Earnings Call: Q1 2021

May 4, 2021

Good morning, welcome to the IDEXX Laboratories first quarter 2021 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the Forward-Looking Statements notice in our earnings release issued this morning, as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations sections of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. These include comparable gross profit growth, comparable gross margin gain or growth, comparable operating expense growth, comparable operating profit growth, comparable operating margin gain or growth, and comparable EPS growth. These non-GAAP financial measures exclude the impact of changes in foreign currency exchange rates and non-recurring or unusual items, if any. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations website of our website. In reviewing our first quarter 2021 results, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent period in 2020, unless otherwise noted. During the question-and-answer session, if you have a question, please press star then 1 on your touch-tone phone. To allow broad participation in the Q&A, we ask that each participant limit their questions to 1 with 1 follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon. Good morning, everyone. I'm pleased to take you through our first quarter results and to provide an update on our financial outlook for 2021. In terms of highlights, IDEXX delivered excellent financial results in Q1, driven by continued strong global momentum in our CAG business. Revenue increased 24% as reported and 21% organically, supported by 23% organic growth in CAG Diagnostic recurring revenues, reflecting continued high gains across U.S. and international markets. Operating profit gains were particularly strong in Q1, reflecting flow-through benefits from high CAG Diagnostic recurring revenue growth and favorable comparisons to relatively higher prior year pre-COVID operating expense levels. These dynamics and a higher than expected $0.17 per share in stock-based compensation tax benefit enabled delivery of $2.35 in earnings per share, an increase of 73% on a comparable basis. Our strong start to the year has increased our confidence in achieving high revenue and profit gains in 2021. We're raising our full-year revenue group outlook range by $40 million to $3.105 billion-$3.160 billion, or reported revenue growth of 14.5%-16.5%. This reflects an updated outlook for 13%-15% overall organic revenue growth, 1.5% higher than our initial outlook. We're raising our organic growth outlook for CAG Diagnostic recurring revenues to 14.5%-16%, 2% higher at midpoint than our initial 2021 growth projections. Our full-year financial outlook now reflects a targeted 150 to 200 basis point improvement in operating margins on a comparable basis. These gains are projected to support EPS of $7.88 to $8.18 per share, reflecting 21%-26% comparable EPS growth. We're planning to deliver these strong profit gains while advancing investments in our innovation and commercial capability to enable long-term accelerated global market development in our core CAG business. We'll discuss our updated 2020 outlook later in my comments. Let's begin with a review of our first quarter results and recent market trends. First quarter organic revenue growth of 21% was driven by 23% gains in CAG diagnostic recurring revenues, reflecting 21% growth in the U.S. and 28% growth in international markets, including some benefits from the lapping of prior year COVID-19 impacts in late March. Strong CAG gains also reflected 27% organic growth in CAG diagnostic instrument revenues. Overall, Q1 organic revenue gains were supported by 9% growth in our LPD business, reflecting strong demand for African swine fever testing in China, as well as by approximately 1% of growth benefit from our OPTI SARS-CoV-2 RT-PCR test initiative. The key driver of our financial model, CAG Diagnostic recurring revenues, expanded at high growth rates across regions through the quarter. First quarter results were largely consistent with the very strong 2-year growth trends we saw in the second half of 2020. On a 2-year basis, CAG Diagnostic recurring revenues increased at a 70% average annual organic growth rate. We'll be highlighting 2-year growth trends selectively in the coming quarters as we calibrate the effect of year-over-year lapping of 2020 COVID impacts on our growth results. High CAG Diagnostic recurring revenue gains were aided by continued high growth in clinical visits. Overall, U.S. clinical visit growth was 12% in Q1, including some benefits from the lapping of prior year COVID-19 impacts in late March. On a 2-year basis, same-store clinical visit growth increased at an average 6% annual rate, slightly higher than our second half 2020 trends. The IDEXX U.S. CAG Diagnostic recurring revenues growth premium to U.S. clinical visits was 900 basis points in the first quarter, or approximately 1,000 to 1,100 basis points adjusted for equivalent day effects. Q1 U.S. clinic visit growth reflected sustained strong 9% growth in non-wellness visits and an increased 16% growth in wellness visits. These gains were supported by relatively higher benefits from growth in new patients, which we estimated added approximately 3% to overall clinical visit growth and 4% to wellness visit growth in the quarter. A continued focus on expanded pet healthcare services, including increases in the utilization of diagnostics, supported a 15% same-store increase in overall veterinary clinic revenues in Q1 and a 21% same-store increase in diagnostic revenues per practice, well ahead of 5% growth in overall visits to veterinary clinics in the quarter. Positive market dynamics, benefits from IDEXX commercial initiatives and technology to support higher standards of care and continued very high customer retention rates drove strong Q1 organic revenue gains across our major testing modalities globally. IDEXX Global Reference Lab revenues increased 22% organically in Q1, reflecting 20%+ organic gains in U.S. and international markets. Our international reference lab gains benefited from strong growth in Europe, supported by our new German core lab capability, our expanded commercial presence, and growth in IDEXX 360 program agreements. Global reference lab gains continue to be driven by high same-store volume growth with strong gains across testing categories. IDEXX VetLab consumable revenues increased 26% on an organic basis in the first quarter, reflecting continued 20%+ growth in the U.S. and 30%+ organic gains in international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium instrument install base. CAG instrument placements increased significantly in Q1 compared to constrained prior year levels as clinics look ahead to supporting high growth and demand for diagnostics globally. Total premium placements increased 32%, reflecting 26% gains in North America and 36% growth in international markets. The quality of CAG instrument placements was excellent, reflected in 302 Catalyst placements at new and competitive accounts in North America, up 27%, and 805 new and competitive placements in international markets, a year-on-year increase of 15%. We also benefited from 464 second Catalyst placements driven by continued strong demand from high-volume customers. These new placements and high customer retention levels supported a 13% year-on-year growth in our global Catalyst install base. We achieved 956 premium hematology placements, including our initial shipments of ProCyte One, supporting a 10% growth in our global premium hematology base compared to Q1 of 2020. We also placed 577 SediVues, including strong placement levels at international markets leveraging IDEXX 360 agreements, which supported a 21% year-on-year global increase in our premium urine sediment install base. We're very encouraged by the momentum we're driving expanding our in-clinic install base as we prepare for continued improvement in sales access to veterinary clinics globally and advance the global launch of ProCyte One. Rapid assay revenues also expanded at a strong 20% organic growth rate in Q1, reflecting mid-teen gains in the U.S., supported by high demand for wellness testing and accelerated growth in international markets. Of note, retention rates for U.S. rapid assay customers reached 97% in Q1, the highest level seen since the initiation of our U.S. go-direct efforts in 2014. Overall, high CAG Diagnostic recurring revenues growth remains primarily volume-driven across our modalities with consistent overall net price gains of 2%-3%. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 9% organically overall. Double-digit gains in recurring software and digital imaging service revenues and solid growth in new software system placements were moderated by lower diagnostic imaging instrument revenue levels, impacted by a year-on-year reduction in earlier generation instrument platform sales. Turning to our other business segments, water business revenues declined 3% organically in Q1 compared to strong prior year results, which included an estimated $2 million or 8% growth benefit from accelerated stocking orders. Adjusting for these impacts, water revenues increased solidly year-on-year as we continue to see relative improvement in non-compliance related testing volumes that have been constrained during the pandemic. Livestock, poultry, and dairy revenue increased 9% organically in Q1, driven by growth in our Asia-Pacific region. Q1 results saw approximately $2 million in favorability from shipment timing, which largely offset favorable shipment timing impacts of Q1 of 2020. LPD results benefited from strong demand for diagnostic testing programs for African swine fever and growth in core swine testing volumes in China, supported by large producer efforts to rebuild swine herds. These gains more than offset lower herd health screening levels compared to strong prior year results. We expect to see some pressure in our LPD revenue growth rate moving forward, particularly in the second half of this year, as we begin to lap the benefits from high prior year demand for our African swine fever testing programs and see increased levels of local competition in China. Turning to the P&L, we had strong profit flow-through in Q1 as we benefited from high CAG Diagnostic recurring revenue gains and comparisons to relatively higher pre-COVID operating expense levels in the first quarter of 2020. Overall, operating margins expanded 830 basis points year-on-year on a comparable basis, driving an increase in operating profits of 72% as reported and 65% on a comparable basis. Gross profit increased 31% in Q1. Gross margins increased 320 basis points on a comparable basis, reflecting productivity improvement in our lab operations, supported by higher organic revenue growth, favorable impacts from strong consumable sales, and benefits from moderate net price gains. We're planning for gross margin gains to moderate over the balance this year as we lap tightly controlled prior year spending levels and increase reference lab staffing to support higher revenue growth and service levels. Operating expenses in Q1 increased 4% as reported, and 3% on a comparable basis. As noted, operating expense growth was moderated by comparisons to higher prior year pre-COVID-19 spending levels, including much higher prior year first quarter travel, trade show, and sales meeting costs. Our 2020 financial outlook includes expectations for an increased rate of OpEx growth moving forward as we lap comparisons to controlled prior OpEx levels and invest to support our strong global growth momentum through enhancements to our commercial and innovation capability. We're also planning for year-on-year increases in costs in key areas such as employee healthcare claims and travel costs as we work through the year and pandemic-related restrictions are eased. Q1 EPS was $2.35 per share, including benefits of $15 million or $0.17 per share related to share-based compensation activity. On a comparable basis, Q1 EPS increased 73%. Foreign exchange added $10 million to operating profits and $0.09 to EPS in Q1, net of approximately $2 million in hedge losses. Free cash flow was $104 million in Q1. On a trailing 12-month basis, our net income to free cash flow conversion rate was 99%, including benefits from delayed capital spending and extension of tax payments. For the full year, we're maintaining a consistent outlook for free cash flow conversion of 80%-90% of net income. Our balance sheet remains in a very strong position. We ended the quarter with leverage ratios of 1.0 times gross and 0.6 times net of cash, with $350 million in cash and no borrowings on our $1 billion revolving credit facility. We reinitiated share repurchases in Q1, allocating $154 million in capital to repurchase 305,000 shares. Turning to our 2021 full-year outlook, we're increasing our projected ranges for overall revenue growth to 14.5%-16.5% as reported. This reflects a 150 basis point increase in our projected organic revenue growth range, offset by approximately $5 million in refinements to our FX assumptions, which now point to a positive 1.5% full-year growth benefit this year at the rate shared in our press release. Our updated overall organic revenue growth outlook of 13%-15% reflects an estimated organic growth range of 14.5%-16% for CAG Diagnostic recurring revenue. As noted, we've raised the CAG Dx recurring revenue growth outlook by 2% at midpoint to reflect our strong Q1 results, trends that point towards a sustained high rate of U.S. clinic visit growth, and confidence in our global CAG commercial execution, which is driving strong momentum in our international regions. As a benchmark, our updated recurring revenue growth outlook aligns with the higher end of our earlier projections for 2%-5% same-store U.S. clinical visit growth for the full year 2021 and an expected premium of IDEXX's U.S. CAG Diagnostic recurring revenue growth to clinic visit growth of approximately 900 to 1,000 basis points. The increase in our CAG Diagnostic recurring revenue growth outlook, which results in over $50 million of operational revenue upside, is being moderated by relatively more conservative full-year projections for IDEXX human COVID testing. We estimate that we'll see approximately $10 million in lower human COVID revenues year-over-year in the second half of 2021 as we lap the benefits of our prior year initiatives and plan for moderation in testing levels. We've also moderated our outlook for LPD growth to reflect increased local competition in China, including in our African swine fever testing business. Combined, these effects result in a 0.5% headwind compared to our earlier overall 2021 organic growth outlook. Given the lapping of prior year COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter, with continued expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're now targeting 150 to 200 basis points of annual comparable operating margin improvement in 2021, up 100 basis points from our initial outlook. This is reflected in a reported operating margin outlook for 2021 of 28.3% to 28.8%. Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide $0.15 of positive EPS benefit in 2021, net of established hedge positions. Our full-year outlook also includes an updated estimate of $0.19 per share of tax benefit related to share-based compensation activity, $0.09 per share higher than our initial projections. We've provided details on our updated estimates in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments. Thanks, Brian, and good morning. IDEXX had an excellent start to 2021, driven by continued strong market trends in our core CAG business and strong execution. This resulted in 21% quarterly organic revenue growth in the first quarter and high profit flow through, supported by 23% organic growth for CAG Diagnostics recurring revenues. There were strong gains across all our market segments. Our business performance reinforces the tremendous long-term opportunity we see to develop the global market for companion animal healthcare and gives us confidence to raise our 2021 outlook to deliver 14.5%-16% organic growth for CAG Diagnostics recurring revenues and 21%-26% gains in comparable EPS growth. Today, I'll provide an update on the trends we're seeing in our companion animal markets and our approach to drive accelerated market growth, leveraging IDEXX innovation to raise the standard of patient care. I'll also provide an update on our product and commercial initiatives that will enable us to capitalize on market tailwinds and position the company to deliver continued strong financial returns. Let's begin with an update on market trends. Companion animal healthcare continues to see strong global market momentum. This is reflected, for example, in U.S. market data showing higher growth in clinical visits and continued high growth in services, supported by expanded utilization of diagnostics. As Brian highlighted, we saw continued high U.S. clinic visit growth, up 12% in the quarter, with non-wellness visits up 9% and wellness visits up 16%, with strong growth seen across practices of all sizes. New patients continued to be a significant contributor to clinical visit gains. We estimate that new clinical patients added approximately 3% to overall clinical growth versus Q1 2020, up from 1%-2% in the second half of 2020. We continue to see record levels in progesterone testing, evidence of a continued step up in breeder activity. The growth in puppies and kittens and continued evidence of the deepening of the pet owner bond, augmented by the growth in new pet parents, can provide long-term tailwinds for our business. As a benchmark, we estimate that the average annual diagnostic revenue per senior or geriatric pet is double the amount we see per pet for puppies and kittens. If we do our job well with programs like Preventive Care, we can help to drive twice the level of annual visits in young, well pets and continue to expand diagnostics usage through life stages, thereby helping advance standards of care. In looking at our U.S. market data, we've seen an acceleration in the utilization of diagnostics. In our earnings snapshot, we shared annual data for the percentage of 2020 clinical visits, including blood work. The percentage of clinical visits with blood work increased approximately 1% to 18% in 2020, double the historical rate of annual increase. Interestingly, the highest increases were in customer deciles doing more testing. With gains across wellness and non-wellness blood work utilization, reinforcing the point that even the highest users of diagnostics have significant potential for further growth. An increased focus on services and adoption of higher standards of care in areas like diagnostics are driving very strong overall growth in veterinary clinics. In the first quarter, same-store total practice revenues increased 15% versus the same quarter last year, reflecting a 19% growth in clinical revenue per practice and 21% growth in diagnostics revenues. Clearly, our customers are extremely busy. It's not surprising that they are looking for help from partners like IDEXX to support their high levels of business growth through our customer-centric solutions offering. We're particularly pleased with our commercial execution to support these customer needs, evidenced by 32% year-over-year growth in premium instrument placements globally, including strong growth in placements at new and competitive accounts. A key area of focus has been leveraging our integrated direct go-to-market model to accelerate international growth. We achieved 28% CAG Diagnostics recurring organic revenue growth internationally in Q1, with strong gains across all our major regions, while driving a 36% year-over-year increase in premium instrument placements outside of North America, despite continued restrictions in sales access to clinics. IDEXX 360 continues to gain traction internationally, resulting in higher growth with customers leveraging IDEXX technology across modalities. IDEXX 360 is helping to accelerate growth in our international reference labs in key markets like Europe, supported by our state-of-the-art new core lab in Kornwestheim, Germany, and our expanded commercial presence. The international commercial expansion efforts we've highlighted continued to progress to plan, with the goal of completing onboarding of new sales teams in key markets in the first half of 2021. The outstanding growth momentum and long-term potential for IDEXX in international markets reinforces the high return from investments in our global commercial capability. Advancing international commercial expansions will continue to be a key strategy. Innovation is another key pillar in our growth strategy. In late March, we reached an exciting milestone when we began shipments of our next-generation hematology analyzer, ProCyte One. I'm very proud of the extended team, including our Westbrook, Maine-based instrument manufacturing personnel, for delivering this world-class analyzer on schedule during a pandemic. To the delight of our customers. Our first sales and installations were to U.S. clinics that participated in our customer experience trials, which is a testament to their highly positive experience with the analyzer. ProCyte One's exceptional simplicity and accuracy give our customers confidence in running the analyzer and in the patient results. This is helping to gain efficiencies in practices and is truly a best-in-class experience. ProCyte One also represents the next step for IDEXX in providing leading-edge technology integrated with information management, which enables clinical decision support and supports a wide range of veterinarian partners in providing the highest levels of care. We expect ProCyte One to drive CAG growth as chemistry and hematology testing go hand in hand and as part of the IDEXX 360 program to help drive reference lab usage. This quarter, our commercial focus for ProCyte One is on shipments to the clinics that took advantage of our pre-sales program, while concurrently manufacturing and building volume to support our sales ramp through 2021, including the international rollout expected to begin in late Q2, early Q3. The SnapPro instrument is another investment in innovation that supports our customers at the point of care by providing workflow benefits, accurate reading of diagnostic results on the SNAP platform, and Smart Service connectivity. Our veterinary partners are busier than ever, providing ease of information management within the practice is a key benefit to help them save precious time while maintaining accurate records. SnapPro provides a tool to address these needs, has helped drive recent growth internationally for our rapid assay business. We see high engagement from international customers who are actively using SnapPro and are connected to Smart Service, with growth and retention rates consistent with trends across U.S. customers. We're also making excellent progress in expanding our installed base in key geographic markets like Europe, which helped to drive 20% organic growth in global rapid assay revenues in the first quarter. Our innovation agenda is also driving favorable business performance for our software portfolio, which had another excellent quarter. Record-breaking worldwide PIMS placements in the quarter grew 43% versus Q1 of last year, with 2 out of every 3 PIMS placements driven by cloud-based technology. IDEXX Web PACS saw double-digit growth in subscribers, including improvements in customer retention levels to over 96%. We received consistent praise from subscribers about usability, value, and support of the Web PACS system. Important feedback as we look to expand this product into new markets. These integrated offerings together create a diversified technology stack that provides multiple customer benefits to help manage the growing productivity demands of veterinary clinics in a high-growth market. Through our PIMS and tools like SmartFlow, our focus is on improving clinic workflow by seamlessly connecting data between devices to streamline every step from patient admission to discharge. By bringing AI capability to tools like Web PACS, our platforms enable faster procedures while leveraging data to deliver insights and reduce efforts by clinic staff. Extending to the client, our communication applications are more compelling than ever, with clinics managing a significant portion of visits curbside. Connected software is critical for clinics in creating capacity to meet the increasing demands for veterinary services. IDEXX is uniquely positioned to serve customer needs in this area, enhancing our value proposition and differentiation. In terms of our key initiatives, we continue to promote the advancement of preventive care and annual wellness testing through the IDEXX Preventive Care program. In addition to increasing the standard of patient care, preventive care programs can help veterinarians improve practice capacity through more predictable schedule and level loading of practice staff. In the first quarter, the commercial team executed over 200 new enrollments, bringing total enrollments to over 5,000, which is an exciting milestone as we are more than halfway to our goal of 10,000 enrolled customers in the U.S. by 2024. As our customers enter the wellness testing season and wellness visits accelerate in the market, we are focused on continuing to capture the underdeveloped market opportunity in vector-borne disease testing. There are significant long-term opportunities to expand vector-borne disease testing in particular, given the current prevalence of heartworm-only testing in the U.S. Shifting this balance to a full vector-borne disease screening using 4Dx Plus not only enhances the standard of care, it represents a material opportunity for clinics to drive additional revenue. This focus and strong underlying market trends helped to deliver double-digit revenue growth across all regions, led by increases in utilization of 4Dx Plus in feline retrovirus tests. As we look ahead, we're very excited about the opportunity to leverage our commercial capability, innovation, and partnerships with our customers to build on our strong growth trends. A key area of focus for us is to continue to invest in the infrastructure necessary to meet high levels of growth while maintaining top-notch service levels and prioritizing support for our workforce. Our employees and customers have shown high levels of adaptability and resiliency during continued COVID-related restrictions, and we look forward to a post-COVID-19 environment. We anticipate more flexibility in the future and leveraging new ways of working together with our colleagues and customers. I'd like to add that I'm extremely proud of the way that the IDEXX team is executing. We're on track for a strong 2021. That concludes my opening remarks. We now have time for some questions. Thank you. We'll now begin the question and answer session. If you have a question, please press star then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, please limit yourself to 1 question and 1 follow-up. If you do have further questions, please re-enter the queue. Our first question is from Michael Ryskin from Bank of America. Hey, thanks for taking the question and congrats on the strong quarter, guys. To start, I want to ask on, I want to focus on some of the OpEx side of things. Obviously, a great quarter here, and on the margin side, coming out of COVID. Brian, Jay, you both had comments in your prepared remarks sort of on how to manage spend going forward, both from the fact that you're going to be lapping some easier comps, but also that you want to invest into the growth in the business. I think you mentioned, you know, adding on some staffing on the Reference Lab side. Could you expand on that a little bit? Is there anything on the CAG field-based personnel? Just sort of how should we think about, you know, reinvesting some of the gains in the business to support the growth for the rest of the year? Mike, why don't I start by just kind of framing the comparisons that we're trying to highlight as we move forward, 'cause that's a key dynamic we're just trying to reinforce. Clearly, we had very strong profit results in Q1. We are gonna start entering a period here where we're gonna be comparing ourselves to kind of the controlled spending levels that we implemented last year. If you recall, we had $25 million of OpEx savings that we highlighted last 2nd quarter, another $5 million of savings from lower healthcare costs. We really in the earliest stages of the pandemic, tried to be very mindful of how we're controlling labor costs in areas like the labs. We're just trying to highlight as we move forward, we're gonna see, you know, some of those comparison effects moderate the margin gains, the gross margin gains, and we'll see relatively higher OpEx growth. Again, as a benchmark, just in Q1, we had over $7 million of cost reduction year-over-year from things like lower sales meeting costs and T&E, which is about 7% of OpEx growth. Moving forward, we won't have those kind of favorabilities, so we're just trying to highlight that. We're also trying to highlight that we're advancing investment in the business, so maybe Jay can talk a bit about that. Yeah, sure. Just a couple things to build on Brian's comments. Obviously, we're in a high-growth environment, and there's you know, excellent opportunity to continue to support that growth. We do that obviously in areas like reference labs and in production, in field support. The other area of opportunity for us is just our international markets. We've identified this as being very attractive, and we continue to advance our expansions where it makes sense. We know that there's pretty good short-term return on those expansions. We have, I think, really optimized our ability to, you know, identify all the right pieces you need to have in place, including additional field personnel, reference labs, information technology investments, those type of things. We're very optimistic about the opportunity, short term and longer term in our markets, U.S. as well as international, and we'll continue to advance those as we see opportunities before us. Great. Thanks. If I could throw in a follow-up, sort of on some of the underlying figures you provide for market conditions. As always, the snapshot's very helpful in terms of visit growth and rev growth for practices. I'm just curious, you know, looking at it in one more granularity, it seems like you're actually seeing continued acceleration from 4Q, you know, both on a raw numbers basis and even if you adjust for some of the comp. I think, I guess I would say that we were expecting a little bit more moderation and maybe a gradual phase as you go through the year, but it seems like there's markets sort of come out from COVID-19, and we're seeing some reopening of the economy. Just wondering if you could talk about sort of the underlying trends there. I would say, overall, Michael, the theme would be more consistency than change. What we saw in 2020 was an improvement, if you break down the drivers of things like CAG Diagnostic, revenue growth in the clinic. We saw higher levels of contribution from frequency and utilization, and those have sustained. If there was one thing that The clinical was up about 100 basis points, so I think some of the effect of the new puppies and kittens helped. You know, adjusting for that, the two-year growth rates were largely with Q4. It was more consistent change. We're entering a period now where we'll have the COVID compares, you know, you know, the growth rate number a little tougher to follow, so we're trying to highlight some of the 2-year trends. I think we're encouraged that the 2-year trend factored into our outlook for the balance of the year. To add to that, Michael, the trends we described, the broader level trends we've described have largely been intact. These are obviously new clinical business growth driven by new patients, the majority of which are puppies and kittens, higher usage and intensity of diagnostics and more of a pivot to services by the veterinarians. Those that we have seen over the last, you know, second half of 2020, we continue to see in Q1. One thing I'd highlight in addition to the market trends is, in terms of IDEXX's execution, our international teams are really doing an excellent job. We had excellent instrument placements, you know, growth in IDEXX 360. I think the global commercial model that we've been looking to leverage and build is really in a good place, and we're very pleased with the international momentum. Our next question is from Erin. Great. Thanks. You gave some incremental charts in the snapshot this time where the percentage of clinical visits, including the blood work, increased. That seems like an acceleration from the prior trends you've been seeing on an annual basis. Was this driven mostly by the greater proportion of acute visits during this pandemic, and how should we be thinking about that acceleration continuing with potentially greater adoption of preventive care measures as well as other initiatives in a post-pandemic world? I'll make a couple comments about that, Erin. The use of blood work has the growth rate has approximately doubled as we talked about 1% in 2020 and versus about a 0.5% the previous year. There's a number of things that are driving that. We've seen a greater proportion of the higher users of diagnostics continue to increase, and we see that very optimistically as evidence that even those who are at the higher range from a decile standpoint of diagnostic users feel like there's a lot more capacity. We also see as part of clinical visits, greater use of diagnostics, and then when they use them, greater intensity has also gone up. All those factors are playing into it and they've stayed 3-plus quarters. Okay, great. On ProCyte One, can you provide an update on traction there? Do we anticipate that accelerating further, and how is that tracking relative to your internal expectations at this point? Yeah. We're very excited and optimistic about ProCyte One. It's been a very successful rollout. These things, there's a time and dimension to these, you know, as we roll out a new analyzer in terms of building volume in production, create awareness in the marketplace. You know, the exciting thing about ProCyte One is the opportunity itself is very significant. We think that there are 100,000-plus opportunities for placements in the hematology market. There's also a nice multiplier impact where there's hematology, there's chemistry, so we tend to place those together. There's, as part of IDEXX 360, there's pull-through in terms of, you know, the reference labs and rapid assay, not just in the US, but internationally. The We're excited by the opportunity. I think our experience, our customer experience trials have given us a lot of confidence that the analyzer has hit the mark, both in terms of usability and performance, and we expect our ramp to grow throughout the year and especially so internationally as we release late Q2, early Q3, depending on things like regulatory approvals. Great. Thank you. Our next question is from Jon Block from Stifel. Thanks. Good morning. Maybe 2 questions from me. Brian, the first 1's a little long, both for you, I think. The level of year-over-year gross margin expansion, I think you said you expect the year-over-year level to moderate, but just to be clear, does it stay in this, you know, low 60% range? On the balance sheet, the leverage, I think you called that at 0.6 in net. That might be the lowest level I can remember since you came in as CFO and started to flex it a bit. You've got a couple of big CapEx build-outs that's now behind you in Germany and Westbrook. Just maybe if you can comment on how we think about cap deployment going forward, I've just got a quick follow-up. On your first question on gross margin, we're seeing a really nice flow-through and obviously the high CAG Dx recurring mix and just the strong growth is helping. We do anticipate, John, we're gonna be adding back some costs here to keep up with the growth, particularly in things like lab staffing, and then we'll have, you know, some compares just to the, to the, as I mentioned, on a year-over-year basis. We're still anticipating a high level of gross margin flow-through, and that's factored into our, into our outlook. On leverage, you're correct. We've, you know, we're last year in terms of pausing share repurchases and really controlling our capital spending. Our capital spending on an annual basis was below kind of the normal levels that we'd typically have, and we deferred some projects and we'll see a step-up in that as we move forward. Not a change fundamentally in our long-term view, but just, you know, catching up on some of the deferred capital spending. Right now we're just signaling maintaining the kind of net leverage ratios that you see. We did initiate buybacks in Q1 and feel good about sustaining those. Not trying to signal any change to the leverage profile at this point. Okay. Got it. Very helpful. You know, huge quarter, but we got to try to anticipate some of the potential pushback, and the only thing that I can try to identify is, you mentioned the 900 basis point U.S. CAG recurring premium to clinical visit growth. You know, that's down from the 1,600 and 1,200 premium in 3Q and 4Q 2020 respectively. I think you said they adjusted, it was closer to a 1,000 or 1,100 basis points. Any thoughts on why that slight moderation, you know, Jay Mazelsky, maybe in light of the vets, as you mentioned, still focusing a lot more on services at their practices. How do we think about the premium going forward? Is it still in that 1,000 basis point range? Thanks, guys. Yeah. You know, John, there's always a little bit of variability from quarter to quarter. We think that 900, you know, plus, you know, premium is what we've seen over the last, you know, last quarters in 2020, and we think that that is sustainable. I think it's a reflection of a couple different things. Obviously, the pivot to services, which, if anything, has accelerated as part of the, you know, COVID-19 response in clinics. It's also in response that our strategy as a company around innovation and commercial partnership with our customers in bringing testing, relevant tech to practices. We think that that's a successful formula, and it's supportive of what veterinarians and pet owners wanna see in terms of better patient care, better, higher standards of care for patients. That will continue to be a focus for us from a commercial and innovation strategy standpoint. John, one thing I'd highlight too, I know you're looking quarter by quarter, but Q3, I think you need to factor in there was some pent-up demand likely effects. I think the overall trend's very healthy. It's at the higher end of our outlook. It's above where it was pre-COVID. We feel very good about the growth in services trend as being sustainable, something that's gonna, you know, enhance our growth profile. Our next question from Goldman Sachs. Hi, good morning. Thanks for the questions. I actually wanted to start with a follow-up to John's question on the CAG Dx guidance. Brian, I think you said it was up 2%, the prior outlook. I would just be curious more details on the underlying assumptions around visit growth and increases in diagnostic utilization. I think you had talked about kind of 2%-5% growth for the year previously, and then that 9%-10% premium that was just referenced. I'd just be curious if you have any kind of updated assumptions as we think about the balance of the year on those metrics. Sure. Why don't I start a little higher level with the global numbers, Nate, our updated range, the higher end of the CAG Dx recurring range basically assumes similar two-year growth trends to what we saw in Q4 and Q1. It's largely in line with that, I think that is the primary driver of the update, I think is the, you know, more confidence coming through Q1 on sustainability of some of the trends and some positive dynamics with clinical visit growth. That's more of the headline. We're still maintaining, you know, a level, a range because that may moderate. You know, we may see some pullback. We're gonna be up against some compares here. I think, on balance, we feel very good about the trends, and if anything, they improved a bit in Q one. As a benchmark to, we do try to highlight that U.S. clinical visit growth and premium dynamic that you mentioned, and our initial estimates were 2%-5% for the full year. For clinical visit growth, that's a 1-year basis and the 900 to 1,000 basis point premium. I did mention that our updated outlook reflects that we're trending at the higher end on clinical visits and that we're reinforcing the premium outlook, which is right in line with where we were in Q one. You know, I think, I think the, you know, just the underlying market trends have sustained. We feel good about that, and we're seeing that globally, and I think we feel very good about our execution and now, of course, have things like ProCyte One to as innovation initiatives that'll help us build on that momentum. Great. That's helpful. If I could just ask a quick follow-up on ProCyte One. You know, can you talk about, I guess maybe Jay, you know, the placements that you've seen so far, maybe the orders that you're getting. You know, how many of those are in new or competitive accounts versus with existing customers? Can you maybe just talk about the opportunity to use kinda ProCyte One as maybe a lever to get into practices that IDEXX isn't in currently? Yeah. It's early in the rollout, but we're very pleased. It's been a very successful rollout, very successful customer experience trials, and not easy to do, by the way, in the middle of a pandemic. This is a, you know, complex instrument, and it has a world-class user interface and performs at a very high level from just an accuracy, you know, standpoint. You know, we've identified the hematology opportunity as very significant for the company. Keep in mind, a lot of our international markets are hematology-first markets. What that means is if they have a choice in terms of if it's one instrument or none, they tend to choose hematology even before chemistry, even when they have both. In terms of the opportunity itself, as I earlier described it, you know, almost 100,000 placement opportunities, 2/3 plus of which is internationally. Even more importantly, if I pivot just a higher-level comment, it's an important part of our overall in-clinic solution. We tend to sell chemistry and hematology increasingly resembling together. Having this type of solution, which from a performance and cost profile standpoint, you know, hits a sweet spot for the market, is obviously very attractive to us. The other thing that I would point out is that increasingly, you know, the IDEXX 360 program is just getting terrific traction internationally. As part of that capital placement piece is the acre, and there's pull-through on reference labs and rapid assay in terms of delivering the underlying volume commitments. We're excited by the diagnostic opportunity that the ProCyte One represents. It's gonna have, you know, we think a very long tail, both duration as well as, you know, overall volume opportunity. More to come over time. Our last question is from Balaji Prasad from Barclays. You're on mute, Balaji. Hi. Thank you. Sorry, juggling with some calls. Thanks, Phil. Thanks for the questions. Just 2 follow questions from me. 1, a pretty broad level 1, trying to understand or detect the growth. Was there any element of growth coming through market share gains in this quarter? Was it all what we could perceive broader industry growth, led by visits and increasing utilization? Secondly, our web survey indicated a 200 basis points jump in YOY revenue contributions for clinics from diagnostics. Does that sound to you as right or aligned with your internal tracking? Thank you. Yeah. Our, you know, our markets are very competitive. They have always been very competitive. You know, we're pleased with what we've been able to advancing our commercial agenda. You know, we've shared some data on new and competitive placements with Catalyst, both in North America as well as international. You can, you know, make your own assumptions in terms of what that means. Our focus is just continuing to support and serve our customers with IDEXX solutions. We do that both on the instrument side, obviously, but broader diagnostic solutions and software. What we find is when customers use all of our solutions, they grow faster, they tend to stay with us longer, and they find it supports their practice needs. In terms of the survey you're mentioning, I'm not familiar with that, so I'm just gonna withhold comment not knowing the underlying methodology. Fair enough. Thank you. Maybe a specific comment, if you could, throw some lights on what you're seeing with since the launch of SediVue Dx in Q4, and if it is disrupting the market, and what are you seeing on the clinic side in terms of comments? Yeah. You know, the thing to keep I think you're asking a question more generally about the, you know, fecal detection. You know, our belief is that the fecal antigen test that we offer at the IDEXX Global Reference Lab is best in class. It detects up to two times as much than traditional methods like O&P. You know, there are just a number of challenges in doing fecal within the clinic. You know, first and foremost is the sample prep, you know, piece, and that's very time-consuming and continues to be, you know, messy. Then you can develop an algorithm that detects eggs as, you know, as part of the parasites or worms. You know, at the end of the day, they have to be available. You have to be able to visually see them. The benefit in being able to detect through antigen testing is, you are able to see them in the pre-patent period, which is between 4 and 6 weeks earlier than physically when the eggs are available. You get better detection pieces. We like our solutions. We think our customers appreciate fecal antigen at the reference labs, and that's where we continue to support them with. Thank you. I'll turn it back over to Jay for final remarks. Thank you. I wanna thank everybody for calling in. I wanna express my gratitude to the IDEXX team for their ongoing extraordinary performance during these challenging times. We have an amazing purpose and opportunity as a company, and I couldn't be more appreciative of the IDEXX team and how they live our mission every day. With that, we'll conclude the call, and thank you. Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating, and you may now disconnect.