IDEXX Laboratories, Inc. (IDXX) on Q3 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the IDEXX Laboratories Third 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 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 GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our Third 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. To allow broad participation in the Q&A we ask that each participants limit their questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back in the queue and if time permits, we'll take your additional questions. I would now like to turn it over to Brian McKeon.
Brian Mc Keon: Good morning, everyone. We're pleased to share another quarter of excellent financial results for IDEXX, driven by continued strong global momentum in our companion animal business. In terms of highlights, revenue increased 12% as reported and 10% organically compared to high prior-year growth levels. Third quarter results reflect 11.5% organic growth in CAG Diagnostic recurring revenues with double-digit gains across U.S. and international markets. 2-year average annual organic growth for CAG Diagnostic recurring revenues sustained at 16%, reflecting mid-to-high teens, 2-year average gains across our major modalities. We also achieved a record third quarter level of premium instrument placements with strong global gains across our major platforms. High revenue growth and sustained operating margins compared to high prior-year levels, supported delivery of $2.03 in earnings per share, an increase of 12% on a comparable basis. Momentum in our CAG business has us on track to deliver 15.5% to 16% organic revenue growth, 200 to 225 basis points in comparable operating margin gains, and 26% to 27% comparable EPS growth in 2021 at the higher end of our previous guidance ranges. Walk through the details of our updated full-year outlook later in my comments, let's begin with a review of our third quarter results in recent sector trends. Third quarter organic revenue growth of 10% was driven by 13% CAG revenue gains and 13% growth in our water business. These gains were moderated by a 23% organic decline in LPD revenues compared to high prior-year levels, which benefited from the ramping of African swine fever testing in China, as well as by a $3 million a year-on-year decline in human COVID PCR testing. CAG Diagnostic recurring revenues increased 11.5% organically compared to strong prior year growth levels and working 10% gains in the U.S. and 14% growth in international regions. On a two-year basis, average annual CAG Diagnostic recurring revenue growth was 16% overall, reflecting 16% gains in both U.S. and international regions. Strong CAG results were also supported by 15% organic growth in veterinary software services and diagnostic imaging revenues in addition to benefits from our recent easy bet acquisition and 33% year-on-year growth in CAG Diagnostic instrument revenues. We continue to achieve very high levels of supply chain reliability across our business, reflecting outstanding performance by our operating teams, enabling us to support continued high levels of growth in customer service. Continued strong U.S. CAG Diagnostic recurring revenue growth was supported by year-on-year gains and U.S. clinical visits. U.S. clinical visit growth was 2% overall in Q3 with solid gains across wellness and non-wellness categories. This compared to strong 7% gains in the third quarter of 2020, which included benefits from pent-up clinical demand, including very high growth in wellness testing. On a 2-year basis, U.S. same-store clinical visit growth increased at a 4.4% average annual rate, sustaining above annual clinic visit growth trends heading into the pandemic. The IDEXX U.S. CAG Diagnostic recurring revenue growth premium to U.S. clinical visits was approximately 850 basis points on a 1-year basis compared to very strong prior year growth levels for diagnostic testing, which supported a 1500 basis point growth premium last year. On an average 2-year basis, which helps to calibrate for year-on-year pandemic dynamics, the growth premium was approximately 1200 basis points in the third quarter, slightly higher than the 2-year trends in the first half of the year. Expanding pet healthcare services, including continued solid increases in the utilization of diagnostics, supported a 7% same-store increase in overall veterinary clinical revenues in Q3. Diagnostic revenues per practice increased 7% on a 1-year basis and 13% on an average 2-year basis consistent with recent 2-year growth trends. IDEXX, innovation and commercial engagement continues to build on positive healthcare demand trends, driving high Q3 organic revenue gains across our major testing modalities globally. IDEXX reference lab revenues increased 10% organically in Q3 with similar year-on-year gains in U.S. and international regions. Global Reference Lab gains continue to be driven by high same-store volume growth for strong gains across testing categories. IDEXX VetLab consumable revenues increased 14% organically in the third quarter, reflecting double-digit gains in the U.S., and continued high growth in international regions. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium instrument installed base. IDEXX achieved a third quarter record of 4,307 premium CAG instrument placements, up over 1,100 units, or 36% from constrained prior levels, reflecting strong gains across U.S. and international regions. We saw a strong global placement gains across our platforms with catalyst up 22%, premium hematology up 62%, and SediVue up 30%. The quality of CAG instrument placements remains excellent, reflected in 344 catalyst placements at new and competitive accounts in North America, up 14% year-on-year, and 1,003 new and competitive placements in international regions, up 17%. We also benefited from 571 second catalyst placements driven by continued strong demand from high-volume customers. The global rollout of ProCyte One continues to support strong overall placement momentum with the majority of our ProCyte One placements in new and competitive accounts. New instrument placements, and continued very high customer retention levels, supported a 14% year-on-year growth in our global premium installed base, setting a foundation for continued high-growth in IDEXX VetLab recurring diagnostic revenues. Rapid assay revenues expanded 9% organically in Q3 compared to strong prior-year demand levels that included benefits from pent-up demand for wellness testing. Growth in vector-borne disease testing drove solid year-on-year volume games in the U.S., and global growth continues to benefit from double-digit gains in international regions. High CAG Diagnostic recurring revenue growth remains primarily volume-driven across our modalities with consistent overall net price gains of 2% to 3%. In other areas of our CAG business or veterinary software and diagnostic imaging revenues increased 15% organically and 33% as reported, including benefits from our recent ezyVet acquisition. Strong growth in veterinary software services was supported by double-digit comparable gains in PIMS placements and continued strong growth in related recurring services. We also saw continued high-growth in diagnostic imaging system placements driven by our entry-level ImageVue DR30 platform, with nearly 80% of placements at competitive accounts. We continue to see 20% plus growth in recurring digital service revenues, including expansion of Web PACS subscriptions aligned with our expanding Cloud-based capability. Turning to other business segments, water revenue increased 13% organically in Q3 compared to 4% organic declines in last year's third quarter, as this business continues to track back towards pre - COVID, growth levels. Business growth was supported by solid gains across compliance and non-compliance testing categories. Livestock, Poultry, and Dairy revenue decreased organically 23% in Q3 compared to 18% organic growth levels in Q3 of 2020. Overall dynamics in our China LPD and related export testing businesses offset growth in other global regions. As expected, Q3 revenue growth was constrained by the lapping of high prior-year demand for African Swine Fever testing and lower herd health screening levels. We're now seeing additional constraints on China LPD testing demand reflecting relaxation of local African Swine sweep -- Swine Fever disease management approaches in China, and as we work through impacts from low pork prices and changing government regulations related to livestock infectious disease testing programs. Reflecting these factors, we're planning for continued lower LPD revenues overall on upcoming quarters, which is factored into our 2021 financial outlook. Turning to the P&L, sustained high revenue growth supported double-digit comparable operating profit and EPS gains. Operating profit increased 32% as reported, including benefits from the lapping of $27.5 million G&A charge, related to an ongoing litigation matter, which is excluded from our comparable growth metrics. On a comparable basis, operating profits expanded 12% and operating margins increased 20 basis points compared to high prior-year levels, which included benefits from pandemic-related cost controls. Gross profit increased 12% in Q3 reflecting strong revenue gains. Gross margins decreased modestly on a comparable basis as benefits from continued high recurring CAG Diagnostic revenue growth, and moderate net price gains were offset by business mix impacts from high CAG instrument revenue growth and lower LPD and human PCR revenues. We also saw some gross margin impact from investments in our lab businesses to support high growth and customer service levels. Operating expenses decreased 2% as reported, and increased 10% on a comparable basis in Q3. As expected, we saw a higher level of comparable OpEx growth as we advance investments in our global and commercial innovation capability and onboard the ezyVet acquisition. Q2 -- Q3 EPS was $2.03 per share, including benefits of $4 million or $0.05 per share related to share-based compensation activity. On a comparable basis, Q3 EPS increased 12%. Foreign exchange added $2 million to operating profits and $0.02 to EPS in Q3, net of $2 million in hedge losses. Free cash flow was $354 million in Q3 and $458 million for the first 9 months of 2021. On a trolling -- trailing 12-month basis, our net income to free cash flow conversion rate was 88%. We increased our 2021 full-year outlook for free cash flow conversion to 80% to 85% of net income, reflecting a refined capital spending estimate of approximately $150 million, including approximately $20 million in real estate purchases. As we advance plans for 2022, we expect an increase in capital spending levels to support additions to our manufacturing distribution capacity aligned with our high-growth profile. Our Balance Sheet remains at a strong position. We ended the quarter with debt to EBITDA leverage ratios of 0.8 times gross and 0.7 times net of cash with $145 million in cash and no borrowings on our $1 billion revolving credit facility. We allocated $184 million in capital to repurchase 275,000 shares in the quarter. Turning to our 2021 full-year outlook we're updating our projected range for overall revenue to $3,185 million to $3,200 million. Based on our continued strong momentum in Q2 -- Q3, we're increasing the lower end of our organic growth outlook by 1%, and maintaining the higher end of our growth outlook aligned with sustained high 2-year annual growth trends for CAG Diagnostic recurring revenues. Operationally, this results in an increase of $10 million in our full-year revenue outlook at midpoint. These improvements were offset by a $5 million FX headwind compared to our last outlook related to the recent strengthening of the U.S. dollar. Our updated reported revenue growth outlook is 17.5% to 18%, including approximately 1.5% of full-year growth benefit from the FX and 0.5% of growth benefit from acquisitions. Our updated overall organic growth outlook of 15.5% to 16% reflects an estimated organic growth range of 17% to 17.5% for CAG Diagnostic recurring revenue. Other elements of our revenue growth outlook include continued expectations for lower year-on-year LPD revenues in the second half and for a reduction in human COVID testing revenues year-on-year. In terms of key financial metrics we've refined our reported operating margin outlook for 2021 to 28.8% to 29% reflecting expectations for 200 basis points to 225 basis points of full-year comparable operating margin improvement at the high end of our last guidance range. We're planning for moderately lower operating margins in Q4 compared to high prior-year levels, driven by mix impacts and advancement of commercial and innovation investments and target project spending, aligned with our high-growth profile. We're raising our EPS guidance range by $0.06 at midpoint, to $8.30 to $8.38, reflecting 26% to 27% full-year comparable EPS growth. We now estimate FX will provide $0.16 of positive full-year EPS benefits, $0.01 lower than our earlier estimates net of established heads positions. We've also refined our overall effective tax estimate to 19%, including an updated estimate of $0.29 per share of tax benefit related to share-based compensation activity. We provided details on our updated estimates in the tables in our press release and earnings snapshot. As we complete 2021, we're advancing our plans for 2022 aligned with sustaining our strong revenue growth. We're confident we can maintain our excellent supply chain performance to support continued high-growth and manage any inflationary impacts in our business while building on our strong 2021 profit results. We look forward to providing specifics on our 2022 financial outlook on our Q4 earnings call. That concludes our financial review. I'll now turn the call over to Jay for his comments.
Jay Mazelsky: Thank you, Brian. Good morning. We're pleased to report another quarter of excellent results for IDEXX driven by sustained momentum in our CAG business, we delivered double-digit organic revenue growth overall, supported by 11.5% organic CAG Diagnostic recurring revenue growth, compared to very strong prior-year growth levels. 2-year average annual organic growth rates across testing modalities were in line with growth in the first half of 2021 with clinical visit trends sustaining above pre -pandemic levels. These strong trends are evidence that veterinary practices worldwide continue to focus on elevating standards of care by leveraging IDEXX as advanced product and service platforms. The IDEXX team is doing an outstanding job supporting continued high-growth of customer service levels, putting us on track towards 2021 financial performance at the high-end of our previous outlook and above our long-term goals. Today, I highlight key areas of progress in our product and commercial initiatives that position us to deliver continued high-growth and strong financial returns. Let's begin with a brief update on sector trends. Positive companion animal healthcare trends continued in the third quarter, building on the accelerated demand levels achieved throughout the pandemic. U.S. critical visit growth was 2% in Q3, compared to strong 7% prior year third quarter growth levels, which included benefits from pent-up demand. To normalized for prior-year pandemic dynamics, we are monitoring two-year average annual growth rates, which were 4.4% in Q3. Continuing above the pre -pandemic levels of 2% to 3%. Wellness clinical visit growth of 6% on a 2-year basis points to continued adoption of our preventive approach to pet healthcare. The sustained underlying momentum reflects the continued strengthening of the pet on our bond. The benefit of stepped up growth in the pet population beginning early during the COVID19 pandemic through early 2021, and sustained focus in the veterinary clinic on medical services. Around the world, veterinarians passion for their work combined with pet owners desire for excellent care, have driven this focus on services as they remain extremely busy. U.S. practice revenue growth in the third quarter advanced the healthy 7% versus the prior year, and an even more impressive 9% on a 2-year basis, supported by 2-year average growth of 11% in clinical revenue and 13% in diagnostic revenue. Customers are clearly attracted to IDEXX's broad portfolio of products and services to support the elevated levels of demand, while also growing their practices. These positive dynamics are also true in our international regions. IDEXX 's growth is sustaining at an even stronger rate reflected in the 16%, 2-year average annual growth in CAG Diagnostics' recurring revenues in Q3, a premium of nearly 1200 basis points above 2-year average critical visit growth rates. High levels of execution and consistently strong sector trends reinforce our confidence in sustaining strong growth momentum as we finish the year and build our plans for 2022. Outstanding commercial execution has been a key driver of our business performance and our team continues to support our customers at a high level. This is evidenced by 36% year-on-year growth in premium instrument placements in Q3, a record number of third quarter placements for the Company. High-growth across our Catalyst, ProCyte, and SediVue platform supported a 14% overall year-over-year increase in our premium installed base. Veterinarians are using IDEXX 's diagnostic tools to build capacity and improve efficiency within the clinic to support future growth, which is also reflected in high levels of second Catalyst placements and continued strong 16% gains in Catalyst placements, had new and competitive accounts. Our strong global instrument place mode momentum has long-term benefits and gives us further confidence that future consumable streams will also support continued strong growth. These results were achieved despite continued constraints on direct access to customers. Time for our customers is a scarce and valuable resorts. In-person sales trends remain at approximately 60% in the U.S. and slightly lower in Europe at over 50%. Despite these constraints, our teams are into high levels of connection to our customers to deliver exceptional results by leveraging their trusted long-term relationships as highly relevant partners. We continue to enhance our commercial capabilities through rolling country level expansions of our field sales force to build on these results and to address the significant opportunities ahead of us. We've completed our expansions in Germany, France, and South Korea, and are seeing significant positive traction in instrument placements and CAG recurring revenue growth in these countries as a result. In addition, we are expanding our footprint in 3 additional countries as noted on our last call with hiring, on-boarding, and training tracking well to our plans in those areas. We expect to be live in all second-wave countries by the end of Q1 of next year. In addition to our commercial footprint, we made progress in the past quarter in expanding our service footprint and capabilities, in order to better support international business and customers. This included targeted investments to expand our European Reference Lab network and enhance our telemedicine service. These capabilities will support our long term growth goals by ensuring we meet our customers needs with a broad network and comprehensive portfolio of services. Complementing our world-class Reference Lab facility in corn west time Germany. These advancements support high-growth across our testing modalities as customers continue to take advantage of the flexibility offered by our customer - centric programs such as IDEXX 360 to grow their businesses and elevate standards of care around the world. Innovative products like ProCyte One are helping to build on this momentum. We've seen a very strong response to ProCyte One having delivered over 1,000 units worldwide since launch and on track for the approximately 4,000 annual worldwide premium hematology placement pace we shared during Investor Day. Feedback from customers of all sizes have been overwhelmingly positive, as a rave about ProCyte One's easy-to-use, low maintenance profile, and excellent performance. Our growth trajectory now reflects launches in all 4 of our major regions with a select number of country launches remaining in the fourth quarter of this year and into 2022. ProCyte One provides a great opportunity for increased engagement with customers, supporting strong adoption in its new platform globally, and the broader expansion of our business relationships. As an example, almost 95% worldwide ProCyte One placements and nearly a 100% in North America have either included a Catalyst One or have been placed at a customer that already has a Catalyst One, demonstrating the strong multiplier effect of this innovative product. Our Rapid Assay business is another area which provides an opportunity to expand relationships with customers around the globe. Rapid assay test revenues grew solidly in Q3 compared to a very strong prior-year. In 14% on a two-year basis with comparable gains in the U.S. and internationally. Vector-borne disease testing, a critical component of the rapid assay business and the wellness testing in the U.S. more broadly, was the primary driver of this growth as tick-borne disease becomes more prevalent in regions around the U.S. This testing growth continues to be supported by the SNAP Pro instrument, which helps drive engagement and loyalty through enhanced insight, accuracy, and practice workflow benefits. Double-digit growth in the SNAP Pro installed base in the U.S. and internationally in recent innovations like critical decision support, which aids increasingly busy veterinarians in making critical decisions when faced with a positive test, have helped drive excellent 97% customer retention levels within the Rapid Assay business. Our innovation strategy is also reflected in the expansion of our cloud-based software capabilities, which benefited from the Q2 acquisition of ezyVet. The integration of ezyVet into our software portfolio is proceeding to play out with high customer enthusiasm. ezyVet acquisition helped drive 33% reported growth of veterinary software, services and diagnostic imaging systems revenue in the third quarter, which was further supported by strong 15% organic growth in our core software and digital imaging products. This growth reflects solid double-digit year-over-year gains in our profitable recurring revenue software products. It also demonstrates the benefit of a growing installed base of PIMS in industry-leading low-dose diagnostic imaging products. Cloud-based offerings represent the majority of PIMS placements at over 80% as cloud-based offerings provide performance, quality, and life-cycle cost advantages. And within diagnostic imaging, recent updates to the Web PACS product include additional features important to specialty practices, and deeper, more seamless integrations with PIM systems. With a growing installed base and very high retention levels, IDEXX Web PACS has become an important part of our enterprise software ecosystem. Product enhancements like this and others aimed at making clinical workflow and customer communications easier and more efficient, are an impactful example of how our technology for life approach in supporting busy practices. Our commercial sales force and marketing teams continue to balance product sales with advancing the IDEXX Preventive Care program, which provides a structure and incentive for our customers continue driving wellness testing, and raising the standard of care. Enrollments in this program in the third quarter, despite constrained in-person discussions with customers sustained at a rate similar to the second quarter as we executed approximately 150 new preventive care enrollments and continue to track towards our goal of 10,000 engaged customers in the U.S. by 2024. In addition to strong commercial execution, our consistent growth trajectory also reflects the resiliency and agility in our supply chain. This has enabled us to weather the impacts of the COVID19 pandemic and meet the strong demand within our sector. IDEXX benefits from a number of factors related to our business, including strong long-term supplier relationships, year shoring and product standardization and inventory buffers. These factors in their proactive approach, managing front-line operational processes have allowed us to achieve 99% customer product availability through the pandemic, resulting in high customer satisfaction and increased retention. We believe we are well prepared to support sustained high-growth and service levels in our business going forward, where there may be relatively higher-cost in certain areas to support our growth plans. We're confident we can manage these impacts effectively through our operational capability and focus while building on our strong financial performance. Overall, we feel very positive about our continued strong business momentum as we engage with and support veterinarians around the world who are advancing the care standard. Looking forward, we are proceeding with plans for sustained high-growth aligned with our long-term growth potential. As current momentum positions us well to support investments in infrastructure, solutions, and commercial capabilities necessary to achieve the significant opportunity ahead of us, while delivering continued strong financial performance. Finally, I'd like to thank our employees and our customers for their perseverance and flexibility during these dynamic times. And extremely proud of what we've accomplished together. And look forward to continued excellence in the future. That concludes my remarks, and we now have time for questions.
Operator: Thank you. And now begin the question-and-answer session. And our first question is from Michael Ryskin from Bank of America.
Michael Ryskin: Thanks for taking the question guys. Had a lot of comments in the prepared remarks on strong instrument placement trends, particularly with ProCyte One, from the cross zone, you've been able to see there. Just wondering, are you able to see sequential acceleration there and any increased uptake of set of use, you could clarify on that, and just -- especially in some of those markets, you're seeing incremental competitive introductions by some of your peers. I'm just wondering if you could talk on dynamics and what you can go see from others in the marketplace.
Jay Mazelsky: Good morning, Mike. The Q3 was a record placement really across our premium instruments, hematology, chemistry SediVue. And we think in part what's driving that is less pent-up demand and more practices really investing in their practice. That's because they're busy. They're looking for technology that can support productivity. and, obviously, greater patient flow. With respect to ProCyte One, you recalled we launched in the U.S. in late Q1, and then internationally in late Q2. And we've see n very rapid uptake that the majority of the ProCyte One -- the vast majority of the ProCyte One either have gone into competitive accounts with Catalyst or to existing Catalyst accounts. So it's a real customer pleaser. I think it's delivered on all aspects of the brand and product promise, easy use performance, great cost profile. Keep in mind it's also part of our pay-per-run and auto replenishment model. So it's a -- we're excited about the opportunity, if you recall from Investor Day we identified almost 100,000 placement opportunities globally. 2/3 plus of that internationally, we're just in the early days of getting started on that. So very promising outlook for hematology with respect to SediVue, we continue to make excellent progress in SediVue, obviously into replacements where we're high 30% plus. It's all nice uptake in the U.S., a nice sequential progress internationally.
Michael Ryskin: Great, thanks. If I could ask a follow-up just on trends you saw over the course of 3Q and as we just think about 4Q. If we look at the snapshot in clinical visit growth and on revenues per visit, obviously you have the much tougher comps from a year prior, but as you continue going forward and so 4Q and 1Q next year, as we look at the 2-year stack comp on recurring CAG Diagnostics and total CAG revenue growth, are there any other dynamics we should be mindful of as we think of going into 4Q besides the comp dynamics? Anything else you're seeing in terms of changes in the marketplace or the gross volume growth things like that?
Brian Mc Keon: Morning, Mike. I think the bigger theme that we're highlighting is the CAG Diagnostic recurring growth trend on a 2-year basis really held up quite well. In the third quarter as we -- as you know, you get into these year-on-year comparison dynamics that we're focusing a bit on the 2-year trend to calibrate. And that we saw the 16% 2-year average annual growth level both in U.S. and international. And I think that's also the premium on a 2-year basis held up very well. It was 1,200 basis points in Q3. So I think that is the bigger trend that aligns with the higher end of our revenue growth outlook. And that's informing our posture heading into next year that we're really planning for sustained strong growth. We're investing towards that, ensuring that we have high service levels. So in terms of broader trends, I think Jay can provide some color, but I think the clinical visit trend was moderated a bit from the first half on a 2-year basis. We may be seeing some plateauing of the incremental growth benefit we saw from the step-up in new pets. Although the pet population has expanded and sustained and perhaps it might be reflective of victims clinics just being quite easy, but I think it was quite overall modest and our own trends have held up quite well.
Jay Mazelsky: Just to build on that, Mike. All indications there that demand in the marketplace and the trends remain very strong in a -- clearly, the 1 year growth rate held up quite well. If you think back to Q3 in 2020, there's a lot of pent-up demand. There was increased pet patient visits. So really nice growth across tough compares the 2-year clinical visit trends as we've talked about it, 4.4% is clearly above pre -pandemic levels at 2% to 3%. And then if you take a look at how we've translated that in our own business, 60% in a globally CAG Diagnostic recurring revenue, U.S. and internationally. Those are 2-year figures. We've seen nice growth across all modalities, whether you look at the 1-year or 2-year. And I think our execution as a Company has been excellent. So the -- I think the growth momentum remains quite strong and as Brian indicated, we're really positioned to support faster growth by expanding capabilities commercially, innovation, really expanding the resiliency and capacity of our supply chain and manufacturing network.
Michael Ryskin: Great thank you so much.
John Ravis: Our next question is from Nathan Rich from Goldman Sachs.
Nathan Rich: Hi, good morning. Thanks for the questions. Maybe following up on the last one. Jay or Brian, could you maybe -- how do you feel about vet practice capacity right now? I don't know if you feel like there are any labor shortages that are impacting just overall volumes of vet clinics. But it'd be great to get your perspective on where you think vet practices are operating at this point.
Jay Mazelsky: Good morning Nathan. Vet practices are clearly very busy. They -- there are a number of things that they've done, I think on a short-term basis, to be able to provide additional capacity of -- a lot of practices are working longer hours, they're hiring more staff and on a short-term basis, they can hire, let's say associate veterinary technicians and train them. The more trained higher-level skilled staff obviously takes a bit more time. A number of practices have been able to really improve mix of workflow improvements and adjust capacity just by adding things like exam rooms and things like that. From the standpoint of what we can do as a Company, there's another -- there's a number of really, I think, positive opportunities for us. Obviously, we provide technologies, analyzers, tools, software that practices can invest in that help them perform both at a higher medical or clinical level. But also more productively whether its communications or internally or with pet owners, or really improving staff productivity. I think evidence of that is to me, very significant step-up in instrument placements that we've seen and very fast-growth in software PIMS systems and ancillary systems that work with PIMS.
Nathan Rich: Great. That's helpful. And maybe a follow-up for Brian. What -- how should we think about the right baseline level for operating margins as we head into next year? The cadence this year has been a bit unusual with the elevated margins in the first half of the year. I think the back half. The guidance implies maybe around 26%. And maybe talked about the investments. But could you maybe flush out sort of what you think the right starting point is for as we think about the margin trajectory into 2022? Thank you.
Brian Mc Keon: Sure. On a full-year basis, I think we said 28.8% to 29%. We do have some quarterly differences in margins normally, I think Q2 tends to be our highest with just some of the wellness testing that goes on Rapid Assay sales and things of that nature. I think we feel good about the growth trajectory in the business, particularly the growth on the CAG recurring revenues that's a key driver for us, and that really gives us the ability to reinvest and into -- to build on the margin performance that we've had. I think we are intending to invest. We have been investing in growth aligned with the higher growth profile and we want to build on that. We see that as a very high return area for us, particularly, areas like commercial investment. We get a very quick payback on that. And we're really pleased with the progress we had in our initial wave of international markets. And we'll look to do more with that next year. We'll provide more clarity on that as we get into the year, but our goal is to build on the strong performance that we have this year. And the strong growth trajectory in the business really gives us an opportunity to do that.
Operator: And our next question is from Jon Block, from Stifel.
Jon Block: Great, thanks, guys. Good morning. Brian maybe just to start, the gross margin trend, it was down for the third consecutive quarter. And I know you called out some mix headwinds, ongoing investments, but just want to go back to the big deck from the Analyst Day. You talked about gross margin, I'll frame it as that double up green arrow long term. And so I'm just curious, does that double up green arrow take hold in '22 or should we think about some of these investments really spilling out into the next several quarters?
Brian Mc Keon: Okay, John. I think it's important to calibrate at just what we're working through, if you go back to last year. And at just looking at our numbers and year-over-year improvement on a comparable basis. We were up over 200 basis points in Q2 - Q3 last year. We're comparing to some higher numbers in terms of the levels we were at last year where we had really constrained cost conditions. And I think the -- that's a key factor we are investing back now and we're seeing that paying off in terms of high service levels and growth. I think we had some impacts from mix through the X1 instrument placement growth has a little bit of a mix headwind for us. And those are factors we're working through. But I think the overall dynamics in margins are something that we believe we can build upon. We'll provide more insight into that as we get into next year. But I think that longer-term trend, the key driver there is our strong CAG Diagnostic recurring revenue growth rates. And we are well-positioned to build on that with the trends that we've seen in the business so I think that longer-term story still holds for us.
Jon Block: Okay. And then just a follow-up. Maybe we just push you a little bit on the '22 trends in CAG curing and the 16% CAG recurring 2-year average has been remarkably consistent for the first 3 quarters of '21. The guide implies a slight step down in the fourth quarter of '21. And is that slight deceleration the way to think about the CAG Dx 2-year slope as we head into '22 and to maybe layer on top of that, is there an opportunity for you guys, for price to play a bigger role in CAG Dx into '22, just based on what we hear from some of the practices on their recent ability to realize price? Thanks, guys.
Brian Mc Keon: We didn't provide specific guidance on Q4, but I can tell you that our high-end of our range is consistent with the trends that we've seen on a 2-year basis on CAG Diagnostic recurring for the first 3 quarters. So that is reflected in a guidance. The overall organic growth, just keep in mind, we're up against a little tougher concurrent instruments in Q4. It's not a change in trend. It's just we're working through some compares there. But it's -- again the high-end is largely consistent with where we've been trending. I think that we're going to learn more on this as we move forward. I think the -- we're really pleased with the execution in the business. I think the momentum on our key initiatives, particularly things like instruments, give us a lot of confidence that we can build on. The strong consumable growth, and I think our execution to other modalities is very strong as well. And we're watching the market trends and I think that it's very encouraging. I think there -- like I said, there may be some moderation in terms of the step-up in things like pet population growth and we've got to pay attention to capacity at clinics and things like that, but those are good problems that we think we can help our customers with. So we're -- I think that's a key theme. Hopefully you here today is the trends of the business we're very pleased with, particularly in CAG business, and we -- we're looking to invest to build on them.
Jon Block: In that price realization Brian, if I can just circle back on that -- sorry do you think that one's a bigger opportunity?
Brian Mc Keon: Sorry about that, John. So we've been in that 2% to 3% range. I think that -- hey, look, I think that is an area that we were going to continue to look at. Pet owners are willing to pay more for services over time. There may be some select inflationary pressures in the business here and things like some input costs on labor and freight. And so we're paying attention to that. I think it is something we can look at over time if we see some sustained impacts on those fronts. And like I said, I think the market backdrop -- the industry backdrop gives us an opportunity to look at that just given the strength of the pet owner bond.
Jon Block: Perfect. Thanks, guys.
John Ravis: Our next question is from Chris Scott from JPMorgan.
Chris Scott: Great. Thanks so much. Just this 2 for me. I guess, first on in-person, that access. I think you mentioned in-person access now in the 50% to 60% range. As that number moves higher, is that a meaningful benefit for your business or have you found that you were able to do pretty much everything you need to do given the access as it is today. And I just had 1 follow-up after that.
Jay Mazelsky: Good morning, Chris. We -- we're up around 60% in the U.S, 50% outside of the U.S. And we think that can grow. The net will be higher as we work through the -- hopefully, what's the tail end of the pandemic. I think we've gotten very good at really segmenting what should be done or what is best on, in-person versus virtually. We've been able to -- I think pretty much do all what we need to do virtually. But there are some activities like whether you're introducing a product or visiting competitive accounts in building. And I think strengthening relationships are better done in person. So we think that over time that we'll get a increase. It's not going to go back to 100%, but it'll be something less than that. I think it will benefit our preventive care initiative, where we know practices are not only very busy, but I think repeated access is helpful in being able to sell and partner with customers. With that program, do we expect over time that right step-up to pre -pandemic levels.
Chris Scott: Okay, great. And then just come back to the top of inflation. Just what do you think about this kind of new inflationary environment? Are you seeing or do you expect to see in the near-term any gross or operating margin pressures to this? I think you mentioned that if this is more sustained, there might be an opportunity within -- on the price side to address, but I'm just trying to think in the nearer term, is that something that's noticeable in the numbers or is there abilities to offset that elsewhere in the business?
Brian Mc Keon: This is, Brian, the -- we have seen some inflationary impacts on the business. I think it's been more in areas like freight and distribution, which I think a lot of companies are experiencing. And for us, it's a relatively select on input costs, things like electronics and in resins, and we're paying attention to labor costs as well. I think those are all important areas for us. We've been able to manage through those effects well and we're really focused on sustaining high levels service for our customers, particularly in this high growth market. So that's our focus and our intent and I think we're confident that we can build on the profit trends that we've had while managing through those kind of effects on our business.
Chris Scott: Great. Thanks so much.
John Ravis: Our next question is from Ryan Daniels, from William Blair.
Mitch: Hey guys, Mitch speaking for Ryan. Thanks for taking my question. I guess to start, given the lack of bandwidth in the in the constraint on the capacity, has it affected the selling process and things like product education? Is that affected negatively at all or have you been able to work around that?
Jay Mazelsky: Yes. Good morning. As I had previously indicated, practices are extremely busy and it has affected how we do our sales calls. Once upon time you could get a fair amount of time with the veterinarian and her staff workers -- her staff and I think we've -- we try to be very efficient. And what -- previously we may have had 40 minutes or 50 minutes, now we're able to accomplish in 20. So we've adjusted accordingly where have provided tools to our sales organization so that they're productive and they can get to the point. And we continue to provide a lot of training including CE Training virtually into the webinar to our customers, so that they can get the training they need when they have some free windows and moments. We try to be, obviously, respectful, but very efficient when we could call it practices. And because I think most practice and practice owners consider as highly relevant to their success. They, at large measure, provide time when we meet with them. And I think with good results.
Mitch: Great thanks. Brian, on the capital instruments side of things, would you say you worked your way through most of the back-fill, and a lot of this growth is now incremental, practices realizing that they need an addition of a ProCyte or an additional Catalyst or that sort of thing?
Jay Mazelsky: Yeah. I think this is that the capital performance we've seen is not pent-up demand, it really represents Investments. The practices are making in their capacity and really improve capacity and productivity of their practices. So I think it's just a solid reflection of demand trends.
Mitch: Great, thanks.
John Ravis: Our next question from Balaji Prasad from Barclays.
Balaji Prasad: Hi. Good morning, and thanks for the questions. Couple of them. Firstly, all that you did comment on increased testing for ASF, I wanted to understand if you have visibility into what has led to this, and see if there's any broader read through to ASF trends. In other words, can an increase in testing signal that ASF in sense of spiking up -- spiking gain? Secondly, I'm not sure about this, but obviously in any supply chain disruptions and reach off your segments would be or could be most exposed to the current global supply chain challenges? And lastly if you can, can you just help us understand the CAG dynamics better? Trying to correlate the same-store revenue growth, which is 5% points above the visit growth of 2%. So is this all linked to higher utilization or was there any component of pricing which is above normal trends? Thank you.
Brian Mc Keon: Why don't I take your first question on African swine fever. The primary dynamics we've seen around our China business for LPD, we saw a significant step-up in program testing in support of addressing African swine fever to last year and -- but those trends have changed. There are changes in the local management of the disease in China where there is now harvesting of the -- local farmers are allowed to harvest the animals rather than -- so that's leading them to harvest them rather than treat the disease. So there's been a decline in demand and that's raised some compares for us. So for our business, that's been the primary impact on African swine fever. And we're anticipating that's going to be a -- continue to be a challenge for us year-over-year for some upcoming quarters.
Jay Mazelsky: And I'll speak to the supply chain. I think resiliency and performance of the business, which has been excellent. As I previously indicated, we have an excellent long-term supplier relationships. We've been able to leverage those and they make sure that we're very well provided. We also -- most of our manufacturing or almost all of our manufacturing is local where you're assured that we have a great deal of product standardization. We have maintained high inventory buffers. So we've been able to really support very high product availability throughout the pandemic. Our customers have clearly appreciated that, and have rewarded us with their business. So we feel very positive about our ability to continue to do that going forward.
Brian Mc Keon: I believe your third question was on utilization at the clinic level, and --
Jay Mazelsky: Right.
Brian Mc Keon: -- what we point out at if that was those correct is the year-over-year basis. Again, you get into these compares with last year, we had a big step-up and wellness testing and pent-up demand. The big -- the bigger driver of growth in the third quarter year-over-year was utilization growth. So the utilization gains at the clinic level have remained quite strong and on a two-year basis, good one-year growth. And it was more than offset on a flat frequency that was more related to the year-on-year compares in terms of the testing of number of visits.
Jay Mazelsky: Okay. And with that, I'd like to thank everybody for calling in. I'd also like to address the broader IDEXX team, some of which are on the call and say thank you for their continued extraordinary performance. Our employees have demonstrated an admirable commitment to our purpose and excellent ability to execute against our strategy. And I truly appreciate all their efforts. And so with that, we'll conclude the call. Thank you.
Operator: Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.
