All right, guys, great. Next up, we have on stage IDEXX Laboratories, the worldwide leader in animal health diagnostics. Joining me on the stage is the company's CFO, Brian McKeon, down on the left, and Mike Lane, EVP and General Manager, Reference Lab and Information Technology. Long title, hopefully I got it all.
You got it.
Congrats. Thanks, guys, for doing Jaws & Paws again this year. I'm gonna start where I probably get the most questions and, you know, it's around visits. A lot of us can see the data. I'll run some numbers by you. For 2Q to date, the data source that we use has clinical visits, essentially zero, I mean, down 0.1%. I went back, and I looked at this same source has run an eight-quarter average that's roughly 50 bips better than your clinical visit results. So Brian, I guess the good news is, you know, seemingly better than the 1Q 2024 exit rate that you guys talked about, that was down 1.5%, but still below IDEXX's long-term build or LRP that you guys talk about, which is +3%.
You talked about capacity constraints, macro headwinds. Maybe just help us out, you know, is it more one than the other? Has it evolved when we think about those dynamics that seem to be pressuring visits?
Yeah, thanks, Jon. So I think in terms of clinical visits, as you pointed out, that's one kind of contributor to the overall growth equation for the company that's been more dynamic the last couple of years. If I could set some context, we had, you know, historically, 2%-3% in the US same store clinical visit growth for a number of years. During the pandemic, that jumped up to about 5% annually. We went through a transition in the US in 2022, 2023, where we saw a pullback in capacity at the clinics. I think that was a key dynamic.
There was likely some lapping of sort of the puppy boom as well, you know, just in terms of adapting to some of the unusual things that went on during the pandemic period. And we in fourth quarter of last year, we saw a relatively flat clinical visit trends. We knew that we were still working through some of the dynamics with the clinics on just managing staffing and helping them with that aspect of what is an ongoing kind of evolution, I think, for the clinics, just to adapting to the higher level of demand and you know, other things that are going on, just the labor market.
To your point, I think we saw a relatively softer than expected visit trends in Q1 coming out of the quarter, down about 1.5%. You know, I think the staffing continues to be, I think, a constraint to growth. I think that's the right way to think about it, is that it's a, you know, something the clinics are still working through. I think we're engaging actively with them and bringing productivity solutions and trying out new, new innovations that will help manage that over time, and we see a lot of positive factors to point to and just in terms of the optimism around the sector and willingness to invest, that we think will be be helpful over time. There may, there may be a consumer impact here that we're seeing. I think the...
As we've discussed many times, we kinda pay attention to things like wellness versus non-wellness trends. We might expect to see kinda consumer impacts a bit more on the wellness side, just a little relatively more discretionary. I think in the second half of 2023 and into Q1, it's somewhat softer, so I think that could be a factor. And I think the broader theme is our business and the sector is incredibly resilient, but we're not immune to consumer impacts, and there's been a cumulative impact of inflation, I think, on consumers that may be affecting demand.
But net-net, we're, we try to capture that in the near term outlook, and I think, continue to be very optimistic about the longer term view in the sector and, and hopefully we'll see a stabilization of those trends like we expected, in, in the second half of this year.
That was great. That was great color. I think every quarter we do our surveys, and we usually ask the vets if they're optimistic or pessimistic, and most are optimistic. Then we pipe them in, and we say sort of, you know, what's the thought behind that reasoning? And, you know, I'll do something with my hands so no one on the webcast can see. But initially, you know, there were constraints around capacity were sort of front and center, and macro was behind that. And now it seems like it's gone the other way, where, you know, macro seems to be the main headwind. Capacity is still an issue, to be clear but maybe taking a little bit more of a back seat. What's your reaction to that? Do you think that has swapped a little bit over the past 12-24 months?
Just building on what I said earlier, I think, and I think it's pretty much what you're saying. I think staffing and capacity are still a constraint, and I think there may be a macro impact here that we're seeing at the margin. I think the bigger theme is it's an incredibly resilient sector. We're growing well, we're delivering good financial performance, and as we continue to invest, and we're excited about the innovations that we're bringing to the sector, particularly in the you know coming year. And so, against a backdrop where we're expanding instrument placements, and I think our customers are to your point, optimistic on what demand-how demand can evolve over time. I don't know if you want to.
Yeah, let me add a little color to your comment there. As an example, I was in a large veterinary specialty referral hospital last week, but I think it's representative of what we see across the sector. This hospital had a major ER practice, full practice, so growing demand, but a bit constrained in the, you know, in the ER, from a staffing standpoint, two-hour wait. But these pet parents are waiting patiently, and you can just feel the bond that's in the room. And talking to the hospital director, the medical director, you know, they're focused on growing productively. They're using IDEXX point-of-care, you know, real time. In this case, you can picture sick patients, such value of having those results right there in the practice.
But they also use the reference lab as an extension of the practice in terms of some of h elping to manage some of those staffing constraints. And then they've got IDEXX practice management software, bringing it all together. So I think it's representative, and it's, you know, why we're so focused on helping practices with innovations like inVue, with Vello. These innovations that take work out of workflow and make it easier for them to meet this demand at times when they have that constrained staff.
Okay, great. Great color. And guys, as always, if you have any questions, just throw your hand up or even shout out. I'm gonna pivot and do a little bit of, you know, Kate.
Quick comment here. Typically, we see 2 hours would be a really short wait. We're seeing 4, 5 hours, people having to literally come back the next day.
Yeah, there's certainly. So it's 2 hours, but there's some people that leave, right? And this particular hospital tracks that. They may go down the street to a different hospital. This was in a metropolitan area.
What do you see across—obviously, you've got a huge network of hospitals and people that put your product out there. What do you see across that? Is it too typical, or is what we're seeing typical? Always, especially as we heard in an earlier presentation, that's not really one of the work weekends either.
Yeah. I think that, I think that's accurate. I think we continue to see pent-up demand. This is a theme that we've been talking about for a while. I think the key thing we're trying to highlight, there was a dynamic that was going on with a pullback in capacity. I mean, a reduction in hours. I think we've moved past that, but I think.
Saturdays being pulled back.
Right. You know, and that, that was a very thing that we could see in the data. We have access to PIMS data and could see the, you know, the operating hours for the practice. To your point, I don't think that there's been a, you know, the theme hasn't been, oh, that's coming back. I think there is an ongoing kind of management of capacity dynamics and ongoing, you know, management of the staffing in a more challenging environment, and there's a range of kind of how practices are adapting to that. So I think, to your point, we continue to see.
We saw a 10% expansion in the pet population, so we know that there's a lot of pets out there, and they're owned by people that increasingly care about pet healthcare and, you know, have a humanization of their relationship with the pet. So, we definitely see this as a long-term favorable trend, and I think some of this is just helping the clinics to adapt and we're seeing our customers leaning in more here. I think organic volume growth is becoming a more important theme, you know, for practices. I know you're gonna have some folks visiting today to talk about you know, how they're managing their businesses. And I.
If you look at where your position and your point of care solutions and the instrumentation, that's the opportunity, right? The opportunity to circumvent some of these, staff shortages, et cetera, et cetera. So quick question on that is, from the point of care, what initiatives are you taking to train the staff in these places so that they're up to speed as quickly as possible to running it? Because this is a model that we've seen work, in instrumentation businesses that I've been involved in for many years. Actually, not relying on the hospital or, or the staff themselves, but going in there and making sure that, you know, it's, it's a 6-week start, 3-week start.
Yeah, y ou want me to take that?
Yeah, please.
Yeah, yeah, we do that. We do that. A big part of our commercial engagement model are just not sales professionals, but also field support that follows and trains and educates on workflow across the whole point-of-care suite. But it's not just point of care. Testing begets testing, and there's certainly opportunities to help the practice with efficiency, with point-of-care testing, but also utilizing the reference laboratory as an extension. We see that as well, and then bringing it all together with IDEXX software. So we do what we're doing, what, what, what you're describing, but that's, you know, that's the, that's the job, and that's where practices are leaning in and, and wanting us to do more and more of.
That last point is really important, the impact of the software, right? And everybody's talking about AI, this, that, and the other, but the impact of your software in a specific niche to make those things move along quickly and get to those decision points and whether it's enhanced or not, but it right. I think that's-
Yeah. I think it's unique to IDEXX's, approach to the market. We have an integrated business model that. We've been focused on organic growth for decades, you know, and it's with a belief in the long-term potential for pet healthcare. And if you look at how we've approached it, we've been agnostic to in-clinic versus reference lab. We want to support our customers in a way that makes sense for them, and it's integrated with software. We are adding to our capability around the software. You know, we you know, the obviously, the PIM systems themselves, we're a leading cloud-based provider work seamlessly with our solutions. We are wired into the practices, so we're basically able to add innovation to our instrumentations through you know on an ongoing basis. We're providing solutions that are getting at pain points.
InVue, the new solution that we'll be launching later this year is, you know, things like urocytology and blood morphology, or those are common, you know, kind of pain points within the practice that we can help solve. And, you know, we're adding to the capability of the practices to be able to engage with the pet owner and drive engagement with the clinic. So Vello, which is, you know, a pet owner engagement, is a key part of our future software strategy. We're excited about the opportunities that that's gonna bring, and I think when we—most importantly, when we're talking to our customers, we're talking about solving the problems that they're very focused on solving too.
You know, to your point about how they're gonna grow their businesses is gonna be centered on services, and diagnostics is a key part of that. It's the most profitable part of the practice, and so we see this as a win-win, and you know, I'm really encouraged. We saw this significant expansion of demand in pet healthcare through the pandemic, and we're growing off of that. So I think we're learning to adapt and get ready for the next phase of growth in this sector and very excited about how we're getting to.
Thanks. And can we talk a little bit about the guidance cadence, you know, just for this year? So I think, for the Q2 , if I've got it right, the organic revenue growth guidance is about 6%-8.5%, midpoint just north of 7%. 1Q was 6.8%. So, you know, if you look at 1H, you might land around 7%.
That's right.
Okay, full year is 8, obviously implies an acceleration.
Midpoint, midpoint.
Midpoint, pardon me. 8 obviously implies an acceleration in 2H. I think you mentioned there's a days benefit i n there. There will be the launch of inVue, right? That you mentioned earlier. Any other dynamics that, you know, that you wanna call out in terms of what should aid that 2H versus 1H, and the relatively modest acceleration that you have embedded in the back half of the midpoint of the range?
Sure. So, you know, just as a caveat, we're not updating anything today, but just reframing the guidance we discussed in our last call. To Jon's point, our midpoint outlook for would imply approximately 7% organic growth H1 . It would imply approximately 9% H2 . So there's a 200 bips step up. 50 bips, so that is days. You know, that'll be principally in the third quarter. We have some more favorable lapping, second half of the year, Jon, in areas like LPD. As you know, China's been kind of a headwind in that business. We're working through that, targeting higher growth in our, our software business, our recurring software revenue, so that'll be helpful. And, the underlying assumption on the, on the, things like the, the, the, clinical visit growth levels, we're, we're assuming a flattening of trends second half at midpoint, versus the, you know, the down, you know, the down 1.5, you know, that we, that, that we implied for the Q2 . So, you know, those are kind of the bridging items.
W e've captured the new platform launch in our outlook as well. But, you know, it does rely to a degree on an improvement in the underlying sector trend. And, you know, we continue to see positive dynamics supporting that, and, you know, we're positioned to deliver good results, you know, within the ranges that we've talked about. And, you know, while we continue to invest towards the long-term growth potential that we see, we're very optimistic about the future for our business. And, you know, think we're in a good position to build on the momentum that we've had.
Okay. And one of the areas that you certainly have some solid momentum seems to be EMEA. You break out your EMEA and APAC revenue in your filings. You know, APAC, as you mentioned, has been sort of running into headwinds, largely factored by LPD. But I have 1Q 2024 EMEA revenue that was up 14%, sort of another quarter of mid-teens growth, and there's FX in there. At a high level, EMEA seems to be showing some solid momentum. Can you talk about what's driving that? And then, you know, you do give us the CAG DX recurring international, which is below that. So maybe just talk about the dynamic, and this would be specific to DX recurring between EMEA and APAC would be helpful.
Maybe, just in the clarification, I would say that Europe and Asia Pacific were similar in Q1. If you take out FX in both very solid growth rates, and we feel very good about the momentum that we're building there.
Yeah, I would just add, excited about international growth opportunity. Certainly Europe, you know, seven commercial expansions, Jon, in the past four years, so that's, you know, part of it. Part of it is also, really, honing the commercial model that we've fine-tuned here in the US, in EMEA. The commercial team is not only expanded, but you know, has the programs, the multimodality solution. You know, we've matched this with the investment on the lab side, as you know, not just commercial, but also with our investment in Kornwestheim, our largest laboratory in the world, which really forms the hub and spoke core of our European network.
So we've got the lab service capability, we've got the point of care capability, we've got the commercial execution, and I, I think that combines to, you know, just to what you're, what you're seeing.
Okay. In terms of the overall traction, both in EMEA and APAC, within CAG DX recurring. Okay, and I'm gonna pivot a little bit. I, I'm gonna go through the growth algo, and I've got the CFO up here - so I might as well pain you a little bit and go through this process. You know, look, we've done a lot of work on this over the past couple of years, and the CAG DX recurring organic growth guidance this year, so DX recurring is 8.5. The Street's at 10-10.5 next year, 2025. We're Street low, we're 9%, and again, CAG DX recurring organic. So for price, this year, you're taking 5%, which was lower than last year. I would assume your 2025 price increase is likely below this year's 5% contribution.
We just sort of see inflation coming down. I know we've already had some panels today that have talked about pricing, and how it's been pretty rich for the past handful of years. So if next year it's 4%, I'll still be above your LRP of 3%. But if price steps down next year by 100 basis points, and the Street has you accelerating the 8.5% to 10% and change by 150 basis points, you've got to find a 250 basis point accelerant from either visits or the IDEXX premium, in terms of how we define it.
Just walk us through that, Brian, right? I mean, that, the, you know, Street is like, what, what gets you there? What are the drivers? Would one be more the visits than innovation, vice versa, or do you see more of an opportunity, you know, with price being more durable than maybe I'm giving you credit for?
So just in terms of our growth algorithm as a company, longer term, the biggest driver of our long-term growth is going to be driving adoption of IDEXX innovations and expanding utilization. So that is the core driver of the long-term growth that it gets at, you know, the premium that you mentioned. You know, and we're really excited about the momentum that we have on this front. I think our execution has been excellent as we work through, you know, kinda building out this higher growth post the pandemic, and work through some of the clinical visit changes that have gone on. We continue to have excellent net new business gains.
Our retention levels are as high as they've ever been, and we're really excited about the innovation pipeline that we've got coming to market that also supports things like our price realization. Do you wanna talk about some of the innovation?
Yeah, absolutely. We've touched on a few, but maybe I can just add a little color. inVue, you know, very encouraging feedback, you know, from, you know, customers as they're learning about inVue. You know, one thing to keep in mind is, you know, ear cytology, blood morphology, you know, when you're looking through the microscope, that's time-consuming in and of itself, but recognize you're also looking at a slide. So every one of those slides needs to be created in the practice, which is technique intensive, labor intensive. So inVue removes that. It just fits so nicely into the VetLab suite of instruments, with just like ProCyte and Catalyst, load and go. And so it's really encouraging, you know, feedback that we have on inVue.
Brian mentioned Vello, also, you know, to help practices with this client engagement, you know, in supporting clinical visits. Very positive feedback there in terms of significantly reducing no-shows, and then providing prompts, including remembering to bring, you know, bring the fecal sample in, prompts during the visit, follow-ups. So these innovations, you know, just back to that practice that I mentioned earlier, these are the things that practices are leaning into because they don't, they don't want the wait in the ER room, if you're the medical director, to be two hours or four hours, right? They don't want that, so they're really leaning into these technology solutions that we can help them with, and help them grow faster and help them grow productively.
Brian, if I can just go back to, you know, maybe the growth algo or the construct, sort of the A plus B plus C. So sorry, to get to the 250 basis points accelerant that I alluded to earlier, is there one variable? 'Cause I... The way that I look at it is, you have a lot of great innovation that's coming. You have inVue, you got something else. You haven't told us yet, but you got something else. And there's other, you know, ongoing new tests that you're always rolling out. But those really wouldn't be a CAG DX recurring contributor so much in 2025, right, as we've been through this, you know, building.
You build it, build over time.
Yeah, yeah, you gotta build it over time. So if the IDEXX, like, what accelerates the IDEXX premium, if that builds over time, price comes down, premium is flattish, are you sort of, not you or- is the street making this bet on visits being the accelerant to get to the 10-10.5?
I don't know the answer to that. I do know what our focus is gonna be on continuing to expand. You know, we see a long runway for adoption of a premium instrument install base. You know, we had 8% growth year-over-year in placements in the quarter. We've got double-digit growth in our install base globally. You know, that's benefiting from our ProCyte One, our hematology platform, which is expanding at a rapid rate and continued growth in areas like SediVue Dx, and now we'll have a new platform launched this year, and we'll have another platform to follow in the future. So I think we've got, you know, a number of things, as well as ongoing test innovation.
I mean, we'll continue to expand, like, what we can do on that front. And, you know, as we continue to build these relationships with our customers, where we've got an ecosystem that is enabled by e-enhanced insight, DecisionIQ, you know, we're increasingly, you know, leveraging the power of the data that we have access to and our knowledge across the sector to enhance the ability of clinicians to provide services. We're just very excited about our ability to continue to expand.
Sure.
And, you know, I think, Jon, obviously, we're... Our long-term view is that clinical visits are gonna expand. We see, you know, this is a sector that was able to grow, you know, 3% annually, including same store sales. The clinics are adding practices. They're building new practices. In fact, we have specific programs targeted at customers that are doing greenfield clinic expansions that are enabled by our kind of solutions. So we think we're really well positioned to be aligned with that kind of growth and, we see that as a potential positive factor over time. So I think those are, t hat's why we continue to have a long-term view about double-digit organic growth and, you know, something that we're investing towards and earn really good returns when we're able to achieve that, and very, very confident in the long-term opportunity that we have for our business.
That's great. Is there a component that people aren't putting in or maybe you are putting into this? That there is going to be a massive aging dog population based off the COVID puppy boom. That's coming 2025, 2026, 2027. That's got to push your bottom line. That's got to be in there.
We highlighted this in, trying to recall. I forget dates now. 2022, I think. When we saw the initial boom, I think we added 50 bips to the long-term growth rate, which was static, by the way. It was assuming the same kind of behavior that doesn't assume that you know, testing increases. It's sort of like if everybody tests the way they do today, over time, that should be a tailwind to your point. And I think there, I'd add another dynamic to it, is pets are living longer. So it isn't just that they're, the existing pets are gonna, there's sort of a, you know. I don't know what the analogy is, the rat through the python kind of thing.
We'll see this puppy boom play out over time, but with enhanced care and capabilities, enhanced therapeutics that you'll hear about today, you know, the quality of pets' lives is improving, and they're living longer, and there's a lot more diagnostic testing as they get older. So I think those are longer-term tailwinds, you know, for us, and you know, we're trying to lay the foundation that will enable us to be really well positioned to help, you know, our customers grow when that plays out over time.
And Brian, just to shift over to innovation, you have a lot going on there. Maybe just for inVue, we should think about an overlap of a SediVue practice having a greater likelihood to be your early adopter of inVue. Is that a fair statement to make, you know, when we're kicking the tire?
Well, it's certainly a testing category that's solving a pain point in the clinic, and I think we would usually see, I think, early adopters being customers that are bought into the.
Exactly
In-clinic solutions and willing to lean in on that. I think to Mike's point, there's very positive feedback 'cause this is such a common... These are common use cases that people can—there's a direct line here. So I think, and I'd add that I think our commercial capability is, you know, as good as it's ever been, even stronger than it was when we had a SediVue, you know, launch. So I think it'll, you know, have the kind of capabilities that we've been able to leverage the cloud connectivity, and we'll be able to add to the testing menu, you know, as we launch.
Definitely over time.
So, I think it's. Yeah, we'll play that out. We point to SediVue Dx as an example of how these things build, and I think that's a pretty good example, but yeah.
O ne more, and then I want to leave time for the last, you know, or the next system. I always get tripped up on this a little bit. Will we sort of see, running through the P&L, a realized ASP of $13,000-$15,000? I mean, your instrument placements have been so strong, but sometimes you could have a lower realized ASP because there's, like a, an upgrade or an international that might carry a lower ASP. When we all sort of do our work, and we're getting to inVue adopters, do we sort of see that translating on the P&L of a realized ASP of low to mid-teens in that regard?
Yeah, we'll, we'll get more specific with those assumptions as we get closer, but I think, you know, there'll be an instrument revenue, obviously, component of it, and most of that gets recognized up front. And, you know, the bigger story here is going to be, there's a building new stream of recurring revenue, and even more importantly, it is another point of dialogue with the clinic to talk about, you know, adopting the IDEXX ecosystem and working with all our solutions. As you might imagine, salespeople are going to be quite excited about having something new to talk about, and, you know, Mike runs our reference lab business.
The lab business is excited about engagement with the customers on a new platform because we do 360 agreements that expand our reference lab business. So I think we're... These are kind of things, to your point, that build over time. Kind of that's the nature of our business model, and so we'll look forward to sharing more on that and, you know, as we advance our thinking.
Okay, and in the 2-3 minutes that we have left, the next point-of-care system, you know, a few details to date, other than it exists. It will be incremental to the current point-of-care suite. There have been some thoughts, and we actually had a doctor up here earlier who alluded to a new system that might be a point-of-care screening tool for cancer diagnostics. You know, it carries this, like, massive theoretical TAM associated with it, but maybe you can talk to what went wrong for other offerings that have been in the market to date. You know, we saw PetDx. You had an agreement with them, and then unfortunately, they've had to shutter. There's a Volition test, Nu.Q, that I think's gotten some mixed results. So maybe there is this massive TAM, but why have the current offerings arguably stumbled, and what has been some of their challenges?
On the cancer, cancer Dx side? Yeah, yeah, let me add a little bit of color. You know, we say cancer, but you know, cancer is complicated, and it's multiple diseases and conditions, and you know, and sadly, it's the leading cause of death for dogs. So Jon, to your point, I think there's a lot of focus on how do we bring earlier stage testing capabilities, and you mentioned a few of those. You know, IDEXX is already a leader in cancer diagnostics when you look at clinical pathology, anatomic pathology, radiology. These are advanced consulting services that we provide to practices about 1.5 million cases a year that we're supporting these suspected or cancer cases.
But it's late stage, you know, it's later stage, and so what you see is, you know, focus on innovation, and I think this is an area, certainly where IDEXX will continue to focus on innovation to, you know, support the practitioners, whether it be general practitioners or specialists, with bringing that earlier. 'Cause we know if we can, detect cancer sooner, the outcome certainly will be better. So, I think it's a, you know, exciting area in the sense that, you know, we and others are focused on it, and we'll continue to innovate to, you know, help patients and practitioners in this area.
As someone who runs a reference lab, I mean, why is this a point-of-care test and, and not a reference lab test in that regard? I mean, you always hear about greater accuracy, better sensitivity, specificity, you know, at the lab relative to point-of-care. Why would this be a point-of-care test?
Well, you may know, I ran the point-of-care business for 15 years as well. So, you know, so what we've done over time is bring reference lab accuracy to the point of care. You see that with inVue, you see that with ProCyte, you see that with Catalyst, and so it's a high bar to bring that to the point of care, but because we're in both modalities, we know how to do that. And then we also, you know, bring these together because practitioners, they wanna use both. They wanna use both. You may have, you know, that, back to that emergency practice, point of care, real-time results, you know, it's essential. But you may need more comprehensive results, you know, from the reference lab.
Alternatively, you may start with a preventive care panel at the reference lab, and then you're gonna monitor something ongoing, because one in four preventive care panels, something's discovered, something discovered more. So it's a, it's a combination, but it's about bringing refer, and, I think to your question, these are reference lab quality platforms. For example-
That's occurring at the point-of-care.
For example, inVue to the point-of-care.
Okay, and so maybe just to conclude, when we look at those tests that were out there that arguably haven't gained a lot of traction, would the thought be, and I'm oversimplifying, but maybe the PetDx price point was a little high, the Nu.Q sensitivity specificity could be improved. There's this gap in the market where IDEXX can go ahead and capitalize that between maybe more cost effective, better accuracy, and then there are somewhat-
Well, in general, you know, diagnostics is certainly a performance category, so what you described in terms of, you know, specificity, you know, sensitivity, what have you, on a given diagnostic, not just cancer, is, you know, is essential and, you know, and price point is important as well. You know, and certainly, to get this early stage, you really want it part of the preventive care, panel, right? You want that in the screening panel, so price point is important as well.
Okay. More for you, but we've got to stop there. As always, guys, I really appreciate it. Thank you.
Thank you, Jon.
Thanks, Jon.
Okay. Thank you.