Idexx Laboratories Inc /De Q3 FY2022 Earnings Call

Good morning, and welcome to the IDEXX Laboratories Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements 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 third quarter 2022 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2021, unless otherwise noted. 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, 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 in 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 in 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 our full-year outlook later in 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 in 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 the 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 trends support and solid increases in diagnostic revenues at U.S. clinics. Diagnostic revenue increased 7% on a 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 clinic capacity from peak levels and the lapping of the significant step-up in 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 benefit 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. Global demand for IDEXX products remained solid, achieving positive year-on-year organic revenue growth in all market segments during the quarter. We believe that continued innovation and service excellence will allow us to sustain and, importantly, return to growth across pet health and not only to re-engage customers but also to attract new pet owners back to veterinarians. Our Q3 results reflect the company's strong execution and responsiveness to changing market dynamics, and we're confident in our ability to build on this momentum for the remainder of the year. Thank you.

Thank you, Brian, and good morning. I'm pleased to share that IDEXX delivered strong results in the third quarter, as teams across the company continued excellent execution to advance our strategic priorities. Demand for Companion Animal healthcare remains high, building on stepped-up levels during the pandemic supported by a continued focus on service within veterinary clinics. Veterinarians are looking for partners to support their growth while they provide high levels of care in an efficient manner. These professionals continue to turn to IDEXX for support in the third quarter. This was reflected in yet another quarter of record placements of premium capital instruments, strong momentum in PIMS placements, continued desire for cloud-native products, consistent new business gains, and sustained high customer retention levels. These continued trends demonstrate that veterinarians appreciate IDEXX's integrated ecosystem, and the layers of innovation that support and improve each step of clinic workflows. The result was expansion across IDEXX execution growth drivers, including relatively higher net price realization, which drove IDEXX CAG Diagnostics recurring revenue growth to significantly outpace clinical visit growth. This supported a solid same-store diagnostics revenue growth in the U.S. despite moderating impacts from reductions in clinic capacity levels this year. This morning, I'll highlight how IDEXX continued to advance our key strategic initiatives in the quarter while delivering strong financial results. I'll begin with a review of recent trends in the companion animal sector. Third quarter CAG sector trends were supported by solid global demand for veterinary services, building on a significant step-up in pet ownership and patient visits during the pandemic. U.S. same-store diagnostics revenues grew 7% per practice during the third quarter, a sequential increase from the prior quarter and well above total same-store practice revenue growth of 4% in the quarter. Services remain a key focus for veterinarians. And within services, diagnostics is a key component in providing valuable health care insights, supporting practice economics, and driving revenue growth. Consistent with trends through this year, diagnostics revenue growth at the practice level continues to be driven by increases in both the frequency and utilization of diagnostics, resulting in 9.5% growth in diagnostics revenue per visit for the quarter, building on the strong gains seen through the pandemic. IDEXX grew overall U.S. CAG Diagnostics recurring revenue at approximately 10% normalized despite recent clinic visit growth headwinds as we benefit from decades of focus and investment, which brings differentiated value to our customers. As Brian noted, IDEXX execution drivers contributed approximately 1,300 basis points to U.S. growth in Q3 on a normalized basis. This reflects benefits from continued expansion of our premium instrument installed base, adoption of IDEXX innovations, consistent business gains, record retention levels, and increased price realization. On a multi-year basis, critical visit growth was healthy in the quarter with solid growth in both wellness and non-wellness visits. Three-year CAGR wellness visit growth, in particular, was in line with historic trends of 2% to 3%, demonstrating that U.S. pet owners are continuing to prioritize pet health care. This trend continues to be supported by IDEXX's turnkey Preventive Care program, which included approximately 200 new U.S. enrollments in the quarter. This is the second quarter of year-over-year increased enrollments, showing that customers continue to appreciate the simple yet comprehensive testing and pet owner communication tools included in this program. This program is just one example of how we are engaging with our customers to support them through near-term challenges related to managing clinic capacity in meeting growing demand for health care services. We are building on our strong customer relationships to drive continued solid organic growth in our CAG business. With that, let's now turn to discuss IDEXX's strong progress against our key strategic growth initiatives. As mentioned, excellent execution across the IDEXX organization supported strong performance during a dynamic third quarter with commercial teams delivering the day while also building the foundation for long-term growth across regions. Record quarterly placements of premium instruments supported another quarter of double-digit growth in our worldwide premium instrument installed base. Global premium instrument placements grew 10% in the quarter, and placements in new and competitive accounts grew even faster at 13%, supporting strong EVI gains across regions. These results, combined with continued sustained new business gains and 98% Catalyst customer retention rates, will support future recurring revenue growth aligned with the long-term financial framework shared at our recent Investor Day. Sustained high levels of commercial performance were aided in part by continued improvement in the rate of in-person visits for account managers, up to 75% in the U.S. and nearly 70% in Europe. IDEXX sales representatives are welcome in the clinic as trusted advisers to their customers, adding value by helping customers provide high standards of medical care, drive strong practice economics, and improve practice efficiency. These results are also supported by our world-class innovative products like ProCyte One and customer-friendly marketing programs that help support the adoption of IDEXX Innovations. ProCyte One provides customers with an efficient lower-cost hematology platform at the point of care and is especially sought after in international regions where veterinarians have been trained to do hematology testing first when doing a basic workup on a patient. This platform is integral to our strategy to address the approximately 230,000 long-term global instrument placement opportunity that Dr. Tina Hunt shared at Investor Day, and third quarter results continue to be very encouraging. ProCyte One was a key driver of 26% growth in premium hematology placements in the quarter with international regions representing approximately 75% of ProCyte One placements and more than 60% of its installed base. Attach rates for ProCyte One are consistently high. Over 95% of ProCyte One customers overall and more than 80% of competitive customers also utilize our chemistry platform, demonstrating the excellent placement quality and strong multiplier benefit of this platform. These results are further supported by benefits from investments we have made to expand our global commercial organization, where we are seeing positive reach-to-revenue trends and deeper customer relationships. Customer survey work in Germany and France demonstrates that customers have had an overwhelmingly positive experience during the first year of the new commercial ecosystem. Over 90% of customers in Germany, for example, indicate that their commercial experience is the same or better than a year ago with the highest satisfaction rates in practices that receive continuous commercial engagement. This feedback highlights the benefit of our high-touch commercial model, where diagnostic subject matter experts partner with practice centers and staff to drive practice patient care and business objectives. Our commercial and operational teams in the Asia-Pacific region are also driving successful execution against our strategic plans. Asia-Pacific premium instrument placements are at a record high and were delivered while hiring and onboarding new sales professionals in Japan and opening a new reference lab in Brisbane, Australia during the quarter. Concurrent seamless execution of our commercial investments across multiple regions is not easy to do and to do so while also delivering against our business goals. This demonstrates the value of the investments we've made in these teams, which will continue to benefit us as we work to address the significant long-term addressable opportunity outside the U.S. In addition to these excellent commercial results, we also delivered multiple new technologies to our customers during the quarter. Since VMX in January, we have announced eight new product, service, and software solution enhancements across IDEXX modalities, each of which add value to the relationship that customers have with IDEXX while demonstrating our commitment to a technology-for-life strategy. Five out of these eight projects were launched in the third quarter. These are, number one, expanding the comprehensiveness of our fecal antigen reference lab test by adding a flea tapeworm assay, which now detects up to five times more than traditional methods; number two, providing faster access to PCR results for North American customers by opening a next-day PCR lab in Louisville; number three, improved veterinary insight into the treatment of feline chronic kidney disease by adding an improved disease marker, FGF23, to our reference lab menu; number four, improving the efficiency, convenience, and sustainability of the Catalyst SDMA test by reformulating the test to include onboard reagents; and number five, delivering enhanced accuracy and longer room temperature storage in our best-in-class 4Dx Plus Test. The rollout of these new products and services was enthusiastically received by our customers and highlighted the IDEXX team's ability to deliver high-quality new products, which will help increase standards of animal health care and develop our sector while also providing very high customer service levels. Another strategic area of innovation is IDEXX's software and diagnostic imaging businesses, which include a full suite of software product offerings to create a connected ecosystem within the clinic that supports each step of clinic workflow through the patient appointment. The practice information management system and its easily updatable customer-friendly front-end interface is the center of this solution. Record third-quarter PIMS placements highlight strong customer interest in the whole product solution that IDEXX offers. Furthermore, the shift to cloud-based products that we highlighted at Investor Day continued in the quarter as over 90% of placements were cloud-based subscriptions, reflecting 50% growth in cloud-based placements compared to the prior year and demonstrating the value that last year's ezyVet acquisition continues to bring to the business. Strong results across this business in the quarter were not limited to PIMS products; diagnostic imaging systems placements, Web PACS subscriptions, PIMS application adoption like payment processing, and VetConnect PLUS with clinical decision support all advanced at healthy levels in the quarter. We know veterinarians are looking for ways to obtain, understand, and communicate diagnostic insights in a digital and streamlined way, and our software portfolio is well positioned to provide them with these solutions. The benefits of these products and solutions to IDEXX and our customers are compelling. They have highly favorable economics given the recurring nature of the revenue stream and high incremental gross margins. They also drive customer engagement, which supports high levels of retention since they improve our customers' productivity and overall experience. IDEXX's innovation agenda also extends beyond our Companion Animal business. We recently took the opportunity to advance our water business by acquiring Tecta Pathogen Detection System, with an automated microbiology detection platform that uses patented technology to automate the incubation, reading, and results notification for E. Coli and total coliform testing in drinking water supplies. This application provides an automated data-enabled instrument in EPA-approved coliform testing solution that complements our core water solutions by providing value for customers operating under rushed conditions. We're excited to be able to invest in the attractive area of water testing and leverage our commercial resources to scale this new technology. This innovation agenda demonstrates a relentless focus on providing our customers with world-class products that increase in value over time. Products not only provide them with important insights but also help increase workflow efficiency and effectiveness. In addition to these top-notch products, our customer focus is supported by extremely high service levels to ensure customers have a wonderful experience with IDEXX, allowing us to earn their business every day. Our frontline supply chain and customer service teams continue to deliver high levels of service, reflected in another quarter of approximately 99% product availability despite ongoing challenges in the external environment. This strong performance leverages years of investment in our supply chain and customer support resources as we continue to deliver on the operational needs of our customers. That concludes our review. I'm proud to report another quarter of strong results as IDEXX remains well positioned to deliver solid growth and financial results over the long run while also delivering on our mission to create a better future for animals, people, and our planet. Our performance reflects the commitment and talent of our IDEXX team. On behalf of the management team, I'd like to thank our more than 10,000 colleagues for the passion and engagement they bring to our purpose and strategy every day. You're making a meaningful difference to the health and well-being of pets, people, and biodiversity around the world. So now we'll end the prepared section of the call and open the line for Q&A.

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

Great. Thanks so much for the question. I was just trying to get a little bit more color on how you're thinking about vet visit growth dynamics as we look out to 2023. I don't know if it's premature to get a view there. But maybe just, qualitatively, can you just elaborate on what you think needs to happen for vet visit growth to start growing again and I guess just where we are in that process as we're trying to get a handle on the trajectory of the business as we look out to next year? Thank you.

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, still remains fairly dynamic. There are a lot of external factors like macro impacts, labor supply dynamics that we've talked about, and even potential impacts from further COVID outbreaks. So we'll be monitoring those macro impacts as 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. We continue to do extremely well in being able to support customers with technology, whether it's PIMS systems or software, which help their productivity and support their efficiency. 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 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 macro factors, and we'll see how that plays out and whether that continues going forward.

Thank you.

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

Hi. This is Bhuvan on for Mike. Thanks for taking questions. It seems that the U.S. results were somewhat weaker this quarter. Could you elaborate on what you're experiencing internationally and your expectations for future trends there compared to the U.S.?

Thanks for your question. In international markets, we're seeing similar dynamics in terms of IDEXX execution. 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, and price utilization. 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. I think the international market has been relatively more impacted by the macro dynamics, particularly in regions like Europe. 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 we're making and the very strong instrument placement gains and continued high retention levels, excellent engagement with our customers, are allowing us to deliver solid, continued growth.

Yeah. Just to add to that, the fit of our in-clinic instruments now with ProCyte One is outstanding for these international markets. We saw ProCyte One growth of 26%, as I indicated in my comments. And so from a footprint, price, performance, and connectivity standpoint, it fits us international markets very well. The international customers depend on the country or region, but they tend to test hematology first. So it's a really important solution for these customers and has a big multiplier impact because very often when we sell ProCyte One, we also sell it with a chemistry analyzer and, in some cases, even a SediVue. We feel very positive about our solutions and our ability to help customers achieve their objectives. Certainly, there are macro factors that we've talked about in the past, including the Russia-Ukraine conflict and energy prices, and we'll just continue to monitor that and see how that plays out over time.

Got it. Much appreciated.

Our next question comes from the line of Erin Wright of Morgan Stanley. Please go ahead.

Great. Thanks for taking my questions. 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.

Thanks for your question, Erin. Our price realization is very much in line with what we shared at Investor Day. We had roughly 4% price realization coming out of the second quarter. We're advantaging some additional price increases in the second half. As I mentioned, globally, we were in the 5% to 6% range. In Q3, it was at the higher end of that for the U.S., and that's very much in line with the 5.5% to 6% year-on-year benefit that was implied for the second half, and that equates to 5% for the full year. As we head into 2023, we will have carryover benefits from the pricing that we've achieved this year, including the second-half initiatives. Our plan is to have a normally timed price increase. We'll have an additional increase at the beginning of the year, and we'll share more details on that as we roll that out, but that will incorporate the conditions we're seeing in terms of the value that we're adding and also inflationary impacts in the business.

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

Okay, thanks. And then on 2023, the FX dynamics here are understandable given the environment that we're in. But how are you thinking about CAG recurring organic growth in 2023, just given the price realization that you are seeing and the ability to kind of assume a more potentially stable vet clinic growth as you kind of lap some of the labor dynamics assuming that those don't get forced but don't get better either? I guess, is high single-digit CAG recurring growth the right way to think about 2023? Or what are some of those dynamics as we think about the headwinds and tailwinds into 2023? Thanks.

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. 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.

I think what's been very gratifying is the resonance and, I think, interest amongst our customers about our solutions. I talked about software. But our customers pretty much across the board are feeling pressures. There may be capacity pressures or and or staff pressures within their practices and trying to run a business, deliver excellent medical care but also sensitive to the economics and making sure they have a healthy business. They're looking to software solutions. So we see this with our PIMs solutions, cloud-based PIMS solutions, and their enthusiasm around really upgrading software within their practices that help support workflow optimization, staff productivity, and client communications. All the things that they've been looking for. I think we have the right solutions at the right time given the market circumstances. We're seeing that in clinic pretty much across the board, across all the solutions. And even at our Reference Lab, we had really nice momentum, especially in the U.S. As we look, we've expanded our menu and improved our service offerings in the case of PCR at Louisville, which is next day if customers would like that. They're using that as an extension of their own practice. So we’re optimistic that for those things that we can control, we'll do a good job, and that customers are highly enthusiastic about these solutions.

Okay, great. Thank you.

Our next question comes from the line of Jon Block of Stifel. Please go ahead.

Thanks, everyone. Good morning. I'll begin with clinical visits, which decreased by 2.4% year-over-year. However, wellness seems to have performed slightly better than emergent, which seems inconsistent considering the capacity issues in the U.S. I would have expected these issues to be more pronounced on the wellness side. Can you explain what you're observing and why the impact on emergent is less significant? What might be driving the better performance in wellness? Additionally, do you think this could be related to a return to work trend where people are noticing fewer health issues with their pets, thus affecting emergent volumes? Thank you.

Yeah. Jon, on balance, I mean, on balance, there is some variability within any given quarter. But if you look at over a two-three year CAGR rate there, it's what you would expect. So I don't think there's anything specifically related to capacity. The capacity speaks to the length in getting an appointment. And with existing pet owners, most veterinarians aren't turning those folks away whether it's a wellness visit or a sick visit. So you wouldn't necessarily expect to see any dynamic related to that piece of it. We know that people are going back to work, at least in a hybrid fashion. We haven't been able to pull out anything specifically related to return to work, whether it's two or three days a year. What we do see is capacity pullback, especially on weekends, has gone down somewhat over the year, and we think that just reflects practices being short-staffed and trying to balance their working environment better for their employees. But nothing specific that I think we can call out or point to.

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.

Yeah, Jon, it's primarily related to both geographic mix. We're selling more internationally, and then product mix with more ProCyte Ones, which have a lower AUP than the ProCyte Dx. So the ProCyte One grew 26%. It's a lower AUP. The international mix was higher. And so that I think accounts for the 5% drop in revenue on a very, very strong placement rate.

There are impacts from selling programs as well. I think we feel very good about the expansion of 360. We've seen very high attach rates of replacing ProCyte Ones. We're replacing Catalysts, and that's really the multiplier benefit that we've had to highlight and that gets folded into the 360-type agreement. So that's part of the dynamic as well. But largely, it's the factors that Jay was highlighting. The bulk of our growth is in international markets, and that's a meaningful driver of some of the relative revenue changes. Overall, the growth in our base is very strong. Our EVI metrics were up at high levels. Consumable gains are strong. The instrument base expansion is a big driver of our execution growth benefit. So we feel really good about the instrument performance.

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%. That's a reflection of just the focus of our commercial organization and the importance of chemistry consumables to the business.

Good color. Thanks, guys.

Thank you.

Our next question comes from the line of Nathan Rich of Goldman Sachs. Please go ahead.

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?

Yeah. Thanks, Nate. And good morning. Our customers, I think, see our pricing as reasonable given the current environment. They know it's more expensive for them to run their businesses. I think they continue to see really good end customer demand within the clinics. Their focus is really on they want to make sure they get the support from a product continuity, testing results on time, and the engagement that we provide with the customer technical support organization. So their primary focus is on that. Pricing and the flip side of pricing is the value that we deliver, and we continue to deliver extremely high value. We've had eight product introductions or enhancements this year, just five in Q3 alone, really across the business in software, reference labs, and our clinic businesses. So that helps them from both the standpoint of delivering better patient care but also productivity and efficiency within the practice, and I appreciate that. From the standpoint of their own ability, from an end customer pet owner pricing standpoint, to increase prices, they've done that. I think diagnostics is a small piece of their overall cost envelope, but it drives the important health care services envelope for their practice. So they see this as a core enabler to what they do.

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? 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?

Yeah. Thanks, Nate. We thought it was appropriate to maintain a similar outlook to what we had shared for the second half. I think we're very pleased with our third-quarter execution and performance. I think on the clinic visit growth trend side, that was a relatively favorable factor in Q3, but we're not viewing that as a longer-term trend. We think the trends we've seen in the last few months are appropriate to plan off of, and our pricing execution is in line with our plans. We really focus on the midpoint of the range. We think that's still an appropriate place to be. The lower end of the range is really reflective of potential macro risk that we think is appropriate to build in. Of course, the higher end would be if we can continue to execute well and see some improvement in the underlying visit trends. On balance, we think it's a consistent outlook, and we think that's appropriate in the current environment.

Helpful. Thank you.

Our next question comes from the line of David Westerberg of Piper. Please go ahead.

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 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.

Yeah. Good morning. We have a multifaceted strategy to really support efficiency within practices. I mentioned the portfolio piece, including software. To answer a part of your question directly, practices are taking the time to implement new PIMS systems, specifically ezyVet. They see a really good return on that, and they're enthusiastic about moving to the cloud-based systems and, in some cases, modifying or optimizing workflow if it helps them. Specifically around the questions about training, we have a number of different platforms to support the training needs and knowledge needs of practices. Some of it is clinical, some of it is business and workflow optimization, both online and in person. We have a very significantly sized field service representative organization as well as professional service vets for more peer-to-peer support, both in person and over the phone. We've seen nice growth in engagement and calls into IDEXX to help support them. So there are lots of avenues open to customers for training and practice efficiency support.

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

Yeah, guys. Thanks for taking the questions. Obviously, rightfully, a lot of airtime on the CAG business, but I'm hoping you could go into a bit of color on the Water and LPD in particular, kind of what the growth outlook is there if we continue to see macro headwinds, both in the U.S. How recurring is that versus somewhat sensitive to the consumer overall macro environment? Thanks.

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. The backdrop there is strong global growth and good growth across regions. We have solid net price realization as well. We highlighted an acquisition this quarter, which complements our product offering. We feel very good about the momentum in that business, building off the progress we've made recently. LPD, as we reported, had positive growth, 7% in the quarter. We've worked through the tough compares we've been facing in recent quarters in China. We were up against really an easy compare last year in China. It was probably our toughest quarter of the year. We worked through that and saw positive benefits from health screening as a driver. Overall, we have modest growth in our testing areas. I think it is an area that we're paying attention to in terms of the macro backdrop. But I think we've worked through the tougher compares here and feel that we're positioned for positive growth moving forward.

Okay, perfect. And then my follow-up, a little bit different. Just the Preventive Care program obviously continues to roll out nicely. Can you remind us of the status of that in the U.S.? Given the investments you've made in the U.S., is there a potential to push that more and try to make that even more recurring in the face of a potentially weak U.S. macro environment? Thanks.

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 level of interest is there. It just may not be as much knowledge in terms of workflow standpoint and customer education work that still needs to be done. So we're making progress. I would just say it's more embryonic and we think represents a solid long-term opportunity.

Our next question comes from the line of Elliot Wilbur of Raymond James. Please go ahead.

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 Q3. 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. 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 Q1 and longer-term average of 50 basis points. I'm wondering if you think that relatively higher diagnostic frequency per visit metric is sustainable if we see clinic visit trends revert to positive trends in early 2023, just sort of getting into the idea that maybe the decline in clinic visit trends is more related to 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 been lost, and that is reflected in kind of that more favorable diagnostic frequency number. Thanks.

Yeah. Good morning, Elliot. There are a couple of different questions you're getting at. We saw, as you indicated, a negative 2.4% clinical visit decline in the quarter. This was a modest sequential improvement compared to Q2, but we don't really see this as a fundamental change in the trend. We continue to expect near-term impacts from reductions in capacity. Obviously, the macro environment remains dynamic. We are pleased, as we've talked about, with the overall diagnostics revenue per practice visit. That's both a function of adoption as well as utilization. Those two pieces, I think, are performing extremely well through the first three quarters of this year relative to historical rates. That's a reflection of just the execution drivers in the business, really driving commercial engagement and innovations, the type of things that I think customers want and that support medical services within the practice and things that are important for delivering exceptional patient care. With that, that will conclude the Q&A portion of the call. I'd like to thank everybody on the phone for their participation this morning. I know we have lots of IDEXX employees listening, and I'd like to say thank you for your continued commitment to our purpose and your focus and execution against our strategy. Your continued engagement in the midst of what we all know are dynamic external factors helped deliver another excellent quarter and excellent execution. I'm thankful for all your work, and I look forward to finishing 2022 on a strong note. With that, we'll conclude the call. And again, thank you.

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