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

All right. Thanks, guys. Sorry for some technical difficulties. We'll get going. The next company is the #1 player in the animal health space, in the in-clinic and reference lab markets, IDEXX Laboratories. With us from IDEXX, we have Jay Mazelsky, President and CEO. And Brian McKeon, Executive Vice President and CFO. Thanks, guys for participating and great to see you.

I'm going to get right after it and jump into a bunch of questions. I think to kick things off, just on trends and guidance, Jay, maybe I'll start with you. The most common question I get is the structural shift for the industry from COVID. And in other words, do you believe this accelerated rate of growth that we're seeing is durable when we look forward? And maybe to just put some numbers around it, from 2015 to 2019, the CAG recurring CAGR was roughly 12.5%. You guys did 15% in 2020. That's also the guidance for '21. So when we think about that uptick in 200 to 300 bps is that sustainable? And if so, why? What are the variables that really drive this longer term?

Good morning Jon. Pleasure to join the conference. Interestingly, I think the COVID pandemic has contributed an acceleration of both clinical visit growth and diagnostics center business. So I'd highlight just a couple of factors as that underpin it and would claim that they are sustainable. If you start just with the strengthening pay owner pit bond, that's been there for a while, if anything, as we work remotely and from home, that's increased. And it's reflected in the net pet adoptions, if you take a look at the U.S., this trend is not localized just the U.S. We've seen a 6% or so net increase in pet adoptions. That's relative to 1%. So that represents 10 million new dogs and cats, primarily, the majority of which are puppies and kittens. And by the way, we've seen growth in Germany, in the U.K., in Netherlands and Australia also. So this is a longer-term trend and as these pets age and become dogs and cats and seniors and geriatrics through the life stages, we think will benefit. The other big factor we've seen is that veterinarians continue to pivot to services. And this has been a pre-COVID trend and, if anything, that's accelerated. And not surprisingly, as a result of product sales moving online. We haven't been able to access clinics with more curbside drop-off and pickups. Veterinarians are doing what they love. And when they focus on delivering medical services and assessing patient health status, to treat they first have to diagnose. So we've seen that reflected in greater diagnostics usage. Both from a use and frequency standpoint, more clinical visits are including diagnostics, but also from an intensity standpoint, the dollar of diagnostics CSH per clinical visit and is [indiscernible]. So really, very nice trends there. I think that when you take a look at those factors and our strategy as a company, which is to really create the market through innovation and clinic and veterinarian engagement with our commercial organization. We do think that there's a -- these are sustainable. I think what is a bit unknown as we all emerge from COVID in the pandemic and more folks go back to work. There could be some moderation in terms of business, but we'll see how that plays out over time.

Okay, okay. That's very helpful, Jay. Thanks for that. And Brian, I think maybe to shift over to you, and that it was a good segue. The current guidance, Brian, if you would, what does that embed. In other words, that the 1Q '21 industry trends stay largely intact throughout the balance of the year? Maybe if you can just level set us on what the guidance assumes.

Sure. So we tried to highlight 2-year growth rates or average annual growth rates over the last 2 years in our more recent call commentary, Jon, just to help calibrate as we move forward into this period where we're going to be comparing ourselves to the pandemic event impacts from last year. But if you look at the Q4, Q1 trends, the 2-year average annual growth rate was of 15.5%, 16.5% range. And so as we look at our full year guidance that we provided on the call, we're not updating that today, but what we shared recently in the call, the higher end of our guidance range was correlated with those types of trends sustaining through the year. And I think the lower end of the range is looking at -- there are factors here like a the step-up of the new pet ownership, the accelerated growth in services that we believe, as Jay pointed out, that those are sustainable trends. The question is, do we see some plateauing of the growth rate effect and that's basically simply year. So we're very confident we're going to have a strong here, but I think the -- some of these societies going to learn about -- more about as we go through the year.

Okay. Okay. So I'll ask a couple more on sort of the trends or the guidance. We're starting to get into that period of just crazy comps, right? And so maybe the last data point is arguably the best one. Brian, I think just the level of was 1Q '21 a clean normalized number for CAG recurring? In other words, I'm assuming we're well through like the pent-up demand or backlog that may have occurred at some point in 2020. Is it fair to assume 1Q '21 was reflective of end market demand, if you would?

Yes, I think it was -- we had -- are you referring to the growth rate or just the absolute kind of levels of demand?

Just really the absolute levels of demand, if you would?

Yes. I think we'd agree with that. Yes.

Okay. So I think they're trying to push you on the model, and I always try to tie things back to the model. Let me throw some numbers by you real time, which is always a little dangerous. But if I look back at 2014 to 2019, the CAG recurring growth, right, which is the durable, consistent part of the business, was up, on average, 8.5% sequentially, so 1Q to 2Q, up 8.5% sequentially, and it's really consistent in there. I mean, it moved between 8% and 10%, if you will, but it was pretty consistent. For this quarter, we have you up 2% from 1Q to 2Q '21, yet we're above consensus for 2Q total company sales, look, those are our numbers. But just help me out. If 1Q was a real number and it wasn't reflective of pent-up demand, if you would, what are the dynamics that would cause that sequential step down, if you would, from the 8% to the 2%, that's more reflective of Street, Brian?

Well, as you know, we don't -- we haven't provided quarterly numbers. So our trends as a business, there is some seasonality in the business, just the spring testing seasons for some of the in clinic tests, you see some increases. So there are always factors year-to-year in terms of just timing of holidays and things of that nature that may impact it. But those types of trains should be consistent. And again, as we look at our full year numbers, we think we've got a pretty well calibrated view of how we think the year may trend, and we'll learn more as we work through the year on some of these how we compare to -- coming out of the pandemic and how we compare to some of the dynamics that went on during 2020.

Very helpful. I'm going to touch on margins, Brian, I never ask you about margins. But in 1Q, they were up almost 900 basis points in 1Q '21 versus 1Q '20. The guidance was increased. You brought it up big time after your printed 1Q results, but it still implies a much more modest expansion to the tune of about 100 bps for each of the next 3 quarters. And that's arguably with an easy 3Q '20 op margin comp because you established the IDEXX Foundation last year. So Brian and/or Jay, can you just talk to the big pullback and the rate of margin expansion for the balance of the year? Why would we see that? If you could be as specific as possible with any incremental investments that the company is making, please?

Sure. Why don't I talk about the margin dynamic and maybe Jay can weigh in on the areas that we're investing in as we go forward, which I think are important to understand. Looking forward on the compares year-over-year, I think it's important to keep in mind that we took a number of steps that we highlighted following the first quarter last year to pull back on our costs. So if you recall, last year in Q2, we highlighted a $25 million reduction in our cost relative to our budget levels. I think we highlighted $5 million of savings on health care accruals. And so we are -- and we reinstated a lot of those costs as we work through the year. So we're going to start having compares to very tightly controlled kind of cost levels last year that we reinstated and started building back as we were coming out of the pandemic. We didn't have that effect in Q1, we were still having compares to higher cost levels. And so those dynamics are going to shift. In addition to that, we're making investments. I think a few key areas are -- we're growing very quickly in the business and want to ensure that we keep up our service levels. So we're adding staffing in areas like our laboratories. And we're leaning forward on investments in areas like our commercial investments, particularly in international markets, which Jay can talk more to.

Yes. And as I was indicating earlier, we're leaning into growth. Our model really is to drive market creation. We know to do that. You do it through innovation and you do it the engagement, the customer spending time with them, creating awareness, education. And ultimately, consideration of our services. And so from that standpoint, we've talked in the past about 3 international commercial expansions. And as I indicated on our Q1 call, we expect to be done with those in the first half of this year, 2021. We continue to invest where we see opportunities in developing the international market. It represents 2/3 of the potential addressable market of what we pegged at over $30 billion plus. And keep in mind when we talked about the international market development, it's not just account managers or BDCs there's reference labs, there's IT system and application enablement, there's customer service resources. There's some things that Brian were describing around when you grow fast to ensure business continuity, you need to make sure you have the infrastructure and capability in place. So that's clearly a priority for us. Given that we've launched ProCyte One and this represents an important new instrument, new analyzer for us, not just in the U.S., but maybe more importantly, internationally, where a lot of markets are hematology first. We're leaning into it.

Okay. Fair enough. And let me maybe push a little bit there, just ask a follow-up. Some of my last numbers, 950 field-based reps worldwide and maybe 530 in the U.S. And I sort of asked you guys before, what's the optimal call cycle for practice? I mean you guys have made significant investments in your commercial capabilities back to 6 years ago when you shook the industry up and you went direct, right? And I sort of said, how many reps do you need? And you guys have come back and me and say, how fast do you want us to grow. So -- and you certainly put up that growth. But maybe just talk about, Jay, what is it? Is it once every 2 weeks? Is it once a month? What is the optimal cadence, if you would, on calling on veterinarians to highlight IDEXX's portfolio?

Yes. So there's a couple of different measures that we like to use to guide sort of our thinking on there's a reach to market. It is reached IDEXX revenue, higher level metrics that we think about, and we want to be able to reach competitive accounts, certainly, once a quarter, if possible, that you need a lot of resources to be able to do that. And IDEXX account, depending upon their size and level of business with us a couple of times a quarter. The way that gets reflected at a more micro level by account manager is 120, 125 account managers per BDC, and then you obviously have a supporting cast on your field service reps, your professionals service vets, all those folks who work in concert to visit the customer and supporting that account. So when we take a look at markets, and I'll -- what I've described maybe is more U.S., the international markets are a bit earlier. In their own development, there may be more rollout markets or sick patient testing markets. So you're not going to get that sort of account coverage today with our sales organization in place. So those are longer-term goals that we have as an organization, depending upon the state and readiness of the market and our access and penetration within those spaces. But certainly, I think that what we see internationally by country markets are very similar to what I've described for the U.S.