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IDEXX Laboratories Inc  (NASDAQ:IDXX)
Q1 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the IDEXX Laboratories First Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today.

Additional information regarding these risks and uncertainties is available under the forward-looking statements notice in our press release issued this morning as well as in our periodic filings with the Securities and Exchange Commission, which can be obtained from the SEC or by visiting the Investor Relations section of our website, IDEXX.com.

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

In reviewing our first quarter 2019 results, please note all references to growth, organic growth, constant currency growth and comparable constant-currency growth refer to growth compared to the equivalent period in 2018 unless otherwise noted. (Operator Instructions).

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

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

Thank you, and good morning, everyone. IDEXX delivered continued high revenue growth and excellent financial results in the first quarter. In terms of highlights, we achieved 10% organic revenue growth driven by 12% organic gains in CAG Diagnostics recurring revenues. As expected, FX impacts from the strength in U.S. dollar reduced reported revenue growth by about 3%. Operating margins improved 210 basis points on a constant-currency basis, better than projected, reflecting strong gross margin gains and operating expense leverage, which benefited from high CAG Diagnostic recurring revenue growth as well as timing delays related to select IT and R&D project spending.

EPS was $1.17 per share, up 16% on a reported basis or 27% on a comparable constant-currency basis. Strong revenue growth and operating margin gains drove 21% constant-currency operating profit growth. We also recognized about $0.02 per share in upside related to higher than projected tax benefits from stock compensation activity.

In terms of our full year guidance, we're maintaining our outlook for 9.5% to 11% organic revenue growth, reflected in our consistent guidance range of $2,385 billion to $2,425 billion in annual revenues. We're increasing our 2019 EPS guidance range by $0.10 to $4.76 to $4.88 per share. This incorporates an increase of about $0.07 from an updated outlook for 80 to 110 basis points in full year constant-currency operating margin improvement, $0.01 to $0.02 per share in benefit from updated interest and expense projections, and $0.01 to $0.02 in upside related to updated effective tax rate projections.

Our operating margin outlook factors in additional investments we're advancing this year in reference lab capacity, corporate customer support resources and customer-facing software capability while continuing to deliver a strong operating margin improvement and comparable constant-currency EPS gains aligned with our long-term financial goals.

We'll review our updated 2019 outlook later in my comments. Let's begin with a review of our Q1 performance by segment and region.

Q1 results were supported by continued strong performance in our Companion Animal Group. Global CAG revenues were $509 million, up 10% organically driven by 12% organic growth in CAG Diagnostics recurring revenues. Veterinary software services and diagnostic imaging systems revenues increased 7% overall and 6% organically with overall revenue gains constrained by comparisons to very strong prior year digital imaging system placement levels. Veterinary software services revenue grew at high single-digit rates organically in Q1, reflecting very strong sales across -- results across our practice management platforms with the continued growth of our PIMS and application install base supporting expansion of recurring software service revenues.

Our digital imaging business continued to achieve high levels of digital radiography system placements and high growth in recurring Web PACS subscription revenues linked to our expanding install base.

Our Water business revenues grew 8% organically in the first quarter to $30 million, reflecting continued solid growth in the U.S. and double-digit gains in international markets.

Livestock, Poultry and Dairy revenue in Q1 was $32 million, up 4% organically. Gains in herd health screening, poultry and pregnancy product sales were offset by moderate declines in European disease eradication program revenues, continued market demand impacts on our dairy testing business and continued pressure on swine diagnostic testing revenues related to impacts from the African swine fever epidemic in China

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

In terms of our broader U.S. market trends, this quarter, we've significantly revamped and expanded our reporting from our data set from approximately 7,500 practices, representing 5 different practice information management systems. We've also refined our weighting framework based on practice as in region prepared in collaboration with Animalytics. We're now providing same-store growth in clinical visits for practice augmenting our quarterly reporting on total same-store visit and revenue growth for Companion Animal Veterinary visits of all types.

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

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

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

International Reference Lab growth was in the mid-single digit range as we continue to advance commercial efforts targeted on accelerating growth in this line of business while sustaining strong momentum in expanding our Catalyst install base in international markets.

In terms of segment performance, Q1 results were supported by continued progress in driving Catalyst placements at new and competitive accounts. The quality of our instrument placements was strong in Q1. We achieved 307 placements at new and competitive accounts in North America, up 7%, with a high attach rate of premium hematology instruments, which drove a solid increase in EVI, our measure of multiyear economic value of instrument placements. We also placed 122 second Catalysts at IDEXX accounts in North America, compared to 59 in Q1 2018, supporting growth in customer utilization at larger accounts.

Internationally, we placed 633 Catalysts at new and competitive accounts, up 20%. By region, competitive and new Catalyst placements represent 60 -- represented 69% of total placements in North America and 62% internationally. Strong Catalyst placement results and continued high retention is reflected in 24% year-on-year growth in our global Catalyst install base.

Overall, we placed 2,775 premium analyzers in Q1, down 2% compared to very strong prior year levels. Q1 results were led by 1,463 Catalyst placements globally, up 4% overall supported by 443 placements in North America, a 20% year-on-year increase. And 1,020 placements in international markets, down 1% compared to record prior results, which included high levels of VetTest upgrades in emerging markets.

As noted, we saw a high attach rate of premium hematology instruments with chemistry placements in Q1, which supported 823 premium hematology instruments globally, up 9%.

SediVue placements were 489 in Q1, down 26% versus very strong prior year levels impacted by our exceptional SediVue placement performance in Q4 as well as our commercial focus in Q1 on capturing high EVI, new and competitive catalyst placement opportunities.

In addition to strong premium placement results, we drove continued momentum with SNAP Pro with 1,099 placements in the quarter. CAG Diagnostic instrument revenues in Q1 $29 million, a 3% decrease organically off a tough compare 2018, which included mixed benefits from very strong placements of higher priced SediVue instruments.

Benefits from an expanding instrument base, test innovation and enhanced commercial capability continue to drive strong CAG Diagnostic recurring revenue gains across our major modalities. Instrument consumable revenues of $167 million grew 15% organically in Q1. Results reflected double-digit gains in the U.S. and continued 20% plus growth in international markets.

High volume-driven consumable gains continue to be supported by expansion of SediVue Pay per Run and SDMA slide revenues, which contributed approximately 3% combined to year-on-year consumable revenue gains in the quarter.

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

Rapid assay revenues of $54 million grew 6% organically in Q1, reflecting solid gains across U.S. and international markets. Rapid assay gains were primarily volume driven supported by growth in 4Dx Plus and first-generation products.

Turning to the P&L. Operating profit in Q1 was a $133 million, up 18% as reported or 21% on a constant-currency basis, reflecting profit gains across our CAG, Water and LPD segments. Operating margins were 23.1%, up 210 basis points on a constant-currency basis, supported by solid gross margin gains and operating expense leverage. Gross profit was $332 million in Q1, up 9% as reported or 12% on a constant-currency basis. Gross margins increased 110 basis points on a constant-currency basis, supported by continued moderate CAG Diagnostic net price gains, volume leverage and productivity gains in our U.S. Reference Lab business, mixed benefits from high consumable growth as well as a solid gross margin improvement in our Water and LPD businesses. Foreign exchange hedge gains, which are reflected in gross profit were $1.4 million in Q1.

Operating expenses in Q1 were up 4% or 7% on a constant-currency basis, resulting in 100 basis points of positive operating margin leverage. Operating expense increases were driven by growth in CAG, sales and marketing and R&D spending with overall spending increases mitigated by modest constant-currency growth and G&A costs, including benefits from later phasing and certain IT-related projects.

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

Free cash flow was minus $4 million for Q1, reflecting normal quarterly seasonality and increased capital spending related to major projects. We continue to maintain our full year outlook for free cash flow of approximately 60% to 65% of net income for 2019 and a $160 million to $170 million in capital spending, which includes approximately 20% of free cash flow impact, driven by $70 million of combined incremental capital spending related to our Westbrook, Maine headquarter expansion and our German core lab relocation. We allocated $54 million in capital to repurchases of 267,000 shares in Q1.

We ended Q1 with $1,052 billion in debt, including $100 million of new 10-year notes issued in the quarter. Our liquidity remains strong with $117 million in cash and $502 million in capacity under our revolving credit facility. Our leverage ratios as a multiple of adjusted EBITDA were 1.69x gross and 1.5x net of cash and investment balances.

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

Turning to our 2019 guidance, we're reinforcing our full year revenue outlook while raising our EPS range by $0.10 per share. Our full year reported revenue guidance remains $2,385 billion to $2,425 billion, reflecting consistent expectations for 9.5% to 11% overall organic growth and 11% to 12% organic growth in CAG Diagnostic recurring revenues. Our reported revenue outlook reflects a consistent projected 1.5% full year FX revenue growth headwind at the rates assumed in our press release.

We're raising our 2019 full year EPS guidance, $0.10 per share to $4.76 to $4.88 or 16% and 19% growth on a comparable constant-currency basis. This incorporates a 30 basis point increase in our outlook for constant-currency operating margin improvement now estimated at 80 to 100 basis points for the full year resulting in approximately 7% -- $0.07 per share in improvement in our EPS guidance range. We have also refined our outlook for net interest expense and stock compensation tax benefits, which combine at approximately 3% to our full year EPS from $0.03 to our full year EPS range.

We've updated our outlook for our 2019 effective tax rate to 20% to 20.5%, including an updated estimate of $8.5 million to $10.5 million or approximately 2% in full year projected tax rate benefit from exercise of share-based compensation. We estimate that foreign exchange rate gains will decrease reported EPS by $0.03 per share net of approximately $11 million in projected hedge gains.

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

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

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

Thank you, Brian. Now a little color commentary. We had a strong start in 2019 in the first quarter with organic revenue growth of 10% and comparable constant-currency EPS gains of 27%, supported by better-than-expected margin gains.

Globally, we delivered a solid 12% organic growth in our CAG Diagnostic recurring revenues, at the higher end of our full year growth rate was strong gains across the U.S. and international regions. This expanding, highly durable annuity contributed 77% of IDEXX' total revenues in Q1.

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

In Q1, our U.S. field organization was in it's second quarter of the latest territory expansion, and so we saw a strong momentum in placements of Catalyst in new and competitive accounts, up 7% as our the field organization inspires customers to trade up to IDEXX' advanced technology offering.

We also had an exceptional quarter with SNAP Pro placements of almost 2,000 driven by the U.S., up 68% year-over-year. We are methodically transforming our rapid assay customer base into a razor and blade business model, as the SNAP Pro mobile instrument brings significant workflow and charge capture value to the veterinary practice. And we're seeing higher growth and rapid assay loyalty when customers adopt SNAP Pro workflow. With the placements in Q1, we are now well over 60% of our SNAP 4Dx coming from active and connected SNAP Pro customers.

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

Europe also saw a strong -- solid Q1 growth in Catalyst placements and instrument placement value, which is impressive given they are in their first quarter of the field sales expansions. The European expansions are on their way to completion at 92% occupancy, however, 40% of field reps are in their first year. And as a result, sales productivity in Europe will be building through 2019 as field experience and time and territory advances. This is the same dynamic we saw in the U.S. when we undertook a similar major expansion in 2015.

The U.S. Companion Animal market is on very solid footing, as is the pet owner in general based on macro and the trends we see. We are excited to be presenting this quarter a much expanded and improved market growth reporting as shown on the second page of our earnings snapshot with an upgrade to our methodology and an expansion in the number of practice of 7,500 in total coming from a variety of both IDEXX and third-party Practice Management Systems. Additionally, weighted to reflect the market in terms of geography and practice size and type, with the support of Animalytics, and we're grateful for their partnership. We are giving back to the industry by publishing these important metrics on a quarterly basis as part of our earnings. This is an industry with, otherwise, limited-to-no market data of this kind. Of course, the data also helps investors understand IDEXX a little bit better. From this data, we're seeing 2.2% clinical visit growth from existing practices in Q1. To get the total market visit growth, we need to add the impact of net new practice formation, which we estimate to be about 1%. Pet care in the U.S. is a very healthy market, with existing veterinary practices making investments in technology and infrastructure and new practices being open.

Our growth of Companion Animal Group Diagnostics recurring revenue in the U.S. was 11% in Q1, net of about 1% equivalent day headwind. We are, and have been, growing faster our diagnostic volume than patient visit growth for several reasons: First, we're seeing same -- strong same-store sales in diagnostic volume growth beyond clinical visit growth, driven by our unique innovations and our focus on driving ongoing increases in the utilization diagnostics and pet care. Across our modalities, we estimate, this adds about 4% of incremental volume to clinical visit growth. To this, you add another 2% growth in the number of new practices that are utilizing IDEXX as their primary diagnostic partner, whether it be in-house reference lab or both. Call this customer share gain, if you will. In fact, we topped 20,000 practices sending at least 1 sample to IDEXX Reference Labs in Q1, a record for this metric in Q1.

We also continue to realize 2% to 3% net price realization in Companion Animal Diagnostic recurring revenue. So add it all up, 9% volume growth from a variety of sources and 2% to 3% new price realization gets us to low-teens IDEXX recurring revenue in the U.S., aligned with the high-end of our long-term U.S. growth potential of 9% to 13%.

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

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

Just think of it this way. Running a PCC panel on a pet as part of an annual physical exam is like a human getting a physical with blood work every 7 years. The only difference is that the blood work is even more important in pet care as the pet can't speak for themselves, and we got these dogs running around in dog park sniffing around and drinking from the puddles. It's just a different situation, and we're finding there is a lot of value. When a veterinary practice partners with IDEXX, with our proprietary PCC panels, their overall practice revenue growth accelerates generally without the addition of any staff.

Clearly, 2019 is the year where preventative care diagnostics, driven by the expanded capabilities of IDEXX' unique offering is moving into the mainstream of veterinary medicine to the benefit of the veterinary practice, pets, owners and IDEXX' alike. And yet, we believe IDEXX is only serving 10% of the total addressable market for preventative care.

We also see nice same-store sales growth in the VetLab consumables business from the adoption of new menu, including Catalyst SDMA, SediVue and now Catalyst Progesterone. Customer retention rates in the U.S. remain stable in Q1 at world-class levels of 98% to 99%. In an environment where our competitors use their only weapon, price, to compete, it is nice to see our customers do not equate price with the value and evidence the value of our innovations through their loyalty.

New product launches in the quarter included Catalyst Progesterone, which is off to a strong start both U.S. and internationally. France led the launch, helping to expand the availability of poodles. We completed the update of all SediVue in the field with the newest algorithm, Neural Network 4.0, benefit of our Internet of Things strategy with our instruments.

In veterinary software -- In the veterinary software portfolio, we released Cornerstone 9.1 to create excitement and rave reviews. This new release brings a transformed user experience that is more intuitive and reduces clicks, and we're seeing a more rapid take-up of this new release as a result. We had strong placements of new Cornerstone, Neo, Animana and Smart Flow systems in the quarter. In addition, this month, we formally announced the prospective availability of a cloud version of Cornerstone for our customers who value the deep and unique functionality of Cornerstone as the go-to, high-end practice management software, but also want the benefits of a cloud such as full mobile access. We're seeing a strong adoption in our IDEXX Web PACS, our cloud-based software-as-a-service offering with this new reference image library and the ability to work with both IDEXX digital imaging systems as well as those from third parties.

Total Web PACS subscriptions have seen a 40% growth year-over-year. Other software offerings from IDEXX are advancing nicely, including Petly Plans for wellness plans, enterprise to support our corporate customers, and of course, IDEXX VetConnect PLUS, which continues to make steady advancement in both functionality and utilization. It is indeed a comprehensive and impressive IDEXX software technology stack.

We're serving a growth market and supporting further market growth through our advanced diagnostics and software technologies. Given our success, we have in the works augmented investments planned in the North America market, including Reference Lab capacity expansion, corporate account support resources and further investments in our customer-facing software strategies. Of note, we have no plans for further expansion of our field-based footprint in the U.S. or internationally in 2019 in diagnostics, other than completing the occupancy plans in Europe and the small expansion to serve corporate accounts. With these investments, we're focusing on the remainder of 2019 on driving field sales productivity, which comes from time and territory, advancing our CRM and advancing programs such as EVI and IDEXX 360.

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

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

Questions and Answers:

Operator

(Operator Instructions) First question is from the line of Ryan Daniels, William Blair. Please go ahead.

Ryan Scott Daniels -- William Blair & Company -- Analyst

Yes, good morning. Thanks for taking the questions and all the detail. Brian, one for you. Operating margin is clearly stronger than anticipated. And I think you mentioned in your comments there was some IT and maybe R&D spending that was delayed. So can you dive into a little bit more of the rationale behind that? Was it related to personnel hiring given the economy? Or just noise in investment spending?

And then number two, anything we need to think about regarding cadence in those items for the rest of the year on a the quarterly basis?

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

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

I would highlight that in Q1, we had some favorability that benefited the quarter. We had some favorable compares in our LPD business on a gross margin line. We had very strong consumable growth in -- particularly in international. Some of that benefited. We highlighted there was some Brexit pull forward that added a couple of points to growth, and we got some mixed benefits from those factors. And as we work through the years, we've highlight that they will have some incremental investments going -- coming online. In the second quarter, we'll be adding some day lab capacity in the U.S., and that's factored into our margin outlook balance here. So we're clearly feeling good about how the year started. We raised the full year operating margin goal. But I think some of those factors are moderate to gains as we look through the year.

Ryan Scott Daniels -- William Blair & Company -- Analyst

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

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

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

But it's -- the sales expansion -- so I would see -- this is a very major -- this was a very -- a major expansion we undertook over the last 4 to 6 months internationally in selected markets. Obviously, we had a very strong -- we have very strong country organizations there already, but I would say this expansion was kind of more -- for them, it was more in the order of expansion that we undertook in 2015 in the U.S. And so I would use that as a guide how we think things will progress over the year.

Ryan Scott Daniels -- William Blair & Company -- Analyst

Okay. Thanks for the color.

Operator

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

Erin Elizabeth Wilson Wright -- Cre`dit Suisse AG -- Analyst

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

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

Thank you. That's a great question. That is contributing to the 11% reported growth in the U.S. recurring revenue, which a day -- which had a day of headwind in it. So that's -- that is a -- the preventative care is a big deal. And the evidence -- the medical evidence for preventative care is getting stronger and stronger as we put together the data and we share what the industry is and the key opinion leaders. And our field organization, and this is one of the reasons why we've done all of these expansions, they are bringing it to the local practice. So we're adding, every quarter, a couple of hundred practices who are moving to this new way of thinking. They're all being threatened by the retail going out of the practice, and so they're realizing that is a turn to diagnostics. That's not only a nice antidote, but it's a higher -- it's a more productive -- it's higher -- it's a more satisfying and financially impactful way to grow the practice than retail. It has higher margins, and it's a whole lot more satisfying to address issues early than to deal with them very late in their progression with the pet. And so I think we're beginning to see significant momentum.

A 2,800 practice is -- that's approaching 10% of the market. That is not an insubstantial demonstration of the success of this program. And yet, of course, we're really only early days. We think every practice really should be adopting this as the best practice over time. They've got the tools and the support of our field organizations to do so.

Erin Elizabeth Wilson Wright -- Cre`dit Suisse AG -- Analyst

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

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

Yes. Thank you. We're really pleased to be able to present, in partnership with Animalytics, the much more sophisticated U.S. metrics. As we all know, there's just like almost no data in this industry, and there are reasons for that. It's because it's not -- it doesn't have the standardization we see in human healthcare.

In Practice Management Systems, we found 790 different ways to call a dog a dog, which is pretty amazing. So our machine learning and AI is really coming into play here.

With regard to the comparison to international, we just -- we aren't there yet. We don't have that same capability. But generally speaking, they're the same pets and people love their pets, and the level of adoption of diagnostics is still a fraction. And so we are bringing in tension, but certainly, any attention that the industry brings to the profession of the value of diagnostics we think will help grow the market around the world. And clearly, we're seeing that with the double-digit growth in CAG Diagnostic recurring revenues that we're seeing routinely outside the U.S. similar to the more advanced market that we have in the U.S. And it's really not -- it's really a phenomenon that cuts across all cultures and geographies. And really, it's the amount of the attention that we can bring, supported, of course, by a great product line that's going to drive this growth, which is why we've done these expansions internationally to accelerate the adoption of diagnostics in the practice of the veterinary medicine.

Operator

(Operator Instructions). Our next question is from the line of Michael Ryskin, Bank of America. Please go ahead.

Michael Ryskin -- Bank of America -- Analyst

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

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

That is correct. The number was 2% international and...

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

International consumables. That's exactly correct.

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

International consumables. That's -- we're weighted toward the U.S. in consumables, relatively, but I think that's -- those are reasonable estimates of the overall effect. And we'll see. We don't have full insight into how the many customers we have in international markets or in the U.K.

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

Or how Brexit will evolve.

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

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

Michael Ryskin -- Bank of America -- Analyst

Okay. And then another quick one. On the instrument revenues, I think you mentioned sort of the disconnect where revenues were down, I think 3% organically, but you saw pretty solid placements across the board. You mentioned some mix in terms of a tough comp on SediVue year-over-year and how that played into the dynamic. But I was wondering if there are any good phase? Or on an apples-to-apples basis, how is pricing in instruments? You mentioned, I think, it was positive for CAG overall. But I want to focus if it was going down in the capital equipments side of things?

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

Yes. I would say it's similar dynamics. We had different metrics we can look at on that front, but I think the amount of cash that we put out for -- in supportive instrument placement programs on a quarterly basis was kind of in line with the trend we had last year. We did have a couple of tough compares in the quarter. SediVue, we had an exceptional year last year and with very strong placements in Q4. And our organization was really focused in Q1 on the big new -- the competitive placement opportunities, which we saw in the quality, the numbers that we posted there. So that was one factor.

Another one that we'll see going into the second quarter as well is we had very strong Vet creative test upgrade results in international markets including China last year. And so just on an absolute revenue basis, we're up against tougher compares, but net-net, we're shifting a lot of our focus toward the competitive placements, and that's helping us on the EVI front. So we feel very good about the quality of the growth. And just to reinforce, we pointed out that, year-on-year, we've got a 24% increase in our Catalyst install base globally, so that's the big driver of our consumable gains, and we have great momentum there, and we're feeling very good about that. And that's where we're confident in reinforcing the outlook for the year.

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

Yes. And I just want to -- the color commentary in granular by asking that question, Mike, and highlighting that. We really -- we run the business on the economic value of the instrument placement, which of course includes the pricing of the instrument and the instrument revenues, but it also includes our estimate of the economic value of the annuity associated with that placement. And so we don't run it base on instrument revenues, so that would be the wrong way to think about the business. It's about creating value with each quarter. And it was a very solid and positive growth in the value of those placements. And it was really -- to put it in one word, it was really mixed up that -- Hence, the revenues are a little bit different than the value.

Michael Ryskin -- Bank of America -- Analyst

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

Operator

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

Jon Block -- Stifel -- Analyst

Thanks. Good morning. I'll start with gross margin. They were up really strong, 120 bps. It haven't seen sort of that level. I don't believe of a year-over-year gross margin expansion since the first half of '17. But for -- and some of the expansion was from the other businesses. You called it out a bit. But Water and LPD gross margins were up around 400 to 500 bps year-over-year. So if you can talk to what drove that? And is that step function to the new level largely sustainable on those divisions going forward?

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

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

And Water continues to be a very healthy business for us, and I think we're -- we hope to build on that. We are, obviously, expecting this year, gross margin to be a key driver of our overall performance. The 80 to 110 basis point improvement we expect for both of that to be driven by gross margins. But there will be some moderation as we move forward, including in the next quarter, just as we advance some of the investments we talked about, and we have some of the mix dynamics exchanging as well. But we think we have captured that in our full year outlook.

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

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

Jon Block -- Stifel -- Analyst

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

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

Thank you. The -- first of all, the SediVue, to date, has mostly been in North American product area, and it's been driven by North America. And we continue to see that could be the case in the near future.

Our North American organization, particularly our U.S. organization, just had a very strong quarter in competitive Catalyst. Okay? Those are -- they have -- that lab adds a lot of economic value. Those are, in some ways, more challenging than even SediVue. And so we have the remaining SediVue opportunity in front of us that we talk about probably over 30,000 analyzers when we compare what SediVue penetration could be in relation to chemistry and hematology. I think we've laid those numbers out in conversation with investors in the past. And so really, there's no -- we don't really see any change in the ultimate opportunity for SediVue penetration, and we really, really remain a class by our own with regard to SediVue. And it keeps getting better. The Neural Network 4.0, which is a silent upgrade that went across our entire install base, brought a new menu and a greater overall experience. And we're not done yet with continued software investments in SediVue. And our customers know SediVue just gets better and better. So I think it was a quarter where the field working on the competitive Catalyst placements. And I got to tell you, I was pretty proud of our accomplishments in that regard.

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

Operator

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

Mark Massaro -- Canaccord Genuity -- Analyst

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

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

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

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

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

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

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

I think we look at this practice visit growth at the clinical level, not including net new practice formation, which we do not capture in this information because we're looking at same-store sales, year-over-year. I think we see a very robust market. I would generalize stepping apart from the quarter as a whole, I think we're seeing, in same-store sales, 2.5% to approaching 3% on a sustainable basis -- practice visit growth on a same-store sales basis. And as we said, we had estimated you that about 1% to that. So I think it's a very healthy market, and it's nice to see the first quarter -- it does bounce around a little bit from quarter-to-quarter. But I -- it was nice to see the first quarter metrics.

Mark Massaro -- Canaccord Genuity -- Analyst

Okay. Great. That's helpful. And then as more and more animal clinics choose to join larger groups, the value of these contracts become increasingly important. Can you just speak to how you feel your positioned as -- maybe some of your competitors may have won some large deals, whether it's 3 or 4 years ago, some of these might be up for renewal. Can you just speak to the opportunities in front of you? And how you think you're positioned going forward?

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

Yes. I -- we -- thank you. We think we're exceptionally well positioned, and we have very high loyalty among our corporate practices. Our corporate practices value us for a couple of reasons: First of all, we help them drive same-store sales growth, which is -- has as a very nice drop-through benefit in a practice that has high fixed costs leverage. Diagnostics is a great place to improve both the revenue and the profitability. And our field reps, along with our technologies such as preventative care and our underlying diagnostic technologies embedded in the preventative care drive, help them drive same-store sales growth.

Second, there -- the number 1 issue that corporate practices have is staff engagement and retention. It's hard to recruit in the current environment. And the staff likes our products, and they're very loyal to our products, and they -- and our corporate practices appreciate on that. And so they really want to be able to support the local staff with the best technology, and that's one of the reason why we have such high loyalty because they acquire practices with our products and they keep them. And if they decide to take them out, that really usually has a pretty negative impact on engagement, which can lead to issues on staff retention, which of course, has a pretty dramatic impact on the economics of that practice. So you lose a key producer, and you got to go find someone. That's not a pleasant experience.

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

Mark Massaro -- Canaccord Genuity -- Analyst

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

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

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

Operator

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

Andrew Cooper -- Raymond James -- Analyst

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

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

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

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

This is -- generally speaking, this is an amazing business with a very, very high ROIC. It's an investable business, and so we are continuing to invest for sustained long-term growth in the profitable and enduring recurring revenues. So we look -- our plans, of course, extend way beyond the year 2019. And it's really factored into -- what we shared with you is our outlook for the year is the maximizing the growth and the value to our customers and our investors over a 5-year or 5-year-plus time frame.

Andrew Cooper -- Raymond James -- Analyst

That's helpful. I guess could -- is there any way you can sort of help size where you did not make those incremental step-ups that you kind of layered in with this update, what you think the margin profile might have looked like otherwise?

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

It's a relatively small difference. It's -- we haven't broken that out, but it's -- we're just trying to highlight that we're advancing some additional investments. And that's factored into the guide.

Andrew Cooper -- Raymond James -- Analyst

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

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

Well, what I will say is -- and thank you for that question. I think we are driving growth through new instrument placements. We are -- we do see a nice -- you don't get to double-digit recurring revenue growth without a -- both new customer and in-store dynamic and some -- and a modest price realization.

But we don't yet really have an appropriate focus on preventative care outside of North America yet simply because I think it just tests the sick pets. We would be -- there's a lot higher utilization than we have today, so we're just convincing them to add diagnostics as part of the sick pet visit, which is obviously outside the U.S. with a overall lower standards, a higher proportion total practice visits. And yet, the preventative -- there's no reason that preventative care couldn't be an opportunity, broadly speaking -- Outside the U.S., we have it. We have started in a very, very selective markets, but it's a relatively small thing, it's something I talked about last quarter. But it is ahead of us. At some time, we will turn to preventative care globally because we have a great proprietary platform in that regard and the sales organization and the diagnostic modalities to pull that off. It's just not quite ready for -- the opportunities internationally are where we're taking advantage of them today with the instrument placements and utilization growth in sick animal testing.

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

We have time for one more question.

Operator

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

Michael Ryskin -- Bank of America -- Analyst

And question has been answered.Thanks.

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

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

Operator

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

Duration: 60 minutes

Call participants:

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

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

Ryan Scott Daniels -- William Blair & Company -- Analyst

Erin Elizabeth Wilson Wright -- Cre`dit Suisse AG -- Analyst

Michael Ryskin -- Bank of America -- Analyst

Jon Block -- Stifel -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

Andrew Cooper -- Raymond James -- Analyst

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