purchases. We've maintained a strong balance sheet. We ended 2021 with leverage ratios of 0.9 times gross and 0.7 times net of cash, with $144 million in cash at the end of the year. In Q4, we established a new five-year $1 billion revolving credit facility, which provides relatively improved borrowing rates. Our 2022 interest expense outlook incorporates these benefits, current forward interest rates, and expectations for a net leverage ratio of one times next year. In Q4, we allocated $245 million to repurchase 391,000 shares in the quarter. We plan to continue to allocate capital to share repurchases as part of our financial approach, which is reflected in a projected 1% to 1.5% reduction in our diluted shares outstanding for the full year 2022. Turning to our 2022 outlook, we're providing initial guidance for reported revenues of $3.5 billion to $3.565 billion. This outlook reflects a targeted organic revenue growth range of 10% to 12%, carryover benefits of approximately 0.5% from 2021 acquisitions, and an estimated 1.5% revenue growth headwind from FX. Our organic growth outlook reflects an estimated growth range of 12 to 14% for CAG diagnostic recurring revenues. The higher end of this range aligns with sustaining the strong year-on-year growth trends we achieved exiting 2021 and incorporates additional targeted benefits from moderately higher net price realization and investments in global CAG sector development. Our overall organic growth outlook also factors in continued benefits from expansion of our premium instrument install base and solid growth in our water business. These positive factors are partially upset by expectations for continued year-on-year pressure on LPD revenues in the first half of 2022 and a projected contraction in human PCR testing revenues, reflecting our overall strategic growth focus on our core businesses. Our reported operating margin outlook for full year 2022 is 29.7% to 30.2%, reflecting a targeted 50 to 100 basis points of annual comparable operating margin improvement building on our strong operating margin gains in recent years. We expect operating margin improvement will be supported by solid gross margin gains as we advance investments in our global commercial and innovation capability and ensure high levels of operational business continuity as a priority. We've incorporated anticipated inflationary cost impacts as well as benefits from relatively higher net price gains in our overall operating margin outlook. Given exit rates in our OpEx spending, and year-on-year operating profit comparison dynamics, we're planning for operating margin improvements to be primarily driven by gains in the second half of 2022. Our preliminary EPS outlook for 2022 is $9.27 to $9.59 per share. An increase of 8% to 11% is reported. Our EPS outlook factors in an increase in our overall effective tax rate from 17.5% to an estimated 21.5 to 22% in 2022. Approximately 100 to 150 basis points of this increase relates to projected impacts from international tax changes. We're also projecting lower tax benefits from share-based tax compensation activity. Our EPS outlook reflects projected 2022 stock-based compensation tax benefits of $10 million or approximately 12 cents per share compared to high realized 2021 tax benefits of $32 million, or $0.38 per share. As noted, we've also incorporated an estimated year-on-year negative impact of $0.08 per share from FX net of established hedge positions. Adjusting for these factors, our outlook is for EPS growth of 12% to 16% on a comparable basis, including an estimated $0.15 per share, approximately 2% EPS growth impact from international tax rate changes. Our 2022 free cash flow outlook is for a net income to free cash flow conversion ratio of 75% to 80%. This reflects estimated capital spending of $180 million, or approximately 5% of revenues, including $50 million related to a new warehouse and manufacturing site expansion aligned to support our high growth. Adjusting for this major project, our normalized net income to free cash flow conversion ratio is aligned with our longer-term 80% to 90% targets. That concludes our financial review. I'll now turn the call over to Jay for his comments.
spk05: Thank you, Brian, and good morning. IDEC sustained its strong performance in Q4, capping an exceptional year for the company. For the full year, we delivered 16% organic revenue growth, 29% comparable EPS growth supported by solid operating margin gains, and 59% ROIC. These results reflect the attractiveness of our businesses, including our core CAG business, which is sustaining very strong growth trends, benefiting from our commercial expansion and an expanding innovation portfolio. We're well positioned to build on this momentum in 2022, as reflected in our financial outlook. This morning, I'll recap our recent performance and highlight key areas of business focus moving forward. including advancement of new innovations and the ongoing expansion of our global commercial capabilities. Both of these are strategic elements of our plan to develop the substantial long-term market opportunities still before us. Let me begin with a brief update on sector trends. Overall, global companion animal healthcare trends remain strong, driven by ongoing robust demand at veterinary clinics for healthcare services, including diagnostics. As Brian highlighted, U.S. same-store clinical revenues increased 8% in Q4, supported by 2% growth in same-store clinical visits compared to very strong prior-year growth levels. Diagnostic same-store growth continues to expand at a higher pace of nearly 10%. IDEC's U.S. CAG Diagnostics recurring revenue growth is leading this expansion, reflected in 13% organic gains in Q4. building on 21% gains in Q4 of 2020, as we provide highly desired diagnostics and information management platforms that support our customers care mission. We're seeing sustained strong demand trends for clinical service globally, building on the step up achieved through the pandemic. As highlighted in data shared in our earnings snapshot, this includes sustained approximately 2% acceleration in U.S. diagnostics revenue per clinical visit in 2021, building on higher 2020 gains. This solid momentum gives us confidence in investing towards accelerated global CAG sector development and is reflected in our outlook of 12 to 14 percent global CAG diagnostics repairing revenue gains in 2022 at the high end of our long-term goals. Like many sectors of the global economy, Veterinary clinics continue to work through the challenging dynamic of increased clinical demand in the face of staffing challenges, including near-term management impacts from the surge of the Omicron variant. It's clear that strong clinical service demand will be a priority for clinics moving forward. IDEXX remains committed and extremely well positioned to support the growth of our customers through our focus on high customer service levels and solutions that enhance clinic productivity. As we look forward, we're expanding our global commercial capability aligned with these strong demand trends. Our investments in Germany, France, and South Korea in the first half of 2021 continue to pay off as expanded commercial footprints in each country enable significant increases in customer contacts and reach to revenue. Critical elements of our high touch account management philosophy. We're tracking towards completion in early 2022. of the already communicated second wave of expansions in three additional countries, with more to come. These are holistic initiatives that not only involve the addition of customer-facing professionals across multiple job types, such as account managers, professional service veterinarians, and field service representatives, but also include the extension of marketing programs and new field tools, such as IDEXX 360, and the addition of more extensive reference on courier routes and expanded service levels. Increasing our international commercial footprint while maturing our approach will continue to be a key priority beyond Wave 2 countries currently nearing completion. To that end, I'm pleased to share that we are also augmenting our commercial leadership team with an experienced commercial executive in Asia Pacific CAG who will join IDEXX this quarter. As we expand, our commercial team continues to deliver the day, reflected in over 5,000 premium instrument placements in Q4. by far our largest quarterly placements ever achieved. Premium instrument placement growth of 29% includes comparable growth across U.S. and international regions and resulted in 14% growth in our global premium installed base with strong performance across each of our instrument platforms. These exceptional results were delivered despite access challenges. They demonstrate strong commercial execution as well as the fact that customers are increasingly choosing IDEXX innovations to support increased clinical demand today while investing for future business needs. ProSciOne is a great example of this. Our ProSciOne launch has gone exceptionally well. ProSciOne's performance and reliability as used in the demanding environment of a practice has met or exceeded all goals. And feedback remains highly positive as customers love its easy use and how it fits into the veterinary clinic workflow. We see mid-90% global attach rates with chemistry analyzers, and this trend demonstrates Procite 1's importance in building a full diagnostic workup. Furthermore, the Procite 1 launch benefits from programs like IDEXX 360, which not only provides veterinarians with a flexible, customer-friendly way to add this innovative analyzer to their clinics, but also benefits growth across IDEXX testing modalities. Our global Procite 1 regional rollout is now nearly complete. and we have delivered over 2,500 instruments globally since launching in late Q1 of 2021. A growing installed base of premium instruments supports a robust stream of future consumables usage, which gives us confidence in guided ranges for CAG recurring revenue growth. In addition to deriving placements and adoption, our commercial team continues to educate our customers on the benefits of preventive medicines, The preventive care initiative remains our primary vehicle for driving a preventive agenda in the clinic and provides sales professionals an opportunity to engage in thorough conversations with broad participation from practice staff. Despite restricted access to clinics, we drove approximately 125 new U.S. enrollments in the quarter. We're also developing plans to simplify the enrollment process for busy customers, and we look forward to deploying this and continuing to support this broader preventive care effort in 2022. We also see continued momentum in software expansion, as our innovative products are helping customers improve clinic efficiency and pet owner communication. The onboarding of EasyVet has gone very smoothly, and subscriptions are tracking favorably to our high expectations. Customers appreciate the advanced capabilities and intuitive workflow EasyVet provides. Eighty-one percent of PIMS placements were cloud-based in a quarter, demonstrating that we are well-positioned to support customers in their shift to the cloud. This trend provides a significant growth opportunity and excellent profit flow. It puts robust and easy-to-use information management products in the hands of our customers that enable them to focus on providing the highest levels of patient care, enabled by diagnostics to improve health outcomes. Our software portfolio is a strategic area of investment and focus for RDX. veterinarians have never been busier and have a deep need and appreciation for software solutions that are easy to use and built on contemporary technology stacks. They look to these solutions to support patient care, staff productivity, and internal as well as pet owner communications. Our strategy is to bring enterprise PIM software solutions to our customers that work seamlessly with a broader set of business and clinical applications, our own or third parties, that veterinarians use to run their practices. VetConnect Plus, our diagnostics results, clinical decision support, and ordering portal is a great example of this. VetConnect Plus was launched almost 10 years ago. It's integrated from a workflow standpoint in IDEX and third-party PIMS and is now being used in over 30,000 practices globally. Customers who use our software and diagnostic solutions together correlate with higher growth profiles, supporting workflow optimization for our diagnostics testing platforms. Our diagnostic imaging business, which includes our industry-leading Webpack software solution, also experienced an excellent quarter, demonstrating the preference customers had for our premier low-dose imaging solutions. Solid placements in the quarter supported full-year placement growth of 35% and double-digit year-over-year gains in recurring revenue. We also had strong growth in Webpack subscriptions for Q4, up 18% versus the prior year, and with continued customer retention rates in a high 90% range. Growth in the installed base, a profitable revenue stream, and increased utilization of services have helped IDEX WebTACs become an important part of our enterprise software ecosystem. In addition to ensuring the successful rollout and adoption of these recent innovations, we were thrilled to launch a series of new product and service enhancements in VMX last month. Each of these innovations highlight IDEXX's commitment to continually invest in our service and product offerings, with a particular focus on providing insights and decision-making aids to help customers deliver a higher standard of patient care. These enhancements include an expanded oncology testing platform with additional tests and aids for veterinarians to better identify, stage, treat, and monitor several prevalent cancer types. An updated 40X Plus test with improved parameter performance for Anaplasma and the addition of clinical decision support for 40X Plus and NeuroNetwork 6.0 for CetiView, which has now been trained on 800 million urine sediment images. Improving the performance of our products is central to our strategy, and we're also supporting greater efficiency, which helps drive higher adoption and customer satisfaction. Some examples. The new catalyst, SDMA, brings reagents on board the test, reducing the number of steps to run the test and time to results, while also reducing storage space and waste due to the removal of separate reagent cups. The improved VetConnect Plus mobile app provides an enhanced user experience, improved mobile capability, and easier pet owner communication. And finally, coming later in 2022, our 4DX Plus test will allow for extended room temperature storage. The addition of these time-saving technologies demonstrates our technology-for-life approach to product and services designs. Notably, the improved 40X Plus product represents our fifth update to the Heartworm Snap product first launched in 1992. While this test already represents the gold standard for vector-borne disease rapid testing, we remain focused on continuous improvement to support our customers in delivering improved pet health outcomes. Underpinning our strong business performance is a prioritized focus on providing continued high-level service to our customers. A key element achieving these service levels is consistent, strong execution across our supply chain, which we saw again in Q4 through high product availability and strong order turnaround times. In order to build this capability and support growth in the future, we plan to invest in 2022 in the expansion of our manufacturing footprint and lab capacity. while also maintaining strong frontline measures to support high service levels. And while we anticipate some inflationary dynamics and supply chain headwinds going forward, we've captured these impacts in our outlook and believe we are well positioned to build upon our year-end margins. Overall, we're very pleased with the momentum and execution in our business and excited about our plans to build on our progress in 2022. Before we open the line for Q&A, I'd like to say thanks to our employees for another top-notch year in pursuit of our purpose and in service to our customers. The IDAX organization remained highly focused on our customers' needs and continued to perform at a very high level during another dynamic and demanding year. The team's perseverance is seen both in the results highlighted this morning as well as our high levels of engagement as a team, and I'm proud to be able to share today's excellent results on behalf of the whole team's hard work. That concludes my opening remarks. We now have time for some questions.
spk09: Thank you, and I'll begin the question and answer session. If you do have a question, press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you do have a question, press star then 1 on your touchtone phone. And our first question is from Chris Schaaf from JP Morgan.
spk10: Great. Thanks so much for the questions. I just want to do a little bit more color on the magnitude of impact you're seeing from Omicron to the near-term results. So basically, how much of a step down in visits are you seeing currently? And then maybe just following on that, just kind of broader question, can you just elaborate a little bit more on your expectation for vet visit growth as we look out to 2022 and we start to think about annualizing as maybe more normalized comps than we've seen over the past few years? Thanks so much.
spk05: Good morning, Chris. We haven't quantified it. We did see some impact on testing volumes in the international regions for Omicron in late Q4. It primarily manifested itself in a modest drop-off in some lab volumes, and this trend appears to be continuing just in early 22, January. as it affects the U.S. clinical visit growth. The thing to keep in mind is the underlying customer demand is very strong. What vet practices tell us is that they're busy as they've ever been in terms of forward booking. We're seeing month, two months forward booking of patients and pet owners trying to get into practices. So we think practices... have a playbook in which to deal with this. We've all seen this movie a couple times at this point. They've done the curbside drop off and pick up in some cases. There's obviously some staffing issues that they're dealing with. We think that that's more of a temporary basis. And we're in a really good position also to be able to support them with our field service organization and technology solutions that help them be more productive and manage the business.
spk08: And to your question, Chris, our 12% to 14% organic growth outlook for CAG DX recurring revenues assumes positive clinic visit growth, you know, in addition to, you know, short performance, ongoing performance by our teams and helping to grow our revenues faster than that.
spk10: And maybe just one really quick follow-up. I know last year you talked about new instrument placement growth adding, I think, about a percent or so to overall revenue growth. Can you just elaborate on how you're thinking about new instrument placements and its contribution to 2022? Thanks so much.
spk08: You know, I'll let Jay talk to the color of the momentum that we have on instrument placements and our priorities. In terms of our outlook, we didn't break it out specifically what we're We're targeting continued strong placement growth. The revenue growth may lag the placement growth somewhat as we see the expansion of programs like IDEXX 360 and have some mix effects, you know, from higher growth in international markets. But we're targeting solid instrument year-on-year growth, and that's factored into the overall guidance.
spk05: Yeah, we saw record placements in Q4 of 2021, you know, over 5,000. you know, on the back of record hematology placements and catalysts and CityView, pretty much across the board. And we think that that momentum, you know, will remain intact. Practices are clearly investing in technology to help them from a capacity standpoint. They're looking to us and our solutions that, you know, not just support the best standard of care, but also support workflow and staff productivity and enable them to handle higher patient volumes.
spk09: Thanks so much for the questions. Our next question is from Erin Wright from Morgan Stanley.
spk03: Great. Thanks so much. In the inflationary environment that we're in and you anticipate higher price realization in the 2022 guide, But can you quantify some of the offsetting factors, the higher input cost, labor, freight, net-net? How are these dynamics impacting you from a margin perspective in 2022 just based on your guidance?
spk08: So we are seeing some impact selectively in our business. I think you highlighted some of the key drivers, but freight and distribution costs have been a factor. We're monitoring higher labor input costs. I think that's something that we... anticipate will be something we'll need to manage effectively. And we have selective impacts in different parts of our business, but we do use electronic components and things of that nature. I think a lot of our focus, Aaron, is on making sure we have continued very high business continuity, reliability, so we're really pleased with that. We're at 99% and customer reliability, and that's our primary focus. And so we do have some impacts, and as you pointed out, we have a relatively higher expectation for net margin improvement that helps to mitigate that and is reflective to a degree of that and enables us to support the solid operating margin improvements that we're targeting next year.
spk03: Okay, great. And then more of a philosophical question here, so bear with me, but bigger picture, Thinking about broader animal health and more specifically diagnostic trends, and while there will be an element of normalization here near term, just given the tough comps and barring any sort of Omicron volatility, but it does seem that you suggest that we are emerging from the pandemic at a faster underlying growth rate for companion animal diagnostics that may be pre-pandemic over the longer term. Does this change how you're thinking about your five-year outlook and And how are you thinking about some of those changes over the course of the pandemic that may be actually more structural in nature?
spk05: Thanks. Yeah, I'll take that. Good morning, Erin. You know, there's a couple of, I think, longer-term trends that the pandemic probably accelerated that were in effect and, if anything, as a result of new pet adoptions and the pivot within practices. the more service versus retail type product sales, I think have just accelerated as a result of the pandemic. Clearly as veterinarians focus on medical services in patient care, diagnostics is a big piece of that. I think they've recognized that diagnostics is obviously a very high margin, very high profit center within their practices. And so I think the combination of more patients, pet owners wanting the higher standards of patient care, veterinarians pivoting to services and the role the diagnostic plays have been important factors. And then you layer on top of that our strategy as a company, which both includes continuing to innovate both in terms of testing platforms and information management and our commercial strategy, which is a high-touch model and being able to work with veterinarians to help them use these tools. both business and medical-wise, I think we continue to see very strong trends that are higher than pre-pandemic.
spk03: Okay, great. Thank you.
spk09: Our next question is from Michael Reiskin from BOA.
spk02: Great. Thanks for taking the question, and congrats, Jay and Brian, on the quarter and the solid guide. I want to ask about some of the new products and new initiatives you announced earlier this year at VMX or around VMX, including the PetDX partnership. It's slightly different than some of the things you've done in the past, and it does get to a point where we have questions from investors in terms of additional testing modalities, additional opportunities beyond what's already on the market. Could you talk about the oncology opportunity or if there's others beyond that that you're thinking of in terms of you know, some of the untapped markets and diagnostics. How do you see this partnership playing out over the next couple of years? And just sort of, you know, of the things you highlighted earlier this year, how meaningful is that a contributor to 2022 overall? Or is that more of a long-term factor?
spk05: Sure. Good morning, Mike. Yeah, cancer is the most prevalent cause of death in dogs. So there are about 6 million positive cases of cancer of dogs just in the U.S. So it's very significant. And, you know, if you take a look today just at a high level in terms of the process by which the veterinarian diagnoses and treats, it's very complex. It's fragmented, and there aren't, you know, a complete set of diagnostic tools to help support that. So we think that there is a longer-term, very attractive market opportunity to be able to help veterinarians, you know, navigate cancer diagnosis and treatments. And so we're building off our expertise in cancer pathology which is really more today geared towards cancer identification and really trying to cross the continuum of care which is the identification and staging and treating and monitoring and bring solutions to that full value chain of care. So the partnerships we announced we think bring best in class technology to support that process. We're excited by it. It's still early stages in terms of market development, so I think it's less about the revenue opportunity near term and more about supporting the fan areas and helping them navigate what's very complex and what is increasingly pet owner driven demand for these types of services. I think over time it's a quite attractive You know, we bring, I think, incredible technical expertise to be able to support the veterinarian, you know, through this. And we're excited by what we've learned and continuing to build off those capabilities over time.
spk02: Great. Thanks. And then a follow-up question on the guide again. The 12 to 14 percent recurring revenue in CAG is a very solid guide, I think, relative to initial expectations. You touched on, I think you commented that you expect clinical visit growth in the market to be positive, and you cited price again, but could you talk about some of the other moving pieces there? Just trying to get at the bridge from that clinical visit growth to the CAG or current revenues, you know, whether it's diagnostic frequency, diagnostic utilization, just sort of, you know, the CAG premium, if you could help us bridge what are the moving pieces there, that would be helpful.
spk08: Yeah, Mike, so I think the way to think about this is the as we were coming out of 2021 and clearly we had a big step up in demand through the pandemic that we're confident that we can build off of that. So I think that's that's one key theme. And as you look at the, you know, calibrate this to the exit rate of our business in Q4, we had 13% CAGDX recurring growth off that higher base. So we were entering the year with that kind of trajectory. And we see some positive drivers here. We're investing in international growth and feel good about the traction and the potential there. And we'll have some incremental benefit from net pricing that we highlighted. And so the higher end of the range really reflects kind of building off of the momentum that we had, I think, to build on kind of Aaron's question earlier. One of the metrics we share in our snapshot is just the average revenue per clinical visit in veterinary clinics in the U.S. And that increase, as Jay noted, nearly 200 basis points from pre-pandemic levels, from 4% to about 6%. So there's some underlying positive service trends here, and I think what you're seeing in our outlook is confidence that we can execute well, continue to execute well, invest in ways that support that. And if we can sustain that type of momentum, we think we can achieve those higher growth levels. And I think the lower end of the range really is more a calibration of going back towards more pre-pandemic type growth. It's not what we're necessarily projecting, but I think that that's a potential scenario as well. But all of this is building off of the higher demand. So some of this will come down to our execution and I think things like Omicron are near-term dynamics that we'll just need to manage through. As Jay mentioned, we don't see that as indicative of a longer-term or an underlying demand issue, but the momentum in our business we feel very positive about, and we're investing towards that. I think we've got a good strategy to keep building on that progress.
spk02: Great.
spk09: Thanks so much. Appreciate it. Our next question is from John Block from Stiefel.
spk06: Jay O' hey guys great good morning thanks um first question is on wellness clinical visits, they can continue to do very well. Jay O' The two year average actually accelerated from the third quarter 21 levels, so you know just love management thoughts on staffing capacity issues at that practices, we continue to hear a lot about those I think others do as well. Jay O' You know Jay or Brian how difficult are they because you would think wellness would be impacted, but again and accelerated and. Maybe do you believe the underlying industry demand from consumers is actually potentially higher from what we're seeing work its way through? And then I've just got a follow-up. Thanks.
spk05: Yeah. You know, John, in terms of the wellness, there's a couple things that are potentially driving that. Obviously, there's a lot of puppies and kittens who've now become, you know, dogs and cats. And I think there's a lot of pet owners who want to get their pets into the practice and checked up and There's been an emphasis on wellness visits in the U.S. now for quite some time, so it's not new. Obviously, there are some capacity constraints, and some of these visits get pushed off a month or six weeks. And I think over time, that'll get relieved. But I think what we see is the underlying demand for wellness and checkups is there and, you know, have been very robust, as you pointed out, and we expect that to be able to sustain. Certainly, we and others in the marketplace are really focused in emphasizing preventive care as a, you know, an important part of patient health.
spk06: Okay. Fair enough. And the second one builds on Chris's earlier question. So, Brian, I'll try to maybe push you a little bit more. The CagDx recurring guide was I think solid in a lot of people's view. It implies a two-year average of in and around 15.5%. You helped, I thought, a lot on the cadence of op margin expansion in 2022. You called out the comps. But anything specifically to call out for CAGDX recurring two-year average for 1Q? I mean, you got a wildly tough comp. You called out Omicron headwinds that persist, Jan, maybe even to February. You know, could this be a situation where we're looking at an organic revenue CAGDX of mid-single digits when we take that all into account? Or maybe just phrase it, frame it versus the two-year average of 15.5 for full year. Thanks, guys.
spk08: Look, the way I think we're thinking about this is we're building off this higher base, so we clearly had a period there where we needed to look at some two-year metrics here to calibrate for 2020 effectively, you know, the pandemic dynamics. And now we're moving into sort of that phase of building off the higher base. I would say that, you know, there was some incremental benefit last year in Q4 from just the puppy boom. And, you know, that I think is probably the key factor that sustains in the near term. But for the most part, we're normalizing off that higher base. And so I think that 12% to 14% is that full year number. We're not, you know, projecting by quarter, but I think we're you know, that's reflective of the overall momentum of the business. I think the Omicron dynamic is a near-term dynamic in the U.S. that we didn't really see significantly in Q4, and we're seeing, you know, some effects early here. We'll sort that out as we go through the quarter. But I think the underlying momentum and trends we're targeting to remain strong, and, you know, we'll work through these near-term dynamics as they play out.
spk06: All right. Thanks, guys.
spk09: Our next question is from Nathan Rich from Goldman Sachs.
spk04: Hi, good morning. Thanks for the question. Brian, maybe starting with the OPEX guidance, I think you mentioned kind of the higher levels that you saw in the latter half of this year will continue into 2022. You know, I guess it's kind of running in the back half of 2021 was in the low 30% range in terms of revenue. Can you maybe talk about what you see the run rate being going forward both for 2022 and beyond? Because OpEx as a percent of revenue has come down a lot relative to historical levels. Do you see that getting back to historical levels? Or do you kind of feel like, you know, the current rate that we're at is sort of what to expect as we go forward from here?
spk08: So I think the way to think about it, Nate, is we had a Q4 growth rate year-on-year of about 15%. And we're still working through some compares to some relatively more controlled growth OPEX levels in the comparable prior year. And so entering into Q1, we expect kind of that same dynamic. We'll have a relatively higher rate of OPEX growth. That'll be our most challenging compare. And in general terms, I think for the full year, you should expect us to be trending back you know, more in line with kind of our overall revenue growth. We want to lean in and invest, you know, towards future growth. I think our margin dynamics will, as they've been in the past, be supported by solid gross margin improvement. And, you know, so I think longer term, you know, consistent with our longer term outlooks that we've shared at Investor Day, I think OPEX growth closer to revenue growth is a reasonable expectation.
spk04: Okay, that's helpful. And then, Brian, I don't know if you have any commentary on how we should expect kind of the weighting of earnings this year between like the first half and the second half, just kind of given the commentary on kind of the early first quarter trends as well as the higher OPEX levels. Is that going to kind of significantly change the typical seasonality that you usually see in the business?
spk08: Yeah, it's more driven by compares than necessarily a change in seasonality, but I did mention that our margin improvement would be in the second half. And as we just discussed, I think our more challenging compare will be in Q1, you know, in terms of the quarters this year. But that's, again, more reflective of kind of a year-on-year, you know, dynamic. The one thing to highlight specifically is we'll still be working through On LPD, we have the decline in the African swine fever revenues that really started in the third quarter of 2021. We'll still be working through those compares, so that'll have a dynamic as well.
spk04: Okay, great. Thanks a lot.
spk09: Our next question is from Ryan Daniels from William Blair.
spk07: Hey guys, Nick speaking for Ryan. Most of my questions have been asked, but I guess in the release you mentioned you're still working your way through the EasyVet integration, at least on the OpEx side. I was wondering how far along are you in that until you kind of fully integrate and you're no longer dealing with those expenses?
spk05: Good morning, yeah. The EasyVet integration has gone quite well. We're far along in terms of really integrating our sales approach in organizations and product roadmaps. And that continues to be received extremely well in the marketplace. And you saw from the growth numbers that there's a lot of traction. Behind that, it's a key part of our strategy. And over 80% of our PIMS placements were cloud-based placements this quarter. So really good traction, far along in the integration and going well.
spk07: Great, thanks. And I guess kind of just a quick follow-up on the wellness visit caller. With kind of that strong, you know, stacked wellness growth, I was wondering if you guys are seeing any change in the proportion of those that have included, you know, a chem panel. Like with the large growth, are you seeing that kind of proportion come down, or are you kind of maintaining what the historical rate was with that growth?
spk05: Yeah, I mean, it's been pretty constant in terms of, you know, panel mix. It's something we don't break out. These are largely configured panels for wellness. So when customers, you know, use that, you don't get a lot of variation quarter to quarter. And so with that, I'd like to thank everybody for joining this morning's call. I know we have some employees who are listening. I'd like to say thank you to them for their excellent performance and continued passion for our purpose. Day in and day out, our team delivered excellent results, allowing to our long-term opportunity while also demonstrating an unwavering commitment to our purpose in navigating an evolving landscape due to continued pandemic impacts. I'm very grateful for the IDEX team and the purpose which drives our work. And so with that, we'll conclude the call. Thank you.
spk09: Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating. And you may now disconnect.
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