Good morning, and welcome to the IDEXX Laboratories Second Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, 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, idexx.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 second quarter 2022 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2021, 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 will take your additional questions. I would now like to turn the call over to Brian McKeon.

Good morning, and welcome to our second quarter earnings call. Today, I'll take you through our Q2 results and review our updated financial outlook for 2022. In terms of highlights, continued high levels of IDEXX execution drove solid organic revenue growth in Q2 compared to strong prior year results. Overall, IDEXX revenues increased 6.5% organically, supported by 7% organic growth in CAG diagnostic recurring revenues. Key execution metrics were excellent, reflected an 18% gains in premium instrument placements, continued strong double-digit growth in veterinary software and service revenues and a nearly 1,100 basis point U.S. CAG Diagnostics recurring revenue growth premium to same-store clinical visit levels. For the first half of 2022, overall organic growth was 7.2%, slightly below our expectations for first half growth at the low end of our 7.5% to 10% full year guidance range. These results reflect relatively increased headwinds from lower year-on-year US clinical visit levels, increased macroeconomic impacts in international regions. Profit results were in line with our expectations, supported by sustained high gross margins. EPS was $1.56 per share in the quarter, including $0.72 of impact from discrete R&D investments and $0.06 of net year-on-year impact from the stronger US dollar. As planned, EPS results reflected high operating expense growth, including the impact of $80 million in discrete R&D investments in the quarter and carryover effects from prior commercial investments. As we look forward to the second half of 2022, we're targeting continued solid organic revenue growth, building on the significant expansion of IDEXX's business through the pandemic. We've updated our full year overall organic growth outlook to 5.5% to 8% for 2022, reflecting 6.5% to 9% full year organic growth in CAG Diagnostic recurring revenues. The midpoint of this updated range reflects an outlook for continued solid organic gains in the second…

Thank you, Brian, and good morning. IDEXX delivered another quarter of solid growth, supported by excellent execution by our global IDEXX teams. Demand for pet health care remains high, building on the step function and sector growth of pets and patient visits during the pandemic. IDEXX is a diagnostics and software partner of choice of veterinary clinicians. This was reflected in record second quarter premium instrument placements, continued high growth in cloud-based PIMS placements in a sustained IDEXX CAG Diagnostics recurring revenue growth premium to clinical visit growth. Our products support veterinarians by creating an integrated clinic-wide solution that helps them expand capacity and grow their businesses, while providing diagnostic insights to support high levels of pet health care. The solid results that IDEXX delivered in the quarter despite some headwinds from near-term clinical visit growth and international macro factors reinforce our confidence in the durability and long-term growth potential of our business, aligned with increasing care standards for companion animals. Today, I'll discuss our performance and progress in the context of current sector trends in advancing key innovation and commercial initiatives that position us for continued solid growth and financial performance. Let me start by providing some updated context on trends in the companion animal sector. CAG sector trends continue to reflect strong global demand for veterinary services, building on a significant step-up in the number of pets and patient visits observed during the pandemic. US diagnostics revenue per practice grew 6% during the second quarter, against a very strong prior year base, as veterinarians use diagnostics to deliver best care standards, while benefiting from profitable clinical services growth. IDEXX grew US CAG Diagnostics recurring revenue nearly 8%, two points faster, validating the value we bring with differentiated solutions and an excellent customer experience. Specifically, diagnostics remains one of…

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Michael Ryskin with Bank of America.

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Okay. Great. Thanks. Sorry about that. I want to ask on the pricing side of things first, just because we've got a lot of questions on that. Am I understanding correctly that the incremental price you're taking is that you called out in August, the 1.5% to 2%. That's on top of the 4% you took in the first half. And then just sort of how much price do you think you can take until you start seeing a little bit of a pushback. Is this some price you're pulling forward from 2023 in a sense? Just wondering the dynamics there, especially as you talk about weak macro and just uncertain conditions elsewhere?

Thanks for the question, Mike. Just on the first part, that's correct. So we had approximately a 4% increase in the US and worldwide in the first half and the 1.5% to 2%, we anticipate it will be an incremental worldwide benefits, so that would imply 5.5% to 6% for the second half. I'll let Jay talk to the customer dimension.

Yeah. So qualitatively, as Brian indicated, the price increase was really, I think, a reflection of higher costs of running the business. And to your question around pet owner pushback, we don't think that, that's been a driver to date. In fact, pet owners have traditionally prioritized pet health care spend relative to other things. It's a small percentage of total consumable consumer expenditures. So it's a relatively small piece. And we know the human pet owner demand has been strong and growing, and we don't expect that to change.

And can I ask a follow-up on the vet visit growth you talked about. Obviously, we're all tracking a lot of the same indicators, and we're seeing how 2Q came in relative to the first quarter. You talked about all the gains in terms of capacity for vet visits in 2020 and 2021. After -- first of all, what's your assumption for vet visit for the rest of the year? If I'm backing into the numbers correctly, you're assuming gradual improvement from 2Q but still sort of like negative for the second half of the year. I want to make sure that's correct? And then at the end of this year, are we normalized then for the gains we made in 2021, or is there more headwinds in 2023? Is there -- are we back to a normal level and then can grow next year off of this in terms of vet visits, or is there still some more digesting of this capacity next year? Thanks.

So Mike, why don't I walk you through kind of how we're thinking about the outlook analytically and can try to link that back to the underlying sector trends. But just as a grounding, in Q2, the clinical visits year-on-year were down 3%. The revenue per clinical visit was very strong. It was up 8.5%, and that's very positive indicator we think we can build on. But I think the clinical visit levels, as you pointed out, were down relatively to Q1. And we're, I would say, modestly softer than that at the end of the quarter. So as we looked at the midpoint for the second half, if you take the 7.5% midpoint on CAG Dx recurring, there's a days headwind of 1% in Q3. So if we normalize for that, that's 8%. And then if you back off the 1.5% to 2% incremental pricing, it comes up to 6% to 6.5%. So we're basically forecasting that the underlying trends in the sector coming out of Q2 are similar in the second half and that we get incremental benefit from pricing. And the underlying assumptions there are that we're still working through the pullback in capacity that occurred with Fed plans earlier this year. As I mentioned in my comments, there was a big step up from Q1 2020 to Q1 2021, 13%, that's sustained throughout 2021. And then we saw about a 2% pullback in the average visit level in the first half of the year. So that is something that given just ongoing staffing challenges, we think we're still going to be working through that this year. And we're still working through the very strong demand compares to the step-up last year, including the benefits from the pet population expansion. So -- to the latter part of your question, we do think we'll be working through those headwinds through this year, and those should improve, those specific factors should improve as we head into 2023, but we're trying to be realistic on kind of just the near-term trends and the headwinds given the dynamics that we continue to see through Q2, and we think that's prudently reflected in our outlook.

Yes. The other thing I would add to that, Mike, is if you take a look at the net expansion in the number of pets visits in the pandemic. I mean there's -- I think there's some evidence that there's a potential underserved demand given this 10% growth. If you take a look at just extrapolate out the 2% to 3% clinical visit trend. We saw pre-pandemic and add in the number of pets, the clinical visits should be higher just based on pet population. So I think as profession works through some of the capacity constraints that we've talked about, I think the -- we'll see a recovery from there.

We have our next question from Chris Schott with JPMorgan.

Hi, great. Thanks so much. I was just trying to get a little bit of clarification on the guidance change as returning dissects, I guess this vet visit growth dynamic versus some of the softening demand you referenced in Europe. So can you just maybe quantify how much of the, I guess, 200 basis point or so change in organic guidance is from those two factors? And maybe just on elaborating on the macroeconomic side, where are you seeing the greatest impacts here? Is this kind of broadly across Europe, or are you seeing specific markets that are seeing greater pressures than elsewhere? Thanks so much.

Yes, Chris, thanks for your question. The adjustment that we made is principally to reflect the more recent trends we're seeing both in the US and in Europe, principally around the visit trends. I think our execution levels have remained quite strong. We feel good about that. I think the underlying revenue per visit utilization dynamics, as you can see in the metrics are holding up well. And we think we can build on that. But the adjustment is principally to reflect the more recent trends, which were more aligned with the lower end of the outlook. Going back to our earlier guidance, we had talked about the lower end reflecting that some of the pressures continue, and that's what we've -- on visits, and that's what we've seen through the second quarter, and we think we're adjusting for that appropriately. I think we're reflecting in the full range that there's some opportunity for improvement in the second half. I think that to Jay's point, I think there's underlying demand that we believe is out there. And that the clinics can adapt and improve the capacity dynamics, I think that could be a positive factor. And of course, we're trying to highlight that there's some potential for additional macro risk that's more difficult to calibrate, but I think we're cognizant that, that could be a factor as well. So on balance, I think we think we're appropriately adjusting the outlook and reflecting the more recent trends.

Yes. Let me just maybe directly address your question around geographic balance. So we've done a number of different surveys, both in the US and Germany is our largest country in Europe. And what we're seeing is the majority of veterinarians indicate that stack capacity is a major or moderate issue. Not to say the macro effects, especially in Europe, we're seeing some impact from that primarily more so on the reference labs than in-clinic testing. And not surprising when you consider some of the factors that our European sector and regions are dealing with in terms of inflation and energy and the Ukraine-Russian war is much closer to them.

Our next question is from Erin Wright with Morgan Stanley.

Great. Thanks. Another question on the macro. If I heard you correctly here, I guess, you mentioned that the lower end of the guidance embeds a growth expectation similar to what you experienced during the prior economic downturns here. But what the difference across your business now versus, for instance, 2008, 2009 that would make you I guess, more or less insulated from a more challenging economic backdrop here. And as I think about what was going on during that time, for instance, the Catalyst Dx launch, those initiatives may be leaving you differently positioned than maybe you would going into a tougher economic backdrop, particularly here in the US? Thanks.

Good morning. Erin, thanks for the question. Yeah, I think we're in a much stronger position than we were back in 2008, 2009 on a couple of, I think, very important dimensions. Our sales channel, we worked through distributors over a decade ago. And now we have a direct presence in 99% plus from a revenue standpoint. So we have those direct relationships with customers, our portfolio from an innovation standpoint is much more robust across the board, both reference labs, in-clinic software, for example. So I think we offer veterinarians a lot more tools and technology to help manage their practices. I think if anything, that had on our pet bond has grown and is stronger than it was a decade ago. And I think the industry itself, the profession itself is more sophisticated in managing through cycles. I think they're they have adopted a number of, I think, business practices, whether it's individual practices or the corporately owned practices in terms of managing care. So I think we're overall in a much stronger position than we were.

Okay, great. Thanks. And then can you give us an update on innovation, and I'm sure we'll hear about this at the Investor Day. But how do you think about the recent discrete R&D investments that you made as well as the innovation that you called out in your prepared remarks here? And when will these efforts generate material contributions for you? And will this ultimately help bridge the gap between the macro capacity headwinds that you could see and continue to see in your historical long-term growth rates? Thanks.

Yeah. So from an innovation standpoint, I think we've never been more productive. If you look out over the last couple of years and the type of innovations really across the board from instrumentation, testing, services, software. So if you take a look at the instrumentation piece, ProCyte One has just been an incredible success our customers, I think, have responded exceptionally well to it. They love the fact that it's very easy to use. The performance is very high, and it's priced from an economic standpoint, in the sweet spot of the marketplace. So we've seen really dramatic uptake in our international regions, which is not surprising. A lot of those countries or regions are hematology first marketplaces. And the nice thing about hematology is it's hard to do. It's really hard to do well, and there's a multiplier impact. Typically, we sell with chemistry increasingly with SediVue, as part of in-clinic suites. And then on the software front, I think we're all familiar with the challenges that practices are facing from a workflow and staff productivity and client communication standpoint. So I think practices, which have traditionally relied on on-premise software solutions are looking at contemporary cloud-based solutions as a way to address some of those challenges, and we've seen really rapid uptake in our cloud-based PIMS portfolio, whether it's ezyVet or deal or Anima [ph] in some of our country and regions internationally. From a testing standpoint, we continue to -- as I mentioned in my remarks for reference labs, we've had a number of important introductions over the last couple of months and especially in fecal antigen with flea tapeworms expanding the portfolio for that. It's a fast-growing, I think very important franchise that we have, takes five times -- is up to five times as much compared to flotation or O&P. So it's an important part of the overall reference labs because customers, when they use preventive care panels, it fecals a piece of it, but an important piece of it. So a lot of the I think testing is either anchored or driven by the need for fecal. So overall, we're very excited. We're excited by the in-licensing agreements that we struck and we'll continue to provide updates on that over time, including at Investor Day. So look forward to being able to talk more about that.

Thank you. [Operator Instructions] Our next question comes from Jon Block with Stifel.

Thanks, guys. Good morning. Both questions might be centered around price in some way. But when I think about the Dx recurring growth price, for 2022, it looks like it's shaking out around 300 bps. So in other words, the 8% CAG, the ex-recurring midpoint guidance, less roughly 500 basis points of full year price, Brian, if I've got that correct. And historically, you've been closer to 1,000 bps, give or take. You've been growing CAG Dx recurring around 12%. And price was closer to 200 to 300 bps. So maybe some color on that compression of, call it, growth ex-price. Is there anything to call out other than comps, such as less incremental contribution from innovation or maybe what you're even seeing from a market share perspective for that rate of compression?

Jon, I am trying to follow your math, but I think that we're not signaling a fundamental compression in the underlying kind of growth in excess of kind of visit levels, excluding kind of price changes. I think we've got a benefit this year. We're roughly 1,100 basis point premium in the US in the first half with 4% pricing that would imply kind of closer to the higher end of that 900 to 1,000 basis point range that we saw pre-pandemic. And our outlook for the year underlying it, we're not specifically forecasting clinical visit growth, but it's more of the trends that we saw coming out of Q2 would imply consistently high levels, and we're not trying to signal compression on that front. So I think we're -- that's something that we need to continue to execute well against. I think that can be impacted by consumer factors at the margin. So I don't want to say that those are things that we're not considering, but I think our midpoint outlook signals that we think we can continue to deliver well on that front and get some additional benefit from some pricing and that will support our solid full year numbers and second half numbers.

Okay. And maybe just to clarify, Brian, and it might be the same answer, then we can move on. But I'm not talking about, I guess, maybe -- I'm not talking about the premium to underlying clinical visits. I'm just looking at your CAG Dx recurring midpoints around 8% growth, you've got a 500 basis point contribution from price. So CAG Dx ex-price is around 300 basis points. And previously, it had been 900 basis points or 1,000, right? Your CAG Dx is growing 12%, your price was 200 to 300 basis points. So why if we normalize for the contribution from price and we throw that out, the growth just looks like a fraction this year versus prior years. And I'm guessing some of that's attributable to the comps is sort of where I'm going with it. But are there other components to it where you're getting less of an incremental contribution from innovation or less market share gains. That's where I was going with it just to clarify. And again, it might be the same answer we can move on, but hopefully, that was a better question, if you would.

Yeah. And Jon, it's principally the swing in the clinical visit growth. I mean, we're growing 3% and declining 3% in Q3. So that's 600 basis points. I mean, I think our underlying execution and delivery has been quite good. And -- but -- and the swing in that is, as we mentioned, two factors. It's the pullback in the clinic capacity after a significant period of expansion and retroactive clinics couldn't sustain. And I think we believe can adapt to that over time. And I think that we've got -- we are lapping some of the step-up in the -- the big step-up in demand we saw in the pandemic, including the benefits from the patient expansion. So I think for 2022, that's kind of the key factor that we've been working through. That's the key adjustment in our full year outlook this year. We, obviously, had to make some changes. And this is the change in trend from the second half of 2021, but that's change in the visit level is the clinical visit growth levels is the key difference in terms of where we.

That's helpful. I've got -- yeah, I've got that swinging 400 bps plus two to minus two and ex-price compressing 600 to 700 bps, but it gets me a lot closer, and I could follow up offline. So that's why I was asking about market share innovation. Maybe just to shift gears and the second question is still in and around price. I'm just curious, Brian, is it uniform across all your CAG modalities in terms of consumables, lab, rapids. And more importantly, are your competitors following on price for both the point of care and reference lab? And if they're not, what does that say, if anything, about your ability to take the same rate of price increase, the same magnitude into 2023? Thanks.

Yeah. Jon, this was across consumables and reference not capital, and it was a -- primarily a US driven change.

Sorry, Jay. Point of -- I didn't ask capital. Point of care in the reference labs across all your modalities of CAG Dx recurring and have your competitors followed suit the best of your knowledge? And if not, what does it say about your ability to take price in?

We don't have any insight in terms of what competitors or competitive landscape is up to.

It is reflective of the overall inflationary environment. So I think that that's a broader factor that I think everyone in the industry is dealing with.

Fair enough. Thank you.

We have our next question from Elliot Wilbur with Raymond James.

Thanks. Good morning. I understand the granularity on ex US visit trends is a little bit more difficult to attain. But just wondering if you could comment in general, whether or not seeing the same level of deceleration in clinic visit trends ex-US versus US? Any perspective on that? And then more specifically on the performance or relative performance US versus ex US in the reference lab business, differential in growth rate is this purely just a function of difference in clinic visit trends, or are there other factors that continue to lead to the substantial over performance in the US versus international such as price and utilization? Thanks.

Yes, to your point, to your question, visibility internationally. So we don't have the same size PIMS installed base across the different regions. So we don't have that type of pinpoint accuracy we do in North America. I would say that we're seeing similar trends based on other data. I think it's a reflection of some of the same capacity, challenges in the practices because we know during the pandemic, we saw the same pet boom in countries like the UK, Germany, Australia, what have you. I think the overall factor we see internationally, specifically in Europe is we do see some of the macro impacts that does impact reference labs more so than point-of-care, not surprisingly, there's not as big a wellness or preventive care business internationally, but there -- it's probably 20% or so of the visits, and that's primarily a reference lab modality. So we do see some headwinds connected to that.

We have our last question from Ryan Daniels with William Blair.

Yes, thanks for taking the question, guys. I want to take a little bit of a different approach and get any insights you have on what type of IT investments you can make in the near or intermediate term to help your customers increase capacity. So I'm thinking things like digital intake platforms or self-service billing, et cetera. Is that a high priority for you? And do you think that's something that can actually help with throughput for your customers and alleviate some of this pressure?

Good morning, Ryan. We see pretty much across the board, whether it's independent practices or corporate practices, an incredible hunger for those type of IT tools, not just systems, but PIM systems, which provide the pinner-engagement modules, which allow them for – yes, if you take a step back, about 15%, what practice owners tell us, about 15% of their staff time is focused on just that patient intake piece and administration of the patient. And a lot of that can be automated. A lot of that could be done virtually like it's done in other industries. So the ability to use and deploy these software tools for client communications, for workflow optimization and every step of the patient visit is a high priority for these practices. And I mean -- and we're seeing that in our software business, where we've seen very rapid growth. And I think historically, practices have been somewhat hesitant to move away from PIM systems because the data and they've been trained on it and they have all the reports on it, but they're willing to make that switch now because they see the benefits of what a modern software suite can bring. So I think that's a -- that's only going to get stronger over time as work to address some of the capacity challenges.

Okay. And with that, I'd like to thank everybody on the phone for their participation this morning and to IDEXX employees listening, I'd like to just say thank you for your continued devotion to our purpose on wavering, engagement, enable us to continuously execute at a very high level and support our customers despite the unpredictable and evolving dynamics in our sector and around the world. Thankful for your excellent effort and look forward to continuing our strong momentum through the rest of 2022. And so with that, we'll conclude the call. Thank you.

Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.