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

Great. Well, it is 11:00, so we're going to get started here. My name is Andrew Cooper. I cover Diagnostics and Tools here at Raymond James. I had covered IDEXX for a long, long time in the past, and so happy to have them here with us today. I'm going to hand it over to Jay Mazelsky, who's going to give us a presentation. We've also got Dr. Tina Hunt and John Ravis, in the audience as well, but I will hand it to Jay. Thanks for coming, and handing it over to you.

Thank you Andrew. It's a great pleasure to have a chance this morning to talk a little bit about the IDEXX strategy and a business overview. I'm Jay Mazelsky, President and CEO of the company. Just to repeat, Andrew, we have Dr. Tina Hunt, who heads up our strategy, sector development and global operations areas for the company. John Ravis, leads our Investor Relations group. So let me quickly just remind you that today's remarks are covered by safe harbor disclaimer, and they're available on our website if you'd like to go a bit deeper into that. So with that, let me get started and talk about the company. We're a purpose-driven company. You see the full description of the purpose there. I tend to abbreviate it by talking about our purpose being to enhance the health and well-being of people, pets and livestock. It informs and I think energizes our employees. It informs our strategy. I'll talk a little bit about these 3 businesses in the next slide, characterizing them more fully. What I would like to impressify to you is that these are businesses that offer long-term growth prospects -- organic growth prospects, united by a consistency in the strategic approach that we take. We bring innovation that addresses the underlying clinical and business problems of a practice. We engage our customers to a commercial organization that forms partnerships with subject matter expertise and deliver a great customer experience, whether we're talking about companion animals, water, business or livestock, poultry and dairy business. This slide gives you a little bit of more -- a deeper, a more quantifiable picture of our businesses. Last year, we were approximately $3.7 billion in revenue. You could see the vast majority of the portfolio is in the Companion Animal Group. And that will be the focus of my remarks after I finish this slide. Our water business is a microbiology testing business that [indiscernible], the glass of water you had this morning. The breakfast and shower you took was probably tested with an IDEXX [indiscernible] test, livestock, poultry and dairy business is where we actually got our start, almost 40 years ago. So it's a business, and all these businesses share this common characteristic of underlying technology approach to testing, engagement, driving through awareness and education, relevant testing usage. I would also call out our software business, which is a cloud-based practice management and in vertical applications that support the animal health that increasingly relies on data and an underlying AI engine to guide growth. As a result of the consistent application of this strategy, we've been able to deliver excellent top line returns, margins and that all support a high ROIC. As you can see from this slide, the CAG Diagnostics recurring revenue portion of the business has grown faster than the company as a whole. It's also accelerated off a fairly high base. And this is a result of, to be more specific, not just innovation, but innovation with new platforms, testing menu, which is leverageable across both our reference labs and point-of-care solutions as well as integrated software solutions, which help all of these solutions work better together. Our commercial model is more than just account managers. We have professional service vets and field service representatives, internal medicine consultants, sales support. But all combined, we have a seamless ecosystem to support our customers and their objectives. Our commercial model is one that we've invested in and expanded over time, most recently in the U.S. this past quarter. Internationally, there have been 7 expansions over the past 3 years. And then the software business, which we believe offers a long-term opportunity to grow at 15-plus percent. Our practices have -- customers have never been more hungry for these type of technology solutions. And I'll give you some insights in terms of our strategy and approach and where we think the opportunity is. We talk a little bit about innovation and our solutions. It starts with the customer and the patient. And you see this at the center of everything we do. Most customers, in fact, the vast, vast majority of customers, 98-plus percent, use both testing solutions that are generated within the clinic. We call that point of care as well as the reference labs. And they seek best-of-breed solutions, they see diagnostics as a performance category in which accuracy matters, but they also seek importantly, integrated solutions, which support their workflow within the practice, which enables them to draw out these clinical insights within the patient context in which they're seeing that enables them to deliver excellent care. So I'll talk this morning about each of these modalities, how we think about them and how we think about software, which seamlessly connects it on behalf of our customer. The interesting thing is to talk a bit about the industry as a whole and diagnostics within that industry, is this is a terrific industry. You've seen from 2018 to 2023 that the average revenue at the practice level has grown over 7%. In medical services even faster than that, about 100 basis points faster. So our customers, the veterinarian are really focused on delivering medical services at a very high level. Some of the product sales that historically they've relied on have migrated outside of their practice due to the e-shops, the e-commerce type platforms. This is where we, as pet owners want veterinary focus on delivering excellent care. And this is why they went to school. This is where their passion is. Now you can't treat unless you first diagnose. You can't assess the basic health status of the patient unless you diagnose. And that's where diagnostics comes in. It's foundational and it's an enabler to delivering excellent care. And you see diagnostics revenue has grown almost a couple of hundred basis points faster than clinic revenue. And IDEXX in turn has grown even faster. I am often asked why? I think it really comes down to the fact that our solutions work extremely well together. It's seamless. We -- they're highly differentiated. We uncover more. We see things on behalf of the veterinarian and their patients that other diagnostics don't. And you see, as a result of that, really nice growth. Let me talk a little bit about the sector as a whole and how attractive the sector is despite of some challenges with capacity, and I'll talk a little bit about how we're thinking about that. But pet owners think about dogs and cats primarily as members of their household. These are members of the household that they're willing to prioritize care on their behalf, sometimes at the expense of their own care, but certainly, vis-a-vis things like travel and entertainment, and going out to dinner. And so pet owners continue to express this passion and willingness to spend for the health, happiness and well-being of the pet. The other thing that I would say is this is even more pronounced with a younger generation, the younger demographics. So within a few short years, will form the majority of pet households. And so we think that this is a significant tailwind and one that bears continued watching. The other thing that represents, I think, is a significant tailwind or trend within the animal health space is that the pet population has increased pretty substantially. And this is -- though this is U.S. data, we see similar data in our major countries and geographies outside the U.S. During the pandemic, I think maybe it came as no surprise to many of us that the net pet additions from a pet population standpoint, were about 10% over that 2-year period. So that compares to pre-pandemic historic level of 1%. I think maybe what is a little more surprising is that post-pandemic in 2022, it increased 2%, from a net addition standpoint that, again, compares twice as fast as what we saw pre-pandemic. And this is completely new data that we're sharing with you today, 1%, which is back to pre-pandemic historical norms. The other thing to keep in mind this gets back to some of the capacity constraints that we've been talking about the veterinary profession surged during the pandemic to support this on really an unprecedented rate of pet household growth. And they surged by doing things like working longer hours on weekends and during the week and really putting in place on sustainable practices. And they pulled back a little bit in 2022, in 2023. The thing to keep in mind, though, is the absolute number of clinical visits and you could see this from the periods that we've segmented has actually grown and grown fairly substantially. And this, I think, chart puts it in a pretty stark relief in 2023 vis-a-vis 2018. You see the absolute number of clinical visits has appreciably grown and we expect will continue to grow over time just based on the pet population. The other, I think, quite important trend worth calling out is that the average life spans of dogs and cats since 2010 have increased dramatically. 12% in the case of dogs, 14% in the case of cats. And some of that is due to smaller -- a mix of smaller breeds and dogs. They tend to live longer. Cat staying indoors and therefore, safer. Some of it is due to the fact that they're getting better care, better diets, better diagnostics, more therapeutic options, and it is increasing the life span of the pets we love so much. The important thing from a business implication standpoint is that dogs and cats, like all of us, humans and mammals, in general tend to get sicker and consume more health care as they age. And diagnostics, both on an absolute and on a percentage basis increases through these life stages. So we think that this is an important longer-term talent for the business as a whole. When we think about diagnostics, I'm going to double-click on a couple of areas and give you a deeper appreciation or how it's used. First thing we do is we look at frequency of use for clinical visits. Let me just define clinical visits as those visits in which the pet sees a veterinarian. So it's not dropping off your pet for boarding, or grooming, it's an actual clinical visit. And what you see is that the frequency of using diagnostics, this is any diagnostic, because it could be something as simple as a heartworm test or a fecal test has grown and has accelerated through these periods as outlined on the chart. I would also call your attention to the fact that even in 2023, diagnostics has never gone above that 50% mark. So the opportunity in the most advanced market in the U.S. is still very substantial to drive the use of diagnostics of any type. Now let's double-click and go a bit deeper. The way we think about diagnostics is from a blood work standpoint, which represents, if you will, the minimum database. Chemistry and/or hematology. And we segment it into cohorts, wellness or non-wellness visits. So wellness visits, that's self-explanatory. Non-wellness visits include sick patient visits, visits for chronic disease, follow-up, longitudinally over time as well as visits maybe a pet is going to have surgery, which we're using diagnostics. And what you see is the growth on average has increased pretty dramatically, about 50 basis points per annum over a fairly long period of time. So in the U.S., about 19% of medical visits include blood work, chemistry and/or hematology. Wellness, though, it's only 11%. So a little more than 1 in 10 pets that visit the veterinarian who are seemingly well and in many cases, they're not, by the way, I mean it's a lot of peer-reviewed research suggesting that they're not, and non-wellness at 25%. So 1 in 4 sick patients that come in to see the veterinarian in the U.S. isn't getting diagnostics. The question is, why and what do we know about that? So moving to this slide, what we've done is we've taken that same chart that I showed you, but we broke it out by deciles. And what you see is very wide variability across these deciles. You see on the right-hand side of each of the charts, where diagnostics is pretty much a part of the standard care protocol, embedded in workflow, where the doctors believe within that practice that it's foundational. And then on the left-hand side, you see practices which seem to be barely using diagnostics. And sometimes when you talk to them, it comes down to a couple of things. They'll tell you that they don't think the pet owner can afford it. And so therefore, don't even recommend it or offer it. In other cases, they believe that, I think I know what I'm seeing. I don't know that -- maybe I'm going to save the pet owners some money or if it gets worse, then we'll come in or do full workup. So part of this really comes down to just belief journey. Awareness and education that indicates where you're actually missing things. And the study we did with over 30,000 dogs, in similar study with cats is that about 1 in 4 cases involve or indicate these you're seeing things that indicate the need for veterinary professional [indiscernible]. So though they may do some of this well that's testing for senior dogs geriatrics, what the evidence of the data says is they should be doing it more broadly just as a general medical principle. And so one of the ways that we developed that, move those customers on the previous slide from left to right is the innovation. And diagnostics is a performance category. It's difficult science to do diagnostics correctly. We hold ourselves accountable, the third-party peer-reviewed research when we come out with a new parameter or measurement, but we've invested very substantially in the innovation engine of the company over time. Now we have a very large installed base. So our on-market maintenance or sustaining engineering is an important part of how we do business. The other 70% to 80% we divide, and this is pretty unique of most companies, where we have deep competencies in instrumentation, in biomarker assays across all of our modalities as well as customer-facing software. And the key is to design upfront. So that it works together that it provides an optimized workflow within a performance category that makes it very simple all the way from sample preparation and management through the end result. And the spotlight how we do this, and how we think about new product development, let me talk about the point of care business. This is over a period of a decade. And over a period of a decade, we've introduced 4 platforms or the fourth one inVue Dx is going to shift later this year. But our Catalyst One chemistry analyzer, which is more than chemistry, it's electrolytes and also immunoacid. 9 additional slides in the last 12 years, SediVue, 5 drops, 3 minutes, 1.5 billion images to provide in-clinic geared sediment analysis. Of course I want for hematology, a breakthrough from an ease-of-use platform footprint and overall value standpoint. And I'll talk about inVue Dx in a minute. But the way we think about new product development within point of care is based on a couple of first principles. Principle #1, from a performance and accuracy standpoint, it should be as good or better than what you get in a reference to. You shouldn't have to sacrifice performance within a category where the diagnostics test is just so important to medical. So we don't introduce a solution unless we believe -- unless we can prove to ourselves that you're not sacrificing performance. The second thing is, it should be really easy to use. There's a big difference between a trained laboratory technician who does sample preparation and management of testing for a living and the veterinary technician within a practice who may be responsible for hundreds of different tests and is not a specialist in most of those. And so having something that you could very simple, plug and go into sample management, I think, is a key attribute. And then we wanted to fit what from an integration standpoint. It's not about creating more work or the same amount of work and pushing it to some place else within the practice. It's really about eliminating work in a capacity in a world. And we believe we do this as a company, exceptionally well and customers reward us with their business as a result of that. In a minute, I'll talk about inVue Dx, but just want to share with you a historic trend line in which we've really grown pretty dramatically over a period of 13 years, where we had a record instrument -- premium instrument placement year. In 2023, we had approximately 19,000 premium as replacement. So just a great result and one in which we're proud of, and you can see that 12% CAGR, which represents this trend line that we've been on inVue Dx. We announced this at VMX in Orlando in January. It's, I think, a perfect representation of what I'm talking about. Very easy to use. We eliminate the slide, which requires 10 to 20 minutes a veterinary technician time upfront, very variable from a technique standpoint, inconsistent reading of results the veterinarian or the technician. So the sample preparation and management piece is truly transformational. The technology itself advanced diagnostics, an AI-driven algorithm that was informed and trained by Board certified experts from the biggest pathology group in the world at IDEXX. And being able to interrogate and interpret cells and intercellular structures in their natural state, not on a 2D slide. So very excited by this. Our additional menu is for high-volume clinical procedures that veterinarians are very aware of today, ear cytology and blood morphology, and then we announced the next part of the menu would be lumps and bumps or fine needle aspirate testing. So more to come on that. As a result of this, just to update the previous chart, we continue to grow our installed base. We see a lot of opportunity in front of us at Investor Day last August, the premium instrument installed base was 218,000 opportunities. You see it's majority shaped within our international geographies. We believe that there's a -- from the point of shipping over a 5-year period is a 20,000-unit placement opportunity. Let me talk a little bit about software, software, some of the magic, which brings our solutions together. We have cloud -- 2 cloud-based solutions that are contemporary that we think are very powerful. EzyVet is more geared towards the enterprise or larger practices, Neo, very simple to use smaller practices but very feature-rich. I would just remind you that as part of our long-term financial model, we talked about 15% plus growth within the software business over the planning horizon that Brian McKeon, our CFO, shared, and you see it over the last 2 years that we've been able to exceed that by appreciable amounts. Our software enjoys or is segmented targeted different segments as an enterprise solution for the bigger practices and corporate groups, which want to operate in a more harmonized way. We're looking for things like a cockpit and underlying analytics with standardized inventory management and care protocols that help them manage practices with hundreds of different places. And then within the individual practices, they're running a small business. And so you see not just things like for diagnostics, like VetConnect PLUS, which is our diagnostics portal, but also VetLab Station and our new solution for pet owner engagement Vello. Vello is something we're very excited by. We just introduced this in front of a Western conference. Vello enables -- I think brings modern tools to the veterinary practice, which in many cases are lacking of them. It integrates, I think, seamlessly and deeply with all of our PIMS systems are easy that Cornerstone and the PIMS systems, it really creates a digital connection with the pet owner in the practice in a bidirectional way. So the important thing here is that the relationship with the pet owner is not just when they come in for that 20-, 30-minute visit in the practice. It's before the practice, where the veterinarian may be advising you, you should bring your dog in and make sure that he's fasted, because we're going to run some tests that require that he hasn't recently. Please remember to bring your fecal sample. And -- so there's a lot of preplanning that could happen administratively in addition to actually being able to book an appointment. Now many of us are used to that in our personal lives, whether we go to a dental practice or you get a haircut, you can do all this stuff online. It's amazing how within the animal health space and veterinary practices, a lot of this -- a lot of these features are there. And then post visit, the veterinarian may want to communicate the results. They want to tell you, I'd like to see you in another 6 weeks or 3 months. There's a lot of communication that today happens at a very administratively heavy way. In fact, practices say that about 15% of their time is on these type of administrative tasks, which tend to be unrewarded, which really consume a lot of time within a practice. And maybe most importantly, the contribution of the impact that this type of pet under engagement software has is on no shows. Veterinary practices will tell you that there's a huge number of no shows that they confronted with. So they're standing around, they're waiting. They think that you're coming in with your Labrador and you don't come in. It's hard for them to repurpose that time and do something else, we'll make phone calls. It's just lost time. So being able to really solve that problem is something that we think is meaningful. So as a result of our business model, the consistent application of our business model and strategy applied against the market that's highly attractive that enjoys many of these long-term trends that I've outlined. We've delivered excellent financial results as a company. As you see over this 2018 to 2023 period, 11-plus percent organic growth on a CAGR basis, operating margins that have grown appreciably, you see 170 basis points that have resulted in a 22% CAGR EPS growth, all generating a very high ROIC of 47.5% in 2023. So let me bring a couple of these together and talk about our long-term financial model. It comes back to the strategy. There's a remarkable opportunity as a company, still before us. We know that diagnostics place is foundational, enabling role in the care equation, which is a central value proposition of our customers. That what customers want are differentiated innovation that solves the most challenging medical and business problems that they have. They want a partnership with a commercial organization who is not just trying to sell them things but are subject matter experts and trusted advisers. And they want a customer experience where things don't break and when things inevitably happen because of the law of physics and we're all human, to somebody that they can talk to, somebody that addresses this in an expeditious way. So we believe that there's a very attractive long-term opportunity of 10-plus percent growth over this planning horizon, 50 to 100 basis points in operating margin expansion. Capital leverage of buying back shares, for example, and result in a 15% to 20% long-term EPS growth potential for the company. And so with that, thank you very much. I know we have a breakout room, and I'm going to -- we're going to take some questions, but I appreciate your time and attention and enthusiasm about the IDEXX business.