IDEXX Laboratories, Inc. — 2024 Q1

Good morning, and welcome to our first quarter earnings call. Today, I'll take you through our Q1 results and review our updated financial outlook for 2024.

Thank you, Brian, and good morning. IDEXX had a solid start to the year as we continue to advance our strategy to drive the development of the Companion Animal diagnostics sector through innovation and customer engagement. Our ongoing progress benefits from the durable secular growth drivers that have supported the multi-decade expansion of Companion Animal Medical Services. These drivers include growth in the pet population in the strengthened human pet bond as well as the ongoing expansion of pet healthcare services. Medical services is in turn enabled by diagnostics and is a key element of vet clinic growth and profitability.

I'm just interested in the comments you made earlier that it seems like you're seeing both maybe some capacity challenges and macro impacting visit trends. Can you just maybe elaborate a little bit on the latter? It seems like your initial guidance for the year was a bit more optimistic on stabilization of visits. And I'm just wondering if there's any particular, either regions or trends in corporate versus private practice where you're seeing this macro piece more acutely than others? And maybe just linked to that, I know it would be a guess. But as we think about visit erosion right now, what's your best guess in terms of how much of this is just ongoing capacity dynamics at the vet versus what is actually consumer demand at this point?

Thanks for the question, Chris. Maybe I can provide a little clarity on the numbers upfront and then turn it over to Jay to talk about the dynamics. We mentioned that clinical visits were relatively softer than we expected in the U.S. in the first quarter. On our last call, we had talked -- we did anticipate some weather impacts, but I think we were expecting the flattening trends that we've been planning for to emerge. And the trends coming out of the quarter were down about 1.5% versus prior year and so that was relatively softer.

Yes, sure. The way I think about it is both from a customer standpoint, meaning the veterinarian and then the consumer or the pet owner standpoint. And we know that pet owners continue to prioritize spend for healthcare services and general spend on their pets vis-a-vis other priorities, be it building out the dinner, entertainment, travel, that sort of thing. When we -- the conversation we're having with customers is largely very positive. They're very positive on the outlook. They continue to invest in their practices.

Great. Can you hear me okay?

We do.

Great. I wanted to follow up on Chris' questions. I guess, you talked about the kind of end of first quarter traffic running a bit below the prior expectations. I guess, would you be able to comment on -- is April kind of in line with that 1.5% decline? And I guess more importantly, as we think about over the balance of the year, it sounds like you expect some improvement in traffic levels.

Well, I'll take a moment to just try to help with some of the first half to second half bridging. So you obviously have our Q1 results. And in my comments, I highlighted our expectations around Q2, the organic growth of 6% to 8.5%.

Yes. Great. I mean, from our perspective, there's a couple of things that I would highlight. One is that the clinical diagnostics revenue growth rates have continued to remain strong. We saw that in Q1 at 5%, actually higher than total practice revenue growth, which is a little bit over 3%, we continue to see healthy diagnostics frequency and utilization.

Great. If I could maybe just ask a quick follow-up on the gross margin strength. Brian, you talked about the factors that were driving this. It sounds like some of those should be sustainable, but I'd be curious to just kind of get your view on that over the balance of the year. And you didn't change the operating margin guidance, I guess, despite the strength that you saw in the first quarter. So any dynamics that we should be thinking about as we think about the cadence over the balance of the year would be helpful?

Sure. To your point, we feel very good about the start that we had in terms of the profit performance and the gross margin performance. We sustained our outlook despite taking down the high end organic growth outlook. So I think that just reflects some of the underlying operational execution benefits that we're getting and our confidence in the ability to deliver solid operating margin gains this year.

I want to get at the vet visit dynamic in the underlying macro, but I'll try to ask it in a different way. If we take a step back, this really started in 2022, and it was initially seen as a temporary effect of comps and working through that. We're now almost 2.5 years into this, and it continues to sort of lag behind expectations. We're still waiting for this recovery in the vet visits.

Yes. I would point to a couple of things. One is, as you highlighted, our innovation agenda, the innovation portfolio we have, I think, is very strong. It consists really across the portfolio. From a point-of-care standpoint, obviously, we plan to begin shipping inVue in Q4. We think that, that has both a direct and indirect leverage impact on the overall business.

And Mike, I'd just reinforce, I think we've consistently demonstrated the ability to grow -- continue to grow solidly and deliver strong financial performance. And so even as we work through kind of the growth off of the higher base that was established post the pandemic and through some of the more recent kind of macro dynamics that we've been highlighting, I think we will continue to find a way to advance our growth agenda, invest behind those things that are important while continuing to deliver strong financial results. So we remain committed to that and we would build a strong track record to support that outlook.

Okay. But would you consider taking another price increase again or potentially some cost controls in the second half? Is that on the table?

What we -- I think we've laid out our outlook for this year and our assumptions to reinforce, we expect approximately 5% price improvement this year, and that supports the operating margin outlook that we shared today and the strong comparable EPS growth as we invest in advancing our R&D agenda, we highlighted we're investing more there and we're excited about what's going to come. So we're confident in our financial outlook that we shared today.

Okay. And then just really quick one if I could squeeze in a follow-up. Jay, I think you said in your prepared remarks that the inVue continues to -- inVue remains on track. You talked about it at VMX, obviously. What's been some of that early feedback from vets, I realized you're still maybe 5, 6 months from actually releasing it. But you're 3 months further along than when you first sort of unveiled it. Any learnings in terms of the capabilities ramp? Talk about some of the offering that we'll be able at launch versus later on sort of what's been the reception to that?

Yes. They've been -- customers, in general, have been very enthusiastic about the product itself. They like the fact that it addresses very high-volume, time-consuming critical use cases within the practice, either cytology and blood morphology. One of the things that customers continue to tell us is they know they should be doing more blood morphologies that they're doing just as part of a complete CBC or hematology workup. And now they feel like they're going to be able to do it because it just makes a lot of sense.

Great. Can you talk a little bit about the competitive landscape? Do you think that there's more of an opportunity to see some more meaningful market share gains, either across the smaller practices or corporate accounts as well? And there's clearly been some disruption in terms of ownership structure, in terms of distribution changes and I'm just thinking about how you can kind of take advantage of that? And if you have seen any notable kind of share gains to date?

Yes, we've always said, and I think it's still true now that the very competitive landscape, I would say that on a global basis, not just in our largest market, the U.S. And the -- what we focus on, obviously, is being able to support our customers, be they independent practices or corporate with a full end-to-end suite at the point of care -- patient reference labs and increasingly software.

Okay. And then how inVue kind of fits into that strategy as well? I guess initially is the focus on existing customers or swapping out competitor equipment where you have exclusive contracts. Or can you remind us kind of on the timing to of the fine needle aspiration and that seems to be where we're getting some of the earlier feedback and is that sort of 2025? Or how do we think about the time line there?

Yes. So a couple of questions there. The inVue from a focused standpoint, obviously, the IDEXX customers who already enjoy our VetLab suite, our obvious customers from targeting or focus standpoint, we know they'll fit right in with their workflow and already partnership they have with IDEXX.

I don't think really -- a shocker that I'm also going to try to hit on visits and just sort of need to because your stock is largely tailored to seeming with the data. For visits, you mentioned macro capacity constraints weighing on the overall vet visits. And some of our checks seem to tease out, call it like a higher sensitivity from the pet owner. You're taking price and in many cases that, that might be marking up 2, 3, 4x somewhere in there.

Yes. Let me -- Jon, I'll take that. The -- we obviously don't control in pricing to the [indiscernible] that's up to practices and veterinarians. So lot of things factor into that. They're investing in their staff. We think that's a good thing when they retain their staff and really upscale the fellows who are supporting pet owners, that's a long-term driver and a point of stability within practices. And I think coming out of the pandemic, that was a real challenge for them.

Yes. And Jon, just to reinforce Jay's point, I think we align our pricing with the value we were delivering on the underlying inflationary dynamics that we're seeing. And we'll continue to factor that in. And our outlook is consistent with what we shared earlier for 2024, which is approximately 5% net price realization globally.

Okay. Sorry about that. And then let me just maybe try to throw a bunch of small ones in the second question. Brian, you talked about the vet visit data to have embedded the midpoint. I've just gotten some questions. Is it as simple as extrapolating out the negative 1.5%, call it, for the lower end, just when we think about your guidance?

Jon, can you just clarify your first question? I just wanted to follow what you were trying to get at when you said -- was it a full year question you're asking? Yes, just trying to clarify what...

Yes. Sorry, Brian. Is it just as simple as I think and maybe hopefully, I'm just right, but the midpoint of your guide has visits down 1.5% in 2Q and then essentially flat in 2H. Is it a simple for the lower end, call it, just take that 1.5% and like extrapolate it out for 2H, and that's sort of what's call it embedded in the lower band of your CAG DX recurring. That's where I was sort of going with the first part.

It's obviously a broader set of considerations, but I think directionally, your point is valid, which is -- if trends continue to be softer, that would be a factor that could be leading us towards the lower end.

And then on the new box?

Look, I look forward to sharing more. As we get closer to launch, we'll maintain the approach that we've used in the past that -- we'll share that when we we're closer to commercial launch. We're very excited about the inVue advancing and that's on track. And as you know, will contribute directly, and we'll have a lot of multiplier benefits to our business. And I know our sales force is very excited about that, and we are too. And we continue to advance our second platform. And we'll share more on that over time, and we see that as also being an additive driver for our business over time.

A few followups on vet visits. If you could comment on the U.S. vet industry progress on addressing shortages and mental health of vets and using more vet technicians to assist vets, has this continued? And can you discuss any progress to date? And another follow-up on the macro headwinds on the pet owner side, what are your assumptions for the full year vet visits, wellness and non-wellness, please?

Yes. From an industry profession side, what customers tell us and what we see is that the staffing churn has largely stabilized. Coming out of the pandemic, I think there was a lot of challenges and the veterinarian pet owners responded by, I think, increasing salary and benefits and cutting back some hours. So those impacts, I think, have largely stabilized. I think practices to the extent that they were able to hire more, have hired more, in some cases, they've instituted training, more internal training programs and have taken those sort of steps.

Maybe just one quick one in the interest of time. You've talked about the longer-term dynamics of higher diagnostic utilization as pets age through their life cycle. And I know you also have some data about kind of larger than normal pet population growth post the pandemic. So I'm curious if you could give us your thoughts on when we might start seeing the benefits of that flowing through in the industry in regards to diagnostic use?

What we see is it really increases over time even with the young adult dog. So there's obviously a lot of visits, puppies and kittens. And then as they become young adult cats and dogs that both healthcare services, there's a very modest dip, but generally, healthcare services and diagnostics as both an absolute dollar amount and proportion expands. And then there's -- it grows or accelerates even more quickly as they get into the adult and geriatric stage.