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IDEXX Laboratories Inc (NASDAQ:IDXX)
Q2 2019 Earnings Call
Aug 1, 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 Second Quarter 2019 Earnings Conference Call. As a reminder, today's conference is being recorded.

Participating in the call this morning are Jay Mazelsky, Interim President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations.

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

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

In reviewing our second quarter 2019 results, please note all references to growth, organic growth, constant-currency growth and comparable constant currency growth refer to growth compared to the equivalent period in 2018, unless otherwise noted. To allow broad participation in the Q&A, we ask that each participant limit his or her questions to one with one follow-up as necessary. We appreciate you may have additional questions, so please feel free to get back into the queue and if time permits, we'll take your additional questions.

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

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

Good morning, everyone. IDEXX delivered continued strong financial performance in the second quarter. In terms of highlights, Q2 revenues of $620 million grew 7% on a reported basis or 9% organically. Results were driven by continued strong 11% organic gains in CAG Diagnostic recurring revenues, net of a combined 0.5% growth headwind related to Brexit order timing and equivalent day impacts.

The quality of our growth was excellent in the quarter reflected in strong US CAG Diagnostic recurring revenue gains across our major modalities, and 39% growth in new and competitive Catalyst placements in international markets, which supported solid global EVI gains and continued high growth in consumable revenues.

Profit performance continued at a strong pace in Q2 supported by continued high CAG Diagnostic recurring revenue growth and high profit flow-through. EPS was $1.43 per share, an increase of 19% on a comparable constant-currency basis, reflecting a better-than-projected 120 basis point improvement in constant-currency operating margins.

In addition to strong operating profit gains Q2 EPS results also benefited from $0.04 per share in upside related to share-based compensation tax benefits. While our CAG Diagnostic recurring organic revenue growth remains strong and on track with our full year 11% to 12% growth goals, our overall Q2 organic growth of 9% was at the lower end of our projected growth range for the quarter, impacted by a few select factors.

We fell short of our goal is to build on very high prior year international chemistry upgrade levels with the majority of our Q2 upgrade placement shortfall in China. We also saw increased pressure on China LPD revenues in Q2 driven by the African swine fever outbreak, as well as a relatively higher than projected impact from Brexit and equivalent day effects in the quarter.

These factors were largely specific to the second quarter. We've refined our full year revenue outlook to incorporate these effects, we're raising our full year EPS guidance reflecting continued benefits from high CAG Diagnostic recurring revenue growth and disciplined P&L management.

In terms of our full-year revenue outlook , we're maintaining our guidance for 11% to 12% organic growth in CAG Diagnostic recurring revenues. We're refining our overall organic growth guidance to 9.5% to 10.5% lowering our high-end growth outlook by 0.5% incorporating our second quarter results. Our updated full-year revenue guidance is now $2,380 million to $2,410 million, $10 million below our prior midpoint revenue range, reflecting $5 million in operational refinements and approximately $5 million of impacts related to updated FX estimates.

We're raising our 2019 EPS guidance range by $0.05 per share at mid-point to $4.82 to $4.92, or 17% to 20% growth on a comparable constant-currency basis. This outlook reflects $0.02 in EPS benefit at mid-point related to higher expectations for operating performance, driven by our raised outlook for 100 to 125 basis points in full-year constant currency operating margin improvement and lower projected interest expense.

Our guidance builds in a $0.04 per share increase from updated projections for share based compensation tax benefits incorporating Q2 upsides offset by a $0.01 negative impact related to updated FX assumptions.

We'll review our updated 2019 outlook later in my comments. Let's begin with the review of our Q2 performance by segment and region. Q2 results reflect a continued strong performance in our Companion Animal Group. Global CAG revenues were $547 million, up 10% organically driven by a 11% growth in CAG Diagnostic recurring revenues, including strong global gains across our major modalities.

As noted, our CAG Diagnostic recurring revenue growth in the quarter was net of a 0.5% headwind from Brexit order timing and equivalent day effects, which were relatively greater than anticipated impacted by the timing of European holidays. Year-to-date CAG Diagnostic recurring revenues increased 11.4% in line with our full-year goals.

Veterinary software services and diagnostic imaging systems revenues increased 9% overall and 7% organically in Q2, driven by double-digit organic gains in VSS revenues. We saw continued strong sales results across our practice management platforms and growth in recurring software services earnings on our expanding PIMS and application install base.

Our diagnostic imaging business also continues to achieve high levels of digital radiography instrument placements and growth in recurring services although organic revenue gains in the quarter were moderated by comparisons to high prior year instrument placement levels.

Our Water business revenues grew 10% organically in the second quarter to $35 million with consistent mid single-digit growth in the US augmented by high growth in Asia and Latin America, aided by our expanded direct sales presence. Livestock, Poultry and Dairy revenue in Q2 was $33 million reflecting relatively flat organic growth. Strong organic growth in health herd screening revenues aided by a favorable prior year comparison in the quarter and solid gains in poultry and pregnancy testing were offset by greater than projected pressure on swine diagnostic testing revenues related to impacts from the African swine fever epidemic in China, as well as moderate declines in European disease eradication program revenues.

By region, US revenues were $389 million in the quarter, up 9% organically driven by an 11% organic increase in CAG Diagnostic recurring revenues. US recurring revenue gains were supported by double-digit growth in US reference labs and consumables and high single-digit gains in rapid assay sales. US CAG recurring diagnostic growth continues to be primarily volume driven, with net price gains continuing to trend in the 2% to 3% range across our major modalities.

IDEXX's growth continues to outpace broader market trends. In Q2 total visits per practice growth was 0.7% year-on-year with clinical visits per practice growing at a greater amount at 2.1% and overall revenue per practice increasing 4.4%. Market growth results were slightly moderated from Q1 levels, which were refined following our latest dataset refresh. Note that these metrics are on a same-store basis and don't include growth benefits from incremental practice formation which we estimate at approximately 1% annually.

International revenues in Q2 were $230 million, up 9% organically driven by 11% organic gains in CAG Diagnostic recurring revenues. As noted last quarter, we saw benefits in Q1 related to advanced ordering ahead of the previous Brexit deadline. These effects reversed in the second quarter, which along with an unfavorable impact related to the timing of European holidays, reduced overall international CAG Diagnostic recurring revenue gains by approximately 1.5% and consumable gain by over 2% [Phonetic].

Adjusting for this dynamic, international consumable gains were nearly 20% in Q2 supported by our commercial executional focus on expanding our global Catalyst install base. International CAG Diagnostic revenue gains were moderated by consistent mid single-digit revenue gains in our reference lab business. This is an area targeted for improvement in the second half of 2019 aided by relatively more favorable year-on-year comparisons and benefits from our expanding veterinary diagnostic consultant business model.

In terms of segment performance. our Q2 results reflected strong global gains across CAG Diagnostic testing modalities, and continued progress in expanding our premium installed equipment base globally. Globally, EVI was up solidly in Q2 compared to very strong prior-year levels, driven by growth in high quality Catalyst placements.

In North America, we placed 319 Catalyst at new and competitive accounts as well as 159 second Catalysts at larger IDEXX accounts. Second Catalyst placements are supporting continued strong consumable growth and high customer retention rates aided by steadily expanding 360 degree program and other long-term contract commitments These results compared to strong prior-year new and competitive Catalyst placement levels of 346 units and 95 second Catalyst placements. Along with limited VetTest upgrades, total North American Catalyst placements were 486 in the quarter, up 8% supporting a 15% year-on-year growth in our North America installed base, including approximately 5% of growth benefit from upgrades completed in the second half of 2018 at Banfield.

In international markets, we placed 761 Catalysts at new and competitive accounts or 66% of total placements, up 213 units or 39% compared to the prior year. Total international Catalyst placements of 1,149 units were down 4% compared to very strong prior-year levels, which had high levels of VetTest upgrades in Asia-Pacific markets.

As noted, while our new and competitive Catalyst results were excellent, we did fall short of our goals in Q2 to build on our high prior year levels of upgrades and expansion markets such as China, which contributed to a shortfall to our quarterly instrument revenue goals. Despite these dynamics, our international Catalyst installed base reached nearly 21,000 units in Q2, up 28% year-on-year and over 5% compared to ending Q1 levels.

Overall, we placed 3,171 premium analyzers in Q2, down 2% year-on-year. Total Catalyst placements were 1,635, down 1%, reflecting the tough compared to high prior year VetTest upgrade levels. We achieved 602 SediVue placements in Q2 down 16% compared to very strong prior-year levels, which benefited from a high percentage of our early 360 degree program agreements, including [Indecipherable] compared to a more recent mixed shift, which is included relatively more Catalysts as part of our 360 program commitments.

We placed 934 premium hematology instruments globally in the quarter, up 7%, with a continued high attach rate with new and competitive Catalyst placements. In addition to these strong premium instrument results, we've placed a record 2,663 SNAP Pro's in Q2, expanding our SNAP Pro installed base to over 30,000, with over 27,000 installed in North America, helping to support increasing retention rates in our rapid assay business.

CAG Diagnostic instrument revenues in Q2 with $32 million, a decrease of 7% organically off a strong compared to 2018, which included mixed benefits from very strong placements of higher priced SediVue instruments. Benefits from our growing instrument base test and software innovation and expanded direct commercial capable continue to drive strong recurring CAG Diagnostic revenue gains across our major modalities.

Instrument consumable revenues of $175 million, grew 13% organically in Q2 , net of a 1% growth headwind related to Brexit order timing and equivalent day impacts. Results reflect double-digit gains in the US and normalized growth of nearly 20% in international markets. High volume driven consumable gains were supported by continued expansion of SediVue and SDMA on a slide with each contributing nearly 1% to year-on-year consumable revenue gains in the quarter.

Reference laboratory and consulting services revenues of $214 million grew 10% organically in Q2. US lab momentum continues to be very strong reflected in low to mid-teen volume driven organic reference lab revenue gains and sustained high customer retention levels.

Overall lab growth was moderated by consistent mid single-digit organic lab growth in international markets. Rapid assay revenues of $69 million grew 9% organically in Q2 reflecting continued expansion of 4Dx Plus specialty and first-generation products, supported by planned promotional programs and high customer retention levels aided by our expanded SNAP Pro install base.

Rapid assay gains continue to be primarily volume driven augmented by moderate net price gains.

Turning to the P&L, operating profit in Q2 was $164 million, up 13% as reported or 14% on a constant currency basis, supported by operating margin gains across our CAG, Water and LPD segments. Operating margins were 26.5% up 120 basis points on a constant currency basis, or 140 basis points as reported, reflecting moderate gross margin gains and stronger than projected operating expense leverage.

Gross profit was $358 million in Q2, up 8% as reported or 9% on a constant currency basis. Gross margins of 57.7%, increased 30 basis points on a constant currency basis, supported by product margin gains reflecting benefits from moderate net price increases and strong consumable and rapid assay growth. These gains and scale and productivity benefits in our US Lab business were offset by planned investments in lab capacity and systems, as well as incremental year-on-year costs associated with expanded software field service resources.

Foreign exchange hedge gains which are reflected in gross profit were approximately $2.5 million in Q2.

Operating expenses in Q2 were up 4% or 6% on a constant currency basis, resulting in 90 basis points of positive operating margin leverage. Constant currency operating expense increases were driven by growth in R&D spending, and increased costs related to our expanded global commercial infrastructure with some favorability relative to our expectations for the quarter relative to the ramping of cost growth in these areas.

Overall operating expense growth was moderated in Q2 by relatively limited constant currency growth in G&A costs, reflecting low year-on-year corporate function and benefit cost growth and LPD cost controls. EPS in Q2 was $1.43 per share, an increase of 16% as reported and 19% on a comparable constant currency basis.

Foreign exchange, net of hedge impacts in Q2 2018 and 2019 decreased operating profit by $2 million and EPS by $0.01 per share. Our effective tax rate was 19.5% in Q2 including benefits of approximately 3% to our tax rate or $0.05 per share related to share-based compensation activity, which is approximately $0.04 per share higher than projected.

Free cash flow was $99 million for the first half of 2019. We continue to expect free cash flow of 60% to 65% of net income for 2019, reflecting a consistent full-year outlook for capital spending of $160 million to $175 million. This includes approximately $70 million of combined incremental capital spending related to our Westbrook, Maine headquarter expansion and our German Core Lab relocation or about 20% of net income.

We allocated [Indecipherable] in capital to repurchase 86,000 shares in Q2. Year-to-date, we repurchased 353,000 shares for $74 million for an average price of $210 per share. Our balance sheet remains strong, we ended Q2 with $956 million in debt, $111 million in cash and $597 million in capacity under our revolving credit facility.

Our leverage ratios as a multiple of adjusted EBITDA were 1.49x gross and 1.31x net of cash and investment balances. We're refining our 2019 full-year outlook for a reduction in average shares outstanding from stock repurchases of approximately 1%, which reflects more recent stock price trends and assumes that we maintain net leverage ratios at current levels. We now project annual interest expense of approximately $34 million, an improvement of $2 million more than offsetting these impacts.

In terms of our updated P&L outlook for 2019, our full year reported revenue guidance is now $2,380 million to $2,410 million reflecting refined expectations for 9.5% to 10.5% overall organic growth, and consistent 11% to 12% organic growth in CAG Diagnostic recurring revenues.

Our reported revenue outlook reflects a projected 1.5% to 2% full year FX revenue growth headwind at the rates assumed in our press release. As noted, we're raising our 2019 full year EPS guidance $0.05 per share at mid-point to $4.82 to $4.92 reflecting an outlook for 17% to 20% comparable constant-currency EPS growth.

Refinements to our revenue outlook are more than offset by increased expectations for full-year operating margin improvement now projected at 100 to 125 basis points, generating $0.02 of operational benefits including net upsides from revised projections for full-year interest expense and share account reduction.

Our EPS guidance assumes a 2019 effective tax rate of 19.5% to 20%, a 50 basis point improvement compared to earlier guidance and a $0.04 of reported EPS upside. This tax rate includes an estimate of $12 million to $14 million or approximately 2.5% and projected full year tax rate benefit from exercise of share-based compensation.

At midpoint of our guidance estimates, this equates to about $0.15 per share in full-year benefit. We now estimate the foreign exchange rate changes will decrease EPS -- reported EPS by $0.04 per share, a $0.01 greater impact than our last outlook, ahead of approximately $11.5 million in projected hedge gains. For the third quarter outlook, we expect reported revenue growth of 9% to 10.5% and organic revenue gains of 10.5% to 12% including 1% to 1.5% equivalent day growth benefit.

We expect Q3 2019 operating margins to increase 50 to 100 basis points above prior year Q3 levels on a constant currency basis and we expect our effective tax rate in Q3 to be approximately 21% including projected benefits from share based compensation exercise activity.

That concludes the financial review. Our business momentum remains strong and we're on track to deliver our 2019 financial performance aligned with our long-term goals.

Let me now turn the call over to Jay for his comments.

Jay Mazelsky -- Interim President & Chief Executive Officer

Good morning, and thank you, Brian. IDEXX's second-quarter results build on our strong start to 2019 and reflect the strength of our recurring revenue business model keeping us on track toward excellent full-year results aligned with our long-term goals. Our performance was led by solid 11% organic growth and our CAG Diagnostics recurring revenues were 11.5% normalized for Q1 Brexit pull-in and equivalent day impacts. This expanding highly durable annuity contributed 77% of IDEXX's total revenues in Q2.

Let me start with a few reflections on the quarter. We were especially pleased with the strength of our US performance in Q2, where we drove 11% recurring CAG growth reflecting strong gains across all CAG recurring diagnostic modalities. We saw continued momentum in our US reference lab business whereas previously communicated, we continue to invest in operational enhancements such as new courier routes, new day labs, and weekend service. These investments provide service level and results turnaround improvements, both of which support customer retention and new customer acquisition.

In our North American VetLab business, Catalyst placements were up 8% including second Catalysts placed at high testing volume accounts, which also support customer retention and help drive continued double-digit consumable gains. Of note, the Rapid Assay business grew at 9% organically, benefiting from superior clinical accuracy, effective promotional programs and improving customer retention.

The business was also aided by our expanding SNAP Pro install base and increasing leverage of IDEXX multi-modality testing capability. Reinforcing our long held [Indecipherable] , we're seeing strong evidence of faster rapid assay 4Dx Plus growth at IDEXX practices that also use our lab services and are adopting preventative care protocols.

Globally, instrument placements were solid during the quarter, considering tough compares at overall quality with notable strength in international competitive Catalyst placements which were up 39% . Our premium install base continues to expand nicely and we don't see a change in the competitive environment. These placement gains along with ongoing increases in testing utilization drove continued strong growth in international consumables. International consumable sales were up nearly 20% normalized for the impact of Brexit order timing and equivalent days aligned with our strategy to develop the significant in-clinic opportunity in international markets.

Continued solid momentum across our business is keeping us on track for 11% to 12% CAG Diagnostics recurring organic revenue gains this year and comparable constant-currency EPS gains at the high end of our long-term goals.

Let me share some additional highlights related to progress on key fronts in our growth strategy. We continue to make solid progress advancing IDEXX Preventive Care. Our high same-store sales growth at the practice level in our US Labs business is being driven in part by the adoption of preventive care diagnostics, what we call IDEXX Preventive Care. To-date through Q2, over 3,100 practices have enrolled in the Preventive Care Program since its inception with 370 new practices enrolled in the quarter, a quarterly high for first time enrollees.

IDEXX Preventive Care practices are growing CAG Diagnostics recurring revenue at approximately 14% on a trailing 12 month basis versus 11% growth for IDEXX's US customer base over the same period. Virtually our entire VDC[Phonetic] population in the US has now successfully partnered with customers in their territories to deliver IDEXX Preventive Care. In fact, the top 50% of our VDC population as ranked by their engagement in preventive care exceeded their first half territory revenue goals by approximately 200 basis points.

It's a great example of how we create market growth. We always start with the customer and patient need to understand we're appropriately applying IDEXX diagnostics like fecal antigen and IDEXX SDMA can uncover more underlying disease. In the case of preventive care, we bring the relevant test together to create preventive care protocols that closely aligned with our customers consume diagnostics testing, along with compliance driven pricing that support the practice of best medicine.

We leverage big data to raise awareness and practice standards showing the medical benefits of applying appropriate diagnostics testing for preventative care to all pets, not just older dogs and cats. Our field organization also plays an important role in customer success and market growth, representing a key reason we went to a high frequency trusted advisor model. We're able to invest time and resources to help customers achieve their patient and business goals.

In early Q3, we introduced our IDEXX Anywhere Urinalysis Bundle, available exclusively to IDEXX Preventive Care customers. This offering combines the convenience and pricing of preventive care diagnostics run at the reference lab with all the clinical advantages of fresh urine run in house on the SediVue. This innovation is enabled by our unique integration capabilities between the IDEXX VetLab Station, practice management software and the IDEXX reference lab providing to customers a seamless ordering and billing experience across modalities.

We believe this multi-modality customer-friendly solution could help further accelerate our preventive care momentum and help support SediVue placements and associated utilization. We continue to have exceptional performance with our SNAP Pro placements of over 2,300 placed in the second quarter in the US alone, up a 100% year-over-year . We continue to methodically transform our rapid assay customer base into a razor and blade business model, as a SNAP Pro mobile instrument brings significant workflow and charge capture value to the veterinary practice. We see higher growth in rapid assay loyalty with customers adopt to SNAP Pro active and connected workflow. With the placements in Q2, we are now just a bit south of 65% of our SNAP 4Dx Plus revenue coming from these active and connected SNAP Pro customers.

I'd also like to provide an update on the status of our international sales force expansion. Our international business performance is strong, as evidenced by the continued high growth in the economic value of instrument placements and international CAG recurring growth at 12.5% in Q2. Adjusted for approximately 0.5% combined headwind for Brexit order timing and equivalent day impacts.

We've now completed the second full quarter within the expanded model and the commercial teams are responding well. Having had responsibility for three such initiatives in the US, [Indecipherable] to building out an expansion, as we onboard new sales professionals, develop their expertise in diagnostics and our product offering and grow their customer relationships. We track key metrics on our progress, like tenure which chopped nicely in Q2, since experience correlates well with effectiveness. We expect to see further business benefits of these efforts in the second half consistent with our experience in the US, our field effectiveness increased every quarter with tenure and deeper customer relationships.

Moving to the veterinary software portfolio, Q2 was another very strong quarter for global placements of Cornerstone, Neo and Animana systems. In North America, practice management software placements grew 44% year-over-year for the quarter. Neo recently launched in Canada and Australia complementing Cornerstone in both of those markets.

Speaking of Cornerstone, we continue to see an unprecedented pace of Cornerstone upgrades diversion 9.1 driven by customer excitement for the modernized user interface and improved easy use. We have upgraded close to 2,000 Cornerstone users in less than four months, a record and testament to customer enthusiasm, and I'm pleased to share that we achieved a critical technical milestone in the development of Cornerstone club, currently in field testing, which we will make available in the future and will bring the many benefits of the cloud customers that value Cornerstone as the go-to-high-end practice management system.

Q2 was also a strong quarter for Web PACS, one of our nine cloud-based software-as-a service offerings, which experienced 34% year-over-year increase in enrollments. Other software offerings from IDEXX are advancing nicely, including the development of an enterprise management and analytics platform for corporate customers.

In summary, we feel very good about our business progress across a range of strategic fronts and believe we are well positioned to sustain strong recurring CAG Diagnostic revenue growth and EPS gains aligned with our goals. We look forward to sharing more about the enduring growth potential we see for our business and our long-term strategy to capture this potential at the upcoming Investor Day later this month.

Before I conclude, I wanted to extend our best wishes to Jon Ayers, as he works through his rehabilitation process. The strong results, we continue to deliver, reflect the deep and talented team that Jon has develop at IDEXX, and I know you have great confidence that IDEXX will keep delivering against our purpose and potential.

And with that, we'll open it up to Q&A. Cynthia

Questions and Answers:

Operator

[Operator Instructions] And we will go to line of Michael Ryskin with Bank of America. Your line is open.

Michael Ryskin -- Bank of America -- Analyst

Hi guys, thanks for taking the call. I want to start on the reference lab. The overall numbers, I mean that was one area that came in a little bit later relative to expectations and talked a little bit about the US performance and how well that held in. But international, it seems like continues to land just a little bit, I wonder if there is anything going on there, I mean we've talked in the past about the EVI and the focus on the point-of-care offering. But I want to see if the dynamic changed at all. I wonder if there was any impact of the heat wave in Europe, like we've seen in the past or anything like that?

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

Yes, Mike. Why don't I just kind of clarify the numbers. the reference labs' trends in Q2 were very consistent with what we saw in Q1. I think our -- we have some normalization going on, but the US was -- the Q1 was 14%. It was like 13% normalized in Q2 and we had mid single -- very consistent mid single-digit gains in international. So we didn't have a change in trend and Jay can talk more on this, but as you know we've been sort of signaling target improvement as we work through the year on the international labs and we'll have some more favorable compares, Jay, if you can expand on that.

Jay Mazelsky -- Interim President & Chief Executive Officer

Yes. Just some additional context setting, our overall business performance internationally was quite strong, we solved the 12.5% normalized CAG recurring growth performance and as Brian indicated in his remarks, really strong competitive and new placements associated economic value with the International consumables growth at nearly 20% normalized. So overall, very good performance, as I indicated, we're still in the process of building out the VDC expansion and yeah the fixed time as our VDCs continue to build relationships with their customers in the markets and we know with time comes additional effectiveness. Keep in mind that we started with very strong country organizations. A lot of our sales professionals and country managers in international have been with the company in nondiagnostics for a decade or two decades. So that's the base, we're building up on and additional the representing phenomenal product line across that broad-based diagnostics offering, so we're feeling good about where we are and expect to continue to build up that capability in the second half.

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

And just to reinforce something Mike on performance versus expectations ,we felt very good about the recurring CAG growth in the quarter, if you normalize the effects we highlighted it was 11.5%, that's where we are year-to-date, in range with what we're trying to achieve for the full year. So relative to what we were targeting. this was an area that was right in line with what we're hoping to achieve.

Michael Ryskin -- Bank of America -- Analyst

All right, that's helpful. And a quick follow-on, if I could. I've got [Indecipherable] questions. Since you brought up the comments on China, that was a little bit surprising. Could you just walk us through what happened there, what you saw in the quarter, what your expectations are for the rest of the year?

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

Yes, we had a couple of effects that were related to China. Let me break them down, and it may be LPDs. the user want to start with, we've been working through the African swine fever impact. As you know, China is not a big part of our overall company revenues. It's 2.6% last year roughly, evenly split between LPD and CAG and the -- but within the LPD business the swine testing business in China is a meaningful part of our LPD revenues and we saw an acceleration in decline on the African swine fever from the Q1 levels. It's a business still little tougher to predict, we sell into larger laboratories and so it's a little less visibility than some other aspects of our business, but that was a couple of million below what we were expecting to achieve in the quarter and we feel like we've got that reasonably calibrated, we've got some other initiatives we're advancing to mitigate that and we've got some promising trends in other parts of the business, health herd screening that we feel good about. So I think the net-net, we think we've got that factored in, but that was a surprise in Q2. On instrument placements, we had excellent competitive instrument placements in China, the challenge that we had was we had very strong prior year VetTest upgrades as well and I think in retrospect, we probably had overly aggressive goals going into this year to both to make progress on the competitive -- noncompetitive front and to build on those strong upgrade. So it's always been a competitive market, wouldn't necessarily related to softness in the market per se. I think it's more, as I mentioned, in retrospect that we probably had aggressive goals there but I think there is, that's another point of contact. So China is smaller for us overall, but I think in the quarter had some impacts, but we feel we've got that calibrated in the updated outlook.

Michael Ryskin -- Bank of America -- Analyst

That's really helpful. Thanks.

Operator

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

Ryan Daniels -- William Blair & Company -- Analyst

Hey guys, thanks for taking the questions. And I will also start by wishing Jon the best in his rehabilitation. Jay, maybe one for you, you talked about the record enrollment of fixed 370 practices in the IDEXX Preventive Care program. Can you speak a little bit toward what's driving that, it seems a little bit unique. I think we typically see kind of a rapid growth in early adopters and then [Indecipherable] slowly in the vet space, so what's driving such strong momentum there for your business.

Jay Mazelsky -- Interim President & Chief Executive Officer

Sure. Thank you . Ryan for the question. We think it really starts with the fact that there is a very sizable market opportunity and I'm going to refer my comment specifically to North America, in the US, we think that the US Preventive Care market, addressable market is about $3 billion, [Indecipherable] about $1 billion Navidea serve that and we have about a third of that. So we're still in the early stages of being able to develop this marketplace. And then you look at just that sort of benchmark and provide some background context on the opportunity, you know a fairly small percentage of companion animals are getting tested today. We've cited statistics and data in the past that about 15% of dogs coming to a practice for clinical visits undergo a chemistry test, only 15%, and that vector borne disease side, little over third. So 36% canines in any given year get some form of vector-borne disease screening that could be something as basic as heartworm, only 15% are getting the full vector-borne disease screen, 4Dx. It starts with this a very sizable opportunity and then from a programmatic standpoint the IDEXX Preventive Care program I think it really hits the sweet spot in the marketplace. We have care protocols designed specifically for preventative care, wellness screening, it's price that really drive compliance with the client, we are able to provide tools and training for the practices and repeat follow-ups. So from the standpoint of operationalizing or implementing a concept that our customers are quite interested in to begin with, but I have struggled in the past, to be able to get good traction with this, we think we have really hit the sweet spot and our field is trained and excited by it. And consequently, driving growth with it.

Ryan Daniels -- William Blair & Company -- Analyst

Super helpful color. And then just as a follow-up on a different topic, the operating margin performance continue to display upward pressure despite the investments you're making. Can you maybe highlight what some of the key deltas are between prior expectations versus kind of the expectations you had going into the year, what are really the major upside drivers there. Thanks.

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

Yes, I think a couple of factors. I think we always benefit from good execution on growing the CAG recurring diagnostic revenues. So I think there the incremental flow-through from that growth is high gross margin for us. And. I think that always if we're executing well, which we have been, supports a good P&L profile. We have had, as I mentioned in my comment, somewhat slower-than-anticipated ramp in some of the growth we're projecting for R&D and sales and marketing, nothing to be concerned about. It's more just in a world where there's a lot of competition for talent, where we don't have all our positions filled the way that we had originally projected. And we're confident we can get on that track, but we had some upside related to that. And we've had good G&A management, we've been disciplined in the corporate functions, we had better-than-expected benefit costs, which is something that we have -- our HR team does a tremendous job of managing that area and I think we're seeing good results as a company from that

that's been favorable. And so those are some of the drivers. I think it's broadly Ryan more just reflective of the health of our business model when we're growing the recurring CAG revenues well that has good favorability for us.

Ryan Daniels -- William Blair & Company -- Analyst

Thanks for the call.

Operator

Thank you. Our next question will come from the line of Erin Wright with Credit Suisse. Your line is open .

Erin Wright -- Credit Suisse AG -- Analyst

Great, thanks. And I do wish Jon all the best in his recovery as well, we are all thinking about him here and thanks for taking my questions as well. I guess a follow-up to the last question there kind of on the profit experience that obviously was pretty strong and were there any some timing dynamics, were you saying that some of the costs were potentially pushed out to the outer quarters or how should we be contemplating that quarterly cadence in terms of the profit dynamics for the balance of the year.

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

Somewhat more modest. I would say in terms of pushing out timing and I think it's more of the ramp of the costs, Erin . So we are a little favorable in Q2 and we're anticipating we will be back on track in the back half of the year and that's reflected, we shared a 50 to 100 basis point constant-currency improvement in Q3. So that reflects that we're seeing the cost growth particularly in R&D and in the international sales and marketing going to ramping as we work through the year.

So it. We had that I would say is the bigger driver was -- and we had some specific benefits just in terms of things that we've been managing effectively in the quarter, but we feel comfortable with effectively where we have an outlook for the second half. That's more 50 to 100 basis points, which is in line with our longer-term trends and goals.

Erin Wright -- Credit Suisse AG -- Analyst

Okay, great, thanks. And then on the preventative care side what could adding instead of your urine analysis to the program add for you, is this significant in terms of financial contributions or placement trends are and how much of your existing tenant preventative care users are actually already incorporating your urine analysis in their program. I'm just curious what this could add.

Thanks.

Jay Mazelsky -- Interim President & Chief Executive Officer

So we thank you for the question. We think over time that it will help support. So our preventative care momentum over, there is a majority of customers who already use urine as part of the testing panel for preventative care, and one of the requests from customers that they wanted to use measure because it's more clinically relevant. So being able to provide multi modality screen for customers was extremely well received in the marketplace. We're enthusiastic about it and we think it also by the way, help [Indecipherable] over time.

Erin Wright -- Credit Suisse AG -- Analyst

Thank you.

Operator

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

Jonathan Block -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Great, thanks guys, good morning. Maybe two questions on some similar themes that were already touched upon, but just to go to preventative care, I think, Jay, you might have mentioned roughly a 300 basis point premium growth rate from those called it PCC adopters or just non-adopters and maybe you can elaborate on that a little bit. Do you think we see that delta why didn't further over time. And maybe if you were to isolate the practices that did adopt PCC where were they previously, in other words, where they 7% or 8% jump to 14% or 15% anymore granularity would be helpful. Thanks.

Jay Mazelsky -- Interim President & Chief Executive Officer

Yeah. just in terms of that 300 basis point improvement, we think that those customers are using more diagnostics that they have got from largely testing geriatric patients that testing adopted senior patients and incorporating diagnostics in their-in their panels. I think what the data shows is that they had perhaps assumed that if a dog or cat was well and was an adult, but they did do diagnostic testing, they didn't need to do it and what the data showing is that there are very significant -- we're able to uncover -- very significant number of abnormalities that require follow up in doing testing. So we think that it's just a classic case of being able to demonstrate that the clinical benefit of doing testing more broadly across the population of patients, in terms of how that plays out differentially in terms of growth over time, we'll see, we expect that continue to see benefits, but that's a, that's a function of ...

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

Jo we will share more in that at Investor Day that's obviously part of the long-term strategy and will share how we're thinking about them.

Jonathan Block -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Okay, great. And then sort of a quick follow-up, two small ones, first on new products, you got that Analyst Day coming up. Right. As you just mentioned, if you got a lot to discuss what is the belief that new product introductions or more of, call it an industry conference event rather than a Wall Street event and the other small one would just be on the $5 million inorganic revs coming down and certainly seem like it did not occur in CAG recurring. So we were to isolate it Brian, is sort of 50-50 between, call it LPD and the instrument side. Thanks guys.

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

Yeah. two questions. And just on the first one let's say is we intend to have discussions on new products when we're ready to bring them to market. So I think we're, you should anticipate we'll have those discussions, close to when we're ready to bring products to market and we're not going to be trying to time at around investor events, if you will know events. But I think we want to have this lined up as best we can in terms of executing with their business. And in terms of the -- the dynamics versus deltas versus our expectation in the quarter, Jon, that was pretty much it was three things. It was the international upgrades where we had great competitive placements, but we are probably a little aggressive on trying to do that and build on the upgrades. It was LPD China specifically African swine fever effects and to a degree, we had underestimated the days impacts in Europe somewhat. We didn't flag that 0.5% impact heading into the quarter. And we know there were some impact, but that turned out to be just where the days fell a little bit more significant than we anticipated but some total that was about $5 million $6 million delta to where we thought will come in and we're basically just flowing that through. We think it's largely second quarter and we calibrated effectively and feel very good about the year. And as you pointed out, recurring CAG right on track and healthy year-to-date trends right in line with we're hoping to achieved for the full year.

Jonathan Block -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Perfect, thanks for your time guys.

Operator

Thank you. And as a reminder [Operator Instructions]. We will go to the line of Mark Massaro with Canaccord Genuity. Your line is open.

Mark Massaro -- Canaccord Genuity -- Analyst

Hey, guys. Thank you. And I also want to send my best regards to Jon in his recovery. I guess my first question is just on the, how you guys are thinking about. I know you're not ready to guide for 2020 but you've posted some really strong growth in premium instruments as you've talked about in recent quarters and you are going up against a difficult compare as we think about our models for next year. Recognizing that instruments are only 6% of your revenue, how do you think about growth rates in instruments going forward given difficult compares .

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

We intend to continue to build on our rate of placements. I think that the more important metrics to kind of focus on are broader than just placement growth, we're obviously as we're growing our placements, expanding our install base that supported by improving retention so we pointed out in this quarter the 15% percent year-on-year growth in the North American Catalyst install base of 5.5 points of that is the, Banfield expansion and 28% internationally. So we're, this is a business where if we're adding more instruments and doing a better job retaining our customers that installed base continues to grow, its the flywheel effect and that forms the foundation for additional drivers of growth. Right. In terms of expanding adoption of our innovations on this platform -- on our platforms, adding new innovations as we've done in recent years as well.

And that's all supported by the enhanced commercial capability that we have, the VDC model and that all flows into the strong double-digit recurring CAG growth delivering and we intend to deliver in the future. So it's, it's one metric as you pointed out where we're building on bigger numbers, we want to keep growing on that but there is a broader model here in terms of driving increased utilization and innovation on these platforms that grow in capability over time that that support the double-digit growth.

Jay Mazelsky -- Interim President & Chief Executive Officer

And just to add some color to Brian's remarks. The key element of our of our strategy, Mark, is to be able to continue to drive menu expansion, which in turn supports the CAG Diagnostics revenue growth. So if you take a look at Catalyst, for example, we have a technology for life type philosophy, 7 new assays as part of the menu in 7 years latest being progesterone. It's a great example of bringing a real time care measurement to the clinic. As you know, the [Indecipherable] event is a tight window in the veterinary and wants to be able to advise the breeder in terms of the optimal time and you're able to do that in a real-time basis with Catalyst in the clinic, that drives serial testing. In the case of SediVue, you got a great example, with SediVue, the Neural Network 4.0 which we released earlier in the year, based on $75 million images more geared toward in the 4.0 release, liver function, bilirubin and ammonium. So we've got excellent customer feedback on that, that we continue to drive through menu expansion more, more testing utilization. So that's a key element of our strategy.

Mark Massaro -- Canaccord Genuity -- Analyst

Excellent. And I also wanted to just ask about the end market trends look strong to us, you reported clinical visits grew 2.1% this quarter, do you expect clinical visits to hover in that, call it 2% growth rate. And then I also wanted to ask about how you're thinking about competitive dynamics for next year given Zoetis expecting to complete their integration of Abaxis on their SAP.?

Jay Mazelsky -- Interim President & Chief Executive Officer

Yes. So from a market performance standpoint topline practice revenue growth was 4.4% that the clinical piece you indicated was 2.1%. We think that's the relevant piece for at least for our business, because that's where the diagnostic testing occurs as part of those visits but pretty much in line with what we've seen in the past as a little bit of variability quarter-to-quarter, but we think it was a strong quarter. It supports the CAG Diagnostics recurring growth profile that we achieved in the quarter and that we've indicated from an outlook standpoint we expect going forward. And I also think that when you take a look at some of our market development activities like preventative care, that will continue to drive the market part of what we do is we create markets we manufacture our own growth. In terms of the, your second question on competitive dynamics, we haven't up to now see the change more broadly speaking in the competitive landscape. We're always looking and anticipating that, but our focus is really on our customers and servicing our customers with solutions that address both their clinical and business needs.

Mark Massaro -- Canaccord Genuity -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of David Westenberg with Guggenheim Securities. Your line is open .

David Westenberg -- Guggenheim Securities -- Analyst

Thank you for taking the question. And my best to Jon as well. So can you give us an update qualitatively or quantitatively on SDMA on a slide, is it running above, below or at expectations in terms of contributing to growth. And how do you see this as a kind of a multi-year growth driver. Thank you.

Unidentified Speaker

Yeah. Thank you, David for the question. We're very pleased with the progress that we've made on our Catalyst SDMA. In fact, close to 60% of customers in the second quarter actually used SDMA on Catalyst, that's a global number since introduction, or close to 70% of customers have actually purchased SDMA for Catalyst. Another benchmark connected with that is, we've now run over $2 million SDMA tests on Catalyst since its introduction. Now that's on top of the 22 million test plus 22 million plus tests that we run at the global reference labs since introducing that test on the reference lab. So we think from a customer perspective -- customers have really accepted SDMA as an essential element of the chemistry panel, they see significant clinical value, not just for sick patient visit but also well visit testing. One study, it will share more of this at Investor Day is looking at well patient testing. When we move from a just a basic preventive care straight, so chemistry, CBC the one that includes SDMA. We see a 40% increase in profiles that indicate the need for further action. So really clinically powerful. I think our customers appreciate that and we're seeing the type of uptake in the metrics, I shared with you that support it.

Mark Massaro -- Canaccord Genuity -- Analyst

Got. All right, thank you. And then I'm just maybe to around consolidators in corporate clients. Can you talk about changes in demand around software, middleware [Indecipherable] Smart Flow. Are these good conversation starters, are these revenue drivers, are they kind of maybe cross selling opportunities. Can you just walk us through the more the software part element of the corporate customer base. Thank you.

Unidentified Speaker

I'd be glad to do so. Just as a background, keep in mind that you know the whole notion of corporates and consolidation, it's not a new dynamic in the marketplace, IDEXX has quite a successful track record in partnering and growing with corporate accounts over time. But when you talk to the corporate account CEOs, they generally identify commonly three top issues. One is staff engagement and retention, the second one that you pointed out is really this notion of enterprise scale in IT and software, and the third is want a continued drive or improve profitable growth in their corporate practices, and we address all three, as a company. Starts with diagnostics because diagnostics is connected to the information management piece and they I think recognize diagnostics as a profit center, it drives the care envelope. It's an important part of their practices, that is in subject some of the same headwinds that they may see in product sales whether it's food or therapies and there's a lot of evidence that when we provide these type of solutions to them their staff who desire to practice best medicine remain more highly engaged. From an information management standpoint, now getting specifically the core of your question, our customers are corporate customers, place a very high premium on integration and helping them out with workflow and workflow optimization and the type of solutions that support that are Cornerstone or PIM Solutions, SmartFlow VetConnect PLUS, enterprise management and analytics packages that we come up with. SmartFlow is a great example where they are really resonating with an application that works with our PIMS and other third-party PIMS that provide embedded connectivity that helps them with workflow, optimization and communication in the staff, it automatically captures charges, if they desire to go paperless or paperless slight, it has electronic forms. So these are the types of things that they are looking for and highly responsive to.

Mark Massaro -- Canaccord Genuity -- Analyst

Great, thank you.

Operator

Next we'll go to the line of Andrew Cooper with Raymond James. Your line is open.

Andrew Cooper -- Raymond James -- Analyst

Hi, thanks for the question. A lot has already been asked, so I'll keep it quick. But just as we think about kind of IDEXX 360 and more conversations about leveraging the multi-modality approach, how has that evolved relative to kind of layering in your end like you mentioned, and some of the dynamics competitively. Has there been any change there and how do you continue to drive that as it really a competitive advantage for IDEXX relative to what others in the space can replicate.

Jay Mazelsky -- Interim President & Chief Executive Officer

Yes. So we obviously have differentiation, because we have multi-modality solutions and have the ability, like we've just with the IDEXX anywhere urinalysis bundle, to be able to provide the best clinically from a solutions standpoint wherever it makes sense to be tested. So I think it's largely supportive of helping the practice, the way they want to.

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

And I'd point out, we've seen steadily increasing rates of growth in cross CAG agreements with our customers and that's been a trend that's been ongoing, but really has accelerated with concepts like 360 and the advancements that we continue to make and just bringing together broader capability to information management innovation and so to your point, it's an area that is building momentum and you see that in the strong growth in EVI and as well as increasing retention rates across modalities . So it's -- it's definitely been core to IDEXX's strategy for a long time, and we're executing very well again with certain programs like 360 to just help to reinforce that.

Andrew Cooper -- Raymond James -- Analyst

Okay and then just one more quick one, I think, following up on a question that I think Jon asked, but when we think about preventative care and the uptick in growth relative to the base, can you help us think about sort of the ramp of how fast an account says, all right we want to layered in with the pricing, you suggest, etc., etc., to seeing that that outcome. What the sort of the ramp looks like and how, if there's any kind of color, we should be thinking about or you think about the tail to that as we get out further from the first year, the second year, I know it's still early, but any color there would be great.

Jay Mazelsky -- Interim President & Chief Executive Officer

Yeah, I mean, just keep in mind from a background standpoint that it takes time. It's a change management event in the practice. It's not just the veterinarians, but the veterinary techs, receptionist, the whole practice has to change, focus into a new testing category or approach. So it takes time. We'll share some insights at Investor Day in terms of what that looks like, but there is no one role that fits all.

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

A very good progress and it's supporting our high reference lab growth and we're seeing benefits across the business. So it's something that'll -- that will build over time and like many of the things that we have in our business there is a very long runway for development, which bodes well for sustaining high growth for the long run. We have time for one more question.

Operator

There will be a follow-up from the line of Michael Ryskin, Bank of America. Your line is open.

Michael Ryskin -- Bank of America -- Analyst

Hey, thanks for squeezing me for the follow-up. I just want to confirm something from the prepared remarks, I thought I heard you say that the 3rd quarter organic guide was 10.5% to 12% for the total company, I recognize, you've got the extra selling day and that should be a sizable 100 to 150 bps tailwind but that's still, just trying to look at the comps from prior year. You still have a much tougher comp 3Q versus 4Q? So I was wondering if there's anything other than going on in pacing between 3rd quarter and 4th quarter as you go through the year and also how you think about some of the, you called out the guide for the second quarter, OUS instrument placements may have been too aggressive. So, I just want to get a sense of how the aggressive guidance in 2Q factored into your outlook for 3rd quarter and beyond.

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

I'd, just on the 3rd quarter, we talked about to restate 9.5% to 10.5% overall organic and 10.5% to 12% recurring with the day-to-day and a half and I think the day benefit is a little bit higher on the recurring piece, Mike. So it's, largely reflective of the year-to date-trends adjusting for the -- the days and we feel very good about our momentum and our ability to deliver that. So it's not anything specific to Q3 timing, other than the day change.

Michael Ryskin -- Bank of America -- Analyst

Okay, got you. I think I heard you wrong in the overall number then.

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

I would say on the instrument, look we're, as you know we've got, we're always trying to build off of high base, we were executing very well on driving EVI gains and expanding our Catalyst install base and we think we've got our full year and back half outlook appropriately calibrated.

Michael Ryskin -- Bank of America -- Analyst

Thanks.

Unidentified Speaker

Okay, thank you all. With that, we'll conclude the call, I want to thank our employees for the very strong progress and performance in Q2 in the advancement of our purpose, which is enhancing the health and well-being of pets, people and livestock around the world. And also I'm grateful for the confidence that our investors have an IDEXX and our business model. We look forward to being able to share our work with investors and seeing all of you in person or through a Reg FD presentation at our Investor Day in a couple of weeks. So thank you very much for calling in.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

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

Jay Mazelsky -- Interim President & Chief Executive Officer

Unidentified Speaker

Michael Ryskin -- Bank of America -- Analyst

Ryan Daniels -- William Blair & Company -- Analyst

Erin Wright -- Credit Suisse AG -- Analyst

Jonathan Block -- Stifel, Nicolaus & Company, Incorporated -- Analyst

Mark Massaro -- Canaccord Genuity -- Analyst

David Westenberg -- Guggenheim Securities -- Analyst

Andrew Cooper -- Raymond James -- Analyst

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