Earnings Call Transcript - IDXX Q1 2022

Operator, Operator

Good morning, and welcome to the IDEXX Laboratories First 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 first 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. 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. Today, I'll walk you through our first quarter results and discuss our updated financial outlook for 2022. IDEXX showed strong financial performance in the first quarter, building on last year's strong results. Notable highlights include an 8% revenue increase, driven by a 10% organic growth in our Companion Animal Group (CAG) business and an 8% increase in our water business. CAG Diagnostic recurring revenues grew 9% organically compared to last year, which had benefited from a notable rise in new pet patients during the pandemic. Our commercial execution was exceptional, demonstrated by 22% organic growth in CAG instrument revenues and ongoing strong demand for cloud-based software solutions. Earnings per share (EPS) was $2.27, a 3% increase on a comparable basis. As anticipated, comparisons to last year's high gross margins and increased commercial investments limited year-on-year operating profit growth in the quarter. Demand for CAG Diagnostics and IDEXX's commercial execution continues to build on the substantial gains made during the pandemic, supported by ongoing improvements in diagnostics adoption and utilization. We observed a decrease in clinic visit levels compared to the growth trends seen in the latter half of 2021, which underpinned our original 2022 CAG Diagnostic recurring revenue organic growth forecast of 12% to 14%. In the U.S., early Q1 was impacted by higher COVID cases, and visit levels were affected by constraints on veterinary service capacity in a challenging labor market. We saw similar trends in international regions such as Europe, compounded by recent macroeconomic conditions that have also constrained growth in clinical visits compared to last year's strong performance. Given our Q1 results and the near-term trends in the CAG sector, we are adjusting our full-year organic revenue growth outlook to 7.5% to 10%, mainly due to a 3% adjustment in our full-year CAG Diagnostic recurring revenue growth range, which is now projected at 9% to 11%. Additionally, we are considering a $40 million impact from the stronger U.S. dollar. Together, these adjustments lower our reported growth outlook by 3.5% or about $105 million at the midpoint of our guidance range. We believe these adjustments are suitable as we navigate through the near-term dynamics in the CAG sector and face tougher comparisons in the first half of 2022. We aim for higher growth in the latter half of 2022, with the upper end of our full-year growth outlook mirroring our original CAG Diagnostic recurring revenue growth goals for that period. We're optimistic about the growing demand for Companion Animal diagnostics globally, building on the strong progress made during the pandemic. We are confident in our long-term growth potential, backed by our continuous focus on innovation, customer engagement, and advancing the CAG sector. In line with this belief, we are making high-return investments in innovation and commercial capability this year, including about $80 million in in-licensed technology during the second quarter, which Jay will elaborate on in his comments. Our 2022 EPS guidance of $8.11 to $8.35 per share includes updates to our operating outlook, factoring in $0.72 of discrete impact from technology licenses, a $0.10 adjustment related to the stronger U.S. dollar, and $0.05 impact related to increased interest rates. We will examine our full-year outlook in more detail later in my remarks. Now, let's review our first-quarter results. We achieved an 8% organic revenue growth in the first quarter, driven by 10% organic gains in our CAG business and 8% growth in our Water business. These gains were somewhat offset by a 19% organic decline in LPD revenues, primarily due to lower African swine fever testing in China, and a year-on-year decline of $3 million in human COVID testing revenues. Together, these factors reduced overall IDEXX organic revenue growth by approximately 1% in the first quarter. We expect these comparisons to improve in the latter half of 2022. CAG Diagnostic recurring revenues grew 9% organically in Q1, with 10% gains in the U.S. and 8% growth in international markets. Q1 growth in CAG Diagnostic recurring revenues benefited from approximately 1% equivalent day effects. Overall gains were also supported by 22% organic growth in CAG instrument revenues and a 13% increase in veterinary software and diagnostic imaging revenues, plus benefits from the ezyVet acquisition. Regarding U.S. CAG sector demand, same-store clinical visits in the first quarter were about 2% below strong prior year levels, contrasting with the 2% to 3% increases seen in the latter half of 2021 as we began to compare against the ramp-up in testing demand during the pandemic. A contributing factor to these trends is a near-term challenge related to the capacity management of vet clinics globally, resulting in restricted clinic hours and limited access to veterinarians. Jay will delve into these dynamics in his comments. At the practice level in the U.S., same-store diagnostic service revenue growth was a robust 7%. The underlying demand for pet healthcare services remains strong, reflecting significant growth trends over the past few years. Compared to the pre-pandemic base in 2019, U.S. same-store clinical visits and diagnostic revenues increased 4% and 11%, respectively, on a three-year compound annual growth basis. IDEXX's U.S. CAG Diagnostic organic recurring revenue growth of 10% in Q1 continues to surpass sector growth trends, showing a 1,150 basis point premium to clinical visit gains, partly aided by higher net price realization and equivalent day benefits. On a global scale, IDEXX achieved solid organic revenue gains across our various modalities in the first quarter. VetLab consumable revenues grew 11% organically, with double-digit gains across U.S. and international markets. Consumable gains were driven by a 14% year-on-year increase in our global premium installed base, along with strong growth across our Catalyst, premium hematology, and SediVue platforms. CAG premium instrument placements surged 31% in Q1, reflecting 24% growth in the U.S. and 35% growth internationally, as clinics are increasingly confident in investing to meet rising demand for diagnostics worldwide. The quality of instrument placements is also robust, with a 12% growth in new competitively placed Catalyst units. ProCyte One momentum continues to grow, with 1,924 premium hematology placements in the quarter, marking a 101% increase. Rapid Assay revenues increased healthily in Q1 compared to last year's high growth levels. Global Rapid Assay revenues rose 8% organically, bolstered by solid volume gains in the U.S. alongside net price increases. Our global lab revenues also grew 8% organically in Q1, with strong double-digit growth in the U.S. balanced against low single-digit gains in international regions affected by declines in clinical visits in Europe. Reference lab new business momentum and customer retention remain strong globally, further supported by the expansion of IDEXX 360 agreements. In the first quarter, we experienced relatively higher benefits from net price gains, achieving 4% to 5% average growth in U.S. CAG Diagnostic recurring revenues, along with solid increases across international regions. In other areas of our CAG business, veterinary software and diagnostic imaging revenues grew 13% organically and 34% reported, aided by the ezyVet acquisition. Water revenues increased 8% organically in Q1 due to price gains and a steady recovery in testing demand globally from previously constrained levels. Livestock, poultry, and dairy revenue decreased 19% organically in Q1, as expected, due to tough comparisons to last year's high revenue levels in African swine fever and core swine testing in China, which offset moderate overall organic revenue gains in other areas of our LPD business. We anticipate improvement in LPD growth rates in the latter half of the year as we navigate through challenging comparisons in the Asia Pacific region. Shifting to the financials, robust revenue growth supported moderate operating profit and comparable EPS gains compared to last year's elevated levels. Gross profit was up 6% in Q1 as reported and 7% on a comparable basis. Gross margins stood at 59.6%, a decline of 120 basis points on a comparable basis. This decrease reflects comparisons to high Q1 2021 levels, changes in business mix from lower LPD and higher CAG instrument revenues, and increased freight and distribution costs. Gains in CAG recurring revenues, net price increases, and lab productivity initiatives helped offset some inflationary pressures. We also noted benefits from improved software service gross margins as we increase our recurring revenue base. Operating expenses rose 12% year-on-year in Q1 as reported and 13% on a comparable basis. The increase in operating expenses reflects comparisons to controlled prior year levels and investments made in recent quarters to expand our global commercial capabilities, as well as increased travel costs compared to last year. We anticipate relatively higher year-on-year comparable operating expense growth in the second quarter due to these impacts and the expected effects from discrete R&D in-license activities. EPS for Q1 was $2.27 per share, a 3% increase on a comparable basis. Q1 EPS included a benefit of $5 million or $0.06 per share from share-based compensation, down $0.11 per share from last year’s strong levels. Foreign exchange negatively impacted operating profit by $4 million and EPS by $0.03 per share in Q1, net of $2 million in hedge gains. Free cash flow for the first quarter was $83 million, leading to a trailing 12-month net income to free cash flow conversion rate of 84%. For the full year, we now estimate free cash flow conversion at 65% to 70%, which is about 10% lower than previous estimates. This revised outlook accounts for approximately 5% of free cash flow conversion impact due to the discrete R&D investments, higher inventory levels to ensure product availability, and increased deferred tax assets driven by enhanced R&D credits. We are maintaining our full-year capital spending outlook at $180 million, which includes around $50 million for our new manufacturing and warehouse expansion project. Our balance sheet is strong, closing the quarter with leverage ratios of 1.1x gross and 0.9x net of cash. In Q1, we allocated $273 million towards repurchasing 523,000 shares. Our financial outlook assumes capital allocation for share repurchases to keep a similar net leverage ratio and support a projected 1.5% decrease in share count for the full year. Regarding our 2022 full-year outlook, we are updating our organic revenue growth ranges to reflect Q1 performance, recent trends in the CAG sector, and projected impacts from the Ukraine War. We are also modifying our reported revenue growth outlook due to the significant recent appreciation of the U.S. dollar. Our revised full-year revenue growth range of $3.39 billion to $3.465 billion indicates a $105 million reduction at midpoint compared to earlier predictions. This includes $10 million in projected revenue reductions from our Russia, Belarus, and Ukraine operations, and a $40 million adjustment due to the stronger U.S. dollar. Consequently, we expect foreign exchange to lower year-on-year revenue growth by about 3% for the full year, with an estimated 4% headwind anticipated in Q2. Our full-year organic revenue growth outlook of 7.5% to 10% reflects a refinement from our original forecast of 2% to 2.5%, primarily due to an adjustment in our full-year CAG Diagnostic recurring revenue growth expectations. We plan for organic growth on the lower end of this range in the first half of 2022, reflecting recent trends and challenging year-on-year comparisons in the second quarter. We aim for improved growth rates in the latter half of 2022 as veterinary clinics adapt to capacity challenges and we reap the benefits of our commercial initiatives. Our revised forecast for CAG Diagnostic recurring revenue growth is 9% to 11% for the entire year, building upon the strong gains from last year. The upper limit of our full-year growth projection aligns with our original CAG Diagnostic recurring revenue growth targets for the second half of the year. With our updated revenue growth rates, we are now anticipating operating margins between 26.8% and 27.3%, which is lower by 170 to 220 basis points on a reported basis compared to last year’s strong performance. This includes roughly 230 basis points of margin impact due to the discrete R&D investments. This outlook reflects high-return commercial investments aligned with our long-term growth potential and accounts for projected inflationary effects on IDEXX’s business this year. When adjusting for these discrete R&D investments and an estimated net margin benefit of about 10 basis points from foreign exchange hedges, this outlook suggests an aim for a 0% to 50 basis point increase in operating margins in 2022 compared to last year's strong levels. Our EPS outlook is $8.11 to $8.35 per share, representing a decrease of $1.20 at midpoint. This figure incorporates a $0.72 impact from discrete R&D investments, an additional $0.10 per share headwind from foreign exchange, and $0.05 per share impact due to expected higher interest rates. Our guidance for comparable EPS growth is expected to fall between a decline of 1% and an increase of 2%, accounting for negative growth impacts of 9% from the discrete R&D investments and an estimated 2% impact in 2022 from changes to international tax rates. We have provided detailed updates in the tables found in our press release and earnings snapshot. That concludes our financial review. I'll now turn the call over to Jay for his comments.

Jonathan Mazelsky, CEO

Thank you, Brian, and good morning. IDEXX had a solid start to 2022, building on significant gains in demand for companion animal diagnostics and software solutions achieved over the last 2 years. Veterinarians continue to see increased demand in their clinics compared to pre-pandemic times and routinely choose IDEXX's innovative products and services to meet rising standards for pet health care. This is reflected in our continued solid CAG Diagnostics recurring growth and record Q1 global premium instrument placements, supported by our global rollout of ProCyte One. IDEXX's business strategy is focused on inspiring adoption and increasing the utilization of diagnostics, and our results reflect continued strong progress on this path. Our integrated solutions not only help veterinarians expand capacity and grow their businesses but also support an enduring recurring revenue stream in the future. While we've seen some moderation in CAG sector growth metrics from very strong growth levels during the pandemic, we have high confidence in the durability and ongoing growth potential of our business, and our strategy to drive the significant long-term growth opportunity we see for companion animal health care. Today, I'll focus on discussing IDEXX's performance and progress in advancing key growth initiatives that are enabling us to build on our strong growth and financial performance as we serve our mission-driven purpose of enhancing the health and well-being of pets, people, and livestock. Let me start by providing some context on recent trends in the CAG sector. Overall, CAG sector demand trends continued to expand at a solid rate, building on the very strong increases in diagnostics demand seen through the pandemic. As Brian noted, U.S. practice same-store diagnostics revenues increased 7% in the first quarter compared to very strong prior year results. IDEXX's growth strategy has been consistently focused on driving diagnostics adoption and utilization at the clinic level, supported by our investments in commercial engagement and innovation. First quarter results show continued progress on this front. We've provided some additional information in our quarterly snapshot, which breaks down practice-level diagnostics revenue growth dynamics into three key drivers: clinical visit growth; diagnostic frequency, or the percentage of clinical visits, including diagnostics; and diagnostics utilization, or diagnostics revenue per visit that includes diagnostics. This breakdown highlights benefits for both continued solid increases in diagnostics frequency and expanded growth rates in diagnostics utilization ahead of pre-pandemic levels, building on a very strong gain seen over the last 2 years. These impressive gains were moderated in Q1 by a 2% year-on-year decline in clinical visits, which is a change from the very solid 2% to 3% clinical visit growth trends we saw in the second half of 2021. As we've analyzed these recent changes, it appears that in addition to some effects from COVID case spikes and weather dynamics in the first quarter, there are near-term constraints on vet clinic capacity that are impacting clinical visit levels. Veterinarians and their staff are continuing to adapt to the extraordinary growth in demand over the last 2 years when the U.S. pet population expanded approximately 10%, resulting in double-digit increases in same-store clinical visit levels, reflective of the sustained pressure on their time as well as staffing challenges that many sectors are facing currently. Pet clinics have scaled back hours. The metric we can track is the percentage of clinics with weekend appointment activity, which declined to 42% in Q1 from 54% levels pre-pandemic, as clinics and vets themselves are looking to achieve a more balanced workload. As many pet owners wait longer to secure appointments, the underlying demand for pet health care remains strong. But these factors have had the near-term effect of moderating the extraordinary growth pace we've seen in the CAG industry over the last 2 years. We've seen similar dynamics in international regions like Europe in terms of clinical visit levels, with some additional pressures potentially related to the more recent macro headwinds. Given the near-term clinical visit and macro dynamics noted, we felt it was prudent to recalibrate our 2022 outlook. Our full-year outlook for CAG Diagnostics recurring revenue organic growth of 9% to 11% builds on our 17% average annual growth over the last 2 years, with goals to accelerate gains in the second half of 2022 benefiting from continued advancement of our commercial and innovation efforts. The longer-term outlook for pet health care remains very strong, benefiting from increases in pet ownership, favorable demographic trends, and the continued strengthening of the pet and pet owner bond. IDEXX is well-positioned to drive sector growth and help customers service growing demand through our broad array of point-of-care and reference laboratory products and services, all connected by cloud-based software capability, which supports clinic efficiency and workflow enhancements. The IDEXX team is focused on driving this potential and continues to operate at an exceptional level. This is reflected in continued solid new business gains, record instrument placement levels, high growth in software services, and the continued very high levels of customer satisfaction reflected in record high retention models. Our high-touch customer commercial model and innovative diagnostics and software solutions position us well to help customers work through near-term management challenges to extend the strong growth momentum in our business. Let's discuss some recent progress on these key strategic fronts. High levels of commercial engagement that support sector growth remain a pillar of our growth strategy, and we continue to build on our leading commercial capability globally. As noted, we continue to drive strong performance in terms of new business acquisition, with solid net customer gains across modalities and regions. Our highly skilled commercial teams delivered outstanding premium instrument placement performance in Q1 across our platforms, supporting strong growth in our EVI metric in the quarter. We achieved strong growth overall across new, competitive, and loyal customer segments as well as within corporate accounts, as veterinarians are clearly looking to use IDEXX technology to manage elevated demand within their clinics. And despite highly variable access levels globally, our sales teams demonstrate that they have strong and trusting relationships with their customers, regardless of clinic type and a keen ability to meet customer needs with IDEXX products, each of which are driving strong customer retention and healthy global installed base growth. This momentum has been supported by the strengthening of our commercial capabilities in international regions. We're encouraged by the early performance measures like reach to customer and reach to revenue from our recently completed international country expansions. These include Germany, France, Spain, South Korea, Italy, and Brazil, while it had smaller targeted investments in our commercial capabilities to complement these efforts as opportunity warrants, including in our largest region in the U.S. Commercial expansions are supported through our center of excellence approach, which enables efficiency, speed of execution, and high return on our investments. Innovation is a critical enabler of our growth strategy. Key advancements such as ProCyte One, IDEXX's innovative and easy-to-use hematology analyzer, continue to gain momentum and provide multiplier benefits for our business. Just one year after its launch, ProCyte One is now commercially available around the world and has a global installed base of almost 4,000 units, demonstrating the power of the right product in the hands of a dedicated commercial sales force. This trajectory aligns our premium hematology business with the approximately 20,000 placement outlook we shared at our most recent Investor Day, and utilization rates are trending favorably for customers upgrading from existing systems. ProCyte One attach rates with Catalysts are high in the mid-90% range, highlighting the multiplier benefit to our broader point-of-care business. This innovative hematology platform is a key enabler to support penetration of our estimated 200,000 worldwide premium instrument placement opportunity. Another key advancement in our innovation agenda is 4Dx Plus, the gold standard diagnostic for vector-borne disease in canines, which will provide customers with benefits from multiple product enhancements this year, including more sensitive end-of-plasma detection, clinical decision support, and USDA approval for 2x longer room temperature storage for our point-of-care test SNAP 4Dx Plus. It's an example of IDEXX's whole product approach of enhancing assay performance, workflow, and clinical decision support. Additionally, the SNAP Pro analyzer, which has had excellent momentum in global placements during Q1, improves clinic workflows by seamlessly adding test results through our powerful diagnostics portal VetConnect PLUS, and ensuring charge capture of all tests run through the instrument. These innovative products help our customers improve clinic efficiency and supported solid growth in our rapid assay franchise in the first quarter as we saw seasonally aligned increases in demand for tick-borne disease testing. As we capture near-term benefits from our existing innovations with customers, we continue to advance our long-term innovation agenda as well. As noted in our financial guidance update, we made investments with two companies, the in-licensed technology for worldwide exclusive use in developing point-of-care diagnostics platforms and applications. IDEXX has a long track record of partnering with companies to apply technology that enhances the quality of pet health care. We look forward to sharing more on these initiatives in the future as we build on our compelling real-time care portfolio. Another key area of strategic focus for IDEXX involves delivering whole product software solutions that address a broad jobs-to-do capability within a single platform. Our PIMS solutions, along with Vet Radar and payment processing solutions, VetConnect PLUS, with clinical decision support, and Web PACS, are all increasingly interconnected, offering our customers a seamless experience across the full suite of productivity applications. Consequently, our customers purchased more of these applications in Q1 than in any previous quarter. We also had record global placements with over 350 PIMS installations, with the vast majority of customers choosing a cloud-based solution. Notably, we made significant headway in outfitting greenfield practices that IDEXX is a key partner in establishing and equipping a new clinic. With many customers capacity constrained, veterinarians have a significant investment appetite for modern, mobile, and well-integrated cloud-based software technology. These software solutions allow our customers to focus on providing care instead of maintaining technology. With our recent acquisition of ezyVet and as preference for cloud-based solutions accelerates, our software revenue base continues to move towards a highly profitable recurring revenue stream. As we advance our commercial and innovation capabilities, we are highly committed to sustaining outstanding levels of customer support, reference lab service turnaround time, and product availability enabled by our highly capable operations organization. The manufacturing and supply chain capabilities that we built over multiple decades allow us to support our busy customers and keep up with the strong growth in industry demand while managing through a dynamic supply chain environment. IDEXX customers benefited once again from product availability close to 100% and continuously high levels of on-time deliveries. These excellent service metrics demonstrate the benefit of our long product life cycles and deep supplier relationships, as well as our investment in highly skilled manufacturing centers. And while we continue to monitor the impacts of inflationary dynamics in regional COVID-19 outbreaks, we feel confident in our ability to build upon strong financial performance, as Brian outlined in our full year financial outlook. In concluding our first quarter review, I'd like to welcome Michael Johnson to IDEXX as our new Chief Human Resources Officer. Michael brings over 22 years of experience in developing HR leadership capabilities across multiple disciplines and geographies, most recently at Abbott Laboratories, where he was Divisional Vice President of Diversity and Inclusion. The Chief Human Resources Officer role is a key enabler of our long-term growth strategy in supporting employee engagement, talent development, and organizational effectiveness, and we look forward to Michael's leadership and continually advancing our initiatives and performance in these areas. Welcome, Michael. This concludes our review of our first quarter performance. Before opening the line for Q&A, I want to extend our deepest sympathies to the people of Ukraine as the escalating war has taken a devastating toll on people and pets in the region. As a purpose-driven company, we strongly condemn the invasion and violence there. We have been focused on supporting our customers, the health and safety of our employees in the region, and true to the heart of IDEXX, the pets that are part of their families. We have significantly scaled back operations in Russia, including suspending sales of veterinary diagnostic equipment in the country. Instead, our focus has been on supporting the essential care of pets to the extent that we can through our existing veterinary customers. To support the humanitarian needs of the region, we have leveraged the IDEXX Foundation to provide funding to the International Medical Court, the World Central Kitchen, and the International Fund for Animal Welfare, while also providing free rabies tests for displaced Ukrainian pets all over Europe. Going forward, we will monitor the situation to identify additional ways to support Ukrainian refugees and their pets. I would like to thank our employees around the world who have taken part in the IDEXX Foundation Matching program to make personal donations to these organizations. With that, we will turn to Q&A.

Operator, Operator

Our first question is from Chris Schott from JPMorgan.

Christopher Schott, Analyst

On this issue of vet constraints, it seems like we've been hearing about this issue for much of the pandemic. So I'm just trying to get a better understanding of kind of what's changed in 2022 where this is now starting to back up into your revenue guidance, it's starting to hit numbers a bit more. So I'm just trying to understand, did we finally hit a breaking point where the vets just can't sustain what they've been doing? And maybe as a second part of that same question, what do you think it will take to start to see visit growth normalize? Do we need to just take a little bit of a pause here for some of these vets who need to hire people? I'm just trying to get a sense of just what's the path forward to see growth start to normalize. And then maybe just slip in one other one on some of the same kind of topic. Is the slowdown you're seeing here completely capacity related? So if there were more slots for visits, would there be demand for that? Or are there also some elements of lower demand reflected in the guidance today?

Brian McKeon, CFO

Thanks for your question, Chris. Let me provide some context before Jay shares more details. The clinical visit trends we’ve highlighted represent the main change prompting us to reassess our outlook this year. We began to feel the impact of increased demand from the pandemic in the latter half of 2021, which contributed to the advantages of pet additions and significant rises in services and diagnostics we experienced during that time. Clinical visit levels were solid in the second half of the year, growing 2% to 3% from that elevated baseline. A more recent factor influencing this is vet capacity. Clinics are adapting to a substantial rise in industry demand while also facing labor challenges common in various sectors. We are still navigating through challenging year-on-year comparisons, which we expect to persist through the first half of this year related to the demand increase. This is the primary factor at play. On a positive note, at the clinic level, diagnostic frequency and utilization have increased, same-store service revenues continue to rise, and we’re seeing strong sales, robust instrument performance, record software placements, and high customer retention. Overall, this situation is mainly tied to capacity constraints, which we believe will normalize as we manage these comparisons and clinics adjust to sustained long-term growth in demand.

Jonathan Mazelsky, CEO

Yes. Chris, let me try to address your question from a context standpoint, both from the standpoint of capacity or supply, and then I want to talk a bit about the pet owner dynamics and demand. So all the surveys and all the conversations we've had with veterinarians indicate a good deal of optimism about the future and it includes 2022 in terms of growth and their prospects. Their focus is really, I think, pivoted. The pandemic has only accelerated the pivot towards being able to provide excellent medical services and patient care, as well as a pleasing client experience. So, relatively less emphasis on things like product sales, specialty diets. They're also seeing, from a pet owner standpoint, demanding clients who really want full-service care. So speaking with a number of veterinarians just yesterday, they remarked when pet owners come in are still looking to really have sort of an end-to-end approach to care. So I talked about that strong pivot. And if anything, the pandemic, I think, has only accelerated that. And they know that the diagnostics play a key role in being able to guide care services and the whole clinical envelope. And to Brian's point, at the same time, there's been a very significant step-up in activity, both in terms of number of patients. There's 10-plus percent more pets relative to pre-pandemic, 10-plus percent higher clinical visits. And the practices themselves, they haven't been immune to some of the labor and staff challenges that, to some extent, all businesses are facing. So they're working through that dynamic of higher activity while trying to create some balance and looking to increase capacity. And they're looking at us in many respects, and have this large appetite for things like IDEXX instrumentation. We saw that manifest itself in higher sales, cloud-based software solutions. I think it's both indicative of their optimism for the future, and recognizing that if they have better tools that can support both staff productivity and higher standards of care.

Michael Ryskin, Analyst

Jay, Brian, I want to follow up on some of the points you just mentioned regarding vet demands and what you're observing in the channel. To be direct, if you examine the comparisons from the first half of last year to the second half, it's clear that the second half comparisons for visit growth are considerably easier. However, when you look at it from a 2-year or 3-year perspective, it appears to be more normalized. We can delve into the details of 2-year and 3-year comparisons, but setting that aside, what are your expectations for vet visit growth throughout the year? We saw negative growth of 1.5% in the first quarter. Although there were some Omicron-related issues in January, the situation doesn't seem to have improved significantly for the rest of the quarter. What are your projections for vet business growth in the second quarter and for the entire year? I have a follow-up question as well.

Brian McKeon, CFO

Yes, Mike. Regarding your first question, we are also examining these multiyear dynamics. I believe that is mostly accurate. One point I want to highlight is that the increase in new patients during the pandemic had an incremental impact on growth, which we believe benefitted the second half of 2021 into the first half of 2022. This created a growth dynamic that adds to the challenges of the first half. However, overall, we agree that the multiyear trends appear strong, which contributes to our optimism. When considering our outlook for the year, the higher end of our provided range assumes a return to a healthy positive growth rate in clinical visit trends. As we mentioned, the recurring revenue growth for CAG Diagnostics in the second half at the higher end aligns with our original goals. This is what we anticipated at the beginning of the year. The lower end of the range corresponds more closely to what we observed in Q1. Therefore, there remains some level of year-on-year pressure. We're not specifically guiding on that metric, but this is how we envision our full-year guidance.

Jonathan Mazelsky, CEO

Yes. And I would just add to that, though, clinical visits, it's been an important part of our growth algorithm, but it's just one part. The other thing to keep in mind is the diagnostics adoption and the utilization piece of the business is very strong. We've highlighted that in the earnings highlight where adoption and utilization are at or higher than what we've seen from the pre-pandemic level. So from a customer engagement standpoint, I think we have a pretty well-defined playbook. It's really been honed and optimized over the years to be able to drive and inspire diagnostics adoption and utilization, both through creating awareness and education and ultimately, trialing. But also innovation and continuing to bring innovation that solves the challenging practice and patient problems. So we're optimistic about our ability to continue to do that and do that in an effective way.

Erin Wright, Analyst

I'm a bit surprised that the veterinary capacity constraints have caught you off guard compared to your earlier expectations. However, you did mention a macro dynamic at the beginning of your remarks, and I was curious if that was related to the labor constraints or if it also pertains to shifts in consumer behavior. We've seen your business grow even in a tough economy in the past. Could you remind us how sensitive your business is to a difficult economic environment and what strategies you can implement to grow even when clinic visits are challenging?

Brian McKeon, CFO

Yes. Let me reflect on my earlier comment, and then Jay can elaborate on the resilience of the business. It was specifically related to Europe, where we observed more softness than we expected. We're indicating that this might be linked to the indirect effects of the Ukraine war and rising energy prices. It's challenging for us to fully understand this, but that was the essence of my comment.

Jonathan Mazelsky, CEO

Yes. Erin, just in terms of the resilience of the business. If you go back to the Great Recession and the recovery in 2008, 2009, our revenue grew 5%. Now a lot has changed over that 10-plus years, and I think from a very positive standpoint. We worked through other channels, third-party distributor channels. We now have our own direct channel and direct relationships with customers. We know that the human-animal bond and the strengthening of the bond has suddenly increased and increased very appreciably. Obviously, there's a lot more pets. And our innovation portfolio, both across the reference labs and our point-of-care diagnostics portfolio, and very importantly, in this environment, software has gotten, I think, appreciably stronger and more capable, not just in the U.S. but globally. So we think we're a very resilient business that has become even more resilient as a result of those factors.

Balaji Prasad, Analyst

Thanks for squeezing me in. So it's kind of an extension of the previous question versus what the veterinary industry can do. I'm curious to see what these challenges mean in terms of capacity constraints for you in terms of the opportunity that it opens up in workflow solutions addressing anything else, both near term and longer term in helping your customers. And secondly, I just wanted to clarify again on the R&D cost front. Will this mean that your EBIT margin expansion should be back on track from 2023 onwards?

Jonathan Mazelsky, CEO

Yes. So I'll talk about this, the opportunity. In addition to what I mentioned from a software in a clinic standpoint, our reference laboratory solutions, testing solutions platform really serve as an extension of the practice. So insofar as practices maybe get strained or they want to send out testing and even our medical services. So we have a very large group of pathologists and boarded some radiologists and internal medicine specialists, they can do that. So we think that, that is a net positive in terms of being able to support the practices and continues to open up opportunity to that effect.

Brian McKeon, CFO

And on the R&D question, the $80 million investment that we highlighted that will come through our second quarter results, we view as discrete and nonrecurring. And we are maintaining our long-term goals for operating margin expansion.

Jonathan Mazelsky, CEO

Okay. And with that, I'd like to thank everybody on the phone for their participation this morning and to the IDEXX employees listening. I'd like to say thank you for your continued devotion to our purpose and enduring focus on delivering today. Your unwavering support and engagement enables us to continuously execute at a very high level and support our customers despite unpredictable and evolving dynamics in our sector and around the world. We're thankful for your excellent efforts and look forward to continuing our strong momentum through the rest of '22. And so with that, we'll conclude the call, and thank you.

Operator, Operator

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