Brian P. Mckeon
Chief Financial Officer at IDEXX Laboratories
Good morning, everyone, 'm pleased to take you through our fourth quarter and full-year 2022 results and to provide an overview of our financial outlook for 2023. IDEXX had a strong finish to 2022, reflected in our fourth quarter performance. Revenues increased 7% organically, driven by 8% organic gains in CAG diagnostic recurring revenues and continued strong growth in our software and water businesses.
Operating profits increased 14% as reported and 17% on a comparable basis, benefiting from solid gross margin gains and opex leverage. Combined, these factors enabled delivery of $2.05 in EPS, up 14% on a comparable basis. IDEXX execution drivers supported delivery of full-year financial results at the high-end of our updated guidance range. This performance is reflected in the 1,200 basis point US CAG recurring revenue growth premium to US clinical visits in the second half of 2022, driven by solid volume growth premium and higher levels of price realization. We sustained record high customer retention levels and solid new business gains globally and achieved a record level of annual CAG premium instrument placements, which drove a 13% year-on-year expansion of our global premium instrument base.
Effective P&L management supported sustained full-year comparable operating margins adjusted for discrete R&D costs aligned with our updated 2022 goals. These performance trends position us well as we enter 2023 and advance our growth strategy. This year, we're targeting a return to 10% organic revenue growth at the high-end of our initial guidance range. This outlook is supported by continued strong IDEXX execution and net price benefits captured in our goals for double-digit CAG Diagnostic recurring revenue gains across our US and international regions.
We're also targeting solid comparable operating margin gains, building on the higher profit levels we achieved through the pandemic. We'll walk through the details of our financial guidance later in my comments. We'll highlight the building blocks of our growth outlook and discuss how we are factoring in expectations for overall sector trends and potential macro impacts into our planning. We'll also review estimates for effects from FX and interest rate changes on our reported results in 2023.
Let's begin with the review of our fourth-quarter results. Fourth quarter organic revenue growth of 7% was supported by solid organic gains across our major business segments, including 8% organic growth in our CAG business, 10% organic growth in water, and 6% organic growth and LPD revenues. CAG Diagnostic recurring revenues increased 8% organically in Q4 compared to 13% prior year growth levels, reflecting 9% gains in the US and 6% growth in international regions. On a two-year and three-year basis, Q4 results were in-line with strong Q3 performance.
We achieved continued double-digit organic revenue growth benefits from key execution drivers, including expansion of our premium instrument base, solid new business gains, sustained high customer retention levels, and expansion of diagnostics revenue per visit, including benefits from higher price realization. Overall organic revenue gains were also supported by 17% growth in veterinary software and diagnostic imaging revenues. CAG instrument revenue was down modestly reflecting placement mix and comparisons to high prior year placement levels.
In terms of CAG sector demand drivers, we estimate same-store diagnostics revenue in US veterinary practices increased 7% in Q4. These gains continue to be supported by expansion of diagnostic tests frequency annualization, reflected in the nearly 10% increase in diagnostics, revenue per clinical visit that included diagnostics. Clinical visit levels declined 2.8% in the quarter with consistent growth trends across wellness and non-wellness categories, as we continue to work-through impacts from reductions in debt clinic capacity from peak levels and lap the significant step up in demand we saw in 2021, including benefits from new patient growth.
IDEXX's US CAG Diagnostic recurring revenue growth of 9% in Q4 continues to outpace sector growth trends. IDEXX's US performance was supported by a 1,200 basis point growth benefit from IDEXX execution drivers, including approximately 7% net price gains and continued solid growth contributions from customer additions and leverage of IDEXX innovation. IDEXX achieved solid organic gains across our testing modalities in the fourth quarter. IDEXX VetLab consumable revenues increased 9% organically reflecting solid gains across US and international regions compared to strong prior year growth levels.
Consumable gains were supported by a 13% increase in our global premium installed base in 2022, reflecting double-digit gains across our catalyst premium hematology and SediVue platforms. We placed 5,065 premium instruments in Q4, down modestly from high prior year levels. The quality of placements continues to be excellent reflected in 3% lower gains at new and competitive catalyst placements, including 7% gains in the US. We also saw a 5% growth in new and competitive premium hematology placements globally, leveraging strong customer interest in ProCyte One.
Rapid asset revenues grew 9% organically, supported by benefits from net price increases and solid volume gains in the US. Global lab revenues expanded 8% organically, reflecting a high single-digit gains in the US, which were impacted to a degree by holiday week weather impacts and improved organic growth in international regions. CAG Diagnostic recurring revenue results were supported by a relatively higher levels of net price realization, including benefits from our second half price initiatives. We estimate net price changes contributed approximately 7% to worldwide CAG Diagnostic recurring revenue growth in Q4, reflecting product and service enhancements and coverage of inflationary impacts.
As we'll discuss, we've incorporated an expectation for a 7% to 8% global net price growth benefit for the full-year in 2023, building in effects from annual list price changes which were communicated recently to our customers. In other areas of our CAG business veterinary software and diagnostic imaging revenues increased 17% organically in Q4. Results were supported by continued strong growth in recurring revenues and ongoing momentum in cloud-based software placements. For the full year 2022, veterinary software and diagnostic imaging revenues reached $251 million, up 15% organically and 22% as reported. This includes benefits from the ezyVet acquisition, which continues to track above our acquisition model projections.
Turning to our other business segments, water revenues increased 10% organically in Q4 and for the full-year 2022, reflecting strong performance across our major regions, including benefits from net price improvement and volume gains. Livestock, poultry and dairy revenues increased 6% organically in Q4. Results benefited from growth in herd health screening, shipment timing and improved performance in China where we worked through comparisons to high prior year levels for African swine fever and core swine testing.
Turning to the P&L, we achieved strong operating profit and comparable operating margin gains in the fourth quarter. Operating profit increased 14% as-reported and 17% on a comparable basis, driven by gross profit gains and opex leverage. Gross profit increased 6% as reported and 10% on a comparable basis. Gross margins were 58.5%, up 110 basis points on a comparable basis. Net price gains, higher software service gross margins, lab productivity gains and comparisons to higher prior year investment levels and business mix all contributed positively, offsetting inflationary cost effects.
Operating expenses were flat as reported and up 4% on a comparable basis in the quarter. We benefited from investment prioritization and leverage from our prior commercial expansions as well as favorable comparisons to higher prior year opex levels related to incentive compensation accruals, the ezyVet acquisition and specific R&D investments. For the full-year 2022, operating margins were 26.7%, supported by strong second half gains. On a comparable basis, full-year operating margins declined 240 basis points, driven by 230 basis points of impact from discrete R&D investments.
Q4 EPS was $2.05 per share, up 14% on a comparable basis. Fourth quarter EPS results reflect $0.05 and tax benefits from share-based compensation activity and $0.07 in headwind from foreign exchange changes net of $9 million in Q4 hedged gains. Full year EPS was in $0.03, a decline of 1% on a comparable basis, net of approximately 9% of EPS growth impact from discrete R&D investments. For the full-year stock-based compensation activity provided $13 million or $0.15 per share in tax benefit, lowering our effective tax rate by 150 basis points.
Foreign exchange reduced Q4 and full-year revenue growth by approximately 4% and 3%, respectively. For the full-year, foreign exchange reduced operating profits by $25 million and EPS by $0.22 per share, net of foreign exchange hedge gains of $26 million. Foreign exchange trends have improved significantly since our last call update resulting in relatively lower projected financial impacts in 2023, which we've captured in our outlook.
Free cash flow was $394 million for 2022 or approximately 58% of net income, net of $149 million in capital spending. This performance reflects 25% to 30% of free cash flow conversion impact this year from discrete R&D investments, higher inventory levels aligned with sustaining product availability, higher deferred R&D tax credits, and investments in a major facility expansion. Free-cash flow conversion came in modestly below our guidance outlook of 60% to 65%, reflecting higher than forecast year end working capital levels including impacts from timing. We're targeting improvement in inventory levels in 2023, which is reflected in our outlook for 80% to 90% and free cash flow conversion this year. Our balance sheet remains in a strong position. We ended 2022 with leverage ratios of 1.3 times gross and 1.2 times net of cash. Our 2023 interest expense outlook incorporates current forward interest rates and expectations for a modestly lower net leverage ratio in this year. We allocated $68 million to repurchase 199,000 shares in the fourth quarter. For the full-year 2022, we allocated $811 million to repurchase approximately $2 million shares. Effects from share repurchase support our projected 1.1% to 0.5% reduction and diluted shares outstanding for the full-year 2023.
Turning to our 2023 full-year outlook, we're providing initial guidance for reported revenues of $3,590 million to $3,690 million. On an organic basis, this reflects a range of 7% to 10% growth overall and 8.5% to 11% growth in CAG Diagnostic recurring revenues. Our 10% overall organic growth high-end outlook is aligned with our long-term goals and reflects targets for 11.5% CAG Diagnostic recurring revenue gains in the US and 10% growth in international regions. These targets incorporate a continued high-growth premium from high -- from IDEXX execution drivers, including growth benefits from our expanded global premium instrument installed base, new customer gains and increases in testing utilization supported by IDEXX innovation. Our high-end outlook also incorporates expectations for relative flattening of clinical visit growth trends in the US as we work through 2023.
As noted, CAG Diagnostic recurring revenue gains will be supported by an estimated 7% to 8% full-year growth benefit from net price realization, with expectations for 8% to 9% global net price gains in H1 and 6% to 7% net price benefit in H2. In addition to benefits from solid CAG Diagnostic recurring revenue growth, our overall growth outlook reflects goals for continued strong growth in our veterinary software and water businesses.
We expect these gains will be moderated by flat-to-modest organic growth and LPD revenues in 2023, reflecting current macro trends and approximately $10 million of impacts from lower human COVID testing revenues. The low-end of our overall organic growth outlook of 7% incorporates potential risks to our targeted growth goals, including effects from macroeconomic conditions. Terms of reported revenue, we now estimate foreign exchange will reduce full-year revenue growth by approximately 0.5% at the rates assumed in our press release.
FX revenue growth headwinds are projected to be approximately 3% in Q1, with relative improvement in the second half of the year. In terms of sensitivities to changes to the FX rates assumed in our press release, we projected a 1% change in the value of the US dollar would impact full-year reported revenue by approximately $12 million and operating income by approximately $3 million to $4 million net of currently established hedge positions. Our reported operating margin outlook for the full-year 2023 is 29.0% to 29.6%. At the high-end, this reflects an outlook for approximately 340 basis points in comparable annual operating margin expansion, including approximately 230 basis points of benefit from lapping discrete R&D investments in 2022.
We're planning for constrained gross margin gains on a comparable basis in 2023 as benefits from pricing and lab productivity initiatives help to offset product and labor -- labor inflationary cost impacts, including effects from steps we've taken to ensure high levels of the supply chain and service continuity. We estimate foreign exchange will reduce full-year reported operating margins by approximately 50 basis points, driven by the lapping of the $26 million in 2022 hedge gains.
Our 2023 EPS EPS outlook is $9.27 per shared to $9.75 per share, an increase of 16% to 21% as reported and 19% to 26% on a comparable basis, including approximately 10% of EPS growth benefit from the lapping of discrete R&D investments. We estimate that foreign exchange will reduce full-year EPS by approximately $0.23 per share at the rates assumed in our press release with the bulk of this impact in the first half. We also expect impacts in 2023 from higher interest expense of approximately $0.11 per share compared to 2022.
Our EPS outlook factors in a 1% increase in our overall effective tax rate to 22% in 2023, reflecting lower projected benefits from share-based compensation activity. Our free cash flow outlook is for net income -- a net income to free cash flow conversion ratio of 80% to 90%. This reflects estimated capital spending of approximately $180 million or approximately 5% of revenues, including approximately $35 million of spending or about 5% of free cash flow conversion impacts related to the completion of a major facility expansion. Overall, we are well-positioned to deliver strong financial performance in 2023.
In terms of our operational outlook for Q1, we're planning for overall organic revenue growth closer to the midpoint of our full-year guidance range as we continue to work through some effects from relatively higher prior year clinic capacity comparisons and macro impacts on demand in international regions. In terms of our profit outlook, we're planning for a 50 basis points to 100 basis point year-on year improvement in reported operating margins in Q1. This includes benefits from a customer contract resolution payment of $60 million received in Q1 that will be recorded as an offset to operating expense as well as expectations for foreign exchange impacts and relatively higher opex growth in the first quarter related to specific factors such as the return of in-person sales meetings this year.
That concludes our financial review. I will now turn the call over to Jay for his comments.
