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Idexx Laboratories (IDXX) Q4 2021 Earnings Call Transcript

Dec 2, 2022

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Idexx Laboratories (NASDAQ:IDXX) Q4 2021 Earnings Call Feb 02, 2022, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, and welcome to the IDEXX Laboratories fourth quarter 2021 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, 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 fourth quarter 2021 results, please note, all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2020, unless otherwise noted. [Operator instructions] I would now like to turn the call over to Brian McKeon.

Brian McKeon -- Chief Financial Officer

Good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2021 results and to provide an overview of our financial outlook for 2022. In terms of highlights, IDEXX delivered excellent financial performance in Q4, driven by double-digit top line gains compared to very strong prior-year results. Revenue increased 11% as reported and 10.5% organically supported by 13% organic growth in CAG Diagnostics recurring revenues.

Two-year average annual organic growth for CAG diagnostic recurring revenues was approximately 17% across U.S. and international regions, consistent with the accelerated two-year growth trends seen throughout 2021. We achieved record premium instrument placements in Q4, with strong gains across our major platforms, supporting a 14% year-on-year expansion of our global premium instrument base. Strong revenue growth enabled delivery of $1.89 in EPS, up 12% on a comparable basis as we advance planned investments in our commercial and innovation capability.

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Flow-through benefits from high organic revenue growth in 2021 drove outstanding full year financial performance above our long-term goals. IDEXX achieved 16% overall organic revenue growth for the full year, driven by 18% gains in CAG Diagnostics recurring revenues. Full year operating margins reached 29%, an increase of 220 basis points on a comparable basis. And we delivered full year EPS of $8.60 per share, up 29% on a comparable basis.

We're well positioned to build on this strong financial performance in 2022. We're targeting revenue gains at the higher end of our long-term goals, reflected in our outlook for 10% to 12% overall organic revenue growth and 12% to 14% organic growth in CAG Diagnostics recurring revenues. We're also targeting 50 to 100 basis point improvement in operating margins on a comparable basis, building on the strong profit gains through the pandemic as we continue to invest toward the long-term development of companion animal healthcare globally. Our EPS outlook of $9.27 to $9.59 per share reflects 12% to 16% comparable EPS growth, including an estimated $0.15 per share or 2% EPS growth impact related to higher projected international tax rates.

We'll discuss our 2022 financial outlook later in my comments. Let's begin with a review of our fourth quarter and full year results. Fourth quarter organic revenue growth of 10.5% was driven by 13% overall CAG gains and 13% growth in our Water business. These gains were moderated as expected by a 19% organic decline in LPD revenues, reflecting comparisons to high prior-year results that benefited from the ramping of African swine fever testing in China, as well as by a $5 million year-on-year decline in human COVID PCR testing revenues.

Strong CAG Diagnostic recurring revenue growth reflected 13% organic gains across U.S. and international regions compared to 21% organic growth levels in the fourth quarter of 2020. Strong Q4 and CAG results were also supported by 21% gains in IDEXX VetLab instrument revenues and 13% organic growth in veterinary software and diagnostic imaging revenues in addition to benefits from our recent ezyVet acquisition. For the full year 2021, overall CAG revenues increased 19% organically, driven by 18% organic growth in CAG Diagnostic recurring revenues, reflecting high gains across our major modalities and regions.

Strong U.S. CAG Diagnostics recurring revenue growth in the fourth quarter was aided by solid year-on-year gains in clinical visits and continued positive demand trends, which are supporting high levels of clinical revenue growth at the practice level. Same-store U.S. clinical visit growth was 2.2% in Q4 compared to high prior-year growth levels.

On a two-year basis, U.S. same-store clinical business increased at 5.5%, with solid gains across wellness and non-wellness categories. An increased focus on healthcare services, including diagnostics, supported an 8% same-store increase in overall veterinary clinic revenues in Q4 and nearly 10% gains in clinical diagnostic revenues, which increased 14% on an average two-year basis. Expanding demand for clinical services and benefits from IDEXX innovation and commercial engagement, supported a 1,050 basis point premium of IDEXX U.S.

CAG Diagnostic recurring revenue growth to U.S. clinical visit growth in the quarter. In terms of practice level trends, we did see some modest impact from the recent omicron wave on clinical testing volumes in international regions in Q4, which has continued in early 2022. We've also seen some moderation in clinic visit growth in January in the U.S., including near-term impacts from higher COVID cases on practice level staffing.

We're monitoring these dynamics, which we don't see as indicative of changes in strong underlying demand trends. Globally, IDEXX achieved strong organic gains across our major testing modalities in Q4, resulting in exceptional full year growth results. IDEXX global reference lab revenues increased 12% organically in Q4, reflecting double-digit gains in the U.S. and high single-digit organic growth in international regions compared to strong prior-year growth levels.

Reference Lab gains continue to be driven by solid same-store volume growth, including benefits from the expansion of IDEXX 360 program agreements. For the full year 2021, Global Lab revenues increased 70% organically, reflecting consistent high gains across U.S. and international regions. IDEXX VetLab consumable revenues increased 15% on an organic basis in Q4, reflecting double-digit gains across U.S.

and international regions. Strong consumable growth reflects increases in testing utilization, sustained high customer retention levels and expansion of our global premium instrument installed base. These dynamics supported 20% full year organic growth at IDEXX VetLab consumable revenues in 2021. IDEXX had another quarter of outstanding instrument placements building on this momentum.

We achieved 5,258 premium instrument placements in Q4, up 29% from prior-year levels, reflecting robust gains across U.S. and international regions. We achieved strong global placement growth across our major platforms year on year, with Catalyst up 8%; SediVue up 20%; and premium hematology up 72%, supported by the continued global rollout of ProCyte One. The breadth and quality of CAG instrument placements supported strong gains in our economic value metric.

New instrument placements and continued very high customer retention levels drove a 14% increase in our global premium instrument installed base in 2021, setting a foundation for continued strong consumable growth as we move forward. Rapid Assay revenue increased 10% organically in Q4, reflecting continued solid gains in the U.S., aligned with broader increases in demand for diagnostic testing and high growth in international regions. For the full year 2021, Rapid Assay organic revenue growth was 17%, supported by high volume gains for canine 4Dx feline and specialty testing. CAG Diagnostic recurring revenue growth remains primarily volume-driven, augmented by moderate net price improvement of approximately 3% in key regions like the U.S.

Looking ahead to 2022, we're planning for a net price improvement in the range of 3% to 4%, reflecting higher list price increases to reflect higher service costs and continued investment in service quality and product innovation. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 13% organically and 30% as reported in Q4, including benefits from the ezyVet acquisition. Continued strong gains in recurring software and diagnostic imaging services and high comparable growth in PIMS placements were moderated to a degree by tough compares related to strong prior year diagnostic imaging placements. For the full year 2021, veterinary software and diagnostic imaging revenues expanded to over $200 million, up 15% organically and 27% as reported, as we continue to advance the integration of information technology and insight as a key feature of our diagnostic solutions.

Turning to other business segments. Water revenues increased 13% organically in Q4 compared to flat organic growth in last year's fourth quarter as this business continues to track back toward pre-COVID growth levels. Business growth was supported by solid gains across compliance and noncompliance testing categories. For the full year 2021, Water revenues increased 12% organically compared to a 2% organic decline in 2020.

Livestock, Poultry and Dairy revenues decreased 90% organically in Q4 compared to 13% organic growth levels in Q4 of 2020. As expected, dynamics in our China LPD business, including the lapping of high prior-year demand for African swine fever testing offset growth in other global regions. For the full year 2021, LPD revenues declined 9% organically compared to 11% gains in 2020. We're planning for continued challenging year-on-year comparison in LPD revenues in the first half of 2022, which is factored into our overall revenue outlook.

Turning to the PL. Sustained high revenue growth drove solid operating profit gains compared to strong prior-year levels as we advance planned investments aligned with our growth strategy. Operating profits increased 8% as reported and 9% on a comparable basis in Q4, driven by continued solid gross profit gains. Gross profit increased 12% in the quarter, reflecting strong revenue growth and a modest overall increase in gross margins.

We benefited from continued high CAG Diagnostic recurring revenue growth, moderate net price improvement and higher veterinary software margins, including positive impacts from our expanding SaaS customer base. These factors were moderated by business mix impacts from high CAG instrument revenue growth and lower LPD and human PCR revenues. Operating expenses increased 15% on a reported and comparable basis in Q4. As planned, we saw relatively higher levels of operating expense growth as we advanced investments in RD, enhanced our global CAG sales and marketing capability, and integrated the ezyVet acquisition.

We anticipate sustaining a relatively higher rate of opex growth in 2022, aligned with our strong global growth momentum. Operating expense investments drove a 70 basis point contraction in comparable operating margins in Q4. For the full year 2021, our operating margins reached 29%, up 220 basis points on a comparable basis for the year and up approximately 560 basis points on a comparable basis from pre-pandemic levels in 2019. We're targeting to build on the strong performance in 2022 as we invest toward the high return long-term growth potential in our business.

Q4 EPS was $1.89 per share, including $0.08 per share in tax benefit related to share-based compensation activity. For the full year 2021, EPS was $8.60, up 29% on a comparable basis. Full year EPS results included $32 million or $0.38 per share in tax benefit related to share-based compensation activity, which provided 360 basis points of effective tax rate benefit. Foreign exchange effects reduced revenue growth by approximately 1% in Q4, resulting in a $0.02 per share profit impact, net of a hedge loss of approximately $500,000.

For the full year 2021, foreign exchange rate changes increased EPS by $0.16 per share, net of foreign exchange hedge losses of $7 million. Given the recent strengthening of the U.S. dollar, we're planning for 1.5% FX revenue growth headwind in 2022, with approximately 2% to 2.5% year-on-year growth headwinds in the first half. While previously established hedge positions will mitigate these impacts on profits, our initial 2022 outlook incorporates an estimated $0.08 net unfavorable EPS impact from FX at the rates noted in our press release.

Free cash flow was $636 million for 2021 or approximately 85% of net income, reflecting $120 million in capital spending, including $18 million in real estate purchases. We've maintained a strong balance sheet. We ended 2021 with leverage ratios of 0.9 times gross and 0.7 times net of cash, with $144 million in cash at the end of the year. In Q4, we established a new five-year $1 billion revolving credit facility, which provides relatively improved borrowing rates.

Our 2022 interest expense outlook incorporates these benefits, current forward interest rates, and expectations for a net leverage ratio of one time next year. In Q4, we allocated $245 million to repurchase 391,000 shares in the quarter. We plan to continue to allocate capital to share repurchases as part of our financial approach, which is reflected in the projected 1% to 1.5% reduction in our diluted shares outstanding for the full year 2022. Turning to our 2022 outlook.

We're providing initial guidance for reported revenues of $3.5 billion to $3.565 billion. This outlook reflects a targeted organic revenue growth range of 10% to 12%, carryover benefits of approximately 0.5% from 2021 acquisitions, and an estimated 1.5% revenue growth headwind from FX. Our organic growth outlook reflects an estimated growth range of 12% to 14% for CAG Diagnostic recurring revenues. The higher end of this range aligns with sustaining the strong year-on-year growth trends we achieved exiting 2021 and incorporates additional targeted benefits from a moderately higher net price realization and investments in global CAG sector development.

Our overall organic growth outlook also factors in continued benefits from expansion of our premium instrument installed base and solid growth in our Water business. These positive factors are partially offset by expectations for continued year-on-year pressure on LPD revenues in the first half of 2022 and a projected contraction in human PCR testing revenues, reflecting our overall strategic growth focus on our core businesses. Our reported operating margin outlook for full year 2022 was 29.7% to 30.2%, reflecting a targeted 50 to 100 basis points of annual comparable operating margin improvement, building on our strong operating margin gains in recent years. We expect operating margin improvement will be supported by solid gross margin gains as we advance investments in our global commercial and innovation capability and ensure high levels of operational business continuity as a priority.

We've incorporated anticipated inflationary cost impacts as well as benefits from relatively higher net price gains in our overall operating margin outlook. Given exit rates in our opex spending and year-on-year operating profit comparison dynamics, we're planning for operating margin improvements to be primarily driven by gains in the second half of 2022. Our preliminary EPS outlook for 2022 is $9.27 to $9.59 per share, an increase of 8% to 11% as reported. Our EPS outlook factors in an increase in our overall effective tax rate from 17.5% to an estimated 21.5% to 22% in 2022.

Approximately 100 to 150 basis points of this increase relates to projected impacts from international tax changes. We're also projecting lower tax benefits from share-based tax compensation activity. Our EPS outlook reflects projected 2022 stock-based compensation tax benefits of $10 million or approximately $0.12 per share compared to high realized 2021 tax benefits of $32 million or $0.38 per share. As noted, we've also incorporated an estimated year-on-year negative impact of $0.08 per share from FX, net of established hedge positions.

Adjusting for these factors, our outlook is for EPS growth of 12% to 16% on a comparable basis including an estimated $0.15 per share or approximately 2% EPS growth impact from international tax rate changes. Our 2022 free cash flow outlook is for a net income to free cash flow conversion ratio of 75% to 80%. This reflects estimated capital spending of $180 million or approximately 5% of revenues including $50 million related to a new warehouse and manufacturing site expansion aligned to support our high growth. Adjusting for this major project, our normalized net income to free cash flow conversion ratio is aligned with our longer-term 80% to 90% targets.

That concludes our financial review. I'll now turn the call over to Jay for his comments.

Jay Mazelsky -- President and Chief Executive Officer

Thank you, Brian, and good morning. IDEXX sustained its strong performance in Q4, capping an exceptional year for the company. For the full year, we delivered 16% organic revenue growth, 29% comparable EPS growth, supported by solid operating margin gains and 59% ROIC. These results reflect the attractiveness of our businesses, including our core CAG business, which is sustaining very strong growth trends benefiting from our commercial expansion and an expanding innovation portfolio.

We're well positioned to build on this momentum in 2022 as reflected in our financial outlook. This morning, I'll recap our recent performance and highlight key areas of business focus moving forward, including advancement of new innovations and the ongoing expansion of our global commercial capabilities. Both of these are strategic elements of our plan to develop the substantial long-term market opportunity still before us. Let me begin with a brief update on sector trends.

Overall, global companion animal healthcare trends remained strong, driven by ongoing robust demand and veterinary clinics for healthcare services, including Diagnostics. As Brian highlighted, U.S. same-store clinical revenues increased 8% in Q4, supported by 2% growth in same-store clinical visits compared to very strong prior-year growth levels. Diagnostic same-store growth continues to expand at a higher pace of nearly 10%.

IDEXX U.S. CAG Diagnostics recurring revenue growth is leading this expansion, reflected in 13% organic gains in Q4, building a 21% gains in Q4 of 2020 as we provide highly desired Diagnostics and information management platforms that support our customers' care mission. We're seeing sustained strong demand trends for clinical service globally, building on the step-up achieved through the pandemic. As highlighted in data shared in our earnings snapshot, this includes sustained approximately 2% acceleration in U.S.

Diagnostics revenue per clinical visit in 2021, building on higher 2020 gains. This solid momentum gives us confidence in investing toward accelerated global CAG sector development and is reflected in our outlook of 12% to 14% global CAG Diagnostics recurring revenue gains in 2022 at the high end of our long-term goals. Like many sectors of the global economy, veterinary clinics continue to work through the challenging dynamic of increased clinical demand in the face of staffing challenges, including near-term management impacts from the search of the omicron variant. It's clear that strong clinical service demand will be a priority for clinics moving forward.

IDEXX remains committed and extremely well positioned to support the growth of our customers through our focus on high customer service levels and solutions that enhance clinic productivity. As we look forward, we're expanding our global commercial capability aligned with these strong demand trends. Our investments in Germany, France and South Korea in the first half of 2021 continue to pay off as expanded commercial footprints in each country enable significant increases in customer contact and reach to revenue, critical elements of our high-touch account management philosophy. We're tracking toward completion in early 2022 of the already communicated second wave of expansions in three additional countries with more to come.

These are holistic initiatives that only involve the addition of customer-facing professionals across multiple job types such as account managers, professional service veterinarians and field service representatives but also include the extension of marketing programs and new field tools such as IDEXX 360 and the addition of more expensive reference of carrier routes and expanded service levels. Increasing our international commercial footprint while maturing our approach will continue to be a key priority beyond Wave 2 countries currently nearing completion. To that end, I'm pleased to share that we are also augmenting our commercial leadership team with an experienced commercial executive in Asia-Pacific CAG, who will join IDEXX this quarter. As we expand, our commercial team continues to deliver the day, reflecting in over 5,000 premium instrument placements in Q4.

By far, our largest quarterly placements ever achieved. Premium instrument placement growth of 29% includes comparable growth across U.S. and international regions and resulted in 14% growth in our global premium installed base with strong performance across each of our instrument platforms. These exceptional results were delivered despite excess challenges.

They demonstrate strong commercial execution as well as the fact that customers are increasingly choosing IDEXX innovations to support increased clinical demand today while investing for future business needs. ProCyte One is a great example of this. Our ProCyte One launch has gone exceptionally well. ProCyte One's performance and reliability as use of the demanding environment of a practice has met or exceeded all goals and feedback remains highly positive as customers love its easy use and how it fits into the veterinary clinic workflow.

We see mid-90% global attach rates with chemistry analyzers and this trend demonstrate ProCyte One's importance in building a full diagnostic work. Furthermore, the ProCyte One launch benefits from programs like IDEXX 360, which not only provides veterinarians with a flexible customer-friendly way to add this innovative analyzer to their clinics, but also benefits growth across IDEXX testing modalities. Our global ProCyte One regional route is now nearly complete, and we have delivered over 2,500 instruments globally since launching in late Q1 of 2021. A growing installed base of premium instruments supports a robust stream of future consumables usage, which gives us confidence in guided ranges for CAG recurring revenue growth.

In addition to driving placements and adoption, our commercial team continues to educate our customers on the benefits of preventive medicine. The Preventive Care initiative remains our primary vehicle for driving a preventive agenda in the clinic and provide sales professionals an opportunity to engage in thorough conversations with broad participation from practice staff. Despite restricted access to clinics, we drove approximately 125 new U.S. enrollments in the quarter, while also developing plans to simplify the enrollment process for busy customers, and we look forward to deploying this and continuing to support this broader preventive care effort in 2022.

We also see continued momentum in software expansion as our innovative products are helping customers improve clinic efficiency and pet owner communication. The onboarding of ezyVet has gone very smoothly and subscriptions are tracking favorably to our high expectations. Customers appreciate the advanced capabilities and intuitive workflow ezyVet provides. 81% of PIMS placements were cloud-based in the quarter, demonstrating that we are well positioned to support customers in their shift to the cloud.

This trend provides a significant growth opportunity and excellent profit flow. It puts a robust and easy-to-use information management products at the hands of our customers that enable them to focus on providing the highest levels of patient care enabled by diagnostics to improve health outcomes. Our software portfolio is a strategic area of investment and focus for IDEXX. Veterinarians have never been busier and have a deep need and appreciation for software solutions that are easy to use and built on contemporary technology stacks.

They look to these solutions to support patient care, staff productivity, and internal as well as pet owner communications. Our strategy is to bring enterprise PIMS software solutions to our customers that work seamlessly with a broader set of business and clinical applications, our own or third-parties that veterinarians use to run their practices. VetConnect PLUS, our Diagnostics results, clinical decision support and ordering portal is a great example of this. VetConnect PLUS was launched almost 10 years ago.

It's integrated from a workflow standpoint in IDEXX and third-party PIMS. It is now being used in over 30,000 practices globally. Customers who use our software and diagnostic solutions together correlate with higher growth profiles, supporting workflow optimization for our diagnostics testing platforms. Our Diagnostic Imaging business, which includes our industry-leading web pack software solution also experienced an excellent quarter, demonstrating the preference customers have for our premier low-dose imaging solutions.

Solid placements in the quarter supported full year placement growth of 35% and double-digit year-over-year gains in recurring revenue. We also had strong growth in Web PACS subscriptions for Q4, up 18% versus the prior year and with continued customer retention rates in the high 90% range. Growth in the installed base, a profitable revenue stream and increased utilization of services have helped IDEXX Web PACS become an important part of our enterprise software ecosystem. In addition to ensuring the successful rollout and adoption of these recent innovations, we were thrilled to launch a series of new product and service enhancements at VMX last month.

Each of these innovations highlight IDEXX' commitment to continually invest in our service and product offerings, with a particular focus on providing insights and decision-making aids to help customers deliver a higher standard of patient care. These enhancements include an expanded oncology testing platform with additional test and aids for veterinarians to better identify, stage, treat and monitor several prevalent cancer types, an updated 4Dx Plus test with improved parameter performance for anaplasma and the addition of clinical decision support for 4Dx Plus and Neural Network 6.0 for SediVue, which has now been trained on 800 million urine sediment images. Improving the performance of our products is central to our strategy. And we're also supporting greater efficiency which helps drive higher adoption and customer satisfaction.

Some examples. The new catalyst SDMA, brings reagents on board the test, reducing the number of steps to run the test and time to results, while also reducing storage space and waste due to the removal of separate reagent comps. The improved VetConnect PLUS mobile app provides an enhanced user experience, improved mobile capability and easier pit on our communication. And finally, coming later in 2022, our 4Dx Plus test will allow for extended room temperature storage.

The addition of these time-saving technologies demonstrates our technology for life approach to product and services designs. Notably, the improved 4Dx Plus product represents our fifth update to the heartworm SNAP product first launched in 1992. While this test already represents the gold standard for vector-borne disease rapid testing, we remain focused on continuous improvement to support our customers in delivering improved Pet Health outcomes. Underpinning our strong business performance is a prioritized focus on providing continued high-level service to our customers.

A key element to achieving these service levels is consistent strong execution across our supply chain, which we saw again in Q4 through high product availability and strong order turnaround times. In order to build this capability and support growth in the future, we plan to invest in 2022 in the expansion of our manufacturing footprint and lab capacity, while also maintaining strong frontline measures to support high service levels. And while we anticipate some inflationary dynamics and supply chain headwinds going forward, we have captured these impacts in our outlook and believe we are well positioned to build upon our year-end margins. Overall, we're very pleased with the momentum and execution in our business and excited about our plans to build on our progress in 2022.

Before we open the line for QA, I'd like to say thanks to our employees for another top-notch year in pursuit of our purpose and its service to our customers. The IDEXX organization remained highly focused on our customers' needs and continue to perform at a very high level during another dynamic and demanding year. The team's perseverance is seen both in the results highlighted this morning as well as our high levels of engagement as a team. And I'm proud to be able to share today's excellent results on behalf of the whole team's hard work.

That concludes my opening remarks. We now have time for some questions.

Questions Answers:


Thank you. [Operator instructions] Our first question is from Chris Schott from J. P. Morgan.

Chris Schott -- J.P. Morgan -- Analyst

Great. Thanks so much for the questions. I just want to get a little bit more color on the magnitude of impact you're seeing from omicron to the near-term results. So basically, how much of a step-down in visits are you seeing currently? And then maybe just following on that, just kind of broader question.

Can you just elaborate a little bit more on your expectation for vet visit growth as we look out to 2022, and we start to think about annualizing as well maybe more normalized comps than we've seen over the past few years. Thanks so much. 

Jay Mazelsky -- President and Chief Executive Officer

Good morning, Chris. We haven't quantified it. We did see some impact on testing volumes in the international regions from omicron in late Q4. It primarily manifested itself in a modest drop off in some lab volumes and this trend appears to be continuing just in the early '22 January as it affects the U.S.

clinical visit growth. The thing to keep in mind is the underlying customer demand is very strong. What that practices tell us is that they're busy as they've ever been in terms of forward booking, we're seeing month, two months forward booking of patients and pet owners trying to get into practices. So we think practices have a playbook in which to deal with this.

We've all seen this movie a couple of times at this point. They've done the curbside drop-off and pickup in some cases. There's obviously some staffing issues that they're dealing with, we think that, that's more of a temporary basis. And we're in a really good position also to be able to support them with our field service organization and technology solutions that help them be more productive and manage the business. 

Brian McKeon -- Chief Financial Officer

And to your question, Chris, our 12% to 14% organic growth outlook for CAG Dx recurring revenues assumes positive clinic visit growth in addition to a short performance, ongoing performance by our teams and helping to grow our revenues faster than that.

Chris Schott

And maybe just one really quick follow-up. I know last year, you talked about new instrument placement growth adding, I think, about 1% or so to overall revenue growth. Can you just elaborate on how you're thinking about new instrument placements and its contribution to 2022? Thanks so much. 

Brian McKeon -- Chief Financial Officer

I'll let Jay talk to the color of the momentum that we have on instrument placements and our priorities. In terms of our outlook, we didn't break it out specifically, but we're targeting continued strong placement growth. The revenue growth may lag the placement growth somewhat as we see the expansion of programs like IDEXX 360 and have some mix effects from higher growth in international markets, but we're targeting solid instrument year-on-year growth, and that's factored into the overall guidance.

Jay Mazelsky -- President and Chief Executive Officer

Yes. We saw record placements in Q4 of 2021 over 5,000 on the back of record hematology placements and catalyst and SediVue pretty much across the board. And we think that, that momentum will remain intact. Practices are clearly investing in technology to help them from a capacity standpoint, they're looking to us and our solutions that not just support the best standard of care, but also support workflow and staff productivity and enable them to handle higher patient volumes.

Chris Schott

Thanks so much for the questions. 


Our next question is from Erin Wright from Morgan Stanley.

Erin Wright -- Morgan Stanley -- Analyst

Great. Thanks so much. In the inflationary environment that we're in and you anticipate higher price realization in the 2022 guide. But can you quantify some of the offsetting factors, the higher input cost, labor, freight, net-net, how are these dynamics impacting you from a margin perspective in 2022 just based on your guidance?

Jay Mazelsky -- President and Chief Executive Officer

So we are seeing some impact selectively in our business. I think you highlighted some of the key drivers, but freight and distribution costs have been a factor. We're monitoring higher labor input costs. So I think that's something that we anticipate will be -- something we'll need to manage effectively.

And we have selective impacts in different parts of our business, but we do use electronic components and things of that nature. I think a lot of our focus, Erin, is on making sure we have continued very high business continuity, reliability. So we're really pleased with that. We're at 99% and customer reliability, and that's our primary focus.

And so we do have some impacts. And as you pointed out, we have a relatively higher expectation for net margin improvement that helps to mitigate that and is reflective to a degree of that and enables us to support the solid operating margin improvements that we're targeting next year.

Erin Wright -- Morgan Stanley -- Analyst

OK. Great. And then more of a philosophical question here, so bear with me. But bigger picture, thinking about broader animal health and more specifically diagnostic trends, and while there will be an element of normalization here near term, just given the tough comps and barring any sort of omicron volatility.

But it does seem that you suggest that we are emerging from the pandemic at a faster underlying growth rate for companion animal diagnostics that may be pre-pandemic over the longer term. Does this change how you're thinking about your five-year outlook? And how are you thinking about some of those changes over the course of the pandemic that may be actually more structural in nature? Thanks.

Jay Mazelsky -- President and Chief Executive Officer

Yes. I'll take that. There's a couple of, I think, longer-term trends that the pandemic probably accelerated that were in effect and if anything, as a result of new pet adoptions and the pivot within practices than more service versus retail type product sales, I think have just accelerated as a result of the pandemic. Clearly, as veterinarians focus on medical services, in patient care, Diagnostics is a big piece of that.

I think they've recognized that Diagnostics is, obviously, a very high margin, very high profit center within their practices. And so I think the combination of -- or patients, pet owners wanting higher standards of patient care, veterinarians are pivoting the services and the role the Diagnostic plays have been important factors. And then you layer on top of that our strategy as a company which both includes continuing to innovate both in terms of testing platforms and information management and our commercial strategy, which is a high-touch model and being able to work with veterinarians to help them use these tools effectively, both business and medical life. I think we continue to see very strong trends that are higher than pre-pandemic.

Erin Wright -- Morgan Stanley -- Analyst

OK. Great. Thank you. 


Our next question is from Michael Ryskin from BOA.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Great. Thanks for taking the question. Congrats, Jay and Brian on the quarter and the solid guide. I want to ask about some of the new products and new initiatives you announced earlier this year at VMX or around VMX including the pet Dx partnership, slightly different than some of the things you've done in the past, and it does get to a point we have questions from investors about in terms of additional test and modalities, additional opportunities beyond sort of what's already on the market.

Could you talk about the oncology opportunity or if there's others beyond that that you're thinking of in terms of some of the untapped markets in diagnostics, how do you see this partnership playing out over the next couple of years? And just sort of the things you highlighted earlier this year, how meaningful is that a contributor to 2022 overall? Or is that more of a long-term factor?

Jay Mazelsky -- President and Chief Executive Officer

Sure. Good morning, Mike. Cancer is the most prevalent cause of death in dogs. So there are about six million positive cases of cancer of dogs just in the U.S.

It's very significant. And if we take a look just at a high level in terms of the process by which the veterinarian diagnoses and teat, it's very complex. It's fragmented. And there aren't a complete set of diagnostic tools to help support that.

So we think that there is a longer-term very attractive market opportunity to be able to help veterinarians navigate a cancer diagnosis and treatment. And so we're building off our expertise in cancer pathology, which is really more to date geared toward cancer identification and really trying to across the continuum of care, which is the identification in staging and treating and monitoring and bring solutions to that full value chain of care. So the partnerships we announced, we think bring best-in-class technology to support that process. We're excited by it.

It's still early stages in terms of market development. So I think it's less about the revenue opportunity near term and more about supporting the veterinarians in helping them navigate what's very complex and what is increasingly pet owner-driven demand for these types of services. I think over time, it's a quite attractive opportunity. We bring, I think, incredible technical expertise to be able to support the veterinarian through this, and we're excited by what we've learned and continuing to build off those capabilities over time.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Great. Thanks. And then a follow-up question on the guide again. The 12% to 14% recurring revenue in CAG is a very solid guide and relative to initial expectations.

You touched on -- I mean, you commented that you expect clinical visit growth in the market to be positive and you cited price again. But could you talk about some of the other moving pieces there? Just trying to get off the bridge from that clinical visit growth to the CAG recurring revenues, whether it's diagnostic frequency, diagnostic utilization, just sort of the CAG premium, if you could help us bridge what are the moving pieces there? That would be helpful.

Brian McKeon -- Chief Financial Officer

Yes, Mike. So I think the way to think about this is the -- as we were coming out of 2021. And clearly, we had a big step-up in demand through the pandemic that we're confident that we can build off of that. So I think that's one key theme.

And as you look at the -- calibrate this, so the exit rate of our business in Q4, we had 13% CAG Dx recurring growth off that higher base. So we were entering the year with that kind of trajectory. And we see some positive drivers here. We're investing in international growth and feel good about the traction and the potential there.

And we'll have some incremental benefit from net pricing that we highlighted. And so the higher end of the range really reflects kind of building off of the momentum that we had, I think, to build on kind of Erin's question earlier, one of the metrics we shared in our snapshot is just the average revenue per clinical visit in the -- in veterinary clinics in the U.S. And that increase, as Jay noted, nearly 200 basis points from pre-pandemic levels from 4% to about 6%. So there's some underlying positive service trends here.

And I think what you're seeing in our outlook is confidence that we can execute well, continue to execute well, invest in ways that support that -- and if we can sustain that type of momentum, we were -- we think we can achieve those higher growth levels. And I think the -- the lower end of the range really is more calibration going back toward more pre-pandemic-type growth. It's not what we're necessarily projecting, but I think that, that's a potential scenario as well. But all of this is building off of a higher demand.

So it's -- some of this will come down to our execution. And I think things like omicron or near-term dynamics that we'll just need to manage through, as Jay mentioned, we don't see that as indicative of a longer-term or an underlying demand issue, but the momentum in our business, we feel very positive about, and we're investing toward that. I think we've got a good strategy to keep building on that progress.

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Great. Thanks so much. Appreciate it. 


Our next question is from Jon Block from Stifel.

Jon Block -- Stifel Financial Corp. -- Analyst

Hey, guys. Good morning. Thanks. First question just on wellness clinical visits.

They continue to do very well. The two-year average actually accelerated from the third quarter '21 levels. So just love management thoughts on staffing capacity issues at vet practices. We continue to hear a lot about those.

I think others do as well. Jay or Brian, how difficult are they? Because you would think wellness would be impacted, but again, it accelerated and maybe do you believe the underlying industry demand from consumers is actually potentially higher from what we're seeing work its way through? And then I've just got a follow-up. Thanks. 

Jay Mazelsky -- President and Chief Executive Officer

Yes. Jon, in terms of the wellness is there's a couple of things that are potentially driving that. Obviously, there's a lot of puppies and kittens who have now become dogs and cats, and I think there's a lot of pet owners who want to get their pets into the practice and checked up. And there's been an emphasis on wellness visits in the U.S.

for quite some time, so it's not new. The -- obviously, there are some capacity constraints and some of these visits get pushed off a month or six weeks. And I think over time, that will get relieved, but I think the under -- what we see is the underlying demand for wellness and checkups is there and been very robust, as you pointed out. And we expect that to be able to sustain certainly.

We and others in the marketplace are really focused in emphasizing preventive care as they are an important part of patient health.

Jon Block -- Stifel Financial Corp. -- Analyst

OK. Fair enough. And the second one, built on Chris' earlier question. So Brian, I'll try to maybe push you a little bit more.

The CAG Dx recurring guide was, I think, solid in a lot of people's view. It implies a two-year average of in and around 15.5%. You helped -- I thought a lot on the cadence of op margin expansion in 2022. You called out the comps.

But anything specifically to call out for CAG Dx recurring two-year average for 1Q. I mean you got a wildly tough comp. You call that omicron headwinds that persist January, maybe even in February. Could this be a situation where we're looking at an organic revenue, CAG Dx of mid-single digits when we take that all into account or maybe just phrase it -- frame it versus the two-year average of 15.5% for full year.

Thanks, guys.

Jay Mazelsky -- President and Chief Executive Officer

Look, the way I think we're thinking about this is we're building off this higher base. So we clearly had a period there where we needed to look at some two-year metrics here to calibrate for 2020 effectively, the pandemic dynamics. And now we're moving into sort of that phase of building off a higher base. I would say that there was some incremental benefit last year in Q4 from just the puppy boom and that, I think, is probably the key factor that sustains in the near term.

But for the most part, we're normalizing off that higher base. And so I think that 12% to 14% is that full year number, we're not projecting by quarter, but I think we're -- that is reflective of the overall momentum in the business. I think the omicron dynamic is a near-term dynamic in the U.S. that we didn't really see significantly in Q4, and we're seeing some effects are really here.

We'll sort that out as we go through the quarter. But I think the underlying momentum and trends we're targeting to remain strong, and we'll work through these near-term dynamics as they play out.

Jon Block -- Stifel Financial Corp. -- Analyst

All right. Thanks, guys. 


Our next question is from Nathan Rich from Goldman Sachs.

Nathan Rich -- Goldman Sachs -- Analyst

Hi. Good morning. Thanks for the questions, Brian. Maybe starting with the opex guidance.

I think you mentioned kind of the higher levels that you are -- you saw in the latter half of this year will continue into 2022. I guess it's kind of running in the back half of '21, was in the low 30% range in terms of revenue. Can you maybe talk about what you see the run rate being going forward both for 2022 and beyond because opex, as a percent of revenue, has come down a lot relative to historical levels. Do you see that getting back to historical levels? Or you kind of feel like the current rate that we're at is sort of what to expect as we go forward from here?

Brian McKeon -- Chief Financial Officer

So I think the way to think about it, Nate, is we had a Q4 growth rate year on year of about 15%, and we're working -- still working through some compares to some relatively more controlled growth, opex levels in the comparable prior year. And so entering into Q1, we expect kind of that same dynamic. We'll have a relatively higher rate of opex growth that will be our most challenging compare. And in general terms, I think for the full year, you should expect us to be trending back more in line with kind of our overall revenue growth rate.

We want to lean in and invest toward future growth. I think our margin dynamics will, as they've been in the past, be supported by solid gross margin improvement. And so I think longer term, consistent with our longer-term outlooks that we've shared at investor day, I think opex growth closer to revenue growth is a reasonable expectation.

Jay Mazelsky -- President and Chief Executive Officer

OK. That's helpful. And then, Brian, I don't know if you have any commentary on how we should expect kind of the weighting of earnings this year between like the first half and the second half, just kind of given the commentary on kind of the early first quarter trends as well as the higher opex levels. Is that going to kind of significantly change the typical seasonality that you usually see in the business?

Brian McKeon -- Chief Financial Officer

Yes. It's more driven by compares than necessarily a change in seasonality, but I did mention that our margin improvement would be in the second half. And as we just discussed, I think our more challenging compare will be in Q1 in terms of the quarters this year. But that's, again, more reflective of kind of a year-on-year dynamic.

The one thing to highlight specifically is we'll still be working through on LPD, we have the decline in the African swine fever revenues that really started in the third quarter of 2021, and we'll still be working through those compares, so that will have a dynamic as well.

Nathan Rich -- Goldman Sachs -- Analyst

OK. Great. Thanks a lot. 


Our next question is from Ryan Daniels from William Blair.

Nick Spiekhout -- William Blair -- Analyst

Good. Good morning. Nick speaking on for Ryan. Most of my questions have been asked.

But I guess in the release, you mentioned you're still working your way through the ezyVet integration, at least on the opex side. I was wondering how far along are you in that until you kind of fully integrated and you're no longer dealing with those expenses? Thanks. 

Jay Mazelsky -- President and Chief Executive Officer

The ezyVet integration has gone quite well. We're far along in terms of really integrating our sales approach in organizations and product road maps. And that continues to be received extremely well in the marketplace, and you saw from the growth numbers that there's a lot of traction. Behind that, it's a key part of our strategy and over 80% of our PIMS placements were cloud-based placements this quarter.

So really good traction far along in the integration been going well.

Nick Spiekhout -- William Blair -- Analyst

Great. Thanks. And I guess kind of just a quick follow-up on the wellness visit color with kind of that strong stacked wellness growth. I was wondering if you guys are seeing any change in the proportion of those that have included a TAM panel, like with the large growth are you seeing that kind of proportion come down or are you kind of maintaining what the historical rate was with that growth?

Jay Mazelsky -- President and Chief Executive Officer

Yes. I mean it's been pretty constant in terms of panel mix. It's something we don't break out. It's -- these are largely configured panels for wellness.

So when customers use that, you don't get a lot of variation quarter to quarter. And so with that, I'd like to thank everybody for joining this morning's call. I know we have some employees who are listening, I'd like to say thank you to them for their excellent performance and continued passion for our purpose. Day in and day out, our team delivered excellent results aligned to our long-term opportunity, while also demonstrating unwavering commitment to our purpose in navigating an evolving landscape due to continued pandemic impacts.

Very grateful for the IDEXX team and the purpose which drives our work. And so with that, we'll conclude the call. Thank you.


[Operator signoff]

Duration: 57 minutes

Call participants:

Brian McKeon -- Chief Financial Officer

Jay Mazelsky -- President and Chief Executive Officer

Chris Schott -- J.P. Morgan -- Analyst

Erin Wright -- Morgan Stanley -- Analyst

Michael Ryskin -- Bank of America Merrill Lynch -- Analyst

Jon Block -- Stifel Financial Corp. -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Nick Spiekhout -- William Blair -- Analyst

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