IDEXX Laboratories, Inc. (IDXX) Earnings Call Transcript & Summary

All right, guys, great. Next up, we have on stage, IDEXX Laboratories, the worldwide leader in animal health diagnostics. And joining me on the stage is the company's CFO, Brian McKeon, on the left; and Mike Lane, EVP and General Manager, Reference Lab and Information Technology, a long title, hopefully, I got it all. Congrats. Thanks, guys, for doing Jaws & Paws again this year. I'm going to start where I probably get the most questions and it's with -- around visits. And a lot of us can see the data. I'll run some numbers by you. For 2Q to date, the data source that we use has clinical visits essentially 0. I mean, down 0.1%. I went back and I looked at the -- this same source has run an 8-quarter average, that's roughly 50 bps better than your clinical visit results. So Brian, I guess the good news is seemingly better than the 1Q '24 exit rate that you guys talked about, that was down 1.5% but still below IDEXX' long-term build or LRP that you guys talk about, which is plus 3%. You talked about capacity constraints, macro headwinds.

Maybe just help us out, is it more one than the other? Has it evolved when we think about those dynamics that seem to be pressuring visits?

Yes. Thanks, Jon. So I think in terms of clinical visits, as you pointed out, that's one kind of contributor to the overall growth equation for the company that's been more dynamic the last couple of years. If you could set some context, we had historically in the U.S., 2% to 3% in the same-store clinical visit growth for a number of years. During the pandemic, that jumped up to about 5% annually. We went through a transition in the U.S. in 2022, 2023, where we saw a pullback in capacity at the clinic. So I think that was a key dynamic. There was likely some lapping of sort of the puppy boom as well, just in terms of adapting to some of the unusual things that went on during the pandemic period. And we -- in the fourth quarter of last year, we saw a relatively flat clinical visit trends. We knew that we were still working through some of the dynamics with the clinics on just managing staffing and helping them with that aspect of what is an ongoing kind of evolution, I think, for the clinics just to adapting to the higher level of demand and other things that are going on just the labor market. And to your point, I think we saw a relatively softer-than-expected visit trends in Q1 coming out of the quarter, down about 1.5%. I think the staffing continues to be, I think, a constraint to growth. I think that's the right way to think about it is that it's -- some of the clinics are still working through. I think we're engaging actively with them and bringing productivity solutions and trying out new innovations that will help manage that over time, and we see a lot of positive factors to point to and just in terms of the optimism around the sector and willingness to invest that we think will be helpful over time. There may be a consumer impact here that we're seeing. I think the -- as we've discussed many times, we kind of pay attention to things like wellness versus nonwellness trends. We might expect to see kind of consumer impacts a bit more on the wellness side, just relatively more discretionary. I think in the second half of 2023 and into Q1, it's somewhat softer. So I think that could be a factor. And I think the broader theme is the our business and the sector is incredibly resilient, but we're not immune to consumer impacts and there's been a cumulative impact of inflation, I think, on consumers that may be in affecting demand. But net-net, we're -- we try to capture that in the near-term outlook, and I think continue to be very optimistic about the longer-term view on the sector and hopefully, we'll see a stabilization of those trends like we expected in the second half of this year.

And that was great. That was great color. I think every quarter, we do our surveys, and we usually ask the vets if they're optimistic or pessimistic, and most are optimistic, then we pipe them in and we say sort of what's the thought behind that reasoning. And I'll do something with my hands, so no one on the webcast can see. But initially, there were constraints around capacity were sort of front and center and macro was behind that. And now it seems like it's gone the other way where macro seems to be the main headwind. Capacity is still an issue, to be clear, but maybe taking a little bit more of a back seat. What's your reaction to that? Do you think that has swapped a little bit over the past 12 to 24 months?

Just building on what I said earlier, and I think it's pretty much what you're saying. I think staffing and capacity are still a constraint. And I think there may be a macro impact here that we're seeing at the margin. I think the bigger theme is it's incredibly resilient sector. We're growing well. We're delivering good financial performance and as we continue to invest, and we're excited about the innovations that we're bringing to the sector, particularly in the coming year. And so -- and against a backdrop where we're expanding instrument placements. And I think our customers are, to your point, optimistic on what the -- what demand -- how demand can evolve over time. I don't know if you want to...

Yes. Let me add a little color, Jon, to your comment there. As an example, I was in a large veterinary specialty referral hospital last week, but I think it's representative of what we see across the sector. This hospital had a major ER practice, full practice. So growing demand, but a bit constrained in the ER from a staffing standpoint, 2-hour wait, but these pet parents are waiting patiently and you can just feel the bond that's in the room. And talking to the hospital director, the Medical Director, they're focused on growing productively. They're using IDEXX point of care, real-time. In this case, you can picture sick patients, such value of having those results right there in the practice. But they also use the reference lab as an extension of the practice in terms of some of -- helping to manage some of those staffing constraints. And then they've got IDEXX Practice Management software bringing it all together. So I think it's representative and it's why we're so focused on helping practices with innovations like inVue, with Vello, these innovations that take work out of workflow and make it easier for them to meet this demand at times when they have that constrained staff.

Okay. Great. Great color. And guys, as always, if you have any questions, just throw your hand up or even shout out. I'm going to pivot and do a little bit of a...

Quick comment here. On the specialty [ set for ] the referrals, we -- typically, we see 2 hours would be a really short wait. We see 4 or 5 hours, people having to usually come back the next day.

Yes. There's certainly -- so it's 2 hours, but there are some people that leave, right? And this particular hospital tracks that. They may go down the street to a different hospital. This was in a metropolitan area.

[indiscernible] What do you see [ across ] that? Is 2 typical or is what we're seeing more typical? [indiscernible] especially as we're [ seeing ] earlier [indiscernible]. That's not really what [indiscernible], we can't [indiscernible].

I think that's accurate. I think we continue to see pent-up demand. This is a theme that we've been talking about for a while. I think the key thing we're trying to highlight there was a dynamic that was going on with a pullback in capacity. I mean a reduction in hours. I think we've moved past that.

[ Sat ] arrays being pulled back or what...

Right. That was a very thing that we could see in the data. We have access to PIMS data, you can see the operating hours for the practice. To your point, I don't think that there's been a -- the theme hasn't been, oh, that's coming back. I think there is an ongoing kind of management of capacity dynamics and ongoing management of the staffing in a more challenging environment. And there's a range of kind of how practices are adapting to that. So I think to your point, we continue to see -- we saw a 10% expansion in the pet population. So we know that there's a lot of pets out there, and they're owned by people that increasingly care about pet health care and have a humanization of their relationship with the pet. So we definitely see this as a long-term favorable trend. And I think some of this is just helping the clinics to adapt. And we're seeing our customers leaning in more here. I think organic volume growth is becoming a more important theme for practices. I know you're going to have some folks visiting today to talk about how they're managing their businesses. And I...

But you've got a massive opportunity there, right? If you look at where you're positioned, and your point-of-care solution [ optimization ]. That's the opportunity, right? The opportunity is to circumvent some of this staff shortages, et cetera, et cetera. So quick question on that is, what would point-of-care, what initiatives do you take in to train the staff in these places so that they're up to speed as quickly as possible? Running -- because this is a [indiscernible] word, an instrumentation business [indiscernible] for many years, actually not relying on the hospital or the staff themselves, but going in there, making sure that it's a 6 weeks on, 2 weeks off [indiscernible].

Yes, do you want me to take that? Yes, we do that. We do that. A big part of our commercial engagement model are just not sales professionals, but also field support that follows and trains and educates on workflow across the whole point-of-care suite. But it's not just point-of-care testing begets testing, and there's certainly opportunities to help the practice with efficiency with point-of-care testing, but also utilizing the reference laboratory as an extension, we see that as well. And then bringing it all together with IDEXX software. So we do what we're doing, what you're describing, but that's the job, and that's where practices are leaning in and wanting us to do more and more of.

[indiscernible] the impact of your software [indiscernible] and whether it depends [indiscernible]. I think that's [indiscernible].

Yes. I think it's unique to IDEXX' approach to the market. We have an integrated business model that we've been focused on organic growth for decades, and it's with a belief in the long-term potential for pet health care. And if you look at how we've approached it, we've been agnostic to in-clinic versus reference lab. We want to support our customers in a way that makes sense for them and it's integrated with software. We are adding to our capability around the software. The -- obviously, the PIMS system itself, we're a leading cloud-based provider, work seamlessly with our solutions. We are wired into the practices. So we're basically able to add innovation to our instrumentations through -- on an ongoing basis. We're providing solutions that are getting at pain points, indeed the new solution that we'll be launching later this year is things like ear cytology and blood morphology, those are common kind of pain points within the practice that we can help solve. And we're adding to the capability of big practices to be able to engage with the pet owner and drive engagement with the clinic. So Vello, which is a pet owner engagement. It's a key part of our future software strategy. We're excited about the opportunities that, that's going to bring. And I think when we -- most importantly, when we're talking to our customers, we're talking about solving the problems that they're very focused on solving, too. To your point about how they're going to grow their businesses is going to be centered on services and diagnostics is a key part of that. It's the most profitable part of the practice. And so we see this as a win-win. And I'm really encouraged. We saw this significant expansion of demand in pet Healthcare through the pandemic, and we're growing off of that. So I think we're learning to adapt and get ready for the next phase of growth in this sector and very excited about how we're getting at it.

And can we talk a little bit about the guidance cadence just for this year? So I think -- for the second quarter, if I've got it right, the organic revenue growth guidance is about 6% to 8.5%, midpoint, just north of 7%. 1Q was 6.8%. So -- if you look at 1H, you might land around 7%, okay? Full year is 8%, obviously implies an acceleration.

Midpoint.

Midpoint, pardon me, is 8%, obviously implies an acceleration in 2H. I think you mentioned there's a day's benefit in there. It will be the launch of inVue, right, that you mentioned earlier. And the other dynamics that you want to call out in terms of what should aid that 2H versus 1H and the relatively modest acceleration that you have embedded in the back half or the midpoint of the range.

Sure. So just as a caveat, we're not updating anything today, but just reframing the guidance we discussed in our last call. To John's point, our midpoint outlook for would imply approximately 7% organic growth in H1. It would imply approximately 9% H2. So there's a 200 bps step-up, 50 bps of that is days, that will be principally in the third quarter. We have some more favorable lapping second half of the year, Jon, in areas like LPD. As you know, China has been kind of a headwind in that business. We're working through that, targeting higher growth in our software business or recurring software revenue, so that will be helpful. And the underlying assumption on the things like the clinical visit growth levels, we're assuming a flattening of trends second half at midpoint versus the down 1.5% that we implied for the second quarter. So those are kind of the bridging items. We've captured the new platform launch in our outlook as well. But the -- we -- it does rely, to a degree, on an improvement in the underlying sector trend. And we continue to see positive dynamics supporting that. And we're positioned to deliver good results within the ranges that we've talked about. And while we continue to invest towards the long-term growth potential that we see, we're very optimistic about the future for the -- for our business, and I think we're in a good position to build on the momentum that we have.

Okay. And one of the areas that you certainly have some solid momentum seems to be EMEA. You break out your EMEA and APAC revenue in your filings. APAC, as you mentioned, has been sort of running into headwinds largely factored by LPD. But I have 1Q '24 EMEA revenue that was up 14%, sort of another quarter of mid-teens growth. And there's FX in there. But at a high level, EMEA seems to be showing some solid momentum. Can you talk about what's driving that? And then you do give us the CAG Dx recurring international, which is below that. So maybe just talk about the dynamic, and this will be specific to Dx recurring between EMEA and APAC would be helpful.

Maybe just on the clarification, I would say that Europe and Asia Pacific were similar in Q1. If you take out FX in both very solid growth rates, and we're very -- feel very good about the momentum that we're building there.

Yes. Yes, I would just add, excited about international growth opportunity. Certainly, Europe, 7 commercial expansions, Jon, in the past 4 years. So that's part of it. Part of it is also really honing the commercial model that we've fine-tuned here in the U.S. In EMEA, the commercial team has not only expanded but has the programs, the multimodality solution. We've matched this with the investment on the lab side. As you know, not just commercial but also with our investment in Kornwestheim, our largest laboratory in the world, which really forms the hub and spoke core of our European network. So we've got the lab service capability. We've got the point-of-care capability. We've got the commercial execution. And I think that combines to what you're seeing.

Okay. In terms of the overall traction both in EMEA and APAC with a CAG Dx recurring. Okay. And I'm going to pivot a little bit. I'm going to go through the growth algo, and I've got the CFO up here, so I might as well pain you a little bit and go through this process. And look, we've done a lot of work on this over the past couple of years and the CAG Dx recurring organic growth guidance for this year, so the Dx recurring is 8.5%. The Street is at 10% to 10.5% next year, 2025. We're Street-low. We're 9%. And again, CAG Dx recurring organic. So for price, this year, you're taking 5%, which was lower than last year. I would assume your 25% price increase is likely below this year's 5% contribution. We just sort of see inflation coming down. I know we've already had some panels today that have talked about pricing and how it's been pretty rich for the past 12 years. So if next year, it's 4%, I'll still be above your LRP of 3. But if price steps down next year by 100 bps and The Street has you accelerating the 8.5% to 10% and change by 150 bps, you've got to find a 250-basis-point accelerant from either visits or the IDEXX premium in terms of how we define it. Just walk us through that, Brian, right? I mean, Street has like -- what gets you there? What are the drivers? Would one be more visits than innovation, vice versa? Or do you see more of an opportunity with price being more durable than maybe I'm giving you credit for?