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

Welcome to the IDEXX Laboratories 2021 Annual Shareholders' Meeting. At this time, I would like to turn the meeting over to the company. Please go ahead.

Thanks. And good morning to all our shareholders. I'm Larry Kingsley, Nonexecutive Board Chair of IDEXX Laboratories, and I'll be chairing the meeting. The meeting is now called to order. I'm joined today by Jay Mazelsky, President and Chief Executive Officer; Sharon Underberg, General Counsel and Corporate Secretary; Brian McKeon, Chief Financial Officer; and Gio Twigge, Chief Human Resources Officer. We're pleased to be conducting our live annual meeting once again virtually through an audio webcast. This is our fifth consecutive year holding a virtual annual meeting. We continue to use the virtual format because it facilitates participation by all of our shareholders, regardless of their location, at little to no cost. It has been a particularly helpful format during the COVID-19 pandemic as we focus on protecting the health and safety of all our participants. Through our annual meeting web portal, you may submit questions and vote your shares online before the polls close. In addition, you'll find copies of the agenda and rules of conduct for today's meeting by clicking the materials button at the bottom right corner of the screen. To ensure that the meeting proceeds in an orderly fashion, please observe these rules. We will conduct the formal business portion of the meeting and consider the proposals described in our proxy statement, tabulate the voting and announce the preliminary voting results. We will then conclude the formal business portion of the meeting. After a brief pause, we will then open the floor to your questions during the Q&A session. While we welcome questions from all of our shareholders, please note that we have allocated a total of 30 minutes, including Q&A, for this meeting. We will respond to as many questions as possible during the allocated time. [Operator Instructions] In addition, to ensure that the purpose of the meeting is observed, questions or comments will not be addressed that are irrelevant or inappropriate pursuant to the meeting's rules of conduct. As soon as practicable after the meeting, we will post answers to all the questions submitted, including those that we were unable to answer due to time constraints, on our investor relations website. Shareholders were able to submit questions before the meeting in our online pre-meeting forum. You may also submit questions live during the meeting at any time before the end of the Q&A session. [Operator Instructions] After dialing in, an operator will assist you, and you will be asked for your name and company. We welcome your questions and comments. Please also note that this meeting is being recorded and will be available on our annual meeting web portal within 24 hours after the end of the meeting. Before we get to proposals, I'd like to introduce the other members of our Board who are also in attendance at the meeting: Jon Ayers; Bruce Claflin; Dr. Asha Collins; Dr. Stuart Essig; Dr. Rebecca Henderson; Dan Junius; Jay Mazelsky, again our President and Chief Executive Officer; Sam Samad; Anne Szostak; and Dr. Sophie Vandebroek. At this time, I'd like to take a moment to recognize our retiring Board member, Rebecca Henderson. Over her almost 18-year tenure as a director at IDEXX, Rebecca has played an important role in helping to drive our success and growth. Her expertise in -- help purpose-driven firms innovate, create long-term value for their stakeholders and support a sustainable economy, combined with her deep knowledge of IDEXX, have provided important insights into the organizational and strategic issues facing the company. On behalf of the Board and senior management, we thank Rebecca for her valuable contributions and commitment to IDEXX over the years. And we wish her the very best for the future. We're also joined today by Josh Herron and Matt MacNeil, representatives of PricewaterhouseCoopers. I'll now turn the meeting over to our General Counsel and Corporate Secretary, Sharon Underberg, who will conduct the formal part of the meeting.

Thank you, Larry. And good morning, IDEXX shareholders. Before we proceed, we need to confirm that we have a quorum. I have been advised that the company properly mailed its meeting notice and proxy statement, commencing on March 31, 2021, to all shareholders of record as of March 19, 2021. And we have received an affidavit to that effect from our proxy distribution agent. The list of our registered shareholders entitled to vote at this meeting is available for inspection by any shareholder during the meeting and may be accessed during the meeting on the annual meeting web portal by clicking the materials button at the bottom right corner of the screen. In addition, we are joined by our Inspector of Elections, Christopher Woods of American Election Services, who has advised me that at least a majority of the outstanding shares of common stock entitled to vote are represented by proxy at this meeting. I hereby declare that a quorum exists. At this time, I declare the polls to be open. If you have already voted, you do not need to do anything further. If, however, you wish to change your vote or you have not yet voted, you may do so by voting your shares online by clicking on the voting button at the bottom right corner of the screen at any time during the meeting until the polls are closed. As indicated in the annual meeting notice and proxy statement, we are here today to consider 3 items of business: number one, the election of 4 directors; number two, the ratification of the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the current fiscal year; and number three, the approval of a nonbinding advisory resolution on the company's executive compensation, commonly known as the say-on-pay vote. The first item of business is the election of directors. The nominees for election are: Mr. Bruce L. Claflin as a class 1 director, Dr. Asha S. Collins as a class 1 director, Mr. Daniel M. Junius as a class 2 director, Mr. Sam Samad as a class 1 director. Their biographies and information about their qualifications are included in the proxy statement. The Board unanimously recommends a vote for all the nominees. The second item of business is the ratification of the selection of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the current fiscal year. Information about this proposal is included in the proxy statement. The Board unanimously recommends a vote for this proposal. The third and final item of business is the advisory say-on-pay vote on the company's executive compensation. Information about this proposal and the company's executive compensation are included in the proxy statement. The Board unanimously recommends a vote for this proposal. If you have previously voted and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is needed. If you have not yet voted or wish to change your vote, you may do so by clicking on the voting button at the bottom right corner of the screen at any time during the meeting until the polls are closed. The polls will be closed following these presentations of the proposals. Please note that approval of each of these proposals requires the favorable vote of a majority of the votes cast. Only votes for or against a proposal count as votes cast. Abstentions and broker non-votes are not counted as votes cast and therefore will have no effect on the outcome of the vote on these proposals. [Voting]

Having presented the 3 proposals to be voted on at this meeting, the polls are now closed. The minutes of the meeting will reflect the time at which the polls were closed. We will now announce the preliminary results of the votes on the 3 proposals. On the first proposal, regarding the election of the directors, each of Mr. Claflin, Dr. Collins, Mr. Junius and Mr. Samad received a majority of the shares voted; and each has been elected as a class 1 or class 2 director as detailed in the proxy statement. The second proposal, regarding the ratification of the selection of PricewaterhouseCoopers LLP as the company's independent auditors, received a majority of the shares voted and so was approved. The third proposal, regarding a nonbinding advisory vote on the company's executive compensation, received a vote to approve by a majority of the shares voted and so was approved. The final vote tallies, including ballots cast today, will be disclosed in a current report on Form 8-K filed with the SEC within 4 business days of the meeting. This concludes the formal business portion of the meeting. Before turning the meeting over to Larry to conduct the Q&A session, I advise you that it is possible some of our responses to your questions may include forward-looking statements which are based on current expectations and assumptions and are subject to risks and uncertainties. You are cautioned that our actual results may differ materially from those predicted in any forward-looking statements. In addition, the assumptions, risks and uncertainties include the risks that are described in our reports filed with the SEC, including our 2020 annual report on Form 10-K and our quarterly report on Form 10-Q for the first quarter of 2021. I will now turn the meeting back over to Larry for the Q&A session.

Thank you, Sharon. We will now proceed with the Q&A session and answer questions submitted by our shareholders. We'll start the Q&A session with questions submitted by our shareholders through the online meeting web portal before the meeting. We'll then answer any questions submitted by our shareholders through the online meeting portal during the meeting. Finally, we'll then answer questions from our shareholders on the telephone. [Operator Instructions] We will take one question or comment from each caller. [Operator Instructions] Please note that we have allocated the remainder of the 30 minutes for the meeting for this live Q&A session. We will also post answers to all questions submitted, as soon as practical after the meeting, on our investor relations website.

So let's begin with questions submitted through the online pre-meeting forum before the meeting. Our first question is from a few of our shareholders who ask if we plan to split our stock. And let me turn that question over to our CFO, Brian McKeon.

Thanks, Larry. We don't have plans to split our stock. Stock splits have significant administrative costs and don't change the intrinsic value of our shareholders' equity in IDEXX. In addition, fractional share ownership is now offered by more discount brokerages, which help make higher-priced shares such as IDEXX stock more accessible to individual investors. We also modified our employee stock purchase plan at the end of 2020 so that our employee participants, beginning this year, will be able to purchase notional fractional shares of IDEXX stock, not just whole shares, at a discount to market price using their payroll deductions under the plan. This change permits greater participation by our eligible employees in this valuable employee benefit.

Thanks, Brian. Our next question is, why has the stock price been going down? "Do you think the stock price will go up soon?" I'll note that this question was submitted on or about April 11 of this year. And our closing price on April 9 was approximately $503. As of yesterday, the 11th, our closing stock price was $528.19. So Brian, please take this question.

Thanks, Larry. We can't comment on daily stock movements, which may be affected by various factors, some which -- some of which are beyond our control, but be assured that our Board and executive team are focused on the sustainable value -- sustainable creation of long-term value for all of our stakeholders. And over the longer term, we have confidence in the attractiveness of our served markets and business strategy and the potential for continued strong financial returns.

Thanks, Brian. Our next question is, what are IDEXX' goals in developing more testing for human health? Now let me turn that question over to our CEO and President, Jay Mazelsky.

Thanks, Larry, and thanks for the question. IDEXX' primary business is in companion animal diagnostics products and services as well as practice and application software that supports veterinary clinics and provides veterinary insights to veterinarians. This business is our Companion Animal Group or, abbreviated, our CAG business. While our CAG business is our largest business segment, representing 88% of our 2020 revenues, we also operate other businesses, including those that provide diagnostics tests and information for livestock and poultry; tests for the quality and safety of water and milk; as well as our human medical business, OPTI Medical Systems, which primarily makes analyzers and consumables for blood gases and electrolytes. In response to the critical need for human COVID-19 testing capacity back in early 2020, I'm incredibly proud that, as a company, we leveraged our capability in both human diagnostics that I just described, together with molecular diagnostics development and manufacturing experience, to develop and introduce a human COVID-19 PCR test kit in the second quarter of 2020. We also introduced in 2020 our test kit and protocol for wastewater testing for COVID-19, creating an important epidemiological tool to track the prevalence of COVID-19 in individual communities. While we plan to continue to focus our strategy on the core CAG business given its very significant, long-term runway and value creation opportunities we see there, if there were a need in the future for the company to again support human health and safety efforts in our communities and we were in a position to make a difference, I'd expect that we would answer that call.

Thanks, Jay. Our next question is whether IDEXX is an international corporation. And particular, "Please tell me briefly where you have offices and representatives or sales personnel only." So let me turn that one over to Jay as well.

Thanks, Larry. IDEXX Laboratories is a global company that offers products and services to customers in over 175 countries and employs more than 9,300 people working in over 105 locations in 25 countries. This includes a global network of over 80 reference labs. Our worldwide headquarters is in the State of Maine, and we are incorporated in Delaware. For more information regarding our locations around the world, I would refer you the discussion under properties in our 2020 annual report.

Thanks again, Jay. So our next question is, what is the road map for 2021 and the next 5 years? Also how does the company plan to get profitable and sustainable going forward? Jay?

Thanks, Larry. As I previous noted, we've pursued a consistent business strategy that focuses on our attractive core CAG business and market segments. These market segments have excellent long-term secular growth characteristics with many factors supporting continued growth such as the deepening bond between pets and their owners. We believe that we have a unique opportunity to continue to serve these important segments by pursuing a long-term strategy that focuses on advancing the standard of care through both innovation and global commercial execution and expansion. And we believe that, if we successfully execute our strategy, we'll continue to deliver on our long-term financial goals for enduring revenue growth, operating margin expansion and EPS growth. For more information regarding our business strategy and our long-term financial goals, I refer you to the discussion under generating long-term value and key business highlights in our proxy statement.

Thanks, Jay. Our next question is, "Does your company use aborted fetal cell tissues for any of its research or products? Jay?

Thanks, Larry. As I mentioned before, our primary business is our CAG business. Our other businesses provide diagnostics tests and information for livestock and poultry and tests for the quality and safety of water and milk. Finally, as noted earlier, we operate a small human medical business in our subsidiary OPTI Medical Systems. OPTI Medical Systems provides point-of-care and laboratory diagnostics for the human medical diagnostics market, including electrolyte and blood gas analyzers and related consumable products as well as our human COVID-19 PCR test. We do not use aborted fetal cell issues in any of our research or products.

Thanks again, Jay. Our next question is, where are the women candidates for the Board? And I'll answer this one. And thanks for the question. While one of our female directors, Rebecca Henderson, as I mentioned, is retiring from the Board after 18 years of outstanding service, 3 of our 10 remaining directors or 30% of the Board are women. Our Board is proud of our continued focus on Board refreshment and diversity, which we believe enhances our effectiveness. And for more information regarding the women and all the directors who serve on our Board, I'll refer you to their biographies in our proxy statement. In addition to biographical information about them, you will also find information regarding some of their key experiences, qualifications, attributes and skills that they contribute to our Board. Another shareholder asked why my Board Chair letter in the proxy statement describes some of the self-identified backgrounds of our directors, including gender, race, ethnicity, disability status, noting that her expectation is that the letter should disclose what our Board envisions for the future. And thanks again for this question. I shared information, in my Board letter, regarding diversity and characteristics of our directors because we believe that having a diversity of backgrounds and experiences and education, knowledge, skills and capabilities on our Board, including gender, racial and ethnic diversity, enhances our ability to provide effective oversight and fulfill our responsibilities to IDEXX and our shareholders and other stakeholders. As I highlighted in my letter, those responsibilities include providing productive oversight of the company's strategic plans and risk management capabilities, including in key areas such as leadership succession, planning and ESG strategy and initiatives. And the next question is, why isn't there a DVM or a doctor of veterinary medicine on the Board? And we appreciate the question and the suggestion. Our Board is committed to Board effectiveness, including through ensuring that a wide range of backgrounds and experiences are represented on our Board. We certainly greatly value the work of DVMs, who comprise much of our customer base as well as a significant portion of our employee base and who inspire us every day to fulfill our purpose. And our Board very much values DVMs' perspectives, and we periodically invite them to our meetings to discuss a variety of topics. So with that, we have finished answering the questions submitted in the online pre-meeting forum. Let's now turn our questions to those that are submitted online during the meeting, and I'll turn this portion of the meeting over to Jay.

Thank you. Thank you, Larry. We do have an online question, and so what I'll do is I'll read the question and we'll respond. And so the first online question is from the carpenter pension funds, which holds a total of 51,200 shares of the company stock. And the question is, "As long-term investors, we strongly believe that the company's executive compensation plan should be designed primarily to drive the successful execution of the Board's long-term strategies and business plan. Today's public company executive compensation plans are formulaic, peer-related plans, with simplistic annual say-on-pay voting reinforcing plan homogeneity. Would you or the Chair of the Compensation Committee speak to whether IDEXX Laboratories might be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan?" Thank you. And this question was asked by John Leavitt, carpenters union local 349 and 352. [ Okay ], so I can -- I'll take a stab at that answer. And Larry, if you would like to add to my remarks, you're more than welcome to.

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So we believe that our existing executive compensation program and practices, which include premium price stock option grants to our CEO, are well designed to achieve our executive compensation philosophy: to attract, motivate and retain talented executives who are aligned with and passionate about our purpose. Our purpose is to be a great company that creates exceptional long-term value for our customers, employees and shareholders by enhancing the health and well-being of pets, people and livestock. We also believe that the results of our very favorable recent shareholder advisory votes on executive compensation validate this approach. Our executive compensation philosophy, pay-for-performance framework, program and practices are more fully described in the compensation discussion and analysis section of our 2021 proxy statement; and I refer you to that discussion for more details. Larry, would you like to add anything to that?

[ I'll ] only add, Jay, on behalf of the Board, particularly our Compensation Committee, we believe that we have a very well-designed executive compensation program that achieves a very appropriate balance between short- and long-term goals and is consistent with the growth-focused strategy of the company.

Thank you. So we have no further online questions. Let's turn to questions on the telephone. Operator, do we have any questions on the telephone?

We have no questions on the telephone.

Okay. So thank you. With that, our Q&A session is ended, and I'll turn the meeting back over to Larry to close.

Well, on behalf of the Board and management, I want to thank you for participating in IDEXX' 2021 Annual Shareholders' Meeting and for your support of IDEXX. Stay healthy and safe, everyone. And our meeting is now adjourned.