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IDEXX Laboratories Inc (NASDAQ:IDXX)
Q1 2021 Earnings Call
May 4, 2021, 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 2021 Earnings Conference Call. As a reminder, today's conference is being recorded. Participating in the call this morning are Jay Mazelsky, President and Chief Executive Officer; Brian McKeon, Chief Financial Officer; and John Ravis, Senior Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that our discussion during the call will include forward-looking statements that are subject to risk 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 earnings 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. These include comparable gross profit growth, margin gain or growth, comparable operating expense growth, comparable operating profit growth, comparable operating margin gain or growth and comparable EPS growth. These non-GAAP financial measures exclude the impact of changes in foreign currency exchange rates and nonrecurring or unusual items, if any.

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 website of our website.

In reviewing our first quarter 2021 results, please note all references to growth, organic growth and comparable growth refer to growth compared to the equivalent period in 2020 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

Good morning, everyone. I'm pleased to take you through our first quarter results and to provide an update on our financial outlook for 2021. In terms of highlights, IDEXX delivered excellent financial results in Q1, driven by continued strong global momentum in our CAG business. Revenue increased 24% as reported and 21% organically; supported by 23% organic growth in CAG Diagnostic recurring revenues, reflecting continued high gains across US and international markets.

Operating profit gains were particularly strong in Q1, reflecting flow through benefits from high CAG Diagnostic recurring revenue growth and favorable comparisons to relatively higher prior year pre-COVID operating expense levels. These dynamics and a higher-than-expected $0.17 per share in stock-based compensation tax benefit enabled delivery of $2.35 in earnings per share, an increase of 73% on a comparable basis.

Our strong start to the year has increased our confidence in achieving high revenue and profit gains in 2021. We're raising our full year revenue outlook range by $40 million to $3.105 billion to $3.160 billion, or reported revenue growth of 14.5% to 16.5%. This reflects an updated outlook for 13% to 15% overall organic revenue growth, 1.5% higher than our initial outlook.

We're raising our organic growth outlook for CAG Diagnostic recurring revenues to 14.5% to 16%, 2% higher at midpoint than our initial 2021 growth projections. Our full year financial outlook now reflects a targeted 150 to 200 basis point improvement in operating margins on a comparable basis. These gains are projected to support EPS of $7.88 to $8.18 per share, reflecting 21% to 26% comparable EPS growth. We're planning to deliver these strong profit gains while advancing investments in our innovation and commercial capability to enable long-term accelerated global market development in our core CAG business.

We'll update our -- we'll discuss our updated 2020 outlook later in my comments.

Let's begin with a review of our first quarter results and recent market trends. First quarter organic revenue growth of 21% was driven by 23% gains in CAG Diagnostic recurring revenues, reflecting 21% growth in the US and 28% growth in international markets, including some benefits from the lapping of prior year COVID impacts in late March.

Strong CAG gains also reflected 27% organic growth in CAG Diagnostic instrument revenues. Overall, Q1 organic revenue gains were supported by 9% growth in our LPD business, reflecting strong demand for African swine fever testing in China as well as by approximately 1% of growth benefit from our OPTI human COVID-19 PCR test initiative. The key driver of our financial model, CAG Diagnostic recurring revenues expanded at high-growth rates across regions through the quarter. First quarter results were largely consistent with the very strong 2-year growth trends we saw in the second half of 2020.

On a 2-year basis, CAG Diagnostic recurring revenues increased at a 70% average annual organic growth rate. We'll be highlighting 2-year growth trends selectively in the coming quarters as we calibrate the effect of year-on-year lapping of 2020 COVID impacts on our growth results. High CAG Diagnostic recurring revenue gains were aided by continued high-growth in clinical visits. Overall, US clinical visit growth was 12% in Q1, including some benefits from the lapping of prior year COVID impacts in late March.

On a 2-year basis, same-store clinical visit growth increased at an average 6% annual rate, slightly higher than our second half 2020 trends. The IDEXX US CAG Diagnostic recurring revenue growth premium to US clinical visits was 900 basis points in the first quarter or approximately 1,000 to 1,100 basis points adjusted for equivalent day effects. Q1 US clinic visit growth reflected sustained strong 9% growth in non-wellness visits and an increased 16% growth in wellness visits. These gains were supported by relatively higher benefits from growth in new patients, which we estimated added approximately 3% to overall clinical visit growth and 4% to wellness visit growth in the quarter.

Continued focus on expanded pet healthcare services, including increases in the utilization of diagnostics, supported a 15% same-store increase in overall veterinary clinic revenues in Q1 and a 21% same-store increase in diagnostic revenues per practice, well ahead of 5% growth in overall visits to veterinary clinics in the quarter.

Positive market dynamics, benefits from IDEXX commercial initiatives and technology to support higher standards of care and continued very high customer retention rates drove strong Q1 organic revenue gains across our major testing modalities globally. IDEXX Global reference lab revenues increased 22% organically in Q1 reflecting 20% plus organic gains in US and international markets. Our international reference lab gains benefited from strong growth in Europe, supported by our new German core lab capability, our expanded commercial presence and growth in IDEXX 360 program agreements. Global reference lab gains continue to be driven by high same-store volume growth, with strong gains across testing categories.

IDEXX VetLab consumable revenues increased 26% on an organic basis in the first quarter, reflecting continued 20% plus growth in the US and 30% plus organic gains in international markets. Gains continue to be supported by increases in testing utilization across regions, high customer retention levels and expansion of our global premium instrument installed base.

CAG instrument placements increased significantly in Q1 compared to constrained prior year levels as clinics look ahead to supporting high-growth in demand for diagnostics globally. Total premium placements increased 32%, reflecting 26% gains in North America and 36% growth in international markets. The quality of CAG instrument placements was excellent, reflected in 302 catalyst placements at new and competitive accounts in North America, up 27%; and 805 new and competitive placements in international markets, a year-on-year increase of 15%[Phonetic]. We also benefited from 464 second catalyst placements driven by continued strong demand from high-volume customers. These new placements and high customer retention levels supported a 13% year-on-year growth in our catalyst installed base.

We achieved 956 premium hematology placements, including our initial shipments of ProCyte One supporting a 10% growth in our global premium hematology base compared to Q1 of 2020. We also placed 577 SediVues, including strong placement levels at international markets, leveraging IDEXX 360 agreements, which supported a 21% year-on-year global increase in our premium urine sediment installed base. We're very encouraged by the momentum we drive in expanding our in-clinic installed base as we prepare for continued improvement in sales access to veterinary clinics globally and advance the global launch of ProCyte One.

Rapid assay revenues also expanded at a strong 20% organic growth rate in Q1, reflecting mid-teen gains in the US, supported by high demand for wellness testing and accelerated growth in international markets. Of note, retention rates for US rapid assay customers reached 97% in Q1, the highest level seen since the initiation of our US Go Direct efforts in 2014.

Overall, high CAG Diagnostic recurring revenue growth remains primarily volume-driven across our modalities, with consistent overall net price gains of 2% to 3%. In other areas of our CAG business, our veterinary software and diagnostic imaging revenues increased 9% organically overall. Double-digit gains in recurring software and digital imaging service revenues and solid growth in new software system placements were moderated by lower diagnostic imaging instrument revenue levels, impacted by a year-on-year reduction in earlier generation instrument platform sales.

Turning to our other business segments, Water business revenues declined 3% organically in Q1 compared to strong prior year results, which included an estimated $2 million or 8% growth benefit from accelerated stocking orders. Adjusting for these impacts, Water revenues increased solidly year-on-year as we continue to see relative improvement in non-compliance related testing volumes that have been constrained during the pandemic.

Livestock, poultry and dairy revenue increased 9% organically in Q1, driven by growth in our Asia-Pacific region. Q1 results saw approximately $2 million of favorability from shipment timing, which largely offset favorable shipment timing impacts of Q1 of 2020. LPD results benefited from strong demand for diagnostic testing programs for African swine fever and growth in core swine testing volumes in China, supported by large producer efforts to rebuild swine herds. These gains more than offset lower herd health screening levels compared to strong prior year results. We expect to see some pressure in our LPD revenue growth rate moving forward, particularly in the second half of this year as we begin to lap the benefits from high prior year demand for African swine fever testing programs and see increased levels of local competition in China.

Turning to the P&L. We had strong profit flow-through in Q1 as we benefited from high CAG Diagnostic recurring revenue gains and comparisons to relatively higher pre-COVID operating expense levels in the first quarter of 2020. Overall, operating margins expanded 830 basis points year-on-year on a comparable basis, driving an increase in operating profits of 72% as reported and 65% on a comparable basis. Gross profit increased 31% in Q1. Gross margins increased 320 basis points on a comparable basis reflecting productivity improvement in our lab operations, supported by high organic revenue growth, favorable impacts from strong consumable sales and benefits from moderate net price gains.

We're planning for gross margin gains to moderate over the balance of this year as we lap tightly controlled prior year spending levels and increased reference lab staffing to support high revenue growth and service levels. Operating expenses in Q1 increased 4% as reported and 3% on a comparable basis. As noted, operating expense growth was moderated by comparisons to higher prior year pre-COVID spending levels, including much higher prior year first quarter travel, trade show and sales meeting costs.

Our 2020 financial outlook includes expectations for an increased rate of opex growth moving forward as we lap comparisons to control prior year opex levels and invest to support our strong global growth momentum through enhancements to our commercial and innovation capability. We're also planning for year-on-year increases in costs in key areas such as employee healthcare claims and travel costs as we work through the year and pandemic related restrictions are eased. Q1 EPS was $2.35 per share including benefits of $15 million or $0.17 per share related to share-based compensation activity. On a comparable basis, Q1 EPS increased 73%; foreign exchange added $10 million to operating profits and $0.09 to EPS in Q1 net of approximately $2 million in hedge losses. Free cash flow was $104 million in Q1.

On a trailing 12-month basis, our net income to free cash flow conversion rate was 99%, including benefits from delayed capital spending and extension of tax payments. For the full year, we're maintaining a consistent outlook for free cash flow conversion of 80% to 90% of net income. Our balance sheet remains in a very strong position. We ended the quarter with leverage ratios of 1.0 times gross and 0.6 times net of cash, with $315 million in cash and no borrowings on our $1 billion revolving credit facility. We reinitiated share repurchases in Q1 allocating $154 million of capital to repurchase 305,000 shares.

Turning to our '21 full-year outlook, we're increasing our projected ranges for overall revenue growth to 14.5% to 16.5% as reported. This reflects a 150 basis point increase in our projected in refinements to our FX assumptions, which now point to a positive 1.5% full year growth benefit this year at the rate shared in our press release. Our updated overall organic revenue growth outlook of 13% to 15% reflects an estimated organic growth range of 14.5% to 16% for CAG Diagnostic recurring revenue. As noted, we've raised the CAG Dx recurring revenue growth outlook by 2% at midpoint to reflect our strong Q1 results, trends that point toward a sustained high rate of US clinic visit growth and confidence in our global CAG commercial execution, which is driving strong momentum in our international regions.

As a benchmark, our updated recurring revenue growth outlook aligns with the higher end of our earlier projections for 2% to 5% same-store US clinical visit growth for the full year 2021 and an expected premium of IDEXX US CAG Diagnostic recurring revenue growth to clinic visit growth of approximately 900 to 1000 basis points. The increase in our CAG Diagnostic recurring revenue growth outlook, which results in over $50 million of operational revenue upside is being moderated by relatively more conservative full year projections for IDEXX human COVID testing. We estimate that we'll see approximately $10 million in lower human COVID revenues year-on-year in the second half of 2021 as we lap the benefits of our prior year initiatives and plan for moderation in testing levels.

We've also moderated our outlook for LPD growth to reflect increased local competition in China, including in our African swine fever testing business. Combined, these effects result in a 0.5% headwind compared to our earlier overall '21 organic growth outlook. Given the lapping of prior year COVID impacts, there will likely be significant variability in year-on-year revenue growth rates by quarter, with continued expectations for higher revenue growth in the first half of 2021. In terms of key financial metrics, as noted, we're now targeting 150 to 200 basis points of annual comparable operating margin improvement in 2021, up 100 basis points from our initial outlook. This is reflected in a reported operating margin outlook for 2021 of 28.3% to 28.8%.

Our EPS outlook incorporates updated projections for foreign exchange, which we now estimate will provide $0.15 of positive EPS benefit in 2021 net of established hedge positions. Our full year outlook also includes an updated estimate of $0.19 per share of tax benefit related to share-based compensation activity, $0.09 per share higher than our initial projections. We've provided details on our updated estimates in the tables in our press release and earnings snapshot.

That concludes our financial review. I'll now turn the call over to Jay for his comments.

Jay Mazelsky -- President and Chief Executive Officer

Thanks, Brian, and good morning. IDEXX had an excellent start to 2021 driven by continued strong market trends in our core CAG business and strong execution. This resulted in 21% quarterly organic revenue growth in the first quarter and high profit flow-through, supported by 23% organic growth for CAG Diagnostics recurring revenues. There were strong gains across all our market segments. Our business performance reinforces the tremendous long-term opportunity we see to develop the global market for companion animal healthcare and gives us confidence to raise our 2021 outlook to deliver 14.5% to 16% organic growth for CAG Diagnostics recurring revenues and 21% to 26% gains in comparable EPS growth.

Today, I'll provide an update on the trends we're seeing in our companion animal markets and our approach to drive accelerated market growth leveraging IDEXX innovation to raise the standard of patient care. I'll also provide an update on our product and commercial initiatives that will enable us to capitalize on market tailwinds and position the company to deliver continued strong financial returns.

Let's begin with an update on market trends. Companion animal healthcare continues to see strong global market momentum. This is reflected, for example, in US market data showing higher growth in clinical visits and continued high growth in services supported by expanded utilization of diagnostics.

As Brian highlighted, we saw continued high US clinic visit growth, up 12% in the quarter with non-wellness visits up 9% and wellness visits up 16% with strong growth seen across practices of all sizes. New patients continue to be a significant contributor to clinical visit gains. We estimate that new clinical patients added approximately 3% to overall clinical growth versus Q1 2020, up from 1% to 2% in the second half of 2020 and we continue to see record levels in progesterone testing, evidence of a continued step-up in breeder activity. The growth in puppies and kittens and continued evidence of the deepening of the pet on our bond augmented by the growth in new pet parents can provide long-term tailwinds for our business.

As a benchmark, we estimate that the average annual diagnostic revenue per senior or geriatric pet is double the amount we see per pet for puppies and kittens. If we do our job well with programs like preventive care, we can help to drive twice the level of annual visits in young well pets and continue to expand diagnostics usage through life stages, thereby helping advanced standards of care and looking at our US market data, we've seen an acceleration in the utilization of diagnostics.

In our earnings snapshot, we shared annual data for the percentage of 2020 clinical visits including blood work. The percentage of clinical visits with blood work increased approximately 1% to 18% in 2020, double the historical rate of annual increase. Interestingly, the highest increases were in customer desk[Phonetic] sales doing more testing, with gains across wellness and non-wellness blood work utilization, reinforcing the point that even the highest users of diagnostics has significant potential for further growth. An increased focus on services, and adoption of higher standards of care in areas like diagnostics are driving very strong overall growth in veterinary clinics.

In the first quarter, same store total practice revenues increased 15% versus the same quarter last year, reflecting a 19% growth in clinical revenue per practice and 21% growth in diagnostics revenues. Clearly, our customers are extremely busy, it's not surprising that they are looking for help from partners like IDEXX to support the high levels of business growth through our customer-centric solutions offering. We're particularly pleased with our commercial execution to support these customer needs, evidenced by 32% year-over-year growth in premium instrument placements globally, including strong growth in placements at new and competitive accounts.

A key area of focus has been leveraging our integrated direct go-to-market model to accelerate international growth. We achieved 28% CAG Diagnostics recurring organic revenue growth internationally in Q1 with strong gains across all our major regions, while driving a 36% year-over-year increase in premium instrument placements outside of North America despite continued restrictions in sales access to clinics. IDEXX 360 continues to gain traction internationally, resulting in higher growth with customers leveraging IDEXX technology across modalities. IDEXX 360 is helping to accelerate growth in our international reference labs in key markets like Europe, supported by our state-of-the-art new core lab in Kornwestheim, Germany and our expanded commercial presence. The international commercial expansion efforts we've highlighted continued to progress per plan with the goal of completing on boarding of new sales teams in key markets in the first half of 2021. The outstanding growth momentum and long-term potential for IDEXX in international markets reinforces the high return from investments in our global commercial capability; advancing international commercial expansions will continue to be a key strategy.

Innovation is another key pillar in our growth strategy. In late March, we reached an exciting milestone when we began shipments of our next generation hematology analyzer ProCyte One. I am very proud of the extended team, including our Westbrook, Maine-based instrument manufacturing personnel for delivering this world-class analyzer on schedule during a pandemic to the delight of our customers. Our first sales and installations were to US clinics that participated in our customer experience trials, which is a testament to their highly positive experience with the analyzer.

ProCyte One's exceptional simplicity and accuracy give our customers confidence in running the analyzer and in the patient results. This is helping to gain efficiencies and practices in this truly a best-in-class experience. ProCyte One also represents the next step for IDEXX in providing leading edge technology, integrated with information management which enables clinical decision support and supports a wide range of veterinarian partners in providing the highest levels of care. We expect ProCyte One to drive CAG growth as chemistry and hematology testing go hand in hand and as part of the IDEXX 360 program to help drive reference lab usage. This quarter our commercial focus for ProCyte One is on shipments to the clinics that took advantage of our pre-sales program while concurrently manufacturing and building volume to support our sales ramp through 2021, including the international rollout expected to begin in late Q2 early Q3.

The SNAP Pro instrument is another investment in innovation that supports our customers at the point of care by providing workflow benefits, accurate reading of diagnostic results on the SNAP platform, its smart service connectivity. Our veterinary partners are busier than ever. So providing ease of information management within the practice is a key benefit to help them save precious time while maintaining accurate records. SNAP Pro provides a tool to address these needs and this helped drive recent growth internationally for our rapid assay business. We see high engagement from international customers who are actively using SNAP Pro and are connected to smart service with growth in retention rates consistent with trends across US customers. We're also making excellent progress in expanding our installed base in key geographic markets like Europe, which helped to drive 20% organic growth in global rapid assay revenues in the first quarter.

Our innovation agenda is also driving favorable business performance for our software portfolio, which had another excellent quarter. Record breaking worldwide PIMS placements in the quarter grew 43% versus Q1 of last year with two average[Phonetic] PIMS placements driven by cloud-based technology. IDEXX Web PACS saw double-digit growth in subscribers, including improvements in customer retention levels over 96%. We received consistent praise from subscribers about usability, value and support of the Web PACS system, important feedback as we look to expand this product into new markets. These integrated offerings together create a diversified technology stack that provides multiple customer benefits that help manage the growing productivity demands of veterinary clinics in a high growth market. Through our PIMS tools, through our PIMS and tools like SmartFlow, our focus is on improving clinic workflow by seamlessly connecting data between devices to streamline every step from patient admission to discharge. By bringing AI capability to tools like Web PACS, our platforms enable faster procedures while leveraging data to deliver insights and reduce efforts by clinic staff, extending to the client. Our communication applications are more compelling than ever with clinics managing a significant portion of visits curbside.

Connected software is critical for clinics in creating capacity to meet the increasing demands for veterinary services. IDEXX is uniquely positioned to serve customer needs in this area, enhancing our value proposition and differentiation.

In terms of other key initiatives, we continue to promote the advancement of Preventive Care in annual wellness testing to the IDEXX Preventive Care program. In addition to increasing the standard of patient care, preventive care programs can help veterinarians improve practice capacity, do more predictable schedule and level loading of practice staff. In the first quarter, the commercial team executed over 200 new enrollments bringing total enrollments to over 5,000, which is an exciting milestone as we are more than halfway to our goal of 10,000 enrolled customers in the US by 2024. As our customers enter the wellness testing season and wellness visits accelerate in the market, we are focused on continuing to capture the under-developed market opportunity in vector borne disease testing. There are significant long-term opportunities to expand vector borne disease testing in particular given the current prevalence of heartworm only testing in the US. Shifting its balance to a full vector borne disease screening using 4Dx Plus not only enhances the standard of care, it represents a material opportunity for clinics to drive additional revenue. This focus and strong underlying market trends help to deliver double-digit revenue growth across all regions, led by increases in utilization of 4Dx Plus in feline retro virus test.

As we look ahead, we're very excited about the opportunity to leverage our commercial capability, innovation and partnerships with our customers to build on our strong growth trends. A key area of focus for us is to continue to invest in the infrastructure necessary to meet high levels of growth while maintaining top notch service levels and prioritizing support for our workforce. Our employees and customers have shown high levels of adaptability and resiliency during continued COVID related restrictions and we look forward to a post COVID-19 environment. We anticipate more flexibility in the future and leveraging new ways of working together with our colleagues and customers.

I'd like to add that I'm extremely proud of the way that the IDEXX team is executing. We are on track for a strong 2021.

That concludes my opening remarks, and we now have time for some questions.

Questions and Answers:

Operator

Thank you. And we'll now begin the question-and-answer session. [Operator Instructions] And our first question is from Michael Ryskin from Bank of America.

Michael Ryskin -- Bank of America -- Analyst

Hey, thanks for taking the questions and congrats on the strong quarter guys. To start, I want to ask on -- I want to focus on some of the opex side of things, obviously a great quarter here. And on the margin side coming out of the gate, but Brian, Jay, you both had comments in your prepared remarks sort of on how to manage spend going forward both from the fact that you're going to be lapping some easier comps, but also that you want to invest into the growth in the business. I think you mentioned adding on some staffing on the reference lab side, could you expand on that a little bit?

And is there anything on the CAG field-based personnel? Just how should we think about reinvesting some of the gains in the business to support the growth for the rest of the year?

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

Yeah, Mike. Why don't I start by just kind of framing the comparisons that we're trying to highlight as we move forward, because that's a key dynamic we're just trying to reinforce quickly. We had very strong profit results in Q1, we are going to start entering a period here where we're going to be comparing ourselves to kind of the controlled spending levels that we implemented last year. So if you recall, we had $25 million of opex savings that we highlighted last second quarter, another $5 million of savings from lower healthcare costs. We really in the early stages of the pandemic tried to be very mindful of how we're controlling labor costs in areas like the labs and so we're just trying to highlight, as we move forward, we're going to see some of those comparison effects moderate the margin gains, the gross margin gains, and we'll see relatively higher opex growth again as a benchmark. Just in Q1, we had over $7 million of cost reduction year-on-year from things like lower sales meeting costs and T&E, which is about 7% of opex growth.

So moving forward, we won't have those kinds of favorability. So we're just going to highlight that and we're also trying to highlight that we're advancing investment in the business. So maybe Jay can talk a bit about that.

Jay Mazelsky -- President and Chief Executive Officer

Yes, sure. So just a couple of things to build on Brian's comments. Obviously, we're in a high-growth environment and there's excellent opportunity to continue to support that growth. We do that, obviously, in areas like reference labs and in production and field support. And the other area of opportunity for us is just our international markets. We've identified this as being very attractive, and we continue to advance our expansions where it makes sense. We know that there's pretty good short-term return on those expansions. We have, I think, really optimized our ability to identify all the right pieces you need to have in place, including additional field personnel at the reference labs, information technology investments, those type of things. So we're very optimistic about the opportunity short-term and longer-term in our markets, US as well as international, and we'll continue to advance as we see opportunities before us.

Michael Ryskin -- Bank of America -- Analyst

Great. Thanks. And then if I could throw in a follow-up sort of on some of the underlying figures you provide for market conditions. As always, the snapshot is very helpful in terms of visit growth and revenue growth for practices. I'm just curious, looking at it in more granularity, it seems like you're actually seeing continued acceleration from 4Q both on a raw numbers basis, and if you adjust for some of the comp I think -- I guess I'd say that we were expecting a little bit more moderation and maybe a gradual phase as you go through the year, but it seems like there's no indication of that. Is that a fair analysis of the data? Have you seen anything that would indicate that things are moderating a little bit as some of these markets sort of come out from COVID, and we're seeing some reopening of the economy? Just wondering if you could talk about sort of the underlying trends there?

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

I would say, overall, Mike, the theme would be more consistency than change. What we saw in 2020 was an improvement, if you break down the drivers of things like CAG Diagnostic revenue growth in the clinic. We saw higher levels of contribution from frequency and utilization and those have sustained. If there was one thing that improved a bit in Q1, which we highlighted in the comments, was the new patient contribution to clinical visit growth was up about 100 basis points. So I think some of the building effect of the new puppies and kittens helped.

But adjusting for that, the 2-year growth rates were largely consistent with Q4. It was more consistency than change. We're entering a period now where we'll have the COVID compares. The growth rate numbers are a little tougher to fall, so we're trying to highlight some of the 2-year trends. And I think we're encouraged that the 2-year trends are holding up well, and that's factored into our outlook for the balance of the year.

Jay Mazelsky -- President and Chief Executive Officer

I would just add to that, Mike, the trends we described -- the broader level trends we've described, have largely been intact. So these are obviously new clinical business growth driven by new patients, the majority of which are puppies and kittens, higher usage and intensity of diagnostics and more of a pivot to services by the veterinarians. So those that we have seen over the last second half of 2020, we continue to see in Q1.

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

Well, one thing I'd highlight in addition to the market trends is in terms of IDEXX's execution, our international teams are really doing an excellent job. We had excellent instrument placements, growth in 360. I think the global commercial model that we've been looking to leverage and build upon is really, really in a good place, and we're very pleased with the international momentum. So I wanted to highlight that.

Operator

Our next question is from Erin Wright from Credit Suisse.

Erin Wright -- Credit Suisse -- Analyst

Great. Thanks. So you gave some incremental charts in the snapshot this time where the percentage of clinical visits, including the blood work increased by 1%. So that seems like an acceleration from the prior trends even seen on an annual basis, but was this driven mostly by the greater proportion of acute visits during the pandemic? And how should we be thinking about that acceleration continuing with potentially greater adoption of preventative care measures, as well as other initiatives in a post pandemic world?

Jay Mazelsky -- President and Chief Executive Officer

I'll make a couple comments about that, Erin. So the use of blood work has -- the growth rate has approximately doubled as we talked about a percent in 2020 and versus about 0.5% the previous year. And so there's a number of things that are driving that. We've seen a greater proportion of the higher users of diagnostics continue to increase. And we see that very optimistically, as evidenced, that even those who were at the higher range from a decile standpoint of diagnostic users feel like there's a lot more capacity.

We also see as part of clinical visits greater use of diagnostics, and then when they use them, greater intensity has also gone up. So all those factors are playing into it. And we think that they'll sustain three plus quarters.

Erin Wright -- Credit Suisse -- Analyst

Okay. Great. And then on ProCyte One, can you provide an update on traction there? And do you anticipate that accelerating throughout the year? And how is that tracking relative to your internal expectations at this point?

Jay Mazelsky -- President and Chief Executive Officer

Yes. We're very excited and optimistic about ProCyte One. It's been a very successful rollout. These thing -- there's a timing distance dimension to these as we roll out a new analyzer in terms of building volume in production, create awareness in the marketplace. The exciting thing about ProCyte One is the opportunity itself is very significant. We think that there are 100,000-plus opportunities for placements in the hematology market, but there's also a nice multiplier impact where there's hematology, there's chemistry. So we tend to place those together. There's -- as part of IDEXX 360, there's pull-through in terms of the reference labs and rapid assay, not just in the US now, but internationally and so we're excited by the opportunity.

I think our experience, customer experience trials have given us a lot of confidence that the analyzer has hit the mark, both in terms of usability and performance, and we expect our ramp to grow throughout the year. And especially so internationally as we release late Q2, early Q3, depending on things like regulatory approvals.

Erin Wright -- Credit Suisse -- Analyst

Great, thank you.

Operator

Our next question is from Jon Block from Stifel.

Jon Block -- Stifel -- Analyst

Thanks, good morning. Maybe two questions from me. Brian, the first one is a little long, both for you. I think the level of year-over-year gross margin expansion, I think you said you expect the year-over-year level to moderate but just to be clear, does it stay in this low 60% range? And then on the balance sheet, the leverage, I think you called that a 0.6% net. That might be the lowest level I can remember since you came in as CFO and started to flex it a bit. You've got a couple of big capex build outs that's not behind you in Germany and Westbrook. So just maybe you can comment on how we think about cap deployment going forward? And then I've just got a quick follow-up.

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

Yes. On your first question on gross margin, we're seeing a really nice flow through. And obviously, the high CAG Dx recurring mix and just the strong growth were as helping. We do anticipate, Jon, we're going to be adding back some costs here to keep up with the growth, particularly in things like lab staffing, and then we'll have some compares just to the, as I mentioned, on a year-over-year basis, but we're still anticipating a high level of gross margin flow through, and that's factored into our outlook. And on leverage, you're correct, we're quite disciplined last year in terms of pausing share repurchases and really controlling our capital spending.

Our capital spending on an annual basis was below kind of the normal levels that we typically have, and we deferred some projects, and we'll see a step-up in that as we move forward, not a change fundamentally in our long-term view, but just catching up on some of the deferred capital spending. And right now, we're just signaling maintaining the kind of net leverage ratios that you see. We did initiate buybacks in Q1 and feel good about sustaining those but not trying to signal any change to the leverage profile at this point.

Jon Block -- Stifel -- Analyst

Okay. Got it. Very helpful. And then a huge quarter, but we got to try to anticipate some of the potential pushback. And the only thing that I can try to identify is, you mentioned the 900 basis point US CAG recurring premium to clinical visit growth, that's down from the 1600 and 1200 premium in 3Q and 4Q 2020, respectively, I think you said they adjusted it was closer to 1000 or 1100 bps, but any thoughts on why that slight moderation, Jay, maybe in light of the vets, as you mentioned, still focusing a lot more on services at their practices? And how do we think about the premium going forward, is it still in that 1000 bp range? Thanks, guys.

Jay Mazelsky -- President and Chief Executive Officer

Yes. Jon, there's always a little bit of variability from quarter-to-quarter. We think that 900-plus premium is what we've seen over the last quarters in 2020, and we think that that is sustainable. I think it's a reflection of a couple of different things. Obviously, the pivot to services, which, if anything, has accelerated as part of the COVID response in clinics. But it's also a response that our strategy as a company around innovation and commercial partnership with our customers in bringing testing, relevant testing to practices. And so we think that that's a successful formula, and it's supportive of what veterinarians and pet owners want to see in terms of better patient care, better higher standards of care for patients. And that will continue to be a focus for us from a commercial and innovation strategy standpoint.

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

And, Jon, one thing I'd highlight, too, I know you're looking quarter-by-quarter, but Q3, I think, you need to factor in there was some pent-up demand likely effects. And so I think the overall trend is very healthy. It's at the higher end of our outlook. It's above where it was pre-COVID. We feel very good about the growth in services trend as being sustainable, it's something that's going to enhance our growth profile.

Operator

Our next question is from Nathan Rich from Goldman Sachs.

Nathan Rich -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for the questions. I actually wanted to start with a follow-up to Jon's question on the CAG Dx guidance. Brian, I think you said it was up 2% relative to the prior outlook. I would just be curious to get some more details on the underlying assumptions around visit growth and increases in diagnostic utilization. I think you had talked about kind of 2% to 5% visit growth for the year previously, and then that 9% to 10% premium that was just referenced. So I'd just be curious if you have any kind of updated assumptions as we think about the balance of the year on those metrics?

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

Sure. Why don't I start at a little higher level with the global numbers, but made our -- our updated range, the higher end of the CAG Dx recurring range basically assumes similar 2-year growth trends to what we saw in Q4 and Q1. So it's largely in line with that. And I think that that is the primary driver of the update, I think, is the -- just more confidence coming through Q1 on sustainability of some of the trends and some positive dynamics with clinical visit growth. And so that's more of the headline. We're still maintaining a range because that may moderate. We may see some pullback. We're going to be up against some compares here, but I think, on balance, we feel very good about the trends. And if anything, they improved a bit in Q1.

And as a benchmark, we do try to highlight that US clinical visit growth and premium dynamic that you mentioned, and our initial estimates were 2% to 5% for the full year for clinical visit growth, that's a 1-year basis, and the 900 to 1000 basis point premium. And I did mention that our updated outlook reflects that we're trending at the higher end on clinical visits and that we're reinforcing the premium outlook, which is right in line with where we were in Q1. So I think just the underlying market trends have sustained. We feel good about that, and we're seeing that globally. And I think we feel very good about our execution. And now, of course, have things like ProCyte One to -- as innovation initiatives that will help us build on that momentum.

Nathan Rich -- Goldman Sachs -- Analyst

Great. That's helpful. And if I could just ask a quick follow-up on ProCyte One. Can you talk about, I guess, maybe, Jay, the placements that you've seen so far for maybe the orders that you're getting, how many of those are in new or competitive accounts versus with existing customers? And can you maybe just talk about the opportunity to use kind of ProCyte One as maybe a lever to get into practices that IDEXX isn't in currently?

Jay Mazelsky -- President and Chief Executive Officer

Yes. So it's early in the rollout, but we're very pleased. It's been a very successful rollout, very successful customer experience trials, and not easy to do by the way in the middle of pandemic. This is a complex instrument, and it has a world-class user interface and performs at a very high level from just an accuracy standpoint. We've identified the hematology opportunity is very significant for the company. Keep in mind, a lot of our international markets are hematology first markets. So what that means is, if they have a choice in terms of if it's one instrument or none, they tend to choose hematology and they test with hematology even before chemistry, even when they have both.

So in terms of the opportunity itself, as I earlier described, it's almost 100,000 placement opportunities, two-thirds plus of which is internationally. But even more importantly, if I pivot just a higher level comment, it's an important part of our overall in-clinic solution. We tend to sell chemistry and hematology, increasingly SediVue together. So having this type of solution, which from a performance and cost profile standpoint hits the sweet spot of the market, is obviously very attractive to us.

The other thing that I would point out is that, increasingly, the IDEXX 360 program is just getting terrific traction internationally. And as part of that, the capital placement piece is the anchor. And there's pull-through on reference labs and rapid assay in terms of delivering the underlying volume commitment. So we're excited by the overall CAG Diagnostics opportunity that ProCyte One represents. It's going to have, we think, a very long tail, both duration as well as overall volume opportunity. So more to come over time.

Operator

And our last question is from Balaji Prasad from Barclays.

Balaji Prasad -- Barclays -- Analyst

Thank you. Sorry, juggling different calls. Thanks for the question. Just twofold questions from me. One, a pretty broad level one. Trying to understand a defective[Phonetic] growth. Was there any element of growth coming through market share gains in this quarter? Or was it all what we could perceive broader industry growth led by visits and increasing utilization? And secondly, our vet survey indicated a 200 basis points jump in Y-o-Y revenue contributions for clinics from diagnostics. Does it sound to you as right and are aligned with your internal tracking? Thank you.

Jay Mazelsky -- President and Chief Executive Officer

Yes. So our markets are very competitive. They have always been very competitive. We're pleased with what we've been able to advancing our commercial agenda. We've shared some data on new and competitive placements with catalysts both in North America as well as international. So you can make your own assumptions in terms of what that means. Our focus is just continuing to support and serve our customers. With IDEXX solutions, we do that both on the instrument side, obviously, with broader diagnostic solutions and software. And what we find is, when customers use all of our solutions, they grow faster, they tend to stay with us longer and they find that it supports their practice needs.

In terms of the survey you're mentioning, I'm not familiar with that, so I'm just going to withhold comment not knowing the underlying methodology.

Balaji Prasad -- Barclays -- Analyst

Fair enough. Thank you. Maybe a specific comment, if you could throw some light on what you're seeing with -- since the launch of VETSCAN Imagyst in Q4 and if it is disrupting the market? And what are you seeing on the clinic side in terms of comments?

Jay Mazelsky -- President and Chief Executive Officer

Yes. The thing that -- I think you asked a question more generally about the fecal detection. And our belief is that the fecal antigen tests that we offer at the reference labs is best-in-class. It detects up to 2 times as much than traditional benefits like O&P. There are just a number of challenges in doing fecal within the clinic. First and foremost is the sample prep piece, and that's very time-consuming and continues to be messy. And then you can develop an algorithm that protects eggs as part of the parasites or worms. But at the end of the day, they have to be available, that you have to be able to visually see them. The benefit in being able to detect through antigen testing is you are able to see them in the prepatent period, which is between 4 and 6 weeks earlier than physically when the eggs are available. So you get better detection pieces. So we like our solutions. We think our customers appreciate fecal antigen at the reference labs, and that's where we continue to support them.

Operator

Thank you. I'll now turn it back over to Jay for final remarks.

Jay Mazelsky -- President and Chief Executive Officer

Thank you, I want to thank everybody for calling in. I want to express my gratitude to the IDEXX team for their ongoing, extraordinary performance during these challenging times. We have an amazing purpose and opportunity as a company and I couldn't be more appreciative of the IDEXX team, and how they live our mission every day. And so with that, we'll conclude the call, and thank you.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

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

Jay Mazelsky -- President and Chief Executive Officer

Michael Ryskin -- Bank of America -- Analyst

Erin Wright -- Credit Suisse -- Analyst

Jon Block -- Stifel -- Analyst

Nathan Rich -- Goldman Sachs -- Analyst

Balaji Prasad -- Barclays -- Analyst

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