IDEXX Laboratories Inc

NASDAQ:IDXX

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and welcome to the IDEXX Laboratories First Quarter 2018 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and Kerry Bennett, Vice President-Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, idexx.com.

During this call, we will be discussing certain financial measures not prepared in accordance with Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website.

In reviewing our first quarter 2018 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth refer to growth compared to the equivalent period in 2017 unless otherwise noted.

In order to allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up if necessary. We appreciate you may have additional questions, so please feel free to get back into the queue, and if time permits, we'll take your additional questions.

I would now like to turn the call over to Brian McKeon.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Good morning, everyone. IDEXX's strong business momentum continued in Q1 reflected in another quarter of excellent financial results. We achieved 16% reported revenue growth driven by 13% organic growth in CAG Diagnostic recurring revenues, 21% growth in premium instrument placements and favorable FX changes.

Our reported revenue and 12% overall organic growth results reflect the implementation of the new revenue accounting standard, which now more closely aligns instrument revenue recognition with the timing of the instrument placement. In Q1, $12 million of revenue was attributed to implementation of the New Revenue Standard. A significant portion of this amount related to the introduction of a very successful multi-modality customer program called IDEXX 360, which drove strong U.S. premium instrument placements in the quarter.

EPS was $1.01 per share, an increase of 32% on a comparable constant currency basis, reflecting strong revenue growth, solid operating margin gains, and net benefits from U.S. Tax Reform.

In terms of our outlook, we are maintaining our full year revenue guidance of $2.205 billion to $2.245 billion, as $15 million of operational upsides reflected in our updated projection for 10.5% to 12.5% full year organic revenue growth are offset by impacts from the strengthened U.S. dollar.

We're increasing our 2018 EPS outlook, $0.02 per share to $4.06 to $4.20 or 30% to 35% growth on a comparable constant currency basis. This incorporates our higher revenue outlook and consistent expectations for 75 basis points to 125 basis points in full year constant currency operating margin improvement, resulting in a $0.04 per share full year operational upside. Our outlook also incorporates an additional $0.02 in projected benefits from stock compensation activity. These upsides are offset by a negative $0.04 per share impact from updated FX assumptions.

We will review our updated 2018 outlook later in my comments. Let's begin with the review of our Q1 performance by segment and region. Please note that, as we review our results by segment, the organic growth rates referenced include benefits attributable to the New Revenue Standard. Q1 performance was led by continued momentum in our Companion Animal Group. Global CAG revenues were $471 million, up 13% organically driven by strong gains in recurring CAG revenues, high premium CAG instrument placements and continued high growth in our digital business.

Global recurring CAG Diagnostic revenues increased over 13% organically despite a 1% equivalent day headwind. These results included a $4 million or about 1% benefit from revenue accounting standard changes, primarily related to impacts from our modified retrospective restatement. Veterinary software services and diagnostic imaging system revenues increased 10% organically. These results were supported by solid growth in recurring software services associated with our practice management platforms and 40% year-on-year increase in digital system placements.

Our Water business revenues grew 12% organically in the first quarter to $29 million, reflecting solid growth in the U.S. and strong gains in international markets, including about 3% in year-on-year growth benefit from our Brazil go-direct initiative. These benefits will moderate as we work through the year. Water growth in Q1 reflected about 2% growth benefit attributed to later ship-off cutting rules under the New Revenue Standard.

Livestock, Poultry and Dairy revenue in Q1 was $32 million, up 2% organically. Strong gains in pregnancy product sales, solid growth in recurring livestock diagnostic test revenues and higher herd health screening levels were offset by continued market demand impacts on our dairy testing business and moderate declines in European disease eradication program revenues.

By region, U.S. revenues were $327 million in the quarter, up 13% organically driven by 13% growth in CAG Diagnostic recurring revenues and strong growth in premium instrument placements. U.S. recurring revenue gains were supported by continued strong double-digit growth in reference labs and consumables, and high-single digit growth in rapid assay sales supported by solid volume gains in our 4Dx franchise.

U.S. CAG recurring diagnostic price gains continued to trend in the 2% to 3% range. U.S. recurring CAG Diagnostic customer retention metrics also continued to improve supporting our accelerated growth profile. IDEXX U.S. recurring CAG growth performance continues to significantly outpace U.S. veterinary practice market growth reflected in our dataset from about 7,500 clinics. In Q1, patient visits were up 0.6% and clinic revenues increased 4.8% compared to the prior-year period, a slight moderation from recent trends impacted in part by less favorable weather comparisons.

International revenues in Q1 were $210 million, up 11% organically. International results were driven by 13% organic gains in CAG Diagnostic recurring revenues. This reflected continued high consumable revenue gains supported by our expanding Catalyst instrument base and increasing utilization and strong growth in European lab revenues.

In terms of segment performance, Q1 results were supported by expansion of our premium instrument base and strong global gains across CAG Diagnostic testing modalities. Globally, we've placed a Q1 record 2,822 premium analyzers, up 21% compared to prior year levels. These results were driven by 1,403 Catalyst placements, a 24% year-on-year increase, 664 SediVue placements, up 72%, and 755 premium hematology instruments globally. In addition to the strong premium instrument results, we placed 1,190 SNAP Pros in the quarter, expanding our SNAP Pro installed base to over 20,000.

Continued strong Catalyst performance was driven by 1,034 placements in international markets, up 39% year-on-year, and 288 placements to new and competitive accounts in North America. Consistent with our strategic focus, 78% of North American Catalyst placements were at new or competitive accounts in the quarter. Globally, our installed Catalyst instrument base increased 22% year-on-year in Q1, reflecting 10% year-on-year growth in North America, and 37% year-on-year gains in international markets.

CAG Diagnostic instrument revenues in Q1 were $31 million, up 12% organically, including $7 million in revenues attributed to the accounting standard change. As noted, this amount was primarily related to the launch of the IDEXX 360 customer program in the U.S., which provides customers with benefits from doing business across IDEXX's product lines, and supported our success in driving SediVue and Catalyst placements in the quarter.

Our EVI index increased at a double-digit pace in North America. And we're now using this approach in our international markets as well, aligning our placement strategy globally with maximizing recurring CAG Diagnostic annuity revenues. Benefits from an expanding instrument base, test innovation and enhanced commercial capability, continue to drive strong recurring CAG Diagnostic revenue gains across our major modalities.

Consumable revenues of $150 million grew 17% organically in Q1. Results reflected strong double-digit organic gains across U.S. and international markets. Our focus on innovation continues to drive growth in real-time care with SediVue and SDMA on a slide, contributing nearly 3% combined to year-on-year consumable gains in the quarter.

Reference laboratory and consulting services with revenues of $187 million grew 14% organically in the first quarter. Gains were driven by continued mid-teen organic reference lab gains in the U.S. Strong U.S. gains continue to be primarily volume driven reflecting high levels of growth with existing customers and steadily improving new customer acquisition and customer retention rates.

We also achieved high single digit lab growth in international markets, compared to strong prior year growth levels, supported by higher gains in Europe. Rapid assay revenues of $52 million grew 7% organically in Q1. Continued solid rapid assay gains were driven by volume growth in 4Dx and first-generation products, supported by seasonal stocking programs, as well as continued net price gains.

Operating profit in Q1 was $113 million, up 23% as reported, or 18% on a constant currency basis, driven by high profit growth in our CAG and Water businesses. (10:31) of 100 basis points on a constant currency basis supported by solid gross margin gains and operating expense leverage from our strong revenue growth results in the quarter.

Gross profit was $303 million in Q1, up 17% as reported or 13% on a constant currency basis. Gross margins increased 50 basis points on a constant currency basis. These gains were supported by continued solid net price gains and volume leverage in our VetLab and reference lab businesses, which offset effects from reinvestment of U.S. tax reform benefits and about 20 basis points of gross margin impact from OpEx to cost of goods, cost reclassifications in our lab business.

Foreign exchange hedge losses, which impact gross profit, were approximately $2 million in Q1. Operating expenses in Q1 were up 15% or 11% on a constant currency basis, resulting in 50 basis points of positive operating margin leverage. Operating expense increases reflected year-on-year impacts from our expanded U.S. commercial capability, higher levels of R&D investment, growth in enabling information technology capability, and impacts from reinvestment of U.S. tax reform benefits.

EPS in Q1 was $1.01 per share, including $9.6 million or $0.11 per share in benefit related to share-based compensation activity, which tends to be highest in Q1. On a comparable constant currency basis, EPS increased 32% including net benefits from U.S. tax reform.

Our effective tax rate was 14.3% in Q1, including 9.2% of tax rate benefit from share-based compensation impacts. Foreign exchange, net of hedge impacts in Q1 2017 and 2018, increased operating profit by $4 million and EPS by $0.04 per share.

Free cash flow was $11 million in Q1, reflecting normal quarterly seasonality. We continued to maintain our full-year outlook for free cash flow of 80% to 85% of net income for 2018, including approximately 15% of free cash flow impact driven by $50 million of combined incremental capital spending related to our Westbrook, Maine headquarter expansion and our German core lab relocation, as well as $5 million of incremental growth capital investment supported by additional cash flows associated with U.S. tax reform. Incorporating these investments, our 2018 free cash flow outlook for projected capital spending remains at $140 million.

We allocated $86 million in capital to repurchase 465,000 shares in Q1. We also used our increased flexibility under U.S. tax reform to optimize our global cash and debt balances, resulting in a reduction in our revolving debt outstanding. We ended Q1 with $1.020 billion in debt, $159 million in cash, and $442 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.87 times gross and 1.58 times net of cash and investment balances.

We're maintaining our 2018 full-year outlook for reduction in average shares outstanding from stock repurchases of 1% to 1.5%, which assumes that we maintain net leverage at approximately 1.5 times EBITDA. We continue to project annual net interest expense of $35 million to $36 million.

In terms of our updated P&L outlook for 2018, as noted, we're maintaining our full-year reported revenue guidance of $2.205 billion to $2.245 billion, incorporating $15 million of benefit from a 1% increase in our expectations for a full-year organic revenue growth now projected at 10.5% to 12.5%. This outlook reflects consistent expectations for 12% to 14% organic growth in CAG Diagnostic recurring revenues and increased expectations for instrument revenues, including benefits from our strong Q1 performance and growing premium instrument placements.

Operational revenue upsides are offset by a $15 million adjustment to our FX assumptions, reflecting the recent strengthening of the U.S. dollar. We currently estimate a 1.5% revenue growth benefit in 2018 related to foreign exchange at the rate shown in our press release, resulting in full-year reported revenue growth of 12% to 14%.

We're raising our 2018 full year EPS guidance $0.02 per share to $4.06 to $4.20, reflecting an outlook for 30% to 35% comparable constant currency EPS growth. This incorporates 4% in operational upsides related to our higher revenue outlook and consistent expectations for 75 basis points to 125 basis points in full year constant currency operating margin improvement.

We're also refining our outlook for our 2018 effective tax rate to 19.5% to 20.5%, including an updated estimate of $12.5 million to $16.5 million or approximately 3% in full year projected tax rate benefit from exercise of stock-based compensation. This provides $0.02 per share on EPS upside compared to earlier estimates. Offsetting these benefits are updated projections for year-on-year impacts in foreign exchange rates at the rates shown in our press release.

We now estimate that foreign exchange rate changes will increase reported EPS by $0.07 per share, approximately $0.04 per share below earlier estimates. This is net of approximately $5 million in currently projected hedge losses. There's been a significant amount of movement in currency rates in recent days related to the strengthening of the U.S. dollar and our outlook incorporates recent FX rate levels. In our 10-Q, we highlight sensitivities to change in currency rates. Based on our projections an additional 1% strengthening of the U.S. dollar would reduce balance of year revenue by approximately $6 million and operating income by approximately $1.7 million net of hedges.

In terms of our second quarter outlook, we expect reported revenue growth in the 12% to 13.5% range supported by organic revenue gains of 10.5% to 11.5%. In terms of our P&L outlook, we expect gross margins to be relatively flat in Q2 compared to prior year levels, reflecting relatively tougher year-on-year comparisons in the quarter as well as impacts from tax reform related reinvestment and lab information system cost reclassifications.

We also expect relatively higher year-on-year growth in operating expenses in part driven by timing of R&D investments. Combined, we expect these factors will lead to flat Q2 2018 operating margins compared with prior year Q2 levels of 24%. We expect our effective tax rate in Q2 to be 21% to 22% including projected benefits from share based compensation exercise activity.

That concludes the financial review. Let me turn the call over to Jon for his comments.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Okay. Thank you, Brian. Our strategy to advanced standard of care for pets around the world is purring along nicely as we wrap up the first quarter of the new year. Great results shared by Brian. Sales force and professional productivity in growing the business with our customers was the standout theme for the quarter. And this is evidenced by our Companion Animal Group Diagnostic recurring revenue growth of 13% globally.

As investors know, we have moved to an economic value index or EVI to measure quarterly instrument placements both for our reps commissions and for IDEXX. EVI measures the quarterly impact of the value of instrument placements in building profitable recurring revenues. Prioritizing efforts by EVI of placements and empowers our field professionals to allocate their time and efforts to a mix of placements and programs that maximize long-term shareholder value.

In Q1, we moved to this EVI compensation and measurement system with our international operations, building on the success of the North American field transition to EVI in the beginning of 2017. As Brian mentioned, the EVI of our North American placements grew double-digits in Q1 of 2018 supported by exceptional growth of SediVue. For the rest of the world, the year-over-year growth in EVI from instrument placements was far stronger supported by both strong unit placement and greater percentage of Catalyst placements to new and competitive accounts. Of note, new and competitive placements of Catalyst outside of North America, was up 56% year-over-year in Q1.

We also continue to align our commercial efforts across our modalities to support customer growth and advancements in the standards of care. In Q1, our German team successfully transitioned our commercial organization from two different roles focused separately on instruments and labs respectively to a single account coverage model that we have used in the U.S. for the past several years. In this model, a single sales force supports and advances the full IDEXX offering of in-house instrument and reference lab diagnostic offerings. Our German team executed this transition brilliantly. Along with being fully direct in Germany as we are in most markets around the world, we're now set up for accelerated growth in this very important country just as we have achieved in the U.S. since we made the change to a customer-centric sales model.

Innovation continues to be a key driver globally. Expanded menu on our instrument platforms including T4, SDMA and CRP, an inflammatory marker, grow the same customer instrument recurring revenue and contributed to our 17% organic instrument consumable revenue recurring growth as well as growth – another contributor, of course, was growth from SediVue recurring revenues that came from new instrument placements. New menu adoption by our Catalyst customers will continue to be a growth driver for years to come and of course increase the value of a new Catalyst placement.

Our remarkable test for kidney function IDEXX SDMA had its first quarter of general availability in our in-house Catalyst customer – chemistry platform in North America in Q1. In this short period, 42% of North American Catalyst customers have adopted the test in clinic with the vast majority of these already using it on a regular basis.

Having our proprietary SDMA Test on our in-house instrument, advances several strategic growth objectives for IDEXX. Obviously, Catalyst SDMA generates a new stream of instrument consumable recurring revenues. Second, it further secures the long-term loyalty of Catalyst customers as the test is unique to IDEXX. Third, as customers add SDMA to their in-house profiles, they build upon their reference lab experience with IDEXX accelerating to what we term the journey to believe that SDMA is an essential element of the routine chemistry panel.

The independent KOLs at the pinnacle of veterinary medicine have already completed this journey as they have been involved with and informed of full complement of studies, which provide the irrefutable evidence of SDMA's clinical value as an early indicator of a variety of diseases that have in common that impact kidney function. To put a point on this, in one study, looking at the blood profiles of dogs and cats having a wellness exam adding SDMA to the existing chemistry panel of 21 tests, just one additional test, uncovered another 50% of patients versus the baseline of 21 tests that needed further work-up.

In other words, even in seemingly healthy patients, SDMA dramatically increases the detection of hidden problems. The statistics shows just how important and profound SDMA is as a diagnostic innovation in routine wellness, and in fact the importance of routine wellness testing not to mention sick animal testing.

Catalyst SDMA was launched in Canada in January and the UK in March. The other major international countries will follow in Q2 with a few in Q3. The addition of the SDMA T4 combo kit for Catalyst, another advancement in point of care testing will launch in about a month in North America.

Speaking of new products, an update on our SNAP Fecal launch timing. The assay is performing well and detecting intestinal parasite and our expected regulatory approval timeline is on schedule. The product prototypes are currently in field trials with customers, part of our disciplined new product development process that we use with all products in development. And as is typical of any product, we get many new insights with new to market products in the hands of technicians and practice before the formal launch.

We've concluded there are certain workflow improvements that need to be made to deliver the exceptional customer experience expected from IDEXX. We anticipate these changes to be relatively straightforward, but will take a few extra months to validate. Given this pushes the launch into the very busy Q4, we're planning on a formal launch at the beginning of the New Year.

Our new revenue guidance which we've increased on a constant currency basis by $15 million for the year fully reflects this new SNAP Fecal timing assumption. The guidance reflects tremendous momentum we have in the business today. I might note that with all the innovations that we have in the field and that we're bringing to the market in 2018, our field has no shortage of new products and services to sell, be it in reference labs, in-house instruments, and new test menu.

I also want to comment on our veterinary software offerings with double-digit constant currency growth in Q1. In Q1, we had more than 1,600 customers who use our cloud-based practice information management software or PIMS. And we continue to grow our overall PIMS software customers and revenues, which include the franchise, Cornerstone and DVMAX product lines. All four of our PIMS software platforms are undergoing major investments leading to advanced capabilities for our customers, improved user experience and the support of multi-location corporate accounts, a growing segment of the market.

Our cloud-based applications that customers subscribe to, in order to add value to their PIMS whether IDEXX PIMS or third-party, are also advancing in customer numbers and capabilities. These apps include cloud-based software to support wellness plans, digital radiography packs, client communications, multi practice enterprise management, and a specialty referral CRM for managing relationships with specialty referral clients to referring veterinarians.

The grand daddy of all veterinary software applications in terms of footprint and the global market is VetConnect PLUS. With over 22,000 practices who use VetConnect PLUS each month, 12,500 of which are in the U.S. We broke 2 million results views in the U.S. alone in Q1, 2.9 million globally. That 2 million is an average of 160 results views for every active VetConnect PLUS IDEXX account in the U.S. market.

We estimate that no other veterinary software in the world has even half the number of active accounts on a global basis. And IDEXX diagnostic customers that are highly engaged with VetConnect PLUS grow their diagnostic revenues at a rate three times faster than non-engaged VetConnect PLUS customers, which is why we're pleased that the adoption and utilization of VetConnect PLUS grew more than twice the rate of our underlying diagnostic volumes in Q1.

Between our PIMS, our apps and the VetConnect PLUS franchise, we are uniquely positioned in veterinary software globally. And our guidance contemplates, as Brian mentioned, with the R&D accelerated investments in these platforms in 2018.

Our software strategy confirms several strategic advantages for IDEXX. We can help our customers grow faster, grow profitably, while supporting staff engagement and productivity, so important to practices in the current labor environment. We accelerate IDEXX diagnostics usage and loyalty, and grow the profitable recurring revenues of both diagnostics and our veterinary software and services, and digital radiography businesses.

In conclusion, the key elements of our strategy are clicking innovation and commercial execution which drives adoption of these innovations, and a software strategy that builds upon our diagnostic offering to accelerate customer growth and loyalty. All of us at IDEXX remain dedicated to our purpose to create exceptional long-term value for our customers, employees and shareholders by enhancing the health and wellbeing of pets, people and livestock.

So with that Cindy, we'll open up the call to Q&A.

[Operator]

Thank you. And we will go to line of Erin Wright with Credit Suisse. Your line is open.

[Erin Wilson Wright, Credit Suisse]

Thanks so much. Can you speak to the nature of the Fecal SNAP timing change? Just what are you seeing in the initial field testing? And should we think of a bigger ramp in Fecal SNAP in 2019? I guess how much was truly embedded in 2018 assumptions originally? And also maybe the competitive landscape, are you seeing anyone in the wings as far as the Fecal SNAP test goes? Thanks.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Yes, great. As we mentioned, this really has no impact on our 2018 guidance. Our field team has a tremendous number of offerings to sell. Catalyst now with SDMA and the SDMA T4 combo kit, SediVue which just tremendous runway ahead of us, what a great product, hematology, we're still highly differentiated in hematology, the reference labs, both growing utilization and winning new customers. Preventative care is a big growth driver, organic growth driver for us and the industry's SNAP Pro placements. You saw the digital radiography, the software, the VetConnect PLUS with major advancement. So really, we see the small amount of revenues that we had in our original plan is really being supplanted by growth in all these other areas, and really gives us confidence for the year.

In fact, Q1 is the most logical time to launch a new point of care SNAP assay at the beginning of the year with a lot of focus on new products. We're going into the season for – we're testing most intestinal parasites around people's minds in the summer when dogs are at the dog parks. And we do not expect or see anything on the competitive front. This was quite frankly the assay, which is performing very well. It took us ten years to find and develop the reagents for the three key worms, which we offer by the way in the reference lab. We have a fecal antigen, one of the big drivers of reference lab growth. And that's all a proprietary reagent. So, we think this will be a proprietary product for a long time certainly if you look at the length of our patents.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

And Erin, it will obviously provide a nice uplift for our growth in terms of being all incremental compared to this year. I think you had a question on competitive to this, this is not related to anything going on competitively.

[Erin Wilson Wright, Credit Suisse]

Okay. Great. And then I think your competitive placements overall for instruments were pretty strong. I guess what was some of the key drivers of that? I mean any sort of promotional activity or just better traction and better sales force maturity there? Anything you could, I guess, elaborate on would be great. Thanks.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

I think we're continuing to innovate in how we advance the customer's journey to belief in the importance of our innovative diagnostics and the care of the pet. I would put it mostly on sales force productivity and not just sales force, but of course the supporting marketing. We have the importance of our other professionals in the field whether they are the professional service veterinarians and the field support reps. Our international had a tremendous growth. I think that was the adoption of EVI for international, obviously the U.S. is getting stronger and stronger in understanding how EVI can drive profitable growth.

And yet, we still are discovering innovations to advance the customer's journey to believe in all areas, whether they are the importance of a fresh urinalysis to preventative care. It's amazing the amount of hidden disease. We've done a study for wellness really well, absolutely nothing wrong, by the way nothing wrong to the pet owner, nothing wrong to the veterinarian upon the exam, and yet one in eight dogs and cats in the adult age, one in six in senior and two in five in the geriatric category have evidence of underlying disease when you run the basic chemistry, hematology and SDMA. I mean these are extraordinary numbers. And we're bringing these numbers to the field. I mean, they are both the importance of testing and of course the addition of our unique proprietary assay such as SDMA and our advancements in the hematology area, which remain unique.

And so, this is a huge opportunity for growth. It's shocking that only 14% of clinical visits in our customer base, which is probably more advanced in the customer mix generally include a basic chemistry panel where the sick animal are well and roughly half the visits are wellness. So, there is tremendous opportunity for growth ahead of us in the diagnostic category, and of course that's going to relate to overall practice growth because when they find things, then they need to address them.

[Erin Wilson Wright, Credit Suisse]

Great. Thank you so much.

[Operator]

Thank you. Our next question will come from the line of Ryan Daniels with William Blair. Your line is open.

[Ryan S. Daniels, William Blair & Co. LLC]

Yes. Good morning, guys. Thanks for taking the question. Jon, I was hoping you could provide a bit more detail or color around IDEXX 360 in regards to when that was launched and what it encompasses? And I'm curious if that's primarily targeted at new customers or new placements or if that's more broadly positioned across the entire customer base?

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Well, thank you again for the question, Ryan. It's a really interesting question. It's certainly not a boring question. It's been very successful to us, the launch of the IDEXX 360 program in the first quarter of 2018, in North America. We call it 360 because it's all encompassing or complete. And really what it is is it's a friendly way for customers to adopt more of our portfolio and also adopt more of our menu in our instruments. And so, the reason why it's called 360, it's an all-encompassing or complete diagnostic offering and really leverages the fact that we have a complete portfolio of in-house and very full in-house with the urinalysis and the rapid assay and the reference lab to grow the business.

And it's also – a second reason is, it gives a 360-degree view on the patient's health. Because you can combine both what you might run on an in-house test with what you might reflex or run on the reference lab and have all that available to you in VetConnect PLUS with advanced testing options that are unique to IDEXX.

So it is a program which leverages the fact that we're in all the modalities and makes it easier for customers to adopt, whether it's new systems or come over to our reference lab growing same-store sales, winning new customers on a modality basis, and it's been – as you can see, it's been very successful, which is interesting because any new programs sometimes takes the field a little while to learn and they picked this one up relatively quickly in the first quarter with great success.

[Ryan S. Daniels, William Blair & Co. LLC]

Great. That's helpful color. And then as my follow-up, one on the sales force more specific to the international operations. You discussed Germany in particular is moving to kind of a single sales team like the United States. And I know internationally the EVI launched. How broad if you look at your non-U.S. business now, have you kind of moved that towards the U.S. sales model with the combined team in EVI? And how far along or what inning do you see that in because I know that could be a big uplift for international growth longer term? Thank you.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yeah. It turns out people love their pets all over the world and the opportunity for us is in basically every market depending on its size. And so we're about 99% of our Companion Animal Group revenues are sold direct which gives us full opportunity to work with the customers to grow utilization. And as you know utilization and just diagnostic protocols outside of the U.S. are behind where the U.S. are.

EVI is essentially, although not 100%, it's essentially adopted in all of our direct markets. There are a couple of remaining small markets that are still in process. And for the most of the markets we do have a customer-centric Veterinary Diagnostic Consultant model. Germany is a very important country for us. Because there is tremendous in-house opportunity for us and, of course, we have very strong lab presence that we're augmenting with the adoption – with building out an expansion and a new core lab in Germany which, of course, will be a network for a variety of European countries as well as Germany.

And so each country has its kind of unique aspects in terms of our sales model, but we're very pleased. It's not easy to translate. As you all told us when we did this several years ago in the U.S. market, it is not easy to move sales roles. And I'm just very proud of our German team for doing it and showing that it can be done. I think we leveraged a lot of learnings from the U.S. in doing that in Canada. We're pretty much a common model in Australia. So as you can see here, it's becoming more and more, but it's a step-by-step process. We're not fully adopted yet.

[Ryan S. Daniels, William Blair & Co. LLC]

Okay, great. Thank you so much.

[Operator]

Thank you. We will go to line of Michael Ryskin with Bank of America Merrill Lynch. Your line is open.

[Michael Ryskin, Bank of America Merrill Lynch]

Thanks. Hi, guys. Congrats on the quarter. I had a couple questions on some of the moving pieces for the quarter. You had, by our notes, one fewer selling day, and you also talked about the weather impact in the U.S. in the northeast in March as have others. And then there is also Easter timing in Europe. So I was just wondering if you could sort of parse out the headwinds from those issues? I mean you still put up a good print despite that, but I'm trying to get a sense of sort of the underlying performance if you normalize for these one-off effects?

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yeah. It was basically a 1% headwind on recurring revenues which we noted. The weather is a hard thing to parse. I think it didn't impact our business. We had a great quarter. I think in the market. Overall it likely had somewhat of headwind, but it's just a little tougher to estimate. But I think the one...

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

It was a normal winter and last year was a mild winter.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yeah.

[Michael Ryskin, Bank of America Merrill Lynch]

Okay.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

And so it just reinforces we had great performance, very strong performance. I'd point out in markets like Europe, we had up against a tough compare in the lab business, we had a really nice quarter there as well. So very pleased with how we started the year particularly in context of some of that.

[Michael Ryskin, Bank of America Merrill Lynch]

Got it. That helps. And then to clarify one other point. The accounting change, the revenue recognition, ASU 2014-09. On the 4Q call when you raised the guide for the year by 50 bps, you called out that that was due to that accounting change. And then in this quarter you recognized, you called out an incremental $12 million. That looks like it's right about the 50 bps for the year. So is it right that you're not expecting any more incremental revenue for the rest of the year from the accounting change?

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yeah, why don't you take...

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Those are two different things. So obviously what we talked about in the Q1, much of that was anticipated in Q4, right? So it wasn't incremental for the Q4. And we have – this now aligns with instrument revenues.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yeah. Why don't I just take a minute to give you a little background on the accounting impacts because it takes a minute to kind of digest and understand. But, look, as context, we raised our outlook for 2018 by $15 million and that reflected the Q1 performance as Jon talked about as well as our updated projections for placements and program mix which are all aligned with this new revenue recognition standard.

And I think it's important to understand that under the new standard, the instrument revenues are now going more closely track placements. So if you think across the different programs that we have, revenues under volume commitment programs and rebate programs and upfront programs are all basically in that aligned now with revenue recognition, at the time of the placement.

When you look at the accounting, what's attributed to the accounting impact, calculations of what's attributed can be impacted by changes in program mix which are independent of how many you place. So, for example, under this new accounting guidance, 100% of the revenue from a new program like IDEXX 360 is treated as being related to the implementation of the new revenue standard. And the reason why is that under previous GAAP, this is basically a volume commitment program. Those revenues would have been deferred.

So basically what you have is program mix shifts, which don't impact our view on placements, which drive revenue are being – are attributed to the accounting standards. You just can't take that first quarter effect and multiply it by four. What we did is we're updating our placement view. We took up the full-year numbers based on the strong start. It's all aligned with the new standard that has upfront revenue recognition. And as we work through the year, we'll do the reporting to go what's attributed to new standard, but I wouldn't focus on that metric as how to get at our revenue outlook, if you will.

[Michael Ryskin, Bank of America Merrill Lynch]

Okay. Got it. I really appreciate that, Brian. If I could squeeze in one quick one. You talked about pricing gains for the year on CAG. Specifically in rapid assay, the 6.7% organic, strong volume in 4Dx. But can you talk about pricing on that, specifically for rapid assays and then for the 4Dx, was there anything going on in the quarter?

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Our pricing was up. I mentioned that.

[Michael Ryskin, Bank of America Merrill Lynch]

Yeah.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

We had kind of the seasonal stocking programs we typically do. And that increase was net of those sets of programs. And our outlook for the year is we're trending in that 2% to 3% range and that's consistent across the modality. So we're continuing to get solid net price gains, but more of our growth is being driven by volume growth, and we've got excellent momentum on that front.

[Michael Ryskin, Bank of America Merrill Lynch]

Got it, great. Thanks so much, guys.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Thank you, Mike.

[Operator]

Thank you. The next question comes from the line of Jon Block with Stifel. Your line is open.

[Jonathan David Block, Stifel, Nicolaus & Co., Inc.]

Great. Thanks, guys. Good morning. Maybe 2.5 questions, just one small clarification. So the first one, just 1Q 2018 market growth was a little lighter, market growth that is, was a little lighter per your metrics, actually in line with some of our checks as well. So anything that you can share for April, Jon, or just at a higher level I guess what I'm asking is do you think this was all weather specific, and that the overall industry trends remain solid? That's the first question.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

I'd say, in summary, I think the overall industry trends remain quite solid. Q1 can be a little bit bumpy.

[Jonathan David Block, Stifel, Nicolaus & Co., Inc.]

Yes.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

But we see overall trends are quite solid. There is no reason to believe that they are not. And I would have mentioned that the revenue growth at the practice level was really not that different than what it has been historically at that 4.8%.

[Jonathan David Block, Stifel, Nicolaus & Co., Inc.]

Got it. Okay. And then just certainly impressive to increase the guide, especially considering the new timing on SNAP Fecal antigen. That said, I should have always thought about IDEXX, you're the innovator maybe at least one new product per year. And so should we now think that SNAP Fecal antigen is that product for 2019? Or I guess any other tricks in the bag that you can allude to? And then I'll just have my final clarification question.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Yeah. I mean the product we're really pleased about right now is the Catalyst SDMA. This is an enormous product. It's interesting. You've seen the – you saw the 42% adoption rate in a very short period of time in the U.S. market, which really just shows the underlying demand for SDMA that we've built from the reference lab. Now some of those customers don't even use our reference lab. And so maybe they will use our reference lab now that they see the value of SDMA. And so we've got – and then we've got just great – we've got a completely differentiated hematology offering. Obviously SediVue is going great guns.

And so when you launch a product, you've got like several years, many years of growth ahead of you. Clearly SNAP Fecal will be a big focus of launch in Q1 2019. I'm not ready to talk about any other products at this point in time, but you should expect, of course, continuous improvement in our existing products. So we just launched, for example, the new image algorithm for SediVue, Neural Network 3.0. And we expect to have a cadence of annual algorithm improvements that comes from the fact that at this point we have over 1 million patients that have been run on SediVue, and we use that with machine learning to advance the algorithm. Of course, it's unique to our Smart Service, the fact that all those images come back every day. And so the products will continue to have incremental advancements. But we're going to be – we have good product launch now scheduled for the beginning of 2019 with the SNAP Fecal.

[Jonathan David Block, Stifel, Nicolaus & Co., Inc.]

Okay, perfect. And a clarification, and Brian I think this is for you and hopefully I don't butcher this too bad, but you put up organic growth in CAG of 13.1%. The accounting change, if I remember correctly last quarter, was a 50 bp tailwind for 2018. Was that sort of going to come on board ratably throughout 2018? Or maybe asked differently, normalized for that accounting change, were you essentially at 12.5% for this quarter? Hopefully that makes sense. Thanks, guys.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Yes. I'm going to go back to kind of the earlier responses that I gave, which is I think when you're trying to take what's attributed to the accounting change and adjust growth rates, I don't think will help you understand the trends in the business. And that the way the accounting disclosure work is, you attribute benefit to the accounting change for a new program like IDEXX 360 as if it's 100% related to an accounting change. And obviously this is a successful new program. It's just a mix change.

So what I'd say is the underlying growth we were above where we thought we were going to be because we have really good instrument placements. And as we look at the updated full-year outlook, we've flowed that through, and we took it up more based on the momentum that we see and our estimates of what the program mix will be. And basically under all the programs, Jon, now the instrument placements are much more aligned with – the revenue is much more aligned with when you place the instruments. So we feel comfortable with that. And we'll try to help you understand the growth rate impacts, et cetera. But I think the underlying momentum of the business is very strong and sustainable under the new recognition standards.

[Jonathan David Block, Stifel, Nicolaus & Co., Inc.]

Okay, perfect. Thanks for your time, guys.

[Brian P. McKeon, IDEXX Laboratories, Inc.]

Thanks.

[Operator]

Thank you. Our next question comes from the line of Mark Massaro with Canaccord Genuity. Your line is open.

[Mark Anthony Massaro, Canaccord Genuity, Inc.]

Hey, guys. Thanks for the questions and congrats on a great quarter. My first question is really on the news of Henry Schein's decision to spin out its animal health business and merge with your neighbor, Vets First Choice. Vets First Choice seems to be making some inroads by engaging pet owners. And so, I guess, I'm wondering if you can comment on the strategy of working directly with the pet owners, does that potentially have any overlap with any of the initiatives you have in your software initiative?

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Well, first of all, we would like to congratulate the Henry Schein and Vets First Choice on their merger. As you know, we've moved away from distribution a number of years ago and we have a fully direct model which has been very, very successful for us. I would say that anything that engages pet owners, and in this case I think it's more compliance on with Vets First Choice, it's more compliance on therapeutics and preventatives and that kind of thing. But anything which grows the profession is good for the profession and is good for IDEXX. And so if this is pulled off and good, it's going to be a positive for us and a positive for practices as we firmly believe that pet owners – if practices can better serve pet owners, the underlying demand for pet care is – it's underserved, but dramatically underserved. And anything we can do or others can do to help practices better engage with pet owners is a good thing. So, yes, so that's our point of view.

[Mark Anthony Massaro, Canaccord Genuity, Inc.]

Great. And then I know that Neo is a product that you guys launched a couple of years ago. Can you just give us an update on how the traction of that platform is going? Are you perhaps contemplating your software strategy in context of what Vets First Choice is doing in the market?

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

We're very pleased with the progress, Neo which is cloud based. We're also pleased with Animana and between the two of them, we have 1,600 customers who use our cloud based practice management software.

And of course, we also have a variety of apps which integrate with ours and other third-party softwares that add value for the customer. And so this is I think an exciting area, it's a dynamic area. We've made some accelerating investments in 2017 and more in 2018. And we really have an unparalleled U.S. and global footprint when you add up our PIMS or apps or VetConnect PLUS presence, all of which are back to that prior point of helping customers run their practices better, more efficiently and engage with pet owners better and thus advancing the growth of the profession. So we really think we have a sort of unparalleled offering and it's very important for us. And we'll continue to be growing it as part of our diagnostics and software strategy.

[Mark Anthony Massaro, Canaccord Genuity, Inc.]

Great. And if I can one last quick one. I think at VMX you indicated that your total T4 slide hit about 60% ordering in its first year of launch. You are well on your way on SDMA on a slide at 42%. Do you have confidence that you can meet or exceed the T4 launch with SDMA?

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

I'm going to tell you, 42% within months of launch is an amazing, amazing accomplishment. And nothing happens fast in veterinary. Everything is – the adoption rates are typically very slow. And in that context, the adoption of SDMA on the slide has been exceptional. And so we're very, very pleased with the success we've had.

We've really been fully in the market in the U.S in January. We took some preorders in the fourth quarter, but we're really just ramping up for the last four months. So I think that's a great number. And the nice thing about SDMA on the slide, as I mentioned, it actually increases the economic value of a placement of a Catalyst because it's an additional – a parameter that customers purchase.

And thus the consumable stream from a Catalyst placement goes up just like with T4. And then as I mentioned, we are going to have the SDMA T4 combo kit, which I think is another kind of subtle, but it's going to be very appreciated by our customers because then they can just drop both those in together and with a chem panel and with older dogs and cats you really want to add T4 and of course you also have a very strong case to add SDMA to that for in-house testing. So we're very pleased with that strategy.

[Mark Anthony Massaro, Canaccord Genuity, Inc.]

Great. Thank you.

[Operator]

Thank you. And our final question will come from the line of Andrew Cooper with Raymond James. Your line is open.

[Andrew Cooper, Raymond James Financial, Inc. (Broker)]

Hi, guys. Thanks for sneaking me in here. Just a quick one from me. As we think of SediVue, kind of the placement trajectory there. Can you give us a little bit of color on what percentage of those are going to new customers versus back into the base and then on top of that, sort of what the attachment rate is relative to a new Catalyst placement there? And then lastly, if you can give us a little bit of an update if there is any changes to the pull through you have been seeing per day there that will be great? Thanks.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Yeah, I would say that there's not a material change to your last question in the pull-through. You would think that with exceptional value that your analysis adds to clinical insight, you would think and yet that's really to my prior point, things don't change that fast. And so where I think we've said 3,000, 4,500 in consumables per placement of SediVue.

And to your earlier – it's really all of the above. We're selling into our installed base. We're selling to customers when they buy the full suite. We're selling to customers who don't buy the full suite but maybe they're going to buy the full suite later. It's now very mature, very sophisticated instrument with huge differentiators. Of course, we've got the Pay per Run, which customers love because they don't have to buy consumable inventory in advance. We just had a very, very successful second year Free UA Day, which we can do because it's Pay per Run. We have one customer run 100 urinalysis in one day. That's a lot of urine. And that was a lot of clinical insight. And what we're finding is just like when you run a chemistry panel, there is a tremendous amount of clinical insight that you wouldn't always expect. When you run that urine, you find a lot of hidden disease and you're getting a better differential.

So the runway on – I think you're going to find that in time a practice will feel incomplete without in-house urine sediment analyzer, just as they do today in large part with chemistry, hematology, radiography. This is a core component to be able to reach the basic standard of care in veterinary medicine in the U.S. and then of course we have the whole international, which we really haven't even gotten started on yet because we're having so much success with placing Catalysts as you saw from the numbers, but following on Catalyst over the next decade we'll have a second wave with a very sophisticated urine sediment analyzer in the form of SediVue.

[Andrew Cooper, Raymond James Financial, Inc. (Broker)]

Great. That's it for me. Thanks, guys.

[Operator]

Thank you. And with that gentleman, I'd like to turn it back over to you for any closing comments.

[Jonathan W. Ayers, IDEXX Laboratories, Inc.]

Yeah, thank you. We're just very pleased with our organic growth of 12% driven in large part by the CAG Diagnostics recurring revenue of 13%. That component of our revenue, that CAG Diagnostics recurring revenue constitutes 76% of the company's total revenue. It's a real driver, although the other parts of the company are well too. I want to certainly congratulate our Water business. It had an exceptional 12% quarter, but it is a high-single-digit organic grower with mid-40s operating margins and very little invested capital. It's really an exceptional business and our team is doing a great job there. They did a great job with the go-directs in Brazil.

And then, comparable constant currency EPS growth of 32% was driven by strong fundamentals of our revenue growth and margin expansion and further aided by the net benefits of tax reform. So I just want to congratulate the IDEXX teams around the world for their successes in Q1 and the momentum we have in the business. I think everybody is very, very excited about what we can bring back to veterinary medicine. People love their pets, Millennials love their pets even more, and we can help veterinarians take care of those pets, live long, healthy lives.

With that, we'll conclude the call. Thank you.

[Operator]

Thank you. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.