The IDEXX Laboratories Third Quarter 2023 Earnings Conference Call is being recorded, and the participants include the President, CEO, CFO, and VP of Investor Relations. The company cautions about forward-looking statements and provides information on risks and uncertainties. They will also discuss non-GAAP financial measures and provide a reconciliation. The Q3 results and updated financial outlook for 2023 will be reviewed by the CFO.

IDEXX had a strong third quarter with solid revenue growth and profit gains. They achieved 8% organic revenue growth, supported by various factors such as premium instrument replacements, new business gains, and high customer retention. However, there was a decline in US clinical business due to capacity management challenges and lower wellness visits. Operating profit was higher than expected, resulting in a 16% increase in EPS. As a result, IDEXX has updated their full year EPS and revenue guidance to reflect their strong financial results.

Overall, organic revenue growth was moderated by a 2% growth in the LPD business and a $3 million headwind from lower opti medical revenues. However, CAG diagnostic recurring revenue increased by 9% organically, driven by gains in the US and international regions. This growth was supported by a 7% improvement in global net price. Veterinary software and diagnostic imaging revenues saw a 13% organic growth, while GAC instrument revenues were down 10%. IDEXX's CAG diagnostic recurring revenue growth remains above sector growth levels. In the US, organic growth was 8.3%, with a 50 basis points impact from fewer selling days. This reflects a 1100 basis point growth premium compared to same-store US clinic visit growth levels. IDEXX's growth results were driven by increases in diagnostic frequency and utilization per clinical visit. Instrument benefits from higher net price realization, new business gains, and high customer retention levels. Same-store US clinic visit declines were below expectations at 2%.

In the third quarter, there were software trends impacted by capacity management challenges and a slow down in wellness visits. The company adjusted their revenue outlook for the year to account for these trends, but still expects strong profit performance in 2023. International recurring revenue grew by 10.3%, driven by higher net price realization and volume gains. The company also saw strong growth in their in-clinic diagnostic recurring revenues and consumer revenues, with double-digit gains in both the US and international regions. Despite a decrease in premium instrument placements compared to the previous year, the company saw solid gains in EVI metrics and sustained high placements in the US.

In the third quarter, ProCyte One's global installed base expanded to over 12,000 instruments. Rapid Assay and lab revenues grew by 8% and 7% respectively, with strong growth in the U.S. and moderate growth in international regions. Veterinary Software and Diagnostic Imaging revenues increased by 13%, driven by recurring software and cloud-based software placements. Water revenues grew by 7%, supported by strong growth in the U.S. and the integration of Tecta-PDS. Livestock, Poultry and Dairy revenues increased by 2%, with strong gains in the U.S. offset by constraints in international growth. The company's profit results were also strong, with high operating margin gains and an 8% increase in gross profit. Gross margins improved by 30 basis points, driven by higher net price realization, business mix, and improvement in software service gross margins. However, these gains were moderated by a negative impact from foreign exchange.

In the third quarter, there was a 70 basis point gross margin headwind due to foreign exchange, resulting in a 4% increase in operating expenses. EPS increased by 18% as reported and 16% on a comparable basis. Free cash flow was $238 million and the net income to FCF conversion ratio was 83% on a trailing 12-month basis. The outlook for free cash flow conversion for the full year is 85% to 90% of net income. The balance sheet remains strong with leverage ratios of 0.8x gross and 0.6x net of cash. $35 million was allocated to share repurchases in the third quarter. The 2023 P&L guidance has been updated to reflect Q3 results and revised estimates for foreign exchange impacts.

The company has updated its full-year guidance for reported revenues to reflect a 7.9% to 8.4% growth range, with a $20 million reduction for FX impacts. The updated outlook also includes an organic growth guidance of 8.3% to 8.8%, supported by a CAG Diagnostics recurring revenue organic growth of 9.8% to 10.3%. This aligns with the lower end of the company's previous guidance and assumes continued pressure on clinical visits and sales levels. The outlook for EPS has been narrowed to $9.74 to $9.90 per share, with an increase of $0.05 per share at midpoint. The company has also increased its reported operating margin outlook to 29.6% to 29.8%.

In the third quarter, IDEXX saw strong revenue growth and financial performance due to their high-touch commercial strategy and relevant testing and workflow innovations. Diagnostics revenue continues to be the fastest growing area of veterinary clinic revenues, and IDEXX's strong performance was driven by solid gains in CAG Diagnostics recurring revenues in major regions.

IDEXX's recurring revenues have been increasing due to various factors such as strong instrument placements, new business gains, and net price realization. Despite challenges in overall clinic visits, IDEXX's solutions and customer engagement have helped maintain strong financial performance. The company's commercial teams have been successful in expanding their customer base and promoting the importance of diagnostics to clinicians, resulting in solid revenue growth. This has been driven by a focus on placing high value analyzers at existing and competitive accounts, particularly in North America.

IDEXX's success in the veterinary industry is due to their focus on providing busy clinicians with the products, services, and support they need. This has led to growth in both medical services and diagnostics, with veterinarians incorporating and expanding the use of diagnostics in their care protocols. Despite challenges in clinical visit growth, there has been a 7% increase in same-store diagnostic revenue, showing that pet owners continue to prioritize healthcare for their pets. This is further supported by IDEXX's direct customer engagement model and superior diagnostic solutions, which have led to a 200+ basis point increase in diagnostic revenue growth compared to practice and clinical revenue growth. IDEXX also prioritizes disciplined growth in their commercial footprint as part of their customer engagement strategy.

IDEXX's extensive practice data analysis shows that customers who use their broader diagnostics offering experience higher revenue growth. The company's U.S. commercial expansion is on track and they expect to enter the new year with an expanded team in place. They have also seen positive growth in their international markets, with increasing reach and engagement with clinics. This growth is driven by their highly capable sales teams and the potential for further expansion in international regions.

The company's innovation agenda includes a focus on software, which is being embraced by clinics to improve efficiency and engage with pet owners. The company's software and diagnostic imaging segment saw significant growth in the third quarter, driven by excellent commercial execution and strong customer interest. Cloud-based products are becoming increasingly popular, with 95% of PIMS placements being cloud-based. Customers of all career stages appreciate the workflow benefits and ease-of-use of the company's software stack, allowing them to focus on delivering care.

IDEXX offers an integrated diagnostics portal, VetConnect PLUS with IDEXX DecisionIQ, which provides testing results, decision support, clinical insights, and next step considerations. Their software and data solutions are well-positioned to benefit from current trends and contribute to recurring revenue. IDEXX is also developing a new platform, to be announced in January, which will add to their over 200,000 placement opportunity estimate for existing instrument categories. They are also focused on innovation in advanced test menu and recently launched a new testing assay, Cystatin B, which uses IDEXX IP to help detect kidney injury earlier and more definitively.

The article discusses a recent study on detecting kidney disease and the expansion of IDEXX's reference lab testing menu. It also mentions the opening of a new lab in Perth, Australia and IDEXX's efforts to expand globally. The speaker also expresses sympathy for the recent events in Lewiston, Maine.

The speaker expresses gratitude towards those working to keep communities safe during the difficult time and opens the floor for questions. The first question asks about the impact of the current market conditions on the company's long-term model and expectations. The speaker responds by stating that while the current situation is not ideal, the pet sector is still strong and the company's execution drivers have been successful. The specifics of the model are deferred to another speaker.

The company believes that there is strong demand from end-customers, but there are some constraints related to practice capacity. However, the practices are investing heavily in technology and the company's competitive position is strong. The industry overall is in a positive state and the company is well positioned to take advantage of these trends. The long-term growth potential is 10% and there are positive factors such as expanded population, favorable demographics, and increased utilization of IDEXX technology. However, there are also near-term challenges, such as capacity management issues at clinics and macro impacts, that are impacting growth. The company is resilient but not immune to these impacts.

The speaker discusses how certain factors are impacting their company's short-term growth, but they do not see them as long-term constraints. They also mention their strong competitive position and positive outlook for the future. They decline to provide guidance for 2024 but express confidence in their ability to continue delivering strong performance. The next question is from an analyst at Goldman Sachs.

The performance of the US CAG Diagnostic in the third quarter was in line with expectations, with the only difference being a slight decrease in clinical visit trends, particularly in the wellness category. However, overall customer demand remains strong and employment levels within practices have increased. This has allowed for solid growth in CAG recurring revenues.

The company has not seen any major issues with staff availability in practices. They have conducted surveys to assess the impact of staff turnover, and there has been an increase in diagnostic usage within practices. This trend is seen as positive and is expected to continue. The company has also been able to maintain strong margins despite some challenges this year, and they are confident in their ability to continue this trend in the future.

The company has updated its outlook for margins, taking into account customer credit, R&D and foreign exchange. They expect margins to be 80-100 BPS above the prior year. The company has a strong business model and is supported by factors such as growth in the software business, investments, and new innovation. The company is not able to provide details on their new platform, but it will be launched at BMX and has received positive feedback from initial testing. The second platform technology is on track to roll out in 2024 and will have material contributions.

The speaker discusses the company's unique positioning in the competitive landscape and their ability to take market share. They focus on bringing an integrated solution to the marketplace, including software and new platforms. They use marketing programs and technology to continue to innovate and expand their menu of services.

The company plans to introduce new slides for chemistry and other areas to improve the value of their products. The operator then asks about the company's visit trends and whether it is due to macro or capacity issues. The CEO responds by saying that it is primarily due to capacity, but there may be some macro impacts. The company is working on investing in staff and technology to address this issue. The CFO adds that wellness visits have lower use intensity for diagnostics compared to sick patient visits.

The company has seen a decrease in wellness visits and an increase in diagnostic testing. This may be due to capacity management issues and macro pressures, especially in international markets. However, the company is still performing well internationally thanks to premium instrument installations. The guidance update takes into account these global trends.

The company has seen improvement in volume trends over the past few quarters and this is expected to continue. The international sector is less affected by macroeconomic conditions and the company is happy with its progress. In the third quarter, sales and marketing expenses were down compared to the second quarter, despite ongoing commercial investments. This was due to lapping dynamics.

In Q3 of last year, the company experienced higher sales and bidding costs due to discreet costs on the sales and marketing and R&D sides. As a result, they are expecting a relatively higher level of operating expenses growth in Q4. The company did not scale back on any sales and marketing investments in light of the lighter revenue number in Q2 to Q3. The company's initial forecast for consumable revenue per box on the Set of You product was three to six thousand, but it eventually settled at 3,000 to 4,500. This was in line with the company's original estimate and has remained consistent over time. The company has not updated this estimate in a while.

The company is unable to provide specific details on the new instrument launch, but they are excited about the potential for growth and deeper relationships with customers. They also mentioned the impact of adding menu and improving technology over time. The question was asked about headwinds in the quarter, specifically regarding wellness and labor, and whether they are getting worse or just stable.

Brian McKeon and Jay Mazelsky discuss the key changes in visit trends and execution in the US market in the third quarter. They mention that clinical visit trends were weaker than expected, but they are still managing well and excited about new innovations coming to market. They also mention expanding the US sales force and the potential for unmet demand. They expect the new reps to be trained by 2024, when a new innovative product will also be available.

The speaker thanks the IDEXX team for their hard work and dedication in delivering strong results in the third quarter and positioning the company for future success. They also express gratitude for the team's commitment to improving the health and well-being of animals, people, and livestock. The call is then concluded.

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