Brian McKeon:

Good morning, and welcome to our first quarter earnings call. Today, I'll take you through our Q1 results and review our updated financial outlook for 2024.

Jay Mazelsky:

Thank you, Brian, and good morning. IDEXX had a solid start to the year as we continue to advance our strategy to drive the development of the Companion Animal diagnostics sector through innovation and customer engagement. Our ongoing progress benefits from the durable secular growth drivers that have supported the multi-decade expansion of Companion Animal Medical Services. These drivers include growth in the pet population in the strengthened human pet bond as well as the ongoing expansion of pet healthcare services. Medical services is in turn enabled by diagnostics and is a key element of vet clinic growth and profitability.

Operator:

[Operator Instructions] We'll go first to Chris Schott with JPMorgan.

Brian McKeon:

Thanks for the question, Chris. Maybe I can provide a little clarity on the numbers upfront and then turn it over to Jay to talk about the dynamics. We mentioned that clinical visits were relatively softer than we expected in the U.S. in the first quarter. On our last call, we had talked -- we did anticipate some weather impacts, but I think we were expecting the flattening trends that we've been planning for to emerge. And the trends coming out of the quarter were down about 1.5% versus prior year and so that was relatively softer.

Jay Mazelsky:

Yes, sure. The way I think about it is both from a customer standpoint, meaning the veterinarian and then the consumer or the pet owner standpoint. And we know that pet owners continue to prioritize spend for healthcare services and general spend on their pets vis-a-vis other priorities, be it building out the dinner, entertainment, travel, that sort of thing. When we -- the conversation we're having with customers is largely very positive. They're very positive on the outlook. They continue to invest in their practices.

Nathan Rich:

Great. Can you hear me okay?

Nathan Rich:

Great. I wanted to follow up on Chris' questions. I guess, you talked about the kind of end of first quarter traffic running a bit below the prior expectations. I guess, would you be able to comment on -- is April kind of in line with that 1.5% decline? And I guess more importantly, as we think about over the balance of the year, it sounds like you expect some improvement in traffic levels.

Brian McKeon:

Well, I'll take a moment to just try to help with some of the first half to second half bridging. So you obviously have our Q1 results. And in my comments, I highlighted our expectations around Q2, the organic growth of 6% to 8.5%.

Brian McKeon:

Sure. To your point, we feel very good about the start that we had in terms of the profit performance and the gross margin performance. We sustained our outlook despite taking down the high end organic growth outlook. So I think that just reflects some of the underlying operational execution benefits that we're getting and our confidence in the ability to deliver solid operating margin gains this year.

Operator:

We'll go next to Michael Ryskin with Bank of America.

Brian McKeon:

And Mike, I'd just reinforce, I think we've consistently demonstrated the ability to grow -- continue to grow solidly and deliver strong financial performance. And so even as we work through kind of the growth off of the higher base that was established post the pandemic and through some of the more recent kind of macro dynamics that we've been highlighting, I think we will continue to find a way to advance our growth agenda, invest behind those things that are important while continuing to deliver strong financial results. So we remain committed to that and we would build a strong track record to support that outlook.

Brian McKeon:

What we -- I think we've laid out our outlook for this year and our assumptions to reinforce, we expect approximately 5% price improvement this year, and that supports the operating margin outlook that we shared today and the strong comparable EPS growth as we invest in advancing our R&D agenda, we highlighted we're investing more there and we're excited about what's going to come. So we're confident in our financial outlook that we shared today.

Jay Mazelsky:

Yes. They've been -- customers, in general, have been very enthusiastic about the product itself. They like the fact that it addresses very high-volume, time-consuming critical use cases within the practice, either cytology and blood morphology. One of the things that customers continue to tell us is they know they should be doing more blood morphologies that they're doing just as part of a complete CBC or hematology workup. And now they feel like they're going to be able to do it because it just makes a lot of sense.

Erin Wilson Wright:

Great. Can you talk a little bit about the competitive landscape? Do you think that there's more of an opportunity to see some more meaningful market share gains, either across the smaller practices or corporate accounts as well? And there's clearly been some disruption in terms of ownership structure, in terms of distribution changes and I'm just thinking about how you can kind of take advantage of that? And if you have seen any notable kind of share gains to date?

Jay Mazelsky:

Yes. So a couple of questions there. The inVue from a focused standpoint, obviously, the IDEXX customers who already enjoy our VetLab suite, our obvious customers from targeting or focus standpoint, we know they'll fit right in with their workflow and already partnership they have with IDEXX.

Jonathan Block:

I don't think really -- a shocker that I'm also going to try to hit on visits and just sort of need to because your stock is largely tailored to seeming with the data. For visits, you mentioned macro capacity constraints weighing on the overall vet visits. And some of our checks seem to tease out, call it like a higher sensitivity from the pet owner. You're taking price and in many cases that, that might be marking up 2, 3, 4x somewhere in there.

Jay Mazelsky:

Yes. Let me -- Jon, I'll take that. The -- we obviously don't control in pricing to the [indiscernible] that's up to practices and veterinarians. So lot of things factor into that. They're investing in their staff. We think that's a good thing when they retain their staff and really upscale the fellows who are supporting pet owners, that's a long-term driver and a point of stability within practices. And I think coming out of the pandemic, that was a real challenge for them.

Brian McKeon:

Yes. And Jon, just to reinforce Jay's point, I think we align our pricing with the value we were delivering on the underlying inflationary dynamics that we're seeing. And we'll continue to factor that in. And our outlook is consistent with what we shared earlier for 2024, which is approximately 5% net price realization globally.

Brian McKeon:

Jon, can you just clarify your first question? I just wanted to follow what you were trying to get at when you said -- was it a full year question you're asking? Yes, just trying to clarify what...

Brian McKeon:

It's obviously a broader set of considerations, but I think directionally, your point is valid, which is -- if trends continue to be softer, that would be a factor that could be leading us towards the lower end.

Brian McKeon:

Look, I look forward to sharing more. As we get closer to launch, we'll maintain the approach that we've used in the past that -- we'll share that when we we're closer to commercial launch. We're very excited about the inVue advancing and that's on track. And as you know, will contribute directly, and we'll have a lot of multiplier benefits to our business. And I know our sales force is very excited about that, and we are too. And we continue to advance our second platform. And we'll share more on that over time, and we see that as also being an additive driver for our business over time.

Navann Ty Dietschi:

A few followups on vet visits. If you could comment on the U.S. vet industry progress on addressing shortages and mental health of vets and using more vet technicians to assist vets, has this continued? And can you discuss any progress to date? And another follow-up on the macro headwinds on the pet owner side, what are your assumptions for the full year vet visits, wellness and non-wellness, please?

Ryan Daniels:

Maybe just one quick one in the interest of time. You've talked about the longer-term dynamics of higher diagnostic utilization as pets age through their life cycle. And I know you also have some data about kind of larger than normal pet population growth post the pandemic. So I'm curious if you could give us your thoughts on when we might start seeing the benefits of that flowing through in the industry in regards to diagnostic use?

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2023 results and to provide an overview of our financial outlook for 2024. IDEXX had a strong finish to 2023, reflected in our fourth quarter performance. Revenues increased 8% organically, supported by 10% organic gains in CAG Diagnostic recurring revenues, net of a 1% growth headwind from fewer equivalent selling days. Operating profits increased 8% as reported and 10% on a comparable basis, benefiting from solid gross margin gains and OpEx leverage. These factors and a lower-than-expected effective tax rate supported delivery of $2.32 per share in EPS in Q4, up 17% on a comparable basis. IDEXX execution enabled delivery of strong full year financial results reflected in 9% overall organic revenue growth and high comparable operating margin gains. This supported a 29% increase in EPS for the full year on a comparable basis, including 12% of combined EPS growth benefit from a customer contract resolution payment and the lapping of discrete 2022 R&D investments. These results were driven by 10.5% full year organic growth in CAG Diagnostic recurring revenues, reflecting 11% organic gains in the US and 10% organic growth in international regions, aligned with our original full year growth targets. We also achieved 19% full year organic growth in recurring software and digital imaging revenues, sustained high customer retention levels and placed a record number of CAG premium instruments, which drove an 11% expansion of our global premium installed base. These strong execution trends position us well as we enter 2024 and advance our growth strategy. This year, we're targeting 10% organic revenue growth at the high end of our initial guidance range of 7% to 10% overall organic revenue growth, supported by 7.5% to 10.5% organic gains in CAG Diagnostic recurring revenues. We're also planning for solid comparable operating margin gains, building on our long-term track record supporting continued high comparable EPS growth. We'll walk through the details of our financial guidance later in my comments. Let's begin with a review of our fourth quarter results. Fourth quarter organic revenue growth of 8% was driven by 9% organic gains in our CAG business. CAG Diagnostic recurring revenue increased 10% organically in Q4, reflecting 9% gains in the US and 12% growth in international regions, net of a 1% global growth headwind from equivalent days effects. CAG Diagnostic organic recurring revenue growth was -- in Q4 was supported by average global net price improvement of 6% to 7%, with US net price gains at the low end of this range. IDEXX execution drivers supported volume gains of 4% in both US and international regions normalized for days effects, reflecting an improvement from Q3 volume growth levels and the strongest normalized volume growth quarter in 2023. IDEXX CAG Diagnostics recurring revenue growth remained solidly above sector growth levels. In the US, CAG Diagnostic recurring revenue increased 9% organically, net of 1% negative growth rate impact from fewer equivalent selling days in Q4. This reflects a 1,050 basis point normalized growth premium compared to US clinical visit growth levels, which declined an estimated 0.5% in the quarter on a same-store basis. IDEXX execution drivers drove solid US value growth in the quarter, reflecting benefits from new business gains, high customer retention levels and sustained diagnostic frequency levels per visit. International CAG Diagnostic recurring revenue growth was 12% in Q4, reflecting benefits from higher net price realization and improved volume gains. International results were also supported by strong IDEXX execution, reflected in continued solid growth in premium instrument placements, which supported a 13% year-on-year increase in our international premium instrument install base. IDEXX achieved solid organic gains across our major testing modalities in the fourth quarter. IDEXX VetLab consumable revenues increased 13% organically, reflecting double-digit gains across US and international regions. Consumable gains were supported by an 11% increase in our global premium install base in 2023, reflecting strong gains across our Catalyst, Premium Hematology, and SediVue platforms. For the full year 2023, we achieved a record 19,000 premium instrument placements with excellent quality, reflected in sustained, high new and competitive catalyst placements. In Q4, we placed 5,241 premium instruments, up 3% from high prior year levels, driven by strong gains in SediVue placements and continued expansion of ProCyte One. Overall CAG instrument revenues declined 3% organically in the quarter, reflecting comparisons to high prior year levels, program pricing effects, and global mix. Rapid Assay revenue grew 9% organically in Q4, supported by benefits from net price increases and solid volume gains in the US. Global lab revenues expanded 7% organically, reflecting high single-digit gains in the US and sustained solid organic revenue growth in international regions. CAG Veterinary Software and Diagnostic Imaging revenues increased 6% organically in Q4, compared to strong prior-year levels. Results continued to be supported by double-digit growth in recurring revenues and ongoing momentum in cloud-based software placements. For the full year, Veterinary Software and Diagnostic Imaging revenues increased 11% organically, supported by 19% organic gains in recurring revenues. In our other business segments, water revenues increased 5% organically in Q4 compared to strong prior year levels, supported by continued solid gains in the US and Europe. Overall growth in the quarter was moderated by lower China revenues and year-end order timing. For the full year, Water revenues grew 8% overall and 7% organically. Livestock, Poultry and Dairy revenues decreased 4% organically in Q4 as solid gains in the US, Europe and Latin America were offset by declines in herd health screening revenues and comparisons to higher prior swine testing levels in China. For the full year, LPD revenues were down 1% organically as solid gains across our core ruminant poultry and swine businesses were offset by declines in areas like herd health screening, reflecting regional macro dynamics. We expect to work through comparison issues in herd health screening post the first quarter of 2024. Turning to the P&L. Q4 operating profit increased 8% as reported and 10% on a comparable basis, supported by solid comparable operating margin gains. Gross profit increased 9% as reported and on a comparable basis. Gross margins were 58.4%, up 50 basis points on a comparable basis, adjusting for 70 basis points of negative FX impact, primarily related to the lapping of prior year hedge gains. Gross margin gains reflected benefits from net price improvement, which offset inflationary cost impacts, favorable business mix impacts from strong consumable growth, and higher software service gross margins. Operating expenses were up 9% as reported and 7% on a comparable basis in the quarter, reflecting growth in commercial investments and increases in R&D spending aligned with advancing our innovation initiatives, including our new instrument platforms. For the full year 2023, operating margins were 30%, including approximately 40 basis points of benefit from the Q1 customer contract resolution payment. On a comparable basis, full year operating margins increased 390 basis points, including 280 basis points of combined benefit from the customer contract resolution payment and the lapping of discrete 2022 R&D investments. For the full year, foreign exchange reduced operating margin gains by 60 basis points, primarily related to the lapping of prior year hedge gains. Q4 EPS was $2.32 per share, up 17% on a comparable basis. In Q4, EPS benefited from a lower effective tax rate. This reflected the release of valuation allowances in certain jurisdictions, which lowered our full year effective tax rate by approximately 100 basis points and increased EPS by $0.10 per share. Fourth quarter EPS included $0.02 in tax benefits from share-based compensation activity and $0.04 in headwind from foreign exchange changes primarily related to the lapping of 2022 hedge gains. FX hedge gains were $2 million in the quarter. Full year EPS was $10.06 per share, an increase of 29% on a comparable basis, including 12% of combined EPS growth benefit from the Q1 customer contract resolution payment and the lapping of discrete 2022 R&D investments. For the full year, stock-based compensation activity provided $14 million or $0.16 per share in tax benefit, lowering our effective tax rate by 130 basis points. As noted, full year comparable EPS growth also benefited by $0.10 per share or approximately 1% from the release of tax valuation allowances in certain jurisdictions. Foreign exchange increased Q4 and full year revenue growth by approximately 1% and 0%, respectively. For the full year, foreign exchange reduced operating profits by $25 million and EPS by $0.24 per share, primarily related to the lapping of 2022 hedge gains. In 2023, full year foreign exchange hedge gains were $4 million. Free cash flow was $773 million for 2023 or 91% of net income. Free cash flow conversion was above the high end of earlier projections, reflecting timing and control of capital spending. Capital spending was $134 million for the full year or 3.7% of revenue. Our balance sheet remains in a strong position. We ended 2023 with leverage ratios of 0.7 times gross and 0.4 times net of cash. Our 2024 interest expense outlook incorporates recent forward interest rates and expectations for similar leverage ratios this year. We allocated $38 million to repurchase 90,000 shares in the fourth quarter. For the full year 2023, we allocated $83 million to repurchase 175,000 shares. Targeted deployment of cash to share repurchases supports our projected 0.5% to 1% reduction in diluted shares outstanding for the full year 2024. Turning to our 2024 full year outlook. We're providing initial guidance for revenues of $3,930 million to $4,040 million, an increase of 7.5% to 10.5% on a reported basis. On an organic basis, this reflects a growth range of 7% to 10% overall, supported by 7.5% to 10.5% organic growth in CAG Diagnostic recurring revenues. Current exchange rates, we expect foreign exchange to have limited impact on full year revenue growth. Our reported revenue growth outlook includes approximately $15 million of projected revenue from our recent software acquisition, which Jay will highlight in his comments. In terms of the key drivers of our 2024 organic growth outlook. The midpoint of our CAG Diagnostic recurring revenue growth range incorporates expectations for global net price gains of approximately 5% and volume gains of approximately 4%, aligned with assumptions for relatively flat US clinical visit same-store growth levels post Q1. As we'll discuss, we have seen some effects from severe US weather trends in January, which we expect will impact overall Q1 clinical visit growth levels. Our full year outlook reflects a US volume growth premium to US clinical visits aligned with our trends in the second half of 2023, supported by expectations for continued solid global growth benefits from IDEXX execution drivers. The higher end of our CAG Diagnostic recurring revenue growth outlook range captures the potential for improved sector visit and same-store growth trends and overall IDEXX volume growth potential. The lower end of the range calibrates for potential risk to our targeted growth goals, including effects from macroeconomic conditions. The high end of our overall organic revenue growth guidance of 10% is aligned with our long-term goals. We expect overall organic growth to be constrained somewhat by expectations for modest organic growth in LPD and comparisons to strong prior year instrument placement levels. Our reported operating margin guidance for the full year of 2024 is 30.2% to 30.7%. On a comparable basis, this reflects an outlook for 20 to 70 basis points of improvement in comparable annual operating margins, net of a negative 40 basis point operating margin impact related to the lapping of the Q1 2023 customer contract resolution payment. We're planning for solid gross margin gains on a comparable basis in 2023, supported by continued strong growth in CAG Diagnostic recurring revenues, expansion of our cloud-based software business, and benefits from lab productivity initiatives. We expect limited impact from foreign exchange on 2024 revenue growth and operating margin at the rates assumed in our press release. We estimate foreign exchange will increase full year EPS by $0.02 per share given current hedge positions. In terms of sensitivities to changes to the foreign exchange rates assumed in our press release, we projected that a 1% change in the value of the US dollar would impact full year reported revenue by approximately $30 million and operating income by approximately $4 million net of hedges. Our 2024 EPS outlook is $10.84 to $11.33 per share. This reflects an increase of 8% to 13% as reported and, on a comparable basis, net of a 2% EPS growth headwind from the lapping of the customer contract resolution payment and 1% of headwind related to lapping and benefits from tax valuation reserve releases in 2023. Our EPS outlook factors in a 1.5% increase in our overall effective tax rate to approximately 22% in 2024, reflecting these lapping impacts and lower projected benefits from share-based compensation activity. Our EPS outlook captures expected benefits in 2024 from lower interest expense compared to 2023, as well as expectations for reductions in average share count. Our 2024 free cash flow outlook is for a net income to free cash flow conversion ratio of 90% to 95%, aligned with our long-term goals. This reflects estimated capital spending of $180 million or approximately 4.5% of revenues. Overall, we're well positioned to deliver continued strong financial performance in 2024. In terms of our operational outlook for Q1, we're planning for overall organic revenue growth of 6% to 8%, factoring in approximately 1% of negative growth impact from severe weather in the US in January, and constraints on Q1 growth in areas like LPD related to tougher year-on-year comparisons. Reported revenue growth should be largely in line with organic revenue growth estimates. In terms of our profit outlook, we're planning for reported operating margins of 29.4% to 29.8% in Q1. This reflects an outlook for flat to moderate expansion in comparable operating margins, adjusting for the lapping of the prior year $16 million customer contract resolution payment recorded in Q1 2023 as an offset to operating expense. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. [Operator Instructions] Our first question today comes from Chris Schott of JPMorgan. Please go ahead.

Brian McKeon:

Thanks, Chris. Yes, the guidance range represents about a 3% range. I think we highlighted in our comment some of the logic around the midpoint outlook, which largely captures, I think, the underlying sector trends that we've seen recently in the business, as well as the benefits that we're getting from our execution. The higher end of the range really builds in the potential for sector improvement. I think that we see clinical visit growth levels, same-store sales levels internationally have been below what we think will be the longer-term trends in our sector. And so that captures a potential for upside on that front as well as even stronger execution from our teams. And I think the downside from that midpoint view is capturing risks, including macro risks. And so it's not all that different than I think where we started last year, and we ended up delivering at the higher end of our range, supported by strong execution. So we'll always strive to do that, but that will involve some improvement in the sector trends in terms of the assumptions that we laid out.

Nathan Rich:

Great. Good morning. Thanks for the questions. Maybe just kind of following up on that. I wanted to make sure I kind of understood the kind of underlying end-market assumptions that's embedded in guidance. I guess, could you maybe kind of talk us through how you see the year playing out? I know you said 100 basis point impact from weather. But I'd be kind of interested if you can maybe just detail your kind of clinical visit expectations for the first quarter. And then you said kind of flat same-store visits kind of post Q1. Would you expect to be around that level in Q2 and then over the balance of the year? And the other thing that I think stood out from your prepared remarks was just the strongest kind of normalized volume growth in the fourth quarter of 2023. Just any color you could share on kind of what drove that, and maybe what you're kind of expecting over the balance of '24? Thank you.

Jay Mazelsky:

Yes. And then -- and just to add some color to Brian's remarks. Yes, the end-market appears to be stabilized and healthy. There's good underlying client and pet owner demand, if you take a look at both practice revenue and clinic revenue, it was about 5% in the fourth quarter. From a positioning standpoint, I think customers appreciate the technology solutions that we bring across in all the diagnostic testing modalities. Even more so with software, I think there's a new hunger for really looking at tools that can help them run their practices better, whether it's workflow productivity play, communications, client and internal communications, but also as part of the delivery of care and the way it all integrates. So I think the assumption is that customers will continue to work through some of the capacity challenges that they've had and looking for tools and partnerships to be able to do that. And we're especially, I think, well positioned to help them.

Operator:

Our next question today comes from Michael Ryskin of Bank of America.

Brian McKeon:

Mike, why don't I just briefly address the guidance question then let Jay talk more about the inVue launch? But the -- we've included the assumption for the launch in our overall guidance. It will be principally instrument revenue benefits in the fourth quarter, as we build the annuity revenues over time from that instrument, that it's all captured in our outlook.

Operator:

We will now take a question from --

Michael Ryskin:

Thanks so much for coming back to me. Appreciate that, Jay.

Unidentified Analyst:

Hi. Good morning. Thanks for taking my question. Just a follow-up on inVue, if you could provide maybe the early KOL feedback regarding the slide-free and load-and-go technology or any other area of feedback and whether you're able to provide more information for modeling purposes, including the timing of additional indication. And I just have also a second question, whether we could expect further innovation to be announced on assays in 2024? And would you consider for further M&A in software? Thank you.

Operator:

Our next question today comes from Erin Wright of Morgan Stanley.

Jay Mazelsky:

Yes. So with respect to the point-of-care platform launches. We have a very well-defined tried and true method of developing platforms, putting it in the hands of customers, getting feedback in terms of how it works within a real operating environment. We know that there's a difference between bench-top development and what you see within the clinic when we launch something and begin shipping it. We want to make sure that the average time between support events are four, five, six years. These are world-class levels of performance. And our customers expect that of us. We don't want to premature launch and maybe have issues that are disruptive to the practice environment. So we're comfortable with what we've guided to in terms of the timing of that and making sure that it fits within software ecosystem and the overall operating environment of the practice itself. We're not further disclosing our next point-of-care platform other than what we've talked in the past, we have one, it's outside of the existing testing categories, and when we get closer to launch, we'll talk about it.

Jay Mazelsky:

Yes. Our markets have been very competitive for a long time. I think new ownership hasn't really changed that dynamic. Some of our competitors were also partners with on the clinical services and equipment side. Customers have a choice. Our focus is on continuing to innovate to help address the challenging problems they have in the practice, whether it's capacity constraints, whether it's introducing new testing solutions, to give them better medical results. What we find at the end of the day is customers appreciate the integrated nature of our offering, the ability to generate seamless user-friendly, customer-friendly way these critical insights that inform great medical decisions that help produce outcomes and do it productively. That's where our focus is and that's where our focus is going to remain.

Jonathan Block:

Thanks, guys. Good morning. Brian, maybe just from a modeling perspective. Anyway to think about the gross margin versus op margin expansion this year? Do we get GM expansion because another decent year with price? And then if you look at OpEx, R&D was up for the fourth quarter in a row, actually, the R&D was up 20% year-over-year, G&A down two quarters in a row. So just anything on the GM or OpEx to detail as we sort of sharpen our pencils on '24?

Jonathan Block:

Okay. Great. That was very helpful. Thank you for that. And then just sort of a long second question, more clarification. So it seems like the 2024 vet visit growth expectation is zero, if I had that right, at the midpoint of your 7.5% to 10.5% CAG Dx recurring. I just want to make sure I got that right. And then what's the expectation for 1Q'24 visits. Was that the negative 1% for full quarter? I'm just trying to sort of get at the implied 2Q to 4Q vet visit assumption? And then just sort of a quick miscellaneous tack-on, anything for price to call out US versus international when we think about the 5% global? And then what about days? Do you get an extra day this year? And does that have any tailwind to the growth rates? Thanks, guys/

Jonathan Block:

All right. Thanks, guys.

Operator:

This concludes today's call. Thank you for your participation. You may now disconnect.

Brian McKeon:

Good morning and welcome to our third quarter earnings call. Today I'll take you through our Q3 results and review our updated financial outlook for 2023. In terms of highlights, IDEXX achieved solid revenue growth and strong profit gains in the third quarter. Overall revenues increased 8% organically, supported by 9% organic growth in CAG diagnostic recurring revenues net of approximately 50 basis points of negative impact from fewer equivalent selling days. Organic revenue growth was supported by sustained benefits from IDEXX execution drivers including continued strong premium instrument replacements, solid new business gains, high levels of customer retention and high growth in recurring veterinary software revenues. Overall CAG diagnostics recurring revenue gains in the quarter were moderated by a 2% same-store decline in US clinical business. This was below our expectations for relatively flattening US clinic visit trends, reflecting ongoing capacity management challenges at US clinics and relatively softer wellness visit levels. Operating profit results were ahead of our expectations supported by gross margin gains and operating expense leverage, which enabled EPS delivery of $2.53 per share, up 18% as reported and 16% on a comparable basis. Based on our strong financial results in the quarter, we're updating our full year EPS outlook aligned with the higher end of our previous guidance range. This reflects expectations for strong comparable operating margin gains this year. We're also updating our full year revenue guidance ranges to incorporate our Q3 results and recent sector trends, as well as to reflect the recent strengthening of the US dollar. We will review our updated guidance detail later in my comments. Let's begin with the review of our third quarter results. Third quarter organic revenue growth of 8% was driven by 8% organic CAG gains and 7% organic growth in our Water business. Overall, organic revenue growth was moderated by 2% organic growth in our LPD business and approximately $3 million of headwind related to lower opti medical revenues including effects from the wind down of our human COVID testing business. CAG diagnostic recurring revenue increased 9% organically, reflecting 8.3% gains in the US and 10.3% growth in international regions net of a 0.5% global growth headwind from equivalent days effects. CAG diagnostic organic recurring revenue growth in Q3 was supported by average global net price improvement of approximately 7%, in line with our expectations for 6% to 7% gains in the second half of the year. Overall, organic revenue growth was supported by 13% organic growth in veterinary software and diagnostic imaging revenues, driven by continued strong gains in recurring software revenues. GAC instrument revenues were down 10% organically, reflecting comparisons to high priority levels, program pricing effects and global mix. IDEXX CAG diagnostic recurring revenue growth remains solidly above sector growth levels. In the US, CAG diagnostic recurring revenue organic growth was 8.3%, including approximately 50 basis points of negative impact from fewer selling days in Q3. This reflects an approximately 1100 basis point normalized growth premium, compared to same-store US clinic visit growth levels, which declined an estimated 2% overall in the quarter. IDEXX’s growth results reflect continued increases in diagnostic frequency and utilization per clinical visit at the practice level. Instrument benefits from IDEXX execution drivers, including higher net price realization, solid new business gains, and sustained high customer retention levels. As noted, same-store US clinic visit declines of 2% were below our expectations for relatively flat clinic visit growth in the second half of 2023. Software trends in Q3 a period of an impacted by ongoing capacity management challenges at US clinics, including effects from high staff turnover. We also saw a relative slow down in wellness visits in the quarter, which may reflect some macro impacts on demand at the clinic level. We refined our full year revenue outlook to capture potential impacts from these trends in Q4, while reinforcing our strong outlook for 2023 profit performance. IDEXX international CAG diagnostic recurring revenue growth was 10.3% in Q3, reflecting continued benefits from higher net price realization, and improved volume gains. International results were also supported by strong IDEXX execution, reflected and sustained new business gains and high Q3 premium instrument replacements, which supported a double-digit expansion of our premium instrument installed base. Double-digit growth rate benefits from IDEXX execution offset negative impacts from international macro conditions, which continue to pressure same-store volume growth trends in the quarter. Globally Q3 results were supported by strong growth of IDEXX in-clinic CAG diagnostic recurring revenues. IDEXX VETLAB consumer revenues increased 11% organically with double digit gains in US and international regions. Consumer gains were supported by 11% year-on-year growth at our global premium instrument installed base, reflecting strong gains across our catalyst, premium hematology and set-of-you platforms. We placed 4,571 CAG premium instruments in Q3, a decrease of 4% year-on-year, compared to record prior year levels, which included benefits from our international launch of ProCyte One. The quality of instrument replacements continues to be excellent reflected in solid global gains in EVI metrics and sustained high new and competitive catalyst placements in the US. Global catalyst placements decreased 2% overall reflecting tough comparisons to high prior year international placement levels. ProCyte One installed base expansion continued at a solid pace reflected in a global installed base of over 12,000 instruments. Global Rapid Assay revenues expanded 8% organically in Q3, supported by strong growth in the U.S., including benefits from higher net price realization. Global lab revenues increased 7% organically, reflecting high single-digit gains in the U.S. and relatively improved mid-to-high single-digit growth in International regions. In other areas of our CAG business, Veterinary Software and Diagnostic Imaging revenues increased 13% organically. Results were supported by continued high levels of organic growth in recurring software and diagnostic imaging revenues and ongoing momentum in cloud-based software placements. Water revenues increased 7% organically in Q3, compared to strong prior year growth levels. Growth was driven by continued solid gains in the U.S., including benefits from net price improvement. Our Tecta-PDS acquisition integration continues to progress well and added 1% to reported Water growth. Livestock, Poultry and Dairy revenues increased 2% organically, as strong gains in the U.S. continue to be moderated by constraints on International growth, including impacts from lower herd health screening revenues related to reduced China import testing. Turning to the P&L, Q3 profit results were supported by high comparable operating margin gains, including benefits from operating expense leverage. Gross profit increased 8% in the quarter as reported and on a comparable basis. Gross margins were 59.9%, up 30 basis points on a comparable basis, compared to strong prior year levels. Gross margin gains reflected benefits from higher net price realization, business mix and improvement in software service gross margins. As expected, reported gross margin gains were moderated by a 60-basis point negative impact related to FX, driven by the lapping of prior year hedge gains. We're projecting an approximate 70 basis point gross margin headwind in Q4 related to FX, again primarily related to the lapping of prior year hedge gains. On a reported basis, operating expenses increased 4% year-on-year as reported and on a comparable basis, reflecting benefits from cost controls and lapping of prior year R&D and commercial investments. We're planning for a higher level of OpEx growth in Q4 as we advance our U.S. commercial expansion and increased R&D investments aligned with our innovation initiatives, including our planned 2024 new platform launch. EPS was $2.53 per share in Q3, an increase of 18% as reported and 16% on a comparable basis. Foreign exchange reduced operating profits by $1 million and EPS by $0.01 per share in the quarter, including impacts from the lapping of $9 million in prior year hedge gains. Impacts from 2023 foreign exchange hedges resulted in a $1 million gain in the quarter. Free cash flow was $238 million in the third quarter. On a trailing 12-month basis, our net income to FCF conversion ratio was 83%. For the full year, we're updating our outlook for free cash flow conversion to 85% to 90% of net income at the higher end of our earlier projections reflecting estimated capital spending of $160 to $180 million. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.8x gross and 0.6x net of cash. Share repurchases over the last year supported a 0.1% reduction in diluted shares outstanding for the quarter. We allocated $35 million in capital to share repurchases in the third quarter, as we continue to manage our balance sheet relatively more conservatively in the current interest rate environment. Turning to our 2023 P&L guidance, we're updating our full-year outlook to incorporate our Q3 results and revised estimates for foreign exchange impacts, reflecting the recent strengthening of the U.S. dollar. Our updated full-year guidance for reported revenues is $3,635 million to $3,650 million, reflecting a 7.9% to 8.4% reported growth range. The updated reported revenue outlook includes a $20 million reduction for FX impacts, compared to prior estimates. We now estimate FX will reduce full-year reported growth by approximately 0.5%, with limited year-on-year revenue growth effects in Q4. In terms of our operational revenue growth outlook, we are updating our full-year organic growth guidance to 8.3% to 8.8%, supported by an outlook for CAG Diagnostics recurring revenue organic growth of 9.8% to 10.3%. This aligns with the lower end of our most recent guidance ranges in the midpoint of our original outlook for 2023. Our organic growth guidance assumes a level of continued pressure on U.S. same-store clinical visits and International same-store sales levels in Q4 reflecting ongoing clinic capacity management dynamics and macro-economic impacts on demand. Consistent with earlier guidance our outlook for CAG Diagnostics recurring revenue growth reflects continued solid, positive benefits from IDEXX execution drivers, including consistent expectations for 6% to 7% net price improvement in the second half of 2023. In Q4, we expect global net price improvement within this range, with U.S. net price gains of 6%, reflecting the lapping of prior year price increases. Our Q4 outlook also incorporates a 1% equivalent day volume growth headwind. We're maintaining the high end of our reported EPS outlook and narrowing the full-year EPS guidance range to $9.74 to $9.90 per share, an increase of $0.05 per share at midpoint. At midpoint we're maintaining a consistent operational EPS outlook, as revisions to our organic revenue growth range are offset by positive adjustments to our projections for operating margins incorporating our strong year-to-date performance. We've increased the outlook for reported operating margins to 29.6% to 29.8% for the full year. This reflects an outlook for 360 to 380 basis points in comparable operating margin expansion, including approximately 280 basis points in combined benefit from the $16 million Q1 customer contract resolution payment and the lapping of $80 million of discrete R&D investment in the second quarter of 2022. Our updated full year EPS guidance incorporates $0.11 per share in positive revisions combined to our interest expense and tax rate outlook including $0.04 in upsides related to share based compensation tax benefits. These gains are partially offset by $0.05 of negative impact from foreign exchange changes at updated rates. We now estimate that foreign exchange impacts will decrease EPS by $0.25 per share for the full year and will reduce reported full year operating margins by 70 basis points including impacts from the lapping of $26 million in 2022 hedge gains. We've provided details on our updated 2023 outlook in the press release tables and earnings snapshots. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

[Operator Instructions] Moving first to Michael Ryskin of Bank of America. Your line is open. Please go ahead.

Jay Mazelsky:

Yeah, good morning Mike. This is Jay. Just a couple things, maybe at a higher level and I’ll turn it over to Brian talk about some of the specifics related to the model. Keep in mind the backdrop of the sector is very positive. It's just been an expanded pet population. I think the human health and pet pop has very, very strong. Our execution drivers as a company the things that you know, we can directly influence have been very strong. We've seen that in instrument placements and in PIMS placements, net retention, pricing realization. So all those things I think are very good. We think there's been very good end-customer demand as we cited. There are some constraints related to practice capacity and some challenges there. I think the good news on that front is the practices have hired their baby some yeah, some additional charts that they're working through, but they're investing heavily and in technology, we see that with the use of our lab equipment, both in-clinic, as well as reference labs. And obviously, the appetite for software and applications that help them with optimized workflow have continued to grow. And then overall, our competitive position is very strong and we think as a result of our innovation pipeline, we will continue to be strong enough for some differentiated advantages. So, I think from an industry standpoint, it's a very positive story. I think we're well positioned to capitalize on those trends and the practices just continued to work through some of the constraints we cited.

Michael Ryskin :

Okay. All right. And maybe I'll use my follow-up to just be a little bit more direct on ‘24. I know you're not guiding for ‘24. I'm not asking for ‘24 guide. But just looking at where consensus is right now, it is still at that roughly 10% number. Just given what we see about market conditions, as we sit today, I mean, in November, we've already got a pretty good sense of where they are. Do you think that there's a risk that ‘24 - 2024 is also below that long-term trend line – that long term model?

Michael Ryskin :

Thanks.

Nathan Rich:

Hi, good morning. Can you hear me?

Brian McKeon:

We do.

Nathan Rich:

Great. Hey, good morning. Thanks for the questions. Just wanted to ask about the, the US CAG Diagnostic recurring performance in the third quarter and maybe just if you could go into a little bit more detail on how that played out relative to expectations? Obviously, traffic decelerated during the quarter, but from a diagnostic volume standpoint, I'd wonder if you can maybe, was there anything from a category standpoint that was more challenging than you had expected? And I'll stop there and then maybe ask my follow up next.

Jay Mazelsky :

Yeah, couple additional about comments for - to cover. We always start with PIM customer demand and for what we've seen in the talking with our customers that this good end-market demand certainly pet owners continue to prioritize and against the whole other spending categories, they're bringing their bring their pets to the veterinarian and making sure that they get the care that they need. The other piece that we've been spending time, looking at is just overall employment levels within the practice and we think that that has increased and that's in a good position. We don't necessarily have insights in terms of how many hours they may be working to put in terms of just availability of staff within practices we think that's been reasonably good shape. We have done some qualitative surveying. There is some additional churn within practices if that goes from practice to practice, that is obviously something that will work its way through the system. Just picking up what Brian mentioned against not to not wellness or sick patient visits versus the wellness visits, if the diagnostics usage on the non-wellness side is higher, it's much higher at 70% or so I think we map that out as part of the Investor Day. And so, that's, I think an important tailwind for the business. The other thing that I would point out is the, relative frequency and utilization of diagnostics continues to grow within the practice we've seen that in the US, we think that's a very positive trend. Obviously, veterinarians see the importance of core medical services and to be able to treat a patient they very often have done the first test. So it's great to see that those trends have held up and continue to grow and we think that's a strong positive.

Jay Mazelsky :

I think we've been consistently demonstrating our ability to perform well in that front in despite some of the headwinds that we've seen this year. So I think our updated outlook for margins if you take out the, if you normalize for the customer credit that we've highlighted, as well as the lapping of R&D and foreign exchange, we're most recent guidance is to be 80 to 100 BPS above the prior year. And that's despite some of the headwinds that we've seen this year. So, we've consistently demonstrated the ability to deliver to business model, which we have a number of favorable dynamics that support that we highlighted the strong growth in the software business as it is a positive driver force as we grow and I think we've got investments that we can leverage. And we've got new innovation coming to market. So a number of factors that I think will help us and positions well to keep building on that's strong margin delivery trends.

Operator:

[Operator Instructions] We will move next to Erin Wright with Morgan Stanley. Please go ahead.

Jay Mazelsky :

Yes. Good morning, Erin. I am not going to talk about the new platform other than just to reiterate we are looking forward is just a couple months away from BMX and we can talk more about that. More generally speaking the way the new product development process works is, you develop prototypes, you put it in hands of customers, they provide feedback and it goes through an additive process, you get ready to go to marketplace. So we're excited. We think it's a - we think it's a platform that will make will have the right clinical and business contribution, but really I can't go into additional details beyond that.

Jay Mazelsky :

Yeah, so, a couple maybe high level points and I'll get more specific. Our strategic and innovation approach is really to bring an integrated solution set to the marketplace. So that's in clinic, as well as reference lab, and the connectivity and workflow optimization provided by our software suite, we think is highly differentiated. It supports what the practices are trying to accomplish in terms of improved standards of care, optimizations of staff productivity, client communications, all of those important things and we continue to innovate through menu expansion and then more specifically, new platforms. And new platforms, it's an important component of our business model in terms of really being able to give our customers reference lab quality testing capability within the practice. We place it, we tend to place these through marketing programs. IDEXX360 being the primary one customers are able to get that get that placement then you use reference labs or rapid assay or our Software-as-a-Service based PIMS systems, as part of our dollar volume commitment. So there's a significant multiplier impact when you come out with new innovations. And we just continue to build it through what technology for life philosophy. So we have existing platforms on the marketplace. We will continue to innovate with new slides, for example in chemistry or lots and lots of other examples. We call antigen within the reference labs. So that becomes more valuable clinically over time and customers use more of it as they grow, we grow.

Chris Schott:

Great. Thanks so much. Just had two questions for me. I guess, just coming back to the dynamics with the visit trends that we're seeing versus your expectations, is it possible to tease out how much of what you're seeing right now is macro versus how much is capacity? So, as I'm showing my hands around, is this a situation where we're right now seeing some macro pressures and capacity just isn't getting better relative to where maybe you stood at mid-year or are we also seeing some setbacks on the vet capacity side as well as we think about the updated guidance? And then I just have one follow-up from there.

Brian McKeon:

And Chris, just it's a, it's a great question. I think we've always said that the – in terms of macro where we might see it is on the wellness side where that may be more of a discretionary choice for the pet owner. Interestingly, well, the visits were down in wellness quarter frequency and utilization of diagnostics per wellness as it was up actually stronger than non-wellness. So, for the pet owners that are able to come in and get their pets in, they're actually doing more diagnostics testing, but overall, we saw lower levels of wellness visits. So it doesn't had probably comingled into some of the dynamics that are going on with capacity management. And there may be a level of impact there. We have seen that in international markets that we've been highlighting as we go. And so it's something that we're paying attention for. We're planning appropriately for it, but I think it's as Jay pointed out. I think - we think this is continues to be more of an impact from the ongoing ability of the practices to staff and be able to manage the demand that they're facing.

Brian McKeon:

We definitely saw more of an impact internationally on from macro pressures really starting at the end of 2021. And I would say that that has normalized over time and it’s now relatively more in line with the US trends. We've done quite well internationally. We're doing - benefiting from our premium instrument installed base expansions, so that really helps our growth rate. And we highlighted this quarter, we've seen actually for a few quarters now relative improvement in the volume trends. So, I think the - it's more in line I think with what we're seeing and started some of the US pressures more recently. And it does seem to be normalizing and relatively improving. You can see that in some of the international metrics things like with our reference lab growth was improved in Q3. So that's a positive trend and we're just being realistic about the macro backdrop that we're facing and planning appropriately.

Chris Schott:

Thank you.

John Block:

Thanks guys. Good morning. Brian, maybe just to start with you. The 3Q ‘23 sales and marketing expense was down by 3% to 4% Q-over-Q. I've got usually like flat to slightly up 2Q two to 3Q. And this year's decline was despite ongoing increases that you guys have called out on the commercial investment. So, I don’t know, I'm guessing aspects may have played a little bit of a role Q-over-Q this year in 2023, but anything to highlight on what costs you were able to take out in the S&M side that drove the sequential decline? What you were able to do or lean on even in light of the commercial investments that seem to be ongoing through the end of the year?

John Block:

Okay. Sorry. Just my question was sequentially not year-over-year. So my apologies. The 2Q to 3Q was down 3% to 4%. It's usually up 1%. You're making commercial investments. I guess what I'm – just trying to get a little bit is like managing the bottom-line in the near-term and getting the EPS and we're exceeding the EPS number. Were there anything in sales and marketing that you scale back on in light of the lighter revenue number? Again, Q-over-Q, no.

John Block:

Okay. And then, maybe just to shift to your second question. I'm going to show my age and flashback to set of you, initially you guys expected, I think it was three to six thousand in consumable revenue per box on set of you. I get it a couple quarters in that forecast came down at 3,000 to 4,500, maybe you can just talk about how that eventually shook out, as that product cycle matured? And in any comments on the IDEXX in view trademark, which hit last week, it seems like to us that's probably the BMX analyzer and then how to think about the revs per box on the new system. Thanks.

Jay Mazelsky :

Yeah, John, the other thing that I would add to that is, I think we shared some data through went up like Ericson presented on the evolution of menu and how that that impacts the overall economic value over time. And our technology for life approach where we come – we come out to the marketplace. We introduce product obviously. The installed base grows over time. But as we continue to add menu and improve that, more revenue, more economics are generated. And we've been able to demonstrate that through our platforms including the reference labs.

Operator:

And we'll move next to Brandon Vasquez with William Blair. Your line is open. Please go ahead.

Brian McKeon:

I think it the key change here relative to what we expected to happen in the quarter was, we're looking for flattening visit trends in the US, and they came in at minus 2%. So if you go fundamentally, it was different than what we expected, that's it. But I think our execution was strong and all those dimensions going to play the way that we had hoped. The clinic - US clinical visit trends were minus 1% in Q2 - excuse me, in Q2, and minus 2% in Q3 on a two year basis. They're pretty similar. I think it's a, we did see some relative softening through the quarter. Some relative relatively weaker wellness clinical visit trends, more at the margin I think the bigger, bigger story here was, we had hoped that we had worked through the pullback effects on capacity. And we see some normalization there and I think we're still working through some of the management dynamics. So that that is very much reflected in our or balance year outlook that we've calibrated for that appropriately while we're reinforcing our profit delivery. So I think we're able to manage that well and teams are executing very well. And then again excited about a number of the things that we've got going into next year relative to our positioning as a company and new innovation bringing a market. And look forward to continuing to solid growth in that context.

Brandon Vasquez:

Okay, great. And maybe as a follow-up, you guys are expanding US sales force now that seems on track as we go into ’24. Can you just talk about expectations? How long does it take to get those new reps trained? You'll probably also have a new innovative product for them next year a new system. So what's the timeline to kind of start seeing leverage both sales and kind of margin benefits from the expanded sales force? Thank you.

Operator:

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation. You may disconnect at this time.

Brian McKeon:

Good morning and welcome to our second quarter earnings call. Today I'll take you to our Q2 results and review our updated financial outlook for 2023. In terms of highlights, IDEXX achieves strong growth and financial performance in the second quarter aligned with our full-year performance goals. Overall revenues increased 10% organically supported by 12% organic growth and CAG diagnostic recurring revenues with double-digit gains in U.S. and international regions. Key execution metrics remain very strong globally, reflected in record second quarter premium instrument placements, continued solid new business gains, and sustained high growth in recurring veterinary software revenues. Operating profit results were ahead of our expectations, reflecting solid gross margin gains and operating expense leverage, both benefiting from strong CAG recurring revenue growth. For the first half of 2023, we achieved 10% overall organic revenue growth and nearly 12% growth in CAG diagnostic recurring revenues. We also achieved better-than-targeted operating margin improvement. We've made positive refinements to our full-year operational outlook incorporating this performance, which we'll discuss later in my comments. Let's begin with a review of our second quarter results. Second quarter organic revenue growth of 10% was driven by 11% CAG gains and 9% organic growth in our water business. Overall organic revenue growth was constrained by modest gains in our LPD business and approximately $3 million of headwind related to lower opti medical revenues reflecting the winddown of our human COVID testing business. CAG diagnostic recurring revenue increased 12% organically, reflecting 12% gains in the U.S. and 10% growth in international regions. CAG diagnostics recurring revenue growth in Q2 was supported by global net price gains at the higher end of our targeted 8% to 9% improvement range for the first half of 2023. Overall organic revenue growth was supported by 13% growth in veterinary software and diagnostic imaging revenues. CAG instrument revenues were down 6% organically reflecting comparisons to high-priority levels, program pricing effects, and global mix. IDEXX CAG diagnostic recurring revenue growth remained solidly above sector growth levels. In the U.S., we achieved a consistent, strong 1,370 basis point growth premium in Q2 compared to same-store U.S. clinical visit growth levels, which declined an estimated 1.3% in the quarter. These results reflect benefits from IDEXX execution drivers, including higher net price realization. Solid U.S. volume growth was supported by new business gains, high customer retention levels, and continued increases in diagnostic frequency and utilization at the practice level. International CAG diagnostic recurring revenue growth improved organically to 10% in Q2, reflecting positive volume gains and benefits from higher net price realization. International results were also supported by strong IDEXX execution, reflected in sustained new business gains and record Q2 premium instrument placements, which supported a double digit expansion of our premium instrument install base. Double digit growth rate benefits from IDEXX execution offset impacts from challenging international macro conditions, which continued to pressure same-store volume growth trends in the quarter. Globally, Q2 results were supported by strong growth of IDEXX in-clinic CAG diagnostic revenues. IDEXX VETLAB consumer revenues increased 15% organically with double digit gains in U.S. and international regions. Consumer gains were supported by 11% year-on-year growth in our global premium instrument install base, reflecting strong gains across our catalysts, premium hematology, and set-of-you platforms. We placed 4,740 CAG premium instruments in Q2, an increase of 7% year-on-year compared to very strong prior year levels, which included benefits from our international launch of ProCyte One. Catalyst placements increased 15% globally, reflecting 8% gains in the U.S. and 19% placement growth in international regions. The quality of instrument placements continues to be excellent, demonstrated by 9% global growth in new and competitive catalyst placements, and solid gains in EVI metrics. ProCyte One momentum also continues to be strong globally, reflected in a global install base of approximately 10,800 instruments. Global rapid asset revenues expanded 12% organically in Q2, driven by strong growth in the U.S., reflecting solid volume gains and benefits from higher net price realization. Global Lab revenues increased 9% organically, reflecting double digit gains in the U.S. and mid-single-digit growth in international, with growth in international regions moderated by macroeconomic impacts, which pressure on same-store sales. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 13% organically. Results were supported by continued high levels of organic growth in recurring software and digital imaging revenues, and ongoing momentum in cloud-based software placements. Water revenue increased 9% organically in Q2, reflecting continued solid gains in the U.S., Europe, and Latin America, including benefits from net price improvement. The integration and performance of our recent Tecta-PDS acquisition continues to progress well, expanding our capabilities in water safety testing, and adding approximately 2% to reported water growth. Livestock, Poultry and Dairy revenue increased 1% organically, as strong gains in the U.S. were offset by impacts from lower herd health screening revenues related to reduced China import testing. Turning to the P&L, Q2 profit results were supported by solid gross profit gains. Gross profit increased 11% in the quarter, as reported, and 13% on a comparable basis. Gross margins were 60.7% up 160 basis points on a comparable basis. These gains reflect benefits from higher net price realization, lab productivity and operational initiatives, improvement in software service gross margins, and business mix, which offset inflationary cost effects. As expected, reported gross margin gains were moderated by a 60 basis point negative impact related to forward exchange changes, including the lapping of prior year hedge gains. While forward exchange trends have improved, we're expecting approximately 70 to 80 basis points of negative impact in year-on-year reported gross margin comparisons in the second half of 2023, as we work through lapping of $18 million of prior year foreign exchange hedge gains. On a reported basis, operating expenses decreased 17% year-on-year, reflecting a 26% favorable growth rate impact from comparisons to prior year levels, which included $80 million in discrete R&D investment. Adjusting for this effect, operating expense growth was modestly below revenue growth in the quarter, supporting operating margin gains. EPS was $2.67 per share in Q2, an increase of 71% as reported. On a comparable basis, EPS increased 77%, including approximately 54% of growth rate benefit from lapping the 72% per share prior year impact from discrete R&D investments. Forward exchange reduced operating profits by $8 million, and EPS by $0.07 per share in the quarter, including impacts from lapping $6 million in prior year hedge gains. Impacts from 2023 foreign exchange hedges were limited in the quarter. Free cash flow was $173 million in the second quarter. On a trailing 12-month basis, our net income to free cash flow conversion ratio was 75%. For the full year, we're maintaining our outlook for free cash flow conversion of 80% to 90%, including estimated capital spending of approximately $180 million. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.9 times gross and 0.7 times net of cash. Share repurchases over the last year supported a 1% reduction diluted shares outstanding. We did allocate capital share repurchases in the second quarter as we managed our balance sheet relatively more conservatively in the current interest rate environment. Turning to our 2023 P&L outlook, we're refining our full year outlook to incorporate our solid first half operating results and updated estimates for foreign exchange impacts. Our updated full year guidance for reported revenues is $3,660 million to $3,750 million, reflecting an 8.5% to 10% organic growth range. This outlook includes a $15 million favorable adjustment for foreign exchange changes, which we now estimate will have a relatively flat full year impact on reported revenue growth at the rate shown in our press release. In terms of our operational growth outlook, we're maintaining our performance goals aligned with the high end of our guidance range of 10% overall organic revenue growth, supported by 11% CAG diagnostic recurring revenue gains. This reflects expectations for consistent strong levels of IDEXX execution aligned with H1 trends. Our outlook incorporates approximately 1% of expected H2 headwinds for CAG diagnostic recurring revenues from equivalent days effects. Consistent with earlier guidance, our high end outlook for CAG diagnostic recurring revenue growth reflects expectations for 6% to 7% net price gains and a relative flattening of U.S. same-store or clinical visit growth trends in H2. We've raised the low end of our full year organic revenue growth outlook by 1% to reflect our strong first half performance. We've also made positive adjustments to our outlook for operating margin performance in 2023. Our updated outlook is for reported operating margins in the range of 29.3% to 29.7% for the full year. At the high end, this reflects an outlook for approximately 360 basis points in comparable operating margin expansion. This includes approximately 280 basis points in combined benefit from the $16 million Q1 customer contract resolution payment and the lapping of $80 million of discreet R&D investment in the second quarter of 2022. Our operating margin outlook reflects expectations for moderated year-on-year comparable gross margin gains in the second half compared to strong prior year levels. We continue to project that foreign exchange will reduce operating margins by approximately 60 basis points this year, primarily related to impacts and lapping of $26 million in 2022 hedge gains. We estimate that foreign exchange impacts will decrease EPS by approximately $0.21 per share for the full year with approximately $0.02 per share of negative impact in the second half, including effects from hedge gain lapping. Our updated EPS outlook is $9.64 to $9.90 per share. This is an increase of $0.23 per share at midpoint, reflecting $0.17 in benefit from our raised operational outlook and $0.06 in combined benefit from refined interest expense and foreign exchange estimates. In terms of our operational outlook for Q3, we're planning for organic revenue growth at the lower end of our updated full year growth range, incorporating expected impacts from approximately 1% of equivalent day headwinds. We expect foreign exchange to provide approximately 1.5% in reported growth rate benefit in the quarter. We're planning for operating margins in the 28.5% to 29% range, reflecting expectations for relatively consistent comparable operating margin performance, adjusting for unfavorable foreign exchange margin impacts of approximately 50 basis points during the right hedge gain lapping. We've provided details in our updated full year outlook in the press release tables and earning snapshot. That concludes our financial review. I will now turn the call over to Jay for his comments.

Operator:

Thank you. [Operator Instructions] We'll take our first question from Nathan Rich with Goldman Sachs. Please go ahead.

Brian McKeon:

Thanks for your questions, Nate. On the first question, we saw a post-January relatively similar clinical visit trends in the data, I think with hindsight, January benefited from the year on year COVID lapping. And overall for the first quarter it was flat, but the benefit of from that dynamic and I think the clinical visit trends through Q2 were largely consistent. This was consistent with our expectation. We thought we'd see reduction in the headwinds from the clinical visit capacity pullback that happened last year. And we were still working through some compares on that front in the first half. And so that informed how we were thinking about the second half that we would see that normalize and hopefully over time improve given the strong underlying demand that we believe is out there. So that's sort of the U.S. story. Let me give some context on international. I'm sure Jay can add to this that the strength in international came from our in-clinic business, just the very strong growth in our instrument placements, customer engagement, support of strong consumable gains. And so I think that's directly related to our executional focus. And as you pointed out, labs were relatively consistent. We're still seeing the, have seen the macro headwinds relatively more in international markets. That's been a consistent story. And so that moderated what were double digit growth rate benefits from the executional drivers that enabled us to get to double digit overall growth in international markets.

Nathan Rich:

Great, thanks for the details.

Unidentified Analyst:

Hi, this is Katarina from J.P. Morgan on for Chris. Thank you so much for taking our questions. So first, just on pricing, I know you probably can't give too much specifics, but directionally, any initial thoughts on how you're going to approach price increases in 2024? On one hand, obviously inflation is slow, but then you also probably could see some upward pressure on cost. So does that warrant larger prices? Just how are you thinking about 2024 price increases? And then the second question is, so if you think about both clinical visit growth and then utilization, any major differences between what you're seeing for your corporate clinic accounts versus your non-profit but owned privately owned accounts? Thank you so much.

Jay Mazelsky:

Yes, just a couple of words about pricing. To Brian's point, from a philosophical standpoint, we want to make sure we continue to deliver really strong value. And we think that our pricing reflects the fact that we continue to do that. We see really very high retention levels in our business. We see an increase in adoption and utilization. So from the standpoint of, I think, customer receptivity, we think our pricing is appropriate given the circumstances. If you think about our latest baby release and reference labs, it's a great example of how we add value that we're increasing the menu. 2 million patients on a global basis, annual global basis are going to benefit from this. We're not increasing the price of those panels. I think it's just a great example of how we try to keep that value equation appropriately aligned to what our customers need. In terms of corporate versus independent practices, a couple of dynamics to keep in mind. Largely, we don't see big differences, obviously there's differences in things like the size of the practice, corporate practices tend to be a bit larger. There are more specialty practices owned by corporates. They're focused, I think, increasingly on growth. We've seen nice interest, not just in our solutions, like in-clinic premium analyzers, but also software solutions, as they really try to operate the businesses in a more standardized way. They're interested in the same type of diagnostic solutions that independent practices are. We see a lot of interest in things like preventive care, for example, because it's a great way of, I think, continuing to engage pet owners and clients, really uncover, I think, a disease that may be otherwise subclinical or hidden that drives the medical services' envelopes. Very similar profiles between the two with some small differences that I just mentioned.

Operator:

We'll move to our next question from Michael Ryskin with Bank of America. The floor is yours.

Jay Mazelsky:

Yes, good morning, Mike. It's not unusual to see some variability in a given quarter between wellness and let's say non-wellness or sick patient visits. When you take a look at Q2, on a two-year basis, they were very similar growth profiles between the two. So it's small things that can account for some variability, whether more people are traveling, whether, what have you. What we tend to look at is we tend to look at those diagnostic parameters or menu that are used in wellness areas like 40x plus, for example. And that was very strong growth. So we really haven't seen any drop-off.

Brian McKeon:

Yes, Mike, I think weather at times can have impact in the business. Our outlook that I mentioned was that for Q3 was organic revenue growth at the lower end of our full year outlook range. And that basically aligns with consistent, strong execution trends and adjustments for the day's effects and just obviously our pricing's evolving a bit here as well. So just compared to H1, so it's a targeting, consistent, strong execution and we'll address those types of impacts if they occur in the businesses and report on that if that turns out to be a factor.

Operator:

[Operator Instructions] We'll take our next question from Ryan Daniels with William Blair. Please go ahead.

Jay Mazelsky:

Sure. So we've grown significantly in the U.S. over the last -- years. I think it's been over three years since we did last expansion. We're very optimistic about the long-term growth prospects of the U.S. It's our largest market. It's something that we really evaluate on an ongoing basis. We want to make sure that we have the right account coverage and we'll be able to, we're able to support, product and innovation priorities over time. So we felt that it made sense. Really just comes down to that.

Jay Mazelsky:

Yes, I mean, I think the, it's really normal course of business. We do very well with corporates. We occasionally talk about it, but from a corporate account standpoint, I think they see, increasingly see the integrated benefits of multi-modality solution and software. They're focused on workflow and they're focused on productivity, given the capacity constraints and the need to really operate these models. And I think from a solution standpoint, they appreciate what we're able to bring. We have a footprint that's obviously very broad and deep and can work, can partner with them wherever they are. So I think it's a very natural fit from that standpoint.

Operator:

We'll move to our next question from John Block with Stifel. Please go ahead.

Brian McKeon:

Yes, thanks John for your question. I think the A part of it is working through this effect we saw in 2022 where there was a pullback in capacity. And so I think the pullback was largely happening in the first half of 2022. And so we knew we'd still be working through some of that. And I think that there'll be some relative improvement which I think you were pointing out. And I think overall we anticipate that we continue to look at the growth in demand that we see in terms of the expansion of the pet population and increased interest in pet health care that being affirmed on a lot of the qualitative work that we do believe that there's underserved demand and believe that that will be a positive tailwind over the long-term continue to feel that's very much part of the growth build that we have for the long-term. And we're working through some dynamics here to help clinics adapted to that and improved their productivity. And I think we can be helpful. So I think our long-term optimism is intact. That should be a positive drive over time. And we've made some positive transitions here in their first part of this year. I'd also highlight sometimes we spend a lot of time on the U.S. trends that internationally we've seen relatively more kind of same-store headwind effect that we've been able to offset with our benefits from our business expansion and engagement and invasions that we're bringing. And I think internationally we see the same kind of a story that over time that there's very strong demand for pet healthcare and it's probably relatively greater macro impacts in the near term. But we think that over time that will improve as well.

Brian McKeon:

I'll let Jay dive into the platforms on your latter question. Yes, that's correct. That's what we said.

Jonathan Block:

Thanks, guys.

Operator:

Our next question comes from David Westenberg with Piper Sandler. Please go ahead.

Jay Mazelsky:

That's a quite a different question today. Let me just start with the pricing piece. Obviously clinics control that. If you go back the last five or six quarters, a lot of clinics took multiple price increases on an annual basis. They typically, if you go pre-pandemic or pre-inflationary times, they would increase their prices eight, one time per year. I think a number of clinics on average increase at least two, in some cases three. And that was really just to reflect the higher costs of labor and retaining staff. And in some cases, they needed to add to staff. And so from an employment level standpoint, we think clinics are catching up or caught up. They've hired people. That's not to say they're all working 40 hour weeks. And so in terms of pricing going forward, I think that's really just a reflection of what happens in the economy. At this point, it appears that inflation has moderated somewhat, but we'll have to see how that plays out. And I think they'll make decisions based on how their businesses are doing. Right now, I think clinic revenue, practice revenue is pretty healthy for approaching 6% or so. So I think they feel like they're in a pretty good place from an economic standpoint.

David Westenberg:

Thank you for taking my long question.

Unidentified Analyst:

Hi, this is Micaela on for Balaji. Thanks for taking our questions. Can you talk about anything particular you saw in the quarter that drove the two-year stocked growth deceleration in CAG recurring? Thank you so much.

Jay Mazelsky:

Anything that drove the, it was a question, anything that drove the two-year stack CAG diagnostics recurring revenue growth?

Jay Mazelsky:

Okay, yes, I mean, as we had a very strong quarter in terms of CAG diagnostics, recurrent revenue as indicated. Yes, it was really in part driven by pricing as well as volume growth and just really good execution. So, attention of customers was very good. We saw adoption and utilization of diagnostics really across our broad spectrum. Obviously, consumables in our in-clinic business was very, very strong, and we saw nice performance in international, but that's really more of a cumulative impact of placements that we've, I think achieved over the last, [4-6] quarters.

Jay Mazelsky:

Okay, so with that, we'll conclude the Q&A portion of the call this morning. Thanks for everyone on the phone for your participation. This morning, it's an honor to share another quarter of solid financial and strategic results as we continue to address this significant long-term opportunity to enhance standards of care for companion animals who are on wavering focus on diagnostic insights. And so with that, we'll conclude the call. Hope to see you all at investor day, and thank you.

Brian McKeon:

Good morning and welcome to our first quarter earnings call. IDEXX had a solid start to 2023. In terms of highlights for the quarter, overall revenues increased 10% organically, supported by nearly 12% organic growth in CAG Diagnostics recurring revenues. CAG Diagnostics recurring revenue gains were driven by nearly 14% organic growth in the U.S. supported by solid volume gains and benefits from the higher net price realization. Key execution metrics remained strong globally reflected in record first quarter premium instrument placements, continued solid new business gains and sustained high growth in recurring veterinary software revenues. Operating profits and EPS increased 18% on a comparable basis reflecting solid organic revenue growth, better than expected gross margin gains and benefits from a $16 million customer contract resolution payment. These strong results reflect the durability and resiliency of the IDEXX business model and benefits from our ongoing focus on execution. We've incorporated our Q1 results in positive adjustments to our full-year financial outlook which we'll discuss later in my comments. Let's begin with a review of our first quarter results. First quarter organic revenue growth of 10% was driven by 11% CAG gains and solid 8% growth in Water. Overall organic revenue gains were moderated by 2% declines in our LPD business and approximately $4 million of revenue headwind related to lower human COVID testing revenues, a business area that we winded down completely in Q1. CAG Diagnostics recurring revenue increased 12% organically reflecting 14% gains in the U.S. and 8% growth in international regions. CAG Diagnostics recurring revenue growth was supported by global net price gains in the 8% to 9% range, consistent with our expectations. Overall organic revenue gains were also supported by 14% organic growth in veterinary software and diagnostic imaging revenues. CAG instrument revenues were down 7% organically, reflecting comparisons to high prior year levels, program pricing effects and global mix. IDEXX CAG Diagnostics recurring revenue growth remained solidly above sector growth levels. In the U.S., we achieved a 1,350 basis point growth premium compared to relatively flat same-store U.S. clinical visit growth levels in Q1. These results reflected benefits from execution drivers including higher net price realization. Solid U.S. volume growth was supported by new business gains, high customer retention levels and continued increases in diagnostic frequency and utilization at the practice level. International CAG Diagnostics recurring revenue gains were also supported by strong IDEXX execution, reflected in higher net price realization, sustained new business gains and a double-digit expansion of our premium instrument installed base. Double-digit growth rate benefits from these drivers were moderated by impacts from challenging international macro conditions, which continued to pressure same-store volume growth trends in the quarter. Globally IDEXX achieved strong organic revenue growth across our modalities in Q1. IDEXX VetLab consumables revenues increased 12% organically with double-digit gains in the U.S. and international regions. Consumable gains were supported by 11% year-on-year growth on our global premium instrument installed base reflecting double-digit increases across our Catalyst, Premium Hematology and SediVue platforms. We placed 4,425 CAG premium instruments in Q1, an increase of 3% year-on-year compared to very strong prior year levels building on the record placement levels achieved in the fourth quarter of 2022. The quality of instrument placements continues to be excellent reflected 7% growth in new and competitive Catalyst placements. ProCyte One momentum also continues to be strong globally reflecting in a global installed base that more than doubled over the last year to 9,400 units. Global rapid assay revenues expanded 12% organically driven by strong growth in the U.S., reflecting solid volume gains and benefits from higher net price realization. Global lab revenues increased 11% organically reflecting strong gains in the U.S. and mid single-digit growth in international, with growth in key international regions moderated by macro-economic impacts, which have pressured same-store sales. In terms of other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 14% organically. Results were supported by continued high levels of organic growth in recurring software and digital imaging revenues, and ongoing momentum in cloud-based software placements. Water revenues increased 8% organically in Q1, reflecting solid gains in the U.S., Europe and Latin America, including benefits from net price improvement. The integration and performance of our recent Tecta-PDS acquisition has progressed well expanding our capabilities in Water safety testing. Livestock, Poultry and Dairy revenue decreased 2% organically as solid gains in the U.S. and Europe were offset by comparisons to high prior year sales levels in herd health screening and reduced revenues from non-core food and safety products in certain regions. Turning to the P&L, Q1 profit results were supported by a 150 basis point improvement in reported operating margins reflecting 10% organic revenue growth, solid gross profit gains and benefits from a $16 million customer contract resolution payment. Gross profit increased 9% in the quarter as reported and 12% on a comparable basis. Gross margins were 60.3% up 120 basis points on a comparable basis. Benefits from higher net price realization, lab productivity initiatives, improvement in software service gross margins and business mix offset inflationary cost effects. Later timing of lab staffing increases and select operational upsides also supported Q1 gross profit results. As expected, reported gross margin gains were moderated by a 50 basis point negative impact related to foreign exchange changes, including lapping of prior year hedge gains. Operating expenses increased 5% year-on-year as reported in the quarter and 7% on a comparable basis. This was net of a $16 million or 6% operating expense growth offset related to the customer contract resolution payment. As planned, we saw higher growth in sales & marketing and R&D expense in the quarter related to specific factors including the return of in-person sales meetings this year and advancement of key innovation initiatives. EPS was $2.55 per share in Q1, an increase of 12% as reported and 18% on a comparable basis. Foreign exchange reduced operating profits by $12 million and EPS by $0.11 per share in the quarter, including impacts from the lapping of prior year hedge gains. Free cash flow was $144 million in the first quarter. On a trailing 12-month basis, our net income to free cash flow conversion ratio was 65%. For the full-year, we're maintaining our outlook for free cash flow conversion of 80% to 90%, including estimated capital spending of $180 million. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.1x gross and 1x net of cash down modestly from Q4 levels. Share repurchases over the last year supported a 1.9% reduction in diluted shares outstanding. We didn't allocate capital to share repurchases in the first quarter, as we manage our balance sheet relatively more conservatively in the current interest rate environment. Turning to our 2023 P&L outlook, we're refining our full-year outlook to incorporate our solid Q1 operating results and updated estimates for foreign exchange impacts. We're updating our full-year guidance for reported revenues to $3,615 million to $3,700 million, this includes a $10 million positive adjustment for foreign exchange impacts, which we now estimate will provide a relatively modest full-year headwind to reported revenue growth. Our updated outlook for overall organic revenue growth is 7.5% to 10%. Our Q1 results tracked towards the high end of this range and we're maintaining consistent high-end targets for our performance this year, reflecting benefits from execution drivers and the potential for reduced clinical visit growth headwinds. As part of our financial management approach, we incorporated risk estimates to our targeted growth performance in the low end of our organic revenue growth range, including potential effects from macro-economic conditions. We raised the low end of our full-year organic revenue growth outlook by 0.5% in our updated guidance, incorporating our solid start to the year. We're maintaining our outlook for solid operating margin performance in 2023 with an expectation for reported operating margins in the range of 29% to 29.5% for the full-year. At the high-end, this reflects an outlook for approximately 340 basis points in comparable operating margin expansion. This includes approximately 280 basis points in combined benefit from the $16 million Q1 customer contract resolution payment and the lapping of $80 million of discrete R&D investment in the second quarter of 2022. We now estimate that foreign exchange will reduce reported operating margins by approximately 60 basis points this year slightly higher than earlier projections, which included impacts from the lapping of $26 million in 2022 hedge gains. Our updated EPS outlook is $9.33 to $9.75 per share, reflecting a $0.06 per share increase in our low-end estimate. We continue to estimate that foreign exchange impacts will decrease EPS by approximately $0.23 for the full-year with the bulk of this impact in the first half. In terms of our operational outlook for Q2, we're planning for overall organic revenue growth consistent with the midpoint to higher end of our full-year growth outlook range with approximately 1% of reported growth headwind from year-on-year FX changes. In terms of Q2 operating margins, we're planning for reported operating margins in the range of 29% to 29.5%. This reflects expectations for relatively consistent operating margin performance year-on-year adjusting for about 70 basis points in negative foreign exchange impacts and benefits from comparisons to prior year results, which included $80 million in discrete R&D investment. We've provided details on our updated outlook in the press release tables and earnings snapshot. Overall, we're applying a disciplined financial approach that advances our growth strategy and mitigates potential macro risks to ensure delivery of continued strong financial performance. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

[Operator Instructions]. To ask a question, we'll take our first question from Nathan Rich.

Jay Mazelsky:

Hi, Nate.

Brian McKeon:

Thanks for your question. We have a similar outlook at the high-end. I think we feel very good about the start to the year, particularly in the U.S. And so I think the drivers of that, we highlighted pricing being a positive driver for us this year and the execution is consistent with what we had expected. And I think the executional drivers that help to deliver solid volume growth in the U.S., we're very encouraged by. And looking to build on that. I think internationally, we also saw excellent execution drivers I mentioned, we had double-digit growth benefit from things like new business gains, including benefits from strong instrument placements, higher pricing. We are seeing continued headwinds from macro factors in international markets. So the growth was somewhat below our higher end target so on balance, we feel a good start to the year. I still think that's a good full-year goal for the company and looking forward to continuing to execute well to deliver against it.

Brian McKeon:

Yes, let me try to break that down. We had an expectation for the first quarter for an improvement in reported operating margins of 50 to 100 basis points. We came in at 150. So that was better than expected. That was principally on the gross margin line. We saw some benefit in the quarter from kind of later than time planned staffing in areas like our labs and some specific operational factors more Q1 related. So I think we feel good about the overall performance and do think that the high-end goals that we have are still appropriate. As we highlighted coming into the year, we knew that we had some costs coming back here, just more interface with our customers, more travel I think we're anticipating that to continue. We're trying to support our employees in a higher inflation environment as well. And we do have investments that we're advancing in areas like R&D. I know we've highlighted in the past a couple of new platforms that we're advancing that we're investing behind. So those are all captured in our outlook. I think on balance, our performance is very much in line with what we're targeting again, a good start to the year. And we think the full-year goal is on an -- if we adjust out the R&D lapping and the customer contract resolution payment for a solid 60 basis point comparable improvement and right in line with what we were hoping to achieve this year, and we look forward to working to deliver on that.

Operator:

Our next question comes from Chris Schott from JPMorgan.

Jay Mazelsky:

Yes. Good morning, Chris. This is Jay. So let me take your second question first, and then I'll address the acquisition. Overall, we think pricing to our customers is appropriate within the current environment. From an overall demand standpoint, we see that holding up well relative to the macro conditions, as we've described it in the different pricing scenarios. From just a pet owner perspective, we think they've demonstrated and willingness. We see this both from experience as well as just the survey work that they continue to prioritize health care for their pets. And keep in mind that diagnostics is a relatively small piece of the overall patient spend on their pets. Specifically to your point around wellness versus non-wellness, we've seen the two pretty much move in lockstep over the last five quarters. Or so of course, if the macro -- when we see sort of the macro deterioration from an environmental standpoint during the pandemic, there was some divergence. But generally, at least over the last year plus, they've moved in lockstep. And just an interesting, I think proof point of that, if you take a look at the 4Dx diagnostics testing, it's been highly durable. That's primarily a wellness test and we think indicative of the good end customer demand and pull-through. From the standpoint of the Mars Heska acquisition, just as a matter of policy, we don't comment on specific customer relationships, except to say that no single customer comprises more than 10% of our consolidated revenues. Our customer base is very large and diversified. I think as you know and we maintain and have excellent relationships and a great long-term track record with our corporate customers. They, I think very much appreciate the broad solution portfolio both on the diagnostics as well as software side where we can support their objectives to grow and deliver great care. And it probably just as importantly, footprint-wise to be where there. I think the acquisition itself reflects what we've said all along the attractiveness of the animal health sector and more specifically, diagnostics that we think – long-term, that it can help support the overall market or sector development of diagnostics.

Operator:

[Operator Instructions] We'll take our next question from Jon Block from Stifel.

Jay Mazelsky:

Yes, we can.

Brian McKeon:

Yes, thanks for the question, Jon. We did have a really good start to the year in the U.S. I think our pricing, as you pointed out was globally in line with what we had planned. So we feel good about the execution there. I would say the U.S. clinical visits were overall for the quarter a little better than we anticipated. They were flat, as I mentioned, and we thought we'd still be working through some compares on that front. I think we got some benefit really early in the quarter, I think with some positive growth that helped there. And the -- our own volume execution, the difference between how much growth is coming from our volume relative to clinical visits was a solid 5%, that's kind of pre-pandemic level. So we -- that was in line with kind of where we're hoping to achieve. So on balance, U.S. combined came through quite well. I think international was in line, I would say with what we were guiding towards. We had very good execution as noted and continue to see some macro headwinds that we're working through. So on balance, I think we feel good about the start to the year, as I shared earlier. And we have some goals at the higher end that would help us deliver 10% overall organic growth, which is our goal and we think we're working well towards that. And we're acknowledging that we're in an environment where there is some macro risk, and we think it's proven to have a range of estimates there and continue to monitor those trends as we work through the year. But I think on balance, we feel good about the start.

Jonathan Block:

Perfect. That was helpful, guys. Thanks for that. And then I might have a couple of parts to it. But before just below the line for the guide -- is it essentially a wash like there's some less interest expense, but there's less share repo. You had some wording around the hedges and the way that flows through the change. So just broadly speaking below the line, is it a wash when we think about your current '23 EPS versus where it was back in February. And then the second part of that question is, guys even if you keep it at a high level, can you just talk about what needs to be done for the two new point-of-care systems? And are those initiatives running in parallel, just when we think about timing there? Thanks for your help.

Jay Mazelsky:

And I would just say from a product development standpoint, I'm not going to be specific, obviously, but we are running parallel programs. We continue to invest in software assays, instruments. We spend a lot of money on innovation. We think there's great opportunities across the portfolio and we'll continue to provide updates as we get closer.

Operator:

Our next question comes from Michael Ryskin from Bank of America.

Brian McKeon:

Yes, let me clarify the numbers. I'll let Jay talk to the regional dynamics. It was 8% -- 7.6% CAG Dx recurring. And Mike, I would say that's pretty much in line with the outlook that we shared for the quarter. I think the execution drivers were very -- were strong, in line. We had 17% growth in instrument placements, double-digit benefit from things that weren't related to same-store sales dynamics. And we continue to see the kind of pressure that we've seen on macro -- for macro trends on the same-store side. But we've been building that into our outlook, and I think that was in line with what we were anticipating and kind of consistent with our full-year view as well.

Michael Ryskin:

Okay. Great, thanks. And then for the follow-up, going back to the organic growth guide for the year and some of your assumptions on vet visit growth. I think previously, you'd said that on the high end of the guide, you're baking in a relative flattening of clinical vet visit growth trends as you work through the year. And as you said, you kind of saw them in the first quarter already. So what do you need to see from vet visit sort of quite a chance to say, okay, we're here already, things have definitely improved ready to revise upward? Is that just a matter of seeing these trends continue for another quarter or so? Or is there something that you saw in between the numbers that give you pause?

Jay Mazelsky:

Yes, to Brian's point, the practices from our perspective, speaking now to the U.S. have largely stabilized. We've seen stabilization of ours, for example. I think there's been a really strong appetite and enthusiasm for technology, specifically with a focus on productivity and supporting capacity. Certainly, we've seen heightened interest in software as a way of supporting staff productivity, workflow optimization, removing the sort of high administrative unrewarded tasks. Keep in mind, if you take a look at 2022, there was a 2% net addition in pets in the U.S. That's twice the level pre-pandemic. So I think there's a lot of underserved demand out there, and practices are working through, how they serve that demand. So good progress. I think the other thing is finding the time study, we think identify some things that practices are doing and could do, and there's been a lot of receptivity and enthusiasm for that work and how they can find a couple of minutes here, a couple of minutes there that cumulatively make a big difference.

Operator:

We'll take our next question from Ryan Daniels from William Blair.

Jay Mazelsky:

Yes. So let me address the -- so we had said that we have 9,400 ProCyte One placements, which is nearly half of the goal itself. And I think what we're seeing is a really nice fit with the platform itself from both performance and cost and footprint standpoint. So there's been a lot of, I think customer adoption based on the fact that it fits their practice needs. Keep in mind, internationally which is where we think the larger part of the marketplace is, in many countries, it's hematology first. They do sort of a general body systems diagnostic and then, in some cases, include chemistry or may include chemistry with it. So it does hematology first marketplace. They see this as a key addition to their in-clinic diagnostics suite. And we've done well with that.

Jack Senft:

Perfect. Understood. Thanks. And just as a quick follow-up. Over the past few quarters, the narrative of cloud within the animal health industry seems to have accelerated. And just given the financial hardships that practices currently face, can you just talk about the pricing differences between average cloud-based solutions versus like on-prem or hardware solutions? And then for new practices starting up, are they typically going just right into the cloud? Or I guess like what is the opportunity here? Thanks.

Operator:

Our next question comes from Erin Wright from Morgan Stanley.

Brian McKeon:

Hey Erin, we missed the beginning of -- yes sorry, we missed the beginning.

Jay Mazelsky:

Yes. Thank you, Erin. We think it's a very significant opportunity, just based on the number of pets that develop cancer. So it's the biggest cause of death, mortality of within the pet population. So if you take a look at the U.S., there's six million dogs a year that get cancer, 3x mortality rate of the next sort of greatest cause of death. The diagnosis and staging and treatment protocols today are very fragmented. They tend to be late by the time it's very clinically obvious and then you have to pick the sample and send it out to the pathology lab. And at that point, cancer may be Stage 3, Stage 4 difficult to treat. The other piece is that there aren't a lot of oncology specialists. If you take a look at North America, it's 350 to 400. So most of the camps are diagnosing, and treatment is happening through the general practitioner who aren't specialists. They have a lot of other responsibilities. And so being able to provide diagnostics as a testing regime for them, we think is a really attractive opportunity, we both partner and have internal development efforts. Keep in mind that from a cancer standpoint, just our pathology submissions on a global basis, over 1.3 million a year. So this isn't a new area for us. This is something that we're well versed in and provide a service across the globe for us. So this is just really expanding or enhancing so that we move earlier into being able to support our customers to diagnose cancer while it's still -- you have better chances at being able to treat it.

Jay Mazelsky:

Yes, I mean we have -- generally, we have relationships with both corporate accounts across some of our different testing modalities or product lines. We do think there are some customers who may be sensitive continuing with our competitors. It still comes down. It's a very competitive market. It still comes down to -- we're going to have to compete customer to customer. And we think that the broadest possible solution to support their growth objectives is what, at the end of the day, wins. And we'll continue to focus on that.

Operator:

And our last question comes from David Westenberg from Piper Sandler.

Brian McKeon:

Yes. So David, just on your FX questions, you're correct on revenue. We think the full-year is relatively flat now versus what we thought was a 0.5 point headwind. That's the $10 million positive adjustment in revenue. It didn't flow through to EPS, just given mix of currencies and hedge positions. So it's -- we have a share of all the assumptions relative to rates, but we have a model that we go through looking at all those factors, and it didn't have a net impact just because we're largely hedged at this point, and just the mix of the impacts weren't as favorable.

Operator:

This concludes today's call. Thank you for your participation. You may now disconnect.

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2022 results and to provide an overview of our financial outlook for 2023. IDEXX had a strong finish to 2022, reflected in our fourth quarter performance. Revenues increased 7% organically, driven by 8% organic gains in CAG Diagnostic recurring revenues and continued strong growth in our software and water businesses. Operating profits increased 14% as reported and 17% on a comparable basis, benefiting from solid gross margin gains and OpEx leverage. Combined, these factors enabled delivery of $2.05 in EPS, up 14% on a comparable basis. IDEXX execution drivers supported delivery of full year financial results at the high end of our updated guidance range. This performance is reflected in a 1,200 basis point U.S. CAG recurring revenue growth premium to U.S. clinical visits in the second half of 2022, driven by a solid volume growth premium and higher levels of price realization. We sustained record high customer retention levels and solid new business gains globally and achieved a record level of annual CAG premium instrument placements, which drove a 13% year-on-year expansion of our global premium instrument base. Effective P&L management supported sustained full year comparable operating margins adjusted for discrete R&D costs aligned with our updated 2022 goals. These performance trends position us well as we enter 2023, and advance our growth strategy. This year, we're targeting a return to 10% organic revenue growth at the high end of our initial guidance range. This outlook is supported by continued strong IDEXX execution and net price benefits captured in our goals for double-digit CAG Diagnostic recurring revenue gains across our U.S. and international regions. We're also targeting solid comparable operating margin gains, building on the higher profit levels we achieved through the pandemic. We'll walk through the details of our financial guidance later in my comments. We'll highlight the building blocks of our growth outlook and discuss how we're factoring in expectations for overall sector trends and potential macro impacts into our planning. We'll also review estimates for effects from FX and interest rate changes on our reported results in 2023. Let's begin with a review of our fourth quarter results. Fourth quarter organic revenue growth of 7% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 10% organic growth in water and 6% organic growth in LPD revenues. PAG diagnostic recurring revenues increased 8% organically in Q4 compared to 13% prior year growth levels reflecting 9% gains in the U.S. and 6% growth in international regions. On a two- and three-year basis, Q4 results were in line with strong Q3 performance. We achieved continued double-digit organic revenue growth benefits from key execution drivers, including expansion of our premium instrument base, solid new business gains, sustained high customer retention levels and expansion of diagnostics revenue per visit, including benefits from higher price realization. Overall organic revenue gains were also supported by 17% growth in veterinary software and diagnostic imaging revenues. CAG instrument revenue was down modestly, reflecting placement mix and comparisons to high prior year placement levels. In terms of CAG sector demand drivers, we estimate same-store diagnostics revenue in U.S. veterinary practices increased 7% in Q4. These gains continue to be supported by expansion of diagnostic test frequency and utilization. Reflected in a nearly 10% increase in diagnostics revenue per clinical visit that included diagnostics. Clinical visit levels declined 2.8% in the quarter with consistent growth trends across wellness and non-wellness categories. As we continue to work through impacts from reductions in vet clinic capacity from peak levels and lapped a significant step-up in demand we saw in 2021 and including benefits from new patient growth. IDEXX's U.S. CAG Diagnostic recurring revenue growth of 9% in Q4 continues to outpace sector growth trends. IDEXX' U.S. performance was supported by a 1,200 basis point growth benefit from IDEXX execution drivers, including approximately 7% net price gains and continued solid growth contributions from customer additions and leverage of IDEXX innovation. IDEXX achieved solid organic gains across our testing modalities in the fourth quarter. IDEXX VetLab consumable revenues increased 9% organically, reflecting solid gains across U.S. and international regions compared to strong prior year growth levels. Consumable gains were supported by a 13% increase in our global premium installed base in 2022, reflecting double-digit gains across our catalyst, premium hematology and SediVue platforms. We placed 5,065 premium instruments in Q4, down modestly from high prior year levels. The quality of placements continues to be excellent, reflected in 3% global gains in new and competitive Catalyst placements, including 7% gains in the U.S. We also saw a 5% growth in new and competitive premium hematology placements globally leveraging strong customer interest in ProCyte One. Rapid Assay revenue grew 9% organically, supported by benefits from net price increases and solid volume gains in the U.S. Global Lab revenues expanded 8% organically, reflecting high single-digit gains in the U.S., which were impacted to a degree by holiday week weather impacts and improved organic growth in international regions. CAG Diagnostic recurring revenue results were supported by a relatively higher levels of net price realization, including benefits from our second half price initiatives. We estimate net price changes contributed approximately 7% to worldwide CAG Diagnostic recurring revenue growth in Q4, reflecting product and service enhancements and coverage of inflationary impacts. As we'll discuss, we've incorporated an expectation for a 7% to 8% global net price growth benefit for the full year in 2023 and building and effects from annual list price changes, which were communicated recently to our customers. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 17% organically in Q4. Results were supported by continued strong growth in recurring revenues and ongoing momentum in cloud-based software placements. For the full year 2022, veterinary software and diagnostic imaging revenues reached $251 million up 15% organically and 22% as reported. This includes benefits from the ezyVet acquisition, which continues to track above our acquisition model projections. Turning to our other business segments. Water revenues increased 10% organically in Q4 and for the full year 2022, reflecting strong performance across our major regions, including benefits from net price improvement and volume gains. Livestock, Poultry and Dairy revenues increased 6% organically in Q4. Results benefited from growth in herd health screening, shipment timing and improved performance in China where we work through comparisons to high prior year levels for African swine fever and core wine testing. Turning to the P&L. We achieved strong operating profit and comparable operating margin gains in the fourth quarter. Operating profits increased 14% as reported and 17% on a comparable basis, driven by gross profit gains and OpEx leverage. Gross profit increased 6% as reported and 10% on a comparable basis. Gross margins were 58.5%, up 110 basis points on a comparable basis. Net price gains, higher software service gross margins, lab productivity gains and comparisons to higher prior year investment levels and business mix all contributed positively, offsetting inflationary cost effects. Operating expenses were flat as reported and up 4% on a comparable basis in the quarter. We benefited from investment prioritization and leverage from our prior commercial expansions as well as favorable comparisons to higher prior year OpEx levels related to incentive compensation accruals, the ezyVet acquisition and specific R&D investments. For the full year 2022, operating margins were 26.7%, supported by strong second half gains. On a comparable basis, full year operating margins declined 240 basis points, driven by 230 basis points of impact from discrete R&D investments. Q4 EPS was $2.05 per share, up 14% on a comparable basis. Fourth quarter EPS results reflected $0.05 in tax benefits from share-based compensation activity and $0.07 in headwind from foreign exchange changes net of $9 million in Q4 hedge gains. Full year EPS was $8.03, a decline of 1% on a comparable basis, net of approximately 9% of EPS growth impact from discrete R&D investments. For the full year stock-based compensation activity provided $13 million or $0.15 per share in tax benefit, lowering our effective tax rate by 150 basis points. Foreign exchange reduced Q4 and full year revenue growth by approximately 4% and 3%, respectively. For the full year, foreign exchange reduced operating profits by $25 million and EPS by $0.22 per share net of foreign exchange hedge gains of $26 million. Foreign exchange trends have improved significantly since our last call update, resulting in relatively lower projected financial impacts in 2023, which we've captured in our outlook. Free cash flow was $394 million for 2022 or approximately 58% of net income, net of $149 million in capital spending. This performance reflects 25% to 30% of free cash flow conversion impact this year from discrete R&D investments, higher inventory levels aligned with sustaining product availability, higher deferred R&D tax credits and investments in a major facility expansion. Free cash flow conversion came in modestly below our guidance outlook of 60% to 65%, reflecting higher than forecast year-end working capital levels, including impacts from timing. We're targeting improvement in inventory levels in 2023, which is reflected in our outlook for 80% to 90% and free cash flow conversion this year. Our balance sheet remains in a strong position. We ended 2022 with leverage ratios of 1.3x gross and 1.2x net of cash. Our 2023 interest expense outlook incorporates current forward interest rates and expectations for a modestly lower net leverage ratio this year. We allocated $68 million to repurchase 199,000 shares in the fourth quarter. For the full year 2022, we allocated $811 million to repurchase approximately 2 million shares. Effects from share repurchase support our projected 1% to 1.5% reduction in diluted shares outstanding for the full year 2023. Turning to our 2023 full year outlook, we're providing initial guidance for reported revenues of $3.590 billion to $3.690 billion. On an organic basis, which reflects a range of 7% to 10% growth overall and 8.5% to 11% growth in CAG Diagnostic recurring revenues. Our 10% overall organic growth high-end outlook is aligned with our long-term goals and reflects targets for 11.5% CAG Diagnostic recurring revenue gains in the U.S. and 10% growth in international regions. These targets incorporate a continued high-growth premium from IDEXX execution drivers, including growth benefits from our expanded global premium instrument installed base, new customer gains and increases in testing utilization supported by IDEXX innovation. Our high-end outlook also incorporates expectations for a relative flattening of clinical visit growth trends in the U.S. as we work through 2023. As noted, CAG Diagnostic recurring revenue gains will be supported by an estimated 7% to 8% full year growth benefit from net price realization with expectations for 8% to 9% global net price gains in H1 and 6% to 7% net price benefit in H2. In addition to benefits from solid CAG diagnostic recurring revenue growth, our overall growth outlook reflects goals for continued strong growth in our veterinary software and water businesses. We expect these gains will be moderated by flat to modest organic growth at LPD revenues in 2023 and reflecting current macro trends and approximately $10 million of impact from lower human COVID testing revenues. The low end of our overall organic growth outlook of 7% incorporates potential risks to our targeted growth goals, including effects from macroeconomic conditions. Terms of reported revenue, we now estimate foreign exchange will reduce full year revenue growth by approximately 0.5% at the rates assumed in our press release. FX revenue growth headwinds are projected to be approximately 3% in Q1 with relative improvement in the second half of the year. In terms of sensitivities to changes to the FX rates assumed in our press release, we projected a 1% change in the value of the U.S. dollar would impact full year reported revenue by approximately $12 million and operating income by approximately $3 million to $4 million, net of currently established hedge positions. Our reported operating margin outlook for the full year 2023 is 29.0% to 29.6%. At the high end, this reflects an outlook for approximately 340 basis points in comparable annual operating margin expansion, including approximately 230 basis points of benefit from lapping discrete R&D investments in 2022. We're planning for constrained gross margin gains on a comparable basis in 2023 as benefits from pricing and lab productivity initiatives helped to offset product and labor inflationary cost impacts including effects on steps we've taken to ensure high levels of supply chain and service continuity. We estimate foreign exchange will reduce full year reported operating margins by approximately 50 basis points driven by the lapping of the $26 million in 2022 hedge gains. Our 2023 EPS outlook is $9.27 per share to $9.75 per share, an increase of 16% to 21% as reported and 19% to 26% on a comparable basis, including approximately 10% of the EPS growth benefit from the lapping of discrete R&D investments. We estimate that foreign exchange will reduce full year EPS by approximately $0.23 per share at the rates assumed in our press release, with the bulk of this impact in the first half. We also expect the impacts in 2023 from higher interest expense of approximately $0.11 per share compared to 2022. Our EPS outlook factors in a 1% increase in our overall effective tax rate to 22% in 2023 reflecting lower projected benefits from share-based compensation activity. Our free cash flow outlook is for net income to free cash flow conversion ratio of 80% to 90%. This reflects estimated capital spending of approximately $180 million or approximately 5% of revenues including approximately $35 million of spending or about 5% of free cash flow conversion impact related to the completion of our major facility expansion. Overall, we're well positioned to deliver strong financial performance in 2023. In terms of our operational outlook for Q1, we're planning for overall organic revenue growth closer to the midpoint of our full year guidance range as we continue to work through some effects from relatively higher prior year clinic capacity comparisons and macro impacts on demand in international regions. In terms of our profit outlook, we're planning for a 50 to 100 basis point year-on-year improvement in reported operating margins in Q1. This includes benefits from a customer contract resolution payment of $16 million received in Q1 that will be recorded as an offset to operating expense as well as expectations for foreign exchange impacts and relatively higher OpEx growth in the first quarter related to specific factors such as the return of in-person sales meetings this year. That concludes our financial review. I will now turn the call over to Jay for his comments.

Operator:

Thank you. [Operator Instructions] At this time I'll take your first question from Nathan Rich from Goldman Sachs. Please go ahead.

Brian McKeon:

Thanks for your question, Nate. We are expecting that we'll still be working through some of the compares in the U.S. to the pullback in capacity that kind of happened through the first half of last year. And so you're correct. I think that's something we're acknowledging in the Q1 outlook. We'll still be working through that as well as some of the macro impacts internationally. We -- the guidance that we provided, as you pointed out, the higher end does for the U.S. assume that we see a flattening of the trend and that's meant to imply in the back half of the year. And so that would assume a relative level of improvement, but is not projecting growth. I think Jay can talk a bit more to that, but I think that that's an appropriate assumption we feel with the changes that we've been working through.

Nathan Rich:

Okay, great. And maybe just to follow up on that. Obviously, you've talked about a higher level of net price realization expected for 2023. Could you maybe just talk about what the reactions from customers have been to the price increases that you took in 2022? And does the outlook kind of assume any impact on the level of utilization or volumes that you expect? And could you maybe also just comment on is the price realization kind of brought across the different product lines in CAG?

Brian McKeon:

Just reinforce to that our goals at the higher end, which is what we're shooting for as a company, we reflect sustaining the solid volume growth premium that we've been able to achieve. So, independent of the pricing benefit, how much we've been able to drive volume growth above clinical visit growth, and it reflects sustaining that strong level of performance.

Chris Schott:

Just following up on the pricing one. Can you just talk at least directionally about longer-term pricing dynamics, not looking for specific numbers? But should we think about more normalized price increases as we look out to 2024 and beyond, and this is kind of like a unique window with what's happening with inflation and everything else? Or is this a -- it could be ongoing kind of trend with larger price increases? And then just a follow-up after that.

Chris Schott:

Great and then just -- can you just elaborate a little bit more on your outlook for Europe? I guess how much of a macro headwind that you're seeing in these markets? And maybe just talk a little bit about how you see those headwinds playing out as we move through 2023?

Jay Mazelsky:

Yes. Let me pick up on that of the long-term potential. We see two-thirds of the future TAM outside our U.S. geography. And so that's something that we've invested in. Over time, we've had seven expansions, commercial expansions over the last few years. Currently, there's some macro headwinds as Brian described them, but I think the opportunity is very significant over time and we're approaching it in a similar way that we've approached our sector development in the U.S., which is through innovation, through engagement with our commercial model as partners and really helping create awareness and education and ultimately, adoption. So, we're very optimistic over the longer term. We think also, I would just highlight the role that ProCyte One has played in our international geography. It's a very compelling solution. Our customers, it fits from a performance profile, cost standpoint. Many of these markets are hematology first markets, and we're seeing very nice uptake, and we expect, as we've laid out at Investor Day, that 20,000 premium hematology placements over the planning horizon.

Erin Wright:

Great. Does your guidance for 2023 assume any sort of contribution from the two new platforms that you plan to launch here, hopefully, in the near future? And how should we think about those? Are they more of a 2024 event? And how should we also just be thinking about the timing of magnitude in terms of the contribution from the innovation pipeline?

Brian McKeon:

Yes. They're not in the there's nothing related to those platforms in the guidance.

Brian McKeon:

Other than the cost to support continuing.

Brian McKeon:

The inflationary costs are real. On the product cost front, took a number of steps this year to ensure that we have high product availability and it's been a challenging kind of environment to manage the supply chain dynamics. Our operational team has done a fantastic job on that front, but we did make choices to ensure we've got supply, and that's going to be flowing through in our product costs for a period of time, and there are higher labor costs as well. I think we're the price increases that we advanced, I think reflected in our margin outlook where appropriate, given some of the dynamics that we're working through. And we're able to improve gross margins through initiatives like productivity activity and our initiatives in our lab operations and just continued focus on growing our recurring revenues at a strong rate. But the -- on the gross margin front, that's the primary impact. And I think we're always trying to be balanced with our base of overall investment and that's allowing us to deliver solid margin improvement overall at the higher end of our guidance range.

Operator:

Michael Ryskin with Bank of America. Your line is open.

Brian McKeon:

Right. Thanks for the question, Mike. So, just starting with the high end, let me use the U.S. So if we've got an 11.5% growth goal with 7% to 8% pricing, that's approximately implied about 4% volume growth and with some level of headwind from visits as we work through the first half of the year. That gets us to go to the volume growth premium that we've been delivering and kind of consistent with pre-pandemic trends. So that's how we're thinking about it. We have a range which we think is appropriate to calibrate for risks to that outlook, primarily macroeconomic impacts and, you know, so I think that's not linked to one specific factor, but I think it's something that we think is prudent, is the way we plan the business to make sure that we have financial plans where we can deliver solid profit gains, if things don't all go the way that we anticipate. And so again, it's not linked to one specific factor, but it builds in potential macro headwinds or if things don't recover the way that we're targeting in terms of the clinical visit trends.

Jay Mazelsky:

Yes. We've said for a long time, the diagnostics market is a very attractive market. There's a lot of competitive intensity. Nothing has changed on that front. We believe that through the customer lens that our overall solution portfolio is highly differentiated the combination of our in-clinic laboratory reference laboratory software, the connectivity of it all really helped support the practice mission. We see that if you take a look at our new and competitive placements, which we provided both for Catalyst and now for premium hematology, we're doing extremely well. We're growing our software in Web PACS and Diagnostic Imaging businesses very well. We feel very good about our focus on the customers and helping them to achieve their goals and we think it's reflected in the results.

Michael Ryskin:

No, that's it. Thank you.

Jon Block:

Great. First one, Brian, maybe just a clarification. I thought you said a $16 million customer contract resolution. Was that in the first quarter of '23? I'm not sure I heard you properly. And if so, is that in the GAAP 2023 EPS guide, I'm landing at $0.15-ish to the bottom line. Maybe you can comment on that. And then last, just bolt-on. Is that an offset to OpEx, if I'm right on all these assumptions, not a rev line item, and I'll start with that clarification, please?

Jon Block:

I got it all right. I don't know if I should push it. But the 9% to 16% comparable earnings growth that you sort of have in the release once you back out the 10%, is it in that one as well? The 9% to 16% also benefits from the $0.15?

Jonathan Mazelsky:

Yes. That is correct.

Brian McKeon:

Thanks, John. I was trying to follow your analytics. We focus those discussions on our U.S. numbers, just to be clear because that's where we actually have the reporting. So, the 11.5% overall growth if you use the midpoint of the pricing guide. And I do want to clarify the expected pricing benefit is something that we feel very good about across our performance range. So that is -- we were focusing on kind of the analytics around our high end to help people understand that. But going back to the high end of 11.5% CAG U.S. recurring diagnostic revenue growth, netting out the price benefit, use the midpoint that would be about 4% volume benefit. And we didn't explicitly highlight the clinical visit trend, but it bridges back to that that 5% to 6% kind of volume growth premium that we saw in the second half. That's about what we've seen pre-pandemic. And so, we're looking -- that's what we're shooting for. And all indications our execution is holding up really well. If you look at the performance of trips and just how we've consistently done, so looking to build on that momentum.

Operator:

Ryan Daniels from William Blair. Your line is open.

Jay Mazelsky:

Ryan. So, we have not -- we continue to see that customers would use one modality and diagnostics tend to use more of the other modality and vice versa. It's testing begets testing. We've seen a continuation of that trend. We've also seen wellness versus non-wellness testing hold up well. We think that that's really a function of pet owner demand. Pet owners want to be able to get the great care, whether for health, happiness, even longevity of their pet. So, they're filling into the practices and for wellness and preventive care visits. So, we continue to see that as an important aspect of developing the overall sector. We do see practices I think, to a greater extent than in previous times. I appreciate the role of their staff, retaining their staff, investing in education of their staff. I think they've gotten smarter around the use of technology in the importance of technology. We've seen that in software and the move to cloud-based PIM systems, but also the applications that that integrate and extend the capability of their PIM systems. So, we think that overall, even given the overall macro impacts that we've described, pet owner and consumer demand has held up relatively well.

Jay Mazelsky:

I'd be glad to. Yes, DecisionIQ is what formerly known as clinical decision support as part of our VetConnect PLUS application. Keep in mind, just let me paint the broader context here is that the general practitioner is incredibly busy. They're responsible for this wide range of clinical and medical services and having DecisionIQ, which can support the decision-making, which can suggest the possible things that they may not have considered. And even I think to your question or point, suggest next step test, we think, is an important tool in the hands of veterinarians. We have tens of thousands of practices on a global basis, which are now using VetConnect PLUS and therefore DecisionIQ as part of their daily practice, the ability to support vector-borne disease and now endocrine is that menu will continue to be extended over time. So, it's becoming increasingly valuable in the hands of veterinarians and something that we think over time will just grow in value. But thank you for that question. That's a wrap. We're out of time. I'd like to thank everyone, and that concludes the Q&A portion of the call. I appreciate your participation this morning. So in summary, we see a significant decade-long opportunity to increase the standard of care for companion animal health care and remain committed to our consistent strategic approach to address this opportunity. Sustain high levels of performance by IDEXX teams enabled us to build on the decades-long investments in innovation, infrastructure and commercial capabilities to deliver solid growth and strong financial returns in 2022 and positions us well for 2023. And now we'll conclude the call. Thank you.

Brian McKeon:

Good morning, and welcome to our third quarter earnings call. In terms of highlights, IDEXX achieved solid organic revenue and profit growth in Q3, building on strong prior results. Overall, IDEXX revenues increased 8% organically supported by 9% organic growth and CAG Diagnostic recurring revenues. Key execution metrics remain strong. This is reflected in record Q3 premium instrument placements, double digit growth in veterinary software and digital imaging revenues and 10% organic growth and U.S. CAG Diagnostic recurring revenues. Operating profits and EPS increased 12% and 13% respectively, on a comparable basis reflecting solid gross margin gains and controlled operating expense growth. Outstanding execution in the quarter has us on track to deliver a strong full year financial performance aligned with our updated guidance range In terms of our full year operational outlook, we've incorporated our Q3 organic growth results and maintained a similar midpoint estimate for EPS performance, supported by strong second half comparable operating profit gains. We've also adjusted our reported revenue and EPS outlook to reflect updated estimates for foreign exchange impacts. We'll walk through the details of a full year outlook later my comments. Let's begin with a review of our third quarter results. Third quarter organic revenue growth of 8% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 12% organic growth in water and 7% organic growth and LPD revenue. CAG diagnostic recurring revenue increased 9% organically in Q3 compared to strong prior levels, reflecting 10% gains in the U.S. and 6% growth in international regions net of a 1% equivalent day growth headwind. We achieved double digit organic growth benefits from key execution drivers, including expansion of our premium instrument base, consistent new business gains sustained high customer retention levels, and solid expansion of diagnostic revenues per clinical visit, including benefits from higher net price realization. These gains helped IDEXX to deliver continued solid CAG recurring revenue growth, offsetting near term headwinds related to year-on-year declines in clinic visit levels globally, including effects from a pullback in clinic capacity this year, and macro impacts in international markets. Overall, organic revenue gains are also supported by 15% organic growth in veterinary software and diagnostic imaging revenues. CAG instrument revenue was down modestly compared to high prior levels, as strong placement gains were moderated by mix effects. In terms of CAG sector demand drivers continued healthy trend support and solid increases in diagnostic revenues at U.S. clinics. Diagnostic revenue increased 7% on the same store basis in the U.S. in Q3, to approximately 9.5% on a per visit basis, reflecting continued solid gains in diagnostic frequency and utilization, including benefits from higher net price realization at the practice level. Clinical visit levels in Q3 were down 2.4%, a slight improvement from Q2 trends as we continue to work through impacts from reductions in debt clinic capacity from peak levels and the lapping of the significant step up and demand for pet healthcare during the pandemic. We anticipate year-on-year visit growth headwinds will continue in the fourth quarter, which is factored into our outlook IDEXX's U.S. CAG Diagnostic organic recurring revenue growth of 9.6% in Q3, which included a 1% equivalent day's growth headwind, continues to outpace sector growth trends. The strong performance was supported by a 1,300 basis point normalized growth benefited from IDEXX execution drivers. This included consistent growth benefits from IDEXX utilization and innovation gains and customer additions and an estimated 6% net price benefit in the U.S. supported by our second half price initiatives. Globally, IDEXX achieved solid organic revenue growth across our modalities in Q3. IDEXX VetLab consumables revenues increased 9% organically reflecting solid gains across U.S. and international regions. Consumable gains were supported by 14% year on year growth in our global premium instrument installed base, reflecting double digit increases across our catalyst premium hematology and set of new platforms. We placed 4,737 CAG premium instrument placements in Q3, an increase of 10% year-on-year building on the record placement levels achieved in the third quarter of 2021. The quality of instrument placements continues to be excellent reflecting 30% growth in new and competitive Catalyst placements, compared to strong prior levels. ProCyte One momentum also continues to build globally supporting a 26% year on year increase in premium hematology placements in the quarter. Global rapid asset revenues expanded 7% organically in Q3 compared to high prior demand levels, supported by benefits from that price increases. Global Lab revenues increased 8% organically in Q3 as double digit growth in the U.S. was moderated by modest organic revenue growth in international regions, reflecting pressure on same store clinic visit growth in Europe, including macroeconomic impacts. We continue to achieve solid new business momentum and sustained high customer retention levels across our major modalities, supporting sustained solid volume growth. CAG recurring revenue growth, including net price benefits in the range of 5% to 6% to worldwide CAG diagnose recurring revenues in the quarters reflecting product and service enhancements and coverage of inflationary impacts. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 15% organically. Results were supported by double-digit organic gains in recurring software and digital imaging revenues and continued strong momentum in cloud-based software placements. Water revenues increased 12% organically in Q3, reflecting strong performance across our major regions, including benefits from solid volume gains and net price improvement. We completed the acquisition of Tecta-PDS in the quarter, an automated microbiology testing platform which complements our existing water offering and expands our capabilities in this highly attractive business segment. Livestock, Poultry and Dairy revenue increased 7% organically in Q3. Results benefited from growth in the herd health screening and improved results in China, where we work through comparisons to high prior year revenue levels for African swine fever core swine testing. Turning to the P&L. Q3 profit results were supported by solid gross profit gains. Gross profit increased 7% in the quarter as reported and 10% on a comparable basis. Gross margins were 60.2% up 120 basis points on a comparable basis. Benefits from net price gains, lab productivity initiatives, improvement in software service gross margins and business mix offset inflationary cost effects. Operating expenses increased 6% year-on-year as reported in the third quarter and 9% on a comparable basis. As planned, operating expense growth was more in-line with revenue gains as we prioritize investments and gained leverage from our prior commercial expansions. EPS was $2.15 per share, an increase of 13% on a comparable basis. Q3 EPS results did not include tax benefits related to share-based compensation, which were down $0.05 per share from high prior year levels. Foreign exchange reduced operating profits by $8 million and EPS by $0.08 per share in Q3 net of $9 million in hedge gains. Free cash flow was $151 million in the third quarter. On a trailing 12-month basis, our net income to free cash flow conversion rate was 67%. For the full year, we've updated our estimate of free cash flow conversion to 60% to 65% to incorporate expectations for continued higher inventory levels aligned with sustaining high product availability. The full year outlook reflects approximately 20% of free cash flow conversion impact this year from discrete R&D investments, higher inventory levels, higher deferred tax assets driven by increased R&D tax credits and an investment in the major facility expansion. We've updated our full year outlook for capital spending to approximately $165 million, including $40 million to $50 million in 2022 spending for our new manufacturing and warehouse project. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.4 times gross and 1.3 times net of cash. We increased our financing flexibility with the recently completed credit facility amendment, which provides for a $250 million term loan on attractive terms with proceeds applied to reducing our revolving credit balance. In Q3, we allocated $167 million of capital to repurchase 453,000 shares. Capital allocation to share repurchases supports our projected 2% full year reduction in share count this year. Turning to our 2022 full year P&L outlook. We're narrowing the organic revenue growth range to incorporate our solid Q3 performance and a consistent outlook for Q4 organic revenue growth aligned with the midpoint of our prior second half guidance. We're also maintaining our full year outlook for comparable operating margins, which sustained strong prior year levels, adjusting for the impact of the discrete $80 million R&D investment recorded in Q2. We're updating our reported revenue and EPS outlook to reflect the recent strengthening of the U.S. dollar, which we estimate will reduce 2022 revenue by $10 million and EPS by $0.04 per share compared to our last outlook. We're also factoring in a $0.01 per share adjustment for projected changes in interest rates. Overall, our updated full year revenue growth range of $3.325 billion to $3.365 billion is consistent at midpoint with earlier estimates as FX impacts offset improvements to our operational outlook. We now project FX will reduce year-on-year revenue growth by 4% for the full year with approximately 6% of year-on-year headwinds expected in Q4. Our updated full year organic revenue growth outlook is now 6.5% to 7.5%, reflecting a full year CAG Diagnostics organic recurring revenue growth outlook of 7.5% to 8.5%. Our updated CAG Diagnostic recurring revenue outlook implies fourth quarter organic gains of 5% to 10%, aligned with earlier estimates, which factors in a 2.5% organic growth risk estimate at the low end of the range for potential macroeconomic impacts on demand. We've updated our estimated full year operating margins to 26.3% to 26.8%, reflecting consistent operational outlook at midpoint and an estimated 10 basis points in year-on-year net margin impact from updated foreign exchange estimates. This outlook reflects a projected 230 to 280 basis point decrease on a comparable basis compared to strong 2021 performance, including approximately 230 basis points of operating margin impact related to the discrete R&D investments. Our updated EPS outlook is $7.74 a share to $7.98 per share, including the $0.72 impact from the discrete R&D investments. This represents a decrease of approximately 5% per share at midpoint, reflecting updated estimates for FX and interest rate impacts. For the full year, we estimate foreign exchange will reduce full year operating profits by approximately $28 million and EPS by $0.25 per share. This is net of an estimated $29 million or $0.26 per share benefit from projected 2022 hedge gains. Our outlook factors in no EPS impact from stock-based compensation tax benefits in the second half. We provided details on our updated outlook in the tables in our press release and earnings snapshot. Looking forward, we're advancing our planning processes for 2023. We're targeting sustained strong execution that supported delivery of solid organic revenue and comparable profit growth, building on substantial financial gains IDEXX achieved through the pandemic. Given the significant strengthening of the U.S. dollar this year, in 2023, we estimate that foreign exchange will reduce reported revenue growth by approximately 3%, reported operating margins by approximately 70 basis points and EPS by approximately $0.45 per share at the rates assumed in our press release with current hedge positions. We'll provide updates on these estimates as we share our 2023 guidance on the year-end conference call. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from the line of Chris Schott of JPMorgan. Please go ahead.

Jay Mazelsky:

Yeah, sure. Good morning, Chris. We expect we'll work through the impacts of the pullback in capacity this year in 2023. The overall clinic visit growth, as you indicated in the outlook, it still remains fairly dynamic. There's a lot of external factors like macro impacts, the labor supply dynamics that we've talked about and even potential impacts from further COVID outbreak. So we'll be monitoring those macro impacts as a pet owner behavior and really factor that into our outlook. What I would point out is that our focus is on those things that we can control from an execution standpoint, both innovations and commercial engagement with our commercial teams. And we continue to do extremely well in being able to support customers with technology, whether it's PIMS systems, software, which help their productivity and support their efficiency. Clinic instrument placements -- in-clinic instrument placements were at record levels. I think that reflects at a basic level that there is a very positive outlook on the industry, and their willingness to invest, it really supports growth. We think that, from an overall dynamic standpoint, Europe is a little bit different. But in the U.S., capacity constraints are the primary factor affecting clinical visits versus end customer demand. In Europe, we're seeing some impacts from just the back row factors, and we'll see how that plays out and whether that continues going forward.

Operator:

Our next question comes from the line of Michael Ryskin of Bank of America Global Research. Please go ahead.

Brian McKeon:

Thanks for your question. In international markets, we're seeing similar dynamics in terms of IDEXX execution. So the we highlighted in our comments that we think we got a 1,300 basis point benefit from the combination of things like new business gains, expansion of our premium instrument installed base, price utilization. And we actually think our numbers are roughly in a similar zone in international markets. I think what we're seeing more in international markets is some pressure on the clinical visit growth levels. You can see that in our lab growth, which was up modestly in the quarter despite these new business gains and solid price gains. So it's -- I think international market has been relatively more impacted by the macro dynamics, particularly in regions like Europe. And we've been seeing that really going back to Q4 of last year. So that's been a relatively more meaningful headwind, but the progress that we're making and the very strong instrument placement gains and continued high retention levels, excellent level -- excellent engagement with our customers is allowing us to deliver solid, continued growth.

Unidentified Analyst:

Got it. Much appreciated.

Erin Wright :

Great. Thanks for taking my question s. So on pricing, where do we stand now in terms of net price realization for the year? What's embedded in guidance? And what's that relative to what you were disclosing last quarter? And then are there further price increases, I guess, embedded for the remainder of the year? And then how should we think about your ability to take incremental price in 2023? And are you seeing any pushback there from customers? Thanks.

Jay Mazelsky:

Yeah, I would just add to that, that from a customer perspective, what customers are most interested in and the message we keep hearing back from them, is they want to make sure that from a product testing continuity standpoint, supply chain, how we support them that all those pieces are in place. And they realize that, given the current environment, it's a little bit more expensive to run the business, and they want us to invest in being able to support them. And we see that reflected in very high customer retention rates really globally across the world. We think that's an important input or input into the growth formula of the company. So that's an area we're going to continue to invest in. And as Brian indicated, we think our pricing approach on balance, very reasonable, given the current environment.

Brian McKeon:

I think that we'll share more on that, obviously, as we get further along here. You're pointing out some positive factors that I think will be helpful for us heading into next year. I think the price realization is higher than we've achieved historically. We think it's appropriate in the current environment, and that will be a positive dynamic. And as Jay mentioned, we do think we'll work through some of the headwinds related to the capacity pullback that we saw this year. I think it's early for us to talk about the trajectory into next year, just given the macro backdrops. We'll gain more insight here and focus on what we can do, which is to execute well, and we think that will position us for continued solid growth, and we'll share more of those details as we complete our plans and give you an update on the year-end call.

Erin Wright :

Okay, great. Thank you,

Jon Block :

Thanks, guys. Good morning. I'll start with clinical visits. They were down 2.4% year-over-year, but it looks like wellness performed a bit better than Emergent and that just seems at odds with just capacity issues in the U.S. which would -- I'm thinking would be more acute on the wellness side of the equation. So can you guys just talk about what you're seeing out there and why this is weighing more on and why we're not seeing sort of the capacity issues hit emergent more, right? Why is the wellness performing better? And then just maybe your thoughts, is this just also a return to work dynamic, right, people going back to work maybe noticing less things about their dog or cat, and that's just crimping the emergent volume a bit around the edges? Thanks.

Jon Block :

Okay. I guess I could just follow up with you offline for more color there. Just to move on, I think I have some of these numbers correct, but you mentioned the 4,700 and change premium instruments. I think that was up 10% year-over-year, but the vet instrument revenue was down 5% organic, if I've got that correct. So a lot of those premium instruments are the relatively new ProCyte One, which I think would have a solid ASP. Can you just talk about the discrepancy between, call it, the premium placement instruments, the growth, I think, again, up 10%, the organic instruments down 5% and then what that delta means? Are you getting just a little bit more aggressive in terms of some of the selling programs, maybe that's an IDEXX 360 and the trade-off there sort of in return for longer-term commitments from some of those customers? Thanks.

Jon Block :

That accounts for the 1,500 basis point delta between up 10% and down 5%, no selling programs have evolved?

Jay Mazelsky:

Yeah. One driver, we focus on from just the quality of instrument replacements is new and competitive Catalyst because that drives an outsized portion of the consumables revenue and the clinic business, and that was up 13%. And so that's a reflection of just, I think, the focus of our commercial organization and the importance of chemistry consumables to the business.

Jay Mazelsky:

Thank you.

Nathan Rich :

Hi, good morning. Thanks for the questions. I wanted to follow up on the price realization. I guess, how are you thinking about customer sensitivity to price increases in this market? I guess given the 1,300 basis point normalized spread that you referenced, it doesn't appear to have had an impact on volumes. But could you maybe just elaborate on any potential impacts on demand that you might see as we move forward?

Nathan Rich :

Thanks. And for my follow-up, I wanted to ask on the 4Q CAG Dx guidance. Brian, I think you had said 5% to 10%. Could you maybe just talk about what factors would put you at the high end versus low end of that range? And the midpoint is about 100 basis below what you did this quarter. I was a little surprised just given -- I know you faced a tougher compare, but I'd assume there's maybe some incremental price realization. So could you maybe just talk about your expectations for 4Q in a little bit more detail?

Nathan Rich :

Helpful. Thank you.

David Westenberg :

Hi. Thank you for taking my question. So I want to talk about the percent of your platform that might be using learned staff versus unlearned staff and is there a means of kind of using your sales force to accelerate training of these kind of programs while we're in a supply or veterinarian supply constraint environment and vet techs? And then just as kind of a follow-up to that, can you help us reconcile the constraints in labor with kind of easing them into new platforms? So if we are in an environment where they can't really fully capture all the clientele, do they have capacity to, say, try new cornerstone or try new platforms? And that's all the questions I have. Thank you.

Operator:

Thank you. Our next question comes from the line of Ryan Daniels of William Blair. Please go ahead.

Brian McKeon:

Thanks for your question, Ryan. Let me start with the Water business. The Water business is probably our highest recurring revenue business in terms of our customer relationships. It's very much embedded with the ongoing workflow for water safety testing, and we feel very good about the momentum in that business, as we reported 12% organic growth in the quarter. And so I think the backdrop there is it's a strong global growth, good growth across regions. We have solid net price realization as well. And we highlighted an acquisition this quarter, which complements our product offering. And so we feel very good about the momentum in that business, building off the progress that we've made recently. LPD, as we reported, had positive growth, 7% in the quarter. We were -- have worked through the tough compares that we've been facing in recent quarters in China. And actually, we're up against really an easy compare last year in China. It was probably our toughest quarter in the year. So we've worked through that, and we saw a positive benefit from health screen as a driver. And overall, kind of modest growth, mode growth in our testing areas. I think it is an area that we're paying attention to in terms of macro backdrop. But I think we've worked through the tougher compares here and feel that we're positioned for positive growth moving forward.

Jay Mazelsky:

Yeah. Thanks, Brian. We definitely are expanding Preventive Care beyond the U.S. We see a select number of markets and especially corporate accounts outside the U.S. very interested in preventive care. It's a little bit earlier stages from the standpoint of interest and adoption in some of our international country regions. But the same -- I think that's the same level of interest. It just may not be as much knowledge in terms of -- from a workflow standpoint and customer education work. That still needs to be done. So we're making -- I think we're making progress. I would just say it's more embryonic and we think represents a solid long-term opportunity.

Elliot Wilbur :

Thanks, good morning. I want to go back to the subject matter of clinical visit trends and thinking about the sequential improvement down 3.1% in the second quarter, improving to down 2.4% in 3Q. Just wondering if you could comment on the cadence of improvement over the course of the quarter, whether or not the full quarter rate is indicative of the actual exit rate. And then as a follow-up, and thinking about the trend in clinic visit trends, despite the continued declines over the last couple of quarters, it's been offset by relatively favorable diagnostic frequency per visit metric, which has been up 100 basis points the last two quarters, and I think that compares to positive 50 basis points in 1Q and longer-term average of 50 basis points. I'm wondering if you think that, that relatively higher Dx frequency per visit metric is sustainable if, in fact, we see clinic visit trends revert to positive trends in early 2023, just sort of getting into the idea that maybe the decline in putting visit trends is more related to sort of the loss of pet owners who have perhaps a little bit more or less propensity to spend. So maybe a little bit lower quality customer has sort of been lost and that is reflected in kind of that more favorable Dx frequency number. Thanks.

Operator:

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

Brian McKeon:

Good morning, and welcome to our second quarter earnings call. Today, I'll take you through our Q2 results and review our updated financial outlook for 2022. In terms of highlights, continued high levels of IDEXX execution drove solid organic revenue growth in Q2 compared to strong prior year results. Overall, IDEXX revenues increased 6.5% organically, supported by 7% organic growth in CAG diagnostic recurring revenues. Key execution metrics were excellent, reflected an 18% gains in premium instrument placements, continued strong double-digit growth in veterinary software and service revenues and a nearly 1,100 basis point U.S. CAG Diagnostics recurring revenue growth premium to same-store clinical visit levels. For the first half of 2022, overall organic growth was 7.2%, slightly below our expectations for first half growth at the low end of our 7.5% to 10% full year guidance range. These results reflect relatively increased headwinds from lower year-on-year US clinical visit levels, increased macroeconomic impacts in international regions. Profit results were in line with our expectations, supported by sustained high gross margins. EPS was $1.56 per share in the quarter, including $0.72 of impact from discrete R&D investments and $0.06 of net year-on-year impact from the stronger US dollar. As planned, EPS results reflected high operating expense growth, including the impact of $80 million in discrete R&D investments in the quarter and carryover effects from prior commercial investments. As we look forward to the second half of 2022, we're targeting continued solid organic revenue growth, building on the significant expansion of IDEXX's business through the pandemic. We've updated our full year overall organic growth outlook to 5.5% to 8% for 2022, reflecting 6.5% to 9% full year organic growth in CAG Diagnostic recurring revenues. The midpoint of this updated range reflects an outlook for continued solid organic gains in the second half, aided by strong IDEXX execution trends and benefits from incremental price increases. As we'll discuss, vet practices continue to work through capacity constraints and the lapping of high 2021 demand levels supported by the significant growth in new pets during the pandemic. Given these factors in a challenging global economic climate, our midpoint organic growth outlook incorporates expectations for continued pressure on clinical visit levels in the second half of 2022. At the low end of our updated growth range, we've also incorporated an additional 2.5% organic growth risk estimate in the second half related to higher potential macroeconomic impacts on demand. Our EPS outlook of $7.77 to $8.05 reflects our updated organic revenue growth estimates and new estimates for foreign exchange effects based on the continued strengthening of the US dollar. It also reflects expectations for sustained strong full year operating margins flat to 50 basis points below prior year levels, adjusting for foreign exchange effects and $80 million in discrete R&D costs in 2022. We'll walk through the details of our updated P&L outlook later in my comments. Let's begin with a review of our second quarter results. Second quarter organic revenue growth of 6.5% was supported by 7% organic gains in our CAG business and 9% organic growth in our water business. These gains were moderated by a 5% organic decline in the LPD revenues,, driven primarily by year-on-year impacts related to reduced African swine fever testing in China. CAG Diagnostic recurring revenues increased 7% organically in Q2, compared to strong prior year levels, reflecting 8% gains in the US and 5% growth in international regions. Q2 CAG gains were also supported by 8% organic growth in CAG instrument revenues and 14% organic growth in veterinary software and diagnostic imaging revenues in addition to benefits from the ezyVet acquisition. In terms of US CAG sector demand drivers, sustained healthy trends supporting increased utilization of diagnostics were moderated by relatively increased year-on-year pressure on clinical visit growth. In Q2, same-store clinical visits were an estimated 3.1% below strong prior year levels. This compares to an updated estimate of 1.4% declines in Q1 and 2.5% to 3% increases in the second half of 2021. Our analysis points to two primary factors driving the recent change in US clinical visit growth trends, reduction in vet clinic capacity from peak pandemic levels and the continued lapping of the significant step-up in demand for pet health care during the pandemic, including benefits from the 10% increase in the pet population in 2020 and 2021. Historically, US clinical visits per practice have grown at approximately 2% to 3% annually, supported by steady vet practice capacity expansion. Between Q1 2020 and Q1 2021, US average clinical visits per practice jumped nearly 13%, and these higher absolute visit levels sustained through 2021. Extraordinary efforts by vets and their staff during the pandemic supported the significant increase in demand for clinical services, including diagnostics. In 2022, US clinical visit capacity pulled back from these high levels, impacted by staffing challenges reflected in a 2% contraction in average clinical visit levels in the first half of 2022. This has brought implied vet clinic capacity metrics more in line with longer term expansion trends, while still being below the strong demand in the sector implied by the pet population expansion. We see these specific dynamics is improving over time. However, given the recent pullback in clinic capacity, which continues to be affected by near-term staffing challenges and the lapping of strong underlying demand levels throughout 2021, we believe it's appropriate to plan for continued year-on-year pressure on US clinic visit growth in the second half of this year. Offsetting these near-term growth headwinds is the continued expansion of diagnostics revenue per visit at the clinic level, supported by IDEXX innovation and engagement. While year-on-year clinical visits declined 3% on a same-store basis in Q2, diagnostics revenue per visit expanded nearly 9%, consistent with strong Q1 trends. IDEXX' US CAG Diagnostics organic recurring revenue growth of 7.6% in Q2, continues to outpace solid sector growth trends reflected in the 1,070 basis point premium to clinical visit gains. Jay will talk more about how we're driving sustained strong performance on this front in his comments. Globally, IDEXX achieved solid organic revenue gains across our modalities in the second quarter. IDEXX VetLab consumable revenues increased 8% organically, reflecting solid gains across US and international regions. Consumable gains were supported by 15% year-on-year growth in our global premium instrument installed base, reflecting double-digit increases across our catalyst, premium hematology and SediVue platforms. CAG premium instrument placements increased 18% in Q2, reflecting 8% gains in the US and 25% growth internationally, as clinics showed continued confidence in investing towards support of increasing demand for diagnostics globally. The quality of instrument placements continues to be excellent, reflected in 9% growth in new and competitive Catalyst placements. ProCyte One momentum continues to build, supported by our global expansion efforts reflected in a 64% year-on-year increase in premium hematology placements in the quarter. Rapid assay revenues expanded solidly in Q2 compared to higher prior year demand levels. Global rapid assay revenues increased 6% organically supported by solid volume gains in the US and benefits from net price increases. Global Lab revenues increased 6%, organically in Q2 as high single-digit growth in the US was moderated by flat organic revenue growth in international regions, reflecting pressure on same-store clinic visit growth in Europe, including increased macroeconomic impacts. Reference Lab, new business momentum and customer retention remains strong globally. We achieved continued solid net price gains in the quarter globally with an average 4% growth benefit to US and worldwide CAG Diagnostic recurring revenues in the first half. Our updated outlook includes benefits from additional US CAG price increases implemented in August ,reflecting product and service enhancements and inflationary impacts. We estimate incremental price changes will provide an additional 1.5% to 2% and growth benefit to worldwide CAG Diagnostic recurring revenues in the second half of 2022. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 14% organically and 27% on a reported basis, including benefits from the ezyVet acquisition. Results were supported by double-digit organic gains in recurring software and digital imaging revenues and continued strong momentum in cloud-based software placements. Water revenues increased 9% organically in Q2, reflecting strong performance across regions, including benefits from net price improvements. Livestock, poultry and dairy revenue decreased 5% organically in Q2. Tough comparisons to high prior year revenue levels for African swine fever and core swine testing in China offset moderate overall organic revenue gains in other areas of our LPD business. We've now worked through these comparison impacts and are targeting positive growth in LPD in the second half of this year. Turning to the P&L. Q2 profit results were supported by solid gross profit gains. Gross profit increased 5% in the quarter as reported and 7% on a comparable basis. Gross margins were 59.7% in line with high prior year levels on a comparable basis. Benefits from net price gains, lab productivity initiatives and improvement in software service gross margins helped to offset inflationary effects and impacts from lower LPD revenues. Operating expenses increased 46% year-on-year as reported in the second quarter and 48% on a comparable basis, including a 35% OpEx growth impact related to $80 million in discrete R&D investments. Operating expense increases reflect carryover impacts from investments advanced in recent quarters related to our expanded global commercial capability. We're planning for moderated operating expense growth in the second half particularly in the fourth quarter as we gain leverage from these investments and lap more favorable year-on-year comparisons. EPS was $1.56 per share, a decrease of 30% on a comparable basis including a 32% growth impact related to the discrete R&D investment. EPS results included tax benefits of $3 million or $0.03 per share related to share-based compensation, which was down $0.04 per share from high prior year levels. Foreign exchange reduced operating profits by $6 million and EPS by $0.06 per share in Q2, net of $6 million in hedge gains. Free cash flow was $36 million in the second quarter. On a trailing 12-month basis, our net income to free cash flow conversion rate was 66%. For the full year, we continue to estimate free cash flow conversion of 65% to 70%. This outlook reflects approximately 5% of free cash flow conversion impact from the discrete R&D investments, modestly higher inventory levels to sustain high levels of product availability and higher deferred tax assets. We're maintaining our full year outlook for capital spending of $180 million, including approximately $50 million for our new manufacturing warehouse expansion project. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.4 times gross and 1.3 times net of cash. We allocated $340 million of capital to repurchase 809,000 [ph] shares in Q2. We intend to continue to support our share repurchase program and leverage our strong balance sheet as appropriate on this round. Our financial outlook assumes capital allocation to share repurchases aligned with the consistent net leverage ratio, supporting a projected 2% full year reduction in share count. Turning to our 2022 full year P&L outlook. We're lowering our full year organic revenue growth range by 2% to reflect first half performance, recent care sector trends and to incorporate potential additional impacts from macroeconomic factors at the lower end of our guidance range. We're also adjusting our reported revenue growth outlook for the recent strengthening of the US dollar and updating our EPS outlook to incorporate current expectations for foreign exchange impacts and projected changes in interest rates. Our updated full year revenue growth range of $3.305 billion to $3.385 billion, reflects an $80 million to $85 million reduction compared to earlier estimates. This includes a $20 million adjustment related to the recent strengthening of the US dollar. We now project foreign exchange will reduce year-on-year revenue growth by 3% to 3.5% for the full year with approximately 4.5% of year-on-year headwinds expected in Q3. As noted, we've updated the full year organic revenue growth outlook to 5.5% to 8%. This reflects a full year CAG Diagnostic organic recurring revenue growth outlook of 6.5% to 9%. Our updated CAG Diagnostic recurring revenue outlook implies second half organic gains of 5% to 10%. The midpoint of our outlook for H2 reflects CAG Diagnostic organic recurring revenue growth of 7.5% or 8% normalized for equivalent days effects, which we estimate will reduce Q3 revenue growth by approximately 1%. Supporting this outlook are benefits from price increases were advancing in the second half of 2022, which we estimate will provide 1.5% to 2% of additional benefit to worldwide H2 CAG Diagnostic recurring revenue growth building on first half gains of approximately 4%. Net of this incremental price benefit, the midpoint growth outlook for the second half of 2022 is consistent with the global sector growth trends exiting Q2 and reflects expectations for sustained high IDEXX CAG growth premiums supported by continued strong IDEXX commercial execution. The lower end of our second half growth outlook factors in an additional 2.5% organic growth risk estimate related to higher potential macroeconomic impacts on demand. A 5% second half growth rate for CAG Diagnostic recurring revenues would align with the low end of growth impact seen in the last recessionary period. The higher end of our growth outlook for the second half targets improved 10% CAG Diagnostic recurring revenue growth supported by strong IDEXX execution and price increase benefits but will require an improvement in recent clinical visit growth trends. At our updated revenue growth rates, we're now planning for full year operating margins of 26.4% to 26.9%, an adjustment of approximately 50 basis points from our last outlook. This reflects a projected 210 to 260 basis point decrease on a reported basis compared to strong 2021 performance, including approximately 230 basis points of margin impact related to discrete R&D investments. Adjusted for the discrete R&D investments, and approximately 20 basis points of year-on-year net margin benefit from foreign exchange hedges, the high end of this outlook reflects updated goals for relatively flat operating margin gains in 2022 compared to strong prior year levels. The full year operating margin outlook is supported the goals to deliver solid comparable operating margin gains in H2. We're targeting flat to modest comparable operating margin increases in Q3 and higher levels of improvement in Q4 as we benefit from higher net price realization, cost management efforts and the lapping of prior year stepped up investment levels. Our updated EPS outlook is $7.77 to $8.05 per share, including the $0.72 impact from the discrete R&D investments. This represents a decrease of $0.32 per share at midpoint, including $0.05 of impact from higher projected interest rates and $0.03 of additional headwind related to FX. For the full year at our midpoint outlook, we estimate foreign exchange will reduce full year operating profits by $23 million and EPS by $0.21 per share. This is net of an estimated $26 million or $0.23 per share benefit from projected 2022 hedge gains. We provided details on our updated estimates in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. We will now begin our question-and-answer session. [Operator Instructions] And we have our first question from Michael Ryskin with Bank of America.

Operator:

You're addressing from the mic. We cannot hear you.

Operator:

Here we go. Thank you.

Brian McKeon:

Thanks for the question, Mike. Just on the first part, that's correct. So we had approximately a 4% increase in the US and worldwide in the first half and the 1.5% to 2%, we anticipate it will be an incremental worldwide benefits, so that would imply 5.5% to 6% for the second half. I'll let Jay talk to the customer dimension.

Michael Ryskin:

And can I ask a follow-up on the vet visit growth you talked about. Obviously, we're all tracking a lot of the same indicators, and we're seeing how 2Q came in relative to the first quarter. You talked about all the gains in terms of capacity for vet visits in 2020 and 2021. After -- first of all, what's your assumption for vet visit for the rest of the year? If I'm backing into the numbers correctly, you're assuming gradual improvement from 2Q but still sort of like negative for the second half of the year. I want to make sure that's correct? And then at the end of this year, are we normalized then for the gains we made in 2021, or is there more headwinds in 2023? Is there -- are we back to a normal level and then can grow next year off of this in terms of vet visits, or is there still some more digesting of this capacity next year? Thanks.

Jay Mazelsky:

Yes. The other thing I would add to that, Mike, is if you take a look at the net expansion in the number of pets visits in the pandemic. I mean there's -- I think there's some evidence that there's a potential underserved demand given this 10% growth. If you take a look at just extrapolate out the 2% to 3% clinical visit trend. We saw pre-pandemic and add in the number of pets, the clinical visits should be higher just based on pet population. So I think as profession works through some of the capacity constraints that we've talked about, I think the -- we'll see a recovery from there.

Chris Schott:

Hi, great. Thanks so much. I was just trying to get a little bit of clarification on the guidance change as returning dissects, I guess this vet visit growth dynamic versus some of the softening demand you referenced in Europe. So can you just maybe quantify how much of the, I guess, 200 basis point or so change in organic guidance is from those two factors? And maybe just on elaborating on the macroeconomic side, where are you seeing the greatest impacts here? Is this kind of broadly across Europe, or are you seeing specific markets that are seeing greater pressures than elsewhere? Thanks so much.

Jay Mazelsky:

Yes. Let me just maybe directly address your question around geographic balance. So we've done a number of different surveys, both in the US and Germany is our largest country in Europe. And what we're seeing is the majority of veterinarians indicate that stack capacity is a major or moderate issue. Not to say the macro effects, especially in Europe, we're seeing some impact from that primarily more so on the reference labs than in-clinic testing. And not surprising when you consider some of the factors that our European sector and regions are dealing with in terms of inflation and energy and the Ukraine-Russian war is much closer to them.

Erin Wright:

Great. Thanks. Another question on the macro. If I heard you correctly here, I guess, you mentioned that the lower end of the guidance embeds a growth expectation similar to what you experienced during the prior economic downturns here. But what the difference across your business now versus, for instance, 2008, 2009 that would make you I guess, more or less insulated from a more challenging economic backdrop here. And as I think about what was going on during that time, for instance, the Catalyst Dx launch, those initiatives may be leaving you differently positioned than maybe you would going into a tougher economic backdrop, particularly here in the US? Thanks.

Erin Wright:

Okay, great. Thanks. And then can you give us an update on innovation, and I'm sure we'll hear about this at the Investor Day. But how do you think about the recent discrete R&D investments that you made as well as the innovation that you called out in your prepared remarks here? And when will these efforts generate material contributions for you? And will this ultimately help bridge the gap between the macro capacity headwinds that you could see and continue to see in your historical long-term growth rates? Thanks.

Operator:

Thank you. [Operator Instructions] Our next question comes from Jon Block with Stifel.

Brian McKeon:

Jon, I am trying to follow your math, but I think that we're not signaling a fundamental compression in the underlying kind of growth in excess of kind of visit levels, excluding kind of price changes. I think we've got a benefit this year. We're roughly 1,100 basis point premium in the US in the first half with 4% pricing that would imply kind of closer to the higher end of that 900 to 1,000 basis point range that we saw pre-pandemic. And our outlook for the year underlying it, we're not specifically forecasting clinical visit growth, but it's more of the trends that we saw coming out of Q2 would imply consistently high levels, and we're not trying to signal compression on that front. So I think we're -- that's something that we need to continue to execute well against. I think that can be impacted by consumer factors at the margin. So I don't want to say that those are things that we're not considering, but I think our midpoint outlook signals that we think we can continue to deliver well on that front and get some additional benefit from some pricing and that will support our solid full year numbers and second half numbers.

Brian McKeon:

Yeah. And Jon, it's principally the swing in the clinical visit growth. I mean, we're growing 3% and declining 3% in Q3. So that's 600 basis points. I mean, I think our underlying execution and delivery has been quite good. And -- but -- and the swing in that is, as we mentioned, two factors. It's the pullback in the clinic capacity after a significant period of expansion and retroactive clinics couldn't sustain. And I think we believe can adapt to that over time. And I think that we've got -- we are lapping some of the step-up in the -- the big step-up in demand we saw in the pandemic, including the benefits from the patient expansion. So I think for 2022, that's kind of the key factor that we've been working through. That's the key adjustment in our full year outlook this year. We, obviously, had to make some changes. And this is the change in trend from the second half of 2021, but that's change in the visit level is the clinical visit growth levels is the key difference in terms of where we.

Jay Mazelsky:

Yeah. Jon, this was across consumables and reference not capital, and it was a -- primarily a US driven change.

Jay Mazelsky:

We don't have any insight in terms of what competitors or competitive landscape is up to.

Jon Block:

Fair enough. Thank you.

Elliot Wilbur:

Thanks. Good morning. I understand the granularity on ex US visit trends is a little bit more difficult to attain. But just wondering if you could comment in general, whether or not seeing the same level of deceleration in clinic visit trends ex-US versus US? Any perspective on that? And then more specifically on the performance or relative performance US versus ex US in the reference lab business, differential in growth rate is this purely just a function of difference in clinic visit trends, or are there other factors that continue to lead to the substantial over performance in the US versus international such as price and utilization? Thanks.

Operator:

We have our last question from Ryan Daniels with William Blair.

Jay Mazelsky:

Good morning, Ryan. We see pretty much across the board, whether it's independent practices or corporate practices, an incredible hunger for those type of IT tools, not just systems, but PIM systems, which provide the pinner-engagement modules, which allow them for – yes, if you take a step back, about 15%, what practice owners tell us, about 15% of their staff time is focused on just that patient intake piece and administration of the patient. And a lot of that can be automated. A lot of that could be done virtually like it's done in other industries. So the ability to use and deploy these software tools for client communications, for workflow optimization and every step of the patient visit is a high priority for these practices. And I mean -- and we're seeing that in our software business, where we've seen very rapid growth. And I think historically, practices have been somewhat hesitant to move away from PIM systems because the data and they've been trained on it and they have all the reports on it, but they're willing to make that switch now because they see the benefits of what a modern software suite can bring. So I think that's a -- that's only going to get stronger over time as work to address some of the capacity challenges.

Operator:

Thank you. Ladies and gentlemen, this concludes our conference. Thank you for participating. You may now disconnect.

Brian McKeon:

Good morning, and welcome to our first quarter earnings call. Today, I'll take you through our first quarter results and review our recalibrated financial outlook for 2022. IDEXX delivered solid financial performance in Q1 compared to very strong prior year results. In terms of highlights, revenue increased 8% as reported and organically driven by organic gains of 10% in our CAG business and 8% in our water business. CAG Diagnostic recurring revenues increased 9% organically compared to higher prior year levels, which included benefits from a significant expansion in new pet patients during the pandemic. Our commercial execution was excellent, reflected in 22% organic growth in CAG instrument revenues and continued strong momentum in expanding cloud-based software solutions. EPS was $2.27 per share, up 3% on a comparable basis. As expected, comparisons to high prior year gross margin levels and increased commercial investments constrained year-on-year operating profit gains in the quarter. CAG Diagnostic demand levels and IDEXX commercial execution continue to build on the significant step-up achieved during the pandemic, supported by ongoing gains in diagnostics adoption and utilization. We have seen a moderation in clinic visit levels compared to second half 2021 growth trends, which form the basis for our original 2022 CAG Diagnostic recurring revenue organic growth outlook of 12% to 14%. In the U.S., in addition to early Q1 impacts from higher COVID cases globally, visit levels have been affected by constraints on veterinary service capacity and availability in a challenging labor market, following a period of significant demand expansion. We saw similar COVID and capacity constraint dynamics in international regions like Europe with additional recent impacts for more challenging macro conditions, which have also constrained clinical visit growth compared to strong prior year baselines. Factoring in our Q1 results and near-term CAG sector trends, we're recalibrating our 2022 full year organic revenue growth outlook. We're adjusting our overall organic growth outlook to 7.5% to 10%, primarily reflecting an adjustment of 3% in our targeted full year CAG Diagnostic recurring revenue growth range, now projected at 9% to 11% compared to strong prior year levels. We're also factoring in an additional $40 million impact from the strength in U.S. dollar. Combined, these changes reduced our reported growth outlook by 3.5% or approximately $105 million at the midpoint of our guidance range. We believe these adjustments are appropriate as we work through near-term CAG sector dynamics and more challenging comparisons in the first half of 2022. We're targeting higher growth in the second half of 2022, with the high end of our full year growth outlook reflecting return to our original targeted CAG Diagnostic recurring revenue growth range in H2. We continue to be encouraged by the increased demand for Companion Animal diagnostics globally building on the strong gains achieved during the pandemic. We're confident in the sustained long-term growth potential for our business, supported by our ongoing focus on innovation and customer engagement and driving CAG sector development. Aligning with this conviction, we're advancing high-return investments in innovation and commercial capability this year, including approximately $80 million in discrete investments related to the in-license of technology during the second quarter, which Jay will discuss in his remarks. Our 2022 EPS guidance of $8.11 to $8.35 per share factors and updates to our operating outlook, including $0.72 of discrete impact from the in-license of technology, as well as a $0.10 per share adjustment related to the stronger U.S. dollar and $0.05 of EPS impact related to higher interest rates. We'll discuss our full year outlook in more detail later in my comments. Let's begin with a review of our first quarter results. First quarter organic revenue growth of 8% was supported by 10% organic gains in our CAG business and 8% growth in our Water business. These gains were moderated as expected by a 19% organic decline in LPD revenues, which included impacts from reduced African swine fever testing in China, as well as by a $3 million year-on-year decline in human COVID testing revenues. Combined, these factors reduced overall IDEXX organic revenue growth by approximately 1% in the first quarter. Comparisons on both these fronts will improve in the second half of 2022. CAG Diagnostic recurring revenues increased 9% organically in Q1 compared to strong prior year levels, reflecting 10% gains in the U.S. and 8% growth in international regions. First quarter CAG Diagnostic recurring revenue growth benefited by approximately 1% from equivalent day effects. Overall Q1 CAG gains were also supported by 22% organic growth in CAG instrument revenues and 13% organic growth in veterinary software and diagnostic imaging revenues, in addition to benefits from the ezyVet acquisition. In terms of U.S. CAG sector demand drivers, same-store clinical visits in the first quarter were approximately 2% below strong prior year levels. This compares to 2% to 3% increases seen in the second half of 2021 when we began to lap the step-up in demand -- in testing demand that we saw during the pandemic. As noted, a factor influencing these trends is a near-term challenge related to capacity management of vet clinics that we've seen across global regions, which has resulted in constraints on clinic hours and access to veterinarians. Jay will speak more to these dynamics in his comments. At the U.S. practice level, same-store diagnostic service revenue growth was a solid 7%. Underlying demand for pet health care services remains high, reflecting a robust multiyear growth trends. Compared to the 2019 pre-pandemic base, U.S. same-store clinical visits and diagnostic revenues increased 4% and 11%, respectively, on a 3-year compound annual growth basis. IDEXX's U.S. CAG Diagnostic organic recurring revenue growth of 10% in Q1 continues to outpace sector growth trends, reflected in a 1,150 basis point premium to clinical visit gains, in part supported by relatively higher net price realization and equivalent day benefits. Globally, IDEXX achieved solid organic revenue gains across our modalities in the first quarter. VetLab consumable revenues increased 11% organically with double-digit gains across U.S. and international regions. Consumable gains were supported by 14% year-on-year growth in our global premium installed base, reflecting double-digit gains across our Catalyst, premium hematology and SediVue platforms. CAG premium instrument placements increased 31% in Q1, reflecting 24% gains in the U.S. and 35% growth internationally, as clinics show confidence in investing towards support of increasing demand for diagnostics globally. The quality of instrument placements continues to be very strong, reflected in 12% growth in new and competitive Catalyst placements. ProCyte One momentum continues to build, supporting 1,924 premium hematology placements in the quarter, up 101%. Rapid Assay revenues expanded solidly in Q1 compared to high prior year growth levels. Global Rapid Assay revenues increased 8% organically, supported by solid volume gains in the U.S. and benefits from net price increases. Global lab revenues increased 8% organically in Q1 as double-digit growth in the U.S. was moderated by low single-digit gains in international regions impacted by pressure on clinical visit levels in Europe. Reference lab new business momentum and customer retention remains strong globally, supported by expansion of IDEXX 360 agreements. We achieved relatively higher benefits from net price gains in the first quarter, with 4% to 5% average gains on U.S. CAG Diagnostic recurring revenues and solid levels of increases across international regions. In other areas of our CAG business, veterinary software and diagnostic imaging revenues increased 13% organically and 34% on a reported basis, including benefits from the ezyVet acquisition. Results were supported by double-digit organic gains in recurring software and digital imaging revenues and continued strong momentum in cloud-based software placements. Water revenues increased 8% organically in Q1, reflecting benefits from price gains and a continued solid global recovery in testing demand from constrained pandemic levels. Livestock, poultry and dairy revenue decreased 19% organically in Q1. As expected, tough comparisons to high prior year revenue levels for African swine fever and core swine testing in China, offset moderate overall organic revenue gains in other areas of our LPD business. We expect to see relative improvement in LPD growth rates in the second half of the year as we work through challenging comparisons in the Asia Pacific region. Turning to the P&L. Solid revenue growth supported moderate operating profit and comparable EPS gains compared to high prior year levels. Gross profit increased 6% in Q1 as reported and 7% on a comparable basis. Gross margins were 59.6%, a decrease of 120 basis points on a comparable basis. Comparable gross margin declines reflect the lapping of high Q1 2021 levels, business mix impacts from lower LPD and higher CAG instrument revenues and impacts from higher freight and distribution costs. CAG recurring revenue, net price gains and lab productivity initiatives helped to offset select inflationary impacts. We're also seeing benefits from improvement in software service gross margins as we expand our recurring revenue base. Operating expenses increased 12% year-on-year as reported in the first quarter and 13% on a comparable basis. Higher operating expense growth reflects comparisons to controlled prior year levels, as well as investments advanced in recent quarters related to our expanded global commercial capability. We also saw relatively higher travel costs compared to low prior year levels. We expect relatively higher year-on-year comparable OpEx growth in the second quarter as we lap these impacts, in addition to the second quarter impacts projected from discrete R&D in-license activity. EPS was $2.27 per share, an increase of 3% on a comparable basis. Q1 EPS included benefits of $5 million or $0.06 per share related to share-based compensation benefits, which was down $0.11 per share from high prior year group levels. Foreign exchange reduced operating profit by $4 million and EPS by $0.03 per share in Q1, net of $2 million in hedge gains. Free cash flow was $83 million in the first quarter. On a trailing 12-month basis, our net income to free cash flow conversion rate was 84%. For the full year, we now estimate free cash flow conversion of 65% to 70%, approximately 10% below earlier conversion estimates. This outlook reflects approximately 5% of free cash flow conversion impact from the discrete R&D investments, modestly higher inventory levels to sustain high levels of product availability and higher deferred tax assets driven by increased R&D credits. We're maintaining a consistent full year outlook for capital spending of $180 million, including approximately $50 million for our new manufacturing and warehouse expansion project. Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 1.1x gross and 0.9x net of cash. We allocated $273 million of capital to repurchase 523,000 shares in Q1. Our financial outlook assumes capital allocation to share repurchases aligned with maintaining a similar net leverage ratio, supporting a projected 1.5% full year reduction in share count. Turning to our 2022 full year outlook. We're updating our organic revenue growth ranges to reflect Q1 performance, recent CAG sector trends and projected impacts related to the Ukraine War. We're also adjusting our reported revenue growth outlook for the significant recent strengthening of the U.S. dollar. Our updated full year revenue growth range of $3.39 billion to $3.465 billion reflects a $105 million reduction at midpoint compared to earlier estimates. This includes $10 million of projected revenue reductions related to our Russia, Belarus and Ukraine businesses, and a $40 million adjustment related to the recent strengthening of the U.S. dollar. We now project foreign exchange will reduce year-on-year revenue growth by approximately 3% for the full year, with approximately 4% of year-on-year headwinds expected in Q2. Our full year organic revenue outlook of 7.5% to 10% reflects an adjustment to our original guidance range of 2% to 2.5%, primarily reflecting a recalibration of our full year growth outlook for CAG Diagnostic recurring revenues. We're planning for overall organic growth at the lower end of this range in the first half of 2022, reflecting more recent CAG sector trends and challenging comparisons in the second quarter. We're targeting improved growth rates in the second half of 2022 as vet clinics work to adapt to capacity challenges, and we benefit from our commercial initiatives. Our recalibrated CAG Diagnostic recurring revenue growth outlook is 9% to 11% for the full year, building on strong prior year gains. As noted, the high end of our full year growth range reflects second half CAG Diagnostic recurring revenue growth aligned with our original full year goals. At our updated revenue growth rates, we're now planning for operating margins of 26.8% to 27.3%, down 170 to 220 basis points on a reported basis compared to strong 2021 performance. This includes approximately 230 basis points of margin impact related to the discrete R&D investments. This outlook incorporates effects from high-return commercial investments aligned with our long-term growth potential and captures projected inflationary effects on IDEXX's business this year. Adjusted for the discrete R&D investments and approximately 10 basis points in year-on-year net margin benefit from foreign exchange hedges, this outlook reflects updated goals for 0 to 50 basis points in operating margin gains in 2022 compared to strong prior year levels. Our EPS outlook is $8.11 to $8.35 per share, a decrease of $1.20 at midpoint. This includes $0.72 of impact from discrete R&D investments, an additional $0.10 per share headwind related to foreign exchange and $0.05 per share of impact from higher projected interest rates. Our guidance for comparable EPS growth of minus 1% to plus 2% includes unfavorable growth impacts of 9% from the discrete R&D investments, and an estimated 2% impact in 2022 from international tax rate changes. We provided details on our updated estimates in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

[Operator Instructions]. And our first question is from Chris Schott from JPMorgan.

Brian McKeon:

Thanks for your question, Chris. Maybe I can set some context and Jay can provide more color. On the clinical visit trends, which we've highlighted really were the main change that's going on here that would cause us to kind of recalibrate our outlook this year, we started lapping the step-up in demand in the pandemic in the second half of 2021. And that was flowing through the benefits of the pet additions and the big increases in services and diagnostics that we saw through the pandemic. And the clinical visit levels were up solidly in H2. So they were growing 2% to 3% off that higher base. And so this is a relatively more recent dynamic. I think Jay can go into this more in color, but it's clearly a significant factor here is the vet capacity. I think that there is a trying to adapt following, a significant expansion of the demand in the industry and just dealing with some of the labor dynamics that many sectors are dealing with in the near term. And we're still working through these tough year-on-year compares. I think that will continue through the first half of this year in terms of the step-up. So that is the primary factor. Other dynamics that are going on here are all incredibly positive. I think our -- at the clinic level, diagnostic frequency and utilization is up. The service, focus on services, service -- same-store service revenues are still growing. Sales are great. Instruments are very strong, software placements, customer retention, record levels. So this is primarily this dynamic, which we think is largely related to the capacity constraint. And that will normalize, I think, as we work through some of these compares and as clinics adapt to this long-term growth in demand that we think will sustain.

Operator:

[Operator Instructions]. And our next question is from Michael Ryskin from Bank of America.

Brian McKeon:

Yes, Mike. So on your first question, we're trying to look at these multiyear dynamics too. I think that's largely right. The one thing I'd point out is that the step-up in the new patients that occurred through the pandemic, there was an incremental aspect to the growth that I think benefited, we think, second half of 2021 into the first half of 2022. So there's a bit of a growth dynamic that's additive to making the first half a little more challenging. But I think on balance, we agree that the multiyear trends look quite good, and that informs some of our optimism. And in terms of how we're thinking about the year, if you look at the range that we provided, effectively, the higher end of the range assumes that we move back towards a healthy positive growth rate on the clinical visit trends. It's the -- as we noted, the CAG Diagnostic recurring revenue growth for the second half at the higher end reflects our original goals. And so that was what we were seeing coming into the year. And the lower end is more in line with what we're -- we've seen in Q1. So there's some level of pressure year-on-year continues. So we're not explicitly guiding on that metric. But those, I think logically, that's how the full year guidance ends together.

Michael Ryskin:

Okay. And if I could squeeze in a bigger picture one, hopefully it should be quick. At the Analyst Day last year in August, you guys talked about same strong trends, the same sort of secular drivers. And you pointed to your view of the long-term diagnostic sector growth should be a full percentage point higher than prior because of the higher number of pets, because of the adoption, because of higher sort of diagnostics utilization. But if we sort of flash forward 6 months or 8 months to where we are now, obviously, we're seeing some near-term constraints. So I just wanted to, longer term, are you still sticking with that diagnostics growth of 1% above historical on a multiyear basis?

Operator:

And our next question is from Erin Wright from Morgan Stanley.

Brian McKeon:

Yes. Just on -- let me reflect on the comment I made and then Jay can talk more about the resilience of the business. It was specifically related more to Europe. We saw relatively more softness in Europe than we anticipated. And so we're just signaling that it may be related to some of the impacts indirectly from the Ukraine war and higher energy prices and things of that nature. So we -- that it's harder for us to parse that, but it was -- that was what the comment related to.

Erin Wright:

Okay, great. And then in terms of pricing, where is net price realization shaking out now for the year in terms of what's embedded in the guidance and relative to what you disclosed last quarter? And are there further price increases embedded for the remainder of the year?

Operator:

Our next question is from Jon Block from Stifel.

Brian McKeon:

So we haven't explicitly projected changes in the macro environment in our outlook. What I would say is that we are capturing more recent dynamics, including some of the dynamics that have been going on in regions like Europe, which as we indicated, may have some macro impacts. And they signal, we're anticipating that the growth in the second quarter will be at the lower end of our full year organic growth range of 7.5% to 10%. So I think we are -- we're trying to capture what we believe includes the capacity dynamics, but what macro impacts may be going on into our outlook, and that's also reflected in the full year range that I shared earlier. So I think it's not something, again, we forecast specifically, Jon, but I think as Jay pointed out, this has been a business that's always been resilient. If anything, over time, the factors that are supporting our demand, whether it be strengthening of the pet owner bond or just improvements in our own capacity as a company to influence growth and support the industry have only grown. So we think that reinforces we'll have -- we'll be relatively well positioned to changes. And we think we're capturing kind of the more recent trends appropriately in the guidance range that we've shared.

Jonathan Mazelsky:

Yes. Jon, it's Jay. So keep in mind, that's from -- that 0.5%, which is more of the pre-pandemic historical norm is from a much higher base. So we're building off that 3% base that we saw in Q1 of 2021. And so we both look at -- to the extent that clinical visits include diagnostics, we want to be able to continue to grow that, and we have seen nice growth in this year of that higher base, as well as then when they do use it, are they using more from a volume and dollar standpoint. And that's 8%, which includes some price effect there. So we think that is very healthy in terms of how veterinarians see the use of diagnostics as an enabler to the broader medical services envelope.

Jonathan Mazelsky:

Yes. Just specifically around your comment relative to curb side, drop off and pick up. We see practices even though we've, I think, transitioned from the pandemic to the endemic business, continue that in -- I mean it's in the minority of cases probably 15-plus -- they like that from the standpoint of supporting the productivity of the practice, a lot of pet owners like that. I think practices have adopted some level of concierge service around that type of thing. So I don't think that, that's going to go away. It will probably continue to remain a smaller part of that whole. Certainly, it's a step down from sort of the peak of the pandemic, but it's still there to some extent.

Nathan Rich:

Maybe the first one on just the margin outlook. Brian, I think if I'm moving -- or looking at the moving pieces correctly, it seems like the core kind of constant currency margin is maybe down 30 basis points relative to what you initially expected. I mean, is that just a function of the lower CAG Dx growth expectation and the deleverage there? And I guess, kind of as we think into next year and what might come back, I mean if you see a return to normalized CAG Dx growth in '23, do you see -- do you get back any of that, the lower margin, I guess, that you might realize this year, does that come back next year? And then I just wanted to clarify, do we sort of get the -- or do we lap the kind of R&D expense in 2023 and so you kind of get that impact back next year?

Nathan Rich:

Okay, great. And if I could just ask a quick follow-up, and I know this has kind of been touched on throughout the call. But what are you seeing the industry do to adapt these capacity challenges? And from your standpoint, is it more a staffing issue? Just, maybe some -- hire kind of out of offices during Omicron. Is it issues with getting kind of vet tax? Or is it more of a clinic or kind of vet capacity issue that might take a little bit longer to play out and solve? I'd just be curious, Jay and Brian, to get some additional thoughts that you have around that.

Operator:

Our next question is from Balaji Prasad from Barclays.

Jonathan Mazelsky:

Yes. So I'll talk about this, the opportunity. In addition to what I mentioned from a software in a clinic standpoint, our reference laboratory solutions, testing solutions platform really serve as an extension of the practice. So insofar as practices maybe get strained or they want to send out testing and even our medical services. So we have a very large group of pathologists and boarded some radiologists and internal medicine specialists, they can do that. So we think that, that is a net positive in terms of being able to support the practices and continues to open up opportunity to that effect.

Jonathan Mazelsky:

Okay. And with that, I'd like to thank everybody on the phone for their participation this morning and to the IDEXX employees listening. I'd like to say thank you for your continued devotion to our purpose and enduring focus on delivering today. Your unwavering support and engagement enable us to continuously execute at a very high level and support our customers despite unpredictable and evolving dynamics in our sector and around the world. We're thankful for your excellent efforts and look forward to continuing our strong momentum through the rest of '22. And so with that, we'll conclude the call, and thank you.

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2021 results and to 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 in CAG Diagnostics recurring revenues. Two year average annual organic growth for CAG Diagnostics 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 high organic revenue growth in 2021 drove outstanding full year financial performance above our long term goals. IDEXX achieved 16% overall organic revenue growth for the full year, driven by 18% 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 Diagnostics 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 in CAG Diagnostics 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 Diagnostics 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 up 8%, SediVue up 20% and premium hematology up 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 Diagnostics 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.

Operator:

Thank you and now begin the question and answer session. [Operator Instructions] And our first question is from Chris Schott from JPMorgan.

Jay Mazelsky:

Good morning, Chris. We haven't quantified it. We did see some impact on testing volumes in the international regions from Omicron, 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] (ph) just 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, we think that that’s 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.

Chris Schott:

And maybe 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.

Jay Mazelsky:

We saw record placements in Q4 of 2021 over 5,000 on the back of record hematology placements in catalyst and SediVue, 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.

Operator:

Our next question is from Erin Wright from Morgan Stanley.

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.

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 in effect 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 have 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 I think they recognize 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 a higher standards of patient care, veterinarians pivoting to services and the role that 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.

Operator:

Our next question is from Michael Ryskin from BoA.

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.

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.

Operator:

Our next question is from Jon Block from Stifel.

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.

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.

Operator:

Our next question is from Nathan Rich from Goldman Sachs.

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.

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.

Operator:

Our next question is from Ryan Daniels from William Blair.

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.

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.

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.

Operator:

Thank you. And now begin the question-and-answer session. [Operator Instructions] And our first question is from Michael Ryskin from Bank of America.

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.

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.

Michael Ryskin:

Great thank you so much.

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.

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.

Operator:

And our next question is from Jon Block, from Stifel.

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.

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.

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.

John Ravis:

Our next question is from Chris Scott from JPMorgan.

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.

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.

John Ravis:

Our next question is from Ryan Daniels, from William Blair.

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.

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.

John Ravis:

Our next question from Balaji Prasad from Barclays.

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.

Brian Mc Keon:

I believe your third question was on utilization at the clinic level, and --

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.

Operator:

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our second quarter results and to provide an update on our full year financial outlook for 2021. In terms of highlights, IDEXX delivered another quarter of outstanding financial results supported by continued strong global momentum in our companion animal business. Revenue increased 30% as reported and 25% organically supported by 26% organic growth in CAG Diagnostic recurring revenues, reflecting continued high gains across U.S. and international regions. As we work through comparisons to prior year COVID impacts, we'll be highlighting select two-year average annual revenue growth metrics to calibrate our business trends. In the second quarter, average annual two-year organic growth for CAG Diagnostic recurring revenues was 16%, in line with the strong two-year growth trends in Q4 and Q1. Operating profit increased 30% on a comparable basis in the second quarter, reflecting benefits from high revenue growth and moderate operating margin gains, as we begin to lap the tight cost controls introduced during the initial stages of the pandemic in 2020. High operating profit gains enabled delivery of $2.34 in earnings per share, an increase of 33% on a comparable basis. Continued strong momentum in our CAG business has us on track to deliver high revenue and profit gains in 2021. We're raising our full year revenue growth outlook range by $55 million at midpoint to 3,170 million to 3,205 million. This reflects an outlook for reported revenue growth of 17% to 18.5%, including favorable impacts from FX changes and benefits from our recent acquisitions. Our updated full year outlook is for 14.5% to 16% overall organic revenue growth and 16% to 17.5% growth in CAG Diagnostic recurring revenues. These organic growth ranges are 1% to 1.5% higher than our last outlook, reflecting expectations for sustained strong performance in our CAG business globally. Our full year financial outlook reflects a targeted 175 to 225 basis point improvement in operating margins on a comparable basis, up 25 basis points from our last outlook as we advance increase investments in our CAG innovation and commercial capability. We're increasing our EPS outlook to $8.20 to $8.36 per share, up $0.25 per share at midpoint reflecting 25% to 27% full year comparable EPS growth. We'll discuss our updated 2021 financial outlook later in my comments. Let's begin with a review of our second quarter results and recent sector trends. Second quarter organic revenue growth of 25% was driven by 27% CAG revenue gains and 27% growth in our water business, benefitted from the lapping of prior year pandemic impacts. As noted, CAG Diagnostic recurring revenues increased 26% organically reflecting 24% growth in the U.S. and 30% growth in international regions. On a two-year basis, average annual CAG Diagnostic recurring revenue growth was 16% overall, reflecting 16% gains in the U.S. and 18% growth in international. Strong CAG results were also supported by 78% organic growth in CAG Diagnostic instrument revenues compared to constrained prior year levels. Q2 growth in U.S. CAG Diagnostic recurring revenues was aided by high year-on-year gains in U.S. clinical visits, benefiting in part from comparisons to lower visit levels in April and May of 2020. U.S. clinical visit growth was 13% overall in Q2 with strong gains across non-wellness and wellness visit categories. On an average two-year basis, same-store clinical visit growth increased at a 4.8% annual rate, down modestly from strong Q1 results. The IDEXX U.S. CAG Diagnostic recurring revenue growth premium to U.S. clinical visits was approximately 1,100 basis points in the second quarter, up moderately and on track with our full year outlook. Expanding pet healthcare services, including continued solid increases in the utilization of diagnostics, supported a 16% same-store increase in overall veterinary clinic revenues in Q2. Diagnostic revenue per practice increased 15% on a one-year basis and 12% on an average two-year basis in Q2. Looking ahead to the second half of 2021, as noted in our last call, we expect to see lower levels of one-year growth in U.S. clinical visits and CAG Diagnostic revenue gains, as we lap the significant step up in demand we saw in the second half of 2020. These dynamics are factored into our revenue guidance which projects sustained strong tier growth in CAG Diagnostic recurring revenues in H2. IDEXX innovation and commercial initiatives continue to build on positive healthcare demand trends driving high Q2 organic revenue gains across our major testing modalities globally. IDEXX global reference lab revenues increased 25% organically in Q2, reflecting 20% plus organic gains in the U.S. and approximately 30% growth in international regions. Our international reference lab gains continue to benefit from strong growth in Europe, supported by our new German core lab capability, our expanded commercial presence and growth in IDEXX 360 program agreements. Global reference lab gains continue to be driven by high same-store volume growth, with strong gains across testing categories. IDEXX VetLab consumable revenues increased 26% on an organic basis in the second quarter, also reflecting continued 20% plus growth in the U.S. and approximately 30% organic gains in international. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium instrument install base. CAG instrument placements increased significantly in Q2 compared to constrained prior year levels. Total premium placements reached 3,756 units, up over 400 units from strong Q1 results and doubled the placement levels seen last year. The quality of CAG instrument placements remains excellent, reflected in 308 catalyst placements at new and competitive accounts in North America, up 87% year-on-year and 938 new and competitive placements in international regions, up 75%. We also benefited from 571 second catalyst placements, driven by continued strong demand from high volume customers. These new placements and high customer retention levels supported a 14% year-on-year growth in our global catalyst install base. We achieved 1,119 premium hematology placements, including hundreds of ProCyte One installs as we advance our global rollout schedule. This supported 11% growth in our global premium hematology install base compared to Q2 2020. We also placed 662 SediVue, including strong placement levels in international regions under IDEXX 360 agreements, which supported a year-on-year global increase in our premium urine sediment install base by 24%. We're looking forward to building on this momentum as we gain increased direct access at veterinary clinics globally and support strong demand for diagnostic testing. Rapid assay revenues also expanded at a strong 28% organic growth rate in Q2, reflecting 20% plus gains in the U.S., supported by high demand for wellness testing and accelerated 30% plus growth in international geographies. Of note, core vector borne disease retention rates for U.S. rapid assay reached 97% in the quarter, aligned with sustained high IDEXX retention rates across our major modalities. High CAG Diagnostic 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, our veterinary software and diagnostic imaging revenues increased 26% organically and 33% as reported, including initial benefits from our recent ezyVet acquisition. We saw high growth in diagnostic imaging system placements, driven by favorable customer response to our entry level ImageVue DR30 platform with approximately 80% of placements at competitive accounts. We also continue to see 20% plus growth in recurring digital service revenues, including expansion of Web PACS subscriptions aligned with our expanding cloud-based capability. In our veterinary software services business, we posted double digit organic revenue gains driven by growth in Cornerstone and Neo placements, and strong growth in recurring services. As Jay will discuss, we expanded our cloud-based software capability to our recently announced acquisition of ezyVet, which closed in June. We estimate ezyVet will contribute approximately 15 million to full year 2021 revenues, which is factored into our updated outlook. Turning to our other business segments, water business revenues increased 27% organically in Q2 compared to 16% declines in last year’s second quarter driven by early pandemic-related impacts. We continue to see a solid recovery in demand for water testing as economies reopen including recovery in non-compliance related testing volumes that have been more constrained during the pandemic. Livestock poultry and dairy revenue decreased 2% organically in Q2. Those results were constrained by the lapping of high prior year demand in key areas such as African swine fever testing. Revenue growth was also impacted by relatively lower herd health screening levels reflecting reduced exports, including effects from restrictions on live animal imports into China. We're planning on reduced LPE revenues year-on-year in the second half of 2021, as we continue to lap the benefits from high prior year demand for our ASF programs, and manage through expected pressure on our China LPD business from rebuilding swine herds, low pork prices, and changing government requirements related to livestock infectious disease programs. Turning to the P&L, we had another quarter of strong profit gains in Q2, driven primarily by benefits from high year-on-year CAG Diagnostic recurring revenue gains. We're now starting to work through comparisons to control costs levels in the prior year that were implemented as part of our pandemic contingency management efforts. Despite these dynamics, our strong revenue growth supported the solid 110 basis point expansion of our operating margins on a comparable basis, helping to drive an increase in operating profits of 34% as reported and 30% on a comparable basis. Gross profit increased 29% in Q2, driven by high revenue gains. Gross margins decreased modestly on a comparable basis, reflecting mixed impacts from higher instrument revenue and moderated lab gross margins gains as we lapped tightly controlled prior year cost levels in key areas such as lab operations. Gross margin gains continue to benefit from strong CAG Diagnostic recurring revenue growth, including positive impacts for moderate price gains. We're planning for constrained gross margin gains over the balance of this year as we continue to lap tightly controlled prior year spending levels and see impacts from increases in reference lab staffing and capacity, aligned was supporting high revenue growth. Operating expenses in Q2 increased 24% as reported and 20% on a comparable basis. In Q2 of 2020, we advanced approximately 25 million of cost reductions related to planned levels, including temporary reductions in salary and benefits, and also saw significant cost reductions in other areas such as employee healthcare accruals. The higher operating expense cost growth in Q2 reflects lapping these dynamics as well as the advancement of investments in our global commercial and innovation capability, aligned with our accelerated revenue growth profile. We anticipate operating expense growth will be higher than revenue growth in the second half of 2021, as these investments and the integration of the ezyVet acquisition advance. We also expect to see relative increases in costs such as employee healthcare claims and travel, as pandemic-related restrictions are eased. Q2 EPS was $2.34 per share, including benefits of 6 million or $0.07 per share related to share-based compensation activity. On a comparable basis, Q2 EPS increased 33%. Foreign exchange added 8 million to operating profits and $0.07 to EPS in Q2 net of 3 million in hedge losses. Free cash flow was 211 million in the quarter and 316 million for the first half of 2021. On a trailing 12-month basis, our net income to free cash flow conversion rate was 95%, including benefits from delayed capital spending and extension of tax payments last year. We're increasing our outlook for full year 2021 capital spending to 150 million to 160 million to reflect additional investments to support manufacturing and distribution growth capacity, including approximately $20 million in real estate purchases. With this higher level of projected spending, we're updating our free cash flow conversion outlook for the full year to approximately 80% of net income. Our balance sheet remains in a very strong position. We ended the quarter with debt to EBITDA leverage ratios of 0.9x gross and 0.7x net of cash with 232 million in cash and no borrowings on our $1 billion revolving credit facility. We allocated 188 million in capital to repurchase 341,000 shares in the quarter. Turning to our 2021 full year outlook, we're increasing our projected revenue range for overall revenue to 3,170 million to 3,205 million. At midpoint, this reflects approximately 30 million in organic operational improvement, approximately 10 million benefits from updated FX assumptions and approximately 15 million in increased full year revenue benefit from acquisitions. Our updated revenue outlook is 17% to 18.5% as reported, including approximately 2% for full year growth benefit from FX at approximately 0.5% benefit from acquisitions. Our updated overall organic revenue growth outlook of 14.5% to 16% reflects an estimated organic growth range of 16% to 17.5% for CAG Diagnostic recurring revenue. The high end of our CAG Diagnostic recurring revenue growth outlook range reflects two-year average annual growth rates in line with strong H1 performance levels. As noted on a one-year growth basis, we expect to see moderation in H2 from very high year-on-year growth rate seen in the first half of this year as you work through the comparison to the acceleration in growth that we saw in the second half of 2020, including fulfillment of pent-up demand in last year's third quarter. Other elements of our revenue growth outlook include expectations for lower year-on-year LPD revenues in the second half, and for a reduction in human COVID testing revenues year-on-year as we lapped the benefits over prior initiatives and plan for lower human PCR testing levels. In terms of key financial metrics, we're increasing our reported operating margin outlook for 2021 to 28.6% to 29.1%, reflecting increased expectations for 175 to 225 basis points of full year comparable operating margin improvement. Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide $0.17 of positive full year EPS benefit net of establish hedge positions. Our full year outlook also includes an updated estimate of $0.25 per share of tax benefit related to share-based compensation activity, $0.06 per share higher than our prior projections. We provided details on our updated estimates in the tables in our press release in earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first question is from Michael Ryskin from Bank of America.

Brian McKeon:

Sure. Thanks, Mike, for your question. On OpEx, we're transitioning into a period now where we're comparing to more control cost levels from the prior year. I think you saw that in the second quarter where the comparable OpEx was up 20%. And we are starting to see some costs come back, things like healthcare accruals were up in the second quarter, we expect that to continue. And as the pandemic conditions hopefully continue to get eased, we expect to see some T&E come back. As well, we're advancing investments. We've talked about the commercial investments, particularly in areas like international and our R&D organization. We're leaning into the positive growth. And overall, we think that will create an environment where we've got sustained higher OpEx growth year-on-year and it will be above the revenue growth, which is now up against tougher compares. So that's really the dynamic that we're working through. I think it's all very healthy. We think we're on track for very good full year performance in terms of margin improvement, and look forward to building off that going forward. But second half, we'll be working through those dynamics.

Brian McKeon:

Selectively, I wouldn't say it's been a big impact on our business. I think more just managing through keeping up with the high demand has been the bigger challenge for the business. And I think we've been able to manage those dynamics well. So it hasn't been as big a factor for us to date.

Jay Mazelsky:

Good morning, Mike. Yes, as we indicated in the remarks, the practices are incredibly busy at this point, maybe never busier. And so they certainly welcome I think new menu, new tools, ProCyte One specifically, that helps with productivity. So the reception has been outstanding. We see in the case of the U.S., about 60% of our visits are now in person. Internationally, it's about 50% or so. So they really welcome the opportunity to reengage what they consider to be trusted advisors and partners in the field. And more and more they're looking to IDEXX to be able to provide the analyzers and software solutions that really help them from the standpoint of not just increasing patient care, which has always been the case, but also really driving staff productivity and communications within the practice and with their clients. So overall very, very positive. And we think that there's really an exceptional long-term opportunity, not just in hematology with the ProCyte One, but the entire in clinic that lab suite, because as you know, hematology and chemistry are also very often in vast majority of cases used together.

Operator:

And our next question is from Erin Wright from Credit Suisse.

Brian McKeon:

Yes, why don't I start and I think Jay can help with color on what we're seeing at the clinic level. The trends in the sector and in our growth held up very well in the second quarter. The CAG Dx recurring, as you note, on a two-year stack basis, that's the way we like to track it as we're working through some of these compares was a little above 16% is pretty much in line with what we saw in Q1 and Q4. And so that's very encouraging. I think we're benefiting from continued solid market trends at the clinic level. The visit number was down a bit Q4 to Q1, but the diagnostic revenue growth on a one-year and a two-year stack basis sustained at very good rates. So all indications are demand is holding up very well and that's informing our full year outlook, the higher end of our outlook ranges for the two-year trends to continue in the second half for CAD Dx recurring. And we obviously have a range because there may be some other dynamics that we don't anticipate that go on, and we're going to learn more as we're working through. Hopefully the economies continue to open, but I think we're very encouraged by the strong trends.

Erin Wright:

Okay, great. And then just given some of the stepped up investments internationally, are you seeing any changes in the competitive landscape there? And this goes back also to my bigger question, I guess, that people have is what's the right size for the commercial effort overall? It sounds like you're seeing the growth to justify it. But how are you thinking about in terms of your optimal goal there? Thanks.

Erin Wright:

Okay, great. Thank you.

Jon Block:

Thanks, guys. Good morning. First question is centered on capacity. In the snapshot in the wellness clinical growth decelerated in a two-year stack basis to roughly 85%. It had been 12% to 13% stacked, again, the wellness the prior three quarters. And I feel sometimes Wall Street takes for granted by sort of the ability of an industry to absorb all the additional demand. We've actually anecdotally heard of some practices turning away new customers. So as market leaders, I’d love to get your thoughts, what are you guys hearing? Are there any capacity constraints going on in the industry that's pushing off wellness tests? And this might be a slight headwind for the industry, as we think about the next handful of quarters.

Jon Block:

Okay. And maybe just part B to that one, a follow up. Are you seeing that translate from the veterinarians’ perspective on raising prices to the pet parent? In other words, the demand’s there. They're actually pushing through price. And does that give you guys an opportunity when we think about 2% to 3% annual price increases to maybe bump that up? And then I'll just ask my second question, if that's okay.

Jon Block:

Okay. And then my second question, Brian, for you. I think I've got these numbers right, but you raised EPS from 1Q to 2Q and midpoint by $0.25. I think stock comp, tax and FX was $0.12 on the button. And I'm guessing ezy might have been another nickel. But can you talk about the flow through on that remaining 30 million of core revenue increase? It just seems like the incremental is on that 30 million if I run through the math. Is it too dissimilar from corporate averages? Is that true? And maybe is that reflective of what you're alluding to of some of the reinvestments in the business in the back part of the year? Thanks.

Jon Block:

Perfect. Thanks, guys.

Nathan Rich:

Good morning. Thanks for the questions. Brian, maybe going back to your comments on margins. There's obviously been a lot of variability last year and in the first part of this year, just given the different pandemic effects that you guys have felt. So I guess like when we think about operating margins for kind of 2022 and beyond, how should we kind of frame the right jumping off point, kind of assuming that these pandemic effects normalize? I guess what’s sort of the right baseline type margin as we think about the business going forward?

Nathan Rich:

Great. And then just a couple of quick follow ups. Brian, I think if I caught the number right, you said that in the second quarter, you were lapping I think $25 million of cost reductions. Did I catch that right? And do you have a comparable number for 3Q and 4Q as we think about cycling the temporary cost reductions from last year?

Nathan Rich:

Great. And if I could just sneak one more in. You've continued to see the premium or the spread between clinical visits and the CAG Dx growth above that 9% to 10% range that I think had been assumed in guidance at the beginning of the year. Is that still roughly the right range to use for the full year overall? Or just given what you’ve seen develop in the first half, do you think that you could continue to see that slightly higher spread than what you've seen historically?

Jay Mazelsky:

Yes, Nate, the way we tend to think about that is it's also I think directly related to our execution, which has been excellent, both from an innovation standpoint and we have lots of new stuff, like ProCyte One and digital cytology and software solutions like ezyVet, and also our commercial expansion. So the market’s doing one thing, and it's a very strong market backdrop. And then our execution and ability to develop these markets is the other factor. And I think we've demonstrated a very strong execution in being able to do that. So we're optimistic.

Operator:

Our next question is from Chris Schott from JPMorgan.

Jay Mazelsky:

Yes. So I'll talk about the innovation piece first. Our investment appetite for innovation has always been very high. We think that innovation at the end of the day produces differentiation and solves really challenging customer problems, both clinically and from a business standpoint. So if you look at 2020 last year, we came out with seven I think significant product and service introductions. And they were all extremely well received by our customers and adopted. So we continue to invest in innovation. We'll talk at Investor Day about our approach and the framework in terms of how we think about it, but it involves platforms and instruments and assays and obviously, software as we've talked about, but also innovation in terms of just business models and our reference lab network. So that's alive and well and continues to be a real focus area for us. In terms of your questions around regional differences and testing utilization, as indicated, we've seen really strong growth across the board. The U.S. and North America has much higher use of diagnostics, and that's something that we think over time we can drive increased market adoption internationally with -- the TAM is about 2x from a potential opportunity standpoint relative to the U.S., and that's a function of more than just commercial expansion. It's a function of really putting in place reference lab network like we've done in Kornwestheim, the centers of excellence and broader set of solutions that customers value so much. You do see some, and I would say modest differences just by country in terms of how they're reacting to the pandemic. So we've seen a little bit lower in-person visits in Europe relative to the U.S. U.S. is about 60%. Europe, for example, was 50%. But our ability to continue to support our customers and customers transacting business hasn't really changed as a result of that. I think they've adopted well to the changing environment, and they're seeing a lot of traffic just like we're seeing in the U.S.

Operator:

And our next question is from Ryan Daniels from William Blair.

Jay Mazelsky:

Right. The 60% does refer to customer facing sales visits. That has gone up from what's plateau about 50% thereabouts at sort of the height of last year is a little bit below 50%. But we adapted very quickly to the changed environment. And obviously, it's a function of how things play out going forward, whether that continues to increase in terms of the Delta variant and some of the procedures local governments have put in place in addition to CDC. But we expect as the pandemic recedes that it will continue to increase our in-person visits, but to be determined.

Jay Mazelsky:

Yes. I think there's been some great takeaways in terms of what visits really should be done in person versus where you can support the customer virtually. I think from the standpoint of getting those benefits from a productivity standpoint. I don't think we'd go back to 100%. Having said that, I think what our customers would like to say, given how busy they are is more efficient visits. So at one point, maybe they have time for 45 minutes or an hour, and now they'd like to be able to get them the same amount of work and conversation in 20 minutes or 25 minutes. So we think there's great opportunity there to help them and to increase productivity on both sides of the partnership.

Brian McKeon:

It held up well. I think there's always a bit of quarter-to-quarter variability. Nothing really specifically. We're trying to highlight our trends were quite good. I think vets are very busy. I think that's one thing that we hear gives us a way so that could be a dynamic. But overall, I think the bigger theme is continued strong growth, and we're feeling good about our outlook.

Operator:

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for participating. You may now disconnect.

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our first quarter result and to provide an update on our initial financial outlook for 2021. In terms of highlights, IDEXX delivered excellent financial results in Q1, driven by continued strong global momentum in our CAG business. Revenue increased 24% as reported and 21% organically supported by 23% organic growth in CAG Diagnostic recurring revenues, reflecting continued high gains across U.S. and international markets. The operating profit gains were particularly strong in Q1, reflecting flow-through benefits from high CAG Diagnostic recurring revenue growth and favorable comparisons to relatively higher prior year pre-COVID operating expense levels. These dynamics and a higher than expected $0.17 per share in stock based compensation tax benefit enabled delivery of $2.35 in earnings per share, an increase of 73% on a comparable basis. Our strong start to the year has increased our comp and has been achieving high revenue and profit gains in 2021. We're raising our full-year revenue outlook range by 40 million to $3,105 million to $3,160 million, or reported revenue growth of 14.5% to 16.5%. This reflects an updated outlook for 13% to 15% overall organic revenue growth, 1.5% higher than our initial outlook. We're raising our organic growth outlook for CAG Diagnostic recurring revenues to 14.5% to 16%, 2% higher at mid-point than our initial 2021 growth projections. Our full-year financial outlook now reflects a targeted 150 basis point to 200 basis point improvement in operating margins on a comparable basis. These gains are projected to support EPS of $7.88 to $8.18 per share, reflecting 21% to 26% comparable EPS growth. We're planning to deliver these strong profit gains while advancing investments in our innovation and commercial capability to enable long-term accelerated global market development in our core CAG business. We'll update or we'll discuss our updated 2020 outlook later my comments. Let's begin with a review of our first quarter results in recent market trends. First quarter organic revenue growth of 21% was driven by 23% gains in CAG Diagnostic recurring revenues, reflecting 21% growth in the U.S. and 28% growth in international markets, including some benefits from the lapping of prior year COVID impacts in late March. Strong CAG gains also reflected 27% organic growth in CAG Diagnostic instrument revenues. Overall, Q1 organic revenue gains were supported by 9% growth in our LPD business, reflecting strong demand for African Swine Fever testing in China, as well as by approximately 1% of growth benefit from our OPTI human COVID-19 PCR test initiative. The key driver of our financial model CAG Diagnostic recurring revenues expanded the high growth rates across regions through the quarter. First quarter results were largely consistent with the very strong two-year growth trends we saw on the second half of 2020. On a two-year basis, CAG Diagnostic recurring revenues increased at a 70% average annual organic growth rate. We'll be highlighting two-year growth trends selectively in the coming quarters as we calibrate the effect of year-on-year lapping of 2020 COVID impacts on our growth results. High CAG Diagnostic recurring revenue gains were aided by continued high growth in clinical visits. Overall, U.S. clinical visit growth was 12% in Q1; including some benefits from the lapping of prior year COVID impacts in late March. On a two-year basis, same store clinical visit growth increased at an average 6% annual rate, slightly higher than our second half 2020 trends. The IDEXX U.S. CAG Diagnostic recurring revenue growth premium to U.S. clinical visits was 900 basis points in the first quarter, or approximately 1,000 basis points to 1,100 basis points adjusted for [equivalent day effects]. Q1 U.S. clinic visit growth reflected sustained strong 9% growth in non-wellness visits and an increased 16% growth in wellness visits. These gains were supported by relatively higher benefits from growth in new patients, which we estimated added approximately 3% to overall clinical visit growth, and 4% to wellness visit growth in the quarter. Our continued focus on expanded pet healthcare services, including increases in the utilization of diagnostics supported a 15% same-store increase and overall veterinary clinic revenues in Q1 and a 21% same store increase in diagnostic revenues for practice, well ahead of 5% growth in overall visits to veterinary clinics in the quarter. Positive market dynamics benefits from IDEXX commercial initiatives and technology to support higher standards of care and continued very high customer retention rates drove strong Q1 organic revenue gains across our major testing modalities globally. IDEXX global reference lab revenues increased 22% organically in Q1, reflecting 20% plus organic gains in U.S. and international markets. Our international reference lab gains benefited from strong growth in Europe, supported by our new German core lab capability, our expanded commercial presence, and growth in IDEXX 360 program agreements. Global reference lab gains continued to be driven by high same store volume growth with strong gains across testing categories. IDEXX VetLab consumable revenues increased 26% on an organic basis in the first quarter, reflecting continued 20% plus growth in the U.S. and 30% plus organic gains in international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels, and expansion of our global premium instrument install base. CAG instrument placements increased significantly in Q1 compared to constrain prior levels as clinics look ahead to supporting high growth in demand for diagnostics globally. Total premium placements increased 32%, reflecting 26% gains in North America, and 36% growth in international markets. The quality of CAG instrument placements was excellent reflected in 302 catalyst placements at new and competitive accounts in North America, up 27%, and 805 new and competitive placements in international markets, a year-on-year [increase of 15%]. We also benefited from 464 second Catalyst placements driven by continued strong demand from high volume customers. These new placements and high customer retention levels supported a 13% year-on-year growth in our global Catalyst installed base. We achieved 956 premium hematology placements, including our initial shipments of ProCyte One supporting a 10% growth in our global premium hematology base compared to Q1 of 2020. We also placed 577 SediVue’s including strong placement levels at international markets leveraging IDEXX 360 agreements, which supported a 21% year-on-year global increase in our [premium earned in settlement] installed base. We're very encouraged by the momentum we drive in expanding our in-clinic installed base as we prepare for continued improvement and sales access to veterinary clinics globally, and advanced the global launch of ProCyte One. Rapid assay revenues also expanded a strong 20% organic growth rate in Q1, reflecting mid-teen gains in the U.S., supported by high demand for wellness testing, and accelerated growth in international markets. Of note, retention rates for U.S. rapid asset customers reached 97% in Q1, the highest level seen since the initiation of our U.S. go direct effort since 2014. Overall, 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 CAD business, our veterinary software and diagnostic imaging revenues increased 9% organically overall. Double-digit gains in recurring software and digital imaging service revenues and solid growth and new software system placements were moderated by lower diagnostic imaging instrument revenue levels, impacted by a year-on-year reduction in early regeneration instrument platform sales. Turning to our other business segments, water business revenues declined 3% organically in Q1, compared to strong prior year results, which included an estimated $2 million or 8% growth benefit from accelerated stocking orders. Adjusting for these impacts, water revenues increased solidly year-on-year as we continue to see relative improvement and non-compliance related testing volumes that have been constrained during the pandemic. Livestock poultry and dairy revenue increased 9% organically in Q1, driven by growth in our Asia Pacific region. Q1 results saw approximately 2 million of favorability from shipment timing, which largely offset favorable shipment timing impacts of Q1 of 2020. LPD results benefited from strong demand for diagnostic testing programs for African swine fever and growth in core swine testing volumes in [China], supported by large producer efforts to rebuild swine herds. These gains more than offset lower herd health screening levels, compared to strong prior year results. We expect to see some pressure in our LPD revenue growth rate moving forward, particularly in the second half of this year as we begin to lap the benefits from high prior demand for African swine fever testing programs and see increased levels of local competition in China. Turning to the P&L, we had strong profit flow through in Q1 as we benefited from high CAG Diagnostic recurring revenue gains and comparisons to relatively higher pre-COVID operating expense levels in the first quarter of 2020. Overall operating margins expanded 830 basis points year-on-year on a comparable basis, driving an increase in operating profits of 72% as reported and 65% on a comparable basis. Gross profit increased 31% in Q1. Gross margins increased 320 basis points on a comparable basis, reflecting productivity improvement in our lab operations, supported by higher organic revenue growth, favorable impacts from strong consumable sales, and benefits from moderate net price gains. We’re planning for gross margin gains to moderate over the balance of this year as we [lab tightly] controlled prior spending levels at increased reference lab staffing to support high revenue growth and service levels. Operating expenses in Q1 increased 4% as reported, and 3% on a comparable basis. As noted, operating expense growth was moderated by comparisons to higher prior year pre-COVID spending levels, including much higher prior year first quarter travel, trade show, and sales meeting costs. Our 2020 financial outlook includes expectations for an increased rate of OpEx growth moving forward, as we lap comparisons to control prior year OpEx levels, and invest to support our strong global growth momentum through enhancements to our commercial and innovation capability. We're also planning for year-on-year increases in costs in key areas such as employee health care claims and travel costs as we work through the year in pandemic related restrictions are raised. Q1 EPS was $2.35 per share, including benefits of 15 million or $0.17 per share related to share-based compensation activity. On a comparable basis, Q1 EPS increased 73%. Foreign exchange added 10 million to operating profits and $0.09 to EPS in Q1, net of approximately $2 million in hedge losses. Free cash flow was 104 million in Q1. On a trailing 12-month basis, our net income to free cash flow conversion rate was 99%, including benefits from delayed capital spending, an extension of tax payments. For the full-year, we're maintaining a consistent outlook for free cash flow conversion of 80% to 90% of net income. Our balance sheet remains in a very strong position. We ended the quarter with leverage ratios of 1.0 times gross and 0.6 times net of cash, [the] 350 million in cash and no borrowings and a $1 billion revolving credit facility. We re-initiated share repurchases in Q1 allocating 154 million of capital to repurchase 305,000 shares. Turning to our 2021 full-year outlook, we're increasing our projected ranges for overall revenue growth to 14.5% to 16.5%, as reported. This reflects at 150 basis point increase in our projected organic revenue growth range offset by approximately $5 million and refinements to our FX assumptions, which now point to a positive 1.5% full-year growth benefit this year, at the rate shared in our press release. Our updated organic, overall organic revenue growth outlook of 13% to 15% reflects an estimated organic growth range of 14.5% to 16% for CAG Diagnostic recurring revenue. As noted, we've raised the CAG DX recurring revenue growth outlook by 2% at midpoint to reflect our strong Q1 results, trends that point towards a sustained high rate of U.S. clinic visit growth, and confidence in our global CAG commercial execution, which is driving strong momentum in our international regions. As a benchmark, our updated recurring revenue growth outlook aligns with the higher end of our earlier projections for 2% to 5% same store U.S. clinic clinical visit growth for the full-year 2021 and an expected premium of IDEXX U.S. CAG Diagnostic recurring revenue growth to clinic visit growth of approximately 900 basis to 1,000 basis points. The increase in our CAG Diagnostic recurring revenue growth outlook, which results in over 50 million of operational revenue [upside] is being moderated by relatively more conservative full-year projections for IDEXX [human COVID] testing. We estimate that we'll see approximately $10 million in lower human COVID revenues year-on-year in the second half of 2021 as we lap the benefits of our prior year initiatives and plan for moderation and testing levels. We've also moderated our outlook for LPD growth to reflect to increase local competition in China, including – and our African swine fever testing business. Combined, these effects resulted in 0.5% headwind, compared to earlier overall 20 2021 organic growth outlook. Given the lapping of prior year COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter, with continued expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're now targeting 150 basis points to 200 basis points of annual comparable operating margin improvement in 2021, up 100 basis points from our initial outlook. This is reflected in a reported operating margin outlook for 2021 of 28.3% to 28.8%. Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide $0.15 of positive EPS benefit in 2021, net of established hedged positions. Our full-year outlook also includes an updated estimate of $0.19 per share of tax benefit related to share based compensation activity, $0.09 per share higher than our initial projections. We provided details and our updated estimates in the tables in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. [Operator Instructions] And our first question is from Michael Ryskin from Bank of America.

Brian McKeon :

Mike, why don't I start by, just kind of, framing the comparisons that we're trying to highlight as we move forward, because that's a key dynamic? We're just trying to reinforce. Clearly we had very strong profit results in Q1. We are going to start entering a period here where we're going to be comparing ourselves to the control spending levels that we implemented last year. So, if you recall, we had 25 million of OpEx savings that we highlighted second quarter, another 5 million of savings from lower health care costs. We really, in the early stages of the pandemic tried to be very mindful of how we're controlling labor costs in areas like the labs, and so we're just trying to highlight as we move forward. We're going to see, you know, some of those comparison effects moderate the margin gains, the gross margin gains, and we'll see relatively higher OpEx growth. Again, as a benchmark just in Q1, we had over $7 million of cost reduction year-on-year from things like lower sales meeting costs [in T&E], which is about 7% of OpEx growth. So, moving forward, we won't have those kind of favorability. So, we're just trying to highlight that. And we're also trying to highlight that we're advancing investment in the business. So, maybe Jay can talk a bit about that.

Michael Ryskin:

Great, thanks. And then if I could throw on a follow up, sort of on some of the underlying figures you provide for market conditions, as always, the snapshot is very helpful in terms of visit growth and revenue growth for practices. I'm just curious, you know, looking at it on one more granularity, it seems like you're actually seeing continued acceleration from 4Q, you know, both on a raw number spaces and even if you adjust for some of the comp, I think, I guess I would say that we were expecting a little bit more moderation and maybe a gradual phase as you go through the year. But it seems like there's no indication of that. Is that a fair analysis of the data? Have you seen anything that would indicate that things are moderating a little bit as some of these markets, sort of come out from COVID, and we're seeing some reopening of the economy? Just wondered if you could talk about, sort of the underlying trends there?

Jay Mazelsky:

I would just add to that Mike. The trends we described, the broader level trends we've described have largely been intact. So, these are obviously new critical business growth driven by new patients. The majority of which are puppies and kittens, higher usage and intensity of diagnostics and more of a pivot to services by the veterinarians. For those that we have seen over the last, you know, second half of 2020, we continue to see in Q1.

Operator:

Our next question is from Erin Wright from Credit Suisse.

Jay Mazelsky:

I'll make a couple comments about that, Erin. So the use of Bloodwork has – the growth rate has approximately doubled as we talked about a percent in 2020 and versus about 0.5% the previous year. And so there's a number of things that are driving that. We've seen greater proportion of the higher users of diagnostics continue to increase. And we see that very optimistically, as evidence that even those who were at the higher range from a [dead cell] standpoint of diagnostic users feel like there's a lot more capacity. We also see – as part of clinical visits, greater use of diagnostics, and then when they use them, greater intensity has also gone up. So, all those factors are playing into it. And we think that they'll sustain three plus quarters.

Jay Mazelsky:

Yeah, we're very excited and optimistic about ProCyte One. It's been a very successful roll-out. There things – there's a time and distance dimension to these, you know, as we roll-out a new analyzer in terms of building volume in production, create awareness, in the marketplace. You know, the exciting thing about ProCyte One is the opportunity itself is very significant. We think that there are 100,000 plus opportunities for placements in the hematology market, but there's also a nice multiplier impact where if there's hematology, there's chemistry. So, we tend to place those together. There's, as part of IDEXX 360 there's pull-through in terms of, you know, the reference labs and rapid essay, not just the U.S. now, but internationally. And so, we're excited by the opportunity. I think our experience, our customer experience trials have given us a lot of confidence that the analyzer has hit the mark, both in terms of usability and performance, and we expect our ramp to grow throughout the year. And especially, so internationally as we release late Q2, early Q3 pending on things like regulatory approvals.

Operator:

Our next question is from Jon Block from Stifel.

Brian McKeon:

Yeah. On your first question on gross margin, we are seeing a really nice flow through and obviously the high CAG DX recurring mix and just the strong growth were is helping, we do anticipate, Jon, we're going to be adding back some costs here to keep up with the growth, particularly in things like lab staffing. And then we'll have, you know, some compares just to the, as I mentioned on a year-over-year basis, but we're still anticipating a high level of gross margin flow through and that's factored into our outlook. And on leverage, you're correct, we've, you know, we're quite disciplined last year in terms of pausing, share repurchases, and really controlling our capital spending. Our capital spending on an annual basis was below, kind of the normal levels that we typically have. And we deferred some projects. And we're – you will see a step up in that as we move forward, not a change fundamentally in our long-term view, but just, you know, catching up on some of the deferred capital spending. And right now, we're just signaling maintaining the kind of net leverage ratios that you see. We did initiate buybacks in Q1, and feel good about sustaining those. So – but not trying to signal any change to the leverage profile at this point.

Jay Mazelsky:

Yeah, you know, Jon, there's always a little bit of variability from quarter-to-quarter. We think that 900 plus, you know premium is, it's what we've seen over the last quarters in 2020 and we think that that is sustainable. I think it's a reflection of a couple of different things. Obviously, the pivot to services, which if anything has accelerated as part of the COVID response in clinics, but it's also in response that our strategy as a company around innovation, the commercial partnership with our customers in bringing testing relevant testing practices. And so, we think that that's a successful formula. And it's supportive of what veterinarians and pet owners want to see in terms of better patient care, better – higher standards of care for patients. And that will continue to be a focus for us from a commercial and innovation strategy standpoint.

Operator:

Our next question is from Nathan Rich from Goldman Sachs.

Brian McKeon:

Sure. [Indiscernible] started a little higher level with the global numbers, but made our – our updated range, the higher-end of the CAG DX recurring range, basically assumed similar two year growth trends to what we saw in Q4 and Q1. So, it's largely in-line with that. And I think that, that is the primary driver of the update. I think is the – just, you know, more competence coming through Q1 on sustainability of some of the trends and some positive dynamics with critical visit growth. And so that's more of the headline. We're still maintaining, you know, a range, because that may moderate. You know, we may see some pullback. We're going to be up against some compares here. But I think, on balance, we feel very good about the trends. And if anything, they improved a bit in Q1. And as a benchmark, we do try to highlight that U.S. clinical visit growth, and premium dynamic that you mentioned and our initial estimates were 2% to 5% for the full-year. For clinical visit growth, that's a one-year basis and the 900 basis point to 1,000 basis point premium. And I did mention that our updated outlook reflects that we're trending at the higher-end on clinical visits. And that we're reinforcing the premium outlook, which is right in-line with where we were in Q1. So, you know, I think the, you know, just the underlying market trends have sustained. We feel good about that, and we are seeing that globally. And I think we feel very good about our execution. And now of course have things like ProCyte One to innovation issues that'll help us build on that momentum.

Jay Mazelsky:

Yeah, so it's early in the rollout, but we're very pleased. It's been a very successful route, very successful customer experience trials, and not easy to do, by the way, in the middle of a pandemic. This is a complex instrument, and it has a world-class user interface and performs at a very high level from just an accuracy standpoint. You know, we've identified the hematology opportunity as very significant for the company. Keep in mind, a lot of our international markets are hematology first markets. So what that means is, if they have a choice in terms of, if it's one instrument, or none, they tend to choose hematology and they test with hematology, even before chemistry, even when they have both. So, in terms of the opportunity itself, as I earlier described it, you know, almost 100,000 placement, opportunities, two-thirds plus of which is internationally. But you know, even more importantly, if I pivot just a higher level comment, it's an important part of our overall in clinic solution. We tend to sell chemistry in hematology, increasingly SediVue together. So, having this type of solution, which from a performance and cost profile standpoint, you know, hits a sweet spot. The market is obviously very attractive to us. The other thing that I would point out is that increasingly, the IDEXX 360 program is just getting terrific traction internationally. And as part of that capital placement piece is the [indiscernible], and there’s pull-through on reference labs and rapid essay in terms of delivering the underlying volume commitments. So, we're excited by the overall attack diagnostics opportunity that ProCyte One represents. It’s going to have, you know, we think a very long tail both duration, as well as, you know, overall volume opportunity. So, more to come over time.

Balaji Prasad:

Thank you. Sorry, juggling different calls. Thanks for the question. So, just two-fold questions for me. One, pretty broad level one, trying to understand a defective growth, was there any element of growth coming through market share gains in this quarter or was it all what we could perceive broader industry growth, led by wizards and increasing utilization? And secondly, our Vet survey indicated at 200 basis points jump in [YoY] revenue contributions for clinics, from diagnostics, does that sound too as right and are aligned with your internal tracking? Thank you.

Balaji Prasad:

Fair enough. Thank you. Maybe a specific comment, if you could throw some lights on what you're seeing with – since the launch of VETSCAN Imagyst in Q4, and if it is disrupting the market, and what you’re seeing on the clinic side, in terms of comments?

Operator:

Thank you. I’ll now turn it back over to Jay for final remarks.

Operator:

Thank you, ladies and gentlemen. That concludes today's conference. Thank you for participating, and you may now disconnect.

Brian McKeon:

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2020 results and to provide an overview of our initial financial outlook for 2021. In terms of highlights, IDEXX delivered excellent financial results in Q4, supported by expanding global demand for companion animal health care. Revenue increased 19% as reported and 17% organically, driven by 21% organic growth in CAG Diagnostic recurring revenues. CAG Diagnostics recurring revenue growth sustained at high levels across U.S. and international markets through the fourth quarter, reflecting continued strong clinical visit growth trends and increased utilization of diagnostics. Flow-through operating margin benefits from high CAG Diagnostics recurring revenue growth supported achievement of $2.01 in EPS, which included a $0.25 nonrecurring tax benefit and $0.13 in tax benefit from stock-based compensation activity. Strong CAG growth results and proactive cost controls supported delivery of outstanding full year 2020 financial performance, above our long-term goals. IDEXX achieved 12% full year organic revenue growth, driven by nearly 15% gains in CAG Diagnostics recurring revenues. Full year operating margins reached 25.7%, an increase of 340 basis points on a comparable constant currency basis. The combination of high revenue growth and operating margin gains supported delivery of full year EPS of $6.71 per share, an increase of 31% on a comparable constant currency basis. Robust CAG market trends position us for continued strong financial performance in 2021. Today, we're providing our initial outlook for full year revenue growth and key financial metrics and an expanded information table shown in our press release and snapshot. Highlights include an outlook for 11.5% to 13.5% overall organic revenue growth, supported by 12% to 14.5% organic growth in CAG Diagnostic recurring revenues. Our financial outlook reflects a targeted 50 to 100 basis point improvement in operating margins on a comparable constant currency basis, building on strong 2020 performance. These gains are projected to support 15% to 20% comparable constant currency EPS growth, aligned with our long-term goals. We'll discuss our 2021 outlook later in my comments. Let's begin with a review of our fourth quarter and full year results and recent market trends. Fourth quarter organic revenue growth of 17% was driven by 21% gains in CAG Diagnostic recurring revenues, reflecting 21% growth in the U.S. and 22% gains in international markets. Strong overall organic growth was also supported by 13% organic gains in our LPD business and approximately $10 million or 1.5% of growth benefit from our OPTI human COVID-19 test initiatives. Overall, organic growth was moderated by pandemic related pressures, which constrained water revenue growth and contributed to a 10% year-on-year decline in IDEXX VetLab instrument revenues. As noted, CAG Diagnostic recurring revenue gains sustained at high levels through the fourth quarter. CAG growth dynamics remain healthy across global markets with 20% or higher CAG Diagnostic recurring organic revenue gains achieved in the North America, Europe, Asia Pacific and Latin American regions. For the full year 2020, CAG Diagnostic recurring revenue growth increased an impressive 15% in both U.S. and international markets. High U.S. CAG Diagnostic recurring revenue gains continue to be aided by strong growth in clinical visits. Overall, U.S. same-store clinical visit growth reached 8% in Q4, up from 6% growth in Q3, reflecting sustained 10% growth in wellness visits and higher 10% growth in non-wellness visits. A factor continuing to support high clinical visit gains is an increase in first-time clinical patient visits, which we estimate added 1.5% to 2% to overall clinical visit growth and 2.5% to 3% to wellness visit growth in the quarter. An increased focus on health care services, including diagnostics, supported a 12% same-store increase in overall veterinary clinic revenues in Q4, well ahead of an improved 4% growth in overall visits to veterinary clinics in the quarter. These positive market dynamics and benefits from investments in IDEXX's commercial capability, wellness program initiatives and technology to support higher standards of care drove high Q4 and full year organic revenue gains across our major testing modalities. IDEXX global reference lab revenues increased 19% organically in Q4 led by nearly 20% organic growth in the U.S. and mid to high teens organic growth in international markets. Reference lab gains continue to be driven by high same-store volume growth with strong gains across testing categories, including support from high levels of wellness testing in the U.S. and benefits from the expansion of IDEXX 360 program agreements in international markets. For the full year 2020, global lab revenues increased 13% organically, reflecting mid-teen organic gains in the U.S., and approximately 10% growth overall in international markets. IDEXX VetLab consumable revenues increased 25% on an organic basis in Q4, reflecting high growth across U.S. and international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels and expansion of our global premium installed base. These dynamics supported a 19% full-year growth in IDEXX VetLab consumable revenues in 2020. While CAG instrument placements continue to be constrained by pandemic impacts restricted – restricting sales access to vet clinics, trends have improved solidly over the second half of 2020. In Q4, CAG instrument revenues were $3 million below strong prior year levels, representing a 10% year-over-year organic revenue decline. Overall global Catalyst placements in Q4 were 13% below strong prior year levels, which included high levels of international upgrades. While overall placement levels were constrained to a degree by the pandemic, the quality of CAG instrument placements remained high. Globally, placements at new and competitive accounts were down approximately 4% compared to strong prior year levels. These results reflected 414 Catalyst placements at new and competitive accounts in North America and 1,092 new and competitive placements in international markets. We also placed 525 second Catalysts globally to support high-growth with our customers. New placements and continued high customer retention levels drove a 13% year-on-year increase in our global Catalyst installed base. We achieved 1,224 premium hematology placements in Q4, supporting a 10% year-on-year expansion in our premium hematology installed base. We also placed 671 SediVue analyzers, bringing our global SediVue installed base to nearly 10,700 instruments, up 20% year-on-year. Rapid assay revenue increased 20% organically in Q4, driven by high-growth in the U.S., aligned with broader gains in demand for diagnostic testing, including robust gains in clinical wellness business. For the full year 2020, rapid assay organic revenue growth was 9%, reflecting strong volume gains for canine, 4Dx, feline and specialty testing. Overall, CAG diagnostic recurring revenue growth remains primarily volume-driven, augmented by consistent net price gains of 2% to 3%. We're planning for similar levels of net price improvement in CAG recurring revenues in 2021. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 1% organically overall in the fourth quarter. Double-digit gains in recurring service revenues and solid growth in new software system placements were moderated by lower diagnostic imaging system placement levels. For the full year 2020, veterinary software and diagnostic imaging revenues increased 3% organically, as strong gains in software services were offset by pandemic-related pressure on new imaging system placements. Turning to our other business segments. Water business revenues posted modest organic growth in Q4, as solid gains in compliance testing were offset by pandemic-related pressure on non-compliance-related activity. These impacts contributed to a 2% organic decline in full year 2020 Water revenues. While recent trends in our Water business have improved relatively, we're planning for uneven demand in non-compliance testing in 2021, as we continue to work through pandemic-related impacts. Livestock, Poultry and Dairy revenue increased 13% organically in Q4, driven by continued strong growth in our Asia-Pacific region. Better-than-expected LPD results reflected high demand for diagnostic testing programs for African Swine Fever and gains in core swine testing volumes in China, supported by large producer efforts to rebuild swine herds. These gains offset lower herd health screening levels in export markets compared to strong prior year results. For the full year, LPD revenues increased 11% organically. Looking ahead to 2021, we expect to see constraints on LPD growth rates as we lap the benefits of the 2020 step-up in revenues from expanded African Swine Fever testing programs. Turning to the P&, operating profit results were very strong in Q4 reflecting flow-through from high CAG Diagnostic recurring revenue gains. As a reminder, prior year operating profit results were impacted by $13 million in CEO transition charges. Normalizing for these impacts, operating profits increased 43% year-on-year in Q4 on a comparable constant currency basis, reflecting 460 basis points of comparable operating margin improvement. Gross profit increased 24% in the fourth quarter. Gross margins increased 210 basis points on a reported basis and 270 basis points on a constant currency basis. These results reflected productivity gains in our lab operations supported by high organic lab revenue growth as well as favorable net mix impacts from strong consumable sales and lower instrument revenues and benefits from moderate net price gains. Operating expenses in Q4 increased 4% on a reported basis and 10% on a comparable constant currency basis, excluding impacts from the 2019 CEO transition charges. Relatively accelerated operating expense growth reflected higher incentive compensation and healthcare costs as well as increased investment in R&D and enhancement of our global CAG commercial capability. We anticipate sustaining a relatively higher rate of OpEx growth moving forward as we support our strong global growth momentum. For the full year 2020, operating margins reached 25.7%, up 270 basis points as reported and 340 basis points on a comparable constant currency basis, reflecting high CAG Diagnostic revenue growth and benefit from cost controls. As highlighted in our initial guidance for 2021, we're targeting to build on this strong performance as we advance high return investments aligned with our long-term growth strategy. The EPS in Q4 was $2.01 per share, including $0.25 per share in non-recurring tax benefit and $0.13 per share in tax benefit related to share-based compensation activity. For the full year 2020, EPS was $6.71, up 31% on a comparable constant currency basis. Full year EPS results also included $39 million or $0.45 per share and tax benefit related to share-based compensation activity, which provided 590 basis points of effective tax rate benefit and $22 million or 330 basis points of effective tax rate benefit from the non-recurring tax item. In terms of other factors impacting our reported results, foreign exchange effects have turned favorable given the recent weakening of the U.S. dollar. In Q4, FX added nearly 2% to revenue growth and $1 million to operating profit net of Q4 hedge losses of approximately $2 million. For the full year 2020, foreign exchange rates decreased EPS by $0.06 per share, net of FX hedge gains of $1 million. Free cash flow was $541 million for 2020. Free cash flow conversion was 93% of net income or 97% adjusted for our investments at our Westbrook headquarter expansion and German lab relocation, which are now complete. Our balance sheet is in a very strong position. We ended 2020 with leverage ratios of 1.1 times gross and 0.64 times net of cash with $384 million in cash and no borrowings outstanding on our $1 billion revolving credit facility. We didn't allocate capital to share repurchases in the fourth quarter, but we have reinitiated share repurchases in Q1, reflecting confidence in our long-term growth strategy. Turning to our 2021 outlook. As noted, we've included a table in our press release and snapshot reflecting our initial outlook for revenue growth and other key financial metrics, recognizing that it remains a relatively dynamic environment in terms of financial forecasting. Our initial overall organic revenue growth outlook of 11.5% to 13.5% is centered on an estimated organic growth range of 12% to 14.5% for CAG Diagnostic recurring revenue. As a benchmark, this recurring revenue growth outlook aligns with projections for 2% to 5% same-store U.S. clinical visit growth for the full year 2021, building on strong 2020 momentum and a premium of IDEXX U.S. CAG Diagnostic recurring revenue growth to clinical visit growth of approximately 900 to 1,000 basis points, which is consistent with our strong growth trends heading into the pandemic. Our growth outlook range reflects our plans to drive continued high CAG Diagnostic recurring revenue growth globally while also recognizing each year-on-year comparisons to very strong 2020 growth levels in the second half of the year. In terms of overall organic growth, we factored in an estimated 1% overall growth benefit from higher CAG Diagnostic capital instrument revenues, including net growth benefits from the ProCyte One launch this year. These positive impacts are expected to be moderated by tougher comparisons in our LPD business and continued COVID related growth pressures in certain areas such as water noncompliance testing demand. Please note that given the lapping of prior year COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter with expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're targeting 50 to 100 basis points of annual comparable constant currency operating margin improvement in 2021. This is reflected in a reported operating margin outlook for 2021 of 27.3% to 27.8%. We're planning for continued solid momentum from gross margin gains with some moderation and benefits related to product mix impacts and increased lab staffing to support high-volume growth. Overall, we anticipate sustaining a relatively higher rate of OpEx growth moving forward as we support our strong growth trends. We also expect some relative year-on-year increases in costs in certain areas such as employee health care costs, claims and travel costs as pandemic related restrictions are eased. Our outlook incorporates projection for foreign exchange to be a net positive factor in 2021 at recent exchange rates. At the exchange rate shown in our press release, we estimate FX will provide a positive 1.5% to 2% revenue growth impact in 2021 and approximately $0.14 of EPS benefit net of established hedge positions. We've included an outlook for net interest expense that assumes maintenance of a relatively consistent net leverage ratio in 2021. Given reduced share repurchase activity in 2020; we're projecting more limited year-on-year EPS growth benefit from reductions in average shares outstanding. Our 2021 outlook includes an estimated $0.09 to $0.11 per share of tax benefit related to share-based compensation activity compared to a much higher than anticipated $0.45 per share benefit in 2020. Our 2021 estimates reflect known option expirations and any established 10b5-1 plans. In terms of managing our 2021 financial performance, our focus will be on delivering strong full year results, while advancing our long-term growth strategy prudently in a dynamic environment. Given the strong momentum in our CAG business, we're inclined to lean in towards high-return organic growth-oriented investments while delivering continued improvement in operating margins, aligned with our long-term goals. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Operator:

Thank you. And we’ll now begin the question-and-answer session. [Operator Instructions] And from Bank of America, we have Michael Ryskin. Please go ahead.

Brian McKeon:

Yeah. Mike, why don't I start off, and then I'm sure Jay can weigh in on the broader trends. I think we feel we've got a very healthy growth range, as you know, for the full year on the CAG DX recurring of a 12 to 14.5. And I think the higher end of the range on top of the growth rate we had this year, we think, is a very healthy outlook for our business. I think for – we do feel good about the momentum entering the first half. I think we'll have relatively stronger growth in the first half. And I think you're highlighting the key question, which is the comparison in the second half, there was a step-up in the growth rate and driven by a number of factors, more pets, more testing, some pent-up demand that they've carried over from the early COVID impact. So I think we're just recognizing that there will be some year-over-year compare dynamics that go on that we'll learn more about as we go into the year. But I think we're – we feel very good about the momentum in the business. It was an amazing 2020, amazing recovery for the industry. And I think the – our high growth outlook reflects that.

Michael Ryskin:

Okay. Thanks. Can I ask a quick follow-up on that as well is you touched on the ProCyte One launch. You gave us some color on sort of the rollout in 1Q, 2Q. I'm just wondering, are you baking in any specific contribution from ProCyte One from image review for any of the product launches in 2021. And also just – could you provide a little bit more color on feedback you may have gotten from sort of the pre-launch early customers as far as how that affected your outlook for the full launch?

Brian McKeon:

Yes. We're not breaking out specific projections by platform. But overall, Mike, we did highlight the 1% contribution to growth we expect to get from instrument revenues next year at CAG instrument revenues. And that's a very healthy growth rate that would imply kind of 20% to 30% growth in instrument revenues, and that includes, obviously, benefits from the ProCyte One launch. So we're looking forward that to being a positive net contributor, and we think we've got that built in appropriately in our outlook.

Brian McKeon:

Thank you.

Erin Wright:

Great. Thanks. You had some great data, obviously, on the market trends in the U.S., but I'm curious what you're seeing in international markets at this point in terms of clinical visits, new patient -- or new pet ownership, overall veterinary demand trends. Are you seeing the same level of resiliency there? And is it consistent with what you're seeing in the U.S., or what are some of the key differences between the two markets? And how are the trends in the fourth quarter and what you're anticipating into 2021 on the international side? Thanks.

Brian McKeon:

Go ahead, Jay. Sure.

Brian McKeon:

No, I think that captures it well. Erin, as you know, we don't have the same level of insight at the PIMS level to some of the more granular data, but I would -- we did try to point out that we had basically the same level of CAG Diagnostic recurring revenue growth, U.S. and internationally. Both overall regions were strong throughout the quarter. We had 20% CAG DX recurring revenue growth in Europe, Asia Pacific and higher in Latin America. And we are basically hearing the same trends and seeing the same trends in our business in terms of just vet clinics being very busy and just driven by underlying growth in utilization. So it's similar trends. I think the U.S. is particularly strong, and we have the benefit of more data and insight in the U.S., but I think it just reinforces the strong global momentum that we have in our business.

Jay Mazelsky:

Yeah. So we've grown Q4 placements over Q3, Q3 over Q2. The clinics, we did see some initial restrained access to the clinics early on in the pandemic, and they have these, along with social distancing policies in effect. We're still modestly impacted by that. The other thing to keep in mind is that the clinics themselves are really busy. There's just a lot of -- there's a lot of patient traffic through the clinics. So in those cases, they may not -- they may desire an instrument or a new suite, but don't want to take the time to have to interrupt practice and retrain. So, there's some headwinds connected with that. But overall, I think that our customers are responding very favorably to instruments that could help them with both capacity and productivity as well as practicing better medicine.

Erin Wright:

Great. Thank you.

Nathan Rich:

Good morning Jay and Brian. Thanks for the questions. Maybe just to start on the CAG Dx guidance. Going back to -- I think it was the first question. And the spread that you expect this year kind of narrowing back to the 9% to 10% range from the 12% that you saw this year, how much of that reflects potential conservatism, I guess? Because it seems like a lot of the trends that you saw driving frequency and utilization of diagnostics should continue. So, are there any other factors that we should just kind of keep in mind as we think about that's right kind of going back towards the historical range?

Nathan Rich:

Makes sense. And then just, Brian, quickly, if I could follow up on your comments on sort of the cadence of revenue growth in 2021. Understand it will probably be stronger in the first half than the second. I guess if we think about sort of the current trends continuing into the first quarter, it seems like the CAG Dx recurring growth should be in that 20% range. That would mean sort of the back half of the year is high single-digits to 10%. Is that roughly the right way to think about the cadence of growth between the first half and the second half of the year?

Nathan Rich:

Great. Thank you.