IDEXX Laboratories Q2 2024 Earnings Call Transcript

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 normalizations.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 continue to see level headwinds, I think we're acknowledging that there may be some macro dynamics going on here that we're, we're working through. And I'm 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 and healthcare, including visit trends. And so we'll, we'll talk more about that at investor day, but we continue to have a very optimistic long term outlook for for the growth potential in the sector.

Yeah, good morning, Chris. Just a couple words about the long term trends, as Brian said, we continue to be very optimistic about that. You know, all the longer term sort of secular tailwinds we believe are intact. It's obviously starts with the overall humanization of pets, and that continues to strengthen.

You know, appreciably and increasingly among the younger household only pet where from a demographic standpoint. You know, what they've shown both in terms of intent in actual actions is willing to spend more and prioritize. These would be 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, it's really a global phenomenon. They're more aging and we know that as they age, you know, more generally spend from both the healthcare, overall health care standpoint as well as diagnostics.

Longer lifespans, we'll provide an update on that oninvest today, 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. And again, back to the prioritization, we think that this is a very resilient market that owners are willing to spend and prioritize for the care and well being of their pets.

Maybe on a shorter term basis, just a couple of comments based on a number of ongoing conversations we have with veterinary practices there, very optimistic, and in terms of 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 veterinary technicians amongst their teams. They continue to invest in technology. We've seen that both from a software standpoint as well as point-of-care at record placements in Q2.

As we said in our commentary, there are some high-level macro impacts that are affecting it likely at the margin, some moderation in clinical visits, but we're confident that we'll work through it, and we're working through it effectively as our customers.

Why don't I start with your final question, because I think that will help center the discussion around visit trends, which I think was the first part of your question related to, Mike. Just 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. I mean we had a 33% expansion in the business between 2020 and 2021.

I would say the dynamic in 2022 that kind of 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, and it was fundamentally an impact on clinical visits. So we went from a positive 5% clinical business environment to a minus 3% environment in a relatively short period of time. And 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.

And I think as we've moved forward from that, I think there has been kind of 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 trade-off. And all paths lead back to the fundamental dynamic that's changed is visits. And I think our premium has been quite healthy or placements net new 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. So I think there are - as we look forward in the your 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. So we feel very good about that.

While acknowledging that we've been working through a clinical visit issue. So getting to 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 U.S. at the visit changes on the same-store level, diagnostic frequency diagnostic utilization. And I think we do see some level of an impact on these metrics related to the pain mAbs. We try to pull this apart and we can see on wellness business, they're actually up year-on-year, 100 basis points, and that's been actually a trend we've seen for several quarters now. So a very healthy dynamic. When pet-owners are coming into the clinic, they're doing more diagnostic testing.

On normal testing, those metrics were holding up through last year and 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 Librela kind of launch and kind of penetration. And so 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 or the pain mAbs dynamics probably sustained, you know, continue to expand.

And it might indicate there's a bit more weakness on the clinical visit front, particularly in non-wellness. And I think that's indicative of the macro headwinds that we've been highlighting. So 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.

Mike, let me address a couple of other questions you had embedded in there. First, around the alternate channels of healthcare. What we see from an alternate channel venue standpoint, is it's largely complementary. I'm referring to some of the bricks-and-mortar places like Tractor Supply or PetIQ 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 and therapeutics have to go through, have to go through the veterinarian and does have a good deal of medicine involved in terms of testing and diagnostics and follow up that really require a professional expertise. So we think that that's a, you know, a very positive thing. You know, and in terms of your question around levers that can positively impact growth. We continue to say just to build off of Brian's comments and observations, that innovation is just so important to this industry, not just in 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. If you think about 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 a 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, you know, inVue shipping in Q4 and SmartQC and Pancreatic Lipase or our Catalyst platforms Vello software to staff and be -- there's just a significant amount of innovation that veterinarians can use as part of their tool set to continue to treat patients better. And we note that they look for that and 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.

Great. Thanks for your question, Erin. Regarding the ongoing litigation matter, as we noted, we had a $62 million discrete expense accrual 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 10-Q and our second quarter 10-Q in terms of the nature of this, but this was a, a an issue related to royalty payments over time. And we are, you know, what we've updated is our best estimate of the probable loss from that matter.

In terms of your question on, operating expense leverage, I think, you know, 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 through 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 in the first half, and that's reinforced in our full year outlook as well.

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 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 -- it's a fast-growing business with very good drop-through, and so that's another lever that we have. But we're disciplined. We're able to adjust our expense and expense profile to whatever environment we're in.

Erin, just to your point on the guidance, we've captured the expectations for the Q4 launch of inVue, and as you know, it's principally an instrument introduction. At that point, the recurring revenue will build over time.

And as is our policy, we'll talk about innovation as we get closer to launch. We look forward to Investor Day, 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.

Yes. Thanks for your question, John. I think the, you know, 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 mAbs, a follow-up visits which we capture in our visit number and so I think that could particularly in the first half of this year be indicate that the underlying visits themselves maybe a bit softer relative to the visits that would have diagnostics and the premium might be that much stronger.

So I think that the net of that as the premiums 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, obviously, had a solid net price realization aligned with the value we're delivering. And so I think we're -- we feel positive on that front.

And factors like introduction of innovation are critical to go to helping to increase engagement with our customers to get the multiplier benefits that come from IDEXX innovation and leverage of our ecosystem. And so, I think we're looking forward to the InVue launch and the other initiatives that Jay had highlighted and we had something that can be intend 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 a 10% overall growth organically tactics recurring there was a day's, present days had a benefit, but very solid growth, volume growth continues to be very positive, and we have excellent progress on issuer replacements, which will be a strong indicator of our long-term growth potential. So I think we're feeling very good about the execution metrics, and as we work through some of the visit headwinds that we've highlighted.

Yes. Let me answer to your second question first, and then I'll turn the front end part of the question to Brian. We aren't concerned about that to with from a diagnostics utilization standpoint. We think it remains a pretty -- it's remained pretty constant from the launch of the payments themselves, primarily as a patient visit growth phenomenon that we spoke to related to some capacity challenges that practices are working through as well as the macroeconomic impacts. When you take a look at wellness, for example, we've seen the diagnostic and closure of 100 basis points. And Brian spoke to the effect of payment on the non- wellness, which is where we cataloged 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.

Hi, John, your question on the margins, if I got that right, I think if the underlying performance that we've had this year reflects solid gross margin momentum. There are a number of drivers there. I think we've had ongoing benefits from cost management, things like labor productivity initiatives. software business as it's growing as meaningful to us.

The business mix overall, just solid growth in CAG diagnostic recurring revenues and growth in in-clinic revenues is a positive factor. And so -- and just ongoing productivity in our operations functions 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.

I'll take the front-end of your question and have Brian address the gross margin piece. David, if you take a look through the years, most of our growth has actually come through same-store sales.

So we do very well competitively. We're pretty transparent in terms of disclosing it up and then and the progress we make, but we look from a growth algorithm standpoint to drive diagnostics utilization. Now a lot of that happened through innovation. There's also a big Technology for Life component that.

But if you think about Catalyst, for example, that tend to handle parameters 10 new slide over the last 12 years. So we know customers are just using more of that. If that means that the growth profile of the Company from a from a Reference Lab standpoint, the same phenomenon. You know. if you think about critical antigen as an example of 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, though, SaaS breast. So I've used more because it has more clinical value. That's how we think about it. Obviously, new platforms opened up a completely new, no retail space for us. And that's another element of our growth algorithm and the Investor Day Brian always. He always dissect sort of put some of the pieces together to show where that growth comes from the U.S. and internationally.

Yes, indeed, even if in your margin question, I think in the quarter we highlighted that we had benefits from net price realization that offset inflationary cost impacts of software service margin gains and favorable business mix, which has driven by solid VetLab growth.

I would highlight, I think we had strong flat margins in the prior year. And part of that was we were we were ramping staffing. So I think -- some of the lab margins to the underlying productivity is very good. It was muted by a bit of a compare dynamic. But I think overall, I feel very good about the gross margin performance.

Now, I'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 diagnostics sector and unwavering focus on innovation and our customers.

Looking ahead, we remain excited about the significant long-term opportunity to enhance standards of care for companion animal. And so with that, we'll conclude the call. We look forward to seeing many of you at Investor Day. Thank you.