Earnings Call Transcript - IDXX Q1 2023

Operator, Operator

Good morning, and welcome to the IDEXX Laboratories First Quarter 2023 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 noted 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 first quarter 2023 results, please note all references to growth, organic growth, and comparable growth refer to growth compared to the equivalent period in 2022, unless otherwise noted. Today's prepared remarks will be posted to the Investor Relations section of idexx.com after the earnings call concludes. I would now like to turn the call over to Brian McKeon.

Brian McKeon, CFO

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 wound 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.

Jay Mazelsky, CEO

Thank you, Brian, and good morning. I'm pleased to share that IDEXX had a very strong start to 2023, driven by sustained execution of our growth strategy. Demand for Companion Animal medical services continues to grow, supported by IDEXX innovation and direct customer engagement. Veterinarians continue to focus on meeting these high levels of demand with the best possible medical care, with diagnostics as an essential component of this care equation. IDEXX remains a chosen, trusted partner to veterinarians who appreciate how our world-class products and connected ecosystem enable high standards of care, while resulting in growth of a significant profit center within their clinics. IDEXX's strong execution is reflected in double-digit total company organic revenue growth, supported by strong expansion of global CAG Diagnostics recurring revenues. Growth in this recurring revenue annuity was supported by solid contribution from new business gains, sustained high customer retention rates, and net price realization aligned with our expectations. Our commercial teams drove another record quarter for global premium instrument placements and excellent levels of cloud-based software placements. IDEXX products and services offer solutions to improve clinic productivity and support the significantly expanded and underserved demand we've seen for pet healthcare in recent years including net pet additions in the U.S. of 2% in 2022, twice the pre-pandemic trend line. These efforts supported strong IDEXX growth as we continue to work effectively through the near-term sector headwinds related to clinic capacity constraints and global macro conditions. Today I'll discuss how IDEXX's sustained execution against our strategy to drive the adoption and utilization of diagnostics helps deliver continued strong financial results. First, I'll provide an update on our commercial execution, which through education and customer engagement drives relevant utilization of IDEXX's innovative solutions. IDEXX commercial teams delivered another record first-quarter global premium instrument placements to start 2023, building on very strong prior year results. Our commercial teams demonstrated a continued ability to advance placement, quantity and quality. This is reflected in strong growth in Catalyst placements at new and competitive accounts globally driving solid EVI achievement. These commercial results are highly encouraging as we address the significant opportunity for an estimated 220,000 worldwide premium instrument placements and give us confidence that we have the right strategic playbook in place. IDEXX professionals provide world-class, software-enabled products that are in high demand, and supported by a wide menu of customer-friendly marketing programs that enable the adoption of new technology. These results also reflect continued strong clinical interest in using IDEXX's products and services, to not only meet the increased demand for pet healthcare, but to deliver the best possible level of care. Our commercial execution is supported by the multiplier benefits that flow from IDEXX innovations as evidenced by the success of our newest hematology analyzer, ProCyte One. ProCyte One provides customers with an attractive in-clinic hematology solution, its small footprint, easy pay-per-run model, and lower cost come without sacrificing CBC performance. IDEXX premium placements have benefited from strong ProCyte One adoption to date thanks to sustained high attach rates with Catalyst, as defined by ProCyte One placements either with a Catalyst or at an existing Catalyst customer. The result is a multiplier benefit, supported by clinics who choose to outfit their in-clinic suite with IDEXX products. As a result, we are nearly halfway to the incremental 20,000 premium hematology placement objective we shared at Investor Day following ProCyte One's launch, while the strong attach rates should also help IDEXX penetrate the long-term worldwide placement opportunity. Key to developing this long-term opportunity will be increasing customer engagement in international regions. We're leveraging our successful VDC model to build strong relationships with international customers, as evidenced by sustained strong new business gains and a 19% increase in Catalyst placements. This strong performance is allowing us to deliver solid CAG Diagnostics recurring revenue growth in international regions, despite continued macro headwinds, which are pressuring same-store clinical visit levels. Customer engagement remains excellent as evidenced by high reach to revenue levels in the first quarter, including benefits from our expanded commercial salesforce in targeted regions. The flywheel is beginning to turn in these countries, where we've seen excellent gains from new business, strong interest in engaging with customer marketing programs, and solid overall volume growth. Commercial expansion is an important early step in our international strategy, supporting recent efforts to optimize our reference lab network, roll out highly relevant products like ProCyte One, and drive further adoption of software tools like VetConnect PLUS, our cloud-based diagnostic portal. Software innovation continues to be a key driver of our growth strategy globally. IDEXX software solutions are a key enabler of diagnostics utilization, creating a connected ecosystem that helps improve diagnostics workflow, while providing deeper clinical insights and supporting pet-owner communication. It's an attractive standalone business as well. Strong PIMS placements in the first quarter were supported by continued preference for cloud-native products, with IDEXX well-positioned to address this trend. Placements of cloud-based products maintained the strong velocity we saw coming out of 2022 and represented greater than 90% of total placements supported by continued high interest in our ezyVet and Neo solutions, which are seamlessly integrated into our product offering. This provides customers with options when it comes to picking the best, most relevant PIMS solution for their clinic size and workflow complexity. Our strong first-quarter placement performance supported double-digit recurring revenue growth with an attractive gross margin profile and we're on track to achieve this year a PIMS footprint that is over 50% cloud-based. This milestone is especially important in the current veterinary clinic environment, where productivity is a priority in addressing the sustained high levels of demand seen through the pandemic. By embracing IDEXX's cloud-based ecosystem, customers gain the advantage of an easy-to-use software stack that touches every area of the veterinary clinic. And the benefit of these tools is enduring for our customers, evidenced by strong engagement metrics across applications — including increasing rates of our Web PACS user base that are power users as well as sustained rates of VetConnect PLUS users who use the software as part of their daily routine. Adoption and continued use of these products allow veterinarians and their staffs to spend more time focusing on the care they deliver to their patients rather than on costly, time-intensive administrative activities. Our software strategy is to increase cloud adoption and build increased business and clinical functionality into IDEXX software solutions. Another use case of our innovation agenda is our 4Dx Plus Test, the gold standard test for canine vector-borne disease testing. The current 4Dx Plus Test is our fourth version on a multiplexed canine vector-borne disease diagnostics over the past 20-plus years with improved sensitivity of Anaplasma and a 2x increase in the ability to store the product at room temperature. This is a true testament to our Technology for Life strategy and supported 12% global organic rapid assay recurring revenue growth and solid customer gains in the first quarter. A full vector-borne screen using 4Dx Plus is recommended over a Heartworm-only test given significant increases in incidence and prevalence of vector-borne diseases over the past 10 plus years. And yet, in 2022 less than one in every five dogs received this comprehensive level of testing. 4Dx Plus enables veterinarians to deliver this higher standard of care, with follow-up testing and care protocol guidance provided through DecisionIQ, which aims to drive better health outcomes while encouraging increased diagnostic testing. Furthermore, our entire rapid assay franchise is supported by the SNAP Pro analyzer. The analyzer not only simplifies the workflow when running a SNAP test but also ensures the diagnostic results flow seamlessly to VetConnect PLUS and ultimately result in charge capture and invoicing at the point of sale. This is a clear case of how our products, integral components of our connected software ecosystem, improve in value over time, while delivering a multiplier benefit to our customers and drive IDEXX CAG Diagnostics recurring revenue. The sustained execution against our commercial and innovation agendas is made possible by an unrelenting focus on our customers and ensuring they have a world-class experience with IDEXX. This takes multiple forms, all focused to ensure our customers have the resources they need to provide the best possible levels of medical care. Continued 99% plus product availability and reliable, fast reference lab service turnaround times provide them with important business continuity and are the result of our investment in manufacturing and supply chain logistics teams, facilities, and relationships. Additionally, the support of the high-touch, highly knowledgeable sales teams that we have built out over the decades ensures they have the products and services that are right for their busy clinics. Our customers realize the benefits of the IDEXX partnership every day and in turn reward us with their business and their enduring loyalty, as measured by another quarter of consistent, high customer retention rates. Providing our customers with reliable, consistent support is even more essential right now given the dynamic backdrop of our sector. High demand for animal medical services combined with sustained labor supply constraints continue to create productivity and growth challenges at the clinic level. Taking our customer support efforts a step further, we recently published an empirically based study, which examines the drivers of productivity within a practice and helps customers to understand their productivity strengths and areas for opportunities. Through this rigorous effort we found three key drivers of practice productivity. Number one workflow, which includes staffing models like optimized technician to veterinarian mix, and staff and patient friendly physical layout of the practice. Number two technology or digitizing each step of the patient workflow to remove high effort administrative routines. Number three the role of culture including clarity of roles and responsibilities, investments in training and staff effectiveness, and aligned incentives to drive teamwork and achievement of practice goals. As a result of this initiative, we believe there is still a great opportunity for clinics to improve productivity measures and we look forward to educating and supporting our customers in these efforts. Opportunities to do so could result in 30% or more incremental visit capacity, even for practices that are in the top cohort of productivity. We are integrating elements of these efforts into our strategy and commercial approach this year. With that, I'll now conclude the prepared remarks portion of the call by thanking our nearly 11,000 IDEXX colleagues for the commitment and passion they bring to our purpose-driven work every day. Your efforts not only help provide a better future for animals, people, and our planet, but you also supported IDEXX in starting 2023 on a strong financial note. We have an attractive sector and a strong track record, and the opportunity ahead of us, which is significant is to work with our customers to elevate companion animal healthcare standards through increased diagnostics utilization. The tireless work of the IDEXX team has positioned us well to deliver solid growth and financial results into the future. So, on behalf of the management team, thank you for your continued focus on enhancing the health and well-being of pets, people, and livestock. Now, let's open the line for Q&A.

Operator, Operator

To ask a question, we will take our first question from Nathan Rich.

Nathan Rich, Analyst

Thanks for the question.

Jay Mazelsky, CEO

Hi, Nate.

Nathan Rich, Analyst

Hi, good morning. Thanks for the questions. I had two on the updated guidance. Brian, on top-line, I think you've talked about targeting the high-end of the CAG Dx recurring revenue range at 11%. First quarter came in a bit better than expected. I guess any change in how you're thinking about getting to that for the full-year? And any change in assumptions on either kind of the U.S. or international outlooks based on what you’ve seen through the first quarter?

Brian McKeon, CFO

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.

Nathan Rich, Analyst

Okay. And then I wanted to ask a follow-up on the operating margin guidance. I think you mentioned kind of unchanged outside of the FX impact. Gross margin, I think you said came in better than expected, but was offset I guess by higher OpEx. Could you maybe just talk about how that plays out over the balance of the year? Especially sales and marketing, I think was up meaningfully as a percent of revenue in the first quarter. Just what drove that increase? And how should we think about the run rate for the full-year?

Brian McKeon, CFO

Yes, let me break that down. We had expected an improvement in reported operating margins of 50 to 100 basis points for the first quarter, and we achieved 150, which was better than anticipated. This improvement was mainly due to gross margin. We experienced some advantages this quarter from later-than-planned staffing in areas like our labs and specific operational factors related to Q1. Overall, we feel positive about our performance and believe that our high-end goals remain achievable. As we noted at the start of the year, we anticipated some cost increases due to more interaction with our customers and more travel, which we expect to continue. We are also focused on supporting our employees in a higher inflation environment. Additionally, we are advancing investments in areas like R&D, including a couple of new platforms we previously highlighted. All of this is included in our outlook. Overall, our performance aligns well with our targets, marking a solid start to the year. We believe our full-year goals are feasible, adjusting for factors like R&D lapping and customer contract resolution payments, which indicate a solid 60 basis point comparable improvement in line with our expectations for this year. We look forward to achieving these goals.

Nathan Rich, Analyst

Great, thank you.

Operator, Operator

Our next question comes from Chris Schott from JPMorgan.

Christopher Schott, Analyst

Thank you very much. I have two questions. First, could you provide any comments on the proposed acquisition of Mars Heska and its potential impact on the competitive landscape? My second question is about pricing. I'm trying to understand the feedback you’re receiving regarding the recent changes and whether they have affected demand, particularly regarding wellness visits or less acute conditions. This seems to be a key concern for investors, so any insights you could share on pricing would be appreciated. Thank you.

Jay Mazelsky, CEO

Good morning, Chris. This is Jay. I'll start with your second question about pricing and then move on to the acquisition. Overall, we believe that our pricing to customers is appropriate for the current environment. Demand appears to be holding up well despite the broader economic conditions, as we've discussed in various pricing scenarios. From the perspective of pet owners, they have shown a willingness to spend, which is supported by our experience and survey data indicating that they continue to prioritize health care for their pets. It's important to note that diagnostics represent a relatively small portion of the total spending on pet care. Regarding your question about wellness versus non-wellness spending, we have observed that both have remained closely aligned over the last five quarters. There was some divergence during the pandemic due to economic deterioration, but overall, they have kept pace with each other over the past year. An interesting point is the resilience of 4Dx diagnostics testing, which is primarily a wellness test and suggests strong demand from end customers. Concerning the Mars Heska acquisition, as a matter of policy, we don’t discuss specific customer relationships, but I can say that no single customer accounts for more than 10% of our total revenues. Our customer base is large and diversified. We have strong relationships and a proven track record with our corporate customers, who appreciate our broad solution portfolio in diagnostics and software that supports their goals for growth and quality care. The acquisition underscores our long-standing belief in the attractiveness of the animal health sector, particularly in diagnostics, which we believe will contribute to the development of the market in the long run.

Christopher Schott, Analyst

Thank you.

Operator, Operator

We'll take our next question from Jon Block from Stifel.

Jonathan Block, Analyst

Yes, hi. It's Jon from Stifel. Can you hear me okay?

Jay Mazelsky, CEO

Yes, we can.

Jonathan Block, Analyst

Sorry about that interruption. First question, Brian, congratulations on a strong quarter. The CAG Dx revenue of $11.6 million exceeded the high end of your previous guidance, which was 8.5% to 11%. It seems you anticipated that 1Q '23 would be closer to the midpoint of your annual projections, so it's impressive that you surpassed the high end. Could you elaborate on what contributed to this positive outcome? I believe the pricing was consistent with your previous expectations. Would you attribute this growth more to the U.S. market rather than international? That's my initial thought, but I'd like to hear your perspective. If it's indeed in the U.S., are IDEXX drivers a significant factor, or did you notice some increased activity in the industry that you didn't foresee three months ago?

Brian McKeon, CFO

Thank you for the question, Jon. We had a strong start to the year in the U.S. Our pricing was consistent with our expectations globally, and we are pleased with our execution. Overall, U.S. clinical visits for the quarter were slightly better than we anticipated. They remained flat, as mentioned, yet we believed we would still be handling some comparisons in that area. We experienced some early positive growth in the quarter that contributed to this performance. The growth from our volume compared to clinical visits was a solid 5%, which aligns with pre-pandemic levels. This resulted in a satisfactory outcome for the U.S. combined performance. Internationally, results met our guidance, with strong execution despite ongoing macro challenges. Overall, we are pleased with the start to the year and have set ambitious goals that will help us achieve 10% overall organic growth, which we believe we are progressing towards. We recognize the macro risks present and will continue to monitor trends as we move through the year, but overall, we feel optimistic about our start.

Jay Mazelsky, CEO

Yes. And I would just build on that to say that I would build on Brian's comments and just emphasize the excellent commercial drivers that we've talked about certainly pricing, as Brian mentioned, new customer acquisition has been strong, both U.S. and internationally. Customer retention rates continue to remain strong. I think the customer interest and appetite for technology, we see that in premium instrument placements as well as software. And I think that's really reflective of the – some of the capacity challenges that they see. So overall, I think from an execution standpoint, a very strong quarter.

Jonathan Block, Analyst

That was helpful, thank you. I have a couple of questions. Firstly, regarding the guidance, is it essentially balanced? There might be lower interest expense, but there's also less share repurchase, and you mentioned something about hedges and how that affects the changes. So generally speaking, is it balanced when we compare your current 2023 EPS to where it stood back in February? Secondly, could you discuss what needs to happen for the two new point-of-care systems? Are those initiatives progressing concurrently in terms of timing? I appreciate your assistance.

Brian McKeon, CFO

Yes, just to clarify on the profit guide, our operating margin outlook is consistent. We have a slightly higher headwind from FX. And so on a comparable basis, the high end is the same and the low end is up, I think slightly. We obviously have some positive flow-through from raising the low end of the revenue. So that’s the EPS adjustment. And you’re correct. We had lower interest expense projected to offset by relatively lower projected reductions in shares outstanding. So that was a net flat effect.

Jay Mazelsky, CEO

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.

Jonathan Block, Analyst

Thank you.

Operator, Operator

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

Michael Ryskin, Analyst

Thank you for taking my question. Jay, Brian, I want to start by discussing international operations specifically. Could you clarify if the 8% figure you mentioned for international operations was for recurring CAG or total CAG? Also, did that meet your expectations? Are there any specific highlights you can share regarding the results from international operations? You've mentioned the macro environment, but can you point out specific regions or factors contributing to those results?

Brian McKeon, CFO

Yes, let me clarify the numbers. I’ll let Jay talk to the regional dynamics. It was 8% and 7.6% CAG Dx recurring. I would say that’s pretty much in line with the outlook that we shared for the quarter. The execution drivers were strong and in line. We had 17% growth in instrument placements, with a double-digit benefit from factors unrelated to same-store sales dynamics. We continue to experience pressure from macro trends on the same-store side. However, we have incorporated that into our outlook, which aligns with what we were anticipating and is consistent with our full-year view as well.

Jay Mazelsky, CEO

Yes. I mean just to support that, we’ve seen relatively speaking, more macro impacts outside the U.S. As I had mentioned previously, our execution drivers internationally have been excellent. We’ve done seven commercial expansions. And when you take a look at those targeted expansions, we’re doing well. We think we’re bringing more focus. And from a frequency and visit standpoint, the type of successful model that we’ve implemented in the U.S. From an instrument and business-focused standpoint, we’ve seen excellent results in premium instrument placements to pick 19% on the Catalyst side, really strong, the quality has been really strong from both competitive and new placements. And so we’re optimistic. And I think the regions are working or other countries within the regions are working through their specific challenges. But we’re optimistic that the long-term demand is there.

Michael Ryskin, Analyst

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 gives you pause?

Brian McKeon, CFO

I can provide some insight on this. In the U.S., we are seeing that clinical visits were relatively unchanged in the quarter. We're encouraged that it looks like we're addressing the challenges related to staffing capacity, and that seems to be normalizing. It's worth noting that visits were stronger earlier in the first quarter compared to how they ended. We saw a slight decline in visits during March, which continued into early April. This reflects the ongoing dynamics of the broader economic environment and how clinics are adjusting by adding staff to return to their usual growth rates. We're optimistic about overcoming some of the challenges we've previously mentioned. This is an area we will keep monitoring, and we are actively supporting clinics in improving productivity to help them return to the positive growth rates they have achieved in the past.

Jay Mazelsky, CEO

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.

Michael Ryskin, Analyst

Got it, really helpful. Thanks guys.

Operator, Operator

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

Jack Senft, Analyst

Yes, this is Jack Senft filling in for Ryan Daniels. Thank you for taking my question. I have two quick ones. First, could you remind us about the ProCyte One placement goals? I believe the goal of 20,000 is set for 2026, correct? In your prepared remarks, you mentioned that you are already over 50% towards that target. I’m interested in hearing more about the strong performance in these placements, which seems to be ahead of schedule. Secondly, do you anticipate that adoption will slow down, or is there a significant upside potential to that 20,000 target? Thank you.

Jay Mazelsky, CEO

Yes. We have reported 9,400 ProCyte One placements, which is nearly half of our goal. We are seeing a strong alignment with the platform in terms of performance, cost, and footprint. There has been significant customer adoption because it meets their practice needs. It's important to note that in international markets, particularly in many countries, hematology is prioritized. They typically conduct a general body systems diagnostic and may include chemistry later. The marketplace focuses first on hematology, and they view this as a vital addition to their in-clinic diagnostics suite. We have made good progress in that area.

Brian McKeon, CFO

I want to emphasize the multiplier benefits from the ProCyte One launch. We've seen double-digit growth in our overall installed base, particularly in Catalyst, premium hematology, and SediVue. This has been a strong quarter for placements of Catalyst and SediVue, building on last year's successful launch of ProCyte One. The advantages of adding to a platform extend beyond the platform itself and contribute to overall business growth.

Jack Senft, Analyst

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.

Jay Mazelsky, CEO

New practices are generally opting for cloud solutions, as they seek to adopt modern technology. These cloud-based systems are typically priced as SaaS services, which involves a monthly fee. While there are initial costs associated with data migration, onboarding, and training, the major cost advantage lies in the solution's lifecycle. Traditional practice systems required regular server replacements every few years, along with ongoing maintenance costs. An additional benefit of cloud solutions is that they receive software updates regularly without the need to take the system offline for maintenance. This results in significant cost savings over time and also improves functionality. Consequently, there is a growing appreciation for modern software solutions within the veterinary industry.

Operator, Operator

Our next question comes from Erin Wright from Morgan Stanley.

Erin Wright, Analyst

Sorry, hopefully, you can hear me now. So...

Brian McKeon, CFO

Hey Erin, we missed the beginning.

Erin Wright, Analyst

No worries. No worries. So can you talk a little bit about the pet oncology diagnostics opportunity? Why does it make sense for you to partner in this category versus buy? And do you think that this could be a more meaningful driver for you longer term or more limited? Just curious how you're thinking about that at this juncture? Thanks.

Jay Mazelsky, CEO

Thank you, Erin. We believe this represents a significant opportunity due to the number of pets diagnosed with cancer, which is the leading cause of death in the pet population. In the U.S. alone, six million dogs are diagnosed with cancer each year, with a mortality rate three times higher than the second leading cause of death. Currently, diagnosis and treatment processes are quite fragmented and often occur late, when the cancer is already in advanced stages. Samples are collected and sent to pathology labs, which can mean the cancer is difficult to treat by the time it's diagnosed. Additionally, there are relatively few oncology specialists in North America, around 350 to 400, so most diagnoses and treatments are performed by general practitioners who also have many other responsibilities. Therefore, offering diagnostics as a testing option for these practitioners is an appealing opportunity for us, driven by both partnerships and internal development efforts. We have considerable experience in this area, with over 1.3 million pathology submissions globally each year. This initiative is about expanding our capabilities to support our customers in diagnosing cancer earlier, which can significantly improve treatment outcomes.

Erin Wright, Analyst

Great. I know you've mentioned the Heska Mars deal, but do you expect more opportunities for corporate relationships beyond Mars? With a few of Heska's partnerships up for bid in the next year, is that significant? What is the competitive response? Thank you.

Jay Mazelsky, CEO

Yes, we have established relationships with various corporate accounts across our different testing modalities and product lines. We recognize that some customers may prefer our competitors. The market remains highly competitive, and we will need to compete on a customer-by-customer basis. Ultimately, we believe that offering the broadest possible solutions to support their growth objectives will lead to success. We will maintain our focus on this strategy.

Erin Wright, Analyst

Thanks.

Operator, Operator

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

David Westenberg, Analyst

Hi, thank you for taking my question. I apologize if I didn't fully grasp the foreign exchange aspect. Regarding the change in guidance, it shifted from 50 basis points on revenue to 20 basis points, while EPS increased. I'm a bit confused about what's going on with the top line since I view you as an exporter. I know you've provided some commentary, but I might need a clearer explanation. Now, for my second question, I want to discuss the Mars Heska situation from a different angle. Your win rate against Antech has been quite high, but my discussions with veterinarians suggest they prefer not to compete against Antech. Is there a chance for additional win rates in the inside lab considering this perspective, and how should we think about that dynamic? Thank you very much.

Brian McKeon, CFO

Yes, regarding your foreign exchange questions, you are correct about the revenue. We now believe the full-year revenue will be relatively flat, adjusting from our previous expectation of a 0.5 point headwind. This translates to a $10 million positive adjustment in revenue. However, this did not affect our earnings per share due to the mix of currencies and hedge positions. We have accounted for various assumptions related to exchange rates, and while we analyze all these factors, there was no overall impact because we are largely hedged at this time, and the mix of impacts was not particularly favorable.

Jay Mazelsky, CEO

Yes. And then to answer your second question, we don’t think about it necessarily as migration of one modality to the other based on the competitive landscape. Customers use both clinic as well as reference labs. They choose partners based on a variety of your product and solution differentiation, cost, service, footprint, all those things. So we think there’s still going to be the primary drivers of who corporate customers and independent customers choose, and I’ll leave it at that. So with that, we’ll conclude the Q&A portion of the call. Thank you for your participation this morning. And to summarize, I’ll reiterate that IDEXX is committed to the significant multi-decade opportunity to increase the standard of care for Companion Animal healthcare. We look forward to executing our organic strategy to address this opportunity. IDEXX teams continued to perform at a high level building on the investments we made over the past decades to develop our sector. And we look forward to continuing strong progress against our strategy through 2023. And now we’ll conclude the call. Thank you.

Operator, Operator

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