Good morning and welcome to the IDEXX Laboratories' Fourth Quarter 2020 Earnings Conference Call. As a reminder, today’s conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release, issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com. During this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website. In reviewing our fourth quarter 2020 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth refer to growth compared to the equivalent period in 2019 unless otherwise noted. [Operator Instructions] To allow broad participation in the Q&A, we ask that each participant limit their questions to one, with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue and if time permits, we will take your additional questions. I would now like to turn the call over to 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…

Thanks, Brian, and good morning. IDEXX had a strong finish to 2020, driven by exceptional CAG Diagnostics recurring revenue growth. Strong CAG market trends continued through Q4, enabling us to deliver outstanding full year performance with 12% overall organic growth, significant expansion of our operating margins, 31% EPS growth on a comparable constant currency basis and 55% return on invested capital. While managing through pandemic impacts, we deepened our connection with our customers, strengthened our global commercial capability and advanced key elements of our innovation agenda. These steps position us well to build on our business momentum in 2021. Today, I'll provide an update on the trends we're seeing in our markets and some of the dynamics that are supporting the impressive growth rates we've achieved in our core business. I'll also provide an update on some of our key growth initiatives in areas of emphasis this year. Finally, I'll discuss how we plan to manage the business, aligned with our initial financial outlook in what remains a dynamic macro environment. Let's begin with an update on market trends. We continue to see strong growth trends in Companion Animal healthcare reflected in high-growth in same-store clinical visits in the U.S., higher growth in new patients and an accelerated expansion of care. We also saw sustained solid market recovery across international markets, despite pandemic impacts. As Brian noted, clinical visits were up 8% overall in the U.S. in Q4, led by wellness visit growth of 10% and strong non-wellness, same-store growth of 7%. For the full year, clinical visit growth was approximately 3%, consistent with the growth we have seen in recent years, though with wide variations by quarter due to pandemic effects. Solid U.S. market growth trends have continued into early 2021. Market feedback from veterinarians remains consistent. Clinics are…

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.

Hey, Jay, Brian, thanks for taking the question, and congrats on the quarter, first of all. I want to start with your comments on the guide and the outlook going forward, and that's where we've had the most feedback from investors and where most of the attention is. If you think about what you guys said about clinical visit growth next year, other parts of the revenue bridge, things of diagnostics utilization, they're more in line with 2020 as a whole but still a little bit of a step-down sequentially just from what we're seeing in 3Q 2020, 4Q 2020, with clinical visits being up mid to high single digits. So I'm just wondering, when we think about those components of the bridge, of the revenue bridge for next year, are you baking any conservatism in the second half, or does this reflect a little bit of your views of something like we would refer to pre-COVID landscape, especially once the vaccines are rolled out and you go back to normal? I guess my question is, what are your thoughts on these COVID tailwinds we've seen in the second half of this year and how that continues next year and beyond?

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.

Yes. So I would just add to that. The logic of our guidance is linked to the market data. So we are optimistic about the outlook that the benefits will sustain. And I think Brian aptly painted the parameters of that. What we're seeing is we're seeing more pets in the marketplace. We're seeing those are driving more clinical visits, including first-time clinical visits with first-time pet parents. And veterinarians are providing more medical services beyond just the first time clinical visits. And medical services are enabled by diagnostics. You have to first diagnose before you treat. So it's a – I think it's a very healthy backdrop. And as Brian said, it is still a dynamic environment, and we'll see how it plays out.

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?

Sure, I'll describe the customer experience trials, and then I'll hand it off to Brian to talk about the impact in terms of how we factored it into the forecast. The customer experience trials have done extremely well. I think customers are thrilled with not just the compact footprint but the usability and the very ease of the use of the analyzer. From that standpoint it varies the breakthrough because hematology is a complicated diagnostic testing category. And by the way, the – these customer experience trials, it's something that is best-in-class in terms of the approach that we take. You can develop an amazing analyzer but you have to put it out in real environments and environments that our customers use to get the type of feedback. We're also – the other thing that it's driving is just an increased focus on hematology, in the importance of hematology. We know many of our markets are hematology-first markets and – meaning that they place relative priority on hematology testing even before chemistry. So we're optimistic. We think it's going to be a winner for us. We think that there are over or approximately 100,000 placement opportunities on a global basis. So we're very excited about it. And Brian, why don't you describe how we factored it into our forecast?

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.

Great. Thanks so much, guys.

Thank you.

From Credit Suisse, we have Erin Wright. Please go ahead.

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.

Yeah, I'll comment.

Go ahead, Jay. Sure.

I was going to comment -- I'll comment. I'll give you a general flavor for the international market, and then Brian, I'd ask you to provide some specifics around some of the financials. The international markets continue to be quite healthy. Even with the pullback related subsequent waves, we've seen just a modest pullback in terms of our ability to visit customers in person. But the overall markets and the overall human pet bond has -- we're seeing the same type of trends outside the U.S. as we are in the U.S. And on top of that, we continue to invest in international expansions. I mentioned three country markets that we're expanding in, and those are going extremely well. We think that there continues to be just a great opportunity to be able to tap into the expansions. The other thing that we see is the IDEXX 360 program is being nicely adopted by our European customers. So the majority of our instrument placements are now through IDEXX 360. That's also having a nice impact on our reference lab to services as part of the volume commitment aspect of that. So Brian, would you like to add any flavor to that?

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.

Okay, great. And then do you think that there's any level of pent-up demand in instrument placements more broadly? Are you anticipating stepped up instrument placements into 2021, or how should we be thinking about the trends on a quarterly basis as they potentially normalize throughout the year?

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.

Yes. And one factor I'd point to, I think, to reinforce Jay's point on just the clinics being busy and the demand being a driver for instruments that we feel good about going forward is just the second catalyst placements. If you see the high level of the second catalyst placements in U.S. and international markets, that's reflective of clinics trying to keep up with the higher levels of diagnostics utilization. So, I think that's a positive factor. And we're still working through some of the access headwinds, but I think the general trend has been positive for us.

Great. Thank you.

From Goldman Sachs, we have Nathan Rich. Please go ahead.

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?

Nate, I think it's primarily just reflecting the lapping of the step-up in growth, particularly in the second half. If you look at the premium that we're trying to use, the shorthand ways of looking at it, but in the U.S., the premium of CAG Dx recurring growth to clinical visit growth, it was about 1,600 basis points in Q3. It was about 1,200 basis points in Q4. And so I think there -- some of that, I think the Q3 benefited from pent-up demand. And so I think we're seeing some normalization from that dynamic. And as we get into 2021, we expect -- we do have a very healthy clinical visit growth rate projected and continued strong growth, but I think just recognizing that we had some step-ups here in the demand that, I think, is driving us. The 900 to 1,000 premium, we think, is an excellent premium and I think would position us very well for strong growth moving forward. But those are some of the factors we built in.

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?

Yes, without getting to specifics on projections, because we're not going to be doing quarterly projections, and there's going to be a lot of noise in the quarters, as you know, Nate, maybe we had the beginning of COVID in Q1 and more meaningful impacts in Q2, and so things like the rebound in Q3, so I think year-over-year, the quarters are going to be a little bumpy. But directionally, yes. I think we're expecting that higher level of growth in the first half. And given the year-over-year step-up in growth, more moderate growth rates in the second half is what's implied in our guidance range. And so we'll see how the world -- the markets play out. It's still a very dynamic environment, as you might imagine, to try to forecast them. There's a lot of unknowns here just with the -- how the pandemic plays out and how those factors evolve as, hopefully, people get back to work and lives get back to normal. But I think that directionally, that's how we're thinking about it.

Great. Thank you.

From Stifel, we have Jon Block. Please go ahead.

Thanks guys. Good morning. Maybe first one, Brian, just the CAG recurring acceleration, the acceleration of around 100 to 200 bps, I think it's 13.25 at the mid-point versus pre-COVID levels. Just running some high-level math, it seems like another $30 million to $40 million incremental high margin revenue. And so can you just talk about, as specific as you're willing to get, where you're allocating the incremental gross profit dollars? We talk a lot about the flow-through from the CAG recurring. And, obviously, we're seeing that as that some of these U.S. international investments. And if so, do you think it just puts you guys in a stronger position as we look out in subsequent years? And then I've got a follow-up.

Well, just to start, to your last point, Jon, I think you've got high CAG recurring diagnostic revenue growth. That's a very good dynamic for our business from a profit point of view and a gross profit expansion point of view. And so that is, clearly, a key driver of our performance in recent years and particularly in 2020. Just in terms of dynamics going into 2021, we do anticipate some investments in areas like lab capacity. We're trying to keep up with the very strong growth that we've seen. I'd point out that 2020 was an unusual year in that we -- early on, when we really didn't know how this was going to play out, we erred on the side, I would say, of caution and just been very tight with our costs controls last year and wanted to ensure that we had a healthy business model and asked people to make sacrifices. There were a lot that went into that. And so we're trying to reflect that we've got year-over-year compares here to a year that we had a high level of cost control, and we're going to have some investments that are coming back across the business, and we expect to try to highlight there's going to be things like health care costs and perhaps travel costs and things like that, that come back later in the year and as well as just trying to reengage and investing in areas that we held the line on in 2020 and had very high growth. So we've noted things like international commercial expansion as an area that we want to lean in. We want to continue to support our R&D agenda. And so the number of areas that are all aligned with our organic growth strategy that we're intending to support it, and that's reflected in our intent to have moderate operating margin gains on top of very strong performance. So we're committed to building on the performance but recognizing that we have some pent-up demand here, if you will, for investments in the business.

Yeah. Okay, got it. Very helpful. And then second question, goes down the same road that I think maybe went down to Mike as well, but I'll ask it a little bit differently, I think certainly differently. So you're guiding to an acceleration in the CAG recurring at 13.25 mid-point, and you've been around 11% to 12%, but it seems that the acceleration per your commentary is a function of greater expectations around clinical visits versus your premium to the clinical, right? With your premium to the clinical, you expect around that 900 bp to 1,000 bp premium. And so can you talk to that dynamic, guys? I would just think at a high level, the premium would be more in your control with the increased commercial investments, the innovation driving utilizations versus that, and trying to sort of guesstimate how the underlying clinical visit shakes out. So, why one versus -- you might end up in the same place, but I'm just curious why the premium would be unchanged and you feel more comfortable with the sort of high levels of clinical visit growth.

Thanks guys.

So, let me try to frame this up, Jon. So, there's a number of different factors that I think are driving growth. First off, there's more pets. We've talked about that and the majority being puppies and kittens, and that clearly has an impact. It's hard to get your arms around exactly what that impact is, but we provided some guidance in the past. Then there's more clinical visits even beyond the new pets. And for these clinical visits, we know that there's more clinical visits that are being used to provide medical services that include both higher use and intensity of diagnostics. And I think to your point, that's the piece that we can control through innovation and our commercial strategies and customer-friendly marketing program. So, that's where our focus is on being able to really drive that awareness and education and adoption by the veterinary customer to deliver better medical care. And I think we've provided some ranges in terms of what that looks like. And it's a very healthy market backdrop, and that's where our focus is.

I think we have time for one more question.

And our last question from JPMorgan, we have Chris Schott. Please go ahead.

Great. Thanks so much. Just two fairly quick ones here. Just on that topic of new pet growth. I think you referred to about 10% in 2020. How are you envisioning 2021 playing out? Is this another year of very healthy pet growth, or do you expect as we kind of go through the year, the world starts to normalize a bit, that we may be moderate back down to that 3% or so rate that we've seen historically? And then my second one was just given all the favorable trends that played out in 2020, are you making changes about how you think about promotion and commercial approach to lock in these dynamics? So, I know you've got a lot of initiatives that you've talked about to continue to grow the business. But have you changed what you're emphasizing or how you're approaching the vet just given what we learned about the kind of pet owner and willingness to spend over the last year or so? Thanks so much.

Yes. So, just to answer, so that 10% was new pet clinical growth versus new total pet growth in the marketplace and we think that, that's a healthy dynamic because they initially come into the practice as puppies and kittens. They make their initial checkup, which includes diagnostic tests. And to speak to your second point, the two are really related. If we do our job well with Preventive Care programs and other programs that those puppies and kittens as they become dogs and cats, continue to get care on an annual basis or twice a year. So, we think it's a healthy dynamic and plays into our strengths, both as a commercial and marketing strategy. The programs we actually have in place are ideally suited to drive that. So, if you think about the Preventive Care program that we have 4,800-plus customers enroll in that, that's a great example of a driver of medical services and, in turn, diagnostics usage. So, our programs are geared towards driving education and adoption of both wellness and non-wellness type care and testing. So we think we're very aligned, and we think it's a trend that we can sustain, and that's the plan to be able to do that.

So I think that's the last question. I want to thank everybody for calling in. I know we have some employees who are also on the call. And I just want to express my gratitude for their extraordinary performance during these challenging times. We run the company in a way that takes a long-term view of the opportunities ahead of us while still delivering today. I couldn't be more appreciative of the IDEXX team and the purpose, which animates our work. And so with that, we'll conclude the call. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining, and you may now disconnect at this time. Thank you.