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

Good morning. Welcome to Raymond James 43rd Annual Institutional Investor Conference. My name is Elliot Wilbur. I'm the coverage analyst at Raymond James, following the animal health and specialty pharmaceutical space. Welcome to the IDEXX Laboratories' presentation at the 43rd Annual IIC. IDEXX is the global leader in the Companion Animal Diagnostics market. Presenting for the company this morning is IDEXX' CEO, Jay Mazelsky.

Thank you, Elliot, for the introduction. Good morning. Welcome to the strategic overview of the IDEXX business. I'm Jay Mazelsky, CEO of IDEXX, and it's just a great pleasure to welcome all of you here in the room and those participating in the webcast to today's events. I'd also like to mention with me today in the room, we have Michael Schreck, who's Senior Vice President and General Manager of the Veterinary Software and Services Business for IDEXX, and we have John Ravis, who heads up our Investor Relations business. To start, let me remind everybody that this event is covered by the safe harbor disclaimer, and you can please familiarize yourself with that. So with that behind us, let me get started on the meat of the presentation. IDEXX has taken a consistent strategic approach to developing the business. It's -- our approach is centered on the global development of Companion Animal Diagnostics and information management. Our business model frames an enduring high-growth opportunity we see in our sector. Our business is primarily focused on Companion Animal Diagnostics and information technology services that drive insights and productivity for our veterinary clinicians, our customers. We see a significant decades-long opportunity to increase the standard of care for companion animal health care aligned with a $37 billion total addressable market opportunity. Innovation is a foundational component of our strategy to be able to develop this marketplace aligned with commercial -- a direct commercial model of subject matter experts, trusted advisers who bring these solutions to customers to solve their most challenging problems. These factors combined, aligned with our customers' priorities, enable us to project a double-digit sustained market opportunity, coupled with higher profit gains and high returns on invested capital. As a background for those of you who are less familiar with the IDEXX portfolio, we're in 3 principal businesses, Companion Animal Diagnostics, Livestock, Poultry and Testing and Water businesses. Each of these are worldwide businesses. They represent attractive growth opportunities, organically focused with a consistent strategic approach that we take as a company. Our Livestock, Poultry and Dairy business is highly leveraged from a technology standpoint with our Companion Animal Diagnostics business. We test for the most devastating diseases that occur in livestock, and we also have a pregnancy testing and confirmation business. Our Water business helps protect the drinking water of approximately 2.5 billion people on a global base. This is a durable expanding global business with 99% customer retention and approximately 45% operating margins. My focus today is going to be on the Companion Animal Diagnostics business and Software, which represents about 90% of IDEXX' total revenues. IDEXX has a long history of strong organic revenue growth, yielding high returns on invested capital. We've accelerated growth over time, supported by our consistent focus on innovation, our commercial model of subject matter experts who form our trusted advisers to our customers and really being able to be a leader in our different diagnostic platform modalities, in-clinic point-of-care diagnostic testing as well as our global reference lab testing. We've had a consistent belief in the long-term opportunity or potential in our market, informed in part by the strengthening pet owner and pet bond, and we've invested towards that basis. The key driver of our revenue growth has been the expansion of our Companion Animal Diagnostics recurring revenue business associated with our consumables generated by our point-of-care, in-clinic suite, reference lab -- the global reference lab of approximately 80 laboratories, rapid assays, support contracts and accessories. Our CAG, or Companion Animal Diagnostics, recurring revenue stream represents approximately 80% of the company's revenues and approximately 90% of our CAG business. It actually accelerated during the pandemic. So let's talk about some of the key trends impacting our business, and what that -- what the implications are. So a key dynamic that emerged in the pandemic was an increase in the global pet population. We saw approximately 6% growth in the U.S. in the overall pet population. Keep in mind that, that compares to approximately 1% growth historically. And we saw this on a global basis. We saw similar pet population growth everywhere, U.K., Germany, Netherlands, Australia. And these increases were driven primarily by the younger generations, Millennials and Generation Z. And we know that these younger generations are highly attentive to the needs of their pets, often viewing them as members of their family. Looking forward, we estimate 5 years out that Millennials and Generation Z will form over 50% of dog or canine pet owners. These factors point to a very solid long-term tailwind for pet health care services, and we know that pet health care services are enabled by diagnostics. Growth in new pets contributed to the broader expansion in the demand for veterinary services. It was one factor amongst a number of factors. This has been a longer-term trend in pet health care as veterinarians are increasingly focused on what they went to school for and what they're most passionate about, which is providing patient health care. We also note that a factor within their practices have been product sales. They have over time migrated to online e-commerce type shops and platforms, especially in the specialty diets, but also to some extent within the therapeutics. As pet owners have spent more time with pets and have brought their pets into practices, veterinary practices have modified their business models. We all know about curbside drop-off and pickup as well as the focus on pet services -- pet health care services, which was a trend before the pandemic and only accelerated as part of the pandemic. So solid same-store clinical revenue growth trends emerged in -- throughout the pandemic. In 2021, we saw a 13% clinical revenue growth figure, and that compares to high single digits in the prior year with even faster growth in categories such as diagnostics, which enable the health care services. We now estimate that diagnostics represents approximately 16% of practice revenues and 30% of practice profits. So it's a very -- not only is an important part of the overall service proposition of vet practices but it's a very important part of the overall economic health of the practice. Growth in diagnostics is reflected in this trend towards delivering more in medical services. We know that veterinarians rely on diagnostics to assess patient health status and determine if a patient is sick, what may be wrong with them and what the right therapeutic path is. A core metric that we track as a percentage of bloodwork included in U.S. -- in this case, U.S. clinical visits. And we define bloodwork as both chemistry and/or hematology. Historically, we've seen approximately a 50 basis points increase annually in the use or growth of bloodwork as part of these clinical visits. And that's supported by the approach that we take strategically as a company in terms of bringing innovations to the customers as well as working with our customers through our commercial and medical affairs organizations. In 2020, we saw this trend accelerate to 100 basis points of step-up, inclusion of bloodwork. In 2021, they reverted more to the historical norm of 50 basis points, which is very much in line with our long-term growth projections. These, I think, continued gains demonstrate that clinicians are increasingly focused on medical services and focused on diagnostics, which enable the medical services, again, supported by the engagement that we bring as a commercial and medical affairs organization and innovations, which solve the most pressing diagnostic problems. However, we know when we look at practices, and this is -- it's a busy slide, but it represents the use of diagnostics in both wellness and non-wellness categories that not all customers are the same. Those customers on the left-hand side of those charts use relatively less diagnostics. Those customers on the right-hand side are real believers. And what we see is, on average, in the U.S., about 19% of clinical visits include bloodwork, with a relatively higher percent in the non-wellness area. But what you see is in the top decile, approximately 1/3 -- top decile customers approximately 1/3 clinical visits include bloodwork. And in the top -- tippy top tier about 40%. And these practices I'm often asked what distinguishes these customers who use diagnostics to that extent? And it's also -- it often comes down to a very strong belief in the role the diagnostics play. They embed care protocols as part of their workflow, and it's included in terms of how they view and how they define what the best standard of care is. This is a significant opportunity over time to change the belief systems of customers who use relatively less, and even those who use more, to continue to use even more in the future. So our strategy as a company through innovation and our commercial engagement is to be able to move those customers from left to right on this chart. A big piece of -- or a key piece of how we drive diagnostics is through our instrument placement -- premium instrument replacement strategies. It's currently supported through innovation of these platforms. It's centered on this notion or the philosophy of Technology for Life, meaning when you buy something for us -- from us and partner with us, we continue to update the features and functionality and capabilities of these platforms over time. Our installed base of premium instruments has grown 14% compounded annually since 2010, so 14%. I think that's a reflection of the innovation and really being able to solve customers' problems. As noted on our recent earnings call, we posted a record Q4 instrument placement number for a global basis, and that's in spite of constrained access to clinics. So we think that that's a good reflection of the fact that practices have never been busier. They're doing well economically. They're investing in technology to be able to support their businesses. Let me take this up a level and talk about the industry as a whole. The -- as we assess what the factors that are perhaps favorable or tailwinds and those that present some headwinds. We think that, on a net basis, this remains an incredibly attractive sector and area of investment. A couple words about some of the tailwinds. I think you've heard from us and others that the pet owner, pet bond has never been stronger. It's strengthening and growing throughout the -- only accelerated by the pandemic itself. But I think what's important about that is the cohort, the demographic cohort, which is in part driving that, which is the younger generation of Millennials and Generation Z really being able to support pet ownership and thinking about pets as members of their family. The other piece that I would cite as a very important factor in driving growth in our business is the innovation in diagnostics and therapeutics and information management, software products, solving customer problems, increasing -- being able to provide solutions that increase the standard of care for our customers. And adoption of these technologies is supported by a new generation of veterinarians who view technology and diagnostics as a key part of the care equation who are willing to adopt these technologies significantly if they believe that the science and the empirical evidence supports a higher standard of care. Now having said that, those are the tailwinds, obviously. Having said that, there are some headwinds that we're monitoring. We know practices have never been busier from a capacity standpoint. Veterinarians are all out servicing their customers. COVID and COVID variants like Omicron clearly have resulted in some sicknesses and staffing challenges. So that's just a trend -- that's more of a short-term trend that we're monitoring. And I think all of us in lots of different businesses are monitoring what the post-pandemic work environment will look like in terms of are people going to go back to the office 5 days a week? Or will a more hybrid environment emerge. Or people stay home and work remotely with their pets? From our standpoint, our perspective at this point is that it's going to be more of a hybrid environment that people will go back to the office for those meetings that require in-person visits, whether it's training or teamwork that involves collaboration, but that we've all gotten used to a model working remotely and like it quite a bit. But more to come and more to understand as time develops. So let me talk a little bit about -- I am often asked the question in terms of, does the pet owner have financial capacity to continue to spend on the health outcomes of their pets? And clearly, you can see from this slide, there's a lot of data here, the answer to that is yes; this is U.S. data. This represents health care spend for pets as a percentage of personal consumption expenditures, which is a labor force statistic, and we've normalized it for pet ownership. And what you see across those different demographics from under $50,000 to $200,000 or more, it's relatively fixed. You're looking at approximately 2% in terms of the highest categories, 1.6% overall. So I think as you go deeper, drill deeper into that spend and take a look at veterinary services, 0.7% in diagnostics is a very, very small percentage of the overall total. So we believe that pet owners who prioritize spending money for their pets as a whole, for veterinary medical services, more specifically and then diagnostics, there's a lot of capacity. There's clearly the ability to prioritize spend on those things that are most important to them. So to take a longer-term view of the opportunity, this is a 25-year macro view and our strong performance trends as well as the sustained vectors or drivers of potential in the marketplace, I think it reinforces that there's a very significant long-term opportunity in the pet health care marketplace. We shared at Investor Day that we think the long-term diagnostics opportunity is approximately 9% over the next couple of decades on a global basis, and that's supported by strong execution of our strategy, strong execution operationally year-to-year, increasing the standard of care. Now these projections are calibrated in a couple of different ways. For our international markets, what we've done is we've said 25 years out, we believe that diagnostics has the potential to be used at what we see in the U.S. today. So 25 years from now, we believe that the international markets will use diagnostics approximately what we see in the U.S. today. And then we said for the U.S., we believe that there's a potential 25 years out for diagnostics to be used at the upper tiers of what's happening today, upper decile of what's happening today in the U.S. market. So I think that those are very reasonable assumptions, and that's very much aligned with the $37 billion total addressable market opportunity that I described earlier. And IDEXX is going to play a key role in developing these markets. I've talked about innovation, the ability of our commercial organization and subject matter experts as trusted advisers to practices to help drive, to help effect this change management opportunity before us so that diagnostics plays a key role in improving the standard of care. So let's talk about our innovation strategy as a company because it's very much foundational with our view in terms of what it's going to take to develop this marketplace. We're truly differentiated in terms of being able to provide a fully integrated multi-modality diagnostics and information management solution. We're a global leader in our in-clinic and reference laboratory solutions. We're also a global leader in cloud-based software solutions with innovative offerings like VetConnect PLUS, ezyVet, Web PACS that enable practices to improve how they practice medicine, but also improve the productivity of their staff and communicate internally and with clients. A more recent area of focus has been adding artificial intelligence and machine learning to our solutions, including things like standard workflow in our reference laboratories, algorithms and SediVue, for example, which train on very large data sets, as well as clinical decision support, where we have rules-based guidelines. Overall, our customers appreciate the innovation-based approach that we take in some of the parts. Results in very high customer satisfaction levels as well as high loyalty and engagement. Let me dive deeper on this and talk about our in-clinic premium solutions offering. This is something that we've really invested at over a multiple period of years, decades really. If you think about what customers want from in-clinic solutions, they want solutions that offer performance. From a menu standpoint, roughly equivalent to what you see in reference labs. They want connectivity with PIMS, our own, as well as third parties and applications. They want reliability. So that it just works, and they don't have to be disrupted and call us if there's a problem. And they want to be able to make sure that it supports the workflow. And the workflow means that you have a result that is produced within the patient window, 8, 10, 15 minutes to get a result back. It is very hard to do well. I think our customers appreciate that we provide highly differentiated solutions that are very challenging from a design standpoint to deliver that type of performance. And additionally, I think another element that distinguishes us in the marketplace is our Technology for Life philosophy. If you had purchased a chemistry analyzer from us 5 years ago, you have the opportunity to be upgraded just by through menu of 5-plus new parameters. So you stay current, the analyzer appreciates with time. And that's very, very, I think, different or differentiated than what you see, not just in our industry but most businesses where you invest in capital and it depreciates over time. So that's something we're very proud of. And the opportunity is still in front of us. Our global installed base is approximately 100,000 premium instruments, but we think the opportunity is 2x that. So there's another 200,000 opportunities as customers look to us to really invest in technology that supports their workflow, that supports real-time care within the practice environment, it helps their productivity. Another area of our point-of-care diagnostic solution is our Rapid Assay business. This is a release that was announced at 4Dx -- at VMX for 4Dx that I'm especially proud of. This is our fifth-generation release since we first introduced a heartworm product, which includes heartworm and it represents really an integrated whole product approach of not just performance, assay improvements, already the gold standard, but we improved anaplasma, providing clinical decision support and workflow improvements for room temperature storage, which is 2x what it previously was. So I think this is a great example of being able to really invest in what is already considered the gold standard in a marketplace to support our customers and make it even better. And now, by the way, this connects to the IDEXX ecosystem. Our software ecosystem, the SNAP Pro, we have 45,000 -- approximately 45,000 SNAP Pros. So these rapid assay test results become part of our software workflow embedded in the PIMS for automated charge capture and invoicing the customer. I also announced at VMX our new personalized oncology solution. We think that this is a very attractive long-term opportunity. To give you some benchmark data as context, there are 6 million dogs in the U.S. who are positively diagnosed with cancer on an annual basis, 6 million. It's the most prevalent significant disease of its kind. And there aren't a lot of oncology specialists. So the general practitioner is a veterinarian that's responsible for really diagnosing, assessing, treating and then following up for these cancer patients. So it's a very complex, fragmented process. We're bringing genomic and proteomic technology to genetically fingerprint cancers as a way of verifying or validating cancer diagnosis that we may see in our pathology business, where we have approximately 1 million sessions globally on an annual basis to be able to potentially stage the cancer, suggests a therapeutic path from an oral standpoint, and then monitor and follow up how that treatment is going. So we think it's a very interesting longer-term opportunity. It's very early in terms of what it is today, but I think this over time will become an important part of our reference lab offering. And so speaking of our global reference lab business, this is an area that we've been investing in for decades, literally decades. We have approximately 80 reference labs in our global laboratory network. We recently announced a new reference lab in Kornwestheim, which is 50% larger than the rest of it. We've invested in harmonized lab information management systems, the courier and logistics services that provide same-day -- once or twice a day pickup, same day or next morning test results. So something we're very proud of. We continue to invest in it. It's an important part of our strategy to be the long arm of the practice. Couple words about our software business. We know practices have never been busier. I think software plays a key part to the operational -- how they operationally run their business. We have, from a PIMS system solutions, which really scale across the entire practice, ezyVet, Cornerstone, Cornerstone on the Cloud and Neo, which is really tailored for the smaller single doc and mobile practices. We recently acquired ezyVet. We think that that's really a very nice fit for advanced and specialty practices as well as corporate groups. And those Cornerstone customers who -- large installed base of Cornerstone customers who want to move to the cloud have that opportunity. This is a chart that I think really depicts nicely the fact that the role that software can play in supporting customers who have never been busier in terms of staff productivity, internal communications, external customer communications, really supporting the workflow in the practice. And our strategy is to be able to bring these software solutions to our diagnostic customers. We know that when a customer uses all of our solutions, software and diagnostics, it's correlated with a higher growth profile. They use more, they stay with us longer, they do better and we, in turn, do better. And we think IDEXX is really well positioned as a company to be able to support the move to a cloud-based software and help our customers. Same goes for clinical decision support, which now is at our VetConnect PLUS solutions. Keep in mind that general practitioners are responsible for a huge range of clinical and medical services, and that being able to provide clinical decision support could help suggest things that the veterinarian may not have considered and to really support them in very busy practices. I would be remiss if I didn't talk about our global commercial organization. It's a key part of bringing innovations to our customers. We have approximately 1,000 customer or commercial-facing resources into our organization, subject matter experts, trusted advisers. They're all part of the change management journey that I spoke of earlier. We've invested in -- increasingly investing in our international markets, Germany, France, South Korea as part of the first wave. We've now completed Spain, Italy and Brazil as part of the second wave, and this will continue to be an area of investment and focus for us. So let me tie it all together in terms of what it all means. Strong growth momentum we've achieved in our business as a result of a consistent strategic focus, as I've outlined, I think -- and we benefit from these favorable enduring trends reinforces the 10% plus growth we see in our business. And we shared -- as we shared at Investor Day, a key component of this is 11% to 14% CAG Diagnostics recurring revenue as a driver of that, double digits in both U.S. and international regions. And we also see a 10-plus percent opportunity for our veterinary software and services business in diagnostic imaging. So these strong organic growth gains position us to really build on this very strong track record of performance, aligned with our long-term goals of 10-plus percent top line, 15% to 20% earnings -- comparable earnings per share gain. So just tying it all together, from a conclusion standpoint, we have a very attractive, durable recurring revenue business model, well positioned -- I think we're extremely well positioned to build on this momentum as a company, long-term potential for our core business while generating just exceptional financial returns as a business. So that's the end of my presentation. Thank you for your listening and engagement and look forward to meeting with you -- many of you afterwards.