Great, thanks. Good afternoon, Jonathan Block with Stifel, we're transitioning to Animal Health and IDEXX. Thanks, guys, for joining us. We have with us Jay Mazelsky, President and CEO, and Brian McKeon, Executive Vice President and Chief Financial Officer. Same sort of approach. I've been saying I've got a bunch of questions. Guys, if you have questions, please raise your hand or just shout out, and we'll get after them. I'm gonna start with trends, you know, we get a decent look on U.S. vet volumes from other sources throughout the quarter, which seem highly correlated to your visits. Overall, U.S. clinical visits for IDEXX in 1Q23 was basically flat. I think, Brian, you mentioned it weakened a bit exiting the quarter, but you talked about wellness and emergent moving in tandem. Have you started to see any divergence of late between the two? Yeah. Why don't I, thanks, John. Yep. Thanks, everybody, for attending. Just before I get into this, I, we will speak today about trends through the first quarter, so what we've talked about publicly. It might be helpful to take a step back and just set some context here, for those of you who may not be as familiar with our space. What we saw in terms of trends in diagnostics in the US market was in, through the pandemic, is a significant step up in demand for diagnostics. We actually saw a one-third increase in our total business, you know, high teen organic growth in diagnostics through 2021 into 2022. You know, we've continued to see strong demand for diagnostics at the clinic level. We look at metrics like clinic revenue growth or same-store growth for clinical revenues and diagnostics. The veterinary practices, they were solid growth through 2022, nearly 10% growth in the first quarter this year. The underlying demand in the market has been strong. Our growth's even faster than that. We were nearly 14% organic growth in the first quarter, and that's driven by really the factors that we think of as execution drivers. That includes things like new business gains, driving increased utilization. Frequency and utilization of diagnostics continues to grow at the practice level, sustained high levels of customer retention, and we got additional benefits from that pricing this year. We feel quite good about the overall trends at our execution. Clinical visits were, are one metric. They were flat in Q1 in the U.S. You know, we see that as a positive factor in that we had been working through a pullback in capacity at the clinic level. Basically, what happened with veterinary clinics in the U.S. is there was a significant step up with the pet population. It was 10% over a two-year period, grew another 2% last year, clinics kind of kept up with that for a while and made the decision to pull back on capacity last year. As we had thought going into this year, those headwinds would alleviate, and that's basically what I think we saw in Q1, was kind of a stabilization of those trends. That's a positive factor, something we'll continue to work on with our customers. A solid start to the year for us in terms of the U.S. Internationally, I think we've also had excellent results in terms of our own execution. We had 8% organic growth to start the year, double-digit growth benefits from our execution drivers, including record new instrument placement levels. We've seen somewhat more of a headwind in terms of the same-store clinical visit levels in international markets, as the macro backdrop's a little more challenging and, but in line with kind of how we were planning this year. Solid start, and I think we're monitoring the trends at the practice level, but I think the things that we can drive and control in terms of our execution, we're feeling very good about the start to 2022. Yeah. Maybe just to add one bit of color, wellness versus non-wellness. In the U.S., we've seen for the last five quarters, those are pretty much moved in lockstep. We haven't seen the divergence. You may recall at the beginning of the, you know, pandemic back in 2020, we saw a little bit more of a drop-off. Yep From the wellness piece as that was preferred. It's nice to see over the last, you know, five quarters, you know, those move. Okay More in lockstep. That's helpful, and that was great context, Brian. I think maybe just to, you know, dig a little bit deeper, let me start on the international side. The 8%, I believe you said you're aiming for the high end of your CAGDX recurring of 8.5-11. The 8% for international, that's sort of the expectations to still land toward the high end? In other words, you're not embedding a big reacceleration on the international to get towards the upper band of your 8.5-11. Is that fair? Our higher end of the range, the 11%, reflects what we're targeting this year. We shared our original guidance at the Q4 call. We were targeting 11.5% at the high end for the U.S., 10% for international, and our overall growth range, we factored in, at that time, a 2.5% kind of calibration for potential headwinds, execution risk, macro risk. Really, Q1, we had better performance in the U.S. Yes W as 13.5%, and international, we were at 8%, both within kind of the range that we'd expected. Again, I think for international, it's a continuation of some of the same sort of headwinds that we saw in 2022. Okay. Jay, you mentioned, you know, it's been relatively consistent for wellness and emergent. Admittedly, I'm relying on some third-party data, but it had been consistent, but we've seen it start to diverge as of late. I know you can only speak to your results through 1Q23, but where I'm going with this is, you guys have talked about a tepid vet visit environment because of capacity issues, and that will sort of resolve itself. You know, the vets will get more efficient, adopt technology. If we fast-forward to your second quarter call, and you guys give a lot of granularity, and we see the divergence between emergent and wellness, which would sort of mimic what we're seeing in that third-party data. Does that argument shift for you guys? Do you sort of say, "Hey, it's not just a capacity thing. We're seeing wellness start to fray, and that might be more indicative of a consumer that's more tepid? Yeah. A couple of things. Keep in mind that the data that we publish is clinical visit data versus practice data. Some of the practice data includes things like, you know, boarding and grooming visits and picking up pharmaceutical. The clinical visit, for us, is the, we think, the driver of diagnostics usage. It's when the veterinarian actually sees, you know, the pet. You know, the clinical visit piece is just one element of our overall growth formula. You know, our growth profile focuses on clinical visits, obviously, but retention, frequency of when they visit, do they use diagnostics, utilization, the intensity of the diagnostics they use. All those things that are more in our control than the macro factors, John, that you described. Our innovation strategy, our differentiation strategy, our commercial engagement piece are things that we use to drive those other factors, and we think from an execution standpoint, have done well. Okay, fair enough. Looking forward, I know we're not gonna get into specific 2024 numbers today, but I do want to ask about the moving parts. We've been pretty vocal about some of these things, but, you know, I've been following IDEXX for a long time, you guys used to take 2%-3% price, roughly, per annum. This year, it's gonna be 7%-8%. It's actually greater in the first half relative to the second half. You know, maybe, Jay, for you, for price, your thoughts around the elasticity of demand, Brian, I don't know if this falls in your bucket, but are the days of 2%-3% price gone? You know, when we think about future price increases, maybe at least in the more immediate term, it should be in line with the rate of inflation, which could fall around mid-single digits next year. Yeah. Let me start with pricing from just maybe a philosophical standpoint. We work hard to really make sure that we are in balance from a value delivery standpoint and the price we get in the marketplace. We see the opportunity before us as being multiple decades, and we wanna make sure that we continue to deliver differentiation and don't get too far over our ski tips from a pricing standpoint. Given the macroeconomic environment and the different scenarios, we think we've priced appropriately, given the cost of running the business. We continue to deliver, I think, it's fair to say, outsized differentiation. Our customers appreciate the investments we've made in the profession, in solutions that help them run their practices, and they've been able to, you know, I think, pass that on in a number of instances to the pet owner, to their end customer. You know, keep in mind, you can't treat unless you first diagnose. Diagnostics plays this anchoring role within the practice, where the medical services piece is really the core reason for being, the core reason that they, you know, run a practice. You know, we're very comfortable with what we've been able to deliver. All the metrics around customer retention, around diagnostics frequency and utilization, you know, continue to perform well. We think we're, you know, we think we're doing fine from that standpoint. I don't know, Brian, did you want to address? Yeah, maybe to just talk about our longer-term growth algorithm. We broke this down in detail at our 2021 Investor Day, but kind of the building blocks of growth. If you look at the long-term growth potential, 11%-14%, that we shared at the time for global CAG diagnostics, I think we used 10%-13% for the US. The biggest driver of that is expanding utilization of diagnostics, and we've seen consistently through 2022 into 2023, increased diagnostic frequency and utilization. We're expanding the amount of, you know, our premium to growth versus per clinical visit, sustained at levels that we saw pre-pandemic. We feel very good about the things that we're driving in terms of execution. We have been facing lower than historical levels of visits by pet owners following this period of significant expansion that happened during the pandemic. All the long-term trends that we are seeing is indicate significant underserved demand for pet healthcare, pet owners who are very willing to spend for pet healthcare. We saw a 12% expansion in the pet population over the last three years. You know, we think Our long-term algorithm counts on 3%-4% kind of expansion of clinical visits. That includes, like, same store visits plus practice formation, which tends to correlate with pet growth. we think over the long term, we're gonna have the benefit of, you know, innovation helping us to continue to expand utilization, a return to positive growth on the clinical visit front, supported by the expanded pet population and the focus on pet healthcare, and drivers like pricing will be, you know, additive to that and can help us to achieve our long-term goals. I think we're working through a period of transition now related to coming out of the pandemic, where our business expanded significantly. We built on that in 2022. We look forward to building on that as we go forward. Okay. Maybe if I try to get a little bit more granular, you know, one of the things that we've talked about is backfilling the step down in price. Let's go back to some of the numbers, 7%-8% this year. Sounds like you're not gonna tell us today what it is next year, you know, let's just sort of say it's a step down. 400 basis points. You know, it's roughly 3.5 next year. It's slightly north of where you usually are. It's 7.5 this year. How do you the Street has your CAGDX recurring accelerating next year. I don't. I have you down 100 basis points. Street has you up 100 basis points accelerating. How do you backfill those 400 basis points? Just talk to us. I mean, Brian, you mentioned vet visits 3%-4%. It's 0%-1%, maybe this year, who knows? It's, you know, what are the main variables? Would it be vet visits improving, contribution from innovation stepping up, and international CAGDX improving marginally? Like, give us the building blocks of the 2023 to 2024 and how you backfill the lower contribution from price. The way we think about growing the business, again, going back to the long-term growth algorithm for the company, is first and foremost, expanding utilization of diagnostics globally. In the U.S., we expect to continue to have growth in diagnostics, frequency and utilization. We've seen that grow historically. One metric we use is percentage of visits where blood work is, diagnostics use blood work, and that grew about 50 basis points a year. It was I think 19% of visits at the end of last year. That accelerated during the pandemic to about 100 basis points and continued to grow in 2022. That is the biggest driver of growth, you know, in our overall model. We'll continue to emphasize that in terms of our growth. We're bringing new innovations to market to support that. We do believe there's underserved demand, and that over time, we will continue to see expansion of clinical visits and the pet population. That'll be additive to growth. Internationally, we have an incremental growth opportunity just related to 200,000-plus placement opportunities for chemistry and hematology analyzers and urinalysis analyzers. We've had record instrument placements through last year, through the last couple of quarters, really great momentum on that front. Those will be all the things that we're driving to achieve our growth objectives. You know, we continue to feel very optimistic about the long-term growth potential. In fact, just working through this period of time, the continued expansion of the frequency and utilization of diagnostics is just reinforcing our optimism on the long-term growth potential for the business. I mean, yeah, let me get back to a number that Brian cited, which I think is foundational, which is, you know, the pet population, this is U.S., but we've seen similar numbers outside the U.S., expanded over that three-year period by 12%. You know, pre-pandemic, that was growing 1%. If you think about this notion of underserved demand against that template that Brian described around diagnostics utilization, you know, we think practices working through the capacity constraints, the sheer number, absolute number, and relative growth of number of pets and clinical visits will converge, and we'll control those things that we can control, which we think are a very substantial part of the formula. I appreciate that. I guess what I'm trying to admittedly push a little bit on is, you're talking about the long term, but there is a unique scenario specific to 2023-2024, where your step down in price contribution is different from all your past years. You know, I've been fortunate. I've been covering you guys for 15 years and had a buy for, like, 13 of those 15 years. It's been a good place to be, as you guys have been incredibly successful. What I'm trying to drill down on is the unique factors around 2023-2024, because price had been consistent 2%-3%, so you put on the building blocks, and you get to a certain place. Here, I think arguably, you might have a 400 basis point gap on the pricing contribution and how you get people comfortable and where you make that up specific to next year. That's just what I'm trying to get at a little bit. Yeah, I guess, I guess coming out, John, is not exactly how we think about it. I think we think about building and growing the business, and where it starts with is increasing adoption of our innovations, working with our customers to grow their practices faster, helping them to serve what we see as underserved demand, so we get back to positive growth in the terms of the clinical visit growth. Those will all be the positive drivers, as well as thinking about price realization as we continue to build our plans and sharing with you how we think about it long term. We'll share more as we're thinking about next year, as we get closer to that. I think we're really pleased with the momentum that we have in executing in the business and the positive feedback we continue to get from the market. That's fair. That's helpful. Brian, maybe, Jay, one more for you. I do want to switch to innovation. Yeah. because you guys have a lot to talk about there. We never got this work done and, actually published. I think I can allude to it, just say, what are you seeing from your customers? I think the Street always sometimes has a bearish view of you're increasing price. They're also passing that fully along. Let's just take an example. Like, you got a panel at $30, and they're charging 3x, and they're, you know, charging the pet owner $90, and you go to $35, them charging $90 is still a pretty good value proposition for the, you know, for the veterinarian. It's one of the highest margin areas that hasn't been disintermediated. Importantly for investors, are they passing it along? I think investors are worried the 30-90 is going 35-105 and might hit utilization, you know, for someone who's a little bit more price sensitive. Are you seeing them pass that along, or do they sort of say, "You know what? A 2.9x markup is still a pretty good business, and I'll go ahead and absorb the price increase? You know, the way we think about it, and I think the way our customers think about it, is there's two sides of the transaction. There's the pet owner, and there's the, you know, caregiver. Let me start with the pet owner piece of this. You know, in terms of overall spend as a percentage of personal consumption expenditure, PCE, the amount that pet owners spend on their pets is under 2%, and the amount that they spend on pet healthcare spending is about, you know, 1% and under 1%, and then diagnostics is a smaller percentage of that. Pet owners uniformly tell market researchers, and we have our own market research, which validates this. they prioritize the spend on their pet vis-a-vis things like entertainment and travel and going out to eat, all those other things that they could. By the way, this is true across different demographics. Whether you are under 50,000, more than 200,000, we see very, very similar spending trends and prioritization. From the standpoint of the pet owner, there's the willingness and capacity. Now, what veterinarians will tell you is, as a result of some of the trends, John, that you described, disintermediation from the eShops and what have you, is that medical services is the key growth driver in their practice. You can't treat unless, in many cases, you first diagnose. Diagnostics plays this foundational role. Your dog can't tell you, "I'm not sleeping well," or, "I have this pain right where my spleen or pancreas may be located." You have to use diagnostics. Practice owners know that the diagnostics area of their practice is significant, it's the fastest-growing, and it's a significant profit generator. Not only is it good for the pet from a healthcare delivery standpoint and outcome standpoint, it creates healthy economics in the practice. We think those factors that gets the overlay, that we continue to deliver differentiation and are in balance, how we price for that differentiation. Okay. means that, you know, the overall environment will remain attractive. Okay. Got it. helpful, Jay. I'm gonna pivot. I'm gonna try to go five minutes on innovation, five minutes on others, so I'll move quickly. You know, when I think about IDEXX, highly innovative company, a bunch of new innovations over the years, but I think of them more as singular product launches. Catalyst One, ProCyte One, SediVue Dx, they never really overlapped. At your recent Investor Day, you talked about two new point-of-care systems. What would be the go-to-market strategy there? Would it be a singular approach, or do you sort of say, "You know what, John? We're one of the few companies in animal health that has a direct, massive sales force, so we can go ahead and launch them simultaneously, and our commercial organization can properly digest that? Yeah, I, let me just nuance the your setup for the question because I think, you know, we're often thought of as a company that has these singular, sort of, as you described them, more or less, you know, blockbuster-type products. We differ from the pharmaceutical side in that our model, our is really driven, as Brian McKeon was describing it, around diagnostics utilization. That is a function of the cumulative impact of innovations, whether it's nine new parameters for our chemistry analyzer over a decade, whether it's, you know, continuing to provide upgrades to our SediVue Dx urine sediment analyzer, menu expansion, like flea tapeworms for Fecal Dx antigen. All those things contribute to the overall growth. When we introduce SediVue Dx, for example, or ProCyte One on the hematology side, there is a significant multiplier impact as a result of the way we place it at customers through an IDEXX 360-type marketing placement program that drives not just the attach rates for Catalyst, but also pull-through in our reference labs. Yep. point of care and software business. We think we have the, you know, the overall approach in terms of how we've approached launches and the multiplier impact on the business creates this utilization flywheel. Sure. You've talked about the Technology for Life and introducing new innovations through the cloud. I guess, Jay, what I'm trying to get at is just from a new instrumentation standpoint, going back, I didn't see Catalyst One and ProCyte One and SediVue Dx all launched simultaneously. When we think about the new platforms, because you've talked about them being incremental, not cannibalizing current chemistry, hematology, and clinic urine sediment, is this something that the organization would launch simultaneously, or should we think about singular product launches? Yeah. When we get closer to, you know, the launch or launches, we'll. You know, I'll give you more specificity and granularity, you know, about that, but we're not prepared to actually talk about the specific launch today. Okay. I'll continue with innovation, maybe I'll go to fecal point of care, you mentioned specificity. You know, going back, a number of years, I think you wanted to introduce something fecal point of care, but it was through sort of the SNAP platform, the sensitivity and specificity didn't quite get there. You sort of scratched that project, then you had a lot of innovation at the lab around antigen testing, which enabled better sensitivity and specificity. Since that point in time, we've seen some of your competitors introduce a fecal analyzer point of care. I'm just curious, when we think about these two new platforms and what they could or couldn't be, and, you know, I certainly don't know, but what's the company's approach to fecal? Is it, hey, this is usually part of a wellness exam and more appropriate for a reference lab test where we have antigen testing, or is it something that you do want to bring the site of service to the point of care? Yeah. Let me talk about, you know, maybe clinical first principles that we have. When we bring something in clinic or, you know, to the clinic, we want to make sure that from a performance standpoint, sensitivity, specificity, easy use, that it's at least as good as what you have at the reference labs. You know, the Fecal Dx antigen test that we offer through the reference lab, it covers more relative to OMP. You know, before we introduced the flea tapeworm extension to the menu, it was twice as much as OMP. With flea tapeworm, it's now five times as much. You know, we think it's growing well, there's a very nice opportunity. The performance is very high. To be able to tap into the in-clinic opportunity, we would want to make sure that you can deliver that type of performance, that the customer is not leaving performance on the table. Okay, fair enough. A similar question in a way to, you know, cancer diagnostics, and maybe if you could just talk to, I believe you have this sort of dual-prong strategy with PetDx and Volition. If you can comment on how you're segmenting the market. The add-on question, and again, in an effort to try to plow forward, would be, your view of diagnostics in this space, and if a point-of-care test is appropriate, or do you feel like the reference lab setting is the better place to be? Yes. Let me start with the latter- Okay. I'll move to the former. You know, we think the cancer testing opportunity is very compelling. You know, if you think about. I've described some of these numbers before. In just the U.S. alone, there are 6 million dogs a year that have cancer. It's the biggest driver of mortality in dogs by a factor of three over the next cause of mortality. As a company, we do 1.5 million cancer tests a year, globally, and most of those are pathology-driven tests. There's some cytology in there also, so 1.5 million. The challenge is, those tests are typically done at later stages. The patient may be exhibiting clinical symptoms. They come into the practice, you find cancer at stage three, stage four, maybe. Yet very challenging to treat, and the outcomes aren't as good. The opportunity to be able to detect earlier in the process is, you know, we think very, very compelling. The other overlay to that is that if you take a look at North America, there are under 300, 400 clinical oncology specialists in North America. 6 million dogs with cancer a year. There's not a lot of clinical specialists who can help them, so the vast majority of diagnosis and staging and treatment and follow-up is happening amongst the general practitioner. They need support. They need support with education, but also testing solutions. We think that being able to screen earlier and detect earlier is very compelling. Whether you do it at the point of care, which is, I think, at a question you were asking, really comes down to specificity and actionability. You know, the 4Dx test that you were citing, John, is a screening test. It doesn't tell you diagnostically whether a patient has hemangiosarcoma or lymphoma. It tells you low, medium, high risk, which then drives follow-up. From that standpoint, we see that more as a, how you would think about preventive care screening through the reference lab, not as time sensitive. Okay. Perfect. That was very helpful. I'm gonna, Brian, maybe speed date with you really quickly on a couple different things. Rev recognition around innovation. One of your last incremental platforms was SediVue. I went back to filings, I looked at your 10-K, and you guys have great disclosures. In that year that SediVue was introduced, I think it was around April, it was $24 million, the vast majority of that was capital, right? Because the capital leads, the consumables follow, and I think that reflected about eight months of revenue. Since that point in time, IDEXX 360 is becoming even more prominent in terms of how you guys sell. When we think about backfilling the step down from pricing contribution, which in my head, I have 300-400 bips. People are pointing to vet visits, maybe international picks up, but notably innovation. How do we think about innovation under the IDEXX 360 umbrella? In other words, is the rev rec more blunted because you're not necessarily selling the piece of equipment for a high ASP? Under IDEXX 360, you get more the long-term contract, but not as much upfront. Maybe if you could talk to this dynamic. Really, with the GAAP changes to revenue recognition that happened a few years ago, most of the rev rec on instrument revenues is upfront, under IDEXX 360. It's not the effect that you're describing. There's an allocation of aspects of it, but the bulk of it is upfront. We can still see a, call it, a pretty big pop or contribution, or maybe use SediVue as that benchmark, if you would, in terms of a year one contribution? You know, I think conceptually, SediVue is a good way to think about new platforms, in that they tend to build over time. They, they have their own contribution in terms of the economics. I think importantly, what they do is they open up conversations with customers about a broader relationship with IDEXX and all the, all the solutions that we bring to bear, and you can see that with ProCyte One this year. I think it is part of what Jay was alluding to earlier, just the benefits of utilization really occur over or innovation occur over time and build and obviously, you know, instrument revenue is part of that, but the value that we're really creating here is the long-term customer relationship and the annuity revenues streams. If you recall, I mean, with SediVue at $24 million, eight months, I mean, more, maybe more like a $30 million-$35 million full year contribution, year one. Is that right? I don't recall specifically. Okay. One other thing that, in one minute that we have left, and I wasn't able to get to a whole lot, but I just want to talk about the $16 million contract resolution this year. You know, the guide for the 50 to 100 basis points, and in there is a 40 basis point benefit, roughly. Yep. From the contract resolution. When we think to next year. You sort of said 50 to 100 basis points this year, but you're benefiting from the contract resolution. Next year, is it 50 to 100 basis points, and you absorb that, or is it gonna be 50 to 100 basis points normalized? I think you see where I'm going with it, is 50 to 100 basis points next year, if you don't adjust, is really closer to 90 to 140 basis points, I believe. What's the company's thought on how you, how you approach that? The way we think about it, again, We're not updating guidance. This was our guidance that we just shared. We had 29%-29.5% operating margin guidance this year. Yep. If you normalize out the benefit from the contract resolution payment, that would imply to 10-60 basis points comparable. The 40 bip. Which we've highlighted, we would think of that as a discrete kind of impact as we thought about R&D, you know, where we had an investment last year that we're lapping. We would effectively normalize that out as we think about, you know, moving forward. We haven't shared any of our thinking on 2024. Our long-term goals are 50 to 100 basis points in comparable operating margin improvement. We think our business model will enable us to continue to do a good job on that front as we, as we've done historically. I'm sorry. I don't know if others got it. Maybe I lost you somewhere in there. Is it 50 to 100 bips, you know, factoring the $16 million contract resolution, or are you gonna go ahead and adjust that out? I guess, if this year's really 10 to 60, is next year really one to 140 or 90 to 140? We're not guiding on 2024 today. We're gonna treat the $16 million payment as we did the discrete R&D investment we led. Got it. did last year. In a similar manner to that. In terms of normalizing our numbers. Okay. A lot I wasn't able to get to. Any last-minute questions for the team? Perfect. Jay, Brian, thanks very much. Thank you, John. Appreciate it. Appreciate the time.