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Good morning, and welcome to the IDEXX Laboratories Fourth Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, 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 measures is provided in our earnings release, which may also be found by visiting the Investor Relations section of our website.
In reviewing our fourth quarter 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. Fourth quarter 2019 and full year 2019 comparable constant currency, operating expense growth, operating profit growth, operating margin growth and comparable constant currency EPS growth exclude the impact of the fourth quarter 2019 CEO transition charges. (Operator Instructions)
I would now like to turn the call over to Brian McKeon.
Thanks, and good morning, everyone. I'm pleased to take you through our fourth quarter and full year 2019 results and to provide an update on our financial outlook for 2020. IDEXX achieved continued strong financial performance in Q4, which supported delivery of full year revenue and EPS gains aligned with our long-term financial goals. In terms of highlights, we achieved 10% organic revenue growth in the fourth quarter driven by 11% organic growth in CAG Diagnostics recurring revenues and 10% organic growth in our LPD and Water businesses. Solid fourth quarter gains supported full year organic revenue growth of over 10% and nearly 12% organic growth in CAG Diagnostics recurring revenues. Our full year EPS was $4.89, an increase of 21% on a comparable constant currency basis, supported by 120 basis points in comparable constant currency operating margin improvement.
Note that our comparable growth rates and comparable operating margin improvement metrics now exclude impacts from Q4 CEO transition charges. These charges reduced operating profits by $13.4 million in Q4, aligned with expectations; and EPS by $0.14 per share after tax, approximately $0.04 better than initial projections, reflecting updated tax provision estimates. Full year EPS results included $0.22 per share in tax benefit from share-based compensation activity, $0.05 per share above our guidance estimates. We also saw an additional $0.04 of below-the-line upside to our earlier guidance estimates related to final tax provision estimates and lower-than-projected interest expense.
We're well positioned to build on these strong results in 2020. We're maintaining our outlook for 9% to 10.5% organic revenue growth reflected in our increased guidance range of $2.620 billion to $2.655 billion in annual revenues, which include updated FX estimates. We're raising our EPS guidance range by $0.12 to $5.42 to $5.58 per share, reflecting 13% to 16% comparable constant currency EPS growth. Positive revisions to our preliminary guidance range reflect the flow-through of our 2019 performance with consistent operational improvement assumptions and favorable updates to projections for interest expense, share-based compensation tax benefits and FX impacts.
We'll walk you through the details of our 2020 guidance later in my comments. Let's begin with a review of our fourth quarter and full year 2019 results by segment. Q4 results were supported by continued strong momentum in our Companion Animal Group. Global CAG revenues were up 11% organically driven by 11% organic gains in CAG Diagnostics recurring revenues, net of a modest equivalent days' headwind overall. By region, U.S. CAG Diagnostics recurring revenues increased 10.5% organically net of a 0.5% equivalent days' impact. Consistent strong U.S. gains were supported by low- to mid-teens organic growth in reference lab sales, double-digit gains in VetLab consumables and solid gains in rapid assay revenues. U.S. CAG Diagnostics recurring revenue growth remains primarily volume-driven, with net price gains trending in the 2% to 3% range. We also maintained high levels of customer retention across modalities.
U.S. CAG Diagnostics revenue growth continues to outpace broader market trends. Total visits per practice were relatively flat in the quarter on a same-store basis with a 4.3% increase on overall same-store practice revenue. Total market clinical visit growth was 1.8% in Q4, following relatively strong Q3 results, with some moderation in visit gains earlier in the fourth quarter offset by stronger gains in December. For the full year, clinical same-store visit growth increased 2.5% of the 7,500 practices in our data set, up from 2.1% in 2018, reflecting continued solid market expansion in diagnostic services. International CAG Diagnostics recurring revenues increased 12% organically in Q4, net of a modest overall equivalent day's headwind. International results reflected mid-teens organic growth in consumable revenues supported by a 25% year-on-year expansion in our Catalyst installed base outside of the U.S. Strong consumable gains of nearly 20% in Europe and continued strong gains in Canada and Latin America were moderated to a degree in Q4 by impacts related to the timing of shipments in Asia, which benefited Q3 2019 and prior year Q4 results as well as equivalent day impacts.
For the full year, international consumable revenues increased nearly 20% organically. International reference lab sales increased organically at consistent high single-digit rates in Q4 with solid gains across our major regions. For the full year, global CAG Diagnostics recurring revenues increased nearly 12% organically, reflecting 11% gains in the U.S. and 13% growth in international markets, aligned with our long-term goals. By modality, global reference lab and consulting services revenues expanded 11% organically in the fourth quarter supported by a nearly 1% equivalent day growth benefit with an additional 2% of reported growth benefit related to the initial integration of Marshfield Labs. Full year organic growth of 11% in lab revenues was driven by consistent strong growth in the U.S., supported by continued high same-store sales growth at IDEXX customers. Global VetLab consumable revenues grew 12% organically in Q4 net of a 1.5% equivalent day headwind. For the full year, VetLab consumable revenues increased 14% organically driven by double-digit growth across U.S. and international markets, supported by increases in diagnostic test utilization and ongoing expansion of our premium instruments installed base.
We had another excellent quarter in terms of high-quality instrument placements in Q4, supporting double-digit year-on-year growth in our Economic Value Index or EVI. Global premium placements increased 13% year-on-year in Q4 driven by 23% year-on-year growth in Catalyst placements, supporting a 19% year-on-year growth in our global Catalyst installed base. Overall, we placed 2,517 Catalysts in the quarter, with 456 at new and competitive accounts in North America, up 8% year-on-year; and 1,119 new and competitive placements in international markets, a 24% year-on-year increase. We also achieved 1,248 premium hematology placements, up 7%; and 713 SediVue placements, down 4% compared to strong prior year levels. Overall, our SediVue global installed base is now over 8,900 instruments, up 35% year-on-year. Rapid assay revenues grew 4% organically in Q4, reflecting solid gains across U.S. and international markets, net of a 1.5% equivalent-day headwind. For the full year, rapid assay revenues grew nearly 8% organically, reflecting continued solid growth of 4Dx Plus specialty and first-generation products. Growth, high customer retention in our rapid assay business continued to benefit from ongoing expansion of our engaged SNAP Pro installed base, supported by additional 10,000 placements in 2019, bringing our global installed base to over 37,000.
Veterinary software services and diagnostic imaging system revenues increased 9% organically in Q4, supported by double-digit gains in VSS and continued solid expansion of digital imaging services.
Overall, global CAG revenues grew nearly 11% organically in 2019, and we're targeting continued double-digit organic gains in the CAG business in 2020.
In terms of our other lines of business. Water revenues grew 10% organically in Q4, including approximately 1% benefit from equivalent days, supported by solid gains across our major regions. For the full year, Water revenues increased 9% organically with faster operating profit growth resulted in 47% full year operating margins. We're very pleased with our continued momentum in the Water business and are targeting continued high-single-digit organic growth in this highly profitable business in 2020.
Livestock, Poultry and Dairy revenue in Q4 increased 10% organically. Strong Q4 growth results were supported by benefits from the sales of diagnostic testing programs for airports and African swine fever in China, which offset declines in core swine diagnostic testing as well as solid growth in poultry testing and herd health screening. Q4 results also benefited from favorable year-on-year comparisons related to timing of government and distributor orders. For the full year 2019, our LPD revenue was up 6% organically, with relatively higher operating profit growth benefiting from productivity improvement and cost controls.
We're pleased with our progress in expanding our LPD revenues and profits in 2019 in a very dynamic global climate. In 2020, we're targeting flat-to-modest organic growth in our LPD business as benefits from growth in our pregnancy testing franchise and African swine fever testing programs are moderated by expected ongoing pressures on broader swine diagnostic testing in Asia and bovine government disease control programs in Europe as well as tough compares related to strong 2019 herd health screening levels.
Turning to the P&L. Gross profit was up 10% on a reported basis in Q4 or 11% adjusted for foreign exchange impacts. Gross margins decreased slightly on a constant currency basis, reflecting increased investment in our reference lab business related to day lab capacity, route expansion, system investments and acquisition integration, which offset benefits from moderate net price gains and continued strong consumable revenue growth. Foreign exchange hedge gains, which benefited gross profit, were $3.5 million in Q4.
Operating profit in Q4 was flat as reported, including impacts from CEO transition charges. On a comparable constant currency basis, operating income increased 12%, reflecting solid profit gains across our CAG, Water and LPD segments, supported by high revenue growth. As expected, comparable constant currency operating margin gains were relatively flat in Q4. Operating expense growth increased to 10% on a comparable constant currency basis driven by increases in global CAG commercial capability and R&D. As we'll discuss in our guidance update, investment impacts will carry into the first half of 2020.
For the full year, operating profit increased 13% as reported or 16% on a comparable constant currency basis. This reflects an operating margin of 23% and an increase of 120 basis points on a comparable constant currency basis, which excludes CEO transition charge impacts. Constant currency operating margin gains reflected a balance 50 basis points of gross margin improvement and 70 basis points of operating expense leverage on strong volume growth.
EPS in Q4 was $1.04 per share, including $0.05 per share in tax benefit related to share-based compensation activity. On a comparable constant currency basis, EPS increased 17%. For 2019, EPS was $4.89 or 21% on a comparable constant currency basis. For the full year, foreign exchange rate changes decreased EPS by $0.05 per share, net of FX hedge gains of nearly $11 million.
Full year EPS results included $19 million or $0.22 per share in tax benefit related to share-based compensation activity, which provided 3.7% of benefit in our 2019 effective tax rate of 18%. We had interest expense of $30.6 million for the year, net of approximately $2 million of capitalized interest related to major facility projects.
Free cash flow was $304 million for 2019 or 71% of net income. Capital spending came in at $155 million, including $58 million of combined investment or approximately 14% of net income related to our Westbrook, Maine headquarter expansion and German core lab relocation with some favorability to earlier estimates related to timing of major project cash deployment. We allocated $304 million of capital towards the repurchase of 1.215 million shares for the full year 2019 at an average price of $250 per share. This included repurchases of 532,000 shares in Q4 for $139 million.
Our balance sheet is in an excellent position. We ended the year with $991 million of debt, $90 million in cash and $560 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.4x - 1.45x gross and 1.32x net of cash at year-end. Our strong financial performance and disciplined capital allocation supported achievement of a 46% after-tax return on invested capital, excluding cash and investments for 2019.
We're well positioned to build on the strong performance in 2020, with a financial outlook aligned with our long-term goals. We're increasing our reported revenue guidance range to $2.620 billion to $2.655 billion, up $7.5 million at midpoint, including approximately $5 million of benefit from updated FX assumptions. We're maintaining consistent guidance for 9% to 10.5% organic revenue growth supported by continued strong CAG Diagnostics recurring revenue growth of 11% to 12%. Our guidance assumes 0.5% growth rate benefit from completed 2019 acquisitions, which is offset by a projected 0.5% FX growth headwind resulting in projected revenue growth of 9% to 10.5%.
We're raising our 2020 EPS outlook to $5.42 to $5.58 per share, an increase of $0.12. This aligns with a comparable EPS growth of 13% to 16%, reflecting a consistent outlook for 50 to 100 basis points of comparable constant currency operating margin improvement. The $0.12 increase in the EPS outlook compared to our preliminary guidance includes approximately $0.05 in combined benefit from the flow-through of 2019 operating performance and favorable updates to assumptions for interest expense and projected reductions in average shares outstanding. We're now projecting approximately $35 million in net interest costs in 2020 and a 1% to 1.5% reduction in average shares outstanding, with both metrics aligned with an assumed maintenance of our net leverage at 1.5x EBITDA.
Our updated outlook also reflects $0.05 in projected tax benefit from share-based compensation activity. We're now projecting an effective tax rate in 2020 of 20% to 21%, including $7.5 million to $9.5 million or 1.5% in tax rate benefit from exercise of stock-based compensation in 2020, which equates to $0.09 to $0.11 per share.
Finally, our guidance benefited by $0.02 from updated FX assumptions. Overall, we're now projecting an estimated $0.09 negative year-on-year impact from FX, net of $5 million of projected hedge gains in 2020.
In terms of free cash flow, we're targeting deployment of $140 million to $155 million in capital spending, including approximately $35 million related to the completion of our Westbrook headquarters, German core lab projects and the acquisition of real estate associated with a U.S. core lab. For 2020, this results in an outlook for free cash flow of 75% to 80% of net income including approximately 7% impact from these discrete investments.
In terms of our first quarter outlook in 2020, we expect Q1 reported revenue growth in the 9.5% to 11% range, reflected organic gains of 10% to 11.5%, including a projected 1% equivalent-day tailwind related to the leap year. We expect our operating margins will be moderately below prior year levels, reflecting stepped-up commercial and lab investments advanced in the second half of 2019 and as we continue to integrate our Marshfield acquisition and onboard our Westbrook headquarters expansion. We expect operating margin gains in 2020 will be driven by second half performance as we grow into our scaled investments, including our new headquarters and German core lab facility.
That concludes the financial overview. Let me now turn the call over to Jay for his comments.
Good morning, and thank you, Brian. IDEXX had a strong finish to 2019, with double-digit growth across our Companion Animal, Livestock and Water diagnostic businesses. Core CAG Diagnostics recurring revenue, which now represents over 3/4 of overall company revenues, grew 12% organically for the full year. Excellent execution across our businesses enabled us to deliver organic revenue of 10%-plus and comparable constant currency EPS growth of 21%, aligned with our long-term financial goals. Return on invested capital at 46% for the year was exceptional. The progress we are advancing on key strategic fronts positions us well to build on this performance in 2020.
Outstanding commercial execution is an essential pillar in our organic growth strategy, and we consistently see a high return in increasing these field-based capabilities that allow our sales professionals to spend more time with customers. Expansion in the number of our global customer-facing resources and investments in enabling commercial systems in areas like Salesforce or service club were two areas of focus in 2019.
We completed the U.S. commercial expansion in Q4 and started the year with our expanded U.S. team in seat and trained. We now have 530 field-based professionals in the U.S. to support market development, more than double the number from five years ago. As we enter 2020, we anticipate some settling in during the first quarter of the expansion as sales professionals, including those newly recruited, develop relationships in their new or reconfigured territories. Notably, we accomplished this expansion in Q4 while delivering 425 new and competitive Catalyst placements in the U.S., a record number. We also continue to make progress with preventive care, with 360 new enrollees in the quarter to reach over 3,800 enrollees in the program to date. Customers are embracing the IDEXX Preventive Care turnkey solution and increasingly view it as a foundational pillar in their own practice strategies. We believe that our North American commercial resources are properly balanced at this point with the addressable market opportunity. And in 2020, we will focus on driving productivity in our expanded sales force, which becomes even more effective over time with tenure and with deeper customer relationships.
Our commercial capability and performance in international markets also continues to advance as they build tenure and competencies with key commercial programs like IDEXX 360. The commercial team's priorities have been driven by the Economic Value Index of an instrument placement that prioritizes high-value competitive chemistry placements, resulting in 24% growth in new and competitive Catalyst placements in Q4 to a record of more than 1,100 units.
Our Catalyst installed base outside of North America grew 26% year-over-year, supporting nearly 20% organic revenue growth at IDEXX VetLab consumables internationally in 2019. We expect to gain global leverage and further strengthen execution in 2020 with our enhanced field global commercial organization, as previously announced.
Leading with innovation includes expanding our testing platforms is another key growth pillar. We are excited by the new innovations that we announced at VMX earlier this month. These were enthusiastically greeted by customers as clinically rigorous and value-added since veterinarians embrace new and expanded tools that enable them to raise the standard of care in workflow-efficient ways. This year, we are bringing bile acids to our Catalyst platform with shipments expected this quarter. Catalyst bile acids as a measure of liver function brings reference lab test quality in clinic. This is a great example of how we constantly make our Catalyst platform more valuable to customers. Catalyst has steady innovation heartbeat, with eight clinically important tests launched over the past eight years. The technology-for-life benefit of Catalyst is supporting continued global expansion of this best-in-class testing platform.
Following another great year of instrument placements and customer retention, as of the end of 2019, approximately 41,000 practices of Catalysts installed. Even with the successful installed base expansion, we estimate there remain approximately 70,000 addressable placement opportunities for Catalyst alone around the world.
Our innovation focus increasingly uses large clinical data sets with AI and machine learning to develop highly capable algorithms that assist clinicians with even the most challenging patients. This is the case with SediVue Dx, our groundbreaking platform with Neural Network 5.0, leveraging 350 million images launching this quarter. We are adding advance bacteria-detection capabilities made possible by proprietary reagents, leveraging patent-pending technology at no additional charge for our 8,900 customers. Seeing bacteria is clinically relevant and especially challenging because of their very small size, the difficulty of seeing bacteria in highly cluttered image and because debris could be mistaken for bacteria due to similarity in appearance. Moreover, because our in-clinic analyzers are all connected by smart service, we will be able to quickly update our global installed base with no customer disruption.
In reference lab, our broad and differentiated service portfolio, including fecal antigen Dx continues to support strong same-store customer growth. Because the fecal antigen test does not rely on the visual confirmation of parasites eggs, it's able to uncover twice as many infections as O&P alone, identifying the presence of intestinal parasites earlier in the life cycle of the infection.
We're also further expanding our reference lab offering with an exciting new service, digital cytology, announced at VMX for launch in North America in February. Cytology results often have at least a two day turnaround time. With our new digital cytology service, we are transforming the speed at which customers receive results with expert interpretation to within two hours, seven days a week, 365 days a year. We're able to do this by leveraging existing capability of an integrated IT workflow, the wide adoption of customer-facing applications like VetConnect PLUS, a field service diagnostic workforce of about 150 field service reps to install and train customers and a global network of more than 100 veterinary clinical pathologists.
We continue to invest in further improving our lab service offering internationally. We're excited about adding our state-of-the-art core German reference laboratory in late spring of this year to our sophisticated global and regional hub-and-spoke laboratory network.
Adoption and utilization of IDEXX SDMA continues to advance nicely in clinic and lab diagnostic modalities. 75% of global Catalyst customers have ordered Catalyst SDMA and have now run at 3.5 million times. In fact, in North America, that number is almost 80% adoption. IDEXX SDMA has also been included in almost 28 million chemistry panels at IDEXX reference labs. Customers are increasingly seeing SDMA, a direct measure of GFR impairment or kidney function, as a standard of care. In fact, the American Animal Hospital Association has updated their canine diagnostics wellness testing guidelines by life stage, and testing guidelines now for the first time include SDMA.
Our veterinary software offerings continue to enjoy robust customer adoption. Customers who use our software applications believe that they are an outstanding enabler to deliver excellent patient care and to running their practices in an efficient manner.
Q4 was another strong quarter for new placements of Cornerstone, Neo, Animana and SmartFlow systems. In North America, we had record patient management software placements, including cloud-based and on-premise software for 63% year-over-year growth at installs for the quarter. We introduced a much improved user experience update with Cornerstone software version 9.1 in March of last year, and we are pleased that well over half of our installed base upgraded by the end of 2019.
Work on Cornerstone cloud continued to progress on schedule in Q4 with very positive customer feedback, positioning us to scale for commercial launch later this year.
IDEXX Web PACS enjoyed another strong quarter with 23% year-over-year increase in subscriptions and a customer installed base of more than 4,500 subscribing practices. We recently released for the end of Q1 delivery a cloud-based software update. It provides new functionality, powered by artificial intelligence, automatically that corrects image orientation and sorts images by body part, potentially shortening read time by 25%. Overall, across these multiple integrated software offerings, we are providing the most comprehensive technology stack offering relied on by independent practices and corporate groups around the world.
In addition to our progress in our core CAG business, we also had strong performance in our Water and Livestock diagnostic businesses in the fourth quarter, with both achieving 10% organic revenue growth. We continue to expand our high-return Water business globally through focus on commercial execution. Our Livestock business has also shown tremendous resilience this year in the face of macro challenges and continued input from the African swine fever in Asia.
Looking ahead, we are optimistic about the long-term potential of our business and our ability to sustain its high growth. One of our key strategic goals is to grow CAG Diagnostics recurring revenue, which in 2020, we're targeting at 11% to 12%. Major drivers include the strong global momentum and expanding our installed base of premium instruments, continued customer adoption of IDEXX' differentiators like integration and ongoing new platform features and our expanded commercial capability aligned with building on this momentum. Over the next 25 years, we see tremendous opportunity for ongoing growth of CAG Diagnostics recurring revenues with a global addressable Companion Animal Diagnostics market of over $30 billion, with the majority of that existing outside of the United States.
We remain focused on our commitment to providing exceptional service to our customers and improving the standard of care to enable the best clinical decision-making and healthy practice growth.
Before we open the call to questions, I want to thank our employees and congratulate them for the accomplishments in 2019 in pursuit of our purpose to enhance the health and well-being of pets, people and livestock.
Okay. And with that, we'll take questions.
[Operator Instructions]. And we will take the first question from the line of Nathan Rich with Goldman Sachs.
Brian, maybe just starting off on how we should be thinking about kind of the cadence of organic growth this year. I think you said the first quarter would be 10% to 11.5%. I think that includes 100 basis point benefit from the leap days. So if we back that out, I think the range is consistent with kind of the full year guidance that you gave for organic growth. So should we be expecting sort of a relatively consistent cadence over the balance of the year?
We'll obviously provide more detail as we work through the year, but I think that's an accurate read, Nate, is that we've got a full year outlook of 9% to 10.5%. We'll have some benefit from days in Q1. We have, I think, a bit of a headwind in Q2. But net-net, on balance for the year, those should wash out. And I think our 11% to 12% recurring CAG growth is very much in line with the trends that we've been seeing if you adjust our fourth quarter results for the days' impact and just some of the shipment timing effects we noted in Asia, which were modest but can impact the growth rate a bit. We're basically right in the middle of that range and looking to build on that in 2020.
And I would add to that. We're well positioned to sustain that 11% to 12% gain that - we reflect in our going for 2020. You start with the fact that it's a good market backdrop. We saw good clinical visit growth over 2019, 2.5%. We have really nice growth and momentum in our - the expansion of our premium installed base: 16% in total, 19% in Catalysts, 35% in SediVue and those result in consumables growth as customers use those products. We're pleased with the adoption we see around IDEXX innovation. Customers are very enthusiastic about the differentiators we've introduced in past years as well as VMX. And we have an expanded sales force, which is out there partnering with customers, driving awareness and education and ultimately, consideration.
And then we note that - as Brian mentioned in his remarks, we have very high retention across all of our modalities. Customers tell us that they appreciate the differentiators we bring, like integration and the platform extensions they've come to rely on. So we're feeling like we're in a very good position to sustain that growth.
Jay, that's helpful. And just a follow-up on your comments on the end market. You kind of noted a strong 2019. Obviously, 4Q is a little bit softer. I know there's kind of always quarter-to-quarter volatility. Is that sort of kind of what you would attribute the 4Q number to? And I think, Brian, you had mentioned December was maybe a little bit stronger. I'd just be curious to know if you've seen that improvement continue into January.
Yes. So the - Q4 was solid, 1.8% clinical growth. Keep in mind, we focus on the clinical growth piece. That's where the veterinarian actually sees the patient and where diagnostics is used as a whole. Now that came off fairly strong Q3, and as noted, a little soft going into the quarter, but picked up in December. So we're positive on the market. We think it's a strong market in 2020 and we don't see anything from a change standpoint.
Our next question comes from the line of Ryan Daniels with William Blair.
A couple of follow-ups on the new digital cytology. I'm curious, number one, if you can speak to the early feedback you got, particularly at VMX? And then number two, as my follow-up, I'm curious what the revenue will look like from that? I know there's an instrument but also reading at the reference lab. So will that be in the equipment or reference lab lines? Or how should we think about the revenue model?
Right. Thank you, Ryan. Let me give you just some market backdrop and the feedback from VMX. Customers were really very enthusiastic about digital cytology service. Typically, the veterinarian will see patient everyday with lumps and bumps. And they'll take a sample, prepare a slide, look at it under a microscope and then decide whether or not they need to send it out for expert interpretation. That process very often takes a couple of days. But it can - depending upon when they send it in, like kind of Friday, can take 4 or 5 days or so. So they were very, very appreciative and enthusiastic about the ability of being able to send it to us and get a result back with an expert interpretation within two hours and be able to do that all hours of the day, every day of the week and all days of the year.
So the - and the reason we were able to do that, by the way, is because we were able to fit that into our existing infrastructure and investments that we've made, in terms of integrated IT workflow; having a field service organization, which is out there who can help install these systems and onboard and train customers on slide preparation; having clinical pathologists around the world to be able to provide that service.
In terms of market size, and then I'll hand it over to Brian to talk a little bit about revenue. The way we think about this is about 5% of practices are higher-volume users of cytology. So we define that as 5-plus cases per month. About 6,000 of IDEXX practices actually send today out cytology to our reference lab for expert interpretation. That's 6,000 of about a little over 20,000 practices that we do business with in reference labs in some measure. So that gives you just a scope of what we're talking about. We think as they continue to use this, there's potential benefits in using more of it over time and more customers adopting it.
Yes. And I think that one way to think about it financially, Ryan, is it is a factor that will be supportive of sustaining the 11% to 12% CAG Dx recurring growth company, including the strong growth that we've seen in U.S. reference labs. It's a valued service and a differentiator and I think something that we believe can support, continue to expand that franchise.
And in terms of instrument revenues, as Jay noted, it's a relatively smaller set of the market that would likely be earlier adopters of the instrument. And we'd anticipate this will be integrated into 360-type program placements, more in the second half of the year as we kind of build market awareness and get the service up and running. But it's not calling it out as a distinct material driver. I think it's something we anticipate will build over time. But we're very excited about it as another example of how IDEXX is adding to the scope of services that we're providing, adding to our differentiation and value and leveraging that to drive the strong double-digit growth in CAG Dx revenues that we should to achieve.
Next, we will go to the line of Michael Ryskin with Bank of America.
I want to follow up on an earlier question just about market conditions, just get a little bit more specific. Maybe you could, I guess, help put my mind at ease. I've had a lot of questions over recent days and weeks about some international markets: the wildfires in Australia towards the end of the year. You've had similar weather in California or heat waves in Europe affect you. Just curious if that had any impact. And also on the recent coronavirus outbreak in China, just a lot of attention there in the market, obviously. And if you could sort of size your China exposure, how much of that is companion versus livestock? And if you've seen anything in terms of vet visits or sort of what you're seeing there in that market and how that factors into your expectations for 2020?
Yes. Why don't I start with that, Mike, and hopefully, I can hit on some of your specific questions? I'm sure Jay can expand on that. But in terms of the coronavirus as context, China for IDEXX is a little less than 2.5% of our overall revenues - all of our revenues in China. So it's a - we have a relatively smaller exposure to that market. Over half of that revenue is LPD. So in terms of the more consumer-driven aspect of that business, it's a relatively smaller exposure. We have seen limited impact to-date. We are monitoring it, of course and - but have not factored a specific kind of impact into our outlook at this point. We've got a range for performance. We're comfortable with that. And I think the headline there is relatively smaller for IDEXX and it's relatively early on to kind of be calibrating more impacts.
I think you had a specific question on the Australia wildfires. We did not see a meaningful impact on that in our results. Again, it's something that we're monitoring, but we had very good results in Australia, continued good results.
And I think we've - the European market, we highlighted that we had nearly 20% consumable growth in the fourth quarter, outstanding instrument placements. I think we - the market - and continued solid results in labs. So I think we feel the market backdrop in Europe looks quite healthy.
Yes. A quick follow-up. I appreciate all the color there. You also cited a lot of investment on the gross margin line. You saw that in this quarter and you mentioned some of that's going to continue through 2020 across the reference lab and the rest of the business. Could you help us think through the pacing there, sort of how that progresses over the course of the year? And is that - is this a slight step-up in investment? Is this something that's going to be the run rate go forward? Or is this sort of relatively onetime that should play out over the course of - you'll see the benefits of this over the course of many quarters?
Yes. I think if there's any investment in our business, it's truly onetime. I think we're always adding capability. But what we were trying to highlight was that we had, through the second half of 2019, a number of investments that we advanced on the lab front in terms of our expanding our capacity, adding day labs. We had some system investments that we've been making; initial integration of Marshfield, which we'll continue; and obviously, some of the investment we made in the commercial organization in the U.S. And just trying to highlight that, that is going to be on a year-over-year basis, carrying into the first half of 2020. And there are a couple of discrete factors that will be additive to that, and that's basically our Westbrook headquarters, which is coming online in Q1. So we'll have the depletion of that starting to factor into our OpEx growth. And in the second quarter, we will be having the impact of the German core lab coming online.
So the net of that is it's - it wasn't intended to signal incremental investment in the labs other than those discrete areas in the Marshfield acquisition but just trying to highlight that we anticipate our margin gains that we're targeting for next year will be second half-driven, will have some moderate pressure in Q1 and basically, just as we grow into those investments. And we would reinforce our long-term goals of 50 to 100 basis points-plus of constant currency annual margin improvement supported by strong recurring revenue growth, so no changes on that front.
And next, we will go to the line of Jonathan Block with Stifel.
Maybe just a couple, more high-level ones for me. Jay, anything on the competitive landscape that's evolved or maybe that you expect to evolve? Zoetis has had Abaxis for some time now, and they purchased a couple of labs. I know it's early, but - and you got another player that's also making a bigger push in international markets. So curious for your thoughts and any color or details that you see on calling and the potential evolution from a competitive standpoint?
Yes. Thank you. So the - it's always been a competitive market, and it's clearly still a competitive market, and we continue to perform very well, as we've highlighted this morning. Our focus is really on growing and adding value for our customers. A lot of our volume growth, as Brian highlighted, comes from same-store sales, comes from existing customers, creating awareness and adoption of relevant testing.
So from a strategy standpoint, it's really continuing to be able to work with those customers, introduce the innovations, take our commercial capability, expanding commercial capability, partner and help those practices succeed. So that's really the focus. The - a lot of competitive intensity, but that really hasn't changed. And we continue to do well and we continue to experience moderate price increases on the 2% to 3%, net basis. So we're feeling good.
Okay, great. And there's a few surprises I thought about on the P&L, so I'll stick high level. Jay, your thoughts on - and willingness to work with other players in the industry to help drive diagnostics growth? And what I mean by that is, that's what you want to do. You're working with Trupanion in some shape, way or form on pet insurance. But there was chatter at VMX that you're going to partner with QE with their sort of their prescriptions platform. And so as leading the company, I'd love to get your thoughts on how you see these opportunities evolving for the company over the next couple of years and IDEXX' willingness to take a more aggressive role there.
Yes. So we've had ongoing partnerships with the specialty diet that - in pharma and software companies in the marketplace. The way we tend to think - I'll address the software piece and the integration piece specifically. The way we tend to think about that is we take an open systems approach. So a group of customers, once it reaches a certain size of critical mass come to us and say that they would like us to integrate an application into our PIMS systems, then we do it. We want to be able to give the customers the workflow that they desire. But in terms of overall partnering at VMX, we participated in a park study, which showed the efficacy - the superior efficacy of fecal antigen. So always looking for ways in appropriate sort of partnership structures of developing the market for diagnostics.
Our next question will come from the line of Erin Wright with Crédit Suisse.
I had a similar question, just given some of the bundling tactics of your competitors. I was curious if you could better leverage your unique positioning in this market as sort of an agnostic player but also partner with large pharma manufacturers to do your own creative bundling with therapeutics or other product offerings? I guess, have you contemplated those sort of partnerships or collaborations more so recently than you have in the past? I'm just curious how that's evolving.
Yes. So when we talk to customers, what customers tell us, is that they - when they're looking at diagnostics and they're looking at solutions to adopt, they believe that it's highly differentiated. It's a highly differentiated category in their practices. It's a decision that they make through the lens of how to deliver best care. It tends to be separate from how they think about therapeutics or specialty diets. They are making typically long-term decisions because of systems that they're buying that need to be integrated that they may have in their practice 5, 10 years. So from a buying standpoint and partnering decision, the customer really separates those two. So the - that hasn't changed with the recent acquisition of some of our competitors.
Okay, okay. That's helpful. And then where do you stand now in terms of market share on your PIMS systems? Where are we at across the industry in terms of converting to cloud-based systems? And can you speak to your positioning around the competitive front there as we head into some sort of potential wave of system upgrades as well?
Yes. So we did - we've done very well this year in terms of payment placements. Cornerstone, we've been able to upgrade more than half of our installed base of Cornerstone with a completely new user interface. We've been able to do this because we have a field-based organization, field service reps who go out and partner with customers. We also - our Neo system, which is really more geared towards general practice customers and mobile customers, is native cloud-based. That's received just, I think, very enthusiastic reception, and we've been able to grow that nicely.
But the key is it's not so much in the PIMS system per se. It's in the connectivity that we're able to provide between software and our diagnostics and the applications that work together. So what customers tell us is they appreciate our PIMS systems. But what they really like is they like the fact that it all works better together, so the PIMS and the applications and VetConnect Plus and the diagnostics. And that ability to support their workflow clinically and from a business standpoint and capturing charges and work that they do is what sets us apart and continues to really provide strong differentiation.
Next, we will go to the line of Andrew Cooper with Raymond James.
With the integration going as expected, was there anything that sort of surprised you? And I guess, from a from a customer reaction perspective, I think sometimes we view some of the regional players as - sometimes view it as an alternative to the larger options that are out there in the market. So has there been any pushback from customers?
And then from a margin perspective, the gross margin, I think, in 4Q was maybe a little lighter than we had expected. So what's the opportunity kind of on Marshfield? And in general, how much maybe did mix impact in the quarter? But on Marshfield specifically, to capture synergies and get kind of that incremental revenue up to - similar to your consolidated lab margins or kind of how you view that in terms of the extra capacity that you added with the acquisition? So any color there would be great, and I appreciate the feedback.
Great. Yes. So the Marshfield integration is on track. We're excited by Marshfield. It really - we've welcomed over 2,000 customers from Marshfield, and they now have access to IDEXX' differentiated tests like SDMA and fecal antigen and VetConnect Plus. And the initial reception has been enthusiastic from those customers. We - keep in mind that a good number of those customers were IDEXX customers already. They use one of our modalities. They may have used our software systems. So it's not like they didn't know us. This just gives us a chance to work more closely with them and to provide reference lab services. I'll turn it to Brian if Brian would like to make a remark on margin and what we see there.
Yes. As expected, we - as we're working to integrate Marshfield, there are some impacts from that. And that we did highlight that as one of the factors, and that will continue into the first half. We're - we have work going on, on that front. But look, over time, I think we're - we've demonstrated and we're confident that the addition of customers into our national lab network and supporting them through our over 50 labs now in the U.S., which is how we think about this business as a national business, is something that we would anticipate in getting leverage from and is supporting the longer-term goals that we have for margin improvement from our reference lab network. So it was a near-term factor and will be a near-term factor to a degree, and we'll get leverage on that over time. It will support our margin improvement going forward.
And we'll take one final question.
Yes, this will be our last question. Thank you.
That will be from the line of David Westenberg with Guggenheim Securities.
So some of the feedback from veterinarians on the cytology instrument starts the conversation in oncology. So I apologize, I'm going to kind of ask an industry kind of wide question here. But does this - how do you see the oncology market kind of playing out in the next, say, 3 to 5 years? Is there opportunities here in diagnostics, in the reference labs? Is there opportunities in therapeutics kind of the way we have in the human market with, say, cancer profiling or early detection of cancer? Just if you can give me kind of a broad overview of that and maybe just cytology kind of start that conversation.
Yes. So the oncology service is something that exists in the marketplace today. It's centered more around specialty practices and there's lots of different areas in oncology, just like there are on the human side in terms of both drugs and therapeutics and LINAC systems and chemotherapy. So that's a very broad question with lots of different areas.
From a diagnostic standpoint, that's something we're always taking a look at. There's - around genomics and proteomics and being able to detect cancer earlier. Certainly, digital cytology, in many instances, you're looking for cancer. So it does begin that discussion when a patient comes in with mumps and bumps and wants to know whether or not their pet is okay.
Okay. And so with that, thank you. With that, we'll conclude the call. I want to thank our employees for the very strong progress and performance in Q4, for the full year of 2019 and for the advancement of our purpose, which is enhancing the health and well-being of pets, people and livestock around the world.
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.