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IDEXX Laboratories, Inc. (NASDAQ:IDXX)
Q2 2018 Earnings Conference Call
August 1, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the IDEXX Laboratories second quarter 2018 earnings conference call. As a reminder, today's conference is being recorded. Participating in the call this morning are John Ayers, Chief Executive Officer, Brian McKeon, Chief Financial Officer, and Kerry Bennett, Vice President, Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning, as well as in our periodic filings with 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 members 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 second quarter 2018 results, please note all references to growth, organic growth, constant currency growth, and comparable constant currency growth refer to growth compared to the equivalent period in 2017 unless otherwise noted. 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 -- Executive Vice President, Treasurer, and Chief Financial Officer

Thank you. And good morning, everyone. IDEXX delivered continued high growth and excellent financial results in Q2, building on our strong start to 2018. In terms of highlights, Q2 revenues of $581 million grew 14% on a reported basis, driven by consistent 13% organic growth and CAG diagnostic recurring revenues, 21% growth in premium instrument places, and favorable year-on-year foreign exchange changes. EPS was $1.23 per share, an increase of 33% on a comparable constant currency basis. These results reflect strong revenue growth related to operating expense leverage which drove a 110 basis point constant currency improvement in operating margins and net benefits from US tax reform. In terms of our outlook, we're raising our full-year organic growth outlook to 11.5% to 12.5% and refining our full-year revenue guidance to $2,205,000,000.00 to $2,230,000,000.00.

The reported revenue outlook is down $7.5 million at the midpoint compared to our earlier guidance, as operational upsides are offset by $20 to $25 million of negative impact related to the recent strengthening of the US dollar. We're raising our 2018 EPS outlook by $0.02 at midpoint to $4.10 to $4.20 or 32% to 36% growth on a comparable constant currency basis. At the midpoint of our guidance range, this new outlook builds in approximately $0.07 per share of full-year operational benefit related to our raised organic revenue growth outlook and updated expectations for 90 to 130 basis points in full-year of constant currency operating margin improvement, incorporating benefits from our strong first half performance. This outlook also factors in additional investments we're advancing in our global commercial capabilities, which we'll discuss in more detail today.

We're also projecting $0.02 in full-year EPS benefit, related to a lower effective tax rate, including additional tax benefit related to stock compensation activity. These increases more than offset a negative $0.07 per share impact from our updated FX assumptions, net of hedges. We'll review our updated 2018 outlook in more detail later in my comments. Let's begin with a review of our Q2 performance by segment and region. Strong Q2 results were driven by continued momentum in our Companion Animal Group. Global CAG revenues were $507 million, up 13% organically, reflecting strong gains and recurring CAG diagnostic revenues, high premium CAG instrument placements, and continued solid growth in our software services and diagnostic imaging system businesses.

Global CAG diagnostic recurring revenues increased over 13% organically, including a $5 million or approximately 1% growth rate benefit from revenue accounting standard changes, primarily related to our modified retrospective restatement. Veterinary software services and diagnostic imaging system revenues increased 9% organically. These results were supported by solid growth and recurring software services associated with our practice management platforms and continued strength in our diagnostic imaging business, driven by a 16% overall increase in diagnostic imaging system unit placements, including a 49% increase in high end digital radiography system installations. Our Water business revenues grew 9% organically in the second quarter to $33 million, reflecting continued high-single-digit growth in the US, augmented by strong gains in Asia and Latin America. Livestock, Poultry, and Dairy revenue in Q2 was $35 million, or flat organically.

Growth in recurring livestock diagnostic test revenues in the US, Europe, and Latin America was offset by lower revenues in Asia related to continued soft and market conditions, including impact from lower milk prices, globally. By region, US revenues with $357 million in the quarter up 13% organically, driven by a 12% increase in CAG diagnostic recurring revenues and strong growth in premium instrument placements. US recurring revenue gains were supported by mid-teen revenue growth in US reference labs and consumables and continued solid growth in rapid assay sales. US CAG recurring diagnostic growth continues to be primarily volume-driven with price gains trending in the 2% range overall. US recurring CAG diagnostic customer retention metrics are sustaining at very high levels, supporting our continued strong US growth profile. IDEXX's US recurring CAG growth performance outpaced solid US veterinary practice market growth reflected in our dataset from approximately 7,500 clinics.

In Q2, patient visits were up 1.5%, and clinic revenues increased 5.7% compared to the prior-year period. International revenues in Q2 were $224 million, up 11% organically. International results were driven by 15% organic gains in CAG diagnostic recurring revenues. This reflected very high consumable revenue gains over 20% year-on-year in the quarter, supported by our expanding Catalyst instrument base, increase in chemistry utilization, and new test adoption. We also saw continued solid gains in European lab revenues in Q2. In terms of segment performance, our Q2 results were supported by global gains across CAG diagnostic testing modalities and rapid expansion of our premium instrument base. Globally, we placed 3,241 premium analyzers, up 21% compared to prior-year levels, reflecting 11% growth in North America and 30% gains in international markets.

These results were driven by 1,651 Catalyst placements, a 39% year-on-year increase and continued strong momentum in SediVue with 716 placements in the quarter. Since our launch in early 2016, we've now installed over 5,200 SediVues globally. We also placed 874 premium hematology instruments globally in the quarter. In addition to these strong premium instrument results, we placed 1,344 SNAP Pros in Q2, expanding our SNAP Pro install base to over 21,500 with nearly 20,000 installed in North America. Strong Catalyst performance in Q2 was supported by 1,200 placements in international markets, up 55% year-on-year, reflecting significant progress and upgrading our vet test install base and strong growth in placements at new and competitive accounts. Globally, we've placed 784 Catalysts and new or competitive accounts in the quarter, up 14% year-on-year. Consistent with our strategic focus, 346 instruments or 77% of North American Catalyst placements were at new competitive accounts.

Our EVI index for premium instruments was up solidly in North America in Q2, supported by Catalyst gains and 32% year-on-year growth and SediVue placements, both benefiting from our multimodality IDEXX 360 program which continues to gain traction with customers. The use of EVI is also sharpening our focus in the international markets, supporting the outstanding Catalyst placement growth results in the quarter. CAG diagnostic instrument revenues in Q2 were $35 million, up 22% organically, including $9 million of revenues, attributed to the accounting standard change which now more closely aligns instrument revenue recognition with the timing of the instrument placement. Consistent with our first quarter results, this amount was primarily related to the launch of the IDEXX 360 customer program in the US.

Benefits from an expanding instrument base, the innovation that we brought to market in the recent years, and our expanded direct commercial capability continue to drive strong, recurring CAG diagnostic revenue gains. Instrument consumable revenues of $159 million grew 18% organically in Q2. Results reflected strong double-digit organic gains across US and international markets. Adoption of our Greenfield innovation continues to build with SediVue and SDMA on a slide, each contributing approximately 2% to year-on-year of consumable revenue gains in the quarter. Reference laboratory and consulting services with revenues of $197 million grew 13% organically in the second quarter. US lab momentum is very strong, reflected in continued mid-teen volume-driven organic reference lab revenue gains and record high customer retention levels, now over 97%.

We also achieved continued high-single-digit organic lab growth in international markets supported by higher gains in Europe. Rapid Assay revenues of $63 million grew 4% organically in Q2 with similar gains in US and international markets. Solid rapid assay growth was driven by continued expansion of 4Dx Plus, specialty, and first generation products. Turning to the P&L, operating profit in Q2 was $146 million, up 19% as reported or 17% on a constant currency basis, driven by high profit growth in our CAG and Water businesses. Operating margins were 25.1%, up 110 basis points on a constant currency basis, aided by operating expense leverage on our strong revenue growth results in the quarter. Relative to our expectations, we saw some favorability related to timing of OpEx investments which supported our strong Q2 operating margins. These benefits are reflected in our raised full-year operating margin guidance. Gross profit was $332 million in Q2, up 14% as reported or 12% on a constant currency basis.

Gross margins of 57.2% decreased 35 basis points on a constant currency basis compared to strong prior-year levels, including about 20 basis points of impact related to cost reclassifications in our lab business from OpEx to cost of revenue. Higher investments in lab information systems and service capacity; employee benefits, including the increase in our 401K match levels as part of the tax reform reinvestment; as well as mix impacts from high instrument revenue growth offset benefits from solid net price gains and ongoing productivity improvement. Foreign exchange hedge losses which impact gross profit were approximately $1 million in Q2. Looking forward, we anticipate relatively more favorable benefits from gross margin leverage in the second half of this year as we stepped up investments in areas like US lab route capacity advanced in the second half of 2017.

Operating expenses in Q2 were up 10% or 7.5% on a constant currency basis, resulting in 140 basis points to positive operating expense leverage. Constant currency operating expense increases were driven by higher global sales in marketing and R&D investment, offset in part by the lab cost reclass. As noted in our press release, we're advancing incremental investments in commercial capability and the US and international markets which will increase the year-on-year growth in operating expenses in the second half of 2018. These investments are factored into our increased full-year operating margin improvement goals. EPS in Q2 was $1.23 per share, including $4 million or $0.05 per share in tax benefits related to share base compensation activity. On a comparable constant currency basis, EPS increased 33%, including net benefits from US tax reform. Our effective tax rate was 20.9% in Q2, including 3% of tax rate benefit from share base compensation impacts.

Foreign exchange, net of hedge impacts in Q2 2017 and 2018 increased the operating profits by $2 million and EPS by $0.02 per share. Free cash flow was $102 million for the first half of 2018. We continue to maintain our full-year outlook for capital spending at about $140 million. This outlook includes about $50 million of combined incremental capital spending related to our Westbrook, Maine headquarters expansion and our German core lab relocation or about 15% of net income. We're now expecting free cash flow of approximately 70% to 75% of net income for 2018, reflecting these investments and additional projected cash deployment related to strong program instrument placements. These program instrument outlays are directly related to supporting the expansion of our highly durable CAG diagnostic recurring revenues and yield high, incremental returns on investment capital. We allocated $106 million in capital to the repurchase of 500,000 shares in Q2.

Year-to-date, we've repurchased one million shares at an average price of $195.00 per share while maintaining a strong balance sheet. We ended Q2 with $1,043,000,000.00 in debt, $175 million in cash, and $412 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.84 times gross and 1.53 times net of cash. We're refining our 2018 full-year outlook for reduction in average shares outstanding from stock repurchases to about 1% which assumes that we maintain net leverage at 1.5 times EBTIDA. We now project annual net interest expense of approximately $35 million, at the lower end of our earlier outlook, reflecting additional benefits from capital structure optimization. In terms of our updated P&L outlook for 2018, as noted, we're refining our full-year reported revenue guidance to $2,205,000,000.00 to $2,230,000,000.00.

This incorporates operational upsides from our higher 11.5% to 12.5% organic growth outlook, including raised expectations for 12.5% to 14% full-year organic growth in CAG diagnostic recurring revenues and flow-through benefits from our strong first half performance in growing premium instrument placements. As noted, these benefits largely offset $20 to $25 million of negative revenue guidance impact from revised FX assumptions for the year related to the recent strengthening of the US dollar. At the revised conversion rate assumption shown in our press release, we now expect a full-year revenue growth benefit of approximately 0.5% to 1% from FX with a 2% reported revenue growth headwind in the second half of 2018. We're raising our 2018 full-year EPS guidance by $0.02 per share at midpoint to $4.10 to $4.20 per share, reflecting an outlook for 32% to 36% comparable constant currency EPS growth.

As noted, our updated EPS outlook incorporates approximately $0.07, an operational upside related to our higher organic revenue growth outlook and updated expectations for 90 to 130 basis points in full-year constant currency operating margin improvement. Our EPS guidance assumes a 2018 effective tax rate of 19% to 20%, a 50 basis point improvement, compared to earlier guidance, netting approximately $0.02 of EPS upside.. This tax rate includes an updated estimate of $16.5 to $18.5 million or approximately 4% in full-year projected tax rate benefit from exercise of stock-based compensation. At the midpoint of our guidance estimates, this equates to about $0.20 per share in full-year benefit. FX impacts aligned with the foreign exchange ratio in our press release partially offset these increases to our full-year EPS guidance.

We now estimate that foreign exchange rate changes will have a $0.01 positive impact on full-year EPS or about $0.07 per share below our earlier estimates. Consistent with these assumptions, we estimate net hedge gains and losses will be relatively flat for the full-year. In terms of our third quarter outlook, we expect reported revenue growth in the 9.5% to 11% range, supported by organic revenue gains of 11.5% to 13%. We expect Q3 2018 operating margins to increase approximately 100 basis points above prior year Q3 levels on a constant currency basis as we ramp our commercial investments. In terms of FX impacts, in addition to a projected 2% revenue growth headwind, we expect year-on-year FX changes will have a modest negative impact on reported operating margins in Q3. So, the reported operating margin improvement will be somewhat below the 100 basis points I noted. We expect our effective tax rate in Q3 to be 19% to 20%, including projected benefits from share-based compensation, exercise of activity.

That concludes the financial review. Overall, our business momentum is very strong, and we're on track to significantly overdeliver against our original goals for 2018 financial performance. Let me now turn the call over to John for his comments.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Brian, thanks. Let me put those great results in context here. Our strategy is to help veterinarians around the world grow their appropriate use of diagnostics in the care of the pet, keeping pets healthy and meeting the needs of owners. The current medical standards practice today broadly define a fraction of what they could be with IDEXX's unique toolkit of tests and services assisted by software technologies. So, in the second quarter, our commercial teams around the world made great progress advancing our strategy, as evidenced by the record Q2 instrument placements and the 13% organic growth and the testing that make up our Companion Animal Group diagnostic recurring revenues. Commercial successes, driven by field presence and ever driven field productivity drove the results that Brian enumerated.

The productivity drivers include our EVI or economic value index basis for instrument placements which has now been adopted globally in 2018, our IDEXX 360 program to grow IDEXX proprietary diagnostics, and our investments in salesforce automation. Our advanced CRM helps our field professionals answer the three key questions they face every day: "Where do I go?" "Who do I see?" and, "What do I say?" The extensive proprietary real-time data we have integrated into our CRM, salesforce.com, empowers our consultants to be highly relevant to our customers in supporting their adoption of IDEXX innovations and advancing their practices. Our IDEXX 3 program has already shown significant successes in the North American market, evidenced by the second quarter performance of 346 Catalyst placements to new and competitive accounts and 650 SediVue placements up 32% year-over-year. We will be implementing the IDEXX 360 program in major international markets over the next six months.

We expect this customer-friendly program will advance instrument placements further and support the enduring growth of IDEXX's diagnostic recurring revenue. A key feature of IDEXX 360 is that the customer can meet their diagnostic growth commitments by testing where they want, in-house or reference labs, and what they want. In addition, customers' adoptions of IDEXX's new and unique tests further support their revenue commitments to IDEXX while growing the adoption of these unique test innovations. Our successes, momentum, and increasing productivity of our sales and marketing team combined with the market opportunity of our unique offering gives us confidence to expand our commercial presence yet again in the second half of 2018. In the US, we are already under way with 13% expansion in our field-based professionals which we expect to be fully in place and in territory by the beginning of Q4 2018.

This will bring us to an estimated 490 field base professionals, up from 435 in Q1. When we expand our presence in the field, each IDEXX professional is able to spend more time with each customer. And thus, our relationships with each customer deepens further. We have consistently found, quite simply, the more we call on customers, the faster they grow with IDEXX. We also know customers who use IDEXX for their in-house and reference labs are larger and grow their revenues faster than practices who do not use IDEXX for either. So, the deeper presence will help us with instrument placements, including the novel SediVue Dx for urinalysis, pro usage of our proprietary assays and technologies such as SDMA and VetConnect PLUS, increased customer loyalty and retention, and support the growth of IDEXX's unique strategy to advance preventative care testing at the reference lab, what we call the preventative care challenge, leveraging IDEXX's unique, expanded test menu.

Note that we are pleased to see over 20,000 US customers now use IDEXX reference labs, an all-time high in Q2 of 2018, a level never achieved before in this most basic metric of IDEXX metric presence. Our successes outside the US market has led us to the same conclusion. There is a strong ROI for IDEXX when we invest in the disciplined expansion of our field professional presence. And so, in the second half of 2018, we are embarking on growth in our field presence in targeted country markets where we see the greatest opportunity. These expansions range from 20% to 100% in field-based professionals depending on the targeted country. Overall, outside the US, we're planning to increase our field-based presence to 390 professionals, up 15% from 340 at the end of 2017. This does not include increases in supporting personnel, including phone-based and marketing staff.

So, in total, our global field-base presence with professionals in the field who are experts in diagnostics and software, supporting our customers, will be an estimated 880 by the end of 2018. Internationally, we've also been moving our sales structures to customer-centric models, similar to the one we put in place in North America a few years ago, and to great effect. Key markets where we have a strong in-house and reference lab with a direct sales approach such as Australia, Japan, the Nordics, and Germany have already moved to this structure over the past couple of years. Germany, in its second quarter in the new structure saws very strong instrument placements with Catalyst placements up 75% year-over-year and strong reference lab organic growth. The UK will move to this account model at the beginning of 2019, the last major market to do so within the IDEXX international portfolio.

These initiatives will help us further develop the unique innovations that we have brought to the market in the last two to four years which, cumulatively, have created a highly differentiated portfolio of instruments, rapid assays, and reference lab services. The 13% growth that we are achieving is coming primarily from the core portfolio of tests and services that make up our Companion Animal Group diagnostic recurring revenues with smaller benefits from new products launched within the last 12 months. These smaller products contributed about 0.5% to our organic growth in Q4. This momentum, augmented with our expanded global commercial presence gives us high confidence we can sustain high growth and the companion animal group recurring revenues as we move forward. We like to provide an update on our new test innovations.

In July, we have launched the Catalyst SDMA T4 combo kit in North America which follows earlier launches of Catalyst CRP and Catalyst SDMA, contributing to the growing IDEXX proprietary in-house testing menu. Most of the international markets will follow with the SDMA T4 combo kit launch within the next two months. This test innovation will further advance SDMA adoption and Catalyst as well as grow T4 utilization with all the benefits to customer retention, new customer acquisition, consumable revenue growth per customer that we have discussed in the past. Looking forward, we are reassessing our SNAP fecal product currently in development. We believe we have more work to do than initially appreciated to bring a fecal SNAP to the field with the level of outstanding sensitivity and specificity that we are currently able to deliver with the reference lab Fecal Dx offering. At this time, we're not in a position to provide a targeted launch date.

We don't anticipate this change will impact either out 2018 or 2019 revenue growth plans, given the large number of current growth drivers already in play in our North American Companion Animal Group commercial operations. Our commercial focus in the fecal testing category will be building on the tremendous success we are experiencing with our proprietary fecal antigen reference lab offering, Fecal Dx. Our unique technology for both routine and sick animal intestinal parasite screening and testing in our reference lab offering finds more disease and finds it earlier in the infection cycle than just the traditional microscopy approach.

Fecal Dx is also a key piece of our proprietary preventative care challenge that is appropriate for all life stages of the dog and cat. Combined with lab 4Dx, the chemistry panel, and with an IDEXX SDMA, and the unique aspects of the IDEXX CBC, we have assembled a comprehensive screen for the seemingly well patient to uncover underlaying diseases that are impacting pet's health and wellbeing and which can be addressed with a treatment plan. We're finding that advancing the appropriate case for preventative care testing using IDEXX proprietary panels in the reference labs is a long-term growth driver for the reference lab volumes and our existing customers in the US. The preventative care challenge really defines what IDEXX is all about: serving the pet, pet owner, and veterinarian alike. We also continue to add to our capability in providing solutions to veterinary practices to support the management of their business.

Of note, our veterinary software and services business has just gotten stronger with the recent acquisition of Smart Flow just after the quarter ended. Virtually, every paper formed in the veterinary practice can be captured electronically using Smart Flow, enabling a truly paperless practice and importantly, ensuring all service charges are captured and added to the invoice and proving both practice efficiency and revenue and profitability. Smart Flow is a very innovative treatment workflow enhancement to the core practice management software systems such as Cornerstone and provide a high ROI due to its impact on productivity and the plugging of revenue leaks from hospital charges not captured. Quite similar to what IDEXX has done with diagnostic integration in VetConnect PLUS, Smart Flow also enhances IDEXX's overall software offering to our customers who need enterprise IT solutions. Practices with enterprise needs currently consist of about 10% to 15% of the global market.

Wrapping up, the market, our strategy, and our execution in the field is driving strong growth in our Companion Animal Group diagnostic recurring revenue with Q2 organic growth of 13%. These recurring revenues contribute an estimated 75% of our overall IDEXX revenue. So, a core enduring growth driver. We are advancing a software strategy that builds on key elements of our strategy to accelerate customer growth and loyalty. Our raised organic growth for 2018 is reflective of the strong momentum we are building in our businesses, position us to continue to deliver on our long-term revenue and profit goals. So, in summary, all of IDEXX remain dedicated to our purpose to create exceptional long-term value for our customers, employees, and shareholders by enhancing the health and wellbeing of pets, people, and livestock. And with that, we'll open it up to Q&A.

Questions and Answers:

Operator

Thank you. And ladies and gentlemen, if you wish to ask a question, please press * followed by 1 on your touchtone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue by pressing the # key. If you are using a speakerphone, please pick up your handset before pressing the numbers. Once again, for any questions or comments, press * and then 1. Question will come from the line of Derik de Bruin with Bank of America. Your line is open.

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

Thanks. This is Mike Ryskin on for Derik.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Hey, Mike.

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

Thanks for taking my call. Couple of quick questions. 1) I just wanted a little more clarity on what you just talked about, John, with Fecal SNAP. You mentioned previously it was expected in the summer of 2018. And on the last call, you said it was more about workflow and some of the earlier response you got from the early users on just optimizing the workflow. So, wanna get a little more clarity on what has changed since then and why this additional change to the fecal. And then a quick follow-up on the sales force expansion. You highlighted some of the international markets you're going, but in the United States, for example, is there any territory reshuffling associated with this? Or is this more just in each territory, additional sales force? And also, timing on how long you expect for those to get up to speed, three, six months. Things like that.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. Thank you. On the fecal offering, we've been so successful with the proprietary antigen-based technology in the reference lab, combining it with core bloodwork, IDEXX chemistry with SDMA and CPC. And that fecal offering is gonna -- it's an outstanding level of sensitivity and specificity. And by the way, it's gonna advance further when we adopt the applied bio-code which is a technology we announced earlier in 2018. And so, in that context, we are continuing to evaluate the customer requirements we need for an in-house screening test for SNAP. So, really, what they -- and you heard all the investments that Brian mentioned that in expanding our reference lab, our presence, our information systems, and the field expansion, we're really going to be focusing on the reference lab side of the fecal testing in 2019. And as I mentioned, that wasn't a product that was even planned until 2019. And we don't think the change in our outlook here changes, of course, either 2018 or 2019 growth prospects.

With regard to the US expansion, we're already actually hired the majority of the people as of now as part of that expansion. And they're in training the field. There's always a small reconfiguration of the territories when you do an expansion, by definition because we're adding more territories. That will take place in Q4. Typically, it takes a quarter for everything to get up to speed, but we have so much momentum, and obviously, we have a lot of supporting people in those territories: our veterinary diagnostic specialist, the instrument specialist, the professional veterinarians, that we -- and this is the third -- actually, this is the third expansion of this nature that we have done. So, we're really down the learning curve on how to do this smoothly with the field. So, that's gonna be fully in place toward the end of the year and obviously preparing for 2019.

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

Thanks. Appreciate it. Look forward to seeing you at the analyst day.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah.

Operator

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

Ryan Daniels -- William Blair & Co. -- Analyst

Yeah, guys. Thanks for taking the question. John, seems like an important datapoint is the upped investments internationally with growing a customer-facing organization. Can you talk a little bit more about what's driving that? Is that increased demand for diagnostics that you're seeing opening up the market? Is it the company success rolling out EVI or 360 that gives you the comfort? Or is it investment ahead of potential competitors, maybe increasing their investments in the market? What's really driving that? Because it seems like a pretty big uptick.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Thank you very much. We're very, very excited about the international expansion. And you're right. That is a new datapoint on the call and noteworthy that we're talking about. And it's really the fact that we've had just tremendous success internationally with our instrument business. Catalyst placements outside of North America up 55% in the second quarter. And we haven't even real -- we've only starting to achieve the benefits of EVI. We haven't even started with IDEXX 360. And we're really early days on leveraging the productivity benefits of salesforce automation, all of which working together increases the productivity of our investment. And so, given the market opportunity that we've laid out in past discussions and we'll reinforce in the investor day in a couple of weeks, we just see the opportunity to be significant. The other point I will make is that we launched SDMA for Catalyst internationally in the second quarter. And it's unbelievable what the take of it is.

We had 50% of Catalyst customers outside of the US who purchased the SDMA. This is amazing because we've only been in the market a couple of months. As faster take up in the US -- I think these international markets -- our teams have done a great job. And they're more medically centric, believe it or not, than the US. And we don't even have reference labs in some of these markets that we've seen SDMA pick up, or a strong reference lab presence. And so, the proprietary nature of our offering -- once we get a Catalyst into a customer -- the loyalty of our Catalyst customers outside the US is 99.9%. And so, we really see the opportunity to double down on growth in these markets around the world.

Ryan Daniels -- William Blair & Co. -- Analyst

Okay. Very helpful. And given that it is a novel datapoint, just wanna get a little bit more of a reference here. Is the 15% uptick in the customer-facing organization OUS incremental to what you started with at the start of the year? Or did you have some plans to grow that, and now it's higher, and you're just talking about this 15% as an overall growth metric? So, any color there would be helpful. Thanks.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yes. It is incremental to what we had as our plan going into 2018. And it's really reflective of the exceptional performance that our teams have achieved and the maturity of our management teams and supporting functions. These are disciplined expansions. We don't do these things willy nilly. We wanna do them right. We wanna do them in a way that our customers benefit and our organization, in an organized fashion -- we know how to do this. We've done more of these expansions in the US, but we're prepared to take this kind of augmented growth mentality internationally. So, yeah. This is something that we really -- it was not part of our plans going into 2018, but we feel the ROI is there. And that's characteristic of IDEXX. We move very, very fast when we see new opportunities.

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

Yeah. Just on the return point, if you look at the incremental growth that we're able to drive as well as the durability of these revenues, the inverse of 99% retention rate is a very long customer relationship. The return on these investments is several times what we're putting into it. And I think with the 55% instrument growth over 20% consumable growth, we're really encouraged by the momentum that we have. And I think this is a great place for us to be spending our time and our resources.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

And there's another interesting dynamic, Ryan, on top of everything we're talking about. What we've done in the US, we've basically upgraded all the vet test catalogues. There's less than I think 99 -- over 99% of our chemistry consumable revenue in the US is now coming from Catalyst customers. In large part, we aren't as far along, but we're well on our way. 85% of our chemistry consumable outside the US is coming from Catalyst customers. And so, while we continue to upgrade that test, we're actually turning our forces toward the new and competitive placements, and we don't have to spend as much time upgrading that just because quite frankly, there are not that many left.

And usually, they're smaller or they're harder to upgrade. And so, we take the same resources and turn them to new and competitive. And of course, that accelerates the consumable growth which is why we're getting over 20% consumable growth in the international markets in Q2 because we've really turned now to the new and competitive. So, it's another reason why we feel good about augmenting our sales organization.

Operator

Thank you. We'll go to line of Erin Wright with Credit Suisse. Your line is open.

Erin Wright -- Credit Suisse -- Analyst

Hi. Thanks. Can you speak to some of the more one-time factors impacting the gross margin in the quarter and the dynamics that are influencing that potentially better trend in the second half? And tied to that, can you speak to the overall price realization in the quarter and the sustainability of pricing trends in general across reference laboratory, rapid assay, as well as the consumables? Thanks.

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

Sure. Why don't I start with price, Erin? We noted we were at a 2% net price increase in the quarter. It's very consistent with the strategy that we've been advancing. Not a lot of change on that front. I would say if anything, at the margin, we're just doing really well with new customer acquisition. And so, that's a growth-oriented investment that causes a little bit of moderation in the gross in that conversion.

But that'll come back over time of course as we secure those accounts and get the benefits of growth with them over time. In terms of the gross margin dynamics, there are a number of investments that have been falling through cost of revenue in the first half. Late last year, we really stepped up some investments in our lab route capacity given the mid-teen volume growth that we were seeing in our US labs. We're rolling out and completing the rollout of our global limb system implementations that also flows through cost of revenue. We added capacity to our software services field service rep organization. And all those things are -- and we had some cost reclassification --

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. 20 basis points of --

[Crosstalk]

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

-- that we talked about. And so, along with the strong instrument growth, it's all flowing through gross margin at the moment. As we look ahead, we'll start lapping some of those investments, particularly the route capacity and the lab information systems will be moderating in terms of their growth. And so, looking ahead to the back half, I made a comment that we'll have more favorable comparisons. So, our increased operating margin outlook factors that in even as we're advancing these incremental commercial investments.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. And then the sequential step-up in profits revenue in patient visit growth that you noted based on the metrics you track, do you think that there was any delay in the flea and tick season that possibly impacted overall visits and influencing your consumables or reference laboratory volume? What's embedded in your guidance also in terms of that underlaying veterinary demand trend in the US in particular and potentially what you saw over the course of the quarter? Thanks.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. Thank you. I think with regard to our performance, we're not as dependent on the flea and tick season as maybe other companies that are serving the industry with different categories. But I think it was a slow start to the year that was probably weather. I think most people said April was a weird month. And then May and June were good months. And it's hard to parse this by month, but there's a lot of anecdotal evidence about that. But I think the market is strong. And as you know, Erin, people love their pets. Millennials love their pets even better. And it turns out Generation Z may even be beyond millennials. So, millennials are moving into their own homes, and the first thing that comes is a pet.

So, they're getting married later, having kids later, but they're getting the pet. So, I think the overall market is strong. I think our customer base, those who are using IDEXX and who are regularly working with IDEXX, we're finding this preventative care is a big growth driver. And that's one of the things that is driving particular our reference lab growth in the first half of the year.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. Thank you.

Operator

Thank you. And as a reminder, for any questions or comments, press * and then 1. And we will go to the line of Jonathan Block from Stifel. Your line is open.

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Thanks and good morning. Maybe two and change in terms of questions. John, you detailed the actual headcount associated with the recent expansion. Where is the approximate US call cycle after this most recent expansion of the sales force? And then where's the optimal call cycle as you see it after factoring in your level of innovation?

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

John, we get that question all the time. The more we call on customers, the faster they grow with IDEXX. And because the adoption of our innovations is still a fraction of what it could be, the adoption of preventative care is still a fra -- just really, at the earliest stages. And the other thing is -- and we are really starting to see huge productivity from our CRM at salesforce.com. It's pretty impressive. A rep can now basically quickly sort their territory by any number of metrics of, for example, adoptions of what customers have purchased SDMA on a slide. And they can sort it and then pick the top opportunities, drop it right into map anything. And they got two days of calls on that particular topic. And it's really powerful. And it's used by the entire sales management team. That is really -- what we've been doing is building the infrastructure. And now we're starting to see the real benefit. So, we're going to -- this expansion allows us to make more calls on customers.

And we expect a good ROI. It's hard for me to say where's the end of this because we're all about advancing the standards of care. And that's what we see as the opportunity. And the most mature market in the world, the US, is not mature at all. And then we look outside the US, and we say, "If the international market got to the US standard of care, what would it take?" And it turns out it would take 25 years of 10% organic revenue growth to get to the US standards of care. And of course, the US isn't standing still. So, yeah. We have a lot of opportunity in front of us, and this is gonna increase the call intensity with our customers.

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Okay. And just to try to quantify it a bit, are you some -- call it once a month in terms of your US salesforce and how frequent they're currently calling on your customers?

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

So, remember, we call customers, everybody out there, whether they're using us or not. Now most practices use us for something but not all. So, we're calling on them whether they're using us or not. And I'd say once a month is -- and we'll have some more of those metrics. It's hard to say, obviously. The big customers, we're calling on far more frequently than once a month. And we're calling more than just with a veterinary diagnostic consultant.

We've got professional service veterinarians, and we've got specialists, and we've now got the -- Brian mentioned as part of the gross margin factor the investments we're making with field-based field support reps who help them with their software. And this is highly appreciated. And our customers who have adopted our PIMS and our apps are larger and more loyal and growing faster. And so, yeah. There's a lot of working with customers. And they really appreciate our presence because we're really bringing subject matter expertise.

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Okay. I'm not trying to be difficult. Let me ask one more just to be clear. This is still part of the first question. But you made a lot of the hires. I guess what I'm trying to get at, by the numbers, it seems like you are calling on much more than once a month. I understand your growth has been highly, highly impressive. But I think what we're all trying to figure out is if there a point in time where this at least goes a little bit more on autopilot rather than handholding. So, John, just to try to get the crux of the question, if you're now at -- I think it was close to 600 reps in North America, what is peak number? Is it 700? Is it 1,200? Is it somewhere in between? Can you give us some context there? And then I promise I'll move on to No. 2.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

I guess the question is what is peak growth? We keep accelerating our growth. So, we can spend some more time on this on analyst day.

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Okay. Fair enough. So, the second question is really following up on SNAP Fecal. And I know you talked about the pipeline being very robust despite the setback in SNAP Fecal, but a couple questions here. So, 1) I wanted to be clear. Is this product still likely coming to market at some point? I don't think I really knew. And then the $50 million in incremental revenue that I think was supposed to be derived from SNAP Fecal, that could have been 100 to 200 basis points of incremental growth, depending on the cadence of those revenues. So, what was the point earlier in the call that you're gonna find ways to make up some, most, or all of that through the traction that you have at the reference lab? Thanks, guys.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yes. That is our expectation.

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Okay. That was pretty tight, so I'll ask the last .5. With this product seemingly unlikely to hit the market in '19, a big part of the IDEXX story has been a continual cadence of new products. Should we expect this to be replaced by something else that you may have in the pipeline next year? Thanks, guys. And I'll see you in a couple weeks.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

We're gonna bring more products to the market next year. They're all different types and sizes. And we'll have more to say when we get closer to 2019. I do wanna say though, what we're really benefiting from is the cumulative effect of the advancements in our proprietary test portfolio. And while everybody loves new products, we've got so many new products and so many proprietary advances out there that are still early in the adoption -- and which bring along all the other diagnostic recurring revenue that -- the vast majority of our growth is just the core growth that comes from the cumulative technology we've brought to the market over the last several years.

Operator

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

Mark Massaro -- Canaccord Genuity -- Analyst

Hey, guys. Thank you very much. You reported outstanding consumables growth of 20%. This appears to be the strongest I've seen in a long time. And I guess Brian, for you, I think you indicated that both SediVue and SDMA on a slide added I believe two points to consumable growth in the quarter. Can you --

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

That's right.

Mark Massaro -- Canaccord Genuity -- Analyst

Okay. So, that's clarified. And then as we think about -- I know you're not prepared to guide 2019. These products are certainly very early. Should we be thinking about these products as potentially two points additive into 2019 as we think about next year?

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

So, a couple clarifications. Organic growth in consumables globally was 18%. It was over 20% internationally. These are long adoptions cycles. So, these products will continue to augment consumable growth in 2019.

 Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

I think the way to think about it is consistent to how we talked in our long-term strategic plan where we highlighted a long-term potential for 9% to 13% recurring CAG growth. And we're obviously at the high end of that range right now. And incorporated in that were benefits from SDMA, SediVue, other new products, including fecal antigen labs, which I believe was -- I think we had a half point to a point in total from fecal antigen. So, these are things that build over time. And they all go into the mix and, as John pointed out, combine with our commercial approaches and integrated strategy to hitting those growth numbers. So, we're not trying to signal that we are adding to that long-term growth potential. We'll talk more about that at investor day. But I think we're executing quite well and at the high end of what we've been targeting to achieve. And we think with the additional investments we're making, we're looking to build on that momentum and sustain that into the future.

Mark Massaro -- Canaccord Genuity -- Analyst

Great. And then last quarter, you indicated that 42% of your Catalyst install base had adopted SDMA on a slide. Do you have an updated number on that? And I think you were hoping to get to maybe somewhere around 60% of your install base at the end of the year. Is that still maybe on track?

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. Thank you for that question. The 42% was a US number because we really haven't launched it internationally. We're right now at 50% globally. Sorry, almost 50%. 49% globally. And so, we're pretty happy with what the international did. International's at 50% and US is at 48%. That averages 49%. So, we're really pleased with the progress at this point in the year.

Mark Massaro -- Canaccord Genuity -- Analyst

That's great. And maybe one last quick one. Certainly, a very strong quarter highlighted by organic revenue growth that beat our forecast. Just wanted to ask on the rapid assay piece --FLEX4 from Abaxis [inaudible]. Can you just speak to your view on what the proforma growth rate of that market is? Is that mid-single-digits? High-single-digits? Or can you talk about any competitive dynamics there?

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

We achieved a little higher than 5%. I think we're at 6% in Q1 and 4% organic growth in Q2 in our rapid assay business, which, as you know, is predominantly a North American business, a US business. So, that was both in volume and price. There was a new test out there. Always, a new test generates some interest. I think the bloom is off the rose on that right now because I think customers appreciate the accuracy and sensitivity of our tests. And by the way, that's the reason why you buy these tests and run them is so they find the disease. And when they don't find -- customers are realizing it's pretty obvious that it's not capturing a lot of the disease that the 4Dx is. But we had to work through that. We're working through that, educating customers every step of the way. And so, there was some impact on that, certainly in our numbers in the second quarter.

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

Consistent with what we had baked into our plans this year.

Mark Massaro -- Canaccord Genuity -- Analyst

Thanks. Look forward to the analyst day.

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

Thanks, Mark.

Operator

Thank you. And our final question will come from the line of David Westenberg with C.L. King. Your line is open.

David Westenberg -- C.L. King & Associates, -- Analyst

Hey. Thanks for squeezing me in. So, I'm really excited about the adoption of SDMA in the clinic. Now I know that no customer is unique, and you're gonna see across the board behaviors. But can you give us a sense on how your customers are adopting -- what percentage of chemistry panels are they adopting, if you can give us that? Or if you can't, maybe can you just give us some anecdotes about how they're using it right now? Anything right now is helpful in understanding how quick that's going to be adopted.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. Thank you very much. It's a great question. So, customers are at all different stages of the journey to belief and understanding in the immense clinical value that SDMA adds to a chemistry panel. We have several hundred customers in the US who are well along that journey and including SDMA, and the large majority of their panels are running SDMA at a large percentage of what they're running core chemistry panels. But we've got a lot more Catalyst customers than that. And there are people that are partway there. There are people that are just starting that journey. And so, this is a change in established doctrine. Over 50 years, we've made a lot of progress with the reference lab. But I think the availability of Catalyst SDMA is bringing new excitement.

And I think we're seeing more and more customers. As they get experience with SDMA, they realize there's an essential element of the chemistry panel. We're gonna show some really interesting data, some of our big data on the impact that SDMA has at the analyst day, David, which I think you'll all find interesting. And this is why we're expanding our field resources because we gotta bring that story to the practice. And it's a great medical story. It's about medical education. And medical education is what advances the adoption of things like SDMA and our other proprietary expanded test menu.

David Westenberg -- C.L. King & Associates, -- Analyst

Thank you very much. So, just one last question in terms of international. So, one of your competitors was acquired by a large company that has international expansion. So, can you remind us a little bit about macro outside of the US, the utilization behavior, how Greenfield it is, whether or not somebody else in the market really has an impact in terms of the reach there, and what you can do there in terms of the Greenfieldness? I know that's not really a word. But just remind us about the international dynamics, please.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. There are Greenfield customers. We think outside of North America, estimated to over 60,000 opportunities that either the small number of remaining vet test upgrades, competitive analyzers, which we're routinely swapping out by the way, and also of the Greenfield. The Greenfield's probably about a third of that 60. And yet, it's expanding because these markets are growing. People love their pets worldwide. And the medicine is advancing. And we're a driver to advancing that. So, we really do see a lot of growth opportunity globally which is why we're embarking upon this 15% expansion in our field-based professionals between now and the end of the year when you look at our internationals field as a whole.

David Westenberg -- C.L. King & Associates, -- Analyst

Thank you. And I will see you in two weeks.

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Great.

Operator

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

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

Yeah. Thank you. Thanks to you all for the call. And again, I wanna thank all the IDEXXers who are working hard to achieve our purpose of enhancing the health hand wellbeing of pets, people, and livestock around the world. It's why we do what we do. And along the way, we're generating a nice return on it. But we just have so much work ahead of us. It's what propels us. And we're pleased to be able to share those results with investors. And look forward to seeing you all either in person or through the reg FD presentation at our analyst day in a couple weeks. Thank you very much.

Operator

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


Duration: 62 minutes

Call participants:

Brian McKeon -- Executive Vice President, Treasurer, and Chief Financial Officer

Jonathan Ayers -- Chairman, President, and Chief Executive Officer

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

Ryan Daniels -- William Blair & Co. -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Jonathan Block -- Stifel, Nicolaus & Co. -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

David Westenberg -- C.L. King & Associates, -- Analyst

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