Good morning, and welcome to the IDEXX Laboratories Third Quarter 2024 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 second quarter 2024 results and updated 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. 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, please feel free to get back into the queue. And if time permits, we'll take your additional questions. Today's prepared remarks will be posted to the Investor Relations section of our website 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 2024. IDEXX delivered solid organic revenue growth and strong comparable profit gains in the third quarter. In terms of highlights, overall revenues increased 6% organically supported by 7% organic growth in CAG diagnostic recurring revenues and 13% organic growth in our water business. Organic revenue gains were supported by benefits from IDEXX execution drivers reflected in consistent solid new business gains, sustained high customer retention rates and double-digit growth in our premium instrument install base. While not reported in our quarterly results, IDEXX secured nearly 700 orders for our new In View Analyzer which supported strong growth in EVI metrics that will position the company to build on this momentum, partially offsetting these benefits, CAG diagnostic recurring revenue growth in Q3 was constrained by impacts from near-term US macro and sector headwinds. As we'll discuss, we're updating our full year organic revenue growth guidance to reflect expectations for continued near-term macro and sectoral pressure in the US and to incorporate estimated negative impacts from recent severe weather events. IDEXX continues to deliver strong profit performance as we work through these dynamics reflected in solid comparable operating margin gains in Q3, keeping us on track to achieve our full year operating margin goals. Solid revenue growth and operating margin gains supported EPS of $2.80 per share in Q3, up 11% as reported and 12% on a comparable basis. We'll review our updated guidance detail later in my comments. Let's begin with a review of our third quarter results. Third quarter organic revenue growth of 6% was driven by 6% organic revenue gains in our CAG business and 13% organic growth in water; partially offset by 2%…

Thank you Brian and good morning. IDEXX delivered against our strategic priorities in the third quarter including strong profit growth as we advanced a robust innovation agenda supported by a high touch commercial model. These pillars of our organic growth strategy position IDEXX to continue to lead the development of the companion animal diagnostics sector over the long-term while supporting solid organic revenue growth in the near-term. Third quarter CAG diagnostics recurring revenue growth was supported by sustained IDEXX execution growth drivers including solid net new business gains, customer retention rates sustaining at over 97% and a net price realization aligned with our expectations including impacts from extens expansions in corporate accounts. Performance was also supported by double digit growth in our premium instrument installed base reflecting high interest by practices around the world in adopting IDEXX technology to obtain differential clinical insights. These consistent growth drivers reflect the benefits from our decades long strategic commitment to focusing and integrating on companion animal diagnostic assays instrumentation software supported by a highly capable and tenured commercial organization. As Brian noted, US Sector and IDEXX US growth has been moderated by cumulative macro pressures on pet owners which has pressured visit and demand trends in U.S. clinics. The results we are providing this morning reflect excellent execution from teams across IDEXX in a more challenged macro environment. We remain confident in the enduring positive secular growth tailwinds that create an attractive growth opportunity for our sector over time. From a growing global pet population to longer pet lifespans and increased opportunities to improve the quality of our pets lives, the future growth opportunity and the value of companion animal medical services remains highly compelling, further enabled by IDEXX innovations and commercial focus. These secular trends position companion animal diagnostics as the fastest…

Thank you. [Operator Instructions] The first question is from Chris Schott with JP Morgan.

Thank you so much. This is Katerina on for Chris. Thank you for taking your question. So first, you touched upon this earlier in the prepared remarks, but can you maybe just elaborate a bit on the drivers of the reduction outlook and the step down in 4Q? I guess what's the rough split between the weather things you mentioned and the underlying US macro versus anything else want to call out? And then I guess second question is just on vet visits more broadly, can you just elaborate a bit on what's the biggest delta I guess between the underlying outlook you gave in 2Q versus the one you're giving now? I guess what's different in the market and what's driving this kind of worsening macro environment? And where are you expecting to see the most impact? Thank you so much.

Thanks for your questions on Q4. Just to clarify the commentary, we highlighted an outlook for organic growth overall of about 3% and CAGDX recurring revenue growth of 3.5 to 4%. The 3.5% to 4% is net of a estimated 0.5% growth rate impact from the hurricane. So if you normalize for that it is 4% to 4.5% and that is actually aligned with our outlook for price benefit. So in Q4 we're basically looking at normalized for weather, relatively flat volume. It is similar to the trends that we saw coming out of Q3. It incorporates a similar outlook for clinical visits that we saw in Q3X the weather impact. There is some impact from weather and so it really is more reflecting the trends that we saw in the third quarter. I think the one element in the third quarter that was somewhat different than we anticipated, we saw relatively more kind of pressure on end clinic demand in terms of just independent of clinics, some compression on that. We tried to highlight in our comments that the for pets coming into the clinic frequency is sustaining. It's actually up in wellness. It's when you adjust for the pain med effect. It's. It's actually up in non-wellness as well. And so I think that is very encouraging that there's still a lot of interest in diagnostics for the pets coming in. It's not expanding like it had historically. I think that's probably our, an element that we're still working through. And again, we think that's more near-term macro impacts that will both on the visits front and in terms of some of these demand impacts we think we'll be able to work through over time. But in the near-term we're just incorporating these trends in our balance of your outlook.

Let me address your question about the clinical visit piece. As Brian indicated, we continue to attribute that to the near-term macro and sector pressures. Clearly from a macro standpoint there's the cumulative pressures of inflation and not just affecting animal health, but across the economy as a whole. We continue to see, that at the pet owner level there's a great deal of resilience. I think pet owners continue to prioritize the care for their pets at the, at the expense of other discretionary categories. But that's not to say that they're immune to these broader macro pressures, especially at the margin. we think that from an overall clinical visit standpoint it will normalize over time. all the, I think sector drivers around pet population growth, pet longevity, human pet bond, aging pets which will, consume more care are important, important support to the overall clinical visit trends. And then that our own innovation and the contribution that our own innovation will play both from a direct and leverage standpoint as, as we add capabilities to practices that support these long-term trends will drive the increase in utilization.

The next question is from Michael Riskin with Bank of America.

Great, thanks for taking the question guys. First to start, the reference lap number came in particularly weak in the quarter. I think we were a little bit surprised. That was the biggest delta. And during your performance remarks you made some comments about how there was some impact to price in reference lab from those three major customer agreements. Could you expand on that a little bit? Is that, I mean, I think we kind of can read between the lines that there was a little bit of price to win the contract. Is that standard operating procedure? Were these a little bit more Outsized than normal, just in general. Is that something you're seeing a little bit more pushback on in terms of price or if there's anything else on Reference Lab to call out?

Thanks, Mike. Maybe I could just set context on the numbers in the quarter and then allow Jay to talk about the dynamics. In reference Labs, we had 2.4% growth organically. We highlighted there was actually a day's headwind effect in labs. The benefit that we saw in the quarter was all related to shipping days. So normalized roughly 3% growth. And we highlighted that volume growth was actually positive. So to your point, there is a level of effect on lab price realization, which is a good news item in that we this year had three major new customer extensions and expansions and that will have long-term bond growth benefits for IDEXX. And you know that that's captured in kind of our gross to net pricing effect. And you see some of that in the Q3 numbers in labs. But the underlying health of the business is quite solid, particularly with some of the pressures we've seen on things like wellness testing. So Jay can expand on that?

Yeah, I think there's a couple ways of looking at this. The execution drivers at the Reference Lab business continue to be really strong. As Brian indicated, we have seen modest volume growth. There's new business gains and very high customer retention levels. The price gains were moderated by these major new customer agreements and expansions and extensions and they will benefit the company and the business over the longer term through volume grades. Keep in mind that the Reference Labs is relatively more indexed to wellness testing. We know that wellness testing has been more pressured. We saw the decline of 3.4% in the U.S. there hasn't been change in any of the mix that we've described over time. And we're very optimistic about the innovation agenda for the Reference Labs. We take Fecal antigen and Cystathin B for kidney health and the IDEXX cancer diagnostics in 2025. Really continue to position that modality in a highly differentiated way. And just getting back to my prior comment, clinical visits will normalize over time.

Okay. And then if I can squeeze in the follow up, just want to expand more on price in general. You talked about five for the quarter. I think you're kind of sticking with 5 for the year. 5% price. 4Q is going to be a little bit lighter than that. Four, four and a half. I know some of that is probably tied to timing of the price increases you took last year. Again, correct me if I'm wrong. And if your 4Q price assumption did get lowered, but just in general, how do you think about price as a lever going forward? Jay, you just talked about thinking that vet visits will come back. We talk about execution and new product launches and sort of the IDEXX premium. The third pillar of the model is price. It's been obviously very elevated over the last three years. In '22, '23, '24, it looks like it's starting to normalize a little bit. Should we expect that to continue continued normalization of price over time back to that 2 to 3% historical level? Is that the right way to think about it?

Yes. Mike, just to clarify some of the numbers that we shared, as you noted, we reinforced the 5% full year outlook. Some moderation in Q4. That's principally just the new business effects that we highlighted. So I think this is consistent kind of trends. We are positioned to communicate our pricing to our customers. It's not a lapping effect, is kind of the. I think that was part of your question. It's more the new business effect. And we're positioned to communicate our price increases for next year later this year with our customers. Continue to feel very good about the value that we're delivering with the focus on innovation and that we've had in the long-term as a company. And we have a new wave of innovation that we're really excited about. So I think it'll be anticipated, it'll be a positive driver for us in the near-term. In the longer term.

Keep in mind that the way we think about pricing is to really maintain. We want to maintain. We want to be on the right side of the whole value equation. And so there's obviously new products, new innovation, but then there's products that we continue to really expand from a feature and capability standpoint. So you think about Fecal imaging and Cystoisospora and tapes and Cystatin B and VEConnect plus these were all added to the menu and panels at no additional cost. So what we strive for is to really make sure that we're adding value and price obviously reflects that. And as Brian indicated, we'll provide more guidance when we provide 2025 guidance.

[Operator Instructions]. The next question is from John Block with Stifel. Thanks guys.

Good morning, Brian. The first one, I think there's a step down in the 24 guidance of about 150bps for total organic revenue versus the 100 bip step down for CAG the ex-recurring at the midpoint. So maybe if you can speak what that's attributable to in regards to the Delta, I'm guessing it might be fewer end use going out this year than maybe initially expected? Maybe a little bit of LPD as well. So we'd love your thoughts there. And then just to tack onto that any color on the realized ASP for in view as we start sort of scrubbing the model and the contribution into '25 and then I'll ask my follow up.

Great, thanks. Thanks for your question. John. I think you hit on the themes. It's the Update includes incorporating Q3 so I think we did see somewhat softer results in areas like LPD than anticipated. So we're carrying that. I think we are capturing also the instrument revenue effects. It's principally just the strength of the in view advanced orders. I think that does have some impact in the overall order generation. So in terms of our other premium instruments, it's a good news story. Overall the EBI normalizes up very strongly and so we're really encouraged by that. And so those are kind of the factors, some tweaking on the software numbers as well just based on trends.So those are kind of the themes. The bigger driver of course is just the calibration on the CAG diagnostic recurring. Regarding your specific question on NV pricing, I think low teens has been the number we've shared and I think that's still a good estimate for the instrument price realization. It'll vary by program, but to the degree these are placed under things like 360 contracts, it's primarily upfront revenue.

Okay, got it. Helpful and maybe I'll ask the follow up there.But Jay, are there any comments of was the plan always to take 700 orders and only ship 50 out? You know obviously you're beta testing this in the field. Were there any challenges that you incurred throughout that process in terms of why most of those shipments are occurring? Call it in '25, '24. That's sort of the follow up. But then the second question just on the corporate renewals, you guys don't typically talk a lot about that but admittedly corporates are a big part of the market. I don't know 30 or 40%. So just any more color that you can provide? Was that just specific to the lab number, not the in clinic? And then for the lab Brian, did we think about it like the pricing will be a headwind for the next three quarters. It took effect third quarter of '24 it's a headwind for the next three quarters, year over year and then essentially you lap the pricing benefit but continue to. I'm sorry, you lapped the pricing headwind but continue to benefit from the volume tailwind for what I'm assuming is a multiyear contract and hopefully that came across okay. Thanks guys.

Yeah, let me start with the corporates and I'll address the in-view launch and I'll turn it to Brian for some additional color on that. from a corporate standpoint, we've been very successful and these represent not just extensions but expansions. I think the corporates from a maturity standpoint are focusing more on organic growth. If you go back, they grew through clinic acquisition and there was a lot of consolidation and arbitrage. And so I think that the focus on organic growth, not just within the reference labs but using technology, whether it's point of care software and integrating those pieces, has positioned us really well and has given us an opportunity to really partner with them and help them achieve those objectives. And as I indicated in my remarks, there are certainly volume benefits that we see over time that will develop as a result of expanded business with those folks. So yeah, very excited by that. There's also, I would say from a corporate standpoint, more of an emphasis on how to implement wellness campaigns and programs. Much more harmonized way versus independent clinics as one offs. From an in view launch standpoint, we have a very tried intrude approach in terms of how we launch instrumentation. If you look at Catalyst, inVue Dx and more recently Prosci one, we start in a control fashion. We're very careful that we deliver the right customer experience. Customers expect that from us and the way we do that is we start with a smaller group of implementations and onboard those customers and tweaks as necessary. So it's really not driven by a certain number in Q4. It's really more from overall readiness so that we deliver the right experience and build over time. The receptivity to that product itself has just been outstanding and we look forward to being able to build global demand based on the menu. Very compelling menu for customers.

And John, to your specific question, I hope I could follow it, but the new business effects and pricing are relatively more in labs, US labs. So that's where some of the business opportunity that we're very excited about in terms of expanding the relationships is flowing from. And I think your point was about lapping and I think you're correct. There is a, there's kind of a gross to net kind of effect in the near-term, but you work through that. Keep in mind it was three agreements that kind of built through the year. So it'll be, we'll get more clarity as we get into 2025, but basically there'll be some favorable lapping dynamics that go on the latter half of next year. To your point, you nailed it.

The next question is from an Aventee with BMP Paribas.

Hi, good morning. Thanks for taking my question. Can you discuss how industry innovation in the affordability space so with vet practices offering payment plans and ADEX credit card in view and Velo could help mitigating lower visits in the near and longer term. And also can you discuss the as you are monitoring the divergence between wellness and non-wellness visits, what are you updated thoughts on the sector conditions? Thank you.

Just maybe address the payment question first. Most of our instruments, whether it's in view or broader vet lab suites are placed through various programs and what that typically involves is there's not cash upfront and the customers make a volume, commitment over a period of time. So from a it's built in financing if you will. So there's not really, practice cash constraints on being able to, purchase new technology or instrumentation. our focus is really being able to provide technology and tools that help with capacity challenges as they exist. You know, the flip side of capacity is obviously productivity and practices are looking for ways that optimize workflow within the practice support staff productivity enable them to communicate with clients or pet owners and Velo helps us do that.

And just your question on visit trends, it's interesting we tried to highlight this pain medication pain med visit effect in the numbers and as we noted that overall the -2 point visits are actually supported by about one to one and a half percent of benefit from these payment visits which show up in the non-wellness visit per the data analysis that we've done. And when you adjust for that, roughly the wellness visits would be down about 4% and non-wellness would be down about 3%. And so it's relatively more pressure on non-wellness exes pain med visits. But I would say it's indicative of a broader kind of challenge that we've had related to the macrodynamics which is visits are down overall. So I think again somewhat more in wellness which is logical given that it's relatively more discretionary but it's a broader theme.

The next question is from Erin Wright with Morgan Stanley.

Great, thanks. Good morning. Could you give us an update on cancer to. Yes, just the timeline magnitude that you're thinking there in terms of the rollout. And then just where should we think about in terms of. Or what should we think about in terms of price? As this is sort of a premium cancer screening wellness type of platform and any sort of early feedb on your kind of pilot testing or as you kind of talk to customers about the opportunity, particularly in the initial offering in canine lymphoma. Thanks.

Yeah, thank you. Good morning, Erin. We continue to work on really making nice progress on IDEXX cancer diagnostics with lymphoma. You know, we're still targeting a 2025 launch from both a price as well as tertiary time standpoint. We see it as a, an appropriate wellness screening, really being able to target younger but at risk dogs as well as older dogs. The feedback from key opinion leaders and oncologists has been excellent. So we continue to fully develop the product, validate the testing platforms, collect data, and are really looking forward to being able to build a market. We know that both pet owners and veterinarians see this as a major pain point today in terms of being able to detect cancer earlier than what's currently done. And when you can detect cancer earlier, obviously the therapeutic options you have are more numerous and more effective.

Okay, thanks. And then just on the reference lab in general, I know you touched a little bit on it before, but in terms of kind of the performance in the quarter, how we should think about the quarterly progression, any sort of changes from a competitive landscape standpoint at all, and then also just kind of your strategy, whether it's turnaround times and service levels and overnight testing and that kind of stuff, is anything changed in terms of how you're kind of contracting or working with your customers on the reference laboratory side, particularly in just kind of an inherently lower volume environment. Thanks.

Yeah. Aaron, we don't see any change in the competitive dynamic. We track that very closely. We look at net new business gains which have been positive for the quarter and for the year. We look at retention levels which remain very high in the reference labs. As Brian indicated earlier, we do see volume growth in the reference labs, the differentiation around the overall menu, Fecal antigen and the whole renal health panels and vecnect plus in the coming IDEXX cancer diagnostics, we think continues to position us really well. I think the corporate contract extensions and expansions I talked to, I spoke about really speak to the differentiation of our reference lab business. Corporates as well as independent practices want to partner with us and putting together win win partnerships is part of our strategy.

The next question is from Brandon Vasquez with William Blair.

Hey everyone, thanks for taking the question. I had two. They're both kind of related to kind of end market volumes. And so I'll maybe just ask them both upfront. The first one is, as part of your snapshot, you guys also disclose the frequency and utilization metrics. Maybe X price, if you look at that. Still a little depressed. I always tend to think of those as things that you have a little bit more control over versus the vet visit volumes. So maybe just talk about within frequency and utilization. What levers do you guys have that you can pull on as we go into 25 to help offset some of the weaker vet visit growth? And then the second follow up on vet visits is just around these pain medication headwinds that you guys are talking about. Can you clarify if this is simply, the headwind that you're talking about is simply looking at vet visit volumes, they're actually worse than they are. Or is the impact that less NSAIDs because now they're switching to injectables, means that less diagnostic tests are being done for pain medication? Thank you.

So maybe I can clarify the last point and it provides a little bit of data insight on your frequency and utilization question that Jay can expand on. But what we're seeing in the data is that there are a number of visits, particularly older pets, that are related to pain medication, more recently, particularly follow up visits where the pets are being brought in and there typically isn't a diagnostic, there's an administration of the pain medication. And that is with the ramp of these pain meds, particularly over the last few quarters, that's been a pretty meaningful positive contributor to visit growth, but obviously doesn't benefit our business in terms of driving diagnostics. So what we're trying to highlight is that minus 2% on clinical visits is really for our business, minus 3% to 3.5% in terms of visits that drive diagnostics. When you turn to their frequency in the utilization side, what's interesting is adjusting for those dynamics, frequency is actually up. So for visits for pets that are coming into the clinic, we think it's positive 50 basis points rather than the minus 50 basis points we show. And it actually we see increases in utilization as well per visit, albeit at moderated paces from what we've seen historically. But it's continuing to be positive. So that's kind of the backdrop. I think there is a specific dynamic as it relates to some of the metrics that our investors focus in on and we focus in on. We think the underlying dynamics within the clinic are very healthy. It's really a visit challenge for us. But Jay can talk more about this?

Yeah. So, the way we, from a strategic standpoint, influence both frequency and utilization is really through innovation and our commercial model. Innovation has both direct and leveraged impacts in terms of being able to drive testing, obviously within we begin shipping inVue, they'll use the cartridges and consumables and that drives utilization. But also, our programs, our marketing programs that place instruments through IDEXX360 really inspire use of the reference labs and rapid assay and our software businesses. So it's, we think that over time, and we've shown this over time that historically where do you bring innovations that solve the most challenging, both clinical and business problems that, customers end up, veterinarians end up using diagnostics because it's really foundational in terms of driving the medical services and care management approaches within their clinics.

The next question is from David Westenberg with Piper Sandler.

Hi. Thanks for taking the question. So I'm going to unpack a couple of that on the reference lab and then on the pain drug visits. And ultimately what I'm trying to get to is potential utilization acceleration probably next year or maybe the year after. But the differential between consumables and reference lab, we haven't seen that big of a gap since 2018. Is there a way maybe veterinary groups are thinking about changing the way they're thinking about diagnostics, perhaps using inside lab more as a strategy to generate more diagnostics. And again, I'm only saying that because we're seeing the biggest gap that we've seen. You've explained some of that stuff, including days and then also on the pain drug. In fact, we've seen Cytopoint. It's been around since 2016. It's been about half as much of an impact on visits, but it's still been an impact on visits. Now elderly patients are more likely to be sold the diagnostics. So you would think that, maybe there's a, as you see this captive audience, I mean, when we talk to veterinary customers, they love this captive audience. So is there maybe a longer tail impact to increase diagnostics? Because now you have the elderly patient. And again, I'm trying to focus this question on utilization of diagnostics. Maybe next year as we build on some of these trends. Thank you.

Yeah. So good morning, David. Let me just talk about the in clinic versus the reference lab model, we don't see actually a modality shift. I think a number of things influence that. Obviously wellness visits, as I called out, is primarily a reference lab send out modality. But just in terms of overall use, it's based on situational conditions with the pet. If the pet comes in and is non well or an acute condition, veterinarians tend to do the in clinic testing so they get to interpretation quickly. In other cases, if it's a specialty test, they'll send that out. But we haven't seen, we actually haven't seen a mix shift above and beyond the wellness visit trend that may be impacted by overall macro considerations. In terms of the pain medication piece, the point that I would highlight is we haven't seen for those patients coming in to the practice that are getting let's say pain medication primarily, let's focus on dogs, primarily older dogs. And we haven't seen any impact on the use of diagnostics. So we don't think there's a substitution, effect or potentially even driving more diagnostics in those cases, if that's what you were getting at.

And Dave, just to your question on utilization and utilization drivers over time, I know you're familiar with this, but we've highlighted frequently in our longer-term strategic discussions the metric of bloodwork inclusion in diagnostics and that for a very long period of time had accelerated at 50 basis points. We saw that going into the pandemic actually accelerated through the pandemic. And what we see more recently in this transition post pandemic period with some of the macro headwinds is it's sustaining, it's just not growing at the 50 basis points. That's a 200-basis point growth upside. If we can get back to the 50 basis point expansion for our US business and 150 basis points globally that was highlighted in our investor day discussion. So we're encouraged that it's sustaining so well with some of the macro dynamics going on and building off of the accelerated growth that we saw there in pandemic. And we feel very confident in our ability to influence that over time as we've done for decades and see that as central to our long-term growth strategy.

So I'll now conclude the Q&A portion of the call. Thank you for your participation this morning. It's once again my pleasure to share how I'd executed against our organic growth strategy. While delivering excellent financial results in the third quarter, companion animal diagnostics sector remains an attractive space supported by long-term global secular growth drivers and a significant opportunity to enhance standards of care. IDEXX's current innovation cycle and effective customer engagement playbook have positioned us well to lead the penetration of this opportunity, and I look forward to sharing more updates with you on our solid progress. And so with that, we'll conclude the call. Thank you.

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