IDEXX Laboratories, Inc. (NASDAQ:IDXX) Q3 2023 Earnings Call Transcript

IDEXX Laboratories, Inc. (NASDAQ:IDXX) Q3 2023 Earnings Call Transcript November 1, 2023

IDEXX Laboratories, Inc. beats earnings expectations. Reported EPS is $2.53, expectations were $2.37.

Operator: Good morning, and welcome to the IDEXX Laboratories Third Quarter 2023 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, Vice President, 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 noticed in our press 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 section 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. A reconciliation of these non-GAAP financial measures to the most directly comparable measures are provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our third quarter 2023 results, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent period in 2022, unless otherwise noted. [Operator Instructions]. Today’s prepared remarks will be posted to the Investor Relations section of idexx.com after the earnings conference call concludes. I would now like to turn the call over to Brian McKeon.

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Brian McKeon: Good morning and welcome to our third quarter earnings call. Today I’ll take you through our Q3 results and review our updated financial outlook for 2023. In terms of highlights, IDEXX achieved solid revenue growth and strong profit gains in the third quarter. Overall revenues increased 8% organically, supported by 9% organic growth in CAG diagnostic recurring revenues net of approximately 50 basis points of negative impact from fewer equivalent selling days. Organic revenue growth was supported by sustained benefits from IDEXX execution drivers including continued strong premium instrument replacements, solid new business gains, high levels of customer retention and high growth in recurring veterinary software revenues.

Overall CAG diagnostics recurring revenue gains in the quarter were moderated by a 2% same-store decline in US clinical business. This was below our expectations for relatively flattening US clinic visit trends, reflecting ongoing capacity management challenges at US clinics and relatively softer wellness visit levels. Operating profit results were ahead of our expectations supported by gross margin gains and operating expense leverage, which enabled EPS delivery of $2.53 per share, up 18% as reported and 16% on a comparable basis. Based on our strong financial results in the quarter, we’re updating our full year EPS outlook aligned with the higher end of our previous guidance range. This reflects expectations for strong comparable operating margin gains this year.

We’re also updating our full year revenue guidance ranges to incorporate our Q3 results and recent sector trends, as well as to reflect the recent strengthening of the US dollar. We will review our updated guidance detail later in my comments. Let’s begin with the review of our third quarter results. Third quarter organic revenue growth of 8% was driven by 8% organic CAG gains and 7% organic growth in our Water business. Overall, organic revenue growth was moderated by 2% organic growth in our LPD business and approximately $3 million of headwind related to lower opti medical revenues including effects from the wind down of our human COVID testing business. CAG diagnostic recurring revenue increased 9% organically, reflecting 8.3% gains in the US and 10.3% growth in international regions net of a 0.5% global growth headwind from equivalent days effects.

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Q&A Session

CAG diagnostic organic recurring revenue growth in Q3 was supported by average global net price improvement of approximately 7%, in line with our expectations for 6% to 7% gains in the second half of the year. Overall, organic revenue growth was supported by 13% organic growth in veterinary software and diagnostic imaging revenues, driven by continued strong gains in recurring software revenues. GAC instrument revenues were down 10% organically, reflecting comparisons to high priority levels, program pricing effects and global mix. IDEXX CAG diagnostic recurring revenue growth remains solidly above sector growth levels. In the US, CAG diagnostic recurring revenue organic growth was 8.3%, including approximately 50 basis points of negative impact from fewer selling days in Q3.

This reflects an approximately 1100 basis point normalized growth premium, compared to same-store US clinic visit growth levels, which declined an estimated 2% overall in the quarter. IDEXX’s growth results reflect continued increases in diagnostic frequency and utilization per clinical visit at the practice level. Instrument benefits from IDEXX execution drivers, including higher net price realization, solid new business gains, and sustained high customer retention levels. As noted, same-store US clinic visit declines of 2% were below our expectations for relatively flat clinic visit growth in the second half of 2023. Software trends in Q3 a period of an impacted by ongoing capacity management challenges at US clinics, including effects from high staff turnover.

We also saw a relative slow down in wellness visits in the quarter, which may reflect some macro impacts on demand at the clinic level. We refined our full year revenue outlook to capture potential impacts from these trends in Q4, while reinforcing our strong outlook for 2023 profit performance. IDEXX international CAG diagnostic recurring revenue growth was 10.3% in Q3, reflecting continued benefits from higher net price realization, and improved volume gains. International results were also supported by strong IDEXX execution, reflected and sustained new business gains and high Q3 premium instrument replacements, which supported a double-digit expansion of our premium instrument installed base. Double-digit growth rate benefits from IDEXX execution offset negative impacts from international macro conditions, which continue to pressure same-store volume growth trends in the quarter.

Globally Q3 results were supported by strong growth of IDEXX in-clinic CAG diagnostic recurring revenues. IDEXX VETLAB consumer revenues increased 11% organically with double digit gains in US and international regions. Consumer gains were supported by 11% year-on-year growth at our global premium instrument installed base, reflecting strong gains across our catalyst, premium hematology and set-of-you platforms. We placed 4,571 CAG premium instruments in Q3, a decrease of 4% year-on-year, compared to record prior year levels, which included benefits from our international launch of ProCyte One. The quality of instrument replacements continues to be excellent reflected in solid global gains in EVI metrics and sustained high new and competitive catalyst placements in the US.

Global catalyst placements decreased 2% overall reflecting tough comparisons to high prior year international placement levels. ProCyte One installed base expansion continued at a solid pace reflected in a global installed base of over 12,000 instruments. Global Rapid Assay revenues expanded 8% organically in Q3, supported by strong growth in the U.S., including benefits from higher net price realization. Global lab revenues increased 7% organically, reflecting high single-digit gains in the U.S. and relatively improved mid-to-high single-digit growth in International regions. In other areas of our CAG business, Veterinary Software and Diagnostic Imaging revenues increased 13% organically. Results were supported by continued high levels of organic growth in recurring software and diagnostic imaging revenues and ongoing momentum in cloud-based software placements.

Water revenues increased 7% organically in Q3, compared to strong prior year growth levels. Growth was driven by continued solid gains in the U.S., including benefits from net price improvement. Our Tecta-PDS acquisition integration continues to progress well and added 1% to reported Water growth. Livestock, Poultry and Dairy revenues increased 2% organically, as strong gains in the U.S. continue to be moderated by constraints on International growth, including impacts from lower herd health screening revenues related to reduced China import testing. Turning to the P&L, Q3 profit results were supported by high comparable operating margin gains, including benefits from operating expense leverage. Gross profit increased 8% in the quarter as reported and on a comparable basis.

Gross margins were 59.9%, up 30 basis points on a comparable basis, compared to strong prior year levels. Gross margin gains reflected benefits from higher net price realization, business mix and improvement in software service gross margins. As expected, reported gross margin gains were moderated by a 60-basis point negative impact related to FX, driven by the lapping of prior year hedge gains. We’re projecting an approximate 70 basis point gross margin headwind in Q4 related to FX, again primarily related to the lapping of prior year hedge gains. On a reported basis, operating expenses increased 4% year-on-year as reported and on a comparable basis, reflecting benefits from cost controls and lapping of prior year R&D and commercial investments.

We’re planning for a higher level of OpEx growth in Q4 as we advance our U.S. commercial expansion and increased R&D investments aligned with our innovation initiatives, including our planned 2024 new platform launch. EPS was $2.53 per share in Q3, an increase of 18% as reported and 16% on a comparable basis. Foreign exchange reduced operating profits by $1 million and EPS by $0.01 per share in the quarter, including impacts from the lapping of $9 million in prior year hedge gains. Impacts from 2023 foreign exchange hedges resulted in a $1 million gain in the quarter. Free cash flow was $238 million in the third quarter. On a trailing 12-month basis, our net income to FCF conversion ratio was 83%. For the full year, we’re updating our outlook for free cash flow conversion to 85% to 90% of net income at the higher end of our earlier projections reflecting estimated capital spending of $160 to $180 million.

Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.8x gross and 0.6x net of cash. Share repurchases over the last year supported a 0.1% reduction in diluted shares outstanding for the quarter. We allocated $35 million in capital to share repurchases in the third quarter, as we continue to manage our balance sheet relatively more conservatively in the current interest rate environment. Turning to our 2023 P&L guidance, we’re updating our full-year outlook to incorporate our Q3 results and revised estimates for foreign exchange impacts, reflecting the recent strengthening of the U.S. dollar. Our updated full-year guidance for reported revenues is $3,635 million to $3,650 million, reflecting a 7.9% to 8.4% reported growth range.