The paragraph introduces the IDEXX Laboratories Second Quarter 2024 Earnings Conference Call and states that it will be recorded. It also mentions the participants in the call and cautions about forward-looking statements. Non-GAAP financial measures and their reconciliation to GAAP measures are also mentioned. The call will focus on the company's second quarter results and updated guidance, with a limit of one question per participant during the Q&A session.

In the second quarter, IDEXX saw solid organic revenue growth and strong profit gains. The company's overall revenues increased by 7%, driven by growth in diagnostic recurring revenues and the water business. However, there were some constraints due to macro and sector headwinds, leading to a decline in U.S. clinical visit growth. Despite this, IDEXX's operating performance was strong, with EPS growth of 15%. The company is focused on expanding its business and delivering strong profit gains, despite ongoing challenges.

IDEXX has updated its financial outlook for 2024 to reflect recent sector trends, which will likely result in lower organic revenue growth. However, the company maintains its outlook for solid operating margin gains and has made adjustments for foreign exchange, net interest expense, and effective tax rate estimates. In the second quarter, the company saw 7% organic revenue growth, driven by strong gains in veterinary software and diagnostic imaging. International growth was particularly strong, thanks to net price realization and new business gains. In the US, growth was supported by new business gains and high customer retention levels.

IDEXX's growth continues to outpace U.S. same-store clinical visit growth, with diagnostic utilization per clinical visit increasing and a 7.5% increase in diagnostic revenue per clinical visit. While there was a slight decline in diagnostic frequency for non-wellness visits, there was an increase in diagnostic frequency for wellness visits. IDEXX remains confident in the long-term demand for diagnostics and has factored in expectations for continued pressure from lower U.S. clinical visits in the second half of 2024. In Q2, IDEXX saw solid organic revenue growth across all modalities, with an 8% increase in VetLab consumable revenues and 11% growth in the global premium instrument install base.

In the second quarter, the company achieved a record number of instrument placements, driven by strong growth in Premium Hematology and SediVue placements. The ProCyte One installed base also increased, while Global Catalyst placements decreased due to high prior year levels. There was a 6% increase in global rapid assay and lab revenues, and a 12% increase in veterinary software and diagnostic imaging revenues, driven by a recent acquisition. Water revenues increased by 10%, while livestock, poultry, and dairy revenues increased by 3%. Gross profit and margins also saw gains, driven by net price realization and favorable business mix.

In the second quarter, operating expenses increased 28% year-on-year, with a significant portion of the growth attributed to a $62 million discrete litigation expense accrual. Excluding this impact, operating expenses were in line with overall revenue growth. Operating margins were 26.3%, including a 610 basis point impact from the litigation expense accrual. EPS was $2.44 per share, a decrease of 9% as reported but an increase of 15% on a comparable basis. Foreign exchange had a negative impact on revenues, operating profit, and EPS. Free cash flow was $215 million in the quarter, and the company is maintaining its outlook for a free cash flow conversion of 90% to 95% for the full year. The company's balance sheet remains strong, with low leverage ratios. $208 million was allocated for share repurchases in the second quarter, resulting in a 0.7% reduction in diluted shares outstanding. For the 2024 outlook, the company has updated its full year organic growth expectation to account for continued pressure on U.S. clinical visit trends in the second half of the year.

The company's updated full year guidance for reported revenues has been reduced by $15 million at midpoint, but still reflects expectations for solid growth. The updated outlook also includes a favorable adjustment for foreign exchange estimates. The company expects organic revenue growth of 6.2% to 7.8%, with expectations for continued pressure on U.S. clinical visit levels. The updated profit guidance incorporates a discrete litigation expense accrual, which will reduce reported operating margins and EPS. The reported operating margin outlook is 28.7% to 29.0%, with a 40 basis point improvement in comparable operating margins at midpoint.

In the second quarter, IDEXX reported a decline in EPS due to litigation expenses, but this was partially offset by favorable foreign exchange adjustments and positive benefits from refinements to interest expense and taxes. For the full year, foreign exchange is expected to reduce revenue growth and EPS. In the third quarter, IDEXX is expecting reported revenue growth of 6-8%, with organic growth of 6.5-8.5%. Operating margins are expected to be down moderately due to higher R&D spending. Despite these challenges, IDEXX remains focused on driving innovation and engaging with customers in the companion animal diagnostics sector.

IDEXX's strong execution and position in the market has positioned them to benefit from long term growth in the pet population and increased importance of medical services for pets. Their focus on innovation has resulted in a compelling portfolio of products and services, leading to record instrument placements and double digit growth in recurring revenue. Despite some challenges in the current macro environment, IDEXX continues to outpace the sector and support their customers' growth through diagnostics and wellness visits.

In this paragraph, the speaker discusses how IDEXX's focus on diagnosing and treating sick pets has led to significant demand for their products and services. They also highlight their commercial success in placing premium instruments, particularly in international regions, and the growth of their loyal customer base. The speaker also mentions their ProCyte analyzer as an example of how their innovation strategy is driving customer upgrades and increased recurring revenues. They conclude by stating that their ProCyte One product has already reached an installed base of over 17,000 in just 3.5 years since its launch.

Upgrading to ProCyte One will benefit customers by providing comprehensive hematology results when combined with inVue Dx blood morphology. IDEXX focuses on quality placements to drive future recurring revenues, such as high placements at new accounts. The company's commercial success is attributed to their high-touch direct commercial model and in-depth training for the North American team on new innovations. The launch of inVue Dx is on track for the fourth quarter, and IDEXX is ensuring a positive user experience for early adopters through infield product validation.

IDEXX is seeing positive results from the small number of inVue analyzers currently being trialed, with customers praising its usability and consistency. The company plans to provide more updates on inVue and other innovations at their upcoming Annual Investor Day. They are also on track to launch the Catalyst Pancreatic Lipase Test in the US and globally, which will be a valuable addition to their Catalyst platform. The company's technology and cloud-enabled analyzers allow for quick implementation of new tests. They are also introducing the Catalyst Smart QC clip, which will improve workflow for customers. In addition, IDEXX is rolling out the next generation of their software and expects all customers to transition before inVue Dx becomes available.

IDEXX's next generation software improves user interface and simplifies common tasks. The demand for intuitive cloud-based software is high among younger generations, and IDEXX is well-positioned to deliver a seamlessly integrated software ecosystem. Q2 practice management orders were mostly cloud-based, setting the foundation for future growth. IDEXX's software solutions extend to areas such as payments and pet owner engagement, providing efficiency gains and driving recurring revenues. The recent launch of Vello, a pet owner engagement tool, has received high interest and is helping to increase active customers. Early beta testers have experienced benefits such as reduced no-shows and improved compliance during clinical visits.

IDEXX is seeing significant growth in their customer base, particularly in the veterinary sector. They have recently acquired Greenline Pet, a digital platform that helps with coupon and rebate redemptions and improves workflow for veterinary clinics. This aligns with their long-term organic growth strategy and they expect to see even more growth as the sector expands. The company credits their success to their dedicated employees and will be hosting an Investor Day later this month.

IDEXX leaders will provide an update on their strategy, growth opportunities, innovation cycle, and execution drivers during a 4-hour event. Members of the senior management team will participate, including Dr. Tina Hunt, Dr. Mike Erickson, Mike Lane, Michael Schreck, George Fennell, and Brian McKeon. The event will end with a Q&A session. The first question from Chris Schott of JPMorgan is about the difference between the outlook given in the first quarter and the one given today, and whether the traditional growth rate of 2-3% is still a viable target. Brian McKeon responds that there was a 150 basis point headwind in the first quarter, and they are carrying that through to their assumptions for the second quarter in the U.S.

The company had expected a flattening of trends in clinical visits in 2023 due to normalization of staffing effects, but they have continued to face headwinds. They believe there may be macro dynamics at play and are adjusting their outlook for the second half of the year. However, they remain optimistic about long-term drivers for growth in pet healthcare, such as the humanization of pets and longer lifespans. They will provide more updates on these trends at Investor Day.

The speaker mentions the resilience of the pet market and how pet owners prioritize the care of their pets. They also mention ongoing conversations with veterinary practices and their optimism about demand and staff retention. The practices are investing in technology and there may be some moderation in clinical visits due to macro impacts, but they are confident in working through it. The next question from Michael Ryskin is about shifting dynamics and utilization trends, specifically in diagnostics and wellness visits versus non-wellness visits. The speaker mentions a potential shift in channel dynamics, with a focus on pain management and the growing popularity of online marketplaces for pet therapeutics.

The speaker explains that the decrease in diagnostic opportunities in clinics could be due to pet owners seeking care elsewhere. They also address concerns about the company's growth profile, which has been below the long-term target due to macro headwinds and a decrease in vet visits. The speaker believes that the capacity pullback effect and transition from the pandemic period have impacted the demand in the industry.

The company has faced staffing challenges and inflation due to the pandemic, but is still performing well in terms of customer retention and innovation. The decrease in visits is largely due to the impact of pain medication on diagnostic utilization, but the wellness business is still seeing an increase in visits and diagnostic testing. This trend began in Q4 of last year and is likely related to the launch and penetration of Librela. Overall, the company remains positive about long-term drivers and demand for their business.

The frequency metric has expanded and may indicate weakness in non-wellness clinical visits due to macro headwinds. Alternate channels of care are complementary and innovation is important for growth in the industry.

The company is constantly innovating and introducing new products to help veterinarians treat their patients. Despite short-term challenges, the company's growth prospects are strong. The company incurred a $62 million expense related to ongoing litigation, but does not comment on the matter. The company has been able to control costs and is confident in its ability to continue doing so until market conditions improve.

The company has updated its estimate of probable loss and has shown good financial performance by adapting to the growth environment and prioritizing long-term growth. They continue to invest in R&D and commercial investments, while also managing costs through automation and digitization. The company remains disciplined in their approach to business and has a strong focus on productivity and network improvement.

Jonathan Block asked IDEXX executives about their guidance and innovation plans. Brian McKeon responded that the guidance includes the Q4 launch of inVue, and they will provide updates on their innovation agenda at Investor Day. Jonathan then asked about the ongoing deceleration of recurring premium growth in the U.S. IDEXX CAG Dx segment, and if this trend is expected to reverse with the launch of inVue. Brian did not give a direct answer but acknowledged the trend and stated that they will discuss their overall company strategy and innovation plans at Investor Day.

The company has been breaking down metrics on an adjusted basis and has seen a 250 basis point increase in clinical visits. However, there has been a dynamic with pain mAbs causing follow-up visits to be captured in the visit number, potentially making the underlying visits softer. Despite this, the company is pleased with the premiums, net new business gains, and customer retention levels. They are also looking forward to the launch of InVue and other initiatives to drive long-term growth. The company has also seen solid international performance and is making progress on issuer replacements. Overall, the company is feeling positive about execution metrics, despite some visit headwinds.

The speaker praises the company for their successful handling of the EPS despite lower revenue and expenses. They ask about potential projects for 2024-2025 and express concern about potential competition for wallet share in the pet medication market. The company's CEO responds, saying they are not worried about this and that diagnostics utilization remains constant. The CFO adds that the company's strong margins are due to various factors.

The company has seen ongoing benefits from cost management, labor productivity, and growth in their software business. They have also had solid growth in diagnostic recurring revenues and in-clinic revenues. They plan to continue improving their comparable operating margin performance. The questioner asks about the company's market share gains and gross margins. The CEO explains that most of their growth has come from same-store sales and the CFO will address the gross margin question.

The company is transparent about its progress and is focused on driving diagnostics utilization through innovation and technology. They have seen growth in their Reference Lab business and have expanded their menu to include more clinically valuable tests. They have also entered the retail space, which has contributed to their growth. The company has also seen benefits from net price realization and margin gains, driven by strong VetLab growth. The lab margins were slightly impacted by a comparison to the previous year, but overall, the company is pleased with their gross margin performance. The Q&A portion of the call has ended.

The speaker is pleased to report positive financial results and the company's focus on developing companion animal diagnostics. They are excited about the potential to improve standards of care for companion animals and the call is concluded.

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