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spk01: Good morning and welcome to the IDEX Laboratories second quarter 2024 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, 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 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 second quarter 2024 results and updated 2024 guidance, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent prior year period 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. Today's prepared remarks will be posted to the Investor Relations section of our website after the earnings conference call concludes. I would now like to turn the call over to Brian McKeon.
spk06: Good morning, and welcome to our second quarter earnings call. Today I'll take you through our key two results and review our updated financial outlook for 2024. IDEX delivered solid organic revenue growth and strong comparable profit gains in the second quarter. In terms of highlights, overall revenues increased 7% organically, supported by 7% organic growth in CAG diagnostic recurring revenues and 10% organic gains in our water business. Solid CAG revenue growth was driven by global benefits from IDEX execution drivers, reflected in sustained solid new business gains, record second quarter premium instrument placements, and double-digit growth in recurring veterinary software and diagnostic imaging revenues. Partially offsetting these benefits, CAG diagnostic recurring revenue growth in Q2 was constrained by impacts from near-term macro and sector headwinds, which contributed to a 2% decline in U.S. same-store clinical visit growth levels in the quarter. IDEX's operating performance, reflected in solid comparable operating profit gains, continued to be strong in Q2. EPS in the quarter was $2.44, down 9% as reported, including a $0.56 per share impact from a $62 million discreet expense accrual related to an ongoing litigation matter. Comparable EPS growth was 15% in the quarter, ahead of our expectations, supported by solid margin gains and benefits from lower net interest costs and shares outstanding. IDEX continues to make progress expanding our business, advancing our innovation agenda, and delivering strong comparable profit gains as we work through near-term macro and sector headwinds that continue to pressure clinical visit levels. We've updated our 2024 financial outlook to incorporate recent sector trends, which we estimate at midpoint will constrain overall organic revenue growth to the lower end of our original organic growth guidance for 2024. Our updated P&L guidance maintains our outlook for solid comparable operating margin gains this year and incorporates favorable adjustments for updated foreign exchange, net interest expense, and effective tax rate estimates. We'll review our updated guidance detail later in my comments. Let's begin with a review of our second quarter results. Second quarter organic revenue growth of 7% reflected 7% organic CAD gains, 10% organic growth in water, and improved 3% organic growth in our LPD business. CAD organic revenue growth was supported by 8% organic gains in veterinary software and diagnostic imaging revenues, driven by 12% organic growth in recurring revenues. CAD instrument revenue increased 5% organically, building on high priority replacement levels. CAD diagnostic recurring revenue increased 7% organically in Q2, supported by average global net price improvement of 5% to 5.5%, with U.S. net price realization at the lower end of this range. CAD diagnostic recurring revenue growth in Q2 was supported by 10% international organic gains, including approximately 1% of growth benefit from equivalent days effects in international regions. Strong international growth reflects benefits from net price realization and continued solid volume gains. International growth continues to be driven by IDEX execution, reflected in strong new business gains and high premium instrument placements, which supported a double digit -on-year expansion of our global premium instrument install base. U.S. CAD diagnostic recurring revenue growth was .2% in Q2, net of a .5% U.S. equivalent day growth headwind in the quarter. IDEX growth was supported by solid new business gains, sustained high customer retention levels, and benefits from net price realization. IDEX growth continues to expand at a high premium to U.S. same-store clinical visit growth levels, which decline .8% in Q2. In the U.S., diagnostic utilization per clinical visit continues to expand solidly at the clinical level. This is reflected in a .5% -on-year increase in diagnostic revenue dollars per clinical visit, including diagnostics. While diagnostic frequency per clinical visit declined modestly in Q2, diagnostic frequency per wellness visit expanded 100 basis points. This partially offset lower diagnostic frequency per non-wellness visit. The decline in diagnostic frequency for non-wellness visits may reflect recent growth in fall clinical visits for pain management drug treatment, which may not include diagnostics. Adjusting for these effects would imply relatively softer comparable U.S. clinical visit trends and a relatively higher IDEX growth premium. Overall, IDEX continues to achieve solid organic revenue growth and CAD diagnostic revenues as we work through headwinds from broader cumulative macro impacts on consumers, which are likely pressuring near-term U.S. clinical visit growth levels. While we remain highly confident in the positive long-term drivers of demand for diagnostics, including the future benefits that will flow from IDEX innovation, we factored in expectations for continued pressure from lower U.S. clinical visits in the second half of 2024 and our updated full-year organic growth outlook. IDEX execution drivers supported solid organic revenue growth across our modalities in Q2. IDEX Vet Lab consumable revenues increased 8% organically, reflecting solid gains in the U.S. and double-digit growth in international regions. Consumable gains were supported by 11% -on-year growth in our global premium instrument install base, reflecting strong gains across our catalyst, premium hematology, and -of-heap platforms. We achieved the Q2 record 4,952 CAG premium instrument placements, an increase of 4% -on-year compared to high prior year levels. These results were supported by continued strong growth in premium hematology and -of-heap placements. ProCyte 1 momentum continues, with the global ProCyte 1 install base increasing to over 17,000 instruments. Global catalyst placements decreased -on-year in the quarter, reflecting comparisons to high prior year placement levels and placement mix in international regions. Global rapid assay revenues expanded 6% organically in Q2, driven by solid gains in the U.S., including benefits from higher net price realization. Global lab revenues also increased 6% organically, reflecting solid U.S. gains and high single-digit growth in international regions. Veterinary software and diagnostic imaging revenues increased 12%, as reported, including benefits from our recent GreenLine software and data platform acquisition. 8% overall organic revenue gains were driven by 12% organic growth in recurring revenues, reflecting benefits from ongoing momentum in cloud-based software placements. Water revenues increased 10% organically in Q2, driven by double-digit gains in the U.S. and continued solid growth in Europe. Livestock poultry and dairy revenues increased 3% organically. Continued solid gains in the U.S. and Europe offset lower Asia-Pacific revenues, including impacts from reduced swine testing in China and lower herd health screening revenues. Turning to the P&L, Q2 profit results were supported by gross margin gains. Gross profit increased 8% in the quarter, as reported, and 9% on a comparable basis. Gross margins were .7% of 90 basis points on a comparable basis. Gross margin gains reflect benefits from net price realization, offsetting inflationary cost impacts, software service margin gains, and favorable business mix. On a recorded basis, operating expenses increased 28% -on-year, including 22% of growth impact related to the $62 million discrete litigation expense accrual recorded in GNA. Excluding this impact, Q2 OPEX growth was in line with overall revenue growth, driven by increases in R&D spending, aligned with advancing our innovation agenda, including new platform development. On a reported basis, operating margins were .3% in the quarter, including a 610 basis impact from the discrete litigation expense accrual. On a comparable basis, excluding this impact, operating margins increased approximately 110 basis points -on-year in the quarter. EPS was $2.44 per share in the quarter, a decrease of 9% as reported, including the $0.56 per share impact related to the discrete litigation expense accrual. EPS increased 15% on a comparable basis. Foreign exchange reduced revenues by approximately $7 million, operating profit by approximately $3 million, and EPS by approximately $0.02 per share in the quarter, net of a $2 million hedge gain. Free cash flow was $215 million in Q2. On a trailing 12-month basis, our net income to free cash flow conversion ratio was 99%. For the full year, we're maintaining our outlook for free cash flow conversion of 90% to 95%, reflecting estimated capital spending of approximately $180 million. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.7 times gross and 0.4 times net of cash as we continue to manage our balance sheet conservatively. We allocated $208 million in capital to share repurchases in the second quarter, supporting a .7% -on-year reduction in diluted shares outstanding. Turning to our 2024 guidance, we've updated our full year organic growth outlook to reflect expectations for continued pressure on US clinical visit trends in the second half of 2024. Our P&L outlook reinforces our full year goals for solid comparable operating margin improvement and incorporates favorable adjustments to estimates for foreign exchange impacts, net interest expense, and our effective tax rate. Our updated full year guidance for reported revenues is ,000,000 to ,000,000, a reduction of $15 million at midpoint. Our updated reported revenue outlook includes a favorable $15 million adjustment related to more recent foreign exchange estimates. We've updated our full year guidance for overall organic revenue growth and CAG diagnostic, organic recurring revenue growth to .2% to 7.8%, approximately 7% at midpoint. Our outlook for overall organic revenue growth continues to reflect expectations for solid CAG diagnostics recurring revenue gains supported by IDEX execution. This includes consistent expectations for full year global net price improvement of approximately 5%. Our updated organic growth outlook at midpoint assumes IDEX execution growth benefits will be partially offset by continued pressure on US clinical visit levels in the second half of this year, similar to first half trends. We expect our H2 organic revenue growth results will benefit by approximately .5% overall from equivalent days effects, reflecting 1% to .5% of our organic growth rate benefits in Q3. In terms of our profit guidance, our updated outlook incorporates impacts from the discrete litigation expense accrual, which we estimate will reduce full year reported operating margins by approximately 160 basis points and EPS by $0.56 per share. We will normalize for the effects of this accrual in setting our 2025 financial performance goals. Incorporating these impacts, our updated reported operating margin outlook is .7% to 29.0%. This reflects a consistent 40 basis point improvement in comparable operating margins at midpoint, net of a negative 40 basis point impact related to lapping of the Q1 2023 customer contract resolution payment. Our updated full year EPS outlook at $10.31 to $10.59 per share is down $0.56 per share at midpoint, reflecting the impact from the discrete litigation expense accrual. Adjustments to our organic revenue growth outlook reduce our operational EPS estimates by approximately $0.08 per share at midpoint, which is offset by approximately $0.04 in favorable foreign exchange adjustments and positive below the line benefits from refinements to our net interest expense and effective tax rate outlook. We now estimate that our Q1 Q3 outlook for Q3 will reduce full year revenue growth by approximately .5% and EPS by approximately $0.05 per share. In terms of our outlook for Q3, we are planning for reported revenue growth of 6% to 8%, net of an estimated 1% growth headwind from foreign exchange, and incorporating approximately .5% in growth benefits from our recent software acquisition. This outlook aligns with an organic revenue growth range of approximately .5% to 8.5%, including approximately 1 to .5% of growth benefit from equivalent days effects. We are planning for reported operating margins of .5% to .0% in Q3, down moderately on a comparable basis. This factors in -in-year comparisons to relatively lower prior sales and marketing expense levels, and projections for continued high -in-year growth and R&D spending, including support of new platform advancement. That concludes our financial review. I'll now turn the call over to Jay for his comments.
spk07: Thank you, Brian, and good morning. IDEX delivered excellent performance against our strategic priorities and strong operational results in the second quarter as we drive development of the companion animal diagnostic sector through a new wave of innovation and high-quality customer engagement. These outcomes reflect high levels of execution and position IDEX to benefit from long-term growth tailwinds, including growth in a pet population, increased pet lifespan, and an ever-strengthening bond between pet owners and their pets. These enduring dynamics combine to elevate the importance of medical services and drive global expansion of companion animal diagnostics and software. As an innovation leader, IDEX growth continues to outpace the sector as we help our customers grow faster. Our progress is reflected in solid second quarter CAG diagnostics recurring revenue growth, supported by key execution drivers. This includes continued solid new business gains, sustained high 97% plus customer retention rates, and solid net price and cost utilization aligned with the value we deliver. IDEX's focus on innovation and companion animal diagnostics has resulted in a highly compelling portfolio of products and services for our highly capable commercial teams to support our customers. This combination helped drive record second quarter global premium instrument placements and double-digit growth at our installed base of premium instruments in five consecutive quarters of double-digit CAG diagnostics recurring revenue growth in Europe. We're delivering this performance as we work through some transition growth headwinds that continue to pressure clinical visit growth levels. This includes ongoing staffing and productivity challenges as well as broader impacts on pet owners in the current macro environment. As we work through these dynamics, we're continuing to deliver solid growth ahead of sector levels. Our customer engagement is helping to support gains in diagnostics, frequency, wellness visits, and continued expansion of diagnostics utilization per clinical visit. Our customers increasingly appreciate that healthy and sustainable clinic growth begins with diagnostics. You can't assess basic health status or treat sick patients without first diagnosing, and treatments then require follow-up monitoring. This has been our long-term focus and we see significant underserved demand for an expanding pet population that will support long-term growth for our customers in support of their mission. Today I'll give an update on IDEX's commercial execution and progress against our innovation strategy. IDEX commercial teams delivered record second quarter global premium instrument placements growing off high prior year levels. A key driver of this growth was high interest in IDEX products in international regions, continued solid new and competitive catalyst placements, and strong placement growth of ProSight and SETI-View analyzers coupled with high levels of retention and an excellent customer experience help deliver double digit growth in our worldwide premium instrument installed base. Growth of our loyal installed base forms a foundation for our future recurring revenues and a significant long-term opportunity for growth and CAG diagnostics recurring revenues. ProSight is a great example of our continued momentum in expanding our customers' businesses through innovation. IDEX sales professionals continue to support customers looking to upgrade from our legacy laser sight system to ProSight 1 in order to realize multiple benefits from load and go reagents that simplify workflow to a smaller footprint that frees up valuable benchtop space and inventory benefits due to its paper run model with automated fulfillment by IDEX. In addition to driving a better customer experience, IDEX benefits from these upgrades in a form of increased loyalty and higher CAG diagnostics recurring revenues that customers who upgrade. This customer interest and commercial effort helped drive our ProSight 1 installed base to over 17,000 in just three and a half years since this product launch. Upgrading to ProSight 1 will also position these customers to benefit from the most comprehensive point of care hematology result when combined with InView DX blood morphology. While we are gratified by the consistent high levels of placements that our commercial teams deliver, we also focus on quality placements that drive the most incremental value to IDEX in the form of future recurring revenues. As an example, continued high placements at Greenfield accounts drive significant value as these new customers are fully incremental to IDEX. Our commercial teams are well equipped to have these initial conversations with DeNovo Clinics and sustained high interest in our new practice program reflects their desire to partner with IDEX as they launch their businesses. IDEX's commercial success reflects our long-term focus on bringing a high touch direct commercial model that includes a broad set of complementary roles including account managers, professional service veterinarians, and the largest in-person field service workforce in the industry. I'm also pleased to share that the entire North American commercial team met in person for several days in July to receive in-depth training on our latest innovations including catalyst, pancreatic lipase test, and IDEX InView DX cellular analyzer as we prepare for the successful commercialization of a significant new wave of innovation. Our commercial teams are highly excited to begin taking orders for InView DX, the formal start of the commercialization process. IDEX InView DX cellular analyzer remains on track for launch in the fourth quarter. IDEX product development teams have moved to the infield product validation stage to ensure early customers who adopt this transformational platform can seamlessly integrate InView into their practice workflows and have the positive user experience they've come to expect from IDEX products and services. We are seeing encouraging early performance and utilization metrics among the small number of analyzers currently being trialed in the field. Customers are praising the usability of InView with all sites commenting that the workflow is intuitive and simple and the consistent which will help them see more patients that drive visit volume growth. I'm excited to provide more updates on InView DX and IDEX's broader innovation agenda at our upcoming annual InvestiDay later this month. We're also on track to launch the recently announced catalyst pancreatic lipase test in the U.S. in the third quarter and globally in Q4. The catalyst pancreatic lipase test, a single slide solution for canine and feline patients suspected of pancreatitis, represents the 10th menu addition to the catalyst platform since 2012. Pancreatitis is a common and treatable disease among cats and dogs which can prove fatal if not caught early. Therefore, equipping veterinarians with quantitative results during the patient visit enables them to competently diagnose and define the treatment envelope while the ped parent is still in the examination room. Our technology for life approach and the cloud enabled in clinic analyzers allow us to quickly ramp this highly relevant test to our more than 70,000 global catalyst install base. In addition to the new catalyst lipase test, we'll begin shipping the catalyst smart QC clip in Q4. Customers are thrilled by the ability to run monthly QCs with the plug and go solution in under 15 minutes. Catalyst smart QC is a great example of how our innovation is sometimes targeted at workflow optimization versus just test menu expansion. We have also begun rolling out the next generation of our industry leading IVLS software and expect to have our install base transition before in-view DX begins shipping. This next generation takes our industry leading IDEX DatLab software and meaningfully improves the user interface and halves the number of steps needed to perform many common tasks. IDEX software solutions are another area that delivers innovation driven growth that addresses solutions that both improve clinic workflows and support greater utilization of diagnostics. Demand for intuitive cloud-based software solution remains high among the customer base that is increasingly reflective of younger generations who are digitally native. By leaning into this trend, IDEX is well positioned to continue to deliver a seamlessly integrated software ecosystem that provides efficiency gains through workflow and communication solutions. Q2 practice management orders were almost entirely cloud-based, building the foundation for strong future growth of economically attractive recurring revenues. IDEX's attractive cloud-based solutions extend further, benefiting many areas of the practice, facilitating payments, delivering digital workflow tools, and delivering an integrated head-on engagement solution are just a few examples of how we're providing a robust software stack that is a win-win, delivering improved clinic productivity while driving incremental recurring revenues to IDEX. For example, our recent launch of Velo, a pet owner engagement application, provides a -its-kind pet owner engagement tool that is natively integrated into the practice management system. High interest in Velo is helping fill the sales pipeline and driving a solid increase in active customers in the first full quarter since launching the product. These customers are experiencing the benefits we saw in our early beta testers, from reduced no-shows to better compliance during clinical visits. As this customer base grows over the long term, we see significant opportunity for Velo to help address the productivity challenges that exist at so many busy veterinary clinics, which is a meaningful benefit to our sector. We're building on the robust features of our customer engagement solution by integrating Greenline into our portfolio. Acquired in the first quarter, Greenline Pet is a leading digital platform that provides easy practice workflow solutions for coupon and rebate redemptions. The tool provides veterinary clinics with the ability to connect their customers with leading animal health, pharmaceutical, and nutrition providers, making it easier for pet owners to take exceptional care of their pets. These higher standards of care reflect the sector development that is at the center of our long-term organic growth strategy. And as the sector grows, we expect IDEX in turn to grow even faster, disproportionately benefiting us as the leader in the space. As we conclude our prepared remarks, I'd like to thank the nearly 11,000 global IDEX employers for your outstanding work and commitment to providing a better future for animals, people, and our planet. Your contributions are essential to the progress we've made against our organic growth strategy and to delivering another quarter of strong financial performance. Thanks to your efforts, IDEX is well positioned to build on this momentum through the second half 2024 and well beyond as we continue to lead the development of the companion animal diagnostic sector. Before we open the line for Q&A, I'd like to remind you that we will be hosting our annual Invest Today later this month, beginning with the management dinner on Wednesday, August 14th, followed by presentations at our global headquarters in Westbrook, Maine on Thursday, August 15th at 8 a.m. Thursday's event will also be live streamed and recorded via IDEX.com for those who cannot make it in person. This is an exciting opportunity for IDEX leaders to provide a comprehensive update on our strategy, long-term growth opportunity, innovation cycle, and execution drivers. Participating will be members of my senior management team, including Dr. Tina Hunt, Executive Vice President, Strategy, Sector Development, and Global Operations, Dr. Mike Erickson, Executive Vice President and General Manager, Point of Care Diagnostics and Telemedicine, Mike Lane, Executive Vice President and General Manager, Reference Laboratories and Information Technology, Michael Schreck, Executive Vice President and General Manager, Veterinary Software and Services, George Fetel, Senior Vice President, Chief Revenue Officer, and Brian McKean, Executive Vice President and CFO. The event will last approximately four hours and will conclude with a Q&A session. With that, we'll end the prepared section of the call and open the line for Q&A.
spk09: Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Again, you may press star one to ask a question. We'll take our first question from Chris Schott with JPMorgan. Please go ahead.
spk05: Great. Thanks so much for the question. That's kind of a two-parter around vet visits. I guess first is what do you think in your view is the biggest delta between the outlook you gave in one view and the outlook you gave today in terms of what's happened to the market over the past few months? And the second part of that is kind of more forward-looking. Are you still confident, and I guess the more traditional kind of two or three percent, that visit growth rate as being an appropriate target over time? And maybe just help bridge us from what we're seeing today to what needs to happen to get back to that more traditional growth? Thank you.
spk06: Thanks for your question, Chris. I think just revisiting the outlook that we had given earlier in the year, we saw roughly 150 basis points of headwind coming out of the first quarter and carried that through our assumptions in the second quarter in the U.S. in terms of clinical visits and highlighted as we had coming out of 2023 that we thought there'd be a flattening of trends over time. We had anticipated seeing some normalization with staffing effects and kind of working through some of those dynamics and thought that the clinic outlook would flatten. I think that as we work through Q2, we've continued to see a level of headwinds. I think we're acknowledging that there may be some macro dynamics going on here that we're working through and trying to capture that in the second half outlook. So that's the principal change. I'll let Jay talk more about the long-term drivers, but we continue to see a number of very positive long-term drivers for growth and demand in pet health care, including visit trends. So we'll talk more about that at Investor Day, but we continue to have a very optimistic long-term outlook for the growth potential in the sector.
spk07: Yes. Good morning, Chris. Just a couple words about the long-term trends. As Brian said, we continue to be very optimistic about that. All the longer-term sort of secular tailwinds, we believe, are intact. It obviously starts with the overall humanization of pets, and that continues to strengthen. Imprecably and increasingly among the younger household-owning pets, from a demographic standpoint, what they've shown, both in terms of intent and actual actions, is willing to spend more and prioritize -a-vis categories like travel, entertainment, going out. There's obviously a lot more pets from a net adoption standpoint, if you take a look at. This is really a global phenomenon. They're more in aging, and we note that as they age, you know, more is generally spent from both a health care, overall health care standpoint, as well as diagnostics. Longer lifespans, we'll provide an update on that at Investor Day, but we know both dogs and cats are living longer, and that's a good thing for both the pets, as well as the overall spend. You know, and again, back to the prioritization. We think that this is a very resilient market that homeowners are willing to spend and prioritize for the care and well-being of their pets. You know, maybe on a shorter-term basis, just a couple comments based on a number of ongoing conversations we have with veterinary practices. They're very optimistic in terms of, you know, demand and the work that they're doing. They think they've made progress coming out of the pandemic around really retaining their staff, creating a more sustainable environment for both veterinarians and the veterinarian technicians amongst their team. They continue to invest in technology. We've seen that both from a software standpoint, as well as -of-care record placements in Q2. As we said in our commentary, there are some high level macro impacts that are affecting, likely at the margin, some moderation in clinical visits, but we're confident that we'll work through it, that we're working through it effectively as our customers.
spk09: We'll move to our next question from Michael Riskin with Bank of America. Your line is now open. Please go ahead.
spk04: Hey, thanks guys. I kind of want to follow up on that topic but take it from a different perspective. Brian Jay, during your prepared remarks, you talked about maybe shifting vet dynamics and you highlighted some of the diagnostics utilization in wellness visits versus non-wellness. I think you were kind of calling out that you were seeing less diagnostic in non-wellness because pain management, we assume, is rampant. There's visits where people come in, just get the shot and then walk out without any diagnostics tied to that. As part of that trend, I'm just wondering if maybe we could be seeing a broader shift in vet channel dynamics, the pain management issue you mentioned. There's also a continuing shift to the online marketplace for therapeutics. All of this can kind of lead to potentially less opportunity for diagnostics in the clinic's office because pet owners are getting their care elsewhere. I'm just wondering how you see that care delivery channel evolving and whether that could be having an impact to the growth profile. Then I'll throw in my follow-up question at the same time. You've updated the guide for this year to 7% organic. You did rounding nine last year and seven and a half the year before. This is now kind of a three-year trend of pretty far below the LRP of 10% plus. We talked about vet visits. There was a point where there was a lot of concern on vet supply in terms of insufficient vets and technicians out there. It just seems like this macro headwind continues to persist and refuses to get better. I'm just wondering, outside of price, what weathers do you have to regain that 10% plus LRP and just confidence that you'll be able to get back there in 2025? Thanks.
spk06: Why don't I start with your final question because I think that'll help to center the discussion around visit trends, which I think was the first party question related to Mike. In terms of the growth trends for the company, I think it's important to put them in the context of this post-pandemic period. We had a 33% expansion of the business between 2020 and 2021. I would say the dynamic in 2022 that played into the first half of 2023 was this capacity pullback effect at the clinics where they had trouble keeping up with the expanded demand. It was fundamentally an impact on clinical visits. We went from a positive 5% clinical visit environment to a minus 3% environment in a relatively short period of time. I think that that was not foundational to the demand in the industry. I think it was this capacity dynamic and this transition from this extraordinary period of growth. I think as we've moved forward from that, I think there has been an ongoing dynamic again in this post-pandemic period related to staffing challenges and what has become a cumulative inflation impact on consumers broadly that's causing global tradeoff. All has lead back to the fundamental dynamic that's changed as business. I think our premium has been quite healthy. Our placements, business gains, customer retention, all the dimensions that we look at in terms of how we're executing the business, we feel very good about and we feel great about our innovation pipeline. I think there are, as we look forward and the question you had about moving ahead, I think we see positive long-term drivers in terms of sector trends and things that we're doing to drive demand in the business as well. We feel very good about that. While acknowledging that we've been working through clinical visit issues. Getting into some of the specifics that we highlighted this morning, I think one of the things we were trying to peel apart here on the visits was, as you know, we look in the US at the visit changes on the same-store level, diagnostic frequency, diagnostic utilization. I think we do see some level of an impact on these metrics related to the pain meds. We try to pull this apart and see on wellness visits, they're actually up year on year under basis points. That's been actually a trend we've seen for several orders now. So, a very healthy dynamic. When pet owners are coming into the clinic, they're doing more diagnostic testing. On non-wellness testing, those metrics were holding up through last year. Where we started to see was change in those metrics beginning in Q4 and into the first half of this year, which aligns with the Labrela launch and penetration. Net-net, we didn't quantify this specifically, but basically the frequency metric which had built off of that high base, expanded base in the dynamic, we think when you adjust for these type of dynamics, the pain med dynamics probably sustained, continue to expand. It might indicate there's a bit more weakness on the clinical visit front, particularly in non-wellness. I think that's indicative of the macro headwinds that we've been highlighting. Again, I think this is, from our view, not foundational to our strategy or execution, but more reflective of just the macro and the sector environment we're in at the moment.
spk07: Mike, let me address a couple of other questions you had embedded in there. First, around the alternate channels of care. What we see from alternate channel venues standpoint is it's largely complementary. I'm referring to some of the bricks and mortar places like Tractor Supply or Pet IQ and some of the clinics that they have, where these are pet owners and pets that don't often have relationships with veterinarians. Keep in mind, a lot of the pharmaceutical therapeutics have to go through the veterinarian. A good deal of medicine involved in terms of testing and diagnostics and follow-ups that really require professional expertise. We think that that's a very positive thing. In terms of your question around levers that can positively impact growth, we could be able to say the build-off of Ryan's comments and observations that innovation is just so important to this industry, not just from the standpoint of diagnostics and software, but therapeutics and specialty diets, all of those things. We know that practices have a lot of unmet business needs, but also unsolved clinical problems where diagnostic solutions really make impactful contributions. You can't treat before you diagnose. You can't assess just basic health line status of the pet. When you do diagnose and the patient has an acute condition or chronic condition and often requires follow-up monitoring, so continue to innovate and work at the front end of a brand new wave of innovation, some of which we've announced, including in-view shipping in Q4, Smart QC, and pancreatic lipase for our catalyst platform, Zello Software, to staff and be there. It's just a significant amount of innovation that veterinarians could use as part of their tool set to continue to treat patients better. We know that they look for that. As these short-term challenges are mitigated from a practice capacity challenge as well as the macro impacts, that we believe that the growth prospects are excellent for the company.
spk09: We'll move to our next question from Erin Wright with Morgan Stanley. Your line is now open. Please go ahead.
spk08: Great. Thanks. If you can speak to it, I guess what was the nature of the legal charge and what's ongoing there? Is that a customer-related relationship? Is there more to come on that front? Then your ability, though, to control costs here is impressive. That's obviously excluding the legal charge in the quarter, but can you talk about those levers you have to control costs and your ability to do that until we see things normalized from a market perspective?
spk06: Thanks. Great. Thanks for your question, Erin. Regarding the ongoing litigation matter, as we noted, we had a $62 million discrete expense of cool in the quarter. As a policy, we don't comment on ongoing litigation matters. We did include disclosures in the footnotes of the press release, and we have as well disclosures that you can refer to in our first quarter 10Q and in our second quarter 10Q in terms of the nature of this, but this was an issue related to royalty payments over time, and what we've updated is our best estimate of the probable loss from that matter. In terms of your question on operating expense leverage, adjusting for these items, I think you can see that we've continued to do a good job of adapting our business financial performance to the growth environment that we're working through. In terms of some of the sector headwinds for delivering strong execution, strong underlying comparable operating margin gains, we had expense growth that was basically in line with our revenue growth and very much focused on the things that we're doing to drive future growth, our R&D agenda and our commercial investments. So as we've done consistently in the past, we have the ability to adapt and ensure we're prioritized against our long-term growth while delivering good financial performance, and we're able to do that again. The first half, then, that's reinforced in our fully route work as well.
spk07: Just a couple words to add to Brian's comments around the overall cost management. We continue to invest very heavily in those areas that we think are important to the long-term growth. The company, R&D, obviously we're working through some significant new innovations, and so we don't want to starve that, and we're feeding that where there are commercial investments from a territory expansion standpoint. We're obviously very excited to be able to invest in those areas. We see a very good return. What I would also say from a business and business model standpoint, these are businesses that have scale and that lend themselves the productivity in the investments from an automation and digitization standpoint and just overall network standpoint, whether you look at the reference labs. Obviously the software business for us is a fast-growing business with very good drop-through, and so that's another lover that we have. But we're disciplined. We're able to adjust our expense and expense profile to whatever environment we're in.
spk08: My follow-up is on innovation. Can you just remind us what's embedded in your guidance as it relates to in-view contribution this year? It sounds like you're still on track in terms of your timing, but also FNA when you anticipate that launch and then also the timing of where you stand in terms of your other platform launch. I guess should we expect to hear something about that potentially at your investor day? Thanks.
spk06: Just to your point on the guidance, we've captured the expectations for the key for launch of in-view, and as you know, it's principally an instrument introduction. At that point, the recurring revenue will build over
spk07: and as is our policy, we'll talk about innovation as we get closer to launch. We look forward to investing and we'll just provide an update in terms of the overall company strategy and where we are from an innovation agenda standpoint. So look forward to having that conversation.
spk09: We'll move to our next question from Jonathan Block with Stiefel. Your line is now open. Please go ahead.
spk03: Thanks, guys. Good morning. I'll just break apart my questions. I guess, Reiner J., I get the ongoing headwind from clinical visits, but when we isolate the US IDEX CAG DX recurring premium that we've laid out a bunch of times, in other words, it sort of looks at the growth X visits X price, I get a premium of around 250 basis points this quarter. It's the lowest I can remember. It looks like an ongoing deceleration for roughly the past ten quarters. So can you talk to that trend and what might be behind it? And then, importantly, should we see that trend start to reverse course arguably in 25 and the earlier days of the in-view launch? And then I'll ask my follow-up. Thanks.
spk06: Yeah, thanks for your question, John. I think we've increasingly kind of broken down these metrics. On an adjusted basis, we have a similar number to what you have if you're taking out the price in the days effects and comparing two clinical visits, about 250 basis points. I think one item we noted, which I know you've been noting in your research, is there is this dynamic of the pain med follow-up visits, which we capture in our visit number. And so I think that could, particularly in the first half of this year, indicate that the underlying visits themselves may be a bit softer relative to visits that would have diagnostics and the premium might be that much stronger. So I think that the net of that is the premium's held up quite well from our lens. I think that we feel good about the key things that drive that, the net new business gains, customer retention levels. We obviously had solid net price realization aligned with the value we're looking at. We feel positive on that front. And factors like introduction of innovation are critical to helping to increase engagement with our customers, get the multiplier benefits that come from I-DEX innovation and leverage of our ecosystem. And so I think we're looking forward to the INGRA launch and the other initiatives that Jay had highlighted and do that as something that can be intended to be a positive long-term driver for us. I'd also highlight just the solid performance internationally as well for the company. So it was 10 percent overall growth organically, CAC-DICS recurring. There was about a percent of days had a benefit, but very solid growth volume growth continues to be very positive and we had excellent progress on instrument placements, which will be a strong indicator of our long-term growth potential. So I think we're feeling very good about the execution metrics as we work through some of the visit headwinds that we've highlighted.
spk03: That was a great call. Thanks, Brian. And for my second one, look, you guys have done a great job in this year of holding the EPS in light of the lighter revenue and some tax and some interest expense. How do we view that, Brian? Is it just better, call it overall efficiency from the company or do we think about any projects or initiatives that might come out of the 24 and going to 25? And then the second sort of tack on question would be, Jay, just taking a step back, and this goes back to sort of that pain Mab thesis that we had a little bit, but is there anything concerning about call it like a wallet share battle, right? I mean, just the fact that a pet owner might be spending a thousand dollars in cash on pain Mabs per annum or atopic dermatitis per annum. And when we think about some of the potential accompanying diagnostic testing, that that might suffer around the edges. Thanks for your time,
spk07: guys. Yes, let me answer your second question first and then I'll turn to the front end part of the question to Brian. We aren't concerned about that from a diagnostics utilization standpoint. We think it remains, it's remained pretty constant from the launch of the pain Mabs themselves. It's primarily a patient visit growth phenomenon that we spoke to related to some of the capacity challenges that practices are working through as well as the macroeconomic impacts. You know, when you take a look at wellness, you know, for example, we've seen the diagnostic inclusion up 100 basis points and Brian spoke to the the effect of payment on non wellnesses, which is where we catalog or characterize that. So when they're coming into the practice, they're using diagnostics and they're using diagnostics both for wellness and non wellness. So we haven't seen any evidence of that cannibalization impact.
spk06: Hey, John, any question on margins? If I got that right, I think the underlying performance that we've had this year reflects a solid gross margin momentum. There are a number of drivers there. I think we've had ongoing benefits from cost management, things like lab productivity initiatives, the software business as it's growing is being helpful to us. The business mix overall just, you know, solid growth and CAD diagnostics, recurring revenues and growth in in clinic revenues is a positive factor. And so and just ongoing productivity in our operations function, you know, coming out from a period where there was relatively more inflation. So I think we feel that's been a consistent driver for us as a company and we look forward to building on that as a foundation of how we can continue to improve our comparable operating margin performance.
spk09: We'll move to our next question from David Westenberg with Piper Sandler. Please go ahead.
spk02: Hi, thank you for taking the question. And I'm going to get a continue to the theme about off ex management and maybe slower in growth relative to history. So just as a wee look, I mean, I've tracked your your your market share gains over the last 10 years. And, you know, in reference lab, I think I've seen from like 40 to into the 50s. You know, in terms of market share gains, do you think that we still have a lot of that laughter? Do you think that most of the growth is going to have to come via innovation and maybe just creating growth in new markets and really work on utilization in clinic? And then I'll just ask my second question up front. I usually when I look at gross margins, you did beat me by seven 70 basis points. I usually look at consumables and reference lab as being the big drivers. I think one of the only one of those beat me. So just in terms of how you kind of got to them that gross margin leverage, thank you.
spk07: I'll take the front of your question and have Brian address the gross margin piece. You know, David, if you take a look through the years, most of our growth has actually come through same store sales. So, you know, we do very well competitively, we're pretty transparent in terms of disclosing, you know, placements and, and progress we make. But, you know, we we look from a growth algorithm standpoint to drive diagnostics utilization. Now, a lot of that happens through innovation. There's also a big technology for life component of it. If you think about catalyst, for example, you know, 10 new 10 new parameters, 10 new slides over the last 12 years. So we know customers are just using more of that is more value connected with it. And that that into the, you know, the growth profile of the company from a reference lab standpoint, same phenomenon. If you think about fecal antigen, as an example, it's a quick growing category within our reference lab business, very important foundational part of wellness, we continue to expand that menu tapes and more recently, just though I saw Spreco is used more because it is more political value. That's how we think about it. Obviously, new platforms open up a completely new Greenfield Greenfield space for us. And it's another element of our growth algorithm. And that investor day Brian always, he, he always dissects or put some of the pieces together to show where that growth comes from the US and internationally.
spk06: Yeah, David, you can your margin question, I think in the quarter, we highlighted that we have benefits from net partialization that offset inflationary cost impacts, software service margin gains and favorable business mix, which is driven by solid that lab growth, I would highlight I think we had strong lab margins in the prior year. And part of that was we were we were ramping staffing. So I think some of the the lab margins to the underlying productivity is very good. It was muted by a bit of a compare dynamic, but I think overall very good about the gross margin performance.
spk07: Now we'll conclude the Q&A portion of the call. Thank you to everyone on the phone for your participation in this morning's event. I'm very pleased to share another quarter of solid financial results as we continue to advance our strategy to drive development to the companion animal diagnostic sector, and unwavering focus on innovation in our customers. Looking ahead, we remain excited about the significant long term opportunity to enhance standards of care for companion animals. And so with that, we'll conclude the call. We look forward to seeing many of you at Invest Today. Thank you.
spk09: This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.
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