IDEXX Laboratories held their Second Quarter 2023 Earnings Conference Call, led by their President and Chief Executive Officer Jay Mazelsky, Chief Financial Officer Brian McKeon, and Vice President of Investor Relations John Ravis. They provided cautionary statements about forward-looking statements and discussed financial measures not prepared in accordance with Generally Accepted Accounting Principles. Brian McKeon then proceeded to review their Q2 results and updated financial outlook for 2023.

IDEXX achieved strong growth and financial performance in the second quarter, with 10% organic revenue growth and 12% organic growth in CAG diagnostic recurring revenues. Record second quarter premium instrument placements, continued solid new business gains, and high growth in recurring veterinary software revenues contributed to better-than-targeted operating margin improvement. CAG diagnostic recurring revenue growth was supported by global net price gains in the 8-9% range, and veterinary software and diagnostic imaging revenues increased 13%.

IDEXX saw a 6% decrease in CAG instrument revenues in Q2, but CAG diagnostic recurring revenue growth remained above sector growth levels. In the U.S., IDEXX achieved a strong 1,370 basis point growth premium, driven by higher net price realization, new business gains, and increased diagnostic frequency and utilization. International CAG diagnostic recurring revenue growth improved to 10%, driven by higher net price realization, strong new business gains, and record Q2 premium instrument placements. IDEXX VETLAB consumer revenues increased 15%, driven by 11% year-on-year growth in the global premium instrument install base and 15% growth in Catalyst placements.

In Q2, instrument placements grew by 9%, ProCyte One momentum was strong with 10,800 instruments installed, Rapid Asset revenues increased 12% organically, Lab revenues increased 9%, Veterinary Software and Diagnostic Imaging revenues increased 13%, Water revenue increased 9%, and Livestock, Poultry and Dairy revenue increased 1%. Gross profit increased 11% as reported and 13% on a comparable basis, and gross margins were 60.7%, up 160 basis points on a comparable basis.

In the second quarter of 2023, net price realization, lab productivity, operational initiatives, and business mix all contributed to an increase in gross margin gains, though this was moderated by a 60 basis point negative impact from forward exchange changes. Operating expenses decreased 17% year-on-year, and EPS was $2.67 per share, an increase of 71%. Despite the lapping of $18 million of prior year foreign exchange hedge gains, forward exchange reduced operating profits by $8 million and EPS by $0.07 per share. Free cash flow was $173 million, and the net income to free cash flow conversion ratio was 75%. The balance sheet remains strong, ending the quarter with leverage ratios of 0.9 times gross and 0.7 times net of cash.

Share repurchases reduced diluted shares outstanding by 1% and the company has updated its revenue guidance for 2023 to $3,660 million to $3,750 million, reflecting an 8.5% to 10% organic growth range. The outlook includes 1% headwinds for CAG diagnostic recurring revenues due to equivalent days effects, as well as 6% to 7% net price gains and a flattening of U.S. same-store or clinical visit growth trends. The company has also adjusted its outlook for operating margins to 29.3% to 29.7%, with the high end reflecting an outlook for approximately 360 basis points in comparable operating margin expansion.

The company's updated EPS outlook is $9.64 to $9.90 per share, which is an increase of $0.23 per share at the midpoint, due to operational and foreign exchange benefits. For Q3, they are expecting organic revenue growth at the lower end of their updated full year growth range, with 1.5% reported growth rate benefit from foreign exchange. Operating margins are expected to be in the 28.5% to 29% range, with 50 basis points of unfavorable foreign exchange impacts due to hedge gain lapping.

IDEXX had strong results in the second quarter, driven by strong demand for medical services and increased utilization of CAG diagnostics. This resulted in double-digit organic revenue growth and the first time ever that U.S. revenues exceeded $1 billion in the first half of 2023. IDEXX saw high-quality premium instrument placements, sustained high-customer retention levels, contribution from new business gains, and net price realization aligned with expectations. IDEXX's diagnostics and software solutions provide key insights and productivity improvements to workflow transformation, as more clinicians partner with IDEXX to deliver higher care standards and efficiency gains.

IDEXX has seen record placements of their premium instruments in the second quarter of the year, both in the US and internationally. They have developed a suite of innovative products, such as ProCyte One, to meet the estimated 220,000 global instrument placement opportunities. Their customer-friendly marketing programs have helped them to gain new customers and increase testing utilization of existing ones.

ProCyte One boosts efficiency and accuracy, and has been a key driver of strong premium hematology placements since its launch in 2021. It has supported record second quarter placements and multiplied effects that drive growth in the customer base. This has resulted in double-digit CAG diagnostics recurring revenue growth, increased density of commercial reach, and strong installed base growth supported by excellent placements and new and competitive accounts. IDEXX is executing a modest expansion of U.S. commercial teams to further drive continued sector development.

IDEXX is expanding their customer base and hiring new territories and customer-facing professionals by the end of this year. In Q2, commercial execution helped drive adoption of IDEXX innovations, such as their rapid vector board disease screening franchise, which has seen 40x plus making up a greater share of in-clinic vector board disease revenue. IDEXX is also advancing their innovation strategy by launching the IDEXX [statinb]test in their North American reference lab network, which helps clinicians detect kidney injury. This novel marker leverages IDEXX IP to help regulate blood pressure, electrolyte balance, and red blood cell production, while also removing toxins.

IDEXX has added a staff and B test to its Reno portfolio and paired it with SDMA, allowing customers to gain a comprehensive view of kidney health and uncover structural injury and impaired kidney function. Additionally, IDEXX provides test panels for 2 million patients annually and a full stack of software solutions that leverage cloud technology to support greater diagnostics utilization. These solutions appeal to independent and corporate customers who are looking to standardize their workflow at scale, allowing them to focus more on their patients.

IDEXX is seeing high demand for its cloud-based products, such as ezyVet, NEO PIMS, and Web PACS imaging software. The company is seeing record instrument placements and double-digit organic growth, and has earned a world-class NPS rating for its diagnostic imaging business. To further discuss their strategy and long-term growth potential, IDEXX will be hosting its annual Investor Day in August, which will be live-streamed and recorded.

The event will feature senior management team members, including Dr. Tina Hunt, Dr. Mike Erickson, Mike Lane, Michael Shrek, and Brian McKeon, and will be concluded with a Q&A session. Nathan Rich from Goldman Sachs asked two questions about volumes, which Brian McKeon answered: the U.S. clinical visits trended softer in the quarter, and the improvement in the international CAG growth was driven by reference lab remaining soft.

In the first quarter, clinical visit trends were flat, but the headwinds from the capacity pullback of last year were expected to normalize and improve over time due to the strong underlying demand. International markets saw double digit growth due to strong instrument placements, customer engagement, and support of consumables. The clinic economics and revenue are growing nicely, indicating a healthy demand dynamic.

Brian McKeon and Jay Mazelsky discussed the company's plans for pricing in 2024, emphasizing a thoughtful approach that is aligned with long-term sector development and value delivery through solutions and innovations. They will also consider inflationary dynamics when making decisions closer to next year.

Brian points out that the company's pricing reflects the fact that customers are highly satisfied with the value they receive, as evidenced by the high retention and adoption rates. The company has recently released a new product to benefit two million patients on a global basis, and the price of the panels have not been increased. Corporate and independent practices have similar interests in the company's solutions, such as premium analyzers and software solutions, as well as preventive care. There are some small differences between the two, such as the size of the practice and the focus on growth.

Michael Ryskin is asking Jay Mazelsky about the differences between wellness and clinical care in the United States, and how it affects preventive care. Mazelsky responds that there is usually variability in a given quarter between the two, and that diagnostic parameters used in wellness areas have seen strong growth. Ryskin then asks about the impact of the heat wave in Europe on their 3Q guidance, and if there is any wiggle room built in for extreme weather.

Brian McKeon and Michael Ryskin discussed the potential impact of weather on the business and Jay Mazelsky explained the reasoning behind the expansion of the US customer facing organization. He stated that they had grown significantly in the US in the past few years and wanted to ensure they have the right account coverage to support product and innovation priorities. Ryan Daniels then asked about the competitive environment post M&A activity in the space.

Brian McKeon explains that the pullback in capacity in the first half of 2022 has been the main factor in the decrease in visits. He believes that there will be an improvement in the second half of 2023, and this trend may continue into 2024.

Brian and Jonathan are discussing the long-term optimism of the pet health care industry, citing qualitative work that shows there is an underserved demand. They have seen some same-store headwind effects internationally, but they anticipate that this will improve over time. They also discuss the staggered launch of new systems with the U.S. leading and international following. Manufacturing of these systems will be handled by the company or its partners. Brian also confirms that Q2 price was closer to 9%, and that full year 2023 price is expected to be between 7 to 8.

Brian McKeon and Jay Mazelsky discussed platform opportunities and how they typically start with the U.S. market. Mazelsky also noted that the key is to build an installed base and get the consumable revenue stream moving, which takes time. David Westenberg asked if there was any pressure from customers to raise prices and if there was potential to ease in volume. Mazelsky also clarified that there was an 18 million dollar contribution due to hedge gains, which led to 100 basis points of gross margin expansion.

Jay Mazelsky discusses the pricing decisions that clinics have made in the last five to six quarters, with multiple price increases taken on an annual basis to reflect higher labor costs and the need to hire more staff. Brian McKeon then explains that the foreign exchange dynamics in 2022 are in a positive zone, providing a benefit on revenue but a reported year-on-year foreign exchange headwind due to hedge gains that roll off eventually.

The question was about the two-year stacked CAG recurring revenue growth. The company had a strong quarter in terms of CAG diagnostics recurring revenue, which was driven by pricing, volume growth, and good execution. This was supported by consumables in the in-clinic business, as well as international placements. The two-year performance was relatively consistent, with similar trends and benefits, including higher pricing. The Q&A portion of the call was concluded.

The company is pleased to report another successful quarter of financial and strategic results, with an emphasis on providing better care for companion animals. The call is now concluding and the company looks forward to seeing everyone at Investor Day.

This summary was generated with AI and may contain some inaccuracies.