IDEXX Laboratories, Inc. (IDXX) on Q4 2021 Results - Earnings Call Transcript
Operator: Good morning, and welcome to the IDEXX Laboratories Fourth 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, 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 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 Fourth 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 into queue and if time permits, we'll take your additional questions. I would now like to turn the call over to Brian McKeon.
Brian McKeon: Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2021 results and provide an overview of our financial outlook for 2022. In terms of highlights, IDEXX delivered excellent financial performance in Q4 driven by double digit top line gains compared to very strong prior year results. Revenue increased 11% as reported and 10.5%, organically supported by 13% organic growth and CAG diagnostics recurring revenues. Two year average annual organic growth for CAG diagnostic recurring revenues was approximately 17% across U.S. and international regions, consistent with the accelerated two year growth trends seen throughout 2021. We achieved record premium instrument placements in Q4 with strong gains across our major platforms supporting a 14% year-on-year expansion of our global premium instrument base. Strong revenue growth enabled delivery of $1.89 and EPS up 12% on a comparable basis as we advanced planned investments in our commercial and innovation capability. Closer benefits from higher organic revenue growth in 2021 drove outstanding full year financial performance above our long term goals. IDEXX achieved 60% overall organic revenue growth for the full year, driven by 80% gains in CAG diagnostics recurring revenues. Full year operating margins reached 29%, an increase of 220 basis points on a comparable basis. And we delivered full year EPS of $8.60 per share up 29% on a comparable basis. We're well-positioned to build on the strong financial performance in 2022. We're targeting revenue gains at the higher end of our long term goals reflected in our outlook for 10% to 12% overall organic revenue growth and 12% to 14% organic growth in CAG diagnostics recurring revenues. We're also targeting a 50 to 100 basis point improvement in operating margins on a comparable basis, building on the strong profit gains through the pandemic as we continue to invest towards the long term development of companion animal healthcare globally. Our EPS outlook of $9.27 to $9.59 per share, reflects 12% to 16%, comparable EPS growth, including an estimated $0.15 per share, or 2% EPS growth impact related to higher projected international tax rates. We'll discuss our 2022 financial outlook later in my comments. Let's begin with a review of our fourth quarter and full year results. Fourth quarter organic revenue growth of 10.5% was driven by 13% overall CAG gains and 13% growth in our water business. These gains were moderated as expected by a 19% organic decline in LPD revenues, reflecting comparisons to high prior year results that benefited from the ramping of African swine fever testing in China, as well as by a $5 million year-on-year decline in human COVID PCR testing revenues. Strong CAG diagnostic recurring revenue growth reflected 13% organic gains across U.S. and international regions, compared to 21% organic growth levels in the fourth quarter of 2020. Strong Q4 CAG results were also supported by 21% gains in IDEXX VetLab instrument revenues and 13% organic growth in veterinary software and diagnostic imaging revenues in addition to benefits from a recent ezyVet acquisition. For the full year 2021 overall CAG revenues increased 19% organically driven by 18% organic growth and CAG diagnostic recurring revenues, reflecting high gains across our major modalities and regions. Strong U.S. CAG diagnostics recurring revenue growth in the fourth quarter was aided by solid year-on-year gains in clinical visits and continued positive demand trends which are supporting high levels of clinical revenue growth at the practice level. Same-store U.S. clinical visit growth was 2.2% in Q4, compared to high prior year growth levels. On a two year basis U.S. same-store clinical visits increased at 5.5% with solid gains across wellness and non-wellness categories. An increased focus on healthcare services including diagnostics supported an 8% same-store increase in overall veterinary clinic revenues in Q4 and nearly 10% gains in clinical diagnostic revenues which increased 14% on an average two year basis. Expanding demand for clinical services and benefits from IDEXX innovation and commercial engagement supported a 1050 basis point premium of IDEXX U.S. CAG diagnostic recurring revenue growth to U.S. clinical visit growth in the quarter. In terms of practice level trends, we did see some modest impact from the recent Omicron wave on clinical testing volumes in international regions in Q4 which has continued in early 2022. We've also seen some moderation in clinic visit growth in January in the U.S. including near term impacts from higher COVID cases on practice level staffing. We're monitoring these dynamics which we don't see as indicative of changes in strong underlying demand trends. Globally, IDEXX achieved strong organic gains across our major testing modalities in Q4 resulting in exceptional full year growth results. IDEXX global reference lab revenues increased 12% organically in Q4 reflecting double digit gains in the U.S. and high single digit organic growth in international regions compared to strong prior year growth levels. Referenced lab gains continue to be driven by solid same-store volume growth including benefits from the expansion of IDEXX 360 program agreements. For the full year 2021 global lab revenues increased 70% organically reflecting consistent high gains across U.S. and international regions. IDEXX VetLab consumable revenues increased 15% on an organic basis in Q4 reflecting double digit gains across U.S. and international regions. Strong consumable growth reflects increases in testing utilization, sustained high customer retention levels, and expansion of our global premium instrument installed base. These dynamics supported 20% full year organic growth at IDEXX VetLab consumable revenues in 2021. IDEXX had another quarter of outstanding instrument placements building on this momentum. We achieved 5,258 premium instrument placements in Q4 up 29% from prior year levels, reflecting robust gains across U.S. and international regions. We achieved strong global placement growth across our major platforms year-on-year with catalyst of 8% SediVue of 20% and premium hematology of 72% supported by the continued global rollout of ProCyte One. The breadth and quality of CAG instrument placements supported strong gains in our economic value metric. New instrument placements and continued very high customer retention levels drove a 14% increase in our global premium instrument installed base in 2021 setting a foundation for continued strong consumable growth as we move forward. Rapid assay revenue increased 10% organically in Q4 reflecting continued solid gains in the U.S. aligned with broader increases in demand for diagnostic testing and high growth in international regions. For the full year 2021 Rapid assay organic revenue growth was 17% supported by high volume gains for canine, 4Dx, feline and specialty testing. CAG diagnostic recurring revenue growth remains primarily volume driven augmented by moderate net price improvement of approximately 3% in key regions like the U.S. Looking ahead to 2022 we're planning for net price improvement in the range of 3% to 4% reflecting higher list price increases to reflect higher service costs, and continued investment in service quality and product innovation. In other areas of our CAG business our veterinary software and diagnostic imaging revenues increased 13% organically and 30% as reported in Q4 including benefits from the ezyVet acquisition. Continued strong gains and recurring software and diagnostic imaging services and high comparable growth in PIMS placements were moderated to a degree by tough compares related to strong prior year diagnostic imaging placements. For the full year 2021 veterinary, software and diagnostic imaging revenues expanded to over $200 million up 15% organically and 27% as reported as we continue to advance integration of information technology and insight as a key feature of our diagnostic solutions. Turning to other business segments, water revenues increased 13% organically in Q4 compared to flat organic growth in last year's fourth 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. For the full year 2021 water revenues increased 12% organically compared to a 2% organic decline in 2020. Livestock, poultry and dairy revenues decreased 90% organically in Q4 compared to 13% organic growth levels in Q4 of 2020. As expected dynamics in our China LPD business including the lapping of high prior year demand for African swine fever testing, offset growth and other global regions. For the full year 2021 LPD revenues declined 9% organically compared to 11% gains in 2020. We're planning for continued challenging year-on-year compares and LPD revenues in the first half of 2022 which is factored into our overall revenue outlook. Turning to the P&L. Sustained high revenue growth drove solid operating profit gains compared to strong prior levels as we advanced plan investments aligned with our growth strategy. Operating profits increased 8% as reported and 9% on a comparable basis in Q4 driven by continued solid gross profit gains. Gross profit increased 12% in the quarter, reflecting strong revenue growth at a modest overall increase in gross margins. We benefited from continued high CAG diagnostic recurring revenue growth, moderate net price improvement, and higher veterinary software margins, including positive impacts from or expanding SaaS customer base. These factors were moderated by business mix impacts from high CAG instrument revenue growth, and lower LPD and human PCR revenues. Operating expenses increased 15% on a reported and comparable basis in Q4. As planned, we saw relatively higher levels of operating expense growth as we advanced investments in R&D, enhanced our global CAG sales and marketing capability and integrated the ezyVet acquisition. We anticipate sustaining a relatively higher rate of OpEx growth in 2022 aligned with our strong global growth momentum. Operating expense investments drove a 70 basis point contraction in comparable operating margins in Q4. For the full year 2021 our operating margins reached 29% up 220 basis points on a comparable basis for the year and up approximately 560 basis points on a comparable basis from pre-pandemic levels in 2019. We're targeting to build on the strong performance in 2022 as we invest towards the high return, long term growth potential in our business. Q4 EPS was $1.89 per share, including $0.08 per share a tax benefit related to share based compensation activity. For the full year 2021 EPS was $8.60 up 29% on a comparable basis. Full year EPS results included $32 million or $0.38 per share in tax benefit related to share based compensation activity, which provided 360 basis points of effective tax rate benefits. Foreign exchange effects reduced revenue growth by approximately 1% in Q4 resulting in a $0.02 per share profit impact net of a hedged loss of approximately $500,000. For the full year 2021 foreign exchange rate changes increased EPS by $0.16 per share net of foreign exchange hedge losses of $7 million. Given the recent strengthening of the U.S. dollar we're planning for 1.5% FX revenue growth headwind in 2022 with approximately 2% to 2.5% year-on-year growth headwinds in the first half. Well, previously established hedge positions will mitigate these impacts on profits, our initial 2022 outlook incorporates an estimated $0.08 net unfavorable EPS impact from the FX at the rates noted in our press release. Free cash flow was $636 million for 2021 or approximately 85% of net income reflecting a $120 million in capital spending including $18 million in real estate purchases. We maintained a strong balance sheet. We ended 2021 with leverage ratios of 0.9 times gross and 0.7 times net of cash with $144 million in cash at the end of the year. In Q4 we established a new five year $1 billion revolving credit facility which provides relatively improved borrowing rates. Our 2022 interest expense outlook incorporate these benefits, current forward interest rates and expectations for a net leverage ratio of one times next year. In Q4, we allocated $245 million to repurchase 391,000 shares in the quarter. We plan to continue to allocate capital to share repurchases as part of our financial approach which is reflected in a projected 1% to 1.5% reduction in our diluted shares outstanding for the full year 2022. Turning towards 2022 outlook we are providing initial guidance for reported revenues of 3.5 billion to 3.565 billion. This outlook reflects a targeted organic revenue growth range of 10% to 12%, carryover benefits of approximately 0.5% from 2021 acquisitions and an estimated 1.5% revenue growth headwind from FX. Our organic growth outlook reflects an estimated growth range of 12% to 14% for CAG diagnostic recurring revenues. The higher end of this range aligns with sustaining the strong year-on-year growth trends we achieved exiting 2021 and incorporates additional targeted benefits for a moderately higher net price realization and investments in global CAG sector development. Our overall organic growth outlook also factors in continued benefits from expansion of our premium instrument installed base and solid growth in our water business. These positive factors are partially offset by expectations for continued year-on-year pressure on LPD revenues in the first half of 2022 and a projected contraction in human PCR testing revenues reflecting our overall strategic growth focus on our core businesses. Our reported operating margin outlook for full year 2022 is 29.7% to 30.2% reflecting a targeted 50 to 100 basis points of annual comparable operating margin improvement building on our strong operating margin gains in recent years. We expect operating margin improvement will be supported by solid gross margin gains as we advanced investments in our global commercial and innovation capability and ensure high levels of operational business continuity as a priority. We've incorporated anticipated inflationary cost impacts, as well as benefits from relatively higher net price gains in our overall operating margin outlook. Given exit rates in our OpEx spending and year-on-year operating profit comparison dynamics, we're planning for operating margin improvements to be primarily driven by gains in the second half of 2022. Our preliminary EPS outlook for 2022 is $9.27 to $9.59 per share an increase of 8% to 11% as reported. Our EPS outlook factors in effect -- it increase in our overall effective tax rate from 17.5% to an estimated 21.5% to 22% in 2022. Approximately 100 to 150 basis points of this increase relates to projected impacts from international tax changes. We're also projecting lower tax benefits from share based tax compensation activity. Our EPS outlook reflects projected 2022 stock based compensation tax benefits of $10 million or approximately $0.12 per share compared to high realized 2021 tax benefits of $32 million or $0.38 per share. As noted, we've also incorporated an estimated year on year negative impact of $0.8 per share from FX, net of establish hedge positions. Adjusting for these factors our outlook is for EPS growth of 12% to 16% on a comparable basis, including an estimated $0.15 per share approximately 2% EPS growth impact from international tax rate changes. Our 2022 free cash flow outlook was for a net income to free cash flow conversion ratio of 75% to 80%. This reflects estimated capital spending of 180 million or approximately 5% of revenues, including $50 million related to a new warehouse and manufacturing site expansion aligned to support our high growth. Adjusting for this major project, our normalized net income to free cash flow conversion ratio is aligned with our longer term 80% to 90% targets. That concludes our financial view. I will now turn the call over to Jay for his comments.
Jay Mazelsky: Thank you, Brian. And good morning. IDEXX sustained a strong performance in Q4 capping an exceptional year for the company. For the full year we delivered 16% organic revenue growth, 29% comparable EPS growth supported by solid operating margin games and 59% ROI fee. These results reflect the attractiveness of our businesses including our core CAG business which is sustaining very strong growth trends benefiting from our commercial expansion in an expanding innovation portfolio. We're well-positioned to build on this momentum in 2022 as reflected in our financial outlook. This morning I'll recap our recent performance and highlight key areas of business focus moving forward including advancement of new innovations in the ongoing expansion of our global commercial capabilities. Both of these are strategic elements of our plan to develop the substantial long term market opportunity still before us. Let me begin with a brief update on sector trends. Overall global companion animal healthcare trends remain strong driven by ongoing robust demand at veterinary clinics for healthcare services, including diagnostics. As Brian highlighted U.S. same-store clinical revenues increased 8% in Q4 supported by 2% growth in same-store clinical visits compared to very strong prior year growth levels. Diagnostic same-store growth continues to expand at a higher pace of nearly 10%. IDEXX U.S. CAG diagnostics recurring revenue growth is leading this expansion reflected in 13% organic gains in Q4 building on 21% gains in Q4 of 2020 as we provide highly desired diagnostics and information management platforms that support our customers care mission. We're seeing sustained strong demand transfer clinic, clinical service globally, building on the step up achieved through the pandemic. As highlighted and data shared in our earning snapshot this includes sustained approximately 2% acceleration in U.S. diagnostics revenue per clinical visit in 2021 building on higher 2020 gains. The solid momentum gives us confidence in investing towards accelerated global CAG sector development and is reflected in our outlook of 12% to 14% global CAG diagnostics recurring revenue gains in 2022 at the high end of our long term goals. Like many sectors of the global economy veterinary clinics continue to work through the challenging dynamic of increased clinical demand in the face of staffing challenges including near term management impacts from the surge of the Omicron variant. It's clear that strong clinical service demand will be a priority for clinics moving forward. IDEXX remains committed and extremely well-positioned to support the growth of our customers through our focus on high customer service levels and solutions that enhance clinic productivity. As we look forward, we're expanding our global commercial capability aligned with the strong demand trends. Our investments in Germany, France and South Korea in the first half of 2021 continue to pay off as expanded commercial footprints in each country enabled significant increases in customer contacts and reach to revenue critical elements of our high touch and account management philosophy. We're tracking towards completion in early 2022 of the already communicated second wave of expansions in three additional countries with more to come. These are holistic initiatives that only involve the addition of customer facing professionals across multiple job types such as account managers, professional service veterinarians, and field service representatives but also include the extension of marketing programs and new field tools such as IDEXX 360 and the addition of more extensive reference of roots and expanded service levels. Increasing our international commercial footprint while maturing our approach will continue to be a key priority beyond wave two countries currently nearing completion. To that end, I'm pleased to share that we are also augmenting our commercial leadership team with an experienced commercial executive in Asia-Pacific CAG, who will join that excess quarter. As we expand, our commercial team continues to deliver the day reflected in over 5000 premium instrument placements in Q4 by far our largest quarterly placements ever achieved. Premium instrument placement growth of 29% includes comparable growth across U.S. and international regions, and resulted in 14% growth in our global premium install base with strong performance across each of our instrument platforms. These exceptional results were delivered despite excess challenges. They demonstrate strong commercial execution as well as the fact that customers are increasingly choosing IDEXX innovations to support increased clinical demand today, while investing for future business needs. ProCyte One is a great example of this. Our ProCyte One launch has done exceptionally well. ProCyte One's performance and reliability is used for the demanding environment of a practice has met or exceeded all goals and feedback remains highly positive as customers love it’s easy to use and how it fits into the veterinary clinic workflow. We see mid 90% global attach rates with chemistry analyzers in this trend demonstrate ProCyte One's importance in building a full diagnostic workup. Furthermore, the ProCyte One launch benefits from programs like IDEXX 360, which not only provides veterinarians with a flexible, customer friendly way to add this innovative analyzer to their clinics, but also benefits growth across IDEXX testing modalities. Our global ProCyte One regional is now nearly complete and we have delivered over 2500 instruments globally since launching in late Q1 of 2021. A growing installed base of premium instruments supports a robust range of future consumable usage, which gives us confidence and guided ranges for CAG recurring revenue growth. In addition to driving placements and adoption. Our commercial team continues to educate our customers on the benefits of preventive medicine. The preventive care initiative remains our primary vehicle for driving a preventive agenda in the clinic, and provide sales professionals an opportunity to engage in thorough conversations with broad participation from practice staff. Despite restricted access to clinics, we drove approximately 125 new U.S. enrollments in the quarter while also developing plans to simplify the enrollment process for busy customers. And we look forward to deploying this and continuing to support this broader preventive care effort in 2022. We also see continued momentum in software expansion as our innovative products helping customers improve clinic efficiency and pet owner communication. The onboarding of ezyVet has gone very smoothly and subscriptions are tracking favorably to our high expectations. Customers appreciate the advanced capabilities and intuitive workflow ezyVet provides. 81% of PIMS placements were cloud based in the quarter, demonstrating that we are well-positioned to support customers in their shift to the cloud. This trend provides a significant growth opportunity and excellent profit flow. It puts robust and easy to use information management products at the hands of our customers that enable them to focus on providing the highest levels of patient care enabled by diagnostics to improve health outcomes. Our software portfolio is a strategic area of investment and focus for IDEXX. Veterinarians have never been busier and have a deep need and appreciation for software solutions that are easy to use and built on contemporary technology stacks. They look to these solutions to support patient care, staff productivity and internal as well as pet owner communications. Our strategy is to bring enterprise PIM software solutions to our customers that work seamlessly with a broader set of business and clinical applications. Our own or third parties that veterinarians used to run their practices VetConnect PLUS diagnostics results clinical decision support and ordering portal is a great example of this. VetConnect PLUS was launched almost 10 years ago. It's integrated from a workflow standpoint in IDEXX in third party PIMs it is now being used in over 30,000 practices globally. Customers who use our software and diagnostic solutions together correlate with higher growth profiles supporting workflow optimization for our diagnostics testing platforms. Our diagnostic imaging business which includes our industry leading Web PAC software solution also experienced an excellent quarter, demonstrating the preference customers have for our premier low dose imaging solutions. Solid placements in the quarter supported full year placement growth of 35% and double digit year-over-year gains in recurring revenue. We also had strong growth in Web PAC subscriptions for Q4 up 18% versus the prior year and with continued customer retention rates and high 90% range growth in the installed base a profitable revenue stream and increased utilization of services have helped IDEXX webpacks become an important part of our enterprise software ecosystem. In addition to ensuring the successful rollout and adoption of these recent innovations, we were thrilled to launch a series of new product and service enhancements in BMX last month. Each of these innovations highlight IDEXX's commitment to continually invest in our service and product offerings with a particular focus on providing insights and decision making aids to help customers deliver a higher standard of patient care. These enhancements include an expanded oncology testing platform with additional tests that aid for veterinarians to better identify, stage, treat and monitor several prevalent cancer types and updated 4Dx plus tests with improved parameter performance for Anaplasma and the addition of clinical decision support 4Dx plus and neuro network 6.0 for SediVue which has now been trained on 800 million urine sediment images. Improving the performance of our products is central to our strategy and we're also supporting greater efficiency which helps drive higher adoption and customer satisfaction. Some examples; the new catalyst SDMA brings reagents onboard the test, reducing the number of steps to run the test and time to results while also reducing storage space and waste due to the removal of separate reagent comps. The improved VetConnect PLUS mobile app provides an enhanced user experience, improve the mobile capability and easier pet owner communication and finally coming later in 2022 our 4Dx plus test will allow for extended room temperature storage. The addition of these time saving technologies demonstrates our technology for life approach to product and services designs. Notably, the improved 4Dx Plus product represents our fifth update to the product first launched in 1992. While this test already represents the gold standard for vector borne disease rapid testing, we remain focused on continuous improvement to support our customers in delivering improved pet health outcomes. Underpinning our strong business performance, it's a prioritized focus on providing continued high level service to our customers. A key element in achieving these service levels is consistent strong execution across our supply chain which we saw again in Q4 through high product availability and strong order turnaround times. In order to build this capability and support growth in the future, we plan to invest in 2022 in the expansion of our manufacturing footprint in lab capacity, while also maintaining strong frontline measures to support high service levels. And while we anticipate some inflationary dynamics in supply chain headwinds going forward, we've captured these impacts in our outlook, and believe we are well positioned to build upon our year end margins. Overall, we're very pleased with the momentum and execution in our business and excited about our plans to build on our progress in 2022. Before we open the line for Q&A, I'd like to say thanks to our employees for another top notch year end in pursuit of our purpose and service to our customers. The IDEXX organization remained highly focused on our customers’ needs and continued to perform at a very high level during another dynamic and demanding year. The team's perseverance is seen both in the results highlighted this morning, as well as our high levels of engagement as a team. And I'm proud to be able to share today's excellent results on behalf of the whole team's hard work. That concludes my opening remarks. We now have time for some questions.
Operator: Thank you and now begin the question and answer session. And our first question is from Chris Scott from JPMorgan.
Chris Scott: Great, thanks so much for the questions. I just want to get a little bit more color on the magnitude of impact you're seeing from Omicron to the near term results. So basically how much of a step down in visits are you seeing currently? And then it'd be just following on that just kind of broader question can you just elaborate a little bit more on your expectation for vet visit growth as we look out to 2022 and we start to think about annualizing maybe more normalized comps that we've seen over the past few years. Thanks so much.
Jay Mazelsky: Good morning, Chris. We haven't quantified it. We did see some impact on testing volumes in the international regions from Omicron, EMF in late Q4. It primarily manifested itself in the modest drop off in some lab volumes. And this trend appears to be continuing just in early ‘22 January as it affects the U.S. clinical visit growth. The thing to keep in mind is the underlying customer demand is very strong. What vet practices tell us is that they're busy as they ever been in terms of forward booking. We're seeing month, two month forward booking of patients and impediments trying to get into practices. So we think practices have a playbook in which to deal with this. We've all seen this movie a couple times at this point. They've done the curbside drop off and pickup. In some cases there's obviously some staffing issues that they're dealing with the vets on more of a temporary basis. And we're in a really good position also to be able to support them with our field service, organization and technology, solutions that help them be more productive and manage that business.
Brian McKeon: And to your question Chris our 12% to 14% organic growth outlook for CAG IDEXX recurring revenues assumes positive clinic visit growth in addition to strong performance, ongoing performance by our teams and helping to grow our revenues faster than that.
Chris Scott: And may be just one really quick follow up. I know, last year, you talked about new instrument placement growth adding I think about a percent or so to overall revenue growth. Can you just elaborate on how you're thinking about new instrument placements and its contribution to 2022? Thanks so much.
Brian McKeon: I'll let Jay talk to the color of the momentum that we have on instrument placements in our priorities. In terms of our outlook we didn't break it out, specifically what we're targeting continued strong placement growth. The revenue growth may lag the placement growth somewhat as we see the expansion of programs like IDEXX 360 and have some mix effects from higher growth in international markets, but we're targeting solid instrument year-on-year growth and that's factored into the overall guidance.
Jay Mazelsky: We saw record placements in Q4 of 2021 over 5,000 on the back of record hematology placements in Catalyst and CityView, pretty much across the board. And we think that that momentum will remain intact. Practices are clearly investing in technology to help them from a capacity standpoint. They are looking to us and our solutions that not just support the best standard of care but also support workflow and staff productivity and enable them to handle higher patient volumes.
Chris Scott: Okay. Thanks so much for the questions.
Operator: Our next question is from Erin Wright from Morgan Stanley.
Erin Wright: Great, thanks so much. In the inflationary environment that we're in and you anticipate higher price realization in the 2022 guide. But can you quantify some of the offsetting factors, the higher input costs, labor freight net net? How are these dynamics impacting you from a margin perspective in 2022, just based on your guidance?
Brian McKeon: So we are seeing some impacts selectively in our business. I think you highlighted some of the key drivers, but freight and distribution costs have been a factor. We are monitoring higher labor input costs. I think that's something that we anticipate will be something we'll need to manage effectively. And we have selective impacts in different parts of our business, but we do use electronic components and things of that nature. I think a lot of our focus, Erin is on making sure we have continued very high business continuity reliability. So we're really pleased with that. We're at 99% and customer reliability and that's our primary focus. And so we do have some impacts and as you pointed out we have a relatively higher expectation for net margins improvement that helps to mitigate that and is reflective to a degree of that and enables us to support the solid operating margin improvements that we're targeting next year.
Erin Wright: Okay, great. And then more of a philosophical question here. So bear with me, but bigger picture, thinking about broader animal health and more specifically diagnostic trends and while there will be an element of normalization here near term, just give them the top comps and in barring any sort of Omicron volatility, but it does seem that you suggest that we are emerging from the pandemic at a faster underlying growth rate for companion animal diagnostics that may be pre-pandemic, over the longer term. Does this change how you're thinking about your five year outlook? And? And how are you thinking about some of those changes over the course of the pandemic that may be actually more structural in nature? Thanks.
Jay Mazelsky: Yes, I'll take that. Good morning, Erin. There is a couple of quick longer term trends that the pandemic probably accelerated that were affected and if anything, as a result of new pet adoptions and the pivot within practices, the more service versus retail type product sales. I think and just accelerated as a result of the pandemic. Clearly as veterinarians focus on medical services and patient care diagnostics is a big piece of that. They have been recognized that diagnostics is obviously a very high margin, very high profit center within their practices. And so I think the combination of more patients, pet owners wanting the higher standards of patient care, veterinarians activity services in the role the diagnostic plays, have been important factors. And then you layer on top of that, our strategy as a company which both includes continuing to innovate both in terms of testing platforms and information management and our commercial strategy, which is a high touch model and being able to work with veterinarians to help them use these tools effectively both business and medical wise. I think we continue to see very strong trends that are higher than pre-pandemic.
Erin Wright: Okay, great, thank you.
Operator: Our next question is from Michael Ryskin from BOA.
Michael Ryskin: Great, thanks for taking the question. And congrats, Jay and Brian on the quarter and on solid guide. I want to ask about some of the new products and new initiatives you announced earlier this year at BMX or around BMX including the pet DX partnership slightly different than some of the things you've done in the past. And it does get to a point we've had questions from investors about in terms of additional testing modalities, additional opportunities beyond sort of what's already on the market. Could you talk about the oncology opportunity? Or if there's others beyond that that you're thinking of in terms of some of the untapped markets and diagnostics? How do you see this partnership playing out over next couple of years? And sort of -- of the things you highlighted earlier this year how meaningful is that a contributor to 2022 overall? Or is that more of a long term factor?
Jay Mazelsky: Sure. Good morning, Mike. Pet cancer is the most prevalent cause of death in dogs. So there are about 6 billion positive cases of cancer of dogs just in the U.S., it's very significant. And if you take a look, that I just did a high level in terms of the process by which the veterinarian diagnosis and treats, it's very complex. It's fragmented and there aren't a complete set of diagnostic tools to help support that. So we think that there is a longer term very attractive market opportunity to be able to help veterinarians navigate cancer diagnosis and treatment. So we're building off our expertise in cancer pathology, which is really more today geared towards cancer identification and then really trying to get across the continuum of care which is the identification and staging and treating in monitoring and bring solutions to that full value chain of care. So the partnerships we announced, we think bring best in class technology to support that process. We're excited by it. It's still early stages in terms of market development. So I think it's less about the revenue opportunity near term and more about supporting veterinarians and helping them navigate what's very complex and what is increasingly pet owner driven demand for these types of services. I think over time it's a quite attractive opportunity. We bring, I think credible technical expertise to be able to support the veterinarian through this and we're excited by what we've learned and continuing to build off those capabilities over time.
Michael Ryskin: Great, thanks. And then a follow up question on the guide again. The 12% to 14% recurrent revenue in CAG is very solid guide and relative to initial expectations, you touched on and you commented that you expect clinical visit growth in the market to be positive. And you stated price again, but could you talk about some of the other moving pieces there. Just trying to get at the bridge from that clinical visit growth to the CAG recurring revenues whether it's diagnostic frequency diagnostic utilization? Just sort of the CAG premium could help us bridge what are the moving pieces there? That'd be helpful.
Brian McKeon: Yes, Mike. So I think the way to think about this as the as we were coming out of 2021 and clearly, we had a big step up in demand through the pandemic that we're confident that we can build off of that. So I think that's one key theme. And as you look at the calibrate this, the exit rate of our business in Q4 we had 13%, CAG DX recurring growth off that higher base. So we were entering the year with that kind of trajectory. And we see some positive drivers here. We're investing in international growth and feel good about the attraction and the potential there and we will have some incremental benefit from net pricing that we highlighted. And so the higher end of the range really reflects kind of building off of the momentum that we had I think to build on kind of Erin's question earlier, one of the metrics we share in our snapshot is just the average revenue per clinical visit in the inventor clinics in the U.S. and that increases Jay noted nearly 200 basis points from pre-pandemic levels from 4% to about 6%. So there's some underlying positive service trends here. And I think what you're seeing in our outlook is confidence that we can execute well, continue to execute well invest in ways that support that and if we can sustain that type of momentum we were, we think we can achieve those higher growth levels. And I think the lower end of the range really is more calibration going back towards more pre-pandemic type growth. It's not where we're necessarily projecting, but I think that that's a potential scenario as well. But all of this is building off of the higher demand. So it's some of this will come down to our execution. And I think things like Omicron or near term dynamics that we'll just need to manage through. As Jay mentioned, we don't see that as indicative of a longer term or an underlying demand issue. But the momentum on our business we feel very positive about and we're investing towards that. I think we've got a good strategy to keep building on that progress.
Michael Ryskin: Great. Thanks so much. Appreciate it.
Operator: Our next question is from Jon Block from Stifel.
Jon Block: Hey, guys, great. Good morning. Thanks. First question is on wellness, clinical visits. They can continue to do very well. The two year average actually accelerated from the third quarter 21 levels. So just love management spots on staffing capacity issues at vet practices, we continue to hear a lot about those. I think others do as well. Jay and Brian how difficult are they because you would think wellness would be impacted. But again, an accelerated and maybe you believe the underlying industry demand from consumers is actually potentially higher from what we're seeing work its way through and then I've just got a follow up. Thanks.
Jay Mazelsky: Yes. John, in terms of the wellness visits, and a couple of things that are potentially driving that. Obviously there's a lot of puppies and kittens who have now become dogs and cats. And I think there's a lot of pet owners who want to get their pets into the practice and being checked up and there's been an emphasis on wellness visits in the U.S. now for quite some time. So it's not new. Obviously there are some capacity constraints in some of these visits get pushed off a month or six weeks. And I think over time, that'll get relieved, but I think the under what we see as the underlying demand for wellness and checkups, is there and have been very robust as you pointed out, and we expect that to be able to sustain. Certainly we and others in the market place, I really focused and emphasizing preventive care, as they an important part of patient health.
Jon Block: Okay, fair enough. And the second one, built on Chris's earlier question. So Brian, I'll try to maybe push you a little bit more. I think CAG DX recurring guide was, I think solid and a lot of people's view. It implies a two year average of in and around 15.5%. You helped I thought a lot on the cadence of OP margin expansion in 2022. You call that the comps with anything specifically to call out for CAG DX recurring to your average for 1Q? I mean, you got a wildly tough comp. You call that Omicron headwinds that persists. Jan, maybe even in February. Could this be a situation where we're looking at an organic revenue CAG DX of mid single digits when we take that all into account? Or maybe just phrase it, frame it versus that the two year average of 15.5 for full year? Thanks, guys.
Brian McKeon: Look, the way I think we're thinking about this is we're building off this higher base. So we clearly had a period there where we needed to look at some two year metrics here to calibrate for 2020 effectively the pandemic dynamics. And now we're moving into sort of that phase of building off the higher base, I would say that there was some incremental benefit last year in Q4 from just the puppy boom and that I think is probably the key factor that sustains in the near term but for the most part we're normalizing off that hire base. And so I think that 12% to 14%, is that full year number one. We're not projecting by quarter, but I think we're that reflective of the overall momentum in the business. I think the Omicron dynamic is a near term dynamic in the U.S. that we didn't really see significantly in Q4. And then we're seeing some effects early here, what we'll sort that out as we go through the quarter, but I think the underlying momentum and trends we're targeting to remain strong and we'll work through these near term dynamics as they play out.
Jon Block: All right, thanks, guys.
Operator: Our next question is from Nathan Rich from Goldman Sachs.
Nathan Rich: Hi, good morning. Thanks for the questions. Brian, maybe starting with the OpEx guidance. I think you mentioned kind of the higher levels that you saw in the latter half of this year will continue into 2022. I guess it's kind of running in the back half of ‘21 was in the low 30% range in terms of revenue. Can you maybe talk about what you see the run rate being going forward both for 2022 and beyond because OpEx as a percent of revenue has come down a lot relative to historical levels? Do you see that getting back to historical levels are, you kind of feel like the current rate that we're adding is sort of what to expect as we go forward from here?
Brian McKeon: So I think the way to think about Nathan is we had a Q4 growth rate year-on-year about 15% and we're working, still working through some compares to some relatively more controlled growth at OpEx levels in the comparable prior year. And so entering into Q1 we expect kind of the that same dynamic will have a relatively higher rate of OpEx that'll be our most challenging compare. And, in general terms, I think, for the full year, you should expect us to be trending back more in line with kind of our overall revenue growth where we want to lean in and invest towards future growth. I think our market dynamics will, as they've been in the past be supported by solid gross margin improvement. And so I think longer term consistent with our longer term outlooks that we've shared at Investor Day, I think OpEx grow closer to revenue growth is a reasonable expectation.
Nathan Rich: Okay, that's helpful. And then, Brian, I don't know if you have any commentary on how we should expect kind of the weighting of earnings this year between like the first half and the second half, just kind of given the commentary on kind of the early first quarter trends as well as the higher OpEx levels. Is that going to kind of significantly change the typical seasonality that you usually see in the business?
Brian McKeon: Yes. It's more driven by compares than necessarily a change in seasonality, but I did mention that our margin improvement would be in the second half. And as we just discussed, I think are more challenging compare will be in Q1 in terms of the quarters this year, but that's again more reflective of year-on-year dynamic. The one thing to highlight specifically is we'll still be working through an LPD. We have the decline in the African swine fever revenues that really started in the third quarter of 2021. We'll still be working through those compares. So that'll have a dynamic as well.
Nathan Rich: Okay, great. Thanks a lot.
Operator: Our next question is from Ryan Daniels from William Blair.
Unidentified Analyst: Hey guys, for Ryan, most of my question has been asked. But I guess in the release you mentioned, you're still working your way through the ezyVet integration at least on the OpEx side. I was wondering how far along are you in that until you kind of, fully integrate, and you're no longer dealing with those expenses?
Jay Mazelsky: Good morning. Yes the ezyVet integration has gone quite well, where we're far along in terms of really integrating our sales approach and organizations and product roadmaps. And that continues to received extremely well in the marketplace and the things from the growth numbers that there's a lot of traction behind that. It's a key part of our strategy and over 80% of our PIMs placements were cloud based placements this quarter. So really good traction far long in integration and going well.
Unidentified Analyst: Great, thanks. And I guess, kind of just a quick follow up on the wellness visit color. With kind of that strong stack wellness growth, I was wondering if you guys are seeing any change in the proportion of those that have included a 10 panel like with a large growth are you seeing that kind of proportion come down are you kind of maintaining what the historical rate was with that growth?
Brian McKeon: Yes, I mean, it's been pretty constant in terms of panel mix. It's something we don't break out. These are largely configured panels for wellness. So when customers use that get a lot of variation quarter-to-quarter. And so with that, I'd like to thank everybody for joining this morning's call. I know we have some employees who are listening. I would like to say thank you to them for their excellent performance and continued passion for our purpose. Day in and day out, our team delivered excellent results aligned to our long term opportunity while also demonstrating unwavering commitment to our purpose in navigating and evolving landscape through the continued pandemic impacts. Very grateful for the IDEXX team, and the purpose which drives our work. And so with that, we'll conclude the call. Thank you.
Operator: Thank you ladies and gentlemen. That concludes today's conference. Thank you for participating and you may now disconnect.
