Good morning and welcome to the IDEXX Laboratories Fourth 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 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 2023 results and initial 2024 guidance, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period unless otherwise noted. [Operator Instructions] 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 2023 results and to provide an overview of our financial outlook for 2024. IDEXX had a strong finish to 2023, reflected in our fourth quarter performance. Revenues increased 8% organically, supported by 10% organic gains in CAG Diagnostic recurring revenues, net of a 1% growth headwind from fewer equivalent selling days. Operating profits increased 8% as reported and 10% on a comparable basis, benefiting from solid gross margin gains and OpEx leverage. These factors and a lower-than-expected effective tax rate supported delivery of $2.32 per share in EPS in Q4, up 17% on a comparable basis. IDEXX execution enabled delivery of strong full year financial results reflected in 9% overall organic revenue growth and high comparable operating margin gains. This supported a 29% increase in EPS for the full year on a comparable basis, including 12% of combined EPS growth benefit from a customer contract resolution payment and the lapping of discrete 2022 R&D investments. These results were driven by 10.5% full year organic growth in CAG Diagnostic recurring revenues, reflecting 11% organic gains in the US and 10% organic growth in international regions, aligned with our original full year growth targets. We also achieved 19% full year organic growth in recurring software and digital imaging revenues, sustained high customer retention levels and placed a record number of CAG premium instruments, which drove an 11% expansion of our global premium installed base. These strong execution trends position us well as we enter 2024 and advance our growth strategy. This year, we're targeting 10% organic revenue growth at the high end of our initial guidance range of 7% to 10% overall organic revenue growth, supported by 7.5% to 10.5% organic gains in CAG Diagnostic recurring revenues.…

Thank you, Brian, and good morning. IDEXX delivered strong performance in the fourth quarter, capping a year where we advanced our strategic priorities while driving strong business growth and excellent financial results. Our high touch commercial model, the focus on the customer, and accelerated innovation drivers supported ongoing sector development. The use of growth in relevant diagnostic testing generates important clinical insights that informed veterinarians' mission to deliver better medical care while growing their businesses in a highly profitable diagnostics category. High levels of execution against our strategy drove double-digit CAG Diagnostics recurring revenue growth in the fourth quarter and for the full year 2023. This was aligned with our original full year growth targets and reflected strong gains across our major regions. High growth in our durable high-return annuity revenues included strong growth in our recurring software and digital imaging annuity streams. These gains reflected the cumulative impact of double-digit growth in our global premium instrument installed base, supported by high-quality instrument placements, solid new business gains, expansion of integrated cloud-based software solutions, and net price realization aligned with the value we deliver. IDEXX commercial teams delivered improved volume gains this quarter as we continued to work through factors constraining clinical visit levels. The solid growth momentum we carried through 2023 demonstrates that customers of all types appreciate IDEXX's purpose-built solutions and seek these tools and services to achieve sought-after efficiency gains. We're excited to build on this momentum in 2024. Today, I'll highlight the key capabilities and initiatives that have advanced our strategy to address the long-term growth opportunity for our business, through direct commercial partnership and innovation to enhance care delivery. I'll start with a review of our global commercial execution and its foundational role in creating awareness, education and, ultimately, the increased use of IDEXX Diagnostics.…

Thank you. [Operator Instructions] Our first question today comes from Chris Schott of JPMorgan. Please go ahead.

Great. Thanks so much for the question, all the color and the remarks here. I guess my question here is just, it seems like you have a bit wider range on the 2024 revenue guidance than in the past. So I just would like a little bit more color in terms of what's driving that range and where you're seeing the most uncertainty in the year. And maybe just part of that, just latest thinking on the macro environment and how you're kind of reflecting kind of the broader macro environment and the guidance for this year. Thanks so much.

Thanks, Chris. Yes, the guidance range represents about a 3% range. I think we highlighted in our comment some of the logic around the midpoint outlook, which largely captures, I think, the underlying sector trends that we've seen recently in the business, as well as the benefits that we're getting from our execution. The higher end of the range really builds in the potential for sector improvement. I think that we see clinical visit growth levels, same-store sales levels internationally have been below what we think will be the longer-term trends in our sector. And so that captures a potential for upside on that front as well as even stronger execution from our teams. And I think the downside from that midpoint view is capturing risks, including macro risks. And so it's not all that different than I think where we started last year, and we ended up delivering at the higher end of our range, supported by strong execution. So we'll always strive to do that, but that will involve some improvement in the sector trends in terms of the assumptions that we laid out.

Our next question today comes from Nathan Rich of Goldman Sachs. Please go ahead.

Great. Good morning. Thanks for the questions. Maybe just kind of following up on that. I wanted to make sure I kind of understood the kind of underlying end-market assumptions that's embedded in guidance. I guess, could you maybe kind of talk us through how you see the year playing out? I know you said 100 basis point impact from weather. But I'd be kind of interested if you can maybe just detail your kind of clinical visit expectations for the first quarter. And then you said kind of flat same-store visits kind of post Q1. Would you expect to be around that level in Q2 and then over the balance of the year? And the other thing that I think stood out from your prepared remarks was just the strongest kind of normalized volume growth in the fourth quarter of 2023. Just any color you could share on kind of what drove that, and maybe what you're kind of expecting over the balance of '24? Thank you.

Thanks, Nate. Yes, maybe I can start with your last question just to set context. But we had a very good finish to the year in terms of our performance. As you mentioned, the volume trends when you normalize for days effects, we had 4% volume growth US and internationally that was improved from a softer Q3 and actually was our strongest volume growth quarter for the year. So we feel very good about that, and reflects the ongoing benefits that we're getting from the strong execution by our teams. As we thought about our outlook for, and our plans, for 2024, we're looking to build on that. We highlighted that that's -- our volume growth expectation for the year at midpoint is roughly in line with the strong trends we have coming out of the second half, we'll get additional benefit from the pricing that we noted. I think before the weather impacts that we highlighted, we were -- our midpoint view was for largely flat clinical visits in 2024 in the US and somewhat similar trends in international, which had improved in the second half last year, but were still somewhat of a headwind. We explicitly factored in. We're about $10 million of impact, we think, in the US from the severe weather in January. So we're just trying to capture that in Q1 and flowing that through as well for the full year. But we think that's isolated to January. We're hopeful we'll see kind of or at least assuming we've got a flattening in trends and hopefully we'll see some improvement over time aligned with the long-term growth potential we see.

Yes. And then -- and just to add some color to Brian's remarks. Yes, the end-market appears to be stabilized and healthy. There's good underlying client and pet owner demand, if you take a look at both practice revenue and clinic revenue, it was about 5% in the fourth quarter. From a positioning standpoint, I think customers appreciate the technology solutions that we bring across in all the diagnostic testing modalities. Even more so with software, I think there's a new hunger for really looking at tools that can help them run their practices better, whether it's workflow productivity play, communications, client and internal communications, but also as part of the delivery of care and the way it all integrates. So I think the assumption is that customers will continue to work through some of the capacity challenges that they've had and looking for tools and partnerships to be able to do that. And we're especially, I think, well positioned to help them.

Great. Thank you.

Our next question today comes from Michael Ryskin of Bank of America.

Hey, thanks for taking the question, guys, and congrats on the quarter, strong end to the year. I wanted to expand a little bit on the inVue. You guys did a great launch of VMX that was really informative. Just curious, you talked about late 2024 launch or 4Q launch. Are you embedding any contribution in numbers this year, obviously, since it's only going to be couple of months, it's not going to be meaningful? But I'm just wondering, of that revenue target how much are you attributing to inVue already? And then the other question, I'll just throw both at once. You talked about 5% net price this year. That compares to, I believe you ended last year at 7% to 8%. So you're kind of sort of moderate back down to historical levels. Just wondering what's sort of been the feedback to price recently as you've announced the 2024 price rollout? And if you could provide any difference on US versus OUS price, that would be helpful. Thanks.

Mike, why don't I just briefly address the guidance question then let Jay talk more about the inVue launch? But the -- we've included the assumption for the launch in our overall guidance. It will be principally instrument revenue benefits in the fourth quarter, as we build the annuity revenues over time from that instrument, that it's all captured in our outlook.

Yes. Just some follow-up commentary on the inVue launch. Customers, I think, very excited to learn more about that, as well as our commercial organization. Talking to the customers who are looking for help with those very high-volume relevant tests that they do today, I think, with the ear cytology and blood morphology, it certainly fits into that profile. It helps address what I think is a gap from a care standpoint. Especially on the blood morphology standpoint where they'd like to do more blood morphologies, but due to the complexities and variability and time constraints with slides, they don't always do as many as they would like. to do. So we're very excited by that. And I think it fits the marketplace and it fits that need. And importantly, it doesn't add work. It's not moving work around. It eliminates work that would otherwise practices are left with. So I think it hits on both the cylinders of delivering excellent medical care but also workflow productivity improvements.

We will now take a question from --

Sorry, Michael, you had also asked about the pricing piece. Keep in mind that pricing is -- there's a mix of combination by different customer types. And so there's not a single way to talk about it. We obviously have corporate customers who may be under longer-term contracts, as well as different program effects. So we think that the 5% debt that we provided as a guide both reflects -- is commensurate with the value that we're delivering and very much in line with what customers see from an IDEXX contribution standpoint. Keep in mind, we don't set the pet owner price. That's up to the veterinarian to decide how they decide to price that and mark it up. And typically, there's an uplift that they factor into their practice management systems. And they obviously price through differentiation -- and not just differentiation in terms of the test itself, but also the medical services piece of it.

Thanks so much for coming back to me. Appreciate that, Jay.

Our next question comes from [indiscernible] of BNP Paribas.

Hi. Good morning. Thanks for taking my question. Just a follow-up on inVue, if you could provide maybe the early KOL feedback regarding the slide-free and load-and-go technology or any other area of feedback and whether you're able to provide more information for modeling purposes, including the timing of additional indication. And I just have also a second question, whether we could expect further innovation to be announced on assays in 2024? And would you consider for further M&A in software? Thank you.

Yes. So let me talk a little bit about inVue and some of the key opinion leader feedback. We've had a number of key opinion leaders involved as part of the upfront definition and development of inVue. So there's -- we typically do involve them when we're bringing something new to the market, new to the world like this. I think the exciting thing from their perspective is that you're looking at cellular structures, including intracellular structures within their natural state. When you prepare a slide, it's a 2D, I don't want to use the word squish, but I'll use the word you're sort of squishing it. So you're getting a non-natural look at it. When you have a three-dimensional view and can interrogate it in that natural state, you see things that you don't otherwise -- you wouldn't otherwise see and are able to provide differential diagnosis from that. So they're very excited by that. I think veterinarians, in general, are very excited by the fact that you don't have to prepare a slide. They know they spend 10 to 20 minutes on that. It's technique-sensitive, it's highly variable. Therefore, the output in interpretation is variable. So having a solution like that, that's relevant, that's something that they -- is well understood, I think they're very enthusiastic about that. With respect to innovation this year and announcing innovation, not going to talk about that. At this point, we're constantly innovating our product development pipeline, and funnel is filled with very interesting activities. And as we get closer to launch of particular assay or software or instrument, then we talk about it and then we'll disclose more.

Our next question today comes from Erin Wright of Morgan Stanley.

Hi. Thanks for taking my question. So I just had another follow-up on inVue and then I have another follow-up after that. But on inVue, could the launch be expedited at all? Or could you do like an earlier soft launch with that with that instrument? And do you still have that other diagnostic platform in the pipeline? Is that more of a 2025 event or later?

Yes. So with respect to the point-of-care platform launches. We have a very well-defined tried and true method of developing platforms, putting it in the hands of customers, getting feedback in terms of how it works within a real operating environment. We know that there's a difference between bench-top development and what you see within the clinic when we launch something and begin shipping it. We want to make sure that the average time between support events are four, five, six years. These are world-class levels of performance. And our customers expect that of us. We don't want to premature launch and maybe have issues that are disruptive to the practice environment. So we're comfortable with what we've guided to in terms of the timing of that and making sure that it fits within software ecosystem and the overall operating environment of the practice itself. We're not further disclosing our next point-of-care platform other than what we've talked in the past, we have one, it's outside of the existing testing categories, and when we get closer to launch, we'll talk about it.

Okay. Thanks. And then a bigger picture question. Just has there been any sort of changes or evolving opportunities as it relates to the competitive landscape, I guess, particularly in the US? Could disruptions in sort of new ownership of one of your competitors or changes in distribution for the other -- one of your competitors is that presenting opportunities for you to take share at this point that you may not have seen previously in either across individual accounts or corporate accounts too? Thanks.

Yes. Our markets have been very competitive for a long time. I think new ownership hasn't really changed that dynamic. Some of our competitors were also partners with on the clinical services and equipment side. Customers have a choice. Our focus is on continuing to innovate to help address the challenging problems they have in the practice, whether it's capacity constraints, whether it's introducing new testing solutions, to give them better medical results. What we find at the end of the day is customers appreciate the integrated nature of our offering, the ability to generate seamless user-friendly, customer-friendly way these critical insights that inform great medical decisions that help produce outcomes and do it productively. That's where our focus is and that's where our focus is going to remain.

We will now take a question from Jon Block of Stifel Financial.

Thanks, guys. Good morning. Brian, maybe just from a modeling perspective. Anyway to think about the gross margin versus op margin expansion this year? Do we get GM expansion because another decent year with price? And then if you look at OpEx, R&D was up for the fourth quarter in a row, actually, the R&D was up 20% year-over-year, G&A down two quarters in a row. So just anything on the GM or OpEx to detail as we sort of sharpen our pencils on '24?

Sure. Thanks for the question, Jon. Just to revisit what we shared was we're targeting 20 to 70 basis points of comparable improvement net of the 40 bps from -- headwind from the customer contract resolution payment. So normalized for that, that's 60 to 110 basis points. We think that will primarily be driven by gross margin gains, consistent with the progress that we supported our 110 basis point improvement in 2023. We benefit as we help our customers grow faster and CAG Diagnostic recurring revenues grow. That includes price benefits that help us to offset inflationary impacts. We're also continuing to benefit as we grow our cloud-based software business. It's an excellent business for us, and we're doing a great job expanding that business and improving our profitability in the software front. And also have an ongoing focus on improving our lab operations, including benefits from expanding our business. So we think we have a number of drivers that will help us to build on our gross profit gains. In terms of our investment profile, I think you highlight where our priorities are. We want to support our innovation agenda. That's an area that's been very high return for us over time. We obviously have the platform that we're launching this year and ongoing innovation that we're supporting. We're continuing to invest in our commercial operations. We had a US expansion recently that we invested in. And we'll continue to look at opportunities to enhance our commercial capability globally and be efficient overall and try to manage our OpEx largely in line with revenue growth. I think that's a reasonable assumption. I think if we do a better job of growing, grow faster, that always there's an opportunity to get some leverage on that front. But I think our plans are to sustain the OpEx investment in line with revenue and prioritize the innovation and commercial agenda.

Okay. Great. That was very helpful. Thank you for that. And then just sort of a long second question, more clarification. So it seems like the 2024 vet visit growth expectation is zero, if I had that right, at the midpoint of your 7.5% to 10.5% CAG Dx recurring. I just want to make sure I got that right. And then what's the expectation for 1Q'24 visits. Was that the negative 1% for full quarter? I'm just trying to sort of get at the implied 2Q to 4Q vet visit assumption? And then just sort of a quick miscellaneous tack-on, anything for price to call out US versus international when we think about the 5% global? And then what about days? Do you get an extra day this year? And does that have any tailwind to the growth rates? Thanks, guys/

Okay. So just on the first one, maybe a simple way to understand this is post Q1, we're, I think I said this in my comments, the midpoint assumes largely flat clinical business in the US. So we're trying to capture that there's about $10 million of headwind that we saw from January. Whether that's principally going to impact the US business, it is US risk, and that will -- we think we'll be seeing in the clinical visit numbers. So we're not trying to estimate that for Q1, but that's obviously a headwind that we're trying to factor in. But I think the bigger picture, Jon, is midpoint, is the midpoint assumptions are largely flat, US clinical visits in Q2 to Q4 timeframe. I think you had a question on price US versus international. We're not guiding regionally, but the 5%, we're expecting solid net price realization globally consistent with what we're able to execute this year. And so I think we're, again, without being specific, you should expect solid price realization in US and international regions. And days, we don't have a material kind of full year dynamic. We'll share clarity as we go through quarter-by-quarter on that, but we're not highlighting that as an issue in Q1 and it's -- or for the full year.

All right. Thanks, guys.

Okay. Thank you. So we don't have further questions. So with that, thank you for your questions. We'll now conclude our Q&A portion of this morning's call. It's been a pleasure to review another quarter of strong IDEXX results. In summary, IDEXX is well positioned to sustain the momentum we've built into 2024, which will continue to help us address the significant decades-long opportunity to raise the standard of care for companion animal health care. Our consistent strategy focused on supporting increased utilization of diagnostics is a key factor in elevating the standards of care and has helped us navigate the highly dynamic external environment in our sector. We look forward to continued strong execution against our strategic priorities by teams across IDEXX as we move forward through 2024 and beyond. So thank you for your participation this morning, and we'll now conclude the call.

This concludes today's call. Thank you for your participation. You may now disconnect.