Good morning, and welcome to the IDEXX Laboratories Fourth 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 noticed 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 fourth 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. Today's prepared remarks will be posted to IDEXX.com. Investors after the earnings conference call concludes. I would now like to turn the call over to Brian McKeon.

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2022 results and to provide an overview of our financial outlook for 2023. IDEXX had a strong finish to 2022, reflected in our fourth quarter performance. Revenues increased 7% organically, driven by 8% organic gains in CAG Diagnostic recurring revenues and continued strong growth in our software and water businesses. Operating profits increased 14% as reported and 17% on a comparable basis, benefiting from solid gross margin gains and OpEx leverage. Combined, these factors enabled delivery of $2.05 in EPS, up 14% on a comparable basis. IDEXX execution drivers supported delivery of full year financial results at the high end of our updated guidance range. This performance is reflected in a 1,200 basis point U.S. CAG recurring revenue growth premium to U.S. clinical visits in the second half of 2022, driven by a solid volume growth premium and higher levels of price realization. We sustained record high customer retention levels and solid new business gains globally and achieved a record level of annual CAG premium instrument placements, which drove a 13% year-on-year expansion of our global premium instrument base. Effective P&L management supported sustained full year comparable operating margins adjusted for discrete R&D costs aligned with our updated 2022 goals. These performance trends position us well as we enter 2023, and advance our growth strategy. This year, we're targeting a return to 10% organic revenue growth at the high end of our initial guidance range. This outlook is supported by continued strong IDEXX execution and net price benefits captured in our goals for double-digit CAG Diagnostic recurring revenue gains across our U.S. and international regions. We're also targeting solid comparable operating margin gains, building on the higher profit levels we achieved through the pandemic. We'll…

Thank you, Brian, and good morning. IDEXX delivered excellent results in the fourth quarter, reflecting sustained high levels of execution of our growth strategy. Demand for veterinary services remained strong, resulting in increased diagnostic frequency and utilization per clinical visit, building on accelerated gains achieved through the pandemic. To address this strong demand, Veterinarians look to IDEXX as their preferred partner in diagnostics and software, which supported high levels of care and helped drive our solid growth results for the fourth quarter and full year. For Q4 in the full year 2022, we achieved 8% organic growth in CAG Diagnostics recurring revenues supported by double-digit contribution and growth from IDEXX execution drivers. This strong performance is reflected in record full year placements for both CAG diagnostics premium instruments and software practice information management systems, continued solid contribution from new business gains, sustained high customer retention rates and net price realization aligned with our expectations. These execution growth drivers helped to offset impacts from adjustments in vet clinic capacity following a period of extraordinary growth during the pandemic as well as macro impacts, which globally pressured clinical visit levels in 2022. IDEXX's ability to deliver solid organic growth with underlying strong performance in operational metrics demonstrates the attractiveness and durability of our business as well as the outstanding work by teams across our organization to deliver results every day. Our decade-long strategic focus on diagnostic sector development, including building strong commercial engagement and innovating to expand adoption of technologies that integrate diagnostics and information management position us to build on this momentum. This morning, I'll highlight how IDEXX advanced our commercial and innovation priorities in 2022 while delivering strong financial results. I'll also discuss our areas of focus for 2023 that build on this progress. Let's start with an update on…

Thank you. [Operator Instructions] At this time I'll take your first question from Nathan Rich from Goldman Sachs. Please go ahead.

I guess, starting with the U.S., how are you thinking about the cadence of U.S. clinical visit growth this year? It sounds like 1Q will be similar to what you saw in the fourth quarter. And then Brian, I think you said the high end of guidance reflects a flattening of visits for the year. So could you maybe just talk about your expectation for how the year plays out? And do you envision a return to positive clinical visit growth by the back half of the year in the high end of your guidance?

Thanks for your question, Nate. We are expecting that we'll still be working through some of the compares in the U.S. to the pullback in capacity that kind of happened through the first half of last year. And so you're correct. I think that's something we're acknowledging in the Q1 outlook. We'll still be working through that as well as some of the macro impacts internationally. We -- the guidance that we provided, as you pointed out, the higher end does for the U.S. assume that we see a flattening of the trend and that's meant to imply in the back half of the year. And so that would assume a relative level of improvement, but is not projecting growth. I think Jay can talk a bit more to that, but I think that that's an appropriate assumption we feel with the changes that we've been working through.

Good morning, Nate. Yes. I would just qualitatively add that what we see from a market standpoint and customer standpoint, is the -- they made good progress in working through some of the capacity constraints they're not all working at the same pace. We've seen a bolus of practices who have adjusted care workflows, added staff particularly licensed veterinarians per overall veterinarian. So, the mix is more towards staff, and they've been able to increase productivity in that sense. So, I think just as we forecasted, it's taken time but I think the profession is making the progress. They're investing in technology. We've seen that with the purchase and inflation of our in-clinic laboratory software solutions particularly cloud-based software solutions is something that veterinarians are looking to as a way of supporting staff productivity, client communications, just overall workflow optimization within the practice.

Okay, great. And maybe just to follow up on that. Obviously, you've talked about a higher level of net price realization expected for 2023. Could you maybe just talk about what the reactions from customers have been to the price increases that you took in 2022? And does the outlook kind of assume any impact on the level of utilization or volumes that you expect? And could you maybe also just comment on is the price realization kind of brought across the different product lines in CAG?

Yes. So let me take the back end of your question first. It is. So this is a global approach that we've taken, and we think pricing is appropriate within the current context. I'll say from a qualitative standpoint, we see demand holding up well relative to both the back impacts in the economy as well as the different pricing scenarios we've articulated. Keep in mind that from a customer standpoint, they're highly appreciative and they value the overall IDEXX value proposition, goods and services and they recognize that on a sustained basis, we've invested and we'll continue to invest in innovation, but also the customer experience, which is critically important to them so that they can focus on providing care and don't have to worry about diagnostic service levels and just overall product continuity. The other thing that I would say is they also recognize that we have taken a technology for life type approach. If you take a look at our catalyst, our chemistry analyzer over the last decade, there have been nine parameter extensions or upgrades so that a customer who purchased. Our catalysts, chemistry analyzer today or 10 years ago would have the exact same features and functionality. And we think that's highly differentiated, not just in our industry, but really in the industry.

Just reinforce to that our goals at the higher end, which is what we're shooting for as a company, we reflect sustaining the solid volume growth premium that we've been able to achieve. So, independent of the pricing benefit, how much we've been able to drive volume growth above clinical visit growth, and it reflects sustaining that strong level of performance.

We'll hear next from Chris Schott from JPMorgan.

Just following up on the pricing one. Can you just talk at least directionally about longer-term pricing dynamics, not looking for specific numbers? But should we think about more normalized price increases as we look out to 2024 and beyond, and this is kind of like a unique window with what's happening with inflation and everything else? Or is this a -- it could be ongoing kind of trend with larger price increases? And then just a follow-up after that.

Yes. Chris, we're not projecting beyond this year, so this is guidance for 2023. We recognize just as a pricing philosophy. We want to maintain a good balance between the value we deliver, the price of our testing services. Keep in mind also that veterinary practices that the diagnostics is a core neighbor medical services within the practice. It's a large profit center for them. They typically mark it up. But having said that, we want to make sure we don't get in front of where the value is. And we're taking a very long-term approach to developing the overall sector. So and you've seen that historically. And the way we've reported it, I think the difference in 2022 and 2023 as inflation and the macroeconomic cost impacts of running the business.

Great and then just -- can you just elaborate a little bit more on your outlook for Europe? I guess how much of a macro headwind that you're seeing in these markets? And maybe just talk a little bit about how you see those headwinds playing out as we move through 2023?

Yes. So, our goal is -- we came out of the second half of the year with about 6% CAG diagnostic recurring growth. Our goal is at the higher end for next year or 10%. And so, that's obviously an improvement. This year it's tougher to calibrate. We don't have the same clinic level data granularity, but I think the same-store sales headwinds in places like Europe are probably in the mid-single-digit range. So, it's softer than the U.S. and so consistent with what we're doing in our U.S. business, we're targeting sustained execution driver leverage. So, getting -- growing faster than the same store sales at the clinic visit growth levels, and we are building in some expectation for less of a headwind but still some headwinds. And I think that's appropriate just given the macro backdrop that our international markets are still working through, but we are targeting double-digit growth. We've got the pricing benefits that Jay highlighted to help support that and still feel very optimistic about the long-term potential in our international regions.

Yes. Let me pick up on that of the long-term potential. We see two-thirds of the future TAM outside our U.S. geography. And so that's something that we've invested in. Over time, we've had seven expansions, commercial expansions over the last few years. Currently, there's some macro headwinds as Brian described them, but I think the opportunity is very significant over time and we're approaching it in a similar way that we've approached our sector development in the U.S., which is through innovation, through engagement with our commercial model as partners and really helping create awareness and education and ultimately, adoption. So, we're very optimistic over the longer term. We think also, I would just highlight the role that ProCyte One has played in our international geography. It's a very compelling solution. Our customers, it fits from a performance profile, cost standpoint. Many of these markets are hematology first markets, and we're seeing very nice uptake, and we expect, as we've laid out at Investor Day, that 20,000 premium hematology placements over the planning horizon.

We'll hear next from Erin Wright with Morgan Stanley.

Great. Does your guidance for 2023 assume any sort of contribution from the two new platforms that you plan to launch here, hopefully, in the near future? And how should we think about those? Are they more of a 2024 event? And how should we also just be thinking about the timing of magnitude in terms of the contribution from the innovation pipeline?

Yes. No, we haven't provided any specifics on the two new point-of-care platforms. And as we get closer to launch, we'll talk about this.

Yes. They're not in the there's nothing related to those platforms in the guidance.

Okay. So -- and then.

Other than the cost to support continuing.

Okay, great. And on the cost side, I guess, 7% to 8% price realization obviously tracking above historical. And I think Brian, you talked about some of this in your prepared remarks, but what are some of those key factors that we should be kind of aware of that are limiting the full drop through from a pricing perspective to the bottom line?

The inflationary costs are real. On the product cost front, took a number of steps this year to ensure that we have high product availability and it's been a challenging kind of environment to manage the supply chain dynamics. Our operational team has done a fantastic job on that front, but we did make choices to ensure we've got supply, and that's going to be flowing through in our product costs for a period of time, and there are higher labor costs as well. I think we're the price increases that we advanced, I think reflected in our margin outlook where appropriate, given some of the dynamics that we're working through. And we're able to improve gross margins through initiatives like productivity activity and our initiatives in our lab operations and just continued focus on growing our recurring revenues at a strong rate. But the -- on the gross margin front, that's the primary impact. And I think we're always trying to be balanced with our base of overall investment and that's allowing us to deliver solid margin improvement overall at the higher end of our guidance range.

Yes. I would also add, just on the commercial front, we're back to more of a normal type operational cadence. We attended the VMX and VMX was the biggest show in its history. We've had sales summits from a customer visit standpoint, our field organization is -- the majority of visits are now in person. So it's much more of a pre- pandemic type operational cadence.

Michael Ryskin with Bank of America. Your line is open.

Great. Brian, I think in your earlier comments, you talked a little bit about the IDEXX premium, the bridge between the underlying vet visit volume and price and then your actual revenue growth. I think you said that the high end of the guide assumes a similar premium to what you've seen previously. Is there a lower premium at the lower end of the guide? Can you talk us through sort of what your expectations are for that between the 7% and the 10%, sort of what are you thinking in terms of the IDEXX growth premium?

Right. Thanks for the question, Mike. So, just starting with the high end, let me use the U.S. So if we've got an 11.5% growth goal with 7% to 8% pricing, that's approximately implied about 4% volume growth and with some level of headwind from visits as we work through the first half of the year. That gets us to go to the volume growth premium that we've been delivering and kind of consistent with pre-pandemic trends. So that's how we're thinking about it. We have a range which we think is appropriate to calibrate for risks to that outlook, primarily macroeconomic impacts and, you know, so I think that's not linked to one specific factor, but I think it's something that we think is prudent, is the way we plan the business to make sure that we have financial plans where we can deliver solid profit gains, if things don't all go the way that we anticipate. And so again, it's not linked to one specific factor, but it builds in potential macro headwinds or if things don't recover the way that we're targeting in terms of the clinical visit trends.

Okay. And then for the follow-up, we're seeing last year in 2022 and this year, some very specific product launches coming from HESKA and ABAXIS and others in the space. So, I'm wondering if you could touch on the competitive landscape just a little bit kind of tied into that previous question as well. Any changes you're seeing there? Any come conversations with customers, how that might factor into your pricing strategy?

Yes. We've said for a long time, the diagnostics market is a very attractive market. There's a lot of competitive intensity. Nothing has changed on that front. We believe that through the customer lens that our overall solution portfolio is highly differentiated the combination of our in-clinic laboratory reference laboratory software, the connectivity of it all really helped support the practice mission. We see that if you take a look at our new and competitive placements, which we provided both for Catalyst and now for premium hematology, we're doing extremely well. We're growing our software in Web PACS and Diagnostic Imaging businesses very well. We feel very good about our focus on the customers and helping them to achieve their goals and we think it's reflected in the results.

Mr. Block you have anything further or Mr. Ryskin, my apologies.

No, that's it. Thank you.

We will move next to Jon Block with Stifel.

Great. First one, Brian, maybe just a clarification. I thought you said a $16 million customer contract resolution. Was that in the first quarter of '23? I'm not sure I heard you properly. And if so, is that in the GAAP 2023 EPS guide, I'm landing at $0.15-ish to the bottom line. Maybe you can comment on that. And then last, just bolt-on. Is that an offset to OpEx, if I'm right on all these assumptions, not a rev line item, and I'll start with that clarification, please?

I think you had got all that right. It is a Q1 2023 factor that we highlighted in our Q1 outlook and it is recorded as an -- it's an other income item for us which is recorded as an offset to G&A, and that's correct.

I got it all right. I don't know if I should push it. But the 9% to 16% comparable earnings growth that you sort of have in the release once you back out the 10%, is it in that one as well? The 9% to 16% also benefits from the $0.15?

Perfect. And then just maybe to follow on Mike's question, I'm just sort of coming at it a little differently. For2023 clinical visits, it sounds like you're landing around down 1% to 2% for the full year, I don't know, around there. So vals are down, 1% to 2%, and price is up 7% to 8%, and just to be clear on price -- it's 7% to 8%, right. The press release read a little funny saying like 7% to 8% was the case if you were at the high end of your range. I'm guessing prices price, maybe you guys can clarify that.

Yes. That is correct.

Okay. So price is right. So yes, there was a confusion incoming on that. So if vals are down 1% to 2% and price is up 7% to 8% if I take your 10% CAG Dx recurring you land at what we're calling 400 to 500 bps of non-price non-visit growth, which seems like an ongoing deceleration throughout sort of '22, certainly the back half of '22. And I know there's moving parts with U.S. and international, Brian, but sometimes we don't get such great granularity too. Just your thoughts on that 400 to 500 bps non-priced on visit growth the deceleration comments, and broadly speaking, is that sort of how we should view the business in the near term until maybe innovation kicks back in?

Thanks, John. I was trying to follow your analytics. We focus those discussions on our U.S. numbers, just to be clear because that's where we actually have the reporting. So, the 11.5% overall growth if you use the midpoint of the pricing guide. And I do want to clarify the expected pricing benefit is something that we feel very good about across our performance range. So that is -- we were focusing on kind of the analytics around our high end to help people understand that. But going back to the high end of 11.5% CAG U.S. recurring diagnostic revenue growth, netting out the price benefit, use the midpoint that would be about 4% volume benefit. And we didn't explicitly highlight the clinical visit trend, but it bridges back to that that 5% to 6% kind of volume growth premium that we saw in the second half. That's about what we've seen pre-pandemic. And so, we're looking -- that's what we're shooting for. And all indications our execution is holding up really well. If you look at the performance of trips and just how we've consistently done, so looking to build on that momentum.

Yes. I would just add to that, if you take a look at the execution metrics around customer retention, new customer acquisition, Brian highlighted price realization, which we think is appropriate given the current context. Overall, commercial execution has been excellent, and we anticipate being able to continue to execute well in the current year.

Ryan Daniels from William Blair. Your line is open.

Jay, maybe a big picture one for you. I'm curious if you look back over the last year or so with the capacity constraints your practice clients are facing. Have you noticed any material changes and maybe either based on your data or conversations with your customer-facing team, in regards to how they're using diagnostics. So changing the point of care to reference lab versus on-site or maybe running larger panels, so they don't have to do reruns, just anything like that from a macro trend basis that you're seeing?

Ryan. So, we have not -- we continue to see that customers would use one modality and diagnostics tend to use more of the other modality and vice versa. It's testing begets testing. We've seen a continuation of that trend. We've also seen wellness versus non-wellness testing hold up well. We think that that's really a function of pet owner demand. Pet owners want to be able to get the great care, whether for health, happiness, even longevity of their pet. So, they're filling into the practices and for wellness and preventive care visits. So, we continue to see that as an important aspect of developing the overall sector. We do see practices I think, to a greater extent than in previous times. I appreciate the role of their staff, retaining their staff, investing in education of their staff. I think they've gotten smarter around the use of technology in the importance of technology. We've seen that in software and the move to cloud-based PIM systems, but also the applications that that integrate and extend the capability of their PIM systems. So, we think that overall, even given the overall macro impacts that we've described, pet owner and consumer demand has held up relatively well.

Okay. And then maybe digging a little bit deeper into some of the clinical decision support, you spent more time, I think, than in the past talking about the cloud and kind of data analytics and using that data. So, can you dive a little bit more into DecisionIQ and how broad that goes in regards to informing point-of-care clinical decisions and how widely used that is from the practitioners that are using it to do next step diagnostics?

I'd be glad to. Yes, DecisionIQ is what formerly known as clinical decision support as part of our VetConnect PLUS application. Keep in mind, just let me paint the broader context here is that the general practitioner is incredibly busy. They're responsible for this wide range of clinical and medical services and having DecisionIQ, which can support the decision-making, which can suggest the possible things that they may not have considered. And even I think to your question or point, suggest next step test, we think, is an important tool in the hands of veterinarians. We have tens of thousands of practices on a global basis, which are now using VetConnect PLUS and therefore DecisionIQ as part of their daily practice, the ability to support vector-borne disease and now endocrine is that menu will continue to be extended over time. So, it's becoming increasingly valuable in the hands of veterinarians and something that we think over time will just grow in value. But thank you for that question. That's a wrap. We're out of time. I'd like to thank everyone, and that concludes the Q&A portion of the call. I appreciate your participation this morning. So in summary, we see a significant decade-long opportunity to increase the standard of care for companion animal health care and remain committed to our consistent strategic approach to address this opportunity. Sustain high levels of performance by IDEXX teams enabled us to build on the decades-long investments in innovation, infrastructure and commercial capabilities to deliver solid growth and strong financial returns in 2022 and positions us well for 2023. And now we'll conclude the call. Thank you.