Idexx Laboratories Inc Barclays 24th Annual Global Financial Services Conference

Thanks for having us, Erin.

Yeah. Great. Let me just start by talking a little bit about the year, and then I will talk about the building blocks and tie back to some of those things. So we had an exceptional Q2 and really start to the year. We have got terrific momentum in the business. Erin, we talked at our investor day about how we are in the very early stages of this broad-based innovation cycle playing out across really multiple different platforms at the point of care, in reference labs, and in software, supported by what we are doing commercially to help our customers adopt these innovations. We are seeing that flow through into double-digit growth, both in reference labs, recurring revenue, and in our VetLab recurring revenue. On that basis, in Q2, we took up our guide for the overall year, as you know, and just reflecting that momentum that we see.

When we are in this sort of dynamic period that we're all in, trying to manage signals and understand where things are headed, with IDEXX, we step back and look through that haze. To your point around the long-term view, it just reaffirms the conviction that we have in the strength of the sector and the long-term potential. We can see our way to the $45 billion TAM that we've talked about in diagnostics globally. We know that diagnostics are dramatically under-penetrated around the world relative to the outsized value that diagnostics create in the practice. Pets can't speak. It's diagnostics that give them a voice in the healthcare equation. We also know that diagnostics drives 80% of all the activity in the practice.

Our entire strategy as a company is to move that needle through what we do on the innovation front and commercially, and we've been successfully doing that now for decades. We measure that through the building blocks that you asked about. We've seen really robust new customer growth. Really, the core of our strategy is to drive volume-based growth through innovation and utilization. We've seen that across the sector, and we know that customers that adopt our IDEXX innovations grow faster. Sector-wide, we're driving about a 50-basis point increase in blood work conclusion annually, and that translates to about 150 basis points of CAG diagnostic recurring revenue for IDEXX. So, we build that up across new customer growth, innovation and utilization, and modest price, tied back to the value that we're creating in the practice.

Yeah, I think just to round out the financial model, obviously that recurring revenue growth stream really enables the rest of the P&L as well. We see high incremental gross margin drop through, when we look at the ability to continue to grow our recurring revenues. We benefit from scale. We're focused on productivity. To Mike's point, part of our growth algorithm is price, in which we're creating value through various different sources of value to our customers. Some of that's innovation, some of that's things like our software capabilities, and our really keen focus on making sure that we can deliver product to them when they need it, because these are medical services, and they're often looking at making sure they can manage their own patient when it comes into the clinic.

So that gives us a really nice, robust ability to reinvest back into the business and in R&D and our commercial efforts, and be able to deliver operating margin improvement over a long period of time, ultimately to achieve that 15% plus EPS growth. So we see really significant opportunity and headroom for us both on the revenue top line, but also in our ability to continue to expand our margin profile and EPS.

Yeah. So to your question, we have seen this modest headwind to visit growth now playing out over multiple quarters, really more on the wellness side, as you know, Erin, which on the margin can be maybe seen as a little bit more discretionary than non-well. We have to step back on that, though, as well and maybe just again see the kind of broader arc through the ups and downs of the pandemic and the dynamic period since then. So if we compare where we're at today to before the pandemic, we have substantially more pets in the system, 22 million more pets through that period. And if you look at medicalized pets, also substantially more on the order of 8 to 9 million more medicalized pets. And we have a lot more visits as well from a total visit volume standpoint.

And if you take any one of those factors, just on a CAGR basis, they've been growing at or above the historical norm, again, through these ups and downs and this dynamic period that we're in. So we feel good about those things. But I think the bigger point that often gets lost in the conversation around visits is really looking at care, the demand for care, the intensity and quality of care that's happening in the visits when those visits take place. And that's, again, the core of our strategy is to drive that. On that dimension, what we've seen is this continuous expansion in blood work inclusion, in wellness visits, 50 basis points annually, growing inclusion, blood work inclusion, and wellness visits.

This overall step up that we've seen continuously quarter over quarter, we reported again in Q2 in diagnostic frequency and utilization, which is a very good proxy, again, for the quality of those visits. And when I sit down and talk to our corporate group, our large partners, this is a big focus for them because they understand that this drives their business model, and they want to grow this too. And so it's a natural point of alignment. And when you break down what are all the things that are driving this, IDEXX Innovation is playing a big role, but there are a number of really important underlying trends also. So we have these COVID pets that were adopted and are aging. And so if you double-click into the visit growth, we actually see positive visit growth, well and non-well, for pets over 5.

That's that bolus of pets coming through. We also know that as pets age, just like people, they need more care. They visit more, but they also need more care in those visits. Not only that, it turns out that pets are living longer, which is incredibly profound when you look at the data. Just over the last decade, dogs and cats are living about a year and a half, 1.5 years longer. That's about a 12% expansion in lifespan. Because they require more care as they age, that translates to a 16% or more increase in diagnostic lifetime value. Then on top of that, we're seeing an interesting trend around the mix of breeds coming into the practice. That reflects consumer choice. Consumers are opting into breeds like the Doodles, for example, and Golden Retrievers, breeds that actually require more care, and they realize that they require more care, but this is what they want.

Between the age mix, pets living longer, breed mix, all of these factors drive a higher demand for care. As we dive into our incredibly large data set of not just practice management data, but now consumer data, what we see is a very high resilience around demand for care across every single consumer economic cohort. We know it's a dynamic time, and we know that people feel pressure in the broader economy, but when they have pets, they're spending on those pets, and that's true across every economic demographic.