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

Hi, everyone. Welcome, and thanks for joining us. My name is Mike Ryskin. I'm on the Life Science Tools and Diagnostics team here at Bank of America. And I also have the privilege of covering Animal Health for the past 5 or 6 years. It's now become a bit of an annual tradition for us to host the Animal Health Summit in late February. I think it's a great opportunity to spend a full day focused on just the animal health space, really dig a little deeper into the topics and issues that matter here. We've also had really great participation from companies in this space, and we do again this year, and of course, great interest from our clients and investors. I'm proud to say that attendance and participation has grown every year and is up again this year, just showing the really large amount of interest in the space. And hopefully, you'll find this event to be useful and productive. Of course, it's a virtual format this year, given ongoing COVID environment. But still, we've got a great lineup of corporate, some expert speakers last day. So we're all really looking forward to it. I want to remind everyone that if you've got any questions throughout the day, don't hesitate to reach out to myself or to anyone else on the team. We'll do our best to incorporate the questions into the session. You can ask the questions during the presentations via the Q&A box in the conference portal. You can also relay them to us via Bloomberg chat or e-mail and we'll work them into the call. So with that, we're going to kick things off. Our first session this morning is IDEXX, and we're joined by Brian McKeon, CFO; and Tina Hunt, Executive VP in charge of the Point of Care and Global Operations. Brian and Tina, thanks so much for joining us.

Glad to be here.

Thank you for having us.

Great. And I guess just to kick things off, you obviously reported 4Q results recently and set the initial guide for 2022. Could you talk us through some of the key factors from the call? Just give us a little bit of a recap, set the floor for the rest of the conversation?

Yes, be happy to. On our recent earnings call, we were pleased to report a strong finish to 2021. And as you know, we've had a great momentum in the business through the pandemic. We actually finished last year with 18% CAG Diagnostics recurring revenue growth, which is the biggest driver of our revenues and economics. And in the fourth quarter, we were -- had a 13% growth rate, and we're starting to obviously lap some of the step-up in demand that we saw through the pandemic. So that momentum, great execution by our team, informed kind of our outlook for 2022. So we've got an outlook for 10% to 12% full year growth. We're not updating guidance today, but those are the targets we shared recently. And that's supported by 12% to 14% CAG Diagnostic recurring revenue growth. So we're looking to build off the strong trends coming out of the end of the year. We are anticipating benefits this year from investments we've been making in expanding our global commercial presence, including expansions in international markets with our sales force. We expect continued benefit from our innovations like ProCyte One and as well as some incremental benefit from relatively higher net price increases in the context of the inflationary environment that we've seen. So overall, we were -- feel very good about the business. I have been really pleased with the returns that we've earned on the investments in driving the growth and are looking to lean into that as we're moving forward in what we see as a very healthy backdrop for the long-term demand in animal healthcare.

Great. And thanks for those opening comments, there's a lot there we're going to want to dive deeper into. But first, just the last little bit you touched on there. The strong demand trends and the underlying things you're seeing in the market. IDEXX has always done a phenomenal job of providing the quarterly snapshot and the data on what you're seeing in the market through all of your touch points in the U.S. clinics. Could you give us an update on what you're seeing or just sort of your thoughts for 2022 in terms of vet visit volume, revenue trends? Obviously, it has been a large focus over the last couple of years, how much that's moved during COVID. So what's sort of your latest thinking on that?

Yes. So we'll confine ourselves to kind of what we talked about through the call -- the earnings call day. But I think overall, last year, we saw a step-up in clinical visit demand. And I think the broader trend which we can talk a bit more about is just growth in veterinary healthcare services in general. So going into the pandemic, I think the clinical -- same-store clinical growth rates were sort of in the 2%, 3% range. And last year, I think we finished the year with 7% kind of year-on-year. And so there's a meaningful step up. And as a benchmark, service growth trends against same-store in the U.S. were kind of high-single-digit, up 7%, 8%, and they were up 12% last year and up 13% in the -- in terms of diagnostic recurring revenues. So it's diagnostic revenues within the clinic. So it's -- that's kind of the broader trend. It was sort of a step-up, I think, in interesting conditions, and we're starting to lap those higher levels. So we focused in on sort of 2-year growth rates to help calibrate for that. And those growth rates were more in the 4% to 5% range coming out of the end of the year or so in the U.S. So that was all kind of a positive backdrop. We did see some impact from Omicron in Q4 and into January that we highlighted in areas like Europe, we saw some impact on lab volumes, which reflected vet clinic traffic. And in the U.S., I think it's had an impact on things like staffing levels within the clinics. And so that's something that we're monitoring. It's a business we can be impacted by that -- those types of dynamics, but we don't see that as indicative of any indication of changes in the underlying trend or strength of demand for pet healthcare.

Brian, and if I may just add to that, if you just step back and we think about the demand for the pet healthcare services, it is an underserved market. We've talked about that, and we're very invested in helping develop that market with our innovations as well as our global commercial REIT. There are quite a few dynamics that are really helping with the growth of the market. And the first is the pet-human bond, which has been very strong, has gotten even stronger during the pandemic, and we're seeing that pet owners want to take care of their pets and noticing a lot more, they're treating them more and more like family members. Then there is a whole -- the demographic that is happening, which is more and more younger pets -- millennials, Gen Z are adopting pets. And we know they're saying that they will do anything for their pets. So that bodes very well for the continued strong demand in the industry. And then if you look at from the clinic side, there are a couple of trends that Brian mentioned that we think are going to stick. So the first one is, we knew there was a pivot happening towards more and more veterinary services versus product sales, retail sales in clinics, and that has accelerated during the pandemic, especially with a higher need for care as more and more adoptions have happened during the pandemic. So what that means is that veterinarians are spending a lot more of their time on medical services and diagnostics is a big part of that. And we're also seeing that veterinarians have gotten a lot more comfortable offering diagnostics to pet owners, and they're seeing that pet owners are saying yes. So that is building their confidence, and we are seeing that the per clinic visit diagnostics is continuing to increase. We saw 200 basis points increase last year, and we think that, that trend will continue. So there are a lot of positive trends that bode very well for the continued strong underlying demand.

Great. And again, really appreciate all the color. I want to follow up on a couple of those points you brought up as well. First, Brian, you talked a little bit about adoption trends, just the growing increase in number of animals. Anything you can talk to in terms of what you're seeing in terms of diagnostics utilization per tranche of animal? For example, is there more utilization coming from the newer pets? And how should we be thinking about that trending over the course of the life? It's a topic we've had a lot of questions on in terms of utilization over the course of the life cycle of the dog or cat. Is it barbell-shaped and how that should play into, given we have this bolus of animals in 2019 and 2020 and '21?

Yes. What we see is, if you look at the total spending -- kind of healthcare spending on a pet, and a dog is a good example, over, kind of say, a 12-year life, I think the early years, puppies are sort of, I believe, in the $200 or so range. And that kind of is -- and then it grows significantly as pets get older. There's quite a bit of sick patient care, and I think it rises to $400 or $500 kind of annually of overall care. And diagnostics also kind of trends with that. It's relatively -- as a percentage of the total, I think it's 9%, 10% in the early years, and it gets up into the close to about 20% of that type of spending over time, again, as it kind of goes hand-in-hand with kind of sick patient testing. So the expansion of the pet population clearly had a level of benefit within the industry, but I think it's something that will carry forward in terms of this new generation of pets needing care over their lives. And we can do things as well to help increase the amount of diagnostics that's being done with pets earlier in their lives through things like preventative care testing and some of the things that we're advocating within the clinics is supportive of best practice healthcare.

Brian, I was just going to add, so there is this whole focus that IDEXX and others in the marketplace have on preventive care. And we're seeing that -- slowly we're seeing the increase, especially with the new pet owners, they -- as they brought their puppies and kittens, and we're hoping that, that's going to stay where they're coming in annually, especially with our initiative, where we're helping practices get more and more comfortable offering these annual preventive visits. And then a lot of work that we do around our big data studies that show how important it is to have the baseline and as pets get older, if diagnostics are done, you find a lot more. And so we're really helping educate our customers on that as well.

Great. And, Tina, I want to follow up with something you brought up earlier in terms of diagnostics utilization and how that's been impacted by the COVID environment, by the virtual environment. That's something we've been monitoring as well in terms of pet owners may be shifting their purchasing patterns for other things, and that's going to impact how the vet thinks about their practice and how they generate revenue, right, because they're business too, and they used to generate a certain amount of revenues from product sales and now they can't do that anymore. So how do they fill the gap? Well, services and diagnostics are 2 things you can't really shift to Chewy. So I guess the questions we have are, what gives you confidence that's going to persist post-COVID? Again, how many of these are transient changes and how much of this is going to be permanent? Any trends you can talk to from 2021 as people -- maybe as the Omicron wave spiked, if you saw any changes there or sort of anything you can take -- you can contribute from your conversations with vets directly in terms of how they're approaching their business mix?

Yes, absolutely, Mike. I think you hit it. Diagnostics is about 17% or used to be about 17% of the revenue, much higher from a profitability perspective. And there is a recognition within veterinary clinics that diagnostics is a high profit – high-margin, high-profit center for them. But we know veterinarians don't do things just for the money. They're doing it because they're -- they've always known diagnostics is important. I mean, we have said, pets cannot talk, so the only way you're going to figure out what's going on with the pet is by running tests on them to identify what is going on. And veterinarians have known this, but for some reason, they had this lack of comfort of offering -- recommending the level of diagnostics that they think would be appropriate. And curbside actually helped with that. We think that when pets came in first, pets were coming in sicker and veterinarians knew the testing they needed to do. So they would just offer it and that whole virtuous cycle of the pet owner agreeing started giving them confidence. So they weren't making the calls based on, well, can this pet owner afford the diagnostics and should I recommend diagnostics? I think that is a shift that we think is going to stick because veterinarians are also starting to see that they actually needed to do diagnostics because they're finding things that they wouldn't have found if they hadn't done diagnostics. So a lot of these kind of trends, especially that confidence of offering diagnostics -- they still have [ weigh diagnostics ], they do. So there is a huge runway for more diagnostics being done for clinical visits, definitely for sake, but also for this demand is going to continue increasing, and we're going to do our part with innovations that we bring as well as our commercial presence, our high-touch model with the reach and frequency with our customers. And that's not just with the sales team. We have a full job types that we have that are facing with our customers, including our professional services veterinarians, our field service representatives, they're all working on educating our customers on the value of the diagnostics, why they should run this diagnostic and also informing them of the innovations that we are bringing. So a lot of -- we're very bullish about where the future lies.

Yes. I'd highlight a couple of tailwinds on that front and building on Tina's comments, but I think the whole area of information management, the ability for veterinarians to have better access to data, you have veterinarians now who are being trained, younger generations of veterinarians, very comfortable with leveraging information and diagnostics as a way to provide care. The solutions we're bringing, as you know, we're fully integrated between our testing modalities and practice management systems, increasingly enabled by the cloud and are adding tools like clinical decision support, AI is being developed in our products, things like SediVue and others that are leveraging data to be better and better on this front. And so I think that's a long-term trend of more tools, more capability to provide services and to do diagnostics. And I'll also highlight as an additional kind of trend in which you may want to get into today, but just one of the increasing investment that's going into the veterinary healthcare space and things like corporate practice ownership, I think that is raising kind of the focus on some of these dimensions in terms of how it can drive the health of the veterinary clinics from an economic point of view and where veterinarians can differentiate and add value. And I think that, that is something that we're seeing more sophistication, I think, in an understanding of how diagnostics can be used to build practices. And so I think those are longer-term trends in addition to what you highlighted, which is some of the disintermediation effects that are going on in other categories that we reinforce our optimism for the long-term growth potential for our space.

Deeper into sort of the shifting utilization of diagnostics in the vet's office and how they think about diagnostics as part of their care offering, are you seeing any difference in the lab in terms of the sentiment that vets have post-COVID? Are they shifting more towards using the point-of-care offering? Or is there a preference for reference lab? And I realize that there's a -- again, a preventative to that as well. But is -- are you seeing more uplift in one versus the other?

Maybe I can -- just to provide some context on what we saw in the pandemic, I'm sure Tina, again, can help better with understanding what's going on with the clinic or blood chemistry testing. It was very broad-based. So I think in the metrics that we shared and reported on, the growth rates were incredibly comparable for in-clinic and reference labs. So I think it was more reflective of just an overall increase in interest in kind of diagnostics and services more broadly. But maybe you can go ahead.

Yes, absolutely. I think it was a case of all water levels rising. What we are seeing is that veterinarians are definitely looking to invest more in technology. I mean, we had record number of instrument placements last year, over 6,500 for -- 16,500 for the year, over 5,200 in just Q4 alone. And that's a strong indication. And it was across the board, all modalities for our -- definitely our ProCyte One, which has been such an accelerator for us, but also Catalyst and SediVue. So veterinarians are investing in technology to enable them to get results faster at point of care, but also from our software solutions, which has been a huge strategic area of focus for us. And what veterinarians are really looking for is easy workflow, easy-to-use intuitive solutions, for example, our ezyVet offering, which is built in very contemporary stacks, technology stacks. It's cloud native and really helps veterinarians just -- not just take care of the pets but also do various operations within the clinics, communicate both internally and with pet owners. So we are seeing and we're very well positioned to help them with wherever they want to practice medicine. And as you know, Mike, we have a very flexible marketing program, which we have rolled out globally, our IDEXX 360, which offers customers the complete flexibility and choice of running diagnostics wherever they want to, and we make it very easy for them to view results and make clinical decisions based on that. So it's really giving them the choice. And what we're seeing is the veterinarians are using both. They're running more in-clinic, and they're sending more out to reference labs.

We've used the term testing begets testing as our long-term experience is that, as the utilization goes up, both in-clinic and laboratory testing tends to expand.

Yes. Yes. And I think one thing we've been waiting for, for a while has been sort of seeing that same pickup in international markets. I mean it certainly continue to trend higher. But if you look at just U.S. versus OUS, even parts of Western Europe, there's still a big delta in terms of those utilization levels in terms of per clinical visit, how often has a Catalyst underperformed or how often has a SediVue underperformed. I guess it's definitely trending in the right direction, but there's always been many, many stuffs behind on there, is this -- could COVID be a catalyst, no pun intended, in some way to really jump start that adoption and sort of change that view of how that...

Yes, as an example, we're right now working on our wave 2 of commercial expansions, that, combined with our innovations like ProCyte One. ProCyte One is a perfect example. And so as we're having more conversations with customers, as they are getting more and more tools at their fingertips to be able to do more testing, we're seeing that they're availing themselves of it because there's ways to go. We've talked about -- you mentioned SediVue, so we've talked about SediVue as it was initially very much a North America focus, but we are seeing more and more interest in SediVue placements outside North America. Just looking at last year, we saw a 50% increase in our installed base outside, internationally. So that just proves that clinics are very open. They're very welcoming to have these solutions so they can practice the level of care. We still have ways to go. I mean there is -- the opportunity is huge, and we'll continue to do our part in helping drive more utilization.

We've seen -- as you pointed out, the utilization levels are higher in the U.S. They're -- blood work as a -- percentage of visits that use blood work, I think, it was roughly 18% in the U.S., 7% international. We have seen growth in both U.S. and international regions in terms of increases. And one thing that we've noticed over time is as clinics adopt new technology like Catalyst, we see an immediate uptick in terms of the utilization levels if they're converting from older generation instruments. And one thing that we've also noticed over time is as the clinics move to higher levels of utilization, you see things like reference lab testing go up because they're doing things like specialized testing and expanding what they're doing. So we -- there's a great history here in terms of how we've developed the business in the U.S. There's no difference in terms of the sophistication of practitioners in international markets. I guess, it's a very sophisticated medical market, and if you look at other areas in terms of therapeutic development, things like that. And as new technologies come into play and are enabling their ability to provide better standards of care, that will just reinforce what we think is a long-term opportunity to develop those areas that result in the estimates that Tina referenced, which is we think 2/3 of the $37 billion TAM is outside of the U.S.

And the other thing I will also add, Mike, is one of the important reasons for ProCyte One, we knew there are many international markets where [ Hematology First ] markets. They did a lot more hematology than they were doing chemistry. So bringing in a solution that really gets at that and the attach rate that we're seeing with Catalyst is very high. It's in the mid-90s for international regions. So the tools that we are bringing to them is also helping us elevate the level of testing that they can do both in-clinic and, like Brian said, send out to our reference labs.

Okay. And going down the product path just because we've kind of gravitated there, more recently, you started talking more and more about second Catalyst placements. Can you talk about what you're seeing in terms of demand trends there? Is this a capacity issue? Is this practices, just sort of volume? Or is it just bigger practices? And how has that trended over time? And any thoughts on how you see the Catalyst expanding down the road?

Yes. We've always had a second Catalyst as a part of our placements. And second Catalysts are really more about the -- clinics are running more testing, and then they want to have 2 analyzers, so they can do the testing, especially as you think about morning hours of surgery, they have to do a lot of testing. They've got to get results pretty quickly. But also, as we continue to expand the menu on Catalyst, it just gives them more tools to be able to do it. So it's always been in our numbers. And I think, Brian, you just mentioned...

Well, we -- I used to typically reference it in the comments. We just added to the snapshot to give people more visibility. But it's become -- it's always been part of the -- it's primarily North America, by the way, where we see that, and it's always been part of the plan and as we're just getting more and more utilization of diagnostics and many clinics have Catalysts, it's an easy way for them to have capacity and ties in well with the programs that we're offering in terms of trying to expand testing with our customers.

And we monitor the utilization of the second Catalyst, and we always see a step up in utilization. And if I would just take us back in history and talk about Catalyst Dx that we had, just as a reminder, Catalyst Dx was an analyzer where you could run 2 tests at a time, you could queue up 2 tests, and we have over 14,000 to 15,000 Catalyst Dxs out there. When we launched Catalyst One, the intention always was that if customers grow in their volume of testing, 2 Catalyst One's would be the ideal offering for them, both because they can run the test, but they always have backup if they need to, if they need to run more extensive menu, they will have it there. So it was very much by design that we decided to go with 2 Catalysts One's in the clinic.

So when you place that second Catalyst, are you -- Brian, I just want to make sure I understand your comment about utilization better in terms of increasing utilization. Are you talking about the total consumables revenues from the practice or the revenues per instrument? Are you seeing higher revenues per instrument even with 2 boxes?

It's in support of growing utilization was the point I was trying to make. So if a clinic is -- the demand that's coming for a second Catalyst just are clinics that are doing lots of testing and are trying to deal with capacity issues. And so it's just -- it's part of the overall equation that we have for supporting customers, and it's an important part of the U.S. growth algorithm.

Okay. Okay. And then just focusing on some of the other recent product introductions you've had going back to VMX about a month ago, you highlighted a number of new products. I think the common theme we kind of picked up was enhancing the efficiency of practices. Could you talk about some of the early feedback you've got on sort of where you're trying to position with this?

Yes. One of the things that we all know, veterinarians are busier than ever. And at IDEXX what we've been looking, and this is what we've done all along, but we're asking ourselves even more and more what can we do? Just simplified workflow, all of those things that would translate into time for them and capacity. So a lot of our announcements that we had, the recent product launches of a broader oncology service offering, we announced the launch of an improved 4Dx test with clinical decision support. We talked about SediVue enhancements. We talked about VetConnect PLUS. By the way, VetConnect PLUS is just a huge time-saving application that maybe we don't talk about enough. It is the portal that allows veterinarians to order tests, get the results. And more and more we're adding clinical. So we've recently launched that -- the mobile -- an enhanced mobile version of it, which is an even better user experience, ease of communicating with pets. And as we continue on services, we've added menu to Catalyst, but we're also thinking about how do we make it easier for them to run that menu. So the new Catalyst SDMA that we announced with all the reagents on board the site, which means it is less steps for them, it's a faster turnaround time, less storage space, less waste, better for the environment. So really, I think, that capacity for clinics by providing them tools that results in higher efficiency. And to answer your question on feedback, of course, veterinarians always love what we bring to them and the products that we've launched there early, some of those we're going to be launching throughout the year as the year rolls. But the ones that we have launched, like ProCyte One, VetConnect PLUS Mobile or early-on oncology services, great reception.

Great. And then the other part that stood out to us from VMX was the announcement with PetDx to sort of help bring their OncoK9 liquid biopsy for dogs, oncology to the market. Could you talk us through how sort of -- how you see oncology fitting into the diagnostics portfolio? It's an area we've talked about a lot, but it's not as big, obviously, in companion animals, as it is in humans. So what's the opportunity there? Talk to us about the market landscape and sort of any other details you can add on the deal and the partnership.

Yes, absolutely. So if you think about oncology, there are 6 million positive cancer cases in U.S. alone, just in U.S. We know that our pathologists look at over 1 million suspected cancer cases a year. So -- and it's -- diagnosing and treating cancer is so complex. The process is very fragmented. So what we looked at -- so it's a huge unmet need out there. So we looked at that and we said, we have pathologists that are -- they have huge expertise in helping diagnose -- identify when there are cancers. How can we bring a more holistic solution to veterinarians to make it easier for them? And that's where we think by partnering with best-in-class technologies and offering more of a turnkey solution to veterinarians. So if you think about from a veterinarian, especially GP, from their standpoint, what they now need to do is leveraging VetConnect PLUS that I talked about, they can order the test, courier comes in, picks up the test and takes it to our labs. They get the results back on VetConnect PLUS. If they have questions, we have medical experts for them to rely on. We are there to support them. So it's a more holistic offering. It's still really early stages for us. We're in the very, very early innings. But as we think about the potential of the long-term opportunity, as we continue to learn more and evolve, it's a huge unmet need.

Okay. All right. And I'm going to just remind investors that if you've got any questions, send them in via either Bloomberg chat or e-mail or via the portal, and I'll make sure I ask them. In the last couple of minutes we have, Brian, I want to sort of focus on some of the financial aspects and just to how we think through the guide and other moving pieces. One of the more common questions we've gotten across our coverage is price. So could you give us an overview? I mean I know that IDEXX typically has plenty of pricing power. But how do you think about price in an inflationary environment? Do you have any ability to take more? Are there any pressure points you're worried about if you try to take too much price, given your customers could be seeing some pressure themselves?

Yes. So we -- from a pricing point of view, we've typically realized 2% to 3% net price improvement in markets like the U.S. Over time, our list price increases tend to be relatively higher than that, and then we have kind of ongoing different aspects of providing programs and things of that nature that reduce that to the 2% to 3%. We highlighted that we were planning for 3% to 4% net price increases this year. And that is reflective of some select increases to reflect higher relative costs. Things like service delivery have gone up, and we're also investing in higher levels of service quality and innovation in the products. So we think that, that also supports a relatively higher level of pricing. We're sensitive to aligning pricing with the value that we're delivering and believe the veterinarians, they've historically had the ability to pass on price increases as appropriate to pet owners. So we're comfortable with that as a near-term dynamic and I think reflective in part of some of the inflationary environments that you highlighted.

And where do you see the most sensitivity to price from your vendors, from your suppliers? Could you talk about, through your relationships and long-term contracts, short-term contracts, sort of any other levers you have to offset inflation from a COGS standpoint or also from a labor standpoint as well?

Yes. We're very focused, first and foremost, on continuity. So we want to make sure that we maintain very high levels of service continuity in areas like our labs, product availability. And we've done an excellent job on that. And the operations team here at IDEXX has been amazing in terms of staying out in front of potential dynamics in those areas. I think we're -- we feel very good about our supplier relationships. We've been able to manage effectively where you would expect to see some pressure in things like electronics and areas of that nature. And we will, as appropriate, lean on things like inventory needed to make sure that we're in a good position to manage that. But I think we're -- we feel good about that. It's something we're monitoring on an ongoing basis. I think I mentioned some of the areas where costs have gone up. I think just the overall kind of delivery end of the supply chain has been an area that's seen some pressure. And we see selective impacts as many companies are seeing these days. But I think we factor that into our plans for this year, and it is, to a degree, reflected in some of the higher pricing that we've advanced as well.

Okay. And just following up on that thought, I think one of the bigger debate points going into the quarter and the guide was how you would guide margins for 2022 just because there's a lot of moving pieces and you got to factor in some of the gains and the benefits you saw in prior years. So I think the question kind of points to sustainability of margins going forward. You've guided 600 basis points of operating margin expansion over the next couple of years. You've guided very nicely for margins in '22. But looking longer term, just sort of how are you thinking about the sustainability of this margin profile? And I guess -- I mean some of the questions we're getting are why don't margins revert closer to back to 2019 levels? Why are these gains permanent and not transient?

Well, we benefit from being in a business where if we can grow our recurring diagnostics revenues, they have great incremental flow-through dynamics. I mean, the incremental gross margins on our in-clinic consumables or reference lab services are all kind of 60% plus. And we -- we're getting benefits from scale. We're continuing to focus on productivity improvements. So volume gains in areas like our labs enables us to reinvest towards service quality, but also to relatively improve our profit margin. So that's the favorable kind of tailwind in the business and the higher growth through the pandemic and our confidence in the long-term positive demand dynamics for our business and sector are giving us confidence that we can continue to build on these trends. And as we do that, we're very upfront about wanting to reinvest. We have a very high return on incremental investment in our business in terms of driving additional annuity growth, which has great durability dynamics. So we're going to lean in and continue to invest in innovation and our commercial footprint and just the overall capability of our organization, but we think we can do that in a balanced way and build on the gains that we've been able to achieve consistently over time.

Okay. Okay. And then another topic and another question we've had a lot of debate on is sort of the competitive landscape. I know there's been a lot of updates and product launches and conversations recently by some of your competitors, Zoetis and Heska, just to call out 2. Give us an update on what you're seeing from the competitive landscape, both in point-of-care and reference lab and probably also both U.S. and OUS. How has that competitive dynamic shifted in the last couple of years? Obviously, Zoetis is making a bigger push into reference labs now, and they also continue to invest in point-of-care. And Heska's got some new products coming to market. So any thoughts on how the competitive landscape plays out and sort of how you see it out of your business?

Well, it's always been a competitive business. I think we're -- going back to whether it be Antech, years of kind of competing with them in areas like reference lab or in-clinic competitors. And I think that there's a theme here, which is it's been a great space, as you've highlighted, a lot of growth, and I think it's attracted investment over time. We're really focused on delighting our customers and trying to support, providing better pet healthcare. And I think as we do that, we've always viewed it less as beating a competitor and more trying to help our customers grow faster and aligning how we go to market with how they'd like to run their business. And when we do that well, we get the benefits of their higher levels of growth. So I think it's -- in many ways, we welcome the competition because it's going to help raise standards of care globally, and I think we're -- we feel very good about how we're positioned, and I think you can see that in our results. And we believe there's plenty of room for growth for the people who are trying to share the mission that we have to improve pet healthcare. And we're confident if we continue to execute the way we have, innovate the way we have, we can grow our business at the rates that we're targeting.

And Brian, I would just echo that, that the more conversations there are about pet healthcare and the importance of diagnostics, the better we are. I mean there is just so much opportunity there that it's really about taking better care of the pets. And we at IDEXX just stay very, very focused on our customers' success. This is what we excel at. And we can see that our customers prefer to partner with us, and we will just continue to stay very focused on what we do best, which is understanding our customers' needs very intimately and then delivering delighting solutions for them.

Great. And with that, we're essentially out of time. So Brian and Tina, I want to thank you very much for joining us. Thanks, everyone, for listening in and participating. And I hope you enjoy the rest of the day and both in your one-on-one meetings and in your group sessions. Thanks again.

Thanks for having us.

Thank you, Mike.

Always good to see you. Thanks.