IDEXX Laboratories, Inc.

Good morning, and welcome to the IDEX Laboratories' fourth quarter 2024 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, Andrew Emerson, Senior Vice President, Corporate and Companion Animal Group Finance, 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 fourth quarter 2024 results and initial 2025 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 in 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.

Good morning, everyone, and welcome to our fourth quarter earnings call. Today, I'm pleased to review our Q4 and full-year 2024 financial results. Andrew Emerson, who will be assuming responsibility as IDEX's CFO on March 1st, will take you through the details of the company's outlook for 2025. IDEX had a solid finish to 2024, reflecting fourth quarter performance ahead of our expectations. Revenue increased 6% organically, supported by 7% organic gains in CAG-diagnostic recurring revenues. Operating profits increased 7% as reported and 8% on a comparable basis, benefiting from solid gross margin gains, which supported operating margin performance at the high end of our guidance range. We also saw positive impacts from increased stock-based compensation activity, which benefited our effective tax rate. These factors supported delivery of $2.62 in EPS and Q4, up 10% on a comparable basis. IDEX execution drove solid expansion of our business for the full year of 2024. This is reflected in 7% full-year organic growth in CAG diagnostic recurring revenues, 9% growth in our global premium instrument install base, 11% organic gains in recurring software and digital imaging revenues, and 11% organic growth in our water business. We delivered excellent four-year financial performance in 2024, supported by comparable operating margin gains at the high end of our long-term annual improvement goals. Four-year EPS of $10.67 per share, which includes $0.56 per share of negative impact related to a discrete litigation expense accrual, increased 12% on a comparable basis, including 2% of negative growth impact from the lapping of a 2023 customer contract resolution payment. These results were achieved as we successfully advanced our innovation-driven growth strategy and worked through greater-than-expected sector and macro headwinds. As Andrew will discuss, this performance sets a solid foundation for our business to build upon as we enter 2025. Let's begin with a review of our 2024 results. Fourth quarter organic revenue growth of 6% reflected solid gains across IDEX's major business segments, including 6% organic growth in CAG, 7% organic gains in LPD, and 9% organic growth in water. Worldwide CAG diagnostic recurring revenue increased 7% organically in Q4, including benefits from improved volume growth trends. Results were supported by average global net price improvement of 4% to 4.5%, with U.S. net price realization of approximately 3.5%. As noted in our last earnings call, U.S. net price realization includes impacts from the successful extension and expansion of three major customer agreements in 2024, which will provide long-term incremental volume growth benefits for IDEX. U.S. CAG diagnostic recurring revenue increased 4% organically in Q4, net of a 1% negative growth impact from fewer equivalent selling days. IDEX execution drove approximately 2% U.S. volume growth in the quarter, normalized for equivalent days. These results were supported by sustained solid new business gains, high customer retention levels, and relatively higher gains in diagnostic frequency and volume utilization per clinical visit. IDEX achieved a solid 800 basis point normalized growth premium compared to U.S. clinical visit growth levels in the fourth quarter. We continue to work through pressure on U.S. same-store clinical visit levels, which declined nearly 3% in Q4 and 2% for the full year in 2024. This has been the primary constraint on IDEX's recent growth, reflecting transitional sector and macro impacts following the accelerated expansion of pet healthcare during the pandemic. International CAG diagnostic recurring revenue growth was 12% in Q4, including a 1% benefit from equivalent days effects. Strong Q4 international results benefited from net price gains and improved volume growth, supported by new business expansion reflected in double-digit year-on-year growth in our international premium instrument install base. IDEXX fourth quarter performance was supported by strong global growth and consumable revenues. IDEXX VetLab consumable revenues increased 12% organically, reflecting double-digit gains in U.S. and international regions, normalized for equivalent days effects. Consumable gains were supported by a 9% increase in our global premium instrument install base in 2024, reflecting solid gains across our Catalyst premium hematology and CETAV platforms. For the full year of 2024, we achieved approximately 18,500 premium instrument placements with excellent quality, reflected in sustained, high, new, and competitive catalyst placements. In the fourth quarter, we placed 4,625 premium instruments, down 12% from high prior year levels. Overall CAG instrument revenues also declined 12% organically in Q4. Quarterly placement results were supported by strong gains in set-of-view and continued expansion of ProSite 1. We also initiated shipments of IDEX InView DX in the quarter, supporting strong comparable EVI gains, including the projected value of InView pre-orders. Rapid assay revenue was flat on an organic basis in Q4. Rapid assay results were constrained by pressure on U.S. wellness visits, as well as by the addition of the pancreatic lipase slide to our catalyst menu, which we estimated to be a 4% headwind to Q4 revenue growth. Global lab revenues expanded 4% organically in Q4. Reference lab results in the quarter were supported by solid normalized volume growth in U.S. and international regions and net price gains. Reference lab net price gains were moderated in Q4 by near-term impacts from major new customer agreements, which will benefit long-term reference lab growth. CAG veterinary software services and diagnostic imaging revenues increased 7% organically in Q4 compared to strong prior year levels. Results continue to be supported by solid growth in recurring revenues and ongoing momentum in cloud-based software placements. In other business segments, water revenues increased 9% organically in Q4 compared to strong prior year levels, driven by continued solid gains in the U.S. and Europe. Livestock, poultry, and dairy revenues increased 7% organically in Q4, supported by solid gains in our U.S., Europe, and Latin America regions. Turning to the P&L, Q4 operating profits increased 7% as reported and 8% on a comparable basis, supported by gross margin gains. Gross profit increased 8% as reported and 9% on a comparable basis. Gross margins were 59.8%, up 130 basis points on a comparable basis, adjusting for approximately 10 basis points of positive FX impact. Gross margin gains reflected favorable business mix, supported by strong consumable growth benefits from net price improvement, and higher water risk margins. Operating expenses were up 10% as reported and 9% on a comparable basis in the quarter, reflecting increases in R&D spending aligned with advancing our innovation initiatives, including our new instrument platforms. For the full year 2024, operating margins were 29%, an increase of 60 basis points on a comparable basis, including an approximately 40 basis point negative impact from lapping a customer contract resolution payment in 2023. Full-year operating margins included 160 basis points of negative impact related to a discrete litigation expense accrual recorded in the second quarter. Q4 EPS was $2.62 per share, up 10% on a comparable basis. In Q4, EPS benefited from a lower effective tax rate including 13 cents per share in tax benefits from share-based compensation activity and 6 cents per share benefit from a non-recurring tax reserve release related to the lapping of an applicable statute of limitations. Foreign exchange drove a 3 cents per share EPS headwind in the quarter, net of approximately $3 million in hedge gains. Full-year EPS was $10.67 per share, an increase of 6% on a reported basis and 12% on a comparable basis. including a 2% negative EPS growth impact related to lapping a customer contract resolution payment. 2024 four-year EPS results include $0.56 of negative impact from a discrete expense accrual related to an ongoing litigation matter, $0.05 of negative impact from currency changes, and $0.24 in tax benefits from share-based compensation activity. Foreign exchange had limited impact on Q4 and four-year revenue growth. For the full year, Foreign Exchange reduced operating profits by $5 million and EPS by 5 cents per share, net of $6 million in hedge gains. Free cash flow was $808 million for 2024, or 91% of net income, aligned with our guidance and long-term goals. Capital spending was $121 million for the full year, or approximately 3% of revenue. We allocated $249 million to repurchase 564,000 shares in the fourth quarter, For the full year, we allocated $859 million to repurchase 1,760,000 shares. Our balance sheet is in a strong position. We ended 2024 with leverage ratios of 0.7 times gross and 0.4 times net of cash. That concludes our financial review. Andrew will now walk you through our initial 2025 financial outlook.

Thank you, Brian. Turning to our 2025 full-year outlook, IDEX is planning to deliver solid organic revenue growth and profit gains. led by strong execution and benefits from new innovation. We're providing initial guidance for revenue of $4,055,000,000 to $4,170,000,000, an increase of 4% to 7% on a reported basis. On an organic basis, this reflects a growth range of 6% to 9% overall, supported by 5% to 8% organic growth in CAG diagnostic recurring revenues. At current exchange rates, we expect foreign exchange to have a 2% negative impact on full-year revenue growth. In terms of key drivers for our 2025 organic growth outlook, the midpoint of our CAG diagnostic reoccurring revenue growth range incorporates expectations for global net price realization of 4% to 4.5% and volume gains of approximately 2%. The outlook includes assumptions for declines in U.S. same-store clinical visit growth levels, with the midpoint reflecting a similar rate of decline seen in 2024. These targets incorporate continued solid global growth benefits from IDEX execution drivers, including new customer gains and increases in testing utilization supported by IDEX innovations. The higher end of our CAG diagnostic recurring revenue growth outlook captures the potential for improved sector visit and same-store growth trends, while the lower end of the range calibrates for further potential effects of macroeconomic conditions. Our revenue growth outlook includes approximately $50 million of projected IDEX InViewDX instrument revenue aligned with 4,500 placements. Jay will discuss progress against our InViewDX launch in his comments. Our reported operating margin outlook for the full year 2025 is 31% to 31.5%. On a comparable basis, this reflects an outlook of 30 to 80 basis points of improvement year over year, net of 160 basis point operating margin benefit related to the lapping of the discrete litigation expense recorded in the second quarter of 2024. We're planning for solid gross margin gains on a comparable basis in 2025, supported by growth in CAG diagnostic recurring revenues, benefits from lab productivity initiatives, and expansion of our high-margin cloud-based software business. This is partially offset by unfavorable business mix planned from higher levels of CAG diagnostic instrument revenue gains and preliminary estimates for tariff risk on internationally sourced materials. Our 2025 EPS outlook is $11.74, to $12.24 per share. This reflects an increase of 8% to 12% on a comparable basis, net of a 6% EPS growth benefit from the lapping of the Q2 2024 discrete litigation expense, and includes a $0.06 per share headwind from higher taxes related to a non-recurring tax reserve release during the fourth quarter of 2024. Our EPS outlooks also includes $42 million of net interest expense at prevailing rates. Foreign exchange is expected to have a negative impact of 21 cents year over year at the rates disclosed in our press release, net of established hedge positions. In terms of sensitivities to changes in foreign exchange rates, we project a 1% change in the value of the U.S. dollar would impact the full year reported revenue by $15 million, and operating income by $5 million net of hedge positions. Our 2025 Free Cash Flow Outlook is for net income to free cash flow conversion ratio of 85% to 90% aligned with our long-term goals. This reflects estimated capital spending of approximately $160 million, or about 4% of revenues. The outlook incorporates increased capital deployment aligned with $1.5 billion towards share repurchases or approximately 4% of our current equity market capitalization. This reflects our high confidence in IDEC's growth potential, including continued strong execution and advancement of our innovation agenda. Regarding our Q1 outlook, we're planning for overall organic revenue growth of 4% to 6%, with similar gains in CAG-diagnostic recurring revenue net of a 1% to 1.5% day's headwind. This factors in U.S. clinic visit trends more aligned with Q4 2024 and pricing benefits at the low end of our full-year price realization range as we work through the major customer agreements noted by Brian. Reported revenue growth of 2% to 4% includes approximately 2% negative impact from foreign exchange at current rates. Our Q1 reported operating margins are planned for 30.2% to 30.6%. This reflects moderate compression in comparable margins in the quarter compared to high prior year levels and reflects investments to support recent and upcoming product launches. Overall, we're well positioned to build on our solid 2024 financial performance with continued strong execution and robust set of new product launches during 2025. This concludes our guidance update, and I will now turn the call over to Jay for his comments.