IDEXX Laboratories Inc

NASDAQ:IDXX

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, and welcome to the IDEXX Laboratories First Quarter 2019 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 John Ravis, Senior Director, 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 measure 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 2019 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 2018 unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up as 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 McKeon, Chief Financial Officer]

Thank you, and good morning, everyone. IDEXX delivered continued high revenue growth and excellent financial results in the first quarter. In terms of highlights, we achieved 10% organic revenue growth driven by 12% organic gains in CAG Diagnostics recurring revenues. As expected, FX impacts from the strengthened U.S. dollar reduced reported revenue growth by about 3%.

Operating margins improved 210 basis points on a constant-currency basis, better than projected, reflecting strong gross margin gains and operating expense leverage, which benefited from high CAG Diagnostic recurring revenue growth as well as timing delays related to select IT and R&D project spending. EPS was $1.17 per share, up 16% on a reported basis or 27% on a comparable constant-currency basis.

Strong revenue growth and operating margin gains drove 21% constant currency operating profit growth. We also recognized about $0.02 per share in upside related to higher than projected tax benefits from stock compensation activity. In terms of our full year guidance, we’re maintaining our outlook for 9.5% to 11% organic revenue growth, reflected in our consistent guidance range of $2,385 billion to $2,425 billion in annual revenues. We’re increasing over 2019 EPS guidance range by $0.10 to $4.76 to $4.88 per share.

This incorporates an increase of about $0.07 from an updated outlook for 80 basis points to 110 basis points in full year constant-currency operating margin improvement, $0.01 to $0.02 per share and benefit from updated interest expense projections, and $0.01 to $0.02 in upside related to updated effective tax rate projections. Our operating margin outlook factors in additional investments were advancing this year and reference lab capacity, corporate customer support resources and customer-facing software capability while continuing to deliver a strong operating margin improvement and comparable constant currency EPS gains aligned with our long-term financial goals.

We’ll review our updated 2019 outlook later in my comments, let’s begin with a review of our Q1 performance by segment and region. Q1 results were supported by continued strong performance in our Companion Animal Group. Global CAG revenues were $509 million, up 10% organically by 12% organic growth in CAG Diagnostics recurring revenues. Veterinary software services and diagnostic imaging systems revenues increased 7% overall and 6% organically with overall revenue gains constrained by comparison to very strong prior year digital imaging system placement levels.

Veterinary software services revenue grew at a high-single digit rates organically in Q1, reflecting very strong skills across – results across our practice management platforms with the continued growth of our PIMs and applications installed base supporting expansion of recurring software services revenue. Our digital imaging business continued to achieve high levels of digital radiography system placements and high growth in recurring Web PACS subscription revenue linked to our expending installed base.

Our Water business revenues grew 8% organically in the first quarter to $30 million, reflecting continued solid growth in the U.S. and double-digit gains in international markets. Livestock, Poultry and Dairy revenue in Q1 was $32 million, up 4% organically. Gains in herd health screening, poultry and pregnancy products sales were offset by moderate declines in European disease eradication program revenues, continued market demand impacts on our dairy testing business and continued pressure on swine diagnostic testing revenues related to impacts from the African swine fever epidemic in China.

By region, U.S. revenues were $358 million in the quarter up 9% organically, driven by 11% growth in CAG Diagnostic recurring revenues, net of an approximate 1% equivalent day headwind. Strong U.S. gains reflected continued double-digit growth in reference lab and consumables and solid mid-single-digit growth in rapid assay sales. CAG Diagnostic recurring revenue gains were primarily volume driven with U.S. net price gains continuing to trend in the 2% to 3% range.

In terms of our broader U.S. market trends, this quarter, we significantly revamped and expanded our reporting from our data set from approximately 7,500 practices, representing five different practice information management systems. We’ve also refined our weighting framework based on practice as in region prepared in collaboration with Animalytix. We’re now providing same-store growth in clinical visits for practice augmenting our quarterly reporting on total same-store visit and revenue growth for Companion Animal Veterinary visits of all types.

In Q1, we saw improvement in total visits per practice growth to 1.3% year-on-year with clinical visits for practice growing at a greater amount of 2.2%, an overall revenue per practice growth of 5%. Please note that these metrics are on a same-store basis and do not include growth benefits from incremental practice formation, which we estimate at approximately 1% annually.

The Q1 2019 earnings snapshot on our website shows quarterly data on clinical visit growth for 2018 and Q1 2019 as well as some additional information we’ve added that describes our measurement methodologies and refinements we made towards historical data to reflect the additional insight we’ve gained from our data analysis efforts.

International revenue in Q1 were $218 million, up 11% organically. International results were driven by strong 14% organic gains in CAG Diagnostic recurring revenues, including continued 20% plus organic growth in consumable revenues as we benefit from 30% year-on-year growth in our global catalyst install base outside of the U.S. We saw modest benefits from advanced ordering in the UK ahead of the Brexit deadline, which added approximately 2% to international consumable growth in Q1.

International reference lab growth was in the mid-single digit range, as we continued to advance commercial efforts targeted on accelerating growth in this line of business, while sustaining strong momentum in expanding our catalyst install base in international markets. In terms of segment performance, Q1 results were supported by continued progress in driving catalyst placements at new and competitive accounts. The quality of our instrument placements were strong in Q1. We achieved 207 placements at new and competitive accounts in North America, up 7% with a higher tax rate of premium hematology instruments, which drove a solid increase in EVI, our measure of multiyear economic value of instrument placements.

We also placed 122 second catalysts at IDEXX accounts in North America, compared to 59 in Q1 2018, supporting growth in customer utilization at larger accounts. Internationally, we placed 633 catalysts at new and competitive accounts, up 20%. By region, competitive and new catalyst placements represented 69% of total placements in North America and 62% internationally.

Strong catalyst placement results and continued high retention is reflected in 24% year-on-year growth in our global catalyst install base. Overall, we placed 2,775 premium analyzers in Q1, down 2% compared to very strong prior year levels. Q1 results were led by 1,463 catalyst placements globally, up 4% overall supported by 442 placement in North America, a 20% year-on-year increase. And 1,020 placements in international markets, down 1% compared to record prior year results, which included high levels of VetTest upgrades in emerging markets.

As noted, we saw a high attach rate of premium hematology instruments with chemistry placements in Q1, which supported 823 premium hematology instruments globally, up 9%. SediVue placements were 489 in Q1, down 26% versus very strong prior levels impacted by our exceptional SediVue placement performance in Q4 as well as our commercial focus in Q1 on capturing high EVI, new and competitive catalyst placement opportunities.

In addition to strong premium placement results, we drove continued momentum with SNAP Pro with 1,999 placements in the quarter. CAG Diagnostic instrument revenues in Q1 were $29 million, a 3% decrease organically of a tough compare in 2018, which included mix benefits from very strong placements of higher price SediVue instruments.

Benefits from an expanding instrument base, test innovation and enhanced commercial capability continue to drive strong CAG Diagnostic recurring revenue gains across our major modalities. Instrument consumable revenues of $167 million grew 15% organically in Q1. Results reflected double-digit gains in the U.S. and continued 20% plus growth in international markets. High volume-driven consumer gains continue to be supported by expansion of SediVue paper run and estimates live revenues, which contributed approximately 3% combined to year-on-year consumable revenue gains in the quarter.

Reference lab and consulting services with revenues of $203 million grew 11% organically in the first quarter. U.S. lab momentum remains strong reflected in solid double-digit volume-driven organic revenue gains, supported by expansion of our preventative care programs. As noted, International reference lab growth was in the mid-single digit range supported by solid gains in Europe.

Rapid assay revenues of $54 million grew 6% organically in Q1 reflecting solid gains across U.S. and international markets. Rapid assay gains were primarily volume-driven supported by growth in 40x plus and first generation products.

Turning to the P&L. Operating profit in Q1 was $133 million, up 18% as reported, or 20% on a constant currency basis, reflecting profit gains across our CAG, Water and LPD segments. Operating margins were 23.1%, up 210 basis points on a constant-currency basis, supported by solid gross margin gains and operating expense leverage.

Gross profit was $332 million in Q1, up 9% as reported or 12% on a constant-currency basis. Gross margins increased to 110 basis points on a constant-currency basis, supported by continued moderate CAG Diagnostic net price gains, volume leverage and productivity gains and our U.S. reference lab business, mix benefits from high consumable growth as well as solid gross margin improvement in our Water and LPD businesses.

Foreign exchange hedge gains, which are reflected in gross profit were $1.4 million in Q1. Operating expenses in Q1 were up 4% or 7% on a constant-currency basis, resulting in 100 basis points of positive operating margin leverage. Operating expense increases were driven by growth in CAG, sales and marketing and R&D spending with overall spending increases mitigated by modest constant-currency growth and G&A cost, including benefits from later phasing and certain IT-related projects.

EPS in Q1 was $1.17 per share, an increase of 16% as reported and 27% on a comparable constant-currency basis. Foreign exchange, net of hedge impacts in Q1 2018 and 2019 decreased operating profit by $4 million and EPS by $0.03 per share. Our effective tax rate was 17.7% in Q1, including benefits of 4.4% to our tax rate or $0.06 per share related to share-based compensation activity, which was approximately $0.02 per share higher than projected.

Free cash flow was minus $4 million for Q1, reflecting normal quarterly seasonality and increased capital spending related to major projects. We continue to maintain our full year outlook for free cash flow of approximately 60% to 65% of net income for 2019 and a $160 million to $170 million in capital spending, which includes approximately 20% of free cash flow impact, driven by $70 million of combined incremental capital spending related to Westbrook, Maine headquarter expansion and our German Core Lab relocation.

We allocated $54 million in capital for repurchases of 267,000 shares in Q1. We ended Q1 with $1,052 billion in debt, including $100 million of the new tenure notes issued in the quarter. Our liquidity remains strong with a $117 million in cash and $502 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.69 times gross and 1.5 times net of cash and investment balances.

We’re maintaining our 2019 full year outlook for reduction in average shares outstanding from stock repurchases of 1% to 1.5%, which assumes net leverage at 1.5 times EBITDA. We’re now projecting annual interest expense, net interest expense of $36 million incorporating a more favorable full year interest rate outlook.

Turning to our 2019 guidance, we’re reinforcing our full year revenue outlook, while raising our EPS range by $0.10 per share. Our full year reported revenue guidance remains $2,385 million to $2,425 million, reflecting consistent expectations for 9.5% to 11% overall organic growth and 11% to 12% organic growth in CAG diagnostic recurring revenues.

Our reported revenue Outlook reflects a consistent projected 1.5% full year FX revenue growth headwind at the rates assumed in our press release. We’re raising our 2019 full year EPS guidance, $0.10 per share to $4.76 to $4.88 or 16% and 19% growth on a comparable constant currency basis. This incorporates a 30 basis point increase in our outlook for constant currency operating margin improvement now estimated at 80 to 110 basis points for the full year, resulting in approximately 7% – $0.07 per share in improvement in our EPS guidance range.

We’ve also refined our outlook for net interest expense and stock compensation tax benefits, which combined at approximately 3% to our full year EPS – $0.03 to our full year EPS range. We’ve updated our outlook for 2019 effective tax rate to 20% to 20.5%, including an updated estimate of $8.5 million to $10.5 million or approximately 2% in full year projected tax rate benefit from exercise of share-based compensation. We estimate that foreign exchange rate gains will decrease reported EPS by $0.03 per year, net of approximately $11 million in projected hedge gains.

For the second quarter, we expect reported revenue growth of 7% to 8.5% and organic revenue gains of 9% to 10.5% supported by consistent 11% to 12% CAG diagnostic recurring revenue gains. We expect Q2 operating margins to be approximately 50 basis points higher than prior year levels on a constant currency basis. This outlook incorporates the re-phasing of plan for staff investments, impacts of higher international commercial staffing levels and incremental investments in select areas including increases to our U.S. VetLab capacity. We expect our effective tax rate in Q2 to be approximately 21.5%, including projected benefits from share-based compensation exercise activity.

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

[Jon Ayers, Chief Executive Officer]

Thank you, Brian. Now a little color commentary. We had a strong start in 2019 in the first quarter with organic revenue growth of 10% and comparable constant currency EPS gains of 27% supported by better than expected margin gains. Globally, we delivered a solid 12% organic growth in our CAG diagnostic recurring revenues at the higher end of our full year growth rate with strong gains across the U.S. and international regions. This expanding highly durable annuity contributed 77% of IDEXX’s total revenues in Q1.

Instrument placements globally considering both quality and quantity together, we’re solid with strength in the U.S., Europe and Latin America offset by year-over-year declines in Asia Pacific, primarily related to tough comparisons. Our premium install base continues to expand at high rates and we do not see any change in the competitive environment.

In Q1, our U.S. field organization was in the second quarter of the latest territory expansion. And so we saw strong momentum in placements of catalysts in new and competitive accounts up 7% as our field organization expires customers to trade up to IDEXX’s advanced technology offering. We also had an exceptional quarter with SNAP Pro placements of almost 2,000, driven by the U.S. up 68% year-over-year.

We are methodically transforming our rapid assay customer base into a razor and blade business model. As a SNAP Pro mobile instrument brings significant workflow and charge capture value to the veterinary practice. And we’re seeing higher growth and rapid assay loyalty when customers adopt SNAP Pro workflow. With placements in Q1, we’re now well over 60% of our SNAP 4Dx coming from active and connective SNAP Pro customers.

Despite tough comparisons to high prior year SediVue placements, new and competitive catalysts and SNAP Pro gave supported solid growth in the U.S. economic value index in the quarter. They really did a great job.

Europe also saw strong – solid Q1 growth in catalyst placements and instrument placement value, which is impressive given they are in their first quarter of the field sales expansions. The European expansions are on their way to completion at 92% occupancy. However, 40% of field reps are in their first year. And as a result, sales productivity in Europe will be building through 2019 as field experience and time and territory advances.

This is the same dynamic we saw in the U.S. when we undertook a similar major expansion in 2015. The U.S. Companion Animal market is on very solid footing as is the pet owner in general based on macro and the trends we see. We are excited to be presenting this quarter a much expanded and improved market growth reporting as shown on the second page of our earnings snapshot with an upgrade to our methodology and an expansion in the number of practice of 7,500 in total coming from a variety of both IDEXX and third-party Practice Management System.

Additionally, weighted to reflect the market in terms of geography and practice size and type with the support of Animalytix and we’re grateful for their partnership. We’re giving back to the industry by publishing these important metrics on a quarterly basis, as part of our earnings. This is an industry with otherwise limited to no market data of this kind. Of course, the data also helps investors understand IDEXX a little bit better.

From this data, we’re seeing 2.2% clinical visit growth from existing practices in Q1 to get to total market visit growth, we need to add the impact of net new practice formation, which we estimate to be about 1%. Pet care in the U.S. is a very healthy market with existing veterinary practices making investments in technology and infrastructure and new practices being opened.

Our growth of the Companion Group diagnostics recurring revenue in the U.S. was 11% in Q1, net of about 1% equivalent day headwind. We are and have been growing faster, our diagnostic volume than patient visit growth for several reasons. First, we’re seeing same – strong same-store sales in diagnostic volume growth beyond clinical visit growth, driven by our unique innovations and our focus on driving ongoing increases in the utilization diagnostics and pet care.

Across our modalities, we estimate this adds about 4% of incremental volume to clinical visit growth. To this, you add another 2% growth in the number of new practices that are utilizing IDEXX as their primary diagnostic partner, whether it be in-house, reference lab or both, call this customer share gain, if you will.

In fact, we topped 20,000 practices sending at least one sample at the IDEXX reference labs and Q1, our record for this metric in Q1. We also continue to realize 2% to 3% net price realization in Companion Animal diagnostic recurring revenue. So added all up 9% volume growth from a variety of sources and 2% to 3% new price realization gets us to low teens Dx recurring revenue in the U.S. aligned with the high end of our long-term U.S. growth potential of 9% to 13%.

Same-store sales at the practice level is being driven in part by the adoption of IDEXX’s fecal offering and by preventative care diagnostics, what we call the Preventative Care Challenge or PCC. To-date, through Q1, nearly 2,800 practices have enrolled in PCC program since its inception with over 300 new practices enrolled in the quarter. These 2,800 practices are growing IDEXX diagnostics at just under 15% on a trailing 12-month basis.

Preventative care is a great example of how we are creating new market growth with our innovations incorporated into reference lab PCC profiles, all of which include at a minimum IDEXX SDMA with the chemistry, the IDEXX CBC, fecal antigen and IDEXX’s 4Dx offering. Together, they make an IDEXX PCC panel, a well justified annual pet owner investment in their pet – in the pet’s health by uncovering underlying disease as part of a wellness visit. Just think it this way.

Running a PCC panel on a pet as part of an annual physical exam is like a human getting a physical with blood work every seven years. The only difference is that the blood work is even more important in pet care as the pet can’t speak for themselves. And we’ve got these dogs running around dog parks sniffing around and drinking from the puddles.

It’s just a different situation and we’re finding there’s a lot of value. When a veterinary practice partners with IDEXX, with our proprietary PCC panels, their overall practice revenue growth accelerates generally without the addition of any staff. Clearly, 2019 is the year where preventative care diagnostics driven by the expanded capabilities of IDEXX’s unique offering is moving into the mainstream of veterinary medicine to the benefit of the veterinary practice, pets, owners and IDEXX’s alike.

And yet, we believe IDEXX is only serving 10% of the total addressable market for preventative care. We also see nice same-store sales growth in the VetLab consumables business from the adoption of new menu, including catalysts SDMA, SediVue and now catalyst progesterone. Customer retention rates in the U.S. remain stable and Q1 at world-class levels of 98% to 99%.

In an environment where our competitors use they’re only weapon price to compete, it’s nice to see our customers do not equate price with the value and evidence the value of our innovations through their loyalty. New Product launches in the quarter included catalysts progesterone, which is off to a strong start, both U.S. and internationally.

France led the launch helping to expand the availability of poodles. We completed the update of all SediVue in the field with the newest algorithm, Neural Network 4.0 benefit of our internet of things strategy with our instruments. And veterinary software – in the veterinary software portfolio, we released Cornerstone 9.1 to great excitement and rave reviews. This new release brings a transformed user experience that is more intuitive and reduces clicks and we’re seeing a more rapid take up of this new release as a result.

We had strong placements of new Cornerstone, Neo, Animana and Smart Flow systems in the quarter. In addition, this month we formally announced the prospective availability of a cloud version of Cornerstone, for our customers who value the deep and unique functionality of Cornerstone as the go-to, high end practice management software, but also want the benefits of the cloud, such as full mobile access. We’re seeing strong adoption in our IDEXX Web PACS, our cloud-based software-as-a-service offering with its new reference image library and the ability to work with both IDEXX digital imaging systems as well as those from third parties.

Total Web PACS subscriptions have seen a 40% growth year-over-year, other software offerings from IDEXX are advancing nicely, including Petly Plans for wellness plans enterprise to support our corporate customers and of course, IDEXX VetConnectPLUS, which continues to make steady advancement in both functionality utilization.

It is indeed a comprehensive and impressive IDEXX software technology stack. We’re serving a growth market and supporting further market growth through our advanced diagnostics and software technologies. Given our success, we have in the works augmented and investments planned in the North American market, including reference lab capacity expansion, corporate account support resources, and further investments in our customer facing software strategies.

Of no – we have no plans for further expansion of our field based footprint in the U.S. or internationally in 2019, in diagnostics other than completing the orchids, the occupancy plans in Europe, and a small expansion to serve corporate accounts. With these investments, we’re focusing on the remainder of 2019 on driving field sales productivity, which comes from time and territory advancing our CRM and advancing programs such as EVI and IDEXX 360.

In summary, we see very solid trends in our markets globally in 2019 and remain on track to advance our strategy of investments to further our innovation agenda, such as our outlook for about $150 million in cash R&D. While delivering our – on our 2019 revenue goals and an augmented outlook of 16% to 19% comparable constant currency EPS gains for the year.

And Kevin, with that, I’ll open the call to questions.

[Operator]

Thank you. [Operator Instructions] First question is from the line of Ryan Daniels of William Blair. Please go ahead.

[Ryan Daniels, William Blair]

Yes, good morning. Thanks for taking the questions and all the detail. Brian, one for you. Operating margins clearly stronger than anticipated. And I think you mentioned in your comments, there were some IT and maybe R&D spending that was delayed. So can you dive into a little bit more the rationale behind that? Was it related to personnel hiring, given the economy or just the noise in investment spending? And then number two, anything we need to think about regarding cadence in those items for the rest of the year on a quarterly basis.

[Brian McKeon, Chief Financial Officer]

Thanks, Ryan. On the project spending, it was just a normal executional timing. It wasn’t a change in plans, but just when we were able to execute some of the IT and R&D project spends. We’re still on track as Jon highlighted for the cash R&D spending goals this year, which are about a 15% increase. And so that will face in relatively more through Q2 through Q4. And we’ll also continue to execute in the IT front. So it was more just a timing versus our estimates.

I would highlight that in Q1, we had some favorability that benefited the quarter. We had some favorable compares in our LPD business on the gross margin line. We had very strong consumable growth in particularly in international, some of that benefited we highlighted there was some Brexit pull forward. That added a couple of points to growth and we’ve got some mix benefits from those factors.

And as we work through the years, we’ve highlighted today, we’ll have some incremental investments going coming online in the second quarter will be adding some day lab capacity in the U.S., and that’s factored into our margin outlook balance of the year. So we are clearly feeling good about how the year started. We raised the full year operating margin goal, but I think some of those factors will moderate the gains as we work through the year.

[Ryan Daniels, William Blair]

Okay, very helpful color. And then Jon, my follow-up will be for you in regards to the international sales force. Can you talk a little bit more about what you’ve seen in regards to their ramp relative to the United States? I know you said 40% are within that first year. So I’m sure there’s a nice ramp curve and maybe there’s confounding factors like moving to IDEXX 360 and some of the other initiatives that make a little hard to gauge versus historical levels. But what would you anticipate in regards to the productivity of that salesforce is it both expands and matures?

[Jon Ayers, Chief Executive Officer]

Yes. I think that’s a good question. I think it’s going to international expansions that they will – we will see the productivity build over the course of your. Obviously, we’ve got a phenomenal product line and we’ve demonstrated that with placements around the world. And it just gets better as we add to it with things like with progesterone and of course, the regular software updates that go to all of our instruments as part of our smart service strategy.

But its – the sales expansion, so I would see this was a very major expansion. And we undertook over the last four months to six months, yes, internationally in selected markets. Obviously we had a very strong, we have very strong country organizations there already. But I would say this expansion was kind of more – for them, was more in the order of expansion that we undertook in 2015 in the U.S. and so I would use that as a guide, how we think things will progress over the year.

[Ryan Daniels, William Blair]

Okay. Thanks for the color.

[Operator]

Next question is from the line of Erin Wright, Credit Suisse. Please go ahead.

[Erin Wright, Credit Suisse]

Great, thanks. You highlighted again in the prepared remarks around the preventative care challenge program, and can you give us a sense on when that will contribute more to financials, if there’s anything embedded in your guidance for 2019? Or if there’s any other metrics, I think you gave some in your prepared remarks that we can track on a quarterly basis just to measure the success and progress of your efforts on the preventative care front? Thanks.

[Jon Ayers, Chief Executive Officer]

Thank you. We – that’s a great question. That is contributing to the 11% reported growth in the U.S. recurring revenue, which had a day of headwind in it. So that that’s – that is a – the preventive care is a big deal. And the evidence, the medical evidence for preventative care is getting stronger and stronger as we put together that the data and we share it with the industries and the key opinion leaders. And our field organization, I mean this is one of the reasons why we’ve done all of these expansions. They are bringing it to the local practice.

So we’re adding every quarter a couple of hundred practices who are moving to this new way of thinking. They’re all being threatened by the retail going out of the practice. And so they’re realizing that is a turned to diagnostics, that’s not only a nice anecdote, but it’s a higher, it’s a more productive, it’s higher, so more satisfying and financially impactful way to grow the practice. Then retail, it has higher margins. And it’s a whole lot more satisfying to address issues early then that deal with them very late in their progression with the pet.

And so I think we’re beginning to see significant momentum of 2,800 practices. That’s approaching 10% of the market. That is not a insubstantial demonstration of the success of this program. And yet, of course, we’re really only early days. We think every practice really should be adopting this as a best practice over time. They’ve got the tools and the support of our field organization to do so.

[Erin Wright, Credit Suisse]

Okay, great. And then you gave some great data points on the underlying market demand trends in the U.S. I’m curious if you keep track of some of those metrics overseas in terms of same-store sales volume trends. And if so, kind of directionally here how we should be thinking about the underlying health of the international CAG market. Are you seeing a broader presence from competitors that can also help drive awareness and advanced practice protocols in Europe as well as more broadly internationally? Thanks.

[Jon Ayers, Chief Executive Officer]

Yes, thank you. We’re really pleased to be able to present in partnership with Animalytix, the much more sophisticated U.S. metrics. And as we all know, there’s just like almost no data in this industry and there are reasons for that. It’s because, it’s not – it doesn’t have the standardization we see in human healthcare. In practice management systems, we found 790 different ways to call a dog, a dog. It’s pretty amazing.

So our machine learning AI is really coming into play here. With regard to the comparison to international, we just, we aren’t there yet. We don’t have that that same capability. But generally speaking, they’re the same pets and people love their pets. And the level of adoption of diagnostics is still a fraction. And so we’re bringing intention, but certainly any intention that the industry brings to the profession of the value of diagnostics we think will help grow the market around the world.

And clearly we’re seeing that with the double-digit growth in CAG Diagnostics recurring revenues that we’re seeing routinely outside the U.S. somewhere to the more advanced market that we have in the U.S. And it’s really not – it’s really a phenomenon and the cuts across all cultures and geographies. And really it’s the amount of the attention that we can bring support of course, by a great product line that’s going to drive this growth, which is why we’ve done these expansions internationally to accelerate the adoption of diagnostics in the practice of veterinary medicine.

[Operator]

[Operator Instructions] Next question from the line of Michael Ryskin by Bank of America. Please go ahead.

[Michael Ryskin, Bank of America]

Hey guys, thanks for taking the question. A few quick ones, just to follow-up on some of the things you highlighted earlier. You mentioned some stocking in the UK tied up with the Brexit, I think you said 2% to international consumables growth. So I’m thinking that’s about 65 to 70 bps to total consumables in the quarter. So make sure that’s correct and sort of, what’s your expectation for that throughout the rest of the years, that belief that that’s going to fade or sort of reverse in 2Q or if you could just tell us how that factors into your outlook.

[Jon Ayers, Chief Executive Officer]

That is correct. The number was 2% international…

[Michael Ryskin, Bank of America]

International consumable, that’s exactly correct.

[Jon Ayers, Chief Executive Officer]

And that’s – we’re weighted towards the U.S. and consumables relatively. but I think that’s – those are reasonable estimates on the overall effect. And we’ll see, we don’t have full insight into how the many customers, we have an international markets are that you take…

[Michael Ryskin, Bank of America]

Correct, perhaps it will evolve.

[Jon Ayers, Chief Executive Officer]

Exactly. But we were anticipating there was a high level of concern obviously, with the uncertainty in Q1 and we’d anticipate some pullback in Q2, but it’s – we’ll see how that plays out. We don’t have full visibility into that at this point.

[Michael Ryskin, Bank of America]

Okay, thanks. And then another quick one, on the instrument revenues, I think you mentioned sort of the disconnect, where revenues were down I think 3% organically, but you saw a pretty solid placements across the board. You mentioned some mix in terms of a tough comp onset of you year-over-year, and how that played into the dynamic, but I was wondering – and then you could say sort of on an apples-to-apples basis, how’s pricing and instruments you mentioned? I think it was positive for the CAG overall, but I want to focus on what’s going on in the capital equipment side of things?

[Jon Ayers, Chief Executive Officer]

Yes. I would say it’s similar – similar dynamics. We had different metrics we can look at on that front. But I think the amount of cash that we put out for, in support of instrument placement programs on a quarterly basis was kind of in line with the trend we had last year. We did have a couple of tough compares in the quarter, set of view, we had an exceptional year last year and we had very strong placements in Q4 and our organization was really focusing Q1 on the big new – the competitive placement opportunities, which you saw on the quality of the numbers that we posted there.

So that was one factor. Another one that we’ll see going into the second quarter as well as we had very strong vet crit test upgrade results in international markets including China last year. And so just on an absolute revenue basis, we’re up against tough for compares, but net-net, we’re shifting a lot of our focus towards the competitive placements and that’s helping us on the EBI front.

So, we feel very good about the quality of the growth and just to reinforce, we pointed out that year-on-year, we’ve got a 24% increase in our Catalyst installed base globally. So, that’s the big driver of our consumable gains and we have great momentum there and we’re feeling very good about that and that’s where we’re confident in reinforcing the outlook for the year.

[Brian McKeon, Chief Financial Officer]

Yes. And I just want to do a color commentary, I’m glad you’re asking that question that Mike and highlighting that. We really, we run the business on the economic value of the instrument placement, which of course, includes the pricing of the instrument and the instrument revenues, but also includes our estimate of the economic value of the annuity, associated with that placement.

And so we don’t run it based on instrument revenues. So that would be the wrong way to think about the business. It’s about creating value with each quarter. And it was a very solid and positive growth in the value of those placements, and it was really, to put it in one word, it was really mixed up that has the revenues a little bit different than the value.

[Michael Ryskin, Bank of America]

Very helpful. Thanks guys. I’ll get back in queue.

[Operator]

Our next question is from the line of Jon Block with Stifel. Please go ahead.

[Jon Block, Stifel]

Thanks. Good morning. I’ll start with gross margins, they were up real strong at 120 bps. I haven’t seen sort of that level, I don’t believe of year-over-year gross margin expansion since the first half of 2017. But Brian, some of that expansion was from the other businesses. You called it out in bid, but Water and LPD gross margins were up around 400 bps to 500 bps year-over-year. So, if you can talk to what drove that and is that step function to the new level largely sustainable in those divisions going forward?

[Brian McKeon, Chief Financial Officer]

I think it is, yes. We should have continued good gross margin performance across the different businesses. I would highlight some factors that are benefiting us in Q1 in LPD. We did a very strong health herd screening, revenues which are relatively higher margin in that business. And that is that – we don’t anticipate that same level of growth as we’re moving forward and some of that was a compare. We had some higher costs last year as well. So, I think it’s a – the year-over-year growth, Jon, we anticipate some moderation in that dynamic, but I think we’re confident that we can sustain a good margin performance we’ve had in the business.

And water continues to be a very healthy business for us. And I think we’re – we hope to build on that. I – we are obviously expecting this year gross margin to be a key driver of our overall performance. The 80 basis points to 110 basis points improvement and we expected the bulk of that to be delivering by gross margins, but there will be some moderation as we as we move forward including in the next quarter just as we advanced some of the investments that we talked about and we have some of the mixed dynamics changing as well. But we think, we’ve captured that in our full-year outlook.

[Jon Ayers, Chief Executive Officer]

Just one more thing Jon, I really – I want to call out, I was very pleased – that we’re very pleased with the reference lab, a gross margin performance in the herd. And as you know that the U.S. has really been very well with the double-digit growth that is higher than our global 11% in the reference lab organically. It’s really being led by the U.S., it’s very, very successful part of our strategy. We’re seeing nice gross margin growth there. Of course, we’re reinvesting some of that for expanded capacity to really continue to provide an exceptional service level across all geographies in the U.S. and we’ve called that out as an incremental investment in balance of the year.

[Jon Block, Stifel]

Got it, very helpful. And just a pivot to my second one here, I didn’t find the instrument figures to surprising. And as you mentioned, clearly where these boxes go dictate the future annuity, but the set of you down 26% year-over-year on a global basis was a surprise to me. I believe the in clinic urine sediment might be around 15% penetrated in the U.S. give or take. So Jon, you know, a couple of years into the U.S. SediVue launch. How do you view the peak penetration rate of in-clinic urine sediment, and put it in perspective of hematology and chemistry, which might be closer to 70% and 90%, respectively. Thanks guys.

[Jon Ayers, Chief Executive Officer]

Yes, thank you. First of all, the SediVue to-date has mostly been a North American product area and it’s been driven by North America. And we continue to see that, that could be in the case in the near future. Our North American organization, particularly, our U.S. organization, it just had a very strong quarter in competitive catalysts, okay. Those are – they have that lot – adds a lot of economic value. Those are in some ways more challenging than even SediVue. And so we have the remaining SediVue opportunity in front of us that we’ve talked about, probably over 30,000 analyzers, when we compare what SediVue penetration could be in relation to chemistry and hematology. I think we’ve laid those numbers out in conversation with investors in the past.

And so really there’s no – we don’t really see any change in the ultimate opportunity for SediVue penetration. And we really, really remain a class by our own with regard to SediVue and keeps getting better, that the Neural Network 4.0, which just is silent upgrade that went across our entire installed base, but a new menu and a greater overall experience. And we’re not done yet with continued software investments in SediVue. And our customers know SediVue just gets better and better. So I think, it was a quarter where the field worked on the competitive catalyst placements. And I got to tell you, I was pretty proud of our accomplishments in that regard.

Also, Jon, one more thing. I know you’ve talked about it in the past. You got to be impressed with that 68% year-over-year growth in SNAP Pro placements. I mean, that’s really turning out to be a great strategy. And of course, that’s also takes a field effort to accomplish.

[Operator]

Next question is from the line of Mark Massaro of Canaccord Genuity. Please go ahead.

[Mark Massaro, Canaccord Genuity]

Hey guys, thanks for the questions and congratulations to your team for putting together this really large dataset. I wanted to ask if you could maybe help me, think of where the additional 2,500 practices of data came from. I think, you reported out 5,000 previously. And then this is probably nitpicking, but last quarter I think you called, 30 basis points of increase and it looks like you revised that down to 30 basis points of decrease. Is that largely a function and I’m referring to Q4 total visit growth. Is that largely a function of the additional practice data? Or was there were something else revised like geographic location changes.

[Jon Ayers, Chief Executive Officer]

Yes. Let me first – take the first part of your question, and then Brian can answer the second part. So the 7,500 practices includes, while the 5,000 always included practices beyond our Cornerstone, which is go to PIMs. We’ve greatly expanded the number of practices across the five major practice information management systems that are out there, only some of which are ours and some of which are third-party. And in addition, not only that, we haven’t just taken a straight growth, we’ve weighted the growth across these practice by segmenting them and getting them proportionally represented to the market, in terms of geography. We may have more in one geography than another, but we’ve adjusted for that. And it’s really been with a supportive Animalytix that we’ve been able to do that weighting.

So really it is a comprehensive revamp and we’ve been able to apply our machine learning algorithms to figure out what are the clinical visits versus what I would call maybe the retail or non-clinical service visits, such as boarding and grooming, which of course, these are the higher quality visits and they’re the ones that have a diagnostics and prescribed medications, so veterinary services that involved the veterinarian. So these are the more important – and they get more important business, so they give greater visibility. So I think long-term trends. Brian, you want to…

[Brian McKeon, Chief Financial Officer]

Yes. And the – to Jon’s point, we’ve refine the methodologies and to make this even more accurate and just went back in time and adjusted the prior data to be consistent with that. So you’ll see some minor changes in the historical data, but it’s all intended to be apples.

[Jon Ayers, Chief Executive Officer]

I think we look at this practice visit growth at the clinical level, not including net new practice formation, which we do not capture in this information, because we’re looking at same-store sales year-over-year. I think, we see a very robust market. I would generalize, stepping apart from the quarter as a whole, I think we’re seeing in same-store sales 2.5% to approaching 3% on a sustainable basis, practice visit growth on a same-store sales basis. And as we said, we had estimated that about 1% of that.

[Brian McKeon, Chief Financial Officer]

So I think it’s very healthy market and it’s nice to see the first quarter. It does bounce around a little bit from quarter-to-quarter, but I was nice to see the first quarter metrics.

[Mark Massaro, Canaccord Genuity]

Okay, great. That’s helpful. And then as more and more animal clinics choose to join larger groups, the value of these contracts become increasingly important. Can you just speak to, how you feel you’re positioned as – maybe some of your competitors may have won some large deals, whether it’s three or four years ago, some of these might be up for renewal. Can you just speak to the opportunities, in front of you and how you think your positions going forward?

[Jon Ayers, Chief Executive Officer]

Thank you. We think we’re exceptionally well positioned and we have very high loyalty among our corporate practices. Our corporate practices value us for a couple of reasons. First of all, we helped them drive same-store sales growth, which just has a very nice drop through benefit in a practice that has high fixed cost leverage. Diagnostics is a great place to improve both the revenue and the profitability. And our field reps along with our technologies such as preventative care and the underlying diagnostic technologies and better than preventative care drive same – help them drive same-store sales growth. Second, the number one issue that corporate practices had his staff engagement and retention. It’s hard to recruit in the current environment. And the staff likes our products and they’re very loyal to our products and they – and our corporate practices appreciate on that.

And so they really want to be able to support the local staff with the best technology. And that’s one of the reasons why we have such high loyalty, because they acquire practices with our products and they keep them. And if they decide to take them out that really usually has a pretty negative impact on engagement, which can lead to issues on staff retention, which of course has a pretty dramatic impact on the economics of that practice. So you lose a key producer and you’ve got to go find someone that’s not a pleasant experience.

So our model works in the corporate and you can see it in our recurring revenue growth even in the period of the slow evolution of the industry to a larger corporate sector. Our recurring revenue growth is quite strong in that regard and those loyalty factors that I mentioned in my prepared remarks of 98% to 99%. That’s all in, that’s individual and corporate all embedded.

[Mark Massaro, Canaccord Genuity]

Great. And if I can sneak one last one in, you performed more or less strong across the board and kind of in line with consensus for Q1. On the reference lab segment, you are going up against tough comps from the first half of last year. And I think we’ve kind of saw the growth rate sort of moderate based on the comp. But in particular on OUS, came in at mid single digits. How should we think about the underlying demand of OUS reference lab? And can you speak to whether or not this might change when the Germany eat reference lab opens?

[Jon Ayers, Chief Executive Officer]

All right. We are on track with opening the new core lab in Germany, which will really replace existing lab in Q1 of 2020. I think your comments are correct with regard to first half and second half for a comparison on the international reference lab. I think it’s all part of that growing the highest and most productive use of these reps is placing instruments, because that’s got very, very – that’s a very, very profitable business for us. But of course, we are growing our labs too. And so it’s really – it’s putting all that together, there’s some time experience to pull that off. And so we’ve got moderated expectations on the reference lab impact of the expansion in relation to what we hope to achieve with regard to instrument placements.

[Operator]

Next question is from the line of Andrew Cooper of Raymond James. Please go ahead.

[Andrew Cooper, Raymond James]

Hey guys, thanks for the questions. Just a couple for me. Kind of to the point that I think Jon was asking about, when we think about the margin dynamics that, that we saw in 1Q and then the increase in the guide. It looks like these relative to what we had modeled really the bulk of the outperformance is in one queue. And there’s not a whole lot of change in the rest of the year. So just any color you could provide on sort of how some of that fell versus your expectations and how much is – to his question, a sustainable step up in the gross margins as opposed to a little bit more of a one-off in the first quarter.

[Brian McKeon, Chief Financial Officer]

We did see more benefit than we anticipated. And some of it we tried to highlight here. I think the broader theme is we’re on track, we’re reinforcing the four year outlook, we’re flowing that through. And maintaining our outlook while we’re advancing some investments that we didn’t have for outlook. So I think it was number of things moved in a good direction in Q1 and we are talk to what their full year goals and it’s all aligned with the long-term goals we have for operating margin improvement. But I think you’re right. There were some upside there that we’re not projecting out in the balance of the year.

[Jon Ayers, Chief Executive Officer]

This is – generally speaking, this is an amazing business with very, very high ROIC. It’s an investible business. And so we are continuing to invest for sustained long-term growth in the profitable and enduring recurring revenue. So we look our plans, of course, extend way beyond the year 2019. And it was really factored into what we shared with you as our outlook for the year is the maximizing the growth and the value to our customers and our investors over a five year or five year plus timeframe.

[Andrew Cooper, Raymond James]

That’s helpful. I guess, is there anyway you can sort of help size, did – were you to not make those incremental step-ups that you’ve kind of layered in with this update. What you think the margin profile might’ve looked like otherwise?

[Jon Ayers, Chief Executive Officer]

It’s relatively small differences. We haven’t broken that up, but it’s – we’re just trying to highlight that we’re advancing some additional investments and that’s factored into the guide.

[Andrew Cooper, Raymond James]

Okay. That’s helpful. And then my last one would just be sort of higher level and again, along the lines that, I think Erin asked about, in terms of international and sort of how we think about the growth there. You’ve seen really strong same-store growth like you talked about in the U.S. Has that pace in terms of same-store been consistent internationally or faster. Or is there – not too much, but much more of a focus on kind of the new accounts and not as much on the same-store kind of drivers. So you think there’s lot more opportunity there, but it maybe hasn’t kept up with the U.S. or any color on that would be great.

[Jon Ayers, Chief Executive Officer]

Well, what I will say is, and thank you for that question. I think we are driving growth through new instrument placements. We do see a nice – you don’t get to double-digit recurring revenue growth without both the new customer and store and dynamic and some modest price realization. But, we don’t yet really have an appropriate focus on preventative care outside of North America yet, simply because I think it just test the sick pets, we would be a lot higher utilization than we have today.

So we’re just convincing them to add diagnostics as part of the sick pet visit, which is obviously outside the U.S. with an overall lower standards, a higher proportion of total practice visits. And yet the preventative – there’s no reason that preventative care couldn’t be an opportunity broadly speaking outside the U.S. we have it, we have started very, very selective markets, but it’s a relatively small thing and something I talked about last quarter, but it is ahead of us.

At some point we will turn to preventative care globally, because we have great proprietary platform in that regard. And the sales organization and the diagnostic modalities to pull that off. It’s just not quite ready for the opportunities internationally are where we’re taking advantage of them today with the new instrument placements and utilization growth and sick animal testing.

[Jon Ayers, Chief Executive Officer]

We have time for one more question.

[Operator]

And that question is from the line of Michael Ryskin. Please go ahead sir.

[Michael Ryskin, Bank of America]

Question has been answered. Thanks.

[Jon Ayers, Chief Executive Officer]

Okay, great. Thank you all. With that, we’ll conclude the call. I want to, again, thank our employees for the phenomenal progress and the performance in Q1 and advancement of our technology and commercial strategies around the world. And also, I’m grateful for the attention the confidence that our investors have in the IDEXX business model. So with that, we’ll conclude the call. Thank you very much for calling in.

[Operator]

Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect.