IDEXX Laboratories, Inc.

Good morning, and welcome to the IDEXX Laboratory's third quarter 2025 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, Andrew Emerson, Chief Financial Officer, and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning, as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the investor relations section of our website, IDEX.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the investor relations section of our website. In reviewing our third quarter 2025 results and updated 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 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 Andrew Emerson.

Good morning. I'm pleased to take you through our third quarter results and provide an updated outlook for our full year 2025 financial expectations. In terms of highlights in the quarter, IDEX delivered strong financial results supported by outstanding commercial execution in our companion animal business with benefits from recently launched IDEX innovations. Revenue increased 13% as reported and 12% organically, supported by over 10% organic growth in CAG Diagnostics' recurring revenues reflecting over 8% gains in the U.S. and double-digit growth in international regions. We achieved another quarter of strong premium instrument placements, including over 1,750 IDEX-NBUDX analyzers, resulting in 71% organic growth of CAG instrument revenues. CAG Diagnostics' reoccurring revenue growth in Q3 was negatively impacted by declines in U.S. same-store clinical visits of 1.2%, driven by ongoing macro and sector pressures. IDEX's operating performance was excellent in the quarter, with comparable operating margin gains of 120 basis points, supported by gross margin expansion, which benefited from strong reoccurring revenue growth. High operating profit gains enabled earnings per share of $3.40 in the quarter, resulting in EPS growth of 15% on a comparable basis. We're increasing our full-year revenue outlook by $43 million at midpoint with an updated range of $4,270,000,000 to $4,300,000,000, an outlook for overall reported revenue growth of 9.6% to 10.3%. Our updated full year overall organic revenue growth outlook is for 8.8% to 9.5%, with organic CAG diagnostics recurring revenue growth of 7.5% to 8.2%. These organic growth ranges represent approximately a 1% increase at midpoint to our previous guidance, supported by strong global execution in our CAG business. We're increasing our full year EPS outlook to $12.81 to $13.01 per share, up $0.33 per share at midpoint, reflecting 12% to 14% comparable EPS growth. We'll discuss our updated 2025 financial expectations later in my comments. Let's begin with a review of the third quarter results. Third quarter organic revenue growth of 12% was driven by 12% CAG revenue gains, 7% growth in our water business, and 14% gains in LPD. Strong CAG results were supported by CAG Diagnostics' reoccurring revenue growth of 10% organically, including average global net price improvement of 4% to 4.5%, and benefits from CAG Diagnostic instrument revenues increasing 71% organically, aided by global placements of NVDX. U.S. organic CAG Diagnostics' reoccurring revenues grew 8% in Q3, supported by solid volume gains and 4% benefit from net price realization. U.S. same-store clinical visits declined 1.2% in the quarter, reflecting an IDEXX U.S. CAG Diagnostics recurring revenue growth premium to U.S. clinical visits of approximately 950 basis points, highlighting outstanding performance by the IDEXX teams. Q3 benefited from aging pets. with non-wellness visits declining only 30 basis points year-over-year, while wellness visits declined 2.5%. Health services continue to expand in the quarter, including increased diagnostic frequency and utilization per clinical visit for both well and non-wellness visits as customers expand the use of diagnostics in their care protocols. International CAG diagnostics recurring revenue grew 14% organically in Q3, including approximately a 1% benefit related to equivalent days. Revenue performance was driven by volume gains, including benefits of net new customers and same-store sales utilization. International regions have sustained strong growth on a days-adjusted basis for the past 10 quarters, highlighting this significant global opportunity as we invest in global commercial capabilities and expansions. IDEXX innovation and commercial execution also delivered strong organic revenue gains across testing modalities globally in the third quarter. IDEXX VetLab consumable revenues increased 16% on an organic basis in the third quarter, reflecting double-digit growth in both the US and international regions. Consumable revenue growth was supported by expansion of our premium instrument install base and expanded testing utilization, including benefits from recent product launches. InViewDx utilization is tracking well to our recurring revenue estimates previously provided of $3,500 to $5,500 per analyzer, and we're excited for the upcoming launch of FNA, starting with mass cell tumor detection. CAG instrument placements increased significantly in Q3 compared to prior year levels. Total premium placements reached 5,665 units, an increase of 37% year-over-year. The quality of placements remains excellent, reflected in 1,203 global new and competitive catalyst placements, including 347 in North America. Globally, we placed 1,753 IDEXX MBUDX instruments as we continue to meet customer demand for this highly innovative analyzer. Ongoing progress of placing instruments combined with high customer retention levels supported the 10% year-over-year growth in our premium instrument install base in the quarter. IDEXX Global Reference Lab revenues increased 9% organically in Q3, up approximately 4% growth from the second quarter driven by solid volume growth across regions, including expanded same-store volume benefits and net new customer gains. IDEXX CancerDx continues to gain further traction in North America, reaching nearly 5,000 customers through October. Global rapid assay revenues declined 5% organically in Q3. Rapid assay results continue to be impacted by customers shifting pancreatic lipase testing to our Catalyst instrument platform, which we estimate to be a 6% headwind in Q3 revenue growth. Veterinary software and diagnostic imaging organic revenues increased 11% driven by reoccurring revenues, which grew 10% during the quarter. Solid growth in veterinary software was supported by strong double-digit growth of cloud-based PIMS installations and adoption of related reoccurring services. We also saw continued strong double-digit year-over-year growth of diagnostic imaging system placements in the quarter. Water revenues increased 7% organically in Q3, with strong growth in international regions and solid mid-single-digit growth in the U.S. Livestock, poultry, and dairy revenues increased 14% organically in the quarter, with double-digit gains across most regions. Turning to the P&L, strong revenue growth enabled 16% comparable operating profit gains. Gross profit increased 15% in the quarter as reported and 13% on a comparable basis. Gross margins were 61.8%, up approximately 80 basis points on a comparable basis. These gains reflect benefits from strong reoccurring revenue growth and IDEXX VetLab consumables and reference lab volumes, along with operational productivity and pricing benefits, which offset inflationary cost pressures. Reported gross margin gains were moderated by 10 basis points of foreign exchange impacts net of hedge positions. On a reported basis, operating expenses increased 12% year-over-year as we advance investments in our global commercial and innovation capabilities. Q3 earnings per share was $3.40 per share, including benefit of $14 million or 17 cents per share related to share-based compensation activity. Income tax includes a 9-cent negative impact related to accelerating tax deductions for previously incurred research expenses allowed under the new U.S. tax legislation, which benefits cash taxes while increasing our effective tax rate in the period. Foreign exchange out of $1.9 million to operating profit and $0.02 to EPS in Q3 net of hedge effects, reflecting a comparable EPS increase of 15%. Free cash flow was $371 million in Q3 and $964 million on a twirling 12-month basis, with net income to free cash flow conversion rate of 94%. For the full year, we're updating our outlook for free cash flow conversion to 95% to 100% of net income. This increase includes a 10% cash tax benefit primarily related to $105 million of acceleration of tax deductions for previously incurred research expenses allowed under recent U.S. tax legislation and a refined outlook for our full-year capital spending of approximately $140 million. Our balance sheet remains in a strong position and we finished the period with leverage ratios of 0.7 times gross and 0.5 times net of cash. We continue to deploy capital towards share repurchases, allocating $242 million during the third quarter and contributing to $985 million on a year-to-date basis. supporting a 2.7% year-over-year reduction in diluted shares outstanding through Q3. Turning to our full year 2025, as noted, we're increasing our outlook for overall revenue to $4,270,000,000 to $4,300,000,000. At midpoint, this reflects approximately $43 million of operational improvement, building on strong third quarter performance, including CAG diagnostics recurring revenue expansion and increased MVDX revenue expectations. Our updated revenue growth outlook is for 9.6% to 10.3% growth as reported, including a 0.8% full-year growth benefit and 2% growth benefit in Q4 from foreign exchange at the rates outlined in our press release. As a sensitivity, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $4 million and EPS by one cent for the remainder of the year. The updated overall organic revenue growth outlook of 8.8% to 9.5% reflects an estimated organic growth range of 7.5% to 8.2% for TAG diagnostics reoccurring revenue, including a consistent 4% to 4.5% benefit from global net price realization. At midpoint during Q4, we're assuming U.S. clinical visits continue to decline at levels moderately better than the year-to-date average. We are again increasing our expectations for our in-view DX placements, which we now expect to be approximately 6,000 during 2025, with instrument revenues of over $65 million as we continue to see strong demand from this exciting new platform. In terms of key financial metrics, we're increasing our reported operating margin outlook to 31.6% to 31.8% in 2025, reflecting an increased expectation for 80 to 100 basis points of full-year comparable operating margin improvement net of 180 basis point operating margin benefit related to the discrete litigation, expense impacts, and updated foreign exchange effects. As noted previously, IDAX remains well positioned to navigate the ongoing changes in the trade landscape. with a largely U.S.-based manufacturing footprint. We remain focused on continuous supply to customers while actively managing cost impacts, which will continue to play out into 2026. Our updated full-year earnings per share outlook is $12.81 to $13.01 per share, an increase of 33 cents per share at midpoint. Our EPS outlook incorporates increased projections for operational improvement of 22 cents at midpoint compared to our prior guide. We've also incorporated lower effective tax rate benefits, including 9 cents of share-based compensation activity compared to the prior outlook, partially offset by other tax impacts, including the noted acceleration of research expense deductions under the new U.S. tax legislation. Updated estimates for interest expense, average share count reduction, and foreign exchange impacts have also been incorporated with additional details available in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Thank you, Andrew, and good morning. IDEX delivered very strong financial performance in the third quarter while advancing our strategic priorities globally. Our proven model of high-touch commercial engagement, combined with differentiated testing and workflow innovations, continues to drive adoption of IDEX's world-class diagnostic and software solutions. These capabilities directly support our customers' mission to deliver the highest standards of care, enabled through greater diagnostics frequency and utilization in everyday practice. Diagnostics remains the fastest-growing revenue stream within veterinary clinics. a durable trend reflecting the central role testing plays in determining patient health status and guiding treatment decisions. Our financial results in a quarter were underpinned by accelerating gains in CAC diagnostics recurring revenues across major regions. Growth in recurring revenues reflects multiple execution drivers, including double-digit growth of our premium installed base, instrument installed base, sustained strong new customer gains, solid net price realization, and continued momentum in cloud-based software adoption. Importantly, these results were supported by continued momentum in our innovation playbook, highlighted by strong placements of InVue DX, growing adoption of Cancer DX, and benefits from the expanding Catalyst menu, including early uptake of Catalyst Cortisol. IDEC Solutions, anchored by our integrated software-enabled multimodality approach, are well-positioned to help clinics enhance efficiency, expand diagnostics reach, and deliver exceptional patient care. Building on the groundbreaking innovations we launched in 2025, and as highlighted at our August Investor Day, we will further expand our cancer DX franchise in 2026 with the addition of mast cell tumor and another high-impact cancer biomarker to the panel. We also plan to bring cancer DX panel to international markets starting in Q1 2026. extending its reach and accelerating our global leadership in veterinary cancer diagnostics. Our commercial organization again delivered outstanding performance in Q3. Across geographies, our teams drove very strong instrument placements with a high quality of placement supporting outstanding year-on-year growth of economic value of placements, a key measure of future recurring revenue gains. Retention of our CAC diagnostics recurring revenue remained in the high 90s, reflecting the enduring loyalty and trust that veterinarians place in IDEX. This loyalty is not simply the result of world-class products. It reflects the strength of our customer engagement and support model, where IDEX representatives serve as true partners in helping practices improve medical outcomes and business performance. In the U.S., growth was fueled by strong volume gains, including benefits from adoption of new innovations alongside sustained, strong new and competitive catalyst placement. Our teams are effectively engaging practices, whether startups outfitting their practice for the first time or established clinics seeking to upgrade and expand capabilities. Accelerated growth in the important diagnostics frequency metric, as well as utilization per clinical visit, is a critical driver of success, enhancing patient care while creating durable growth for both clinics and IDECs. We're also benefiting from corporate account relationship extensions and expansions. These relationships represent significant multi-year growth opportunities as practices transition volume into IDEX's ecosystem of diagnostics, software, and services. Importantly, these partnerships are increasingly structured to elevate care at the practice level to greater diagnostics frequency, utilization, workflow optimization, and expanded menu adoption. Internationally, we deliver double-digit installed base growth for the 11th consecutive quarter, with a step up in the growth of CAC Diagnostics' recurring revenue growth across major regions. Our commercial strategies are globally tailored to regional dynamics, supported by strong reference laboratory networks, and backed by an innovation approach that ensures high product market fit, such as with ProSite 1 and SNAP Lush Media. Expanding diagnostics frequency in international regions continues to be a key growth lever, elevating the standard of care and expanding the sector opportunity. We remain committed to investing in our commercial footprint, where the customer readiness and growth potential are strongest. We are on track with plans to expand in three international countries by the start of 2026, while also enhancing our U.S. commercial footprint. These are high return investments, reducing the number of customers per account manager, supporting more frequent engagement, strengthening loyalty, and driving adoption of IDEC solutions. The commercial organization's ability to consistently deliver growth across varying geographies and macroeconomic conditions demonstrates the durability of our model. Practices continue to prioritize diagnostics and software because they are foundational to their mission, and IDEXX is their partner of choice. Turning to our innovation update, let me begin with Catalyst Cortisol, the newest addition to our Catalyst platform. Launched in North America in late July and at the end of the third quarter internationally, Catalyst Cortisol is already seeing strong momentum, with over a quarter of Catalyst customers in North America adopting the test within the first three months of launch. This is among the fastest adoptions for Catalyst manual expansion, underscoring both the clinical need and the level of customer anticipation. Catalyst Cortisol enables veterinarians to rapidly measure cortisone levels at the point of care, supporting diagnosis and monitoring of adrenal conditions such as Cushing syndrome and Addison's disease. These conditions are often complex and require real-time insights to guide treatment decisions. With Catalyst Cortisol, veterinarians can deliver highly accurate results during the patient visit, avoiding delays, reducing callbacks, and increasing confidence in treatment planning. The addition of cortisol was the most frequently requested Catalyst menu expansion from customers, a clear signal of its importance to clinical practice. The rapid uptake we've seen validates the power of listening closely to our customers. and then delivering innovation that directly addresses their highest priority needs from both a testing accuracy standpoint and workflow friendly way. This is also a great example of our technology for life strategy. By continually expanding the catalyst menu, we increase both the medical and economic value of the installed base. With nearly 77,000 catalyst instruments and practices globally, Each new menu expansion represents a lever for increased utilization, improved care, and long-term recurring revenue. Alongside Catalyst Pancreatic Lipase, which has already achieved adoption across over 50% of the available installed base, and Catalyst SmartQC, which is simplifying quality control workflows, Catalyst Cortisol is strengthening Catalyst's position as the most versatile, value-creating chemistry, immunoassay, and electrolyte platform in veterinary medicine. Moving to InViewDx, by the end of Q3, we have placed over 4,400 InViewDx analyzers globally year-to-date, exceeding our expectations and reinforcing the momentum that began with pre-orders last year. This represents one of the most successful product rollouts in IDEX's history. This strong start gives us confidence to once again raise our full-year outlook to approximately 6,000 placements. Customer feedback has been overwhelmingly positive. with veterinarians consistently highlighting workflow transformation, diagnostic confidence, and powerful clinical insight as the most meaningful benefits. The slide-free cytology workflow reduces technician's time, improves consistency, and delivers results while the patient is still under practice. At the same time, AI models, now trained on more than 60 million cellular images, provide reliable, high-quality insights that elevate standards of care. Frequent software updates, as often as every other week, continuously expand these capabilities, enhancing accuracy and ensuring clinicians always benefit from the latest advancements. A great example of this is a recent update that reduced time to result of an air cytology to approximately eight minutes. Utilization for air cytology and blood morphology has been robust and well aligned with our expectations. Both of these broad use categories have great use cases in everyday practice. serving as high-frequency diagnostics that support patient care across a wide range of conditions. Their adoption underscores the value of NVDX in addressing routine, repeatable testing needs that drive workflow efficiency and strengthen clinical confidence. Importantly, success in these initial categories provide a strong foundation for the platform, creating natural momentum as we expand the menu into additional high-value areas, such as oncology with the addition of fine needle aspirate, which remains on track for rollout later this year. Importantly, InViewDX is not only driving placements and consumables, but also strengthening customer loyalty and long-term contractual relationships. Many practices adopting InView are expanding their broader IDEX commitments, with some extending agreements ahead of schedule to secure access to this transformative platform. Turning to CancerDX, momentum remains strong, with nearly 5,000 practices to date adopting this test, within just a few quarters of launch. Utilization is tracking well with expectations, and we continue to be encouraged by competitive customer adoption, now over 17% of customers. This reflects growing awareness and underscores CancerDx's importance as a new standard in venereal oncology. While the majority of samples are still being used to aid in the diagnosis of canine lymphoma, the number of practices incorporating the test into wellness protocols is nearing parity. enabling early detection and improved patient outcomes. The clinical need for oncology screening is clear. Cancer remains one of the leading causes of death among dogs, and early detection is critical to improving outcomes. CancerDx provides veterinarians with a cost-effective, highly sensitive tool that integrates seamlessly into a standard wellness visit. Looking ahead, our CancerDx roadmap is ambitious as we expand internationally and add mast cell tumor detection and one additional cancer next year. With canine and foam and mast cell tumor detection, the CancerDx platform will address over one-third of all canine cancer cases. Mast cell tumors are top of mind with pet parents because they can often feel these lumps and bumps while petting or cuddling with their dog, and early detection can significantly improve the clinical outcome for an affected dog. The upcoming availability of FNA for lumps and bumps on an IndyDx will allow for cytology results during the patient visit. helping to provide clarity to a concerned pet parent. We have a couple of important highlights in our software business, specifically related to the broad-based adoption of our cloud-based products, reflecting the strength of IDEXX's vertical SAS model purpose-built for animal health. Veterinarians across all stages of their careers recognize the workflow efficiencies and easy use that our solutions provide, enabling them to spend more time delivering care and less time at administrative tasks. Our cloud-native TIMSS platform delivers double-digit install-based growth again this quarter, surpassing a milestone now with over 10,000 locations and strong adoption among both independent practices and enterprise customers with multi-location groups. Customers are choosing IDEXX for a growing vertical SaaS platform, where integrated modules create seamless workflows for clinicians and connectivity with diagnostics, and increasingly for pet pairs to evolve. Now, our client engagement platform continued to expand in Q3, with active clinics growing over 20% sequentially, and over half of PIMS bookings in a quarter included a VELO subscription. Clinics using VELO report higher appointment adherence, increased diagnostics compliance, and greater client satisfaction, all of which translated to higher visit volumes and revenue growth. The integration of VELO with our diagnostics and PIMS ecosystem further amplifies its value, making it an increasingly important part of IDEX's long-term growth engine. As we conclude, I want to extend my deep gratitude to our 11,000 IDEX employees worldwide. Your commitment to innovation, customer partnership, and operational excellence is what enables us to deliver results like these. Q3 was another quarter where innovation and commercial execution came together to drive strong financial performance and advance veterinary care. As diagnostics sit at the center of the veterinary system of care, IDEXX will remain at the forefront of advancing standards, unlocking practice, productivity, and driving sustainable growth. Now, please open the line for Q&A.