IDEXX Laboratories, Inc. (IDXX) Earnings Call Transcript & Summary

All right. Thank you for joining us. My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. For our next session, we have IDEXX Laboratories. Joining us as CEO, Jay Mazelsky; and CFO, Brian McKeon. I think we're going to start with some -- just a couple of minutes of prepared remarks, and then we'll go into fireside chat. [Operator Instructions] If you've got any questions, you can always e-mail us or chat us up on boomer chat, if you want us to ask anything. So with that, Jay?

Thanks, Mike. Happy to be joining the conference today. It's an exciting time to be in the Companion Animal health care industry. As you know, we've seen strong momentum globally in the Companion Animal diagnostics piece of the industry. That actually accelerated through the pandemic in 2020. These trends and the IDEXX has seen very high level of execution, supported excellent performance for the company in 2020. We had 12% overall organic growth in revenues and and nearly 15% organic gains in our CAG Diagnostics' recurring revenue piece of the business. We've long believed and maintained in the secular growth of the Companion Animal market and continue to see strong evidence that pats for all of us, play this prioritized role in the -- in our lives. And that's just not a U.S. phenomenon, it's a phenomenon we really see globally. We've highlighted in the past that the $30 billion plus total addressable market opportunity and believe that the experience we've just seen where resilience and strong growth of the pet healthcare marketplace only reinforces this potential that we've talked about. So as we've entered 2021, we're encouraged by the very strong market trends, including growth in new pet ownership and expansion of medical services by veterinarians, our customer. We're also excited by a number of key initiatives that, as a company, we're advancing, including launching of our ProCyte One hematology platform, continued expansion of our global commercial capability in key markets as well as a number of other things. We think that these and other capabilities, as a company, really position us well to drive continued market development, which is our core business strategy through an approach that integrates best-in-class diagnostics, information management systems in the commercial model that relies on trusted advisers and subject matter experts to partner with our customers. As we've indicated on our most recent earnings conference call, we're planning for continued strong growth in 2021 and intend to lean in towards high-return growth investments in our core business, while still delivering very strong financial performance for the business. And so with that, Mike, I'll turn it back to you. I know you have some questions.

Great. Yes, that's a great overview. And I think that you already touched on a lot of the things I want to follow up on. So first topic for us, obviously, there's been a lot of focus on the strength in 2020 in Companion Animal markets, things we've seen in the vet landscape that have changed as the year progressed. And just trying to get a sense of how durable are these dynamics? What is this going to look like going forward? Is this sort of the new normal. So one of the first ones that you touched on and you commented on this in your earnings calls is a pretty sizable increase in first-time patient visits. You've cited some statistics there. It's been a pretty decent uptrend over the course of the year. I'm just wondering, any additional color you could provide there? How much of it is tied to growing number of adoptions? Just more pets out there versus people that already had a pet and just didn't really use to bring them to the vet, and now they are. And then going forward, obviously, how should we think about that as sort of the new normal? Is this something that you think, as the COVID vaccine rolls out, is going to persist? I mean there's been a lot of debate there, whether this is more of a onetime bump and then we're going to see an air pocket going forward or maybe adoptions fall off a cliff? Sort of any thoughts you have there on sort of the evolution of that part of the market?

Sure. We could probably spend the next half hour or so not talking about that. Let me sort of zero in on a a couple of different, I think, conventions, which are important. Certainly, we've seen new pet adoptions and visits to the practice, and we've talked about that. We thought that contributed 1.5%, 2% in clinical growth in Q4, just to size it roughly. The other thing that we've talked about that we've seen is the -- isn't when a pet visits the practice, the use of diagnostics is growing up -- going up and the intensity of diagnostics is going up. And those have obviously help contribute. So if you take a step back and look at what may be driving some of these or some or potentially all of these factors. There's a couple of things. We know that the majority of people are now working remotely. And so this human-pet bond that we talked about has only gotten stronger. We've noticed when our pets may not be feeling well and don't hesitate to take them to the vet in those cases. The other thing that we've seen is vet behavior. We know veterinarians for a long time have been pivoting to the medical services base. Those are the pieces that aren't tradable within their portfolio. There are some pressure on product sales. And if anything the pandemic has only accelerated that move to deliver medical services and do the things that they went to vet school in the first place to do. And then you overlay that with our business model as a company. We've always been around market creation. We talked about $30 billion plus addressable market. And to get at that, it's a combination of continuing to innovate, partner with customers, through expanded commercial presence, programs like Preventive Care, which feed into their desire to raise the standard of care. So all these things are working, I think, in very close concert with some of the other trends that may be more COVID specific. So we're optimistic. We think it's a strong -- a very strong marketplace with all these new patients coming into the practice. A lot of them are puppies and kittens. These are -- as these puppies and kits become dogs and cats, they're going to need preventive care. They're going to need other care services. So that piece has a sustainable dimension to it.

Great. And then the other point that came up sort of earlier in the -- I guess, in the fall and the early winter was, I think there was a view that only some of the strength you saw was potentially tied to some pent-up demand. Do you think we sort of -- of course, its still is really hard to quantify and track that. What's pent up demand versus what's real, sort of like underlying. Do you think we've sort of worked our way through that by this point? And 4Q was a little bit more of a clean number where you weren't catching up because of lack of visits early in the year? Is that a fair statement?

Yes. Yes. I think that's right. Q3 did, we definitely benefited or pent-up demand. Initially, as part of the pandemic, I think veterinarians triaged on sick care. They prioritize sick care versus wellness. And certainly, in Q3, we saw some of that pent-up demand come through. I think we've largely worked through that at this point.

Anything -- and again, going back to sort of the overall market conditions. I think the big story in the market and sort of just in the U.S. overall, over the last couple of weeks have been though relatively rapid with COVID vaccine rollout. Has that had any impact though when you're seeing in end market demand? Any change in behavior, whether positive or negative, whether more people opening up or whether some people going back to work, anything your parsing the part there? Or is it still a bit too early to tell?

Yes. It's still a little bit early to tell at this point, for example, in Maine, where I live, about 15% of residents have received their first vaccine and so it's going to be another couple of months, I think, before that gets worked through. And epidemiologists talk about herd immunity and just the amount of time it's going to take. Having said that, I think one way to think about this is, even when markets or countries are fully vaccinated, we think that everyone's not going to rush back for the bricks-and-mortar office in any case. They'll probably be more of a hybrid approach. I think we've all gotten used to working remotely. And in some cases, it's worked quite well and productively. And so I think there's not going to be a toggle switch where you go from where we are today, where everyone's now, back commuting to bricks-and-mortar office.

Yes, that makes sense. That makes sense. I think we've had a lot of similar discussions here. I think it's just the challenges no one really knows and very on everyone's kind of guessing a little bit. One other sort of current event issue I want to touch on before we move into the portfolio and some of the company specific drivers. Obviously, there's been some really intense weather throughout the South and the Central U.S. in recent weeks. I mean Texas was largely shut down with a storm that hit them. I'm just wondering, in the past, there have been a few times where extreme weather events have had an impact on the business. If people aren't going outside, they're not going to the vet. They're probably not doing a lot of preventative care. So I'm just wondering if you could comment on that. Have you seen anything -- is it big enough or material enough for sort of what's your exposure to that part of the country?

Yes. So the thing to keep in mind is we're diversified. Our portfolio is fairly diversified. We're a global company. We have different modalities and portfolios, including the water and LPD and our Companion Animal business. So winter is winter, you get bad weather every winter. So we don't comment in terms of inter-quarter trends.

Yes. I think it's -- Mike history has shown, we can have impacts from the weather, but just given our -- the breadth of our kind of geographic reach and kind of the underlying demand trends in the business. It's not something that gives us a higher level of concern. We'll work through those kind of things. And report on that when we a bit get closer to the end of the quarter.

Okay. That's fair. That's fair. I just thought I'd ask given there's been a little bit of interest there from clients the last couple of weeks. But that makes sense. Anything you can comment on in terms of what you're seeing in international markets? I think a lot of the focus has been on the U.S. as sort of the strength that came through and we've certainly seen a lot of these COVID trends play out in the United States, not as many data points and not as much sort of reads from what's going on elsewhere. So could you comment what you're seeing in Europe over the last couple of months? Is it generally similar trends? Are you seeing sort of similar uplift in terms of clinic spend and diagnostics utilization? I realize every market is a little bit distinct, but if you can make any blanket statements there?

Yes. What we saw in 2020 was that our international markets were also very strong. The CAG recurring growth rates, second half of 2020, internationally, was around 20% plus, also in strength across the modalities. The international areas tend to be -- they're an area of investment focus for us. We think they're very promising. Keep in mind that it's very different now than in March and April of 2020 in terms of whether it's a second wave or third wave, and I know there's -- the vaccinations are also being distributed in European countries probably with the U.K. a little bit ahead of some of the other market places. People -- the veterinarians are very comfortable, I think, at this point in terms of servicing customers, they have their playbook like we do in the U.S. So it's not that disruptive event that it was back about a year ago or so. But also, I'd say, in general, it's very strong markets, and it's an area of focus for us, and we're excited by it.

Yes. I think one of the things that we saw through last year, which was pretty amazing is just the consistent breadth of the strength of the recovery for the markets just really was -- early on, we saw impacts from things like lockdown conditions. But as the markets opened up, it was just very consistent, strong growth across modalities, across regions. So it was really encouraging. We didn't see as much kind of geographic variability, if you will. And so I think that's one of the reasons we're feeling good about our growth momentum heading into 2021 and why we're planning for high continued growth this year.

Yes, Mike, if you take a look at Q4 the -- we think about the world in terms of 4 geographies. Obviously, there's countries within those geographies. But all 4 regions, Asia Pacific, Latin America, Europe and North America, we're 20% plus in terms of CAG recurring revenue growth. So just to give a sense for how strong the business is across the globe.

Got it. That's really helpful. Thanks, Brian and Jay. I want to touch a little bit on -- there's a couple of questions from clients that came in via the chat. Let me throw them in there now because they're sort of topical. And the first one is which share of diagnostics in general? I don't think this is related to COVID, but just overall, are for new young pets? And should we see more tests with pets getting older? I think this sort of touches on the question of what is the utilization of diagnostics over the age -- over the lifespan of a pet? And how do you see that sort of evolving?

I'll give you some data points in terms of how we tend to think about it. The sick patient testing uses more diagnostics than well patients diagnostics. So if you have a puppy or kitten and they're relatively healthy, they're going to have a different regimen, if you will, a different panel than sick. So sick is between, let's say, $105, $110 and then well patient testing around $60 plus. Sick is 60% or so, sick means it's 60% versus 40% wellness. You just do the math, the sick piece is the bigger piece of the portfolio. Now having said that, these puppies and kittens, if we do our job well, which is our intention to do, they're now part of wellness or preventive care regimens. So they're going into the practice on an annual basis. And to getting checkups, which include blood work and finding things earlier. So we think it's overall a very positive trend.

Got it. Want to move on a little bit to some specific products. Some areas you've highlighted in recent months. The major one, obviously is the ProCyte One, full product launch. Could you talk about how do we think about that market opportunity? Maybe you could frame it relative to SediVue or to Catalyst One sort of as a proxy for replacement cycle, upsell, penetration is the market. And then if you could -- if there is any sort of early, early feedback you can provide from customers or potential customers, sort of the value proposition there, just much colors you can provide there?

Yes. I mean we're very excited by the ProCyte One launch and what we think it will do for the business. It really is, and it gets some of the use a little bit, but we think it's a transformational hematology analyzer. It has a very compact footprint. The easy use is really very, very breakthrough in terms of -- a lay person could use it with very little construction. The cost profile is great. It's part of the IDEXX ecosystem. So it will be on paper and auto replenishment. It's currently in customer experience trials, the feedback has been outstanding for it. An instrument launch at IDEXX is a big deal for a lot of reasons. One is there's the opportunity in hematology, which we think is sizable. We've talked about a little bit under 100,000 placement opportunities for new greenfield and competitive accounts. The second thing is there's a multiplier. Customers don't buy hematology analyzers alone. They buy hematology whilst chemistry, increasingly SediVue. So the ability to play as in clinic suites, we think, represents an attractive opportunity. The majority of our capitals plays through IDEXX 360. That can be funded in consumables use, but it also can be funded through like reference labs. So the chance to continue to drive multi-modality use of our offerings, I think, is an important benefit. And then finally, if you think about the international opportunity, there are a lot of countries internationally where hematology is first, whether it's China, Brazil, Spain, Italy, where they tend to test first for hematology and then chemistry and other tests. So the blood work up is centered around hematology, and this analyzer fits beautifully in those international markets. So very exciting.

Is there -- yes, I mean, that comment, you've talked about how sort of the entire product suite works together and can drive uptake. That's something we definitely heard before. Is there another part of the instrument suite that's too far upgraded? I mean, as you mentioned, SediVue is still relatively recent launch, Catalyst wasn't that long ago. But is there sort of -- I guess, what's next? Where the additional opportunities beyond this? And what are the -- sort of what are the holes in the portfolio that are due?

Well, Mike, the way we think about our solutions and instrument solutions philosophically is more from a technology for life standpoint. So if you take a look at SediVue, for example, SediVue with the advanced bacteria detection capability. That was Neural Network 5.0 release. Before that, we had released menu expansion, which included ammonium borate and bilirubin. Before that quantification of red blood cells and white blood cells. So these analyzers tend to have, over time, a lot of capability, a lot more capability. So it's not really a question of replacing them per se. Same thing with Catalyst. Catalyst had 8 new additions, 8 menu additions in 8 years. And so bile acids came on top of progesterone. And so the -- and we're rather unique in the marketplace, in being able to do that. We think that customers -- that's what customers want. They don't want proliferation operation of analyzers all over the place with different user interfaces that don't connect with each other. They want platforms that basically continue to grow with them. So again, going back to Catalyst, not only does it do chemistry, but it does electrolytes and immunoassays. So it really is a very broad, capable platform. And as you know, we always are working on new menu and do extensions and enhancements to the capability of our solutions. We are not in a position to telegraph that, and we announce these things closer to when they're going to be launched.

Okay. That's an interesting point there. Maybe pivoting a little bit to the Reference Lab. You've sort of been investing in the Reference Lab in Germany. You've been investing in sort of some international expansion. Could you give us an update on that? Sort of how should we think about that showing up in the numbers, both on the top line and throughout the P&L?

Yes. Let me go through the -- our Reference Lab strategy approach, and perhaps Brian can comment a little bit on how we think about it from a financial impact standpoint. The Kornwestheim facility in Europe, we opened that bright smack in the middle of the pandemic in May. So that was just a terrific effort. It's our biggest lab in the network now. We have 80-plus labs, and that's 50% bigger than the next one. And so it's fully featured. There's like 13, 14 testing categories, depending upon how you think about it, that could service the entire European region, which it does. And we've -- as I mentioned on the previous earnings call, we reached record number of lab ascensions very quickly. So it's just been a great solution for us. The key to the Reference Lab business is network and lab density. You have to be able to reach customers once or twice a day, deliver same-day results next day by 8 am the next morning. So the only way you do that is through lab density, transportation, logistics, networks, so that you can deliver the right experience. And so we've been very successful in doing it, and that's where our investment focus has gone into. The other thing that I would say, which is important, is the way we sell and position with our customers through IDEXX 360. It gives the customer the opportunity to integrate our offerings. So for example, if a customer uses Catalyst and ProCyte Dx and SediVue, they can fund that through reference of usage. So all feeds into each other from a system standpoint. And it's a business that we've invested a long time in and have been very successful. Brian, did you want to add anything to that?

I'd just say that our labs are close to $1 billion in revenue. And as a company, it's about 1/3 of our overall revenue. So clearly, Reference Lab business is a key driver of our growth. Our initial goals that we talked about in the call were for 12% to 14.5% CAG Diagnostic recurring revenue growth and the lab business is going to be a key driver of that. And we're very encouraged with the momentum that we've seen through investments like Kornwestheim. In fact, our our international organic growth for labs in Q4 was in the mid teens range, and the Kornwestheim initiative has been a key enabler of that as long -- as well as with the benefit of things like 360 program additions that Jay highlighted. So we're very encouraged. I think the key challenge we have and as we look ahead is just to make sure that we can -- are investing appropriately in staffing levels to service the very strong growth in the market. And so we're intending to do that, and that's factored into our financial goals this year as well.