Q2 2024 IDEXX Laboratories Inc Earnings Call

Participants

Brian Mckeon; Chief Financial Officer, Executive Vice President, Treasurer; IDEXX Laboratories Inc

Jonathan Mazelsky; President, Chief Executive Officer, Director; IDEXX Laboratories Inc

Christopher Schott; Analyst; JP Morgan

MichaeL Ryskin; Analyst; BofA Securities

Erin Wright; Analyst; Morgan Stanley

Jonathan Block; Analyst; Stifel, Nicolaus & Company

David Westenberg; Analyst; Piper Sandler

Presentation

Operator

Good morning, and welcome to the IDEXX Laboratories second quarter 2024 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 noticed 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 2024 results and updated 2024 guidance, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent prior year period unless otherwise noted.
To allow broad participation in the Q&A, we ask that each participant limit their questions to one with one follow-up as necessary. We appreciate you may have additional questions, please feel free to get back into the queue, and if time permits, we'll take your additional questions. Today's prepared remarks will be posted to the investors relation section of our website after the earnings conference call concludes.
I would like to turn the call over to Brian McKeon.

Brian Mckeon

Good morning, and welcome to our second quarter earnings call. Today, I'll take you through our Q2 results and review our updated financial outlook for 2024.
IDEXX delivered solid organic revenue growth and strong comparable profit gains in the second quarter in terms of highlights overall revenues increase 7% organically, supported by 7% organic growth and CAG Diagnostic recurring revenues and 10% organic (inaudible)
(inaudible) CAG revenue growth was driven by global benefits from IDEXX execution drivers, reflected in sustained (inaudible) second quarter premium instrument placements and double digit growth in recurring veterinary software and diagnostic imaging revenues.
Partially offsetting these benefits CAG Diagnostic recurring revenue growth in Q2 was constrained by impacts from near-term macro and sector headwinds, which contributed to a 2% decline in US same store clinical visit growth levels in the quarter.
IDEXX's operating performance reflected in solid comparable operating profit gains continued to be strong in Q2. EPS in the quarter was $2.44, down 9% as reported, including a $0.56 per share impact from the $62 million discrete expense accrual related to an ongoing litigation matter.
Comparable EPS growth was 15% in the quarter, the head of our expectations supported by solid gross margin gains and benefits from lower net interest costs and shares outstanding. IDEXX continues to make progress, expanding a business, advancing innovation agenda and delivering strong comparable profit gains as we work to nurture macro and sector headwind that continue to pressure clinical visit levels.
We've updated our 2024 financial outlook to incorporate recent sector trends, which we estimate at midpoint who constrained overall organic revenue growth to the lower end of our original organic growth guidance for 2024.
Our updated P&L guidance maintains our outlook for solid comparable operating marginal gains this year. In incorporates favorable adjustments were updated foreign exchange, net interest expense and effected tax rate instruments.
We'll review our updated guidance detail later in my comments. Let's begin with review of our second quarter results.
Second quarter organic revenue growth of 7%, reflecting a 7% organic CAG games, 10% organic growth in water, and improved 3% organic growth in our LPD business. CAG organic revenue growth was supported by 8% organic games and veterinary software and diagnostic imaging revenues, driven by 12% organic growth and recurring revenues.
CAG instrument revenue increased 5% organically, building on a high priority replacement levels. CAG Diagnostic recurring revenue increased 7% organically in Q2, supported by average global net price improvement of 5%, 5.5% with US net price realization at the lower end of this range.
CAG Diagnostic recurring revenue in Q2 was supported by 10% international organic gains, including approximately 1% of growth benefit from equivalent days effects in international regions.
Strong international growth reflects benefits from net price realization and continued solid volume games. International growth continues to be driven by IDEXX execution reflected in strong new business gains and high (inaudible) instrument placements, which supported the double digit year-on-year expansion of our global premium instrument installed base.
International growth continues to driven by IDEXX execution reflected in strong business gains and high premium instrument replacements, which supported the double digit year-on-year expansion of our global premium instrument installed base.
US CAG Diagnostic recurring revenue growth was 5.2% in Q2, net of a 0.5% US equivalent day growth headwind in the quarter. IDEXX growth was supported by solid new business games sustained high customer retention levels and benefits from net price realization.
IDEXX growth continues to expand at a high premium to US same-store clinical visit levels which decline 1.8% in Q2. In the US diagnostic utilization per clinical visit continues to expand (inaudible) at the clinic level. This reflected in a 7.5% year-on-year increase and diagnostic revenue dollars per clinical visit, including diagnostics.
Well, diagnostic frequency per clinical visit decline minus modestly in Q2, diagnostic frequency per wellness visit expanded 100 basis points.
This partially offset lower diagnostic frequency per non wellness visits. The decline in diagnostic frequency for non It's may reflect recent growth in fall clinical visits for pain management drug treatment, which may not include diagnostics. Adjusting for these effects would imply relatively softer comparable US clinical visit trends and a relatively higher IDEXX growth premium.
Overall, IDEXX continues to achieve solid organic revenue growth. And CAG Diagnostic revenues as we work through headwinds from broader cumulative macro impacts and consumers which are likely pressuring near term US clinical visit growth levels.
While we remain highly confident in the positive long term drivers of demand for diagnostics, including the future benefits that will flow from IDEXX innovation. We factored in expectations for continued pressure from lower US clinical visits in the second-half of 2024 and our updated full year organic growth outlook.
IDEXX execution drivers supported solid organic revenue growth across our modalities in Q2. IDEXX WetLab consumable revenues increased 8% organically, reflecting solid gains in the US and double digit growth in international regions.
Consumable gains were supported by 11% year-on-year growth at our global premium instrument install base, reflecting strong gains across our catalyst premium hematology and set of pupil outcomes.
We achieved the Q2 record 4,952 CAG premium instrument placements, an increase of 4% year on year compared to high prior year levels. These results were supported by continued strong growth in premium hematology and (inaudible) placements.
Prosite one momentum continues with the global prosite one installed base increasing to over 17,000 instruments. Global catalyst placements decreased year on year in the quarter, reflecting comparisons to high prior year placement levels and placement mix in international regions.
Global rapid assay revenues expanded 6% organically in Q2, driven by solid gains in the US, including benefits from higher net price realization. Global Lab revenues also increased 6% organically, reflecting solid US gains and high single-digit growth in international regions.
Veterinary software and diagnostic imaging revenues increased 12% as reported, including benefits from a recent greenline software and data platform acquisition. 8% overall organic revenue gains were driven by 12% organic growth in recurring revenues, reflecting benefits from ongoing momentum and cloud based software placements.
Water revenues increased 10% organically in Q2, driven by double-digit gains in the US and continued solid growth in Europe. Livestock, poultry and dairy revenues increased 3% organically. Continued solid gains in the US and Europe offset Lower Asia Pacific revenues.
Including impacts from reduced swine testing in China and lower third health screening revenues. Turning to the P&L, Q2 profit results were supported by gross margin gains. Gross profit increased 8% in the quarter as reported and 9% on a comparable basis.
Gross margins were 61.7% up 90 basis points on a comparable basis. Gross margin gains reflect benefits from net price realization offsetting inflationary cost impacts. Software service margin gains and favorable business mix.
On a reported basis, operating expenses increased 28% year on year, including 22% of growth impact related to the $62 million discrete litigation expense accrual reported in G&A. Excluding this impact, Q2 OpEx growth was in line with overall revenue growth, driven by increases in R&D spending aligned with advancing our innovation agenda, including new platform development.
On a reported basis, operating margins were 26.3% in the quarter, including a 610 basis point impact from the discrete litigation expense accrual. On a comparable basis, excluding this impact, operating margins increased approximately 110 basis points year on year in the quarter.
EPS was $2.44 per share in the quarter, a decrease of 9% as reported, including the $0.56 per share impact related to the discrete litigation expense accrual. EPS increased 15% on a comparable basis. Foreign exchange reduced revenues by approximately $7 million, operating profit by approximately $3 million and EPS by approximately $0.02 per share in the quarter, net of a $2 million hedge gain.
Free cash flow was $215 million in Q2, on trailing 12 month basis, our net income to free cash flow conversion ratio was 99%. For the full year, we're maintaining our outlook for free cash flow conversion of 90% to 95%, reflecting estimated capital spending of approximately $180 million.
Our balance sheet remains in a strong position. We ended the quarter with leverage ratios of 0.7 times gross and 0.4 times enough cash, as we continue to manage our balance sheet conservatively. We allocated $208 million in capital to share repurchases in the second quarter, supporting a 0.7% year-on-year reduction in diluted shares outstanding.
Turning to our 2024 guidance, we've updated our full year organic growth outlook to reflect expectations for continued pressure on US clinical visit trends in the second-half of 2024. Our P&L outlook reinforces our full year goals for solid comparable operating margin improvement and incorporates favorable adjustments to estimates for foreign exchange impacts, net interest expense and our effective tax rate.
Our updated full year guidance for reported revenues is $3,885 million to $3,945 million. A reduction of $15 million at midpoint. Our updated reported revenue outlook includes a favorable $15 million adjustment related to more recent foreign exchange estimates.
We've updated our four year guidance for overall organic revenue growth and CAG diagnostic organic recurring revenue growth to 6.2% to 7.8%, approximately 7% at midpoint. Our outlook for overall organic revenue growth continues to reflect expectations for solid CAG diagnostics with current revenue gains supported by IDEXX execution.
This includes consistent expectations for full year and global net price improvement of approximately 5%. Our updated organic growth outlook at midpoint assumes IDEXX execution growth benefits will be partially offset by continued pressure on US clinical visit levels in the second-half of this year. Similar to first half trends.
We expect our each [shoe] organic revenue growth results will benefit by approximately 0.5% overall from equivalent days effects. Reflecting 1% to 1.5% organic growth rate benefits in Q3. In terms of our profit guidance, our updated outlook incorporates impacts from the discrete litigation expense accrual, which we estimate will reduce full year reported operating margins by approximately 160 basis points and EPS by $0.56 per share.
We will normalize for the effects of this accrual in setting our 2025 financial performance goals. Incorporating these impacts, our updated reported operating margin outlook is 28.7% to 29.0%. This reflects a consistent 40 basis point improvement in comparable operating margins at midpoint net of a negative 40 basis point impact related to lapping of the Q1 2023 customer contract resolution payment.
Our updated four year EPS outlook at $10.31 to $10.59 per share is down $0.56 per share at midpoint, reflecting the impact from the discrete litigation expense are [cool]. Adjustments to our organic revenue growth outlook reduced our operational EPS estimates by approximately $0.08 per share of midpoint, which is offset by approximately 0.04 and favorable foreign exchange adjustments and positive below the line benefits from refinements to our net interest expense and effective tax rate outlook.
We now estimate foreign exchange will reduce full year revenue growth by approximately 0.5% and EPS by approximately $0.05 per share. In terms of our outlook for Q3, we're planning for reported revenue growth of 6% to 8% net of an estimated 1% growth headwind from foreign exchange and incorporating approximately 0.5% in growth benefits from our recent software acquisition.
This outlook aligns with an organic revenue growth range of approximately 6.5% to 8.5%, including approximately 1% to 1.5% of growth benefit from equivalent days effects.
We're planning for reported operating margins of 29.5% to 30.0% in Q3, down moderately on a comparable basis. This factors in year in year comparisons to relatively lower prior year sales and marketing expense levels and projections for continued high year-on-year growth in re spending including support of new platform advancement.
That concludes our financial review. I'll now turn the call over to Jay for his comments.

Jonathan Mazelsky

Thank you, Brian, and good morning. Index delivered excellent performance against our strategic priorities and strong operational results in the second quarter as we drive development to the companion animal diagnostics sector to a new wave of innovation and high quality customer engagement.
These outcomes reflect high levels of execution and position index to benefit from long term growth tailwinds, including growth in the pet population, increased pet lifespans and an ever strengthening bond between pet owners in their pets.
Is enduring dynamics combined to elevate the importance of medical services and drive global expansion of companion animal diagnostics and software. As an innovation leader, IDEXX growth continues to outpace the sector as we help our customers grow faster. Our progress is reflected in solid second quarter CAG Diagnostics recurring revenue growth. Supported by key execution drivers.
This includes continued solid new business gains sustained high 97% plus customer retention rates and solid net price realization aligned with the value we deliver. IDEXX is focused on innovation and companion animal diagnostics has resulted in a highly compelling portfolio of products and services.
For our highly capable commercial teams to support our customer. This combination helped drive record second quarter global premium instrument placements, a double digit growth at our installed base of premium instruments the five consecutive quarters of double digit CAG Diagnostics recurring revenue growth in Europe.
We're delivering this performance as we work through some transitional growth headwinds that continue to pressure clinical visit growth. This includes ongoing staffing and productivity challenges as well as broader impacts on pet owners in the current macro environment as we work through these dynamics, we're continuing to deliver solid growth ahead of sector levels.
Our customer engagement is helping to support gains in diagnostics, frequency and wellness visits and continued expansion of diagnostics utilization per clinical business. Our customers increasingly appreciate that healthy and sustainable clinic growth begins with diagnostics. You can't assess basic health status or treat sick patients without first diagnosing and treatments then require follow up monitoring.
This has been our long term focus and we see significant underserved demand for an expanding pet population that will support long term growth for our customers in support of their mission. Today I'll give an update, on IDEXX's commercial execution and progress against our innovation strategy. IDEXX commercial teams delivered record second quarter global premium instrument placements growing off high prior year levels.
A key driver of this growth was high interest in IDEXX products and international region. Continued solid new and competitive catalyst placements and strong placement growth of pro site and [city] view analyzers coupled with high levels of retention and an excellent customer experience helped deliver double-digit growth in our worldwide premium instrument installed base.
Growth of our loyal installed base formed the foundation for our future recurring revenues and a significant long term opportunity for growth in CAG Diagnostics recurring revenues. (inaudible) is a great example of our continued momentum and expanding our customers businesses through innovation.
I'd like sales professionals continue to support customers looking to upgrade from our legacy laser sight system to pro sight one in order to realize multiple benefits from load and go reagents that simplify workflow to a smaller footprint. It frees up valuable bench top space in inventory benefits due to its paper run model with automated fulfillment by IDEXX.
In addition to driving a better customer experience, IDEXX benefits from these upgrades in the form of increased loyalty and higher CAG Diagnostics. Recurring revenues of customers who upgrade. This customer interest and commercial effort helped drive our pro-site one installed base to over 17,000 in just 3.5 years, since this product launch.
Upgrading to Pro-site one while also position these customers to benefit from the most comprehensive point of care hematology result when combined with in view DX blood morphology. While we are gratified by the consistent high levels of placements that our commercial teams deliver, we also focus on quality placements that will drive the most incremental value to IDEXX in the form of future recurring revenues.
As an example, continued high placements at greenfield accounts drive significant value as these new customers are fully incremental to IDEXX. Our commercial teams are well equipped to have these initial conversations with denovo clinics and sustained high interest at our new practice program reflects their desire to partner with IDEXX as they launch their businesses.
IDEXX's commercial success reflects our long term focus on bringing a high touch direct commercial model that includes a broad set of complementary roles including account managers, professional service veterinarians and the largest in person field service workforce in the industry. I'm also pleased to share that the entire North American commercial team met in person for several days in July to receive in-depth training on our latest innovations including Catalyst, pancreatic lipase test and IDEXX inVue Dx cellular analyzer, as we prepare for the successful commercialization of a significant new wave of innovation.
Our commercial teams are highly excited to begin taking orders for inVue Dx, the formal start of the commercialization process. IDEXX and inVue Dx, Cellular analyzer remains on track for a launch in the 4 quarter. IDEXX product development teams have moved to the infield product validation stage to ensure early customers who adopt this transformational platform can seamlessly integrate in view into their practice workflows and have the positive user experience they've come to expect from IDEXX products and services.
We are seeing encouraging early performance and utilization metrics among the small number of analyzers currently being trialed in the field. Customers are praising the usability of in view with all sites commenting that the workflow is intuitive and simple and the results are consistent which will help them see more patients that drive clinic visit volume growth.
I'm excited to provide more updates on inVue Dx and IDEXX is broader innovation agenda at our upcoming annual Investor Day later this month. We're also on track to launch the recently announced catalyst pancreatic lipase test in the US in the third quarter and globally in Q4.
The catalyst pancreatic lipase test, a single slide solution for canine and feline patients, suspected pancreatitis, represents a 10 menu addition to the catalyst platform since 2012. (inaudible) is a common and treatable disease among cats and dogs which can prove fatal if not caught early.
Therefore, equipping veterinarians with quantitative results during the patient visit enables them to competently diagnose and define the treatment envelope, while the pet parent is still in the examination room.
Our technology for life approach and the cloud enabled in clinic analyzers allow us to quickly ramp this highly relevant tests to our more than 70,000 global catalyst installed base. In addition to the new catalyst, by pace test, we'll begin shipping the catalyst smart QC clip in Q4.
Customers are thrilled by the ability to run monthly QC's with a plug and go solution, in under 15 minutes catalyst smart QC is a great example of how our innovation is sometimes targeted at workflow optimization versus just test menu expansion.
We have also begun rolling out the next generation of our industry-leading [IVLS] software and expect to have our installed base transition before inVue Dx begins shipping. This next generation takes our industry-leading IDEXX VetLab software and meaningfully improves the user interface and halves the number of steps needed to perform many common tasks.
IDEXX software solutions are another area that delivers innovation driven growth that addresses solutions that both improve clinic workflows and support greater utilization of diagnostics. Demand for intuitive cloud based software solution remains high among the customer base that is increasingly reflective of younger generations who are digitally native.
By leaning into this trend, IDEXX is well positioned to continue to deliver a seamlessly integrated software ecosystem that provides efficiency gains, the workflow and communication solutions, Q2 practice management orders were almost entirely cloud based. Building the foundation for strong future growth of economically attractive recurring revenues.
IDEXX is attractive cloud based solutions extend further benefiting many areas of the practice, facilitating payments, delivering digital workflow tools and delivering an integrated pet owner engagement solutions are just a few examples of how we're providing a robust software stack that is a win, win delivering improved clinic productivity, while driving incremental recurring revenues IDEXX, for example, our recent launch of Vello, the pet owner engagement application provides a first of its kind pet owner engagement tool that is natively integrated into the practice management system.
High interest in Vello is helping fill the sales pipeline and driving a solid increase in active customers in the first full quarter, since launching the product. These customers are experiencing the benefits we saw in our early beta testers from reduced no shows to better compliance during clinical visit.
As this customer base grows over the long term, we see significant opportunity for Vello to help address the productivity challenges that exist at so many busy veterinary clinics, which is a meaningful benefit to our sector. We're building on the robust features of our customer engagement solution by integrating greenline into our portfolio.
Acquired in the first quarter greenline pet is a leading digital platform that provides easy practice workflow solutions for coupon and rebate redemption. The tool provides veterinary clinics with the ability to connect their customers with leading animal health, pharmaceutical and nutrition providers, making it easier for pet owners to take exceptional care of their pets.
These higher standards of care reflect the sector development that is at the center of our long term organic growth strategy. And as the sector grows, we expect IDEXX had turned to grow even faster, disproportionately benefiting us as the leader in the space.
As we conclude our prepared remarks, I'd like to thank the nearly 11,000 global IDEXX employees for your outstanding work and commitment to providing a better future for animals, people and our planet. Your contributions are essential to the progress we've made against our organic growth strategy and to delivering another quarter of strong financial performance.
Thanks to your efforts, IDEXX is well positioned to build on this momentum through the second-half of 2024 and well beyond as we continue to lead the development of the companion animal diagnostics sector. Before we open the line for Q&A, I'd like to remind you that we will be hosting our annual Investor Day later this month, beginning with the management dinner on Wednesday, August 14, followed by presentations at our global headquarters in Westbrook Maine on Thursday, August 15 at 8:00 AM.
Thursday's event will also be live streamed and recorded via idexx.com for those who cannot make it in person. This is an exciting opportunity for IDEXX leaders to provide a comprehensive update on our strategy long term growth opportunity, innovation cycle and execution drivers.
Participating will be members of my senior management team. Including Dr. Tina Hunt, Executive Vice President, Strategy Sector Development and Global Operations; Dr. Mike Erickson, Executive Vice President and General Manager point of CAG diagnostics and telemedicine; Mike Lane, Executive Vice President and General Manager, Reference Laboratories and Information Technology; Michael Schreck, Executive Vice President and General Manager, Veterinary Software and Services; George Fennell, Senior Vice President, Chief Revenue Officer; and Brian McKeon, Executive Vice President and CFO.
The event will last approximately 4 hours and will conclude with the Q&A session. With that, we'll end the prepared section of the call and open the line for. Q&A.

Question and Answer Session

Operator

(Operator Instructions) Chris Schott, JPMorgan.

Christopher Schott

Great. Thanks so much for the question. That's kind of have two parts around visit. I guess, first is what do you think in your views the biggest delta between the outlook you gave in Q1 and the outlook u gave today in terms of what's happened to the market over the past few months?
And the second part of that is probably more forward looking are you still confident and I guess the more traditional kind of 2% or 3% that visit growth rate as being an appropriate target overtime. And maybe just help bridge us from what we're seeing today to what needs to happen to get back to that more traditional growth. Thank you.

Brian Mckeon

Excellent question, Chris. I think just revisiting the outlook that we had given earlier in the year, we saw roughly 150 basis points of headwind coming out of the first quarter and carrying that through our assumptions in the second quarter in the US in terms of clinical visit.
And highlighted as we had coming out of 2023 that we think would be a flattening of trends overtime. We had anticipated seeing some normalization with staffing effects and kind of working through some of those dynamics and thought that the clinic outlook would flatten. I think that as we work through Q2, we've continued to see level of headwinds, I think we're acknowledging that there may be some macro dynamics going on here that we're working through and trying to capture that in the second-half outlook.
So that's the principle change, I'll let Jay talk more about the long term drivers, but we continue to see a number of very positive long term drivers for growth and demand and pet healthcare including visit trends. And so we'll talk more about that at Investor Day, but we continue to have a very optimistic long term outlook for the growth potential in the sector.

Jonathan Mazelsky

Yeah, good morning, Chris, just a couple words about the long term trends, as Brian said, we continue to be very optimistic about that. All the longer term sort of secular tailwinds we believe are in tactics obviously starts with the overall humanization of pets and that continues to strengthen.
Appreciably and increasingly among the younger household owning pet, where from a demographic standpoint, what they've shown both in terms of intent in actual actions is willing to spend more and prioritize, these are the categories like travel, entertainment, going out.
There's obviously a lot more pets, so from a net adoption standpoint, if you take a look at this, this is really a global phenomena. They're more in aging and we know that as they age, more generally spend from a both a healthcare overall healthcare standpoint as well as diagnostics.
Longer lifespans will provide an update on that and investigate. But we know both dogs and cats are living longer and it's good thing for both the pets as well as the overall spend. And again back to the prioritization, we think that this is a very resilient market that the owners are willing to spend and prioritize birth for the care and well-being of their pets.
Maybe on a shorter term basis, just a couple of comments based on a number of ongoing conversations we have with veterinary practices, they're very optimistic in terms of demand and the work that they're doing, they think they've made progress coming out of the pandemic around really retaining their staff, creating a more sustainable environment for both veterinarians and the veterinary technicians amongst their team, they continue to invest in technology. We've seen that both from a software standpoint as well as the point of care record placements in Q2.
As we said in our commentary, there are some high level macro impacts that are affecting likely at the margin, some moderation in clinical visits, but we're confident that we'll work through it that we're working through it effectively as our customers.

Operator

Michael Ryskin, Bank of America.

MichaeL Ryskin

Hey, thanks guys. Kind of want to follow up on that topic, but take it from a different perspective. Brian, Jay, during your prepared remarks, you talked about maybe shifting vet dynamics and you highlighted some of the diagnostics utilization trends and wellness visits versus non wellness. I think you were kind of calling out that you are seeing less diagnostic in non-wellness because pain management, we assume (inaudible) is ramping.
So those visits where people come in just get the shot and then walk out without any diagnostics tied to that. As part of that trend I'm just wondering if maybe we could be seeing a broader shift in that channel dynamics, the pain management issue you mentioned, there's also continuing shift to the online marketplace for therapeutics.
All this can kind of lead to potentially less opportunity for diagnostics in the clinic's office because pet owners are getting their care elsewhere. I'm just wondering how you see that care delivery channel evolving and whether that could be having an impact, to the growth profile.
And then I'll throw in my follow question at the same time, you've updated the guide for this year to 7% organic, you did rounding 9% last year and 7.5% the year before, so this is now kind of a three-year trend of pretty far below the LRP of 10% plus. We talked about vet visits. There was a point where there was a lot of concern on vet supply in terms of insufficient vets and technicians out there.
But it just seems like this macro headwind continues to persist and refuses to get better. I'm just wondering outside of pricing what levers do you have to regain that 10% plus LRP and just confidence that you'll be able to get back there in 2025? Thanks.

Brian Mckeon

Why don't I start with your final question, because I think that will help the center the discussion around visit trends, which I think you know was -- which the first party question related to Mike, just in terms of the growth trends for the company, I think it's important to put them in the context of this post pandemic period.
I mean, we had a 33% expansion of the business between 2020 and 2021. I would say the dynamic in 2022 that kind of played into the first half of 2023 was this capacity pullback effect at the clinics where they had trouble keeping up with the expanded demand and it was fundamentally an impact on clinical visits.
So we went from a positive 5% clinical visit environment to a minus 3% environment in a relatively short period of time, and I think that, that was not foundational to the demand in the industry, I think it was capacity dynamic and this transition from this extraordinary period of grow.
And I think as we move forward from that, I think there has been kind of an ongoing dynamic again in this post pandemic period related to staffing challenges and what has become a cumulative inflation impact on consumers broadly that's causing level trade off.
And all paths lead back to the fundamental dynamic that's changed his business and I think our premium has been quite healthy. Our placements -- net new business gains, customer retention, all the dimensions that we look at in terms of how we're executing the business, we feel very good about. And we feel great about our innovation pipeline.
So I think there are as we look forward and the you question you had about, moving ahead, I think we see positive long term drivers in terms of sector trends and things that we're doing to drive demand in the business as well. So we feel very good about that.
While acknowledging that we've been working through clinical visit issues, so you know, getting to some of the specifics that we highlighted this morning, I think one of the things we were trying to peel apart here on the visits was, as you know, we look in the US at the visit changes on the same store level, diagnostic -- frequency diagnostic utilization.
And I think we do see some level of an impact on these metrics related to the pain meds we try to pull this apart and look at the frequency, on wellness visits, they're actually up year on year 100 basis points and that's been actually a trend we've seen for several quarters now.
So a very healthy dynamic win. When pet owners are coming into the clinic, they're doing more diagnostic testing. On non well assessing those metrics we're holding up through last year and where we started to see was change in those metrics beginning in Q4 and into the first half of this year, which aligns with the labella (inaudible) kind of launch and kind of penetration.
And so net, net, we didn't quantify this specifically, but basically the frequency metric which had built off of that high base expanded base in the pandemic. We think when you adjust for these type of dynamics to the [payment] dynamics, it's probably sustained continue to expand and it might indicate there's a bit more weakness on the clinical visit front, particularly in non-wellness and I think that's indicative of the macro headwinds that we've been highlighting,
so I again, I think this is from our view not foundational to our strategy or execution bit more reflective of just the macro and the sector environment we're at the moment.

Jonathan Mazelsky

Mike, let me let me address a couple of other questions you had embedded in there. First around the alternate channels of care. What we see from an alternate channel venue standpoint is it's largely complementary. I'm referring to some of the bricks and mortar places like tractor supplier or head IQ and some of the clinics they have. Where these are pet owners and pets that don't often have relationships with veterinarians.
Keep in mind, a lot of the pharmaceutical and therapeutics have to go through the vendor, and there's a good deal of medicine involved in terms of testing and diagnostics and follow up that really require a professional expertise. So we think that a very positive thing.
And in terms of your question around levers that can positively impact growth, we continue to say just to build off of Brian's comments and observations that innovation is just so important to this industry, not just in the not just from the standpoint of diagnostics and software therapeutics and specialty diets all of those things.
We know that practices that have a lot of unmet business needs, but also unsolved clinical problems. We're diagnostic solution very big impactful contribution, but you think about you can't treat, before you diagnose. You can't assess just basic health line status of the pet when you do diagnose and the patient has an acute condition or chronic condition and often requires follow up monitoring.
So continue to innovate and work at the front end of a brand new wave of innovation, some of which we've announced, including InVue [shipping] in Q4 and Smart QC and pancreatic lipase or our catalyst platforms, VetLab software to staff and be this just a significant amount of innovation that veterinarians could use as part of their tool set to continue to treat patients better.
And we know that they look for that and as these short term challenges are mitigated from a practice capacity challenge as well as the macro impacts that we believe that the growth prospects are excellent for the company.

Operator

Erin Wright, Morgan Stanley.

Erin Wright

Okay, thanks. If you can speak to it, I guess, what was the nature of the legal charge and what's ongoing there? Is that a customer related relationship? Is there more to come on that front? And then and then your ability though to control cost here is impressive and that's obviously excluding the legal charge and in the quarter, but can you talk about those levers you have to control cost and your ability to do that until what we see -- until we see kind of things normalized from a market perspective? Thanks.

Brian Mckeon

Great. Thanks for your question, Erin. Regarding the ongoing litigation matter as we noted, we had a $62 million discrete expense in the quarter. As a policy, we don't comment on ongoing litigation matters. We did include disclosures in the footnotes of the press release and we have as well disclosures that you can refer to in our first quarter 10-Q and in our second quarter 10-Q in terms of the nature of this, but this was a an issue related to royalty payments overtime and we are -- what we've updated is our best estimate of the probable loss from that matter.
In terms of your question on operating expense leverage, I think adjusting for these items, I think you can see that we've continue to do a good job of adapting our business financial performance to the growth environment that we're working through in terms of some of the sector headwinds for delivering strong execution, strong underlying comparable operating margin gains.
We had expense growth that was basically in line with their revenue growth and very much focused on the things that we're doing to drive future growth through R&D agenda and our commercial investments. So we, -- as we've done consistently in the past, we have the ability to adapt and I'm sure we're prioritized against our long term growth while delivering good financial performance. And we're able to do that again in the first half and that's reinforced in our full year outlook as well.

Jonathan Mazelsky

Couple of if may. Just a couple of words that to add to Brian's comments around the overall cost management. We continue to invest very heavily in those areas that we think are important to the long term growth, the company, R&D, obviously we're working through some significant new innovations and so we don't want to starve that and we're feeding that where there are commercial investments from territory expansion standpoint.
We're obviously very excited to be able to invest in those areas. We see a very good return. What I would also say from a business and business model standpoint, these are businesses that have scale and that lend themselves the productivity, investments from an automation and digitization standpoint and just overall network standpoint whether you look at the reference labs.
Obviously the software business for us is a fast growing business with very good drop through and so that's a another lover that we have. But we're disciplined we're able to adjust our expense and expense profile to whatever environment we're in.

Erin Wright

And then my follow-up is on innovation. And can you just remind us what's embedded in your guidance as it relates to in view contribution this year? And it sounds like you're still on track in terms of your timing, but also FNA when you anticipate that launch. And then also the timing of where you stand in terms of your other platform launch. I guess should we expect to hear something about that potentially at your Investor Day? Thanks.

Brian Mckeon

Erin, just to your point on the guidance, we've captured the expectations for the Q4 launch of InVue and as you know, it's principally an instrument introduction at that point the recurring revenue will build overtime.

Jonathan Mazelsky

And as is our policy, we'll talk about innovations as we get closer but the last week, look forward to Investor Day, and we'll just provide an update in terms of the overall company strategy and where we are from an innovation agenda standpoint. So look forward to having that conversation.

Operator

Jonathan Block, Stifel.

Jonathan Block

Thanks guys. Good morning. I'll just break apart my questions. I guess, Brian or Jay, I get the ongoing headwind from clinical visits, but when we isolate the US IDEXX, CAGEXX recurring premium that we've laid out a bunch of times. In other words, it's one looks at the growth x visits x price.
I get a premium of around 250 basis points this quarter. It's the lowest I can remember. It looks like an ongoing deceleration for roughly the past ten quarters. So can you talk to that trend and what might be behind it? And then importantly, should we see that trend start to reverse course arguably in '25 in the earlier days of the InVue launch and I'll ask my follow up? Thanks.

Brian Mckeon

Yeah, thanks. Thanks for your question, Jon. I think we've increasingly kind of broken down these metrics on an adjusted basis, we have a similar number to what you have. If you're taking out the price and the days effects and comparing to clinical visits about 250 basis points, I think one item we noted, which I know you've been noting in your research, is there is this dynamic of the pain med a follow up visits which we capture in our visit number.
And so I think that could, particularly in the first half of this year be indicate that the underlying visits themselves may be a bit softer relative to visits that would have diagnostics and the premium might be that much stronger. So I think that the net of that as the premiums held up quite well from our lens, I think that we feel good about the key things that drive that, the net new business gains, customer retention levels.
Obviously had solid net price realization aligned with the value we're delivering. And so I think we're feel positive on that front and factors like introduction of innovation are critical to helping to increase engagement with our customers to get the multiplier benefits that come from medics innovation and leverage of our ecosystem, and so I think we're looking forward to the InVue launch and the other initiatives that Jay had highlighted and be that as something that can be, intended to be a positive long term driver for us.
I'd also highlight just the solid performance internationally as well for the company. So it was 10% overall growth organically CAGEXX recurring, there was about a day's percent of days had a benefit, but very solid growth. Volume growth continues to be very positive and we had excellent progress on instrument placements, which will be a strong indicator of our long term growth potential.
So I think we're feeling very good about the execution metrics and as we work through some of the visit headwinds that we violated.

Jonathan Block

That's great color. Thanks, Brian. And for my second one, look you guys have done a great job in this year holding the EPS in light of the lighter revenue and some tax and some interest expense. How do we view that Brian, is it just better call overall efficiency from the company or do we think about any projects or initiatives that might come out of '24 and going to '25?
And then the second sort of tack on question would be, Jay just taking a step back and this goes back to sort of that pain meds thesis that we had a little bit. But is there anything to concerning about call like a wallet share battle, right?
I mean just the fact that a pet owner might be spending $1000 in cash on pain meds per annum or atopic dermatitis per annum and when we think about some of the potential accompanying diagnostic testing that, that might suffer around the edges. Thanks for your time guys.

Jonathan Mazelsky

Yeah, let me answer to your second question first and then I'll turn the front end part of the question to Brian. We aren't concerned about that. We from a diagnostics utilization standpoint, we think it remains pretty constant from the launch of the pain meds themselves, primarily a patient visit growth phenomenon that we spoke to related to some of capacity challenges that practices are working through as well as the macroeconomic impacts.
When you take a look at wellness, you know for example, we're seeing the diagnostic conclusion up 100 basis points and Brian spoke to the effect of pay meds on non-wellness, which is where we catalogue -- characterize that. So when they're coming into the practice, they're using diagnostics and they're using diagnostics both for wellness and non-wellness. So we haven't seen any evidence of that cannibalization impact.

Brian Mckeon

Hey, John, your question on margins, if I got that right, I think if the underlying performance that we've had this year reflects a solid gross margin momentum. There are number of drivers there. I think we've had ongoing benefits from cost management, things like lab productivity initiatives, the software business as it's growing extremely helpful to us.
The business mix overall just, saw groping CAG diagnostic revenues and growth in in clinic revenues as a positive factor and so just ongoing productivity in our operations function coming out for a period where there was relatively more inflation.
So I think we feel -- that's been a consistent driver for us as a company and we look forward to building on that as a foundation of how we can continue to improve our comparable operating margin performance.

Operator

David Westenberg, Piper Sandler.

David Westenberg

Hi, thank you for taking the question. And I'm going to again continue the theme about OpEx management and maybe slowing growth relative to history. So just as we look, I mean I've tracked your market share gains over the last 10 years and in reference lab, I think I've seen from like [40] to into the [50s].
In terms of market share gains, do you think that we still have a lot of that left or do you think that most of the growth is going to have to via innovation and maybe just creating growth in new markets and really work on utilization in clinic.
And then I'll just ask my second question up front. I usually when I look at gross margins, you did beat me by 70 basis points. I usually look at consumables and reference lab as being the big drivers. I think one of the -- only one of those beat me so just in terms of how you kind of got to them that on, gross margin leverage. Thank you.

Jonathan Mazelsky

I'll take the front end of your question and have Brian address the gross margin piece. David, if you take a look through the years, most of our growth actually comes through same store sales. So we do very well competitively. We're pretty transparent in terms of disclosing placements, and progress we make.
But we look from a growth algorithm standpoint to drive diagnostics, utilization. Now a lot of that happened through innovation. There's also a big technology for life component of it. If you think about catalysts for example.
10 new parameters, 10 new slides over the last 12 years. So we know customers are just using more of that with more value connected with it and that feeds into the growth profile of the company. From a reference lab standpoint, the same phenomenon, if you think about (inaudible) imaging as an example, it's quick growing category within our reference lab business. Very important foundational part of wellness.
We continue to expand that menu tapes and more recently, just though Isospora, so it's used more because it has more political value. That's how we think about it. Obviously new platforms open up a completely new greenfield space for us and that's another element of our growth algorithm and that Investor Day, Brian always he always dissects or put some of the pieces together to show where that growth comes from US and internationally.

Brian Mckeon

Yeah. Dave, in your margin question, I think in the quarter, we highlighted that we had benefits from net prior serialization that offset inflationary cost impacts, software service margin gains and favorable business mix, which is driven by solid vet lab growth. I would highlight, I think we had strong lab margins in the prior year and part of that was we were ramping staffing.
So I think some of the lab margins, so the underlying productivity is very good. It was muted by a bit of a compare dynamic, but I think overall feel very good about the gross margin performance.

Jonathan Mazelsky

Now we'll conclude the Q&A portion of the call. Thank you to everyone on the phone for your participation in this morning's event. I'm very pleased to share another quarter of solid financial results as we continue to advance our strategy to drive development to the companion animal diagnostics sector and unwavering focus on innovation in our customers.
Looking ahead, we remain excited about the significant long term opportunity to enhance standards of care for companion animals. And so with that, we'll conclude the call. We look forward to seeing many of you at Investor Day. Thank you.

Operator

This concludes today's call. Thank you again for your participation. You may now disconnect and have a great day.