Idexx Laboratories Inc 2026 Q2 Earnings Call

Good morning. I'm pleased to take you through our second quarter results and provide an updated outlook for our full-year 2026 financial expectations. During the second quarter, IDEXX delivered excellent financial results, building on strong execution and expansion of IDEXX innovations in our companion animal business. Revenue increased approximately 10% as reported, and 9% organically, supported by over 10% organic growth in CAG Diagnostics reoccurring revenues, with double-digit gains in both the U.S. and international regions, and strong global growth in our water and LPD businesses. CAG Diagnostics reoccurring revenue growth was led by expanded volumes, while U.S. same-store clinical visits declined an estimated 1.3% in the quarter. Premium instrument placements reached over 5,200 units in the quarter, including approximately 1,600 IDEXX inVue Dx analyzers, on pace for our full-year inVue Dx placement goal of 5,500 units.

IDEXX's operating performance was excellent, with comparable operating margin gains of 110 basis points, supported by gross margin expansion, with benefits from strong recurring revenue growth and favorable product costs in the quarter. Operating profit gains enabled earnings per share of $4.27 in the quarter, resulting in EPS growth of 15% on a comparable basis. Strong second quarter performance supports an increase to our full-year outlook while advancing incremental growth investments. We're updating our full-year revenue range to $4,700,000-$4,745,000, an increase of $5 million at midpoint, net of a $20 million increase in operational performance, offset by a $15 million headwind from updated foreign currency effects. Our updated full-year overall organic revenue growth outlook is 8.5%-9.7%, with organic CAG Diagnostics recurring revenue growth of 9.5%-10.7%.

These organic growth ranges represent an increase of approximately 40 basis points at midpoint to our previous guidance, aided by global momentum in our CAG Diagnostics recurring revenues. We're also increasing our full-year EPS outlook to $14.69-$14.94 per share, an increase of $0.14 per share at midpoint, reflecting a 13%-15% comparable EPS growth range. We'll provide further details on our updated 2026 financial expectations later in my comments. Let's begin with a review of the second quarter results. Second quarter organic revenue growth of 9% was driven by nearly 9% CAG revenue gains, 13% growth in our water business, and 9% growth in LPD. Strong CAG results were supported by CAG Diagnostics recurring revenue growth of 10.3% organically, net of a 50 basis point negative impact related to equivalent days and average global net price improvement of approximately 4%.

As expected, CAG Diagnostic instrument revenues declined 20% organically as we lapped the broad commercial availability of inVue Dx in the prior year period. U.S. organic CAG Diagnostics recurring revenues grew nearly 10% in Q2, including strong volume gains and net price realization aligned with our full-year expectations. U.S. same-store clinical visits declined 1.3% in the quarter, reflecting an IDEXX U.S. CAG Diagnostics recurring revenue growth premium to U.S. clinical visits of approximately 1,100 basis points. Pressure on wellness visits remains the primary constraint to clinical visits, with non-wellness visits showing modest growth. We continue to see growth in pets five years and older across both categories. IDEXX benefits from quality of clinical visits, with an increasing number including diagnostics and broader use of diagnostic testing menu.

With the substantial majority of wellness visits today not including blood work, we see inclusion as a long-duration volume lever that does not depend on visit recovery. International CAG Diagnostics recurring revenues grew nearly 12% organically in Q2, sustaining double-digit gains led by volume growth. International performance continues to be driven by IDEXX execution, with volume gains from net new customers supported by expansion of our premium instrument install base and same-store utilization, including benefits from IDEXX innovations. IDEXX continued to deliver strong organic revenue gains across our major global testing modalities in the second quarter. IDEXX VetLab consumable revenues increased 14% on an organic basis, reflecting double-digit growth in both the U.S. and international regions. Consumable revenue growth included benefits from net new customer gains in our premium instrument install base and expanded testing utilization.

IDEXX Innovations, including our expanded Catalyst menu and growing benefits from inVue Dx recurring revenue, continued to support utilization gains across our customer base. CAG premium instrument placements reached 5,265 units during the second quarter, resulting in an expected year-over-year decline as we lap the broad commercial availability of inVue Dx in the prior year. Instrument placements remained high quality. Globally, we placed 1,602 IDEXX inVue Dx instruments in Q2 and over 1,000 new and competitive Catalyst instruments globally, with nearly 300 in the U.S. IDEXX Global Reference Lab revenues increased over 10% organically in Q2, led by volume gains. Reference Lab carries a higher index to wellness visits, which declined 3.4% in the U.S. during the period. Performance was driven by net customer gains and increased same-store utilization as existing customers adopted broader testing menu, including IDEXX Cancer Dx.

Global Rapid Assay revenues increased approximately 1% organically in Q2, returning to growth as the impact from customer shifting of pancreatic lipase testing to our Catalyst instrument platform eases. Veterinary software and diagnostic imaging organic revenues increased approximately 12%, driven by recurring revenue growth of approximately 10% during the quarter and continued strong placements of the DR50+ platform. Our cloud-native PIMS install base grew double digits, creating an expanded customer footprint to improve workflow and enhance diagnostic protocols in the clinic. Water revenues increased 13% organically in Q2, with strong double-digit growth in both the U.S. and international regions, including benefits from order recovery in the Middle East. Livestock, poultry, and dairy revenues increased 9% organically in the quarter, with solid gains across our regions.

Turning to the P&L, strong recurring revenue growth and favorable product costs enabled 12% comparable operating profit gains in the quarter, with reported operating margins achieving 35%. Gross profit increased 12% in the quarter as reported and 11% on a comparable basis. Gross margins were 64%, up approximately 120 basis points on a comparable basis. These gains reflect benefits from strong recurring revenue growth in IDEXX VetLab consumables and reference lab volumes, operational productivity, and favorable business mix, including strong margin gains in our water and LPD businesses. Pricing benefits offset inflationary cost pressures, which eased in the quarter compared to our expectations. On a reported basis, operating expenses increased 10% year-over-year and 9% on a comparable basis.

We expect to maintain growth in operating expenses through the remainder of the year as we advance investments in our innovation agenda and global commercial capabilities given strong revenue performance. Q2 EPS was $4.27 per share, an increase of 18% as reported and 15% on a comparable basis. EPS in the quarter included a $0.14 per share benefit related to share-based compensation activity, compared to a $0.10 benefit in the prior year period, and foreign exchange added $6 million to operating profit and $0.06 to EPS in Q2, net of hedge effects. Free cash flow was $323 million in Q2 and $557 million for the first half of 2026. On a trailing 12-month basis, our net income to free cash flow conversion rate was 110%.

For the full year, we're increasing our outlook for free cash flow conversion to 90%-100% of net income, including full-year capital spending consistent at approximately $180 million. Our balance sheet remains strong, finishing the period with leverage ratios of 0.6 times gross and 0.5 times net of cash. We maintain deployment of excess capital towards share repurchases, allocating $332 million during the second quarter and $693 million year-to-date. Capital allocated to share repurchases supported approximately a 2% year-over-year reduction in diluted shares outstanding in Q2. Turning to our full-year 2026 outlook, as noted, we're increasing our outlook for overall revenue to $4,700 million-$4,745 million. At midpoint, this reflects a $20 million operational improvement from our prior guidance, building on strong second quarter performance, including CAG Diagnostics recurring revenue expansion.

Our updated reported revenue outlook includes a $15 million headwind related to foreign currency changes compared to our prior estimates. This reflects a reported revenue growth of 9.1%-10.3%, including approximately a 60 basis point benefit to full year growth from foreign exchange at the rates outlined in our press release. As a sensitivity, a 1% strengthening of the U.S. dollar would reduce revenue by approximately $8 million and EPS by $0.03 per share for the remainder of the year. Our updated overall organic revenue growth outlook of 8.5%-9.7% includes organic growth range of 9.5%-10.7% for CAG Diagnostics recurring revenue, including approximately a 4% benefit for global net price realization. At midpoint, we're anticipating second half U.S. clinical visit declines of approximately 1.5%, reflecting similar Q2 trends.