Good morning, and welcome to the IDEXX Laboratories Third 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 third 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 third quarter earnings call. Today I'll take you through our Q3 results and review our updated financial outlook for 2023. In terms of highlights, IDEXX achieved solid revenue growth and strong profit gains in the third quarter. Overall revenues increased 8% organically, supported by 9% organic growth in CAG diagnostic recurring revenues net of approximately 50 basis points of negative impact from fewer equivalent selling days. Organic revenue growth was supported by sustained benefits from IDEXX execution drivers including continued strong premium instrument replacements, solid new business gains, high levels of customer retention and high growth in recurring veterinary software revenues. Overall CAG diagnostics recurring revenue gains in the quarter were moderated by a 2% same-store decline in US clinical business. This was below our expectations for relatively flattening US clinic visit trends, reflecting ongoing capacity management challenges at US clinics and relatively softer wellness visit levels. Operating profit results were ahead of our expectations supported by gross margin gains and operating expense leverage, which enabled EPS delivery of $2.53 per share, up 18% as reported and 16% on a comparable basis. Based on our strong financial results in the quarter, we're updating our full year EPS outlook aligned with the higher end of our previous guidance range. This reflects expectations for strong comparable operating margin gains this year. We're also updating our full year revenue guidance ranges to incorporate our Q3 results and recent sector trends, as well as to reflect the recent strengthening of the US dollar. We will review our updated guidance detail later in my comments. Let's begin with the review of our third quarter results. Third quarter organic revenue growth of 8% was driven by 8% organic CAG gains and 7% organic growth in our Water business. Overall, organic…

Thank you, Brian, and good morning. IDEXX continued to make excellent progress in advancing our business strategy in Q3, while delivering solid organic revenue growth and strong financial performance. Our strategy of high-touch commercial engagement, supported by relevant testing and workflow innovations, drove continued adoption of IDEXX’s world-class products and services. IDEXX solutions support our customer's mission to deliver high standards of care, enabled through the continued expansion of diagnostics frequency and utilization at the practice level. Diagnostics revenue remains the fastest growing area of veterinary clinic revenues, a durable trend since the determination of a patient's health status and the best treatment path very often requires testing. IDEXX’s strong financial performance in Q3 was supported by solid gains in CAG Diagnostics recurring revenues across our major regions. The expansion of recurring revenues benefit from multiple IDEXX execution drivers, including solid placements of premium instruments building off high prior year levels, sustained new business gains, net price realization, and continued momentum in placements of cloud-based software solutions. These gains are offsetting near-term headwinds in overall clinic visit levels globally reflecting ongoing capacity management challenges at veterinary practices, as well as impacts from macroeconomic dynamics. Productivity remains a top priority for veterinary clinics, who continue to refine their business approach and make trade-offs necessary to balance staffing management challenges with strong demand for medical services. IDEXX’s solutions anchored by our software-enabled multi-modality offering give clinics the tools to address these dynamics. Today, I’ll review how we're advancing our strategy focused on developing the significant long-term growth opportunity for our business, while delivering strong financial performance. I’ll start with an update on our global commercial performance and how our focus on customer engagement supports the increase in adoption and utilization of diagnostics. IDEXX commercial teams are highly engaged in a customer-centric model…

[Operator Instructions] Moving first to Michael Ryskin of Bank of America. Your line is open. Please go ahead.

Hey guys. Thanks for taking the question. First, I want to talk about the broader market, I mean, as you said visit trends, as you've said, the pressures remain soft from the numbers in the snapshot relatively consistent with what we expected from third-party data. So not a huge surprise there. But I think it's safe to say that it's the last thing a lot of longer than anyone is expected going into the year. If this continues without anything that's improvement, how does this impact your long-term model and longer term expectations to the business? Already put another way, you're targeting 8.5% organic growth this year well below your 10%, long-term target and that's despite taking 7% to 8% price. So if pricing power is not there, we're not there to the same extent and volumes don't recover, I mean, what other levers do you have to offset that?

Yeah, good morning Mike. This is Jay. Just a couple things, maybe at a higher level and I’ll turn it over to Brian talk about some of the specifics related to the model. Keep in mind the backdrop of the sector is very positive. It's just been an expanded pet population. I think the human health and pet pop has very, very strong. Our execution drivers as a company the things that you know, we can directly influence have been very strong. We've seen that in instrument placements and in PIMS placements, net retention, pricing realization. So all those things I think are very good. We think there's been very good end-customer demand as we cited. There are some constraints related to practice capacity and some challenges there. I think the good news on that front is the practices have hired their baby some yeah, some additional charts that they're working through, but they're investing heavily and in technology, we see that with the use of our lab equipment, both in-clinic, as well as reference labs. And obviously, the appetite for software and applications that help them with optimized workflow have continued to grow. And then overall, our competitive position is very strong and we think as a result of our innovation pipeline, we will continue to be strong enough for some differentiated advantages. So, I think from an industry standpoint, it's a very positive story. I think we're well positioned to capitalize on those trends and the practices just continued to work through some of the constraints we cited.

Yeah, Mike, just to reinforce Jay's points, I think our long-term 10% growth potential, the key drivers that that we look towards we see a lot of positive factors sustaining in terms of our competitive positioning, expansion of diagnostics frequency and utilization. The adoption of IDEXX technology is the long-term demand dynamics that we see associated with expanded population, and favorable demographics in terms of pet ownership. So, all those factors are positive. I think the thing that we're working through is a combination of near-term capacity management challenges at the clinics. And I think that's something we're assisting with and, and believe we'll have solutions to help with that over time. But that is something that is has continued and I think is a factor impacting near term growth, as well as some of the near term macro impacts. So I think, as we stated many times in the past, we're a business that's very resilient, but not immune to those types of impacts. And that's something that that I think is also impacting our near-term growth at the margin. But we don't see that either of those factors as being long-term constraints to the growth potential for the company. And I think from a competitive positioning point of view, we're in a strong position as we've ever been in terms of our ability to support the continued expansion of the sector globally.

Okay. All right. And maybe I'll use my follow-up to just be a little bit more direct on ‘24. I know you're not guiding for ‘24. I'm not asking for ‘24 guide. But just looking at where consensus is right now, it is still at that roughly 10% number. Just given what we see about market conditions, as we sit today, I mean, in November, we've already got a pretty good sense of where they are. Do you think that there's a risk that ‘24 - 2024 is also below that long-term trend line – that long term model?

We're not going to be guiding obviously today, but I think we've got a number of positive factors that we see heading into next year in terms of our execution. The competitive position that I noted the innovation pipeline that we're looking forward to sharing more on as we move forward. And I think those are all things that we will be leaning on to continue to delivering solid growth and continue delivering strong financial performance, which I think we're demonstrating our ability to do this year. So we'll share more in that front as we get into next year. We're focusing on the drivers that we have direct impact on and we feel very good about our execution on that front.

Thanks.

The next question comes from Nathan Rich with Goldman Sachs. Your line is open. Please go ahead.

Hi, good morning. Can you hear me?

Yeah.

We do.

Good morning, Nate.

Great. Hey, good morning. Thanks for the questions. Just wanted to ask about the, the US CAG Diagnostic recurring performance in the third quarter and maybe just if you could go into a little bit more detail on how that played out relative to expectations? Obviously, traffic decelerated during the quarter, but from a diagnostic volume standpoint, I'd wonder if you can maybe, was there anything from a category standpoint that was more challenging than you had expected? And I'll stop there and then maybe ask my follow up next.

Yeah. The performance in the quarter just to reinforce some of the metrics I shared, and then Jay can expand on this was our execution dimensions were very much in line with what we expected. The difference here was we are planning for flattening clinical visit trends and they were down 2% in the quarter. We did see some softening through the quarter and it was relatively more on the wellness side. So I think that that was – that’s a smaller part of the overall testing volume. But that is something that we did see relative impacts, so that that was - it was the visit trend that was different than we had been planning for or hoping for. And the execution metrics held up well and that enabled us to deliver solid growth on a - in terms of the CAG recurring revenues.

Yeah, couple additional about comments for - to cover. We always start with PIM customer demand and for what we've seen in the talking with our customers that this good end-market demand certainly pet owners continue to prioritize and against the whole other spending categories, they're bringing their bring their pets to the veterinarian and making sure that they get the care that they need. The other piece that we've been spending time, looking at is just overall employment levels within the practice and we think that that has increased and that's in a good position. We don't necessarily have insights in terms of how many hours they may be working to put in terms of just availability of staff within practices we think that's been reasonably good shape. We have done some qualitative surveying. There is some additional churn within practices if that goes from practice to practice, that is obviously something that will work its way through the system. Just picking up what Brian mentioned against not to not wellness or sick patient visits versus the wellness visits, if the diagnostics usage on the non-wellness side is higher, it's much higher at 70% or so I think we map that out as part of the Investor Day. And so, that's, I think an important tailwind for the business. The other thing that I would point out is the, relative frequency and utilization of diagnostics continues to grow within the practice we've seen that in the US, we think that's a very positive trend. Obviously, veterinarians see the importance of core medical services and to be able to treat a patient they very often have done the first test. So it's great to see that those trends have held up and continue to grow and we think that's a strong positive.

And if I could just ask on margins, I guess, if you see sort of the visit pressure persist, just the ability to kind of grow margins in line with the kind of 50 to 100 basis point kind of constant currency range into next year, if you do see an overall kind of softer top-line environment, just, I'm curious on kind of how much kind of leverage - how much of the margin expansion is dependent on that, that top-line growth? Thank you.

I think we've been consistently demonstrating our ability to perform well in that front in despite some of the headwinds that we've seen this year. So I think our updated outlook for margins if you take out the, if you normalize for the customer credit that we've highlighted, as well as the lapping of R&D and foreign exchange, we're most recent guidance is to be 80 to 100 BPS above the prior year. And that's despite some of the headwinds that we've seen this year. So, we've consistently demonstrated the ability to deliver to business model, which we have a number of favorable dynamics that support that we highlighted the strong growth in the software business as it is a positive driver force as we grow and I think we've got investments that we can leverage. And we've got new innovation coming to market. So a number of factors that I think will help us and positions well to keep building on that's strong margin delivery trends.

Thank you.

[Operator Instructions] We will move next to Erin Wright with Morgan Stanley. Please go ahead.

Hey, thanks. Has there been any early testing on the new platform you plan to launch at BMX? And if so, like what's the initial feedback and on the second platform technology, is that on track as we'll both roll out in 2024 or will both have material contributions in 2024? Thanks.

Yes. Good morning, Erin. I am not going to talk about the new platform other than just to reiterate we are looking forward is just a couple months away from BMX and we can talk more about that. More generally speaking the way the new product development process works is, you develop prototypes, you put it in hands of customers, they provide feedback and it goes through an additive process, you get ready to go to marketplace. So we're excited. We think it's a - we think it's a platform that will make will have the right clinical and business contribution, but really I can't go into additional details beyond that.

Okay. And, thinking about – I know this is kind of a broader question, just thinking about the competitive landscape and you have this unique positioning now seeing lessened comfort than your closest peers in both point-of-care and reference lab, particularly in the US. I guess, can you talk a little bit more about your ability to take share? Could this accelerate particularly with also new innovation, but with any disruption associated with the other models of your peers? And how are you capitalizing on this now? And how are you taking advantage of maybe the competitive landscape where it stands today?

Yeah, so, a couple maybe high level points and I'll get more specific. Our strategic and innovation approach is really to bring an integrated solution set to the marketplace. So that's in clinic, as well as reference lab, and the connectivity and workflow optimization provided by our software suite, we think is highly differentiated. It supports what the practices are trying to accomplish in terms of improved standards of care, optimizations of staff productivity, client communications, all of those important things and we continue to innovate through menu expansion and then more specifically, new platforms. And new platforms, it's an important component of our business model in terms of really being able to give our customers reference lab quality testing capability within the practice. We place it, we tend to place these through marketing programs. IDEXX360 being the primary one customers are able to get that get that placement then you use reference labs or rapid assay or our Software-as-a-Service based PIMS systems, as part of our dollar volume commitment. So there's a significant multiplier impact when you come out with new innovations. And we just continue to build it through what technology for life philosophy. So we have existing platforms on the marketplace. We will continue to innovate with new slides, for example in chemistry or lots and lots of other examples. We call antigen within the reference labs. So that becomes more valuable clinically over time and customers use more of it as they grow, we grow.

We’ll move next to Chris Schott with JP Morgan. Your line is open. Please go ahead.

Great. Thanks so much. Just had two questions for me. I guess, just coming back to the dynamics with the visit trends that we're seeing versus your expectations, is it possible to tease out how much of what you're seeing right now is macro versus how much is capacity? So, as I'm showing my hands around, is this a situation where we're right now seeing some macro pressures and capacity just isn't getting better relative to where maybe you stood at mid-year or are we also seeing some setbacks on the vet capacity side as well as we think about the updated guidance? And then I just have one follow-up from there.

Yeah. Good morning, Chris. We think it's primarily capacity, it continues to be capacity. I think practices are definitely working through that. We've seen a number of things that practices have done. And the - it takes time. I mean they're making investments. So I think they're investing in their staff, as well as technology, they've hired. They're also just trying to balance the work life balance of their teams, so that they don't lose folks and make sure that it could be stabilized. So I think that's important. We do think at the margin there could be some macro impacts than we've seen in wellness. And I would just also point out that the wellness pieces are relatively lower use intensity-wise of diagnostics. 70% of diagnostic, 70 plus percent of diagnostics are consumed through non-wellness or the sick patient visits.

And Chris, just it's a, it's a great question. I think we've always said that the – in terms of macro where we might see it is on the wellness side where that may be more of a discretionary choice for the pet owner. Interestingly, well, the visits were down in wellness quarter frequency and utilization of diagnostics per wellness as it was up actually stronger than non-wellness. So, for the pet owners that are able to come in and get their pets in, they're actually doing more diagnostics testing, but overall, we saw lower levels of wellness visits. So it doesn't had probably comingled into some of the dynamics that are going on with capacity management. And there may be a level of impact there. We have seen that in international markets that we've been highlighting as we go. And so it's something that we're paying attention for. We're planning appropriately for it, but I think it's as Jay pointed out. I think - we think this is continues to be more of an impact from the ongoing ability of the practices to staff and be able to manage the demand that they're facing.

Okay. Great. Thanks guys. And just a second question was just I think you mentioned a little bit about US versus international. Could you just kind of bigger picture, are you seeing noticeable differences in terms of what's happening in the US versus in the pure international markets? And just, as part of that, is this guidance update, kind of assuming a global impact in terms of visit slowdowns? Or is this skewing more US versus international? Thank you.

We definitely saw more of an impact internationally on from macro pressures really starting at the end of 2021. And I would say that that has normalized over time and it’s now relatively more in line with the US trends. We've done quite well internationally. We're doing - benefiting from our premium instrument installed base expansions, so that really helps our growth rate. And we highlighted this quarter, we've seen actually for a few quarters now relative improvement in the volume trends. So, I think the - it's more in line I think with what we're seeing and started some of the US pressures more recently. And it does seem to be normalizing and relatively improving. You can see that in some of the international metrics things like with our reference lab growth was improved in Q3. So that's a positive trend and we're just being realistic about the macro backdrop that we're facing and planning appropriately.

And keep in mind, the international sectors just a bit different in terms of its overall characteristics. It tends to be more of a sick patient roll out testing approach from a veterinary practice standpoint. So, obviously, that that's an area of richer diagnostics usage scenario, less sensitive to some of the discretionary spend that you may see in a difficult macro environment. So, as Brian said, we're happy with our progress and continues to improve we think that the team is executing extremely well, and the opportunity over time is very substantial.

Thank you.

Well go next to John Block with Stifel. Your line is open. Please go ahead.

Thanks guys. Good morning. Brian, maybe just to start with you. The 3Q ‘23 sales and marketing expense was down by 3% to 4% Q-over-Q. I've got usually like flat to slightly up 2Q two to 3Q. And this year's decline was despite ongoing increases that you guys have called out on the commercial investment. So, I don’t know, I'm guessing aspects may have played a little bit of a role Q-over-Q this year in 2023, but anything to highlight on what costs you were able to take out in the S&M side that drove the sequential decline? What you were able to do or lean on even in light of the commercial investments that seem to be ongoing through the end of the year?

Yeah, John. It's principally a lapping dynamic. We - last year in Q3 had some relatively higher sales and bidding costs. Specifically, there's some discreet costs on both the sales and marketing and the R&D side that we’re lapping. And so, it - as I noted in our outlook, we're expecting a relatively higher level of OpEx growth in Q4. So it it's more related to this year-on-year specific factor dynamic.

Okay. Sorry. Just my question was sequentially not year-over-year. So my apologies. The 2Q to 3Q was down 3% to 4%. It's usually up 1%. You're making commercial investments. I guess what I'm – just trying to get a little bit is like managing the bottom-line in the near-term and getting the EPS and we're exceeding the EPS number. Were there anything in sales and marketing that you scale back on in light of the lighter revenue number? Again, Q-over-Q, no.

No, you have - there's typically some variation and cost quarter-to-quarter that that are unrelated to things like staffing. So we haven't scaled back on anything.

Okay. And then, maybe just to shift to your second question. I'm going to show my age and flashback to set of you, initially you guys expected, I think it was three to six thousand in consumable revenue per box on set of you. I get it a couple quarters in that forecast came down at 3,000 to 4,500, maybe you can just talk about how that eventually shook out, as that product cycle matured? And in any comments on the IDEXX in view trademark, which hit last week, it seems like to us that's probably the BMX analyzer and then how to think about the revs per box on the new system. Thanks.

So on set of you, if I got your question right, the the utilization per placement played out actually quite very much in line with what we expected. So I think we haven’t updated that for a bit, but I think that that was tracked consistently in line with our original estimate since sustained over time. So I think that that has been on track to our estimates. And it's, it's pretty much sure for us to get into the specifics on the, on the new instrument launch. We'll look forward to sharing more on that next year. Just to reinforce, these, as you know, these types of platforms build over time really the biggest effects from them are that they open the door for conversation with veterinarians to talk about IDEXX technology and innovations and adopt them in their practice. And so we're very excited about building on the momentum when we had from ProCyte One to continue those dialogues and deepen our relationships with our customers help them grow faster. And we'll share more on the specifics relating to new innovations as we get into next year.

Yeah, John, the other thing that I would add to that is, I think we shared some data through went up like Ericson presented on the evolution of menu and how that that impacts the overall economic value over time. And our technology for life approach where we come – we come out to the marketplace. We introduce product obviously. The installed base grows over time. But as we continue to add menu and improve that, more revenue, more economics are generated. And we've been able to demonstrate that through our platforms including the reference labs.

Thank you.

And we'll move next to Brandon Vasquez with William Blair. Your line is open. Please go ahead.

Hi, everyone. Thanks for taking the question. First one maybe just follow-up maybe ask on some of the headwinds in the quarter slightly different there's wellness and there's a little bit of labor. The question I want to ask is, are those getting, are they deteriorating are those headwinds increasing as we go into the end of the year? I guess, I'm trying to ask for a little clarification, are things stable, maybe just not improving as much as we thought? Or are we going into year end with those two dynamics kind of worsening a little bit?

I think it the key change here relative to what we expected to happen in the quarter was, we're looking for flattening visit trends in the US, and they came in at minus 2%. So if you go fundamentally, it was different than what we expected, that's it. But I think our execution was strong and all those dimensions going to play the way that we had hoped. The clinic - US clinical visit trends were minus 1% in Q2 - excuse me, in Q2, and minus 2% in Q3 on a two year basis. They're pretty similar. I think it's a, we did see some relative softening through the quarter. Some relative relatively weaker wellness clinical visit trends, more at the margin I think the bigger, bigger story here was, we had hoped that we had worked through the pullback effects on capacity. And we see some normalization there and I think we're still working through some of the management dynamics. So that that is very much reflected in our or balance year outlook that we've calibrated for that appropriately while we're reinforcing our profit delivery. So I think we're able to manage that well and teams are executing very well. And then again excited about a number of the things that we've got going into next year relative to our positioning as a company and new innovation bringing a market. And look forward to continuing to solid growth in that context.

Yeah, and keep in mind, the expanded pet population has been very, very substantial. So, we know that the end-customer demand is there. There is a lot of interest I think that to Brian’s point as we work through that capacity at the clinic level. There's unmet unserved demand out there.

Okay, great. And maybe as a follow-up, you guys are expanding US sales force now that seems on track as we go into ’24. Can you just talk about expectations? How long does it take to get those new reps trained? You'll probably also have a new innovative product for them next year a new system. So what's the timeline to kind of start seeing leverage both sales and kind of margin benefits from the expanded sales force? Thank you.

This is something that we've been we've been doing for a long time. I think we have a very successful formula in terms of how we how we expand the overall commercial ecosystem and footprint in North America. It tends to be a relatively short time to ramp. We have I think a - protective training approach and when we bring new folks into the system, they're well trained. And they really come up to speed within quarters. Now they continue to become more productive over time, but this they get a lot of support through professional service vets and the field service representatives. The entire ecosystem is there to support them. Okay. Thank you for your questions. We'll not conclude our Q&A portion of this morning's call. before we end today's call. I'd like to extend my thanks to the nearly 11,000 IDEXX colleagues for delivering another quarter of strong execution against our organic growth strategy. Our sector remains very dynamic and your steadfast commitment to providing a better future for animals, people and our planet has helped us maintain momentum and deliver strong results. Not only have you delivered today in the third quarter, but your efforts position us well to continue to develop our sector and support our customers well into the future. Well, on behalf of the management team, thank you for your continued focus on enhancing the health and well-being, the pets, people and livestock. So now we'll conclude the call. Thank you.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation. You may disconnect at this time.