Good morning, and welcome to the IDEXX Laboratories Second Quarter 2023 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 measures are provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our second quarter 2023 results, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent period in 2022, unless otherwise noted. [Operator Instructions]. Today's prepared remarks will be posted to the Investor Relations section of idexx.com after the earnings conference call concludes. 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 to our Q2 results and review our updated financial outlook for 2023. In terms of highlights, IDEXX achieves strong growth and financial performance in the second quarter aligned with our full-year performance goals. Overall revenues increased 10% organically supported by 12% organic growth and CAG diagnostic recurring revenues with double-digit gains in U.S. and international regions. Key execution metrics remain very strong globally, reflected in record second quarter premium instrument placements, continued solid new business gains, and sustained high growth in recurring veterinary software revenues. Operating profit results were ahead of our expectations, reflecting solid gross margin gains and operating expense leverage, both benefiting from strong CAG recurring revenue growth. For the first half of 2023, we achieved 10% overall organic revenue growth and nearly 12% growth in CAG diagnostic recurring revenues. We also achieved better-than-targeted operating margin improvement. We've made positive refinements to our full-year operational outlook incorporating this performance, which we'll discuss later in my comments. Let's begin with a review of our second quarter results. Second quarter organic revenue growth of 10% was driven by 11% CAG gains and 9% organic growth in our water business. Overall organic revenue growth was constrained by modest gains in our LPD business and approximately $3 million of headwind related to lower opti medical revenues reflecting the winddown of our human COVID testing business. CAG diagnostic recurring revenue increased 12% organically, reflecting 12% gains in the U.S. and 10% growth in international regions. CAG diagnostics recurring revenue growth in Q2 was supported by global net price gains at the higher end of our targeted 8% to 9% improvement range for the first half of 2023. Overall organic revenue growth was supported by 13% growth in veterinary software…

Thank you, Brian, and good morning. IDEXX once again delivered strong results supported by outstanding execution in the second quarter. We advanced our strategy by engaging customers with integrated testing solutions that support their mission and address real-world clinical and practice problems. Demand for medical services remains high, and veterinary and [CAG diagnostics] as a core enabler to guide individualized best care. As a result, we saw strong diagnostic sector revenue growth, with continued gains in diagnostics testing frequency and utilization. IDEXX remains well positioned to further benefit from these trends, thanks to our decades-on focus on diagnostics and the software solutions that deliver key differentiated insights into the patient's health. IDEXX's strong results are reflected in double-digit, total company organic revenue growth, supported by expansion of CAG diagnostics-recurring revenues across regions. For the first time ever, U.S. revenues exceeded $1 billion in the first half of 2023. IDEXX execution drivers continue to fire in all cylinders, as reflected in our financial results, including growth in high-quality premium instrument placements, sustained high-customer retention levels, contribution from new business gains, and net price realization that remains aligned with our expectations. IDEXX commercial teams delivered yet another record quarter of global premium instrument placements, building off high prior year levels and supporting solid EVI gains for the quarter. IDEXX diagnostics and software solutions deliver key insights and productivity improvements to workflow transformation. These results demonstrate that greater number of clinicians are partnering with IDEXX, with the aim to deliver higher care standards and crucial efficiency gains. This support continues to be an important given persistent clinic productivity constraints in a dynamic macro backdrop. Today I'll discuss how IDEXX delivered continued strong performance through key strategic initiatives aimed at driving sector development. I'll start by providing an update on our global commercial execution.…

Thank you. [Operator Instructions] We'll take our first question from Nathan Rich with Goldman Sachs. Please go ahead.

Great, good morning. Thanks for the questions. Two questions on volumes. I guess first in the U.S. Could you maybe talk, Brian about how clinical visits trended over the course of the quarter? I know you kind of said they had softened earlier in the quarter. Just curious how the quarter played out relative to your expectations and kind of what you're looking for to see that flattening over the balance of the year. And then on international, what drove the improvement in the international CAG growth this quarter? And I think kind of despite the improvement, reference lab kind of remains soft. Why do you think you maybe haven't seen more improvement in reference lab volumes? And can you maybe talk about expectations there for the back half of the year? Thank you.

Thanks for your questions, Nate. On the first question, we saw a post-January relatively similar clinical visit trends in the data, I think with hindsight, January benefited from the year on year COVID lapping. And overall for the first quarter it was flat, but the benefit of from that dynamic and I think the clinical visit trends through Q2 were largely consistent. This was consistent with our expectation. We thought we'd see reduction in the headwinds from the clinical visit capacity pullback that happened last year. And we were still working through some compares on that front in the first half. And so that informed how we were thinking about the second half that we would see that normalize and hopefully over time improve given the strong underlying demand that we believe is out there. So that's sort of the U.S. story. Let me give some context on international. I'm sure Jay can add to this that the strength in international came from our in-clinic business, just the very strong growth in our instrument placements, customer engagement, support of strong consumable gains. And so I think that's directly related to our executional focus. And as you pointed out, labs were relatively consistent. We're still seeing the, have seen the macro headwinds relatively more in international markets. That's been a consistent story. And so that moderated what were double digit growth rate benefits from the executional drivers that enabled us to get to double digit overall growth in international markets.

Yes, and just to add to that Nate, from a higher level standpoint, the clinic economics and overall health of the clinics really is healthy. I think revenue, we showed that revenue is growing nicely. So it's certainly not a demand dynamic. And as Brian said, internationally, we've been benefiting really over a number of quarters of record placements. ProCyte One obviously fits well and leverages and multiplies the impact that we've been able to have on total in clinic placement. So I think very strong execution. We're announcing the benefits of the consumables growth. And that has a small ramp to it, but I think the business is healthy. And we saw positive volume growth in Q2 internationally. So I think the clinics are working through the type of capacity constraints and labor challenges that they've had earlier. And we expect that to continue over time.

Great, thanks for the details.

We'll move to our next question from Chris Schott with J.P. Morgan. Your line is now open, please go ahead.

Hi, this is Katarina from J.P. Morgan on for Chris. Thank you so much for taking our questions. So first, just on pricing, I know you probably can't give too much specifics, but directionally, any initial thoughts on how you're going to approach price increases in 2024? On one hand, obviously inflation is slow, but then you also probably could see some upward pressure on cost. So does that warrant larger prices? Just how are you thinking about 2024 price increases? And then the second question is, so if you think about both clinical visit growth and then utilization, any major differences between what you're seeing for your corporate clinic accounts versus your non-profit but owned privately owned accounts? Thank you so much.

Yes, so good morning. Thanks for your question. On the pricing front, first, I just want to reinforce we have a consistent outlook for the second half of 2023 for 6% to 7% overall net price improvement related to CAG diagnostic recurring revenues. We're not prepared to share our plans for 2024. What I would note is that we'll have, as we've had in the past, a very thoughtful approach that's aligned with long-term sector development in the value that we deliver through our solutions and our innovations, and we'll evaluate and incorporate inflationary dynamics as part of that approach as we get closer to next year.

Yes, just a couple of words about pricing. To Brian's point, from a philosophical standpoint, we want to make sure we continue to deliver really strong value. And we think that our pricing reflects the fact that we continue to do that. We see really very high retention levels in our business. We see an increase in adoption and utilization. So from the standpoint of, I think, customer receptivity, we think our pricing is appropriate given the circumstances. If you think about our latest baby release and reference labs, it's a great example of how we add value that we're increasing the menu. 2 million patients on a global basis, annual global basis are going to benefit from this. We're not increasing the price of those panels. I think it's just a great example of how we try to keep that value equation appropriately aligned to what our customers need. In terms of corporate versus independent practices, a couple of dynamics to keep in mind. Largely, we don't see big differences, obviously there's differences in things like the size of the practice, corporate practices tend to be a bit larger. There are more specialty practices owned by corporates. They're focused, I think, increasingly on growth. We've seen nice interest, not just in our solutions, like in-clinic premium analyzers, but also software solutions, as they really try to operate the businesses in a more standardized way. They're interested in the same type of diagnostic solutions that independent practices are. We see a lot of interest in things like preventive care, for example, because it's a great way of, I think, continuing to engage pet owners and clients, really uncover, I think, a disease that may be otherwise subclinical or hidden that drives the medical services' envelopes. Very similar profiles between the two with some small differences that I just mentioned.

Thank you so much.

We'll move to our next question from Michael Ryskin with Bank of America. The floor is yours.

Great, thanks for taking the question. Two quick ones for me. First, could you expand a little bit on what you saw in a quarter between wellness and clinical and especially as it touches on preventive care in the United States? Just wondering if you're starting to see, or if you are seeing any separation there, just given the price increases between last year and this year, and just thinking about wellness to spend, consumer sensitivity, if you're seeing any impact on demand from that side of things. And then have a follow up.

Yes, good morning, Mike. It's not unusual to see some variability in a given quarter between wellness and let's say non-wellness or sick patient visits. When you take a look at Q2, on a two-year basis, they were very similar growth profiles between the two. So it's small things that can account for some variability, whether more people are traveling, whether, what have you. What we tend to look at is we tend to look at those diagnostic parameters or menu that are used in wellness areas like 40x plus, for example. And that was very strong growth. So we really haven't seen any drop-off.

Okay, all right, thanks, that's helpful. And then this is a little bit of looking ahead to 3Q, but just focusing specifically on international and Europe in particular. I know in prior years, you guys have seen occasionally a little bit of a headwind from weather, from extreme weather events, whether it's heat waves or hurricanes, et cetera, just because it would impact pet owner behavior or ability or willingness to visit the clinics, things like that. Just thinking about the heat wave in Europe that's been going on for the last month or so. Is that factoring to your guidance at all? Are you anticipating a little bit of an impact on revenues? I know you called out a day's impact on mothering. If there's any other wiggle room built in there for just the extreme weather, thanks.

Yes, Mike, I think weather at times can have impact in the business. Our outlook that I mentioned was that for Q3 was organic revenue growth at the lower end of our full year outlook range. And that basically aligns with consistent, strong execution trends and adjustments for the day's effects and just obviously our pricing's evolving a bit here as well. So just compared to H1, so it's a targeting, consistent, strong execution and we'll address those types of impacts if they occur in the businesses and report on that if that turns out to be a factor.

All right, thanks.

[Operator Instructions] We'll take our next question from Ryan Daniels with William Blair. Please go ahead.

Yes, good morning. Thanks for taking the questions. Just wanted to dive into the expansion of the U.S. customer facing organization a little bit more. I know it's been a while and you've been more focused on OUS expansion. So can you talk a little bit about, strategically what drove that? Is it just new clinic openings? Are you seeing more opportunities to visit vets? Is it kind of a competitive opening? Just any color there would be helpful.

Sure. So we've grown significantly in the U.S. over the last -- years. I think it's been over three years since we did last expansion. We're very optimistic about the long-term growth prospects of the U.S. It's our largest market. It's something that we really evaluate on an ongoing basis. We want to make sure that we have the right account coverage and we'll be able to, we're able to support, product and innovation priorities over time. So we felt that it made sense. Really just comes down to that.

Okay, great. And then it's been a while since you've talked about a new big corporate win. And I'm curious if you could talk about maybe the competitive environment more broadly, post some M&A activity in your space. Are you seeing that open up any opportunities or just normal course of business or more innovation? Thanks.

Yes, I mean, I think the, it's really normal course of business. We do very well with corporates. We occasionally talk about it, but from a corporate account standpoint, I think they see, increasingly see the integrated benefits of multi-modality solution and software. They're focused on workflow and they're focused on productivity, given the capacity constraints and the need to really operate these models. And I think from a solution standpoint, they appreciate what we're able to bring. We have a footprint that's obviously very broad and deep and can work, can partner with them wherever they are. So I think it's a very natural fit from that standpoint.

Great, thank you.

We'll move to our next question from John Block with Stifel. Please go ahead.

Thanks guys and good morning. I'll break up my questions. Brian, it seems like the visits are expected to get a bit better in the second half of '23. I think if I had it right, you mentioned flattish, give or take year over year, but 2Q, '23 was down from the 1Q, '23 level. So maybe if you can elaborate a little bit on what helps the 2H, '23 visits from those first half levels, we did some work around labor constraints that might be easing a bit, but we love your thoughts on the improvement in 2H, ‘23. And then do we think about that trend line arguably continuing into 2024? And then I'll ask my follow up.

Yes, thanks John for your question. I think the A part of it is working through this effect we saw in 2022 where there was a pullback in capacity. And so I think the pullback was largely happening in the first half of 2022. And so we knew we'd still be working through some of that. And I think that there'll be some relative improvement which I think you were pointing out. And I think overall we anticipate that we continue to look at the growth in demand that we see in terms of the expansion of the pet population and increased interest in pet health care that being affirmed on a lot of the qualitative work that we do believe that there's underserved demand and believe that that will be a positive tailwind over the long-term continue to feel that's very much part of the growth build that we have for the long-term. And we're working through some dynamics here to help clinics adapted to that and improved their productivity. And I think we can be helpful. So I think our long-term optimism is intact. That should be a positive drive over time. And we've made some positive transitions here in their first part of this year. I'd also highlight sometimes we spend a lot of time on the U.S. trends that internationally we've seen relatively more kind of same-store headwind effect that we've been able to offset with our benefits from our business expansion and engagement and invasions that we're bringing. And I think internationally we see the same kind of a story that over time that there's very strong demand for pet healthcare and it's probably relatively greater macro impacts in the near term. But we think that over time that will improve as well.

Got it, that was a very helpful thing for that. And maybe just a pivot to innovation. When I look back to set of you I believe there was a staggered launch with the U.S. leading and then international following. Any color on how we think of those pending new systems will we see sort of the same approach play out you know, the staggered call it. And then I don't know if you've talked about this before but will the manufacturing be handled by yourself or your partners on those new systems? And just sorry, a quick clarifying question. Brian, I think price in the quarter if I got you right was closer to 9% for Q2 but is full year 2023 price still expected to be between 7 to 8. Thanks guys.

I'll let Jay dive into the platforms on your latter question. Yes, that's correct. That's what we said.

Yes, so from a platform standpoint I'm obviously not going to talk about it until we talk about it and get closer to the launch. What I will say, John, from a premium instrument placement and how we think about the opportunity. We typically do start with the U.S. market but there's nothing that says we have to do that. The key is really to build an installed base and get that consumable revenue stream moving. That takes time. I think set of U.S. was one example and we launched it seven plus years ago and we built the installed base and we have a nice profile. So we really focus on being able to really drive sector development and adoption and solve those critical problems and everything else takes care of itself from there.

Thanks, guys.

Thank you.

Our next question comes from David Westenberg with Piper Sandler. Please go ahead.

Hi, thank you for taking the questions and congrats on continued strong execution here. So just a quick question again on that theme of pricing. I know that's one a lot of people talk about but maybe more on the clinic level as we see continued constraints in labor and that's really what we're seeing. Are you seeing pressure from your customers to raise prices themselves? And do you think that's going to continue for say maybe the next six months or so? And do you see any kind of potential to maybe ease in volume as their prices go up or is it equilibrium as because maybe labor is used in a more optimal way? And then just a second to really clarifying short questions. Can you say how many territories you actually added? And then just on the gross margin commentary, you said was it 18 million in terms of what the contribution was because of hedge gains? I'm just trying to make a sense of the 100 basis points of gross margin expansion. Thank you.

That's a quite a different question today. Let me just start with the pricing piece. Obviously clinics control that. If you go back the last five or six quarters, a lot of clinics took multiple price increases on an annual basis. They typically, if you go pre-pandemic or pre-inflationary times, they would increase their prices eight, one time per year. I think a number of clinics on average increase at least two, in some cases three. And that was really just to reflect the higher costs of labor and retaining staff. And in some cases, they needed to add to staff. And so from an employment level standpoint, we think clinics are catching up or caught up. They've hired people. That's not to say they're all working 40 hour weeks. And so in terms of pricing going forward, I think that's really just a reflection of what happens in the economy. At this point, it appears that inflation has moderated somewhat, but we'll have to see how that plays out. And I think they'll make decisions based on how their businesses are doing. Right now, I think clinic revenue, practice revenue is pretty healthy for approaching 6% or so. So I think they feel like they're in a pretty good place from an economic standpoint.

And Dave, to your questions on gross margin and hedge gains, what we were trying to highlight is terms of our year-over-year performance on margins that there is an effect from in 2022 as the dollar was strengthening, we hedge out, we tend to hedge in advance of the year to help us with our planning. And we had, in the second half of last year, eight to recognize the benefit from $18 million in hedge gains. So what's happened with the foreign exchange dynamics is they've actually moved into a positive zone. So we have some benefit on revenue, but we're going to have some reported year-on-year foreign exchange headwinds. We estimated 70-80 basis points in H2 that relate to just lapping those hedge gains that are roll off eventually. So just trying to highlight that as a factor. We try to, each quarter, note what those gains or losses are, so you have that, and that's in our disclosures as well. So, but just wanted to highlight that as you're to understand kind of the outlook.

Thank you for taking my long question.

Our last question comes from Balaji Prasad, with Barclays, please go ahead.

Hi, this is Micaela on for Balaji. Thanks for taking our questions. Can you talk about anything particular you saw in the quarter that drove the two-year stocked growth deceleration in CAG recurring? Thank you so much.

[So, a] question.

Anything that drove the, it was a question, anything that drove the two-year stack CAG diagnostics recurring revenue growth?

Yes.

Okay, yes, I mean, as we had a very strong quarter in terms of CAG diagnostics, recurrent revenue as indicated. Yes, it was really in part driven by pricing as well as volume growth and just really good execution. So, attention of customers was very good. We saw adoption and utilization of diagnostics really across our broad spectrum. Obviously, consumables in our in-clinic business was very, very strong, and we saw nice performance in international, but that's really more of a cumulative impact of placements that we've, I think achieved over the last, [4-6] quarters.

Yes, I'd highlight the two-year, I'm just looking at the numbers on a two-year basis. We were relatively consistent performance. He won in Q2, so I think we had similar trends, similar benefits, and as Jay highlighted, I think we've had very good execution, including some benefits from the higher pricing this year.

Okay, so with that, we'll conclude the Q&A portion of the call this morning. Thanks for everyone on the phone for your participation. This morning, it's an honor to share another quarter of solid financial and strategic results as we continue to address this significant long-term opportunity to enhance standards of care for companion animals who are on wavering focus on diagnostic insights. And so with that, we'll conclude the call. Hope to see you all at investor day, and thank you.