IDEXX Laboratories, Inc. (IDXX) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.23.13 | About: IDEXX Laboratories, (IDXX)

IDEXX Laboratories (NASDAQ:IDXX)

Q2 2013 Earnings Call

July 23, 2013 9:00 am ET

Executives

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

Willard R. Blanche - Interim Chief Financial Officer and Vice President of Finance

Analysts

Ryan Daniels - William Blair & Company L.L.C., Research Division

David C. Clair - Piper Jaffray Companies, Research Division

Erin E. Wilson - BofA Merrill Lynch, Research Division

Ross Taylor - CL King & Associates, Inc., Research Division

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Ben C. Haynor - Feltl and Company, Inc., Research Division

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Operator

Good morning, everyone, and welcome to the IDEXX Laboratories' Second Quarter 2013 Earnings Conference Call. As a reminder, today's conference is being recorded.

Participating in the call this morning are Jon Ayers, Chief Executive Officer; Will Blanche, Interim Chief Financial Officer; and Ed Garber, Director, Investor Relations.

IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding IDEXX's future expectations, plans and prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the use of words such as expects, may, anticipates, intends, would, will, plans, believes, estimates, should and similar words and expressions. Such statements include, but are not limited to, statements regarding management's expectations for financial results for future periods. Investors should be aware that any forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those discussed here today. These risks factors are explained in detail in the company's filings with the Securities and Exchange Commission. Please refer to these filings for a more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. All forward-looking statements are made as of today and, except as required by law, the company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Also 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 measure is provided in our earnings release, which can be found on our website, idexx.com.

Finally, we plan to end today's call by 10:00 a.m. Eastern.

[Operator Instructions]

I would now like to turn the conference over to Jon Ayers. Please go ahead.

Jonathan W. Ayers

Okay. Thank you, Bonnie. With me is Will Blanche, our VP of Finance and Interim CFO; and also Ed Garber, who is coming back into the role, one of our veteran finance executives and coming back into the role of Director of Investor Relations. So I'm going to just turn over to Will now to take you through the numbers, and I'll come back with some color commentary.

Willard R. Blanche

Thanks, Jon. Good morning, and thank you for joining us for today's call. As reported in our press release, our second quarter revenues were $352.6 million, yielding organic growth of 5.5% and fully diluted earnings per share of $0.99, a year-to-year increase of 9%. Second quarter organic revenue growth was driven by very strong increases in instrument consumables and lab services, partially offset by revenue growth associated with capital and system placements. Earnings per share growth exceeded revenue growth due to strong gross margins, resulting from cost efficiencies and favorable product mix along with augmented shared repurchases. Currency had an immaterial impact on EPS.

As for the economic environment, I wanted to share what we are seeing in the U.S. veterinary market based on data from 700 of our own Cornerstone customers. During the second quarter, patient visits were up 0.7% and practice revenues grew 4.9%, representing a modest improvement over patient visits that grew 0.1% and practice revenues that grew 3.5% in Q1. Growth rates for both metrics did accelerate somewhat over the course of Q2. VetLab instrument and consumable revenue of $112 million grew 9% organically. Instrument revenue of $20.7 million declined 10% organically. Chemistry analyzers placed through volume commitment reagent rental programs in Q2 of this year, which were not used in last year's second quarter, negatively impacted our year-over-year instrument revenue growth by roughly 3%. Adjusted for this, chemistry revenues were up slightly in the quarter. Our worldwide chemistry placements and units were very solid for the quarter, with 14% growth versus prior year and more than a 35% step-up versus Q1. This double-digit year-over-year growth reflects increases in both Catalyst and VetTest placements and was driven by our worldwide sales focus on chemistry instruments, given their importance in resultant consumable stream compared to a hematology placement. We are also very pleased with the quality of these placements, with about 55% of our North American and approximately 50% of our worldwide Catalyst placements going to customers new to IDEXX. Both of these metrics are the highest we've reported since the launch of Catalyst in 2008. For the full year 2013, we maintain our projection for chemistry placement growth to be low single digit, similar to our growth in 2012.

Our worldwide hematology placement saw 18% sequential growth and similar to Catalyst, a little over 50% of worldwide ProCyte placements were to customers new to IDEXX. Total hematology placement declined 11% in the quarter compared to a relatively strong quarter in the prior year and contributed the large majority to total instrument revenue decline. For the full year, we now expect hematology unit placements to be flat versus 2012.

Instrument consumables revenue of $78.5 million grew organically 15% versus the prior year period or 14% when normalized for changes in distributor inventory levels. We are very pleased with this normalized growth rate, which represents our strongest quarterly result in many years. Our growth continues to be a function of our increasing installed base and the quality of those placements; increased testing, as current IDEXX customers upgrade their in-house labs with Catalyst and ProCyte; an enhanced loyalty from our base of Catalyst customers who now account for 82% of our U.S. chemistry consumable revenues, exclusive of corporate accounts.

On the strength of this result and in light of the strong fundamental volume growth drivers that we see, combined with somewhat higher price realization, we are increasing our expectation for full year normalized organic growth for instrument consumables to 12% to 14% from 11% to 13% previously.

Our second quarter Rapid Assay sales of $46.1 million grew organically 2% versus the prior year period, consistent with Q1. Change in distributor inventory levels did not impact second quarter growth. The growth was impacted by a change in marketing programs over the prior year, which shifts the timing of purchases by practices to later in the year. In addition, we did not see patient visit growth, a key driver of same-store sales, pick up very much in Q2. We continue to expect Rapid Assay growth to accelerate over the remainder of the year, driven by marketing program timing, our expanded sales force and the launch of new products. With half of the year behind us, we are now adjusting the full year growth range to 4% to 5% from the previously provided range of 4% to 6%.

U.S. distributor inventory levels for instrument consumables and Rapid Assays averaged 4 weeks at the end of the second quarter based on forward-looking demand, which is within their customary range.

Our reference laboratory and consulting services business, with revenues of $115.9 million, grew organically 9.5% in the second quarter versus the prior year period, representing a 360 basis point improvement over Q1 2013 and the highest rate of growth we have seen since Q1 of 2012.

Growth accelerated across all geographies. The acceleration in growth has been driven by a fully staffed sales force for the first half of the year that has increased diagnostic testing from our existing customer base. In addition, the increasing adoption of VetConnect PLUS in the U.S. has led to improved customer retention.

Lastly, we believe the 2012 weather dynamic that negatively impacted Q1 2013 growth, as discussed in April, had a slightly favorable impact on Q2 2013. For full year 2013, we continue to expect organic revenue growth for labs and consulting services in the 8% to 9% range or 9% to 10% growth for the second half of 2013.

Our customer information management and digital imaging systems businesses, with revenues of $21.8 million, declined 4.5% organically in the second quarter versus the prior year period. As mentioned in our April call, we had significant turnover in sales reps in Q4 2012 and there's a 6- to 9-month learning curve for new reps. As a result, we have relatively low orders and ending backlog for Q1, which contributed to the lower number of install opportunities for Q2. However, as expected, we saw the order rate accelerate throughout the quarter and we have a healthy backlog at the end of Q2, which positions us well as we head into the second half. While we still project an accelerated growth rate in the second half of the year, given Q2 sales, we now expect to deliver high single-digit growth for the full year versus our prior low double-digit expectation.

Our Livestock, Poultry and Dairy revenues declined 1% organically versus the prior year period to $28.3 million in the second quarter. This performance was driven largely by higher-than-anticipated volumes in European livestock disease programs, including BSE. BSE declined slightly less than expected, due to delayed implementation of changes in EU testing regulations. We now project a low single-digit decline in organic growth for the year for Livestock, Poultry and Dairy versus the low- to mid-single digit decline expected in Q1.

Our water business grew 2% organically versus the prior year period to $22.4 million in Q2, reflecting gains in Latin America and Asia-Pacific regions. Year-to-date, the business grew 4%, in line with our thinking and consistent with our expectations for full year organic growth in the mid-single-digit range.

Moving to the rest of the P&L. Gross margin at 56% was 105 basis points favorable to prior year. As mentioned, this was due to cost efficiencies, primarily in lab operations, price realization and favorable revenue mix, with lower margin capital and systems revenue comprising a smaller share of Q2 revenue. Operating expenses were 33.7% of revenue and our effective tax rate at 30.8%, reflected in part the 2013 R&D tax credit.

Turning to cash flow. Our free cash flow was $56 million or 104% of net income in Q2. Consistent with Q1, free cash flow in the quarter is a bit lower than our experience historically, due to spending on our new administrative facility on our main campus.

We repurchased 1.65 million shares during the quarter, representing about 3% of our outstanding stock. This level was higher than the roughly 732,000 shares repurchased in Q1 and was higher than our expectations in April. This activity resulted in about $0.005 of EPS favorability in the quarter. Looking forward, we project full year revenues of $1.37 billion to $1.38 billion, which implies a second half organic revenue growth rate of roughly 10% and yields a full year expected organic growth rate of approximately 7% to 7.5%. Full year expected organic revenue growth is down from our previous guidance in April of 7.5% to 8%, reflecting primarily our latest thinking on revenue associated with capital placements. The acceleration in our second half organic revenue growth rate will be driven by 3 primary factors: First, using year-over-year compares; next, 3 sales force initiatives of note; and third, recent investments and innovations.

In terms of easing year-over-year compares, you may recall that in Q4 of last year, our businesses were impacted by a number of items, including Hurricane Sandy, the timing of the Christmas and New Year's holidays and the launch of our reagent rental program, all of which will benefit Q4 2013 organic revenue growth rates. In fact, we expect organic growth to be almost 300 basis points higher in Q4 than Q3, given these items and our growing momentum.

As to the sales force initiatives, there are 3. In our North American digital imaging and customer information management systems businesses, we have growing capacity and experience in our field sales force for these lines in the second half of the year. Second, as Jon will explain in more detail, we are expecting increase in productivity from our North American diagnostic sales transformation with our new Veterinary Diagnostic Consultants. Finally, in Scandinavia, we expect to see improved capital sales as our new direct sales organization continues to gain experience and build relationships after moving to a direct model in Q1.

In relation to recent investments and innovations, we expect Pet Health Network Pro, VetConnect PLUS and our BioResearch business will contribute to accelerated growth in the back half of the year.

Changes in currency rates since our April guidance contribute modest headwind to revenues, and when combined with a change in organic revenue growth mentioned above, lead us to project reported revenue growth for the year of 6% to 6.5% as compared to 7% to 7.5% previously. We expect full year gross margin to be about 55% or 50 basis points higher than our previous guidance, reflecting our latest thinking about revenue mix for 2013 and operating efficiencies. We expect operating expenses to be approximately 35% of revenue for the year, consistent with our previous guidance. Operating margin is projected to be about 19.5%, which represents a year-to-year expansion of about 20 basis points when normalized for currency and the pharma milestone payment in 2012 and offsetting discrete items in the first quarter of this year, consisting of the 2012 R&D tax credit and the Trendset loss reserves. We expect the tax rate to be 29.5% to 30% for the year, unchanged from our previous guidance. Net interest expense is expected to be $2.5 million to $3 million, also unchanged from our previous guidance. And weighted average share count is expected to be down 3% to 3.5% from full year 2012 levels, an increase of 50 basis points from our previous range of 2.5% to 3%, reflecting our latest thinking on share repurchase.

The reduction in share count increases both ends of our earnings per share guidance range by $0.02. This leads to updated full year 2013 earnings per share guidance of $3.42 to $3.48, which compares to our April guidance of $3.40 to $3.46. With this updated guidance, earnings per share growth for 2013 is projected to be 10.5% to 12.5% when normalized for currency and the discrete items mentioned previously, consisting of the pharma milestone payment in 2012, the Trendset loss reserve in 2013 and the impact of the 2012 R&D tax credit on both years. We expect free cash flow of 95% to 100% of net income compared to 100% to 105% of net income previously. This reflects a revised expectation for capital investment of $90 million versus $80 million at the time of our April call, due to investments to support lab growth, IT productivity investments and some future new products.

Now I turn it back to Jon for his comments.

Jonathan W. Ayers

Okay. Thanks, Will, for taking us through the numbers. I'm pleased with the organic revenue growth and the acceleration from 3.3% to 5.5% in the second quarter for the whole company, and that being led by CAG at 6.8%, which reflects the strong momentum in instrument consumables and lab services. Our prospects on momentum give us confidence in a projected roughly 10% organic revenue growth for the company in the second half of 2013, via the road map laid out by Will.

As noted in the press release, we're ahead of plan with our diagnostic sales force transformation for the Companion Animal business in North America. North American Companion Animal diagnostics revenues make up approximately 50% of our total revenues, just to give you context. As you know, from our April call, 20% of our diagnostic sales representatives in North America transitioned to their new customer-centric role as a Veterinary Diagnostic Consultant, or VDC, during the second quarter. These VDCs demonstrated their ability in the third month of the quarter to increase the number of customer calls on average by almost 60% versus the prior sales model. In addition, even though these representatives were the first wave of the transformation, had brand-new roles and in most cases a modified or different territory and customers set, they achieved sales performance equivalent to the sales professionals that were operating in our prior model. This is pretty impressive give a performance for the first few months of the first wave. We strongly believe incremental benefits will come as the VDCs enjoy additional time in their new role and new territory. We believe that based on the learnings of the first wave, our second wave, which encompasses the remaining 80% of the diagnostic sales force in North America, including all of that in Canada, that this way, we'll get off to a much faster start. In fact, we're seeing a large portion of the target 60% increase in customer calls per professional taking place right away after training the second wave.

We're also ahead of our plan in hiring experienced professionals to expand our field sales presence, having increased our North American diagnostic field force by 14% at the start of July as compared to the start of April. Turnover from the transition to the new roles and territories has been below our 5% projection -- actually 3%, which really indicates the enthusiasm, I think, the sales organization has for this new structure. And the team has done a great job in hiring experienced sales professionals for the new territories and open positions. Average sales experience of the VDC hires is over 10 years, which is very strong. We're very pleased with that. Training is complete in the U.S. and Canada as of last week for the brand-new representatives of IDEXX as well as the second wave of existing field sales representatives moving into their new VDC roles. And so all the field are now fully in their new roles. Of course, we learned a lot between the first and second wave of the implementation, as we knew we would, and I expect that the new territory model, with a regular calling cycle, smaller territories and -- will generate -- and are projected almost 60% growth in the number of in-person customer call will be quickly adopted within the few -- first few weeks of wave -- for wave 2, whereas it took a few months in wave 1. We're seeing that the new model with smaller geographic territories and a smaller -- more regular, consistent calling cycle really works. Between the higher call productivity and the expanded feet on the street, this equates to approximately an 80% increase in customer contact for our North American diagnostic sales reps. This on call activity will lead to greater customer satisfaction and loyalty, greater account growth and more effective cross-selling of diagnostic modalities.

Our field force for diagnostics alone in North America now amounts to 184 professionals. And these are supplemented by our field sales specialists for digital radiography and customer information management, inside sales, our distribution sales support team, trainers and others, a total of 325 personnel. This number also does not account for our distribution partners, which add another approximately 750 representatives to the resources that help our customers grow their practice by adopting the use of our innovative solutions in diagnostics and information technology.

Let me also provide an update on VetConnect PLUS, our innovative cloud-based service that provides the results for the current diagnostic sample within the context of the patient's complete historical diagnostic history, including all of their reference lab and in-house diagnostic testing, all in one single view. We have now activated over 8,500 practices with this innovative service, including several hundred in Canada, subsequent to the launch in this important country, market on July 1. Utilization of VetConnect PLUS is continuing to gain steam as the primary way to view, analyze and share diagnostic results that are provided by IDEXX and thus, gain insight into the patient's health and medical history, as well as communicate results with the pet owner. Of course, one of the key roles of our new VDCs as diagnostic account managers will be to support our customers in the adoption of VetConnect PLUS, with the superior clinical abilities. We find that once a veterinarian sees their patient's IDEXX results through the lens of a patient's complete diagnostic history and is easily able to share that insight with pet owners in a visually compelling way, they never go back to a fax or printout of only the most recent blood sample data. And why would they, as VetConnect PLUS is a free service? We are on track to continue to expand VetConnect PLUS internationally beyond Canada, with launches in the U.K. and Australia by January and other markets in 2014.

In our Rapid Assay product line, we are launching 3 new products: First, we have already launched IDEXX Angio Detect this July, a test for lungworm, which is a life-threatening canine disease prevalent in the U.K. and Denmark and other countries in Northern Europe. We launched it, as I said, in July. So -- but while 2013 revenues for this test are expected to be modest, the introduction is highly appreciated by customers where lungworm is endemic, as there has not been a good diagnostic test until now. We will also be launching another new Rapid Assay test early in 2014, SNAP Feline proBNP, a screening test for heart disease. This builds upon our cardiac franchise in the reference lab using the same biomarker technology. At the most recent American College of Veterinary Internal Medicine in June, several papers were presented on this biomarker and the SNAP Feline proBNP's efficacy.

In this call, we're also announcing the prospective launch of SNAP Pro, a mobile device that automates the SNAP test, as well as pushes result automatically to VetConnect PLUS in the cloud. SNAP Pro improves staff efficiency and saves our clients money from both loss runs and loss charges from test run. Beta test feedback from customers has been fantastic, as it addresses the pain points associated with using all point-of-care test kits. Of course, once VetConnect PLUS is populated with SNAP results, VetConnect PLUS becomes an even more comprehensive portal for a patient's diagnostic history. Like our other diagnostic modalities, other benefits of VetConnect PLUS come into play for our SNAP test kits, including easy sharing of client-friendly electronic summaries with pet owners of SNAP results and mobile access to those results. We'll be taking orders for SNAP Pro in the fourth quarter, with delivery expected in early in the first quarter of 2014. Our distributors will be quite involved in placing SNAP Pro to our broad set of customers who purchase SNAP test kits, and training of our distribution representatives will begin in August.

Finally, later in the quarter, we'll be introducing IDEXX IMAGEBANK, a software as a solution -- software-as-a-service solution that provides backup and storage for a practice's digital images. IMAGEBANK is designed to archive images directly from the IDEXX PACS software, eliminating the need for manual and expensive on-site storage. Clinicians will also enjoy the convenience of accessing patient images through VetConnect PLUS, enabling remote diagnostic interpretation. Image review is enabled by IDEXX's own customized image viewing software, built upon the highly successful I-Vision Mobile iPad app. IMAGEBANK is another key step in building out our patient-centric diagnostic ecosystem on the cloud.

In summary, we believe we have in place pieces of our strategy to bring real value to our customers globally to help them grow their practices and to drive growth and profitability for IDEXX for years to come.

So with those introductory comments, Greg, I'd like to open it up to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ryan Daniels from William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Jon, I wanted to give you a follow-up on the sales force transformation. I'm curious, your view on how quickly the 60% increase in calls leads to stronger organic growth. And then maybe you could talk about how that manifest and at what rate, via better retention, more utilization with existing clients and then the opportunity to cross-sell them to other modalities of diagnostic testing versus what they currently have.

Jonathan W. Ayers

Yes. Ryan, thank you for the question. First of all, we expect the ramp in call frequency because of the smaller territories and because they moved to a regular calling pattern. That ramp is, in the second wave, is happening very quickly and we would expect that to be well in place by the second month of the quarter. And so I think we'll see a greater increase in productivity in the second wave than in the first wave. Now in this new model, what -- our customer has a single diagnostic representative, and that is what's different than in the past. Not only did they not see the rep as frequent, they didn't see the same rep. So they saw 2 different reps, one for the in-house line and one for the reference line. And so seeing the same rep and seeing that rep more consistently, I think, is going to be able to generate a relationship that will allow us to achieve all 3 of those growth parameters that you mentioned. In fact, we believe the vast majority of customers are going to be able to see -- be seen twice a quarter by this rep. And so what that does is it builds a relationship, increases loyalty and retention. And of course, that rep is also going to be helping the customer appreciate, enjoy the benefits of VetConnect PLUS with our diagnostics, which also increases retention, but it also builds that relationship to help us cross-sell. Ryan, as you recall, the majority of our customers who use 1 or 2 of our chemistry and hematology modalities, reference labs at one side or the in-house equipment on the other side, only 36% of that universe actually uses both. So the cross-selling opportunity is pretty big. And then the third area that you mentioned is helping the customer grow. And this really -- what's interesting about the industry is our customers actually want to see our reps because they know our reps can help them with their practice. The biggest complaint we've had in the past is they don't see the rep enough, and we're solving that problem here with a consistent relationship. So how that's going to play? We actually have only modest expectations for the impact of this in our acceleration in organic growth over the second half of the year. You heard the road map that Will laid out, and it was only the second of 3 factors in the sales initiatives, which is itself only one of the 3 factors in the organic growth. But we think it will build momentum over time and position us very, very well for the long term. And they're -- it's exactly unclear how it's going to play out in the short term, but we're very pleased with the success that we had in the wave 1.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, that's very helpful color. And then as a follow-up, maybe a little bit more of a big picture question but related. You've always talked about a somewhat slow adoption curve in the vet space, moving glacially with the new product launches. But do you think the initiatives underway in IDEXX, particularly moving to the more consulted sales team and then introducing more information technology into the practice that you can, perhaps, accelerate innovation and when you think of your new Rapid Assay launches, new test launches actually drive greater utilization of those over a shorter time frame, so that it augments your growth outlook in '14 and beyond?

Jonathan W. Ayers

I think that's very true. One of the areas where we've had -- where you had typically a slow adoption in the veterinary profession is the adoption of new, innovative and highly appreciated test technologies such as, we've launched molecular diagnostics and pancreatitis and cardiac and allergy testing, all new menu, if you will. And the adoption's been slow. And I think one of the reasons the adoption is slow is while we've had a number of resources available to the customer, we haven't had that in-person contact. And one of the things that we found in wave 1 was customer said, "Hey, I heard you started allergy or I wanted to learn a little bit -- more about those pancreatic tests." And so the purpose of these calls is first to address the questions that the customer has. And they're actually quite -- they're quite interested in learning about this, but they really haven't had someone who is fully knowledgeable to be able to take the time as part of the regular call cycle to introduce this. So we could see a more rapid adoption. Clearly, we think the -- while the adoption rate of VetConnect PLUS has been pretty fast relative to our history, we think the adoption rate will accelerate in the new model for the same reason.

Operator

Your next question comes from the line of David Clair from Piper Jaffray.

David C. Clair - Piper Jaffray Companies, Research Division

First one for me, I was just hoping to get some color on how you're monetizing VetConnect PLUS. We've seen some pretty solid adoption trends there. Just wondering if you can give us some color on how that trend's impacting the business.

Jonathan W. Ayers

Well, thank you, David. First of all, VetConnect PLUS is a free service to anyone and, of course, populated with diagnostic information that's generated from IDEXX's modalities. And so we're not monetizing it by targeting subscription. I think what we're seeing and as the adoption increases is customers now get a lot more value out of the diagnostic information that they were getting before from anyone, including IDEXX, because it has it in the context of the history. And what that does is it increases the loyalty of our customer base. And any increase in loyalty, of course, all of the things being equal, increases our growth rate. So I think that's probably the earliest monetization. The second is that VetConnect PLUS makes it very effective for -- very easy for a rep to -- first, to add value with a customer by helping appreciate the benefits of VetConnect PLUS in the modalities that they are using and then cross-sell the other modalities, as they understand that those can also populate VetConnect PLUS. And then third and probably much longer term is direct -- the direct impact of VetConnect PLUS could have on growing utilization of diagnostics, including new, as well as more common types of tests.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And then on the CAG gross margin. In the quarter, I was hoping you could break out the improvement we saw related to mix and price and improved efficiencies. I think you mentioned that the lab business, we saw a nice uptick in efficiency there. Just hoping you can give us some -- quantify the impact.

Willard R. Blanche

Sure, I'll take that one. As far as the gross margin for the businesses, reference labs was the primary driver there and it would -- I'd split it out between the 2. It's -- we don't typically do too much of that, but it's primarily reference labs and then supported by the other change with the mix. I'd say more reference labs, though.

Jonathan W. Ayers

We're getting the, of course, the productivity and efficiency and the volume leverage associated with that strong organic growth.

David C. Clair - Piper Jaffray Companies, Research Division

Okay. And then just one more quick one for me. What's the expected list price for SNAP Pro?

Jonathan W. Ayers

Thank you. That's a good question. The list price is going to be a little under $1,500. But probably the AUP will be less than that because we'll have volume discounts and other types of programs to encourage adoption.

Operator

Next we'll go to the line of Erin Wilson from Bank of America.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Sorry if I missed this. But can you break down the rental placements in the quarter and the impact it had on the overall instrument sales? And how should we think about the quarterly progression of instrument placements in sales. You'd mentioned that's an easier comp and some other drivers, but if you could break down the key drivers going into the second half, that would be helpful.

Jonathan W. Ayers

In rental, I'm assuming you mean our volume commitment to placements where we don't have upfront recognition of the instrument revenue, so I'll let Will take that.

Willard R. Blanche

Sure. So looking at the trend of volume commitment deals over the past several quarters, we did have that -- those commitment deals step down a little bit in Q2. As mentioned, it only impacted us by 3% in the quarter versus what we had seen previously. And that represents roughly somewhere in the neighborhood of 50 or so chemistry instruments. And just for comparative purposes, back in Q1 and Q4, that averaged around 100. So we are seeing a slowing trend there.

Jonathan W. Ayers

It's obviously replaced by other programs because we had a nice pickup in overall chemistry placements and year-over-year growth.

Erin E. Wilson - BofA Merrill Lynch, Research Division

Okay, great. And can you speak to, I guess, any recent changes in distribution, potentially expanding some of your exclusive distribution relationships to include certain instrument products or capital equipment? How much do you forgo on the margin for some of these relationships? And net-net, are the economics favorable to you?

Jonathan W. Ayers

Yes. Thank you. We have -- typically, with distribution in some instruments, had a, what we call a buy-sell relationship with them in the same way that we had consumables. At the request of our distribution partners, we added that. We added the chemistry and hematology instruments to that. A couple of notes: It was -- we don't expect it to be very much of our volume. In fact, I would call it immaterial in the second quarter. And second of all, the economics are no different to us because what we're doing is we're putting this in in replace for a commission or a spiff to distributor rep. And the margin that the company receives is about equivalent to what we would have paid in terms of the spiff. So there's really no change in economics. It's just in some ways, in some cases, the distributor prefer to have this arrangement, and we want to be responsive to our distribution partners.

Erin E. Wilson - BofA Merrill Lynch, Research Division

So sales force on -- or sales representative on the distribution side would have to essentially meet some sort of a threshold to get some sort of commission rate. Is that how it would work?

Jonathan W. Ayers

Well, it's -- they -- with all instruments, our sales reps are highly involved. And in certain situations, we do have involvement of the distributor rep. And in that case and in certain cases, just works out better that the distributor can recognize revenue on that instrument placement. It's really revenue recognition for them. But for us, it's the same price because if we paid them a commission, we would just net that against the purchase price. So by -- well, let me reinforce. The primary way that we sell instruments is, by far and away, is with our direct sales force and we really expect this to be a very small, if not immaterial, aspect of our instrument placements in North America, or I should say, in the U.S., where we have -- where we've made this change. And it's something that we want to be supportive of our distribution partners with.

Operator

[Operator Instructions] Next, we'll go to the line of Ross Taylor from CL King.

Ross Taylor - CL King & Associates, Inc., Research Division

First question, I just wondered if I could have Will repeat what the impact to the changes in distributor inventories was on the instrument consumable growth. And then more substantial question, I just wondered if you could comment at all about some of the new products, any commentary about how the rollout of Pet Health Network Pro is going. And then with regards to the SNAP Feline proBNP test, how do you -- do think this expands the market or does it simply cannibalize your reference lab business for proBNP? Or how might veterinarians use this differently in practice than the current test?

Willard R. Blanche

Perfect. So as far as the impact of the changes in distributor inventory levels, on instrument consumables, there was about 1%. And for Rapid Assays, it was negligible.

Jonathan W. Ayers

So there were a couple of questions in there. So one of them was about Pet Health Network Pro. Just to remind investors, we formally launched Pet Health Network Pro earlier this year, actually I think in March of this year. I think it's become the most robust client patient communication and education service platform out there for the veterinary market. And I'm really quite excited about the impact it's going to have on helping veterinarians communicate and educate pet owners on the attributes of things like preventative health care and in turn, diagnostic testing. The feedback from users really has been outstanding since launch. As you expect with any new software launch like this, penetration is ramping. We have a strong team focused on opportunity. They continue to improve the underlying software. In fact, we had a new release of Pet Health Network Pro. It's a cloud-based system. So when we do a release, everybody benefits from it simultaneously. We had a new release in early July, which adds additional capability. And so I think we're excited about it, both as a revenue generator because it is a subscription-based software as a service but also as a way to help practices to grow. Where we had the most success with Pet Health Network Pro has been with Cornerstone customers, and that makes a lot of sense because it's the only client communication tool that is fully a part of, integrated with and built in to the Practice Management Software. So you can do things like -- have customers generate visits just online as well as direct sharing from the patient record to the patient to the Petly, which is the place that the pet owner has all the patient information. So we're pleased with the ramp and we're building an installed base.

Ross Taylor - CL King & Associates, Inc., Research Division

Okay, good. And also if you have time, just any comments about the NT-proBNP part that...

Jonathan W. Ayers

Yes, I'm sorry. Yes, very briefly, it's not going to -- nothing cannibalizes. Testing begets testing. We think this continues to build the cardiac franchise. Feline, with cats, the protocol really is more and more accepted that this is a screening test of healthy cats because cats can get the cardiac condition that this tests for, just as an adult. And it doesn't present very nicely, it kind of presents a sudden death in some cases. So we like to catch it a little earlier than that. And so I think this really -- it's just going to build upon our reference lab franchise for cardiac testing and give more awareness. As I mentioned in one of the earlier questions, building adoption of these things takes some time. And when you have multiple modalities that provide a similar category of protocols, in this case, cardiac testing, it helps to expand awareness.

Operator

Next, we'll go to the line of Jon Block from Stifel.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Maybe, the first one, Jon, for you. I mean, just big picture, if you can to speak to your overall confidence in the back half pickup? And I know you guys gave very good reasons as to why we should see the acceleration in the back part of the year. But to be fair, those reasons also existed before, right, I mean, 3 and 6 months ago when you alluded to them. So you step down the organic by 50 bps in each of the past 2 quarters. Do you feel comfortable that the guidance is where it needs to be? And then maybe, what went on over the past 3 or 6 months that lead to, I mean, it seems capital base, but if you can maybe pinpoint where the shortfall stem from.

Jonathan W. Ayers

Yes, thank you. Thank you for the question. We feel -- we've really taken a close look at the second half. Of course, the second half is where we always thought the step-up would occur. And the second half, at this point, is still in front of us, like it was earlier in the year. The shortfall in the second quarter that you refer to and the step-down in organic growth is associated with capital placements. In some cases, it's really the lower margin capital associated with digital radiography and customer information management, and then the quantity versus the quality of the capital placements. But the -- I'll tell you what the other thing that we feel pretty excited about is the success. As we predicted, overall, in the growing use of the annuity portions of our CAG diagnostic modalities, 76% of the company's revenues are the Companion Animal Group and about 90% of the Companion Animal Group's revenues are the annuity portions of the modality. That'll be all the reference labs, all the instrument consumables and the SNAP kits. And we're now -- we're actually stepping up our guidance for instrument consumables. Those are already pretty strong from -- at 11% to 13% organic growth. And now we're stepping up to 12%, 14%. We are certainly very pleased with the 55% competitive chemistry placements in the second quarter. I think our sales organization has really learned how to do that. They have a lot of confidence now. And then of course we are pleased that lab is progressing, just as we expected, with a 9.5% organic growth in the second quarter. So we think we're on track there. And so that's the important part of the business. And then of course, we have the non-CAG businesses, which are doing, on a whole, as they expected. We're also seeing -- Jon, this is not just the -- it's not just the U.S., it's just not -- not just in North America story, it's a global story. We achieved growth in Europe in the first half of 8.1%. That was -- first quarter was 6.6%, second quarter was 9.3%. There's a little bit of calendarization in that. But 8.1% in our European Companion Animal Group, which I think is a very strong performance given the shape of the European economy, and it's certainly not helping us out. But we have a very strong offering and a very strong strategy and a very strong set of country management teams there. We also achieved close to 10%, 9.6%, to be precise, growth in our -- in IDEXX in the Asia-Pacific portion of the world and we had flat growth in Q1 and 19% in Q2. I think, again, some things are between the quarter, so I take the growth there. We have -- we see a step-up in both of those strong regions in the second half of the year, which is another factor that gives us confidence and the momentum in the second quarter that gives us confidence in the full year organic growth. But what we have not put very much -- stock in yet is the impact of the sales force transformation. There's a small amount in there associated with the acceleration, but it's a very small portion of that step-up. We've -- obviously, people have to learn their new roles, but we're certainly very pleased with what we've seen so far. I tell you, I am very pleased with the level of enthusiasm that we have in our sales organizations. I was with them over the last couple of weeks. And what's different about the second wave than the first wave is the second wave knew it was coming. They knew what their new territory was, as of April 1. They listen to the experience of the first wave reps, and so their enthusiasm builds. And really one of the most common reactions that I got from the sales organization was, "We're just excited. It's here now." Many of our veterans said, "This is something that is going to be a better experience than we have before. We're really going to be able to take care of customers." And I think you can see that in the extraordinary low attrition. We had associated with the change of this magnitude, 3% attrition in the second quarter in our CAG entirety, in our CAG diagnostic sales force in North America in the middle of all these territories changing, and everything, I think, really speaks to where the sales force is on this.

Jonathan D. Block - Stifel, Nicolaus & Co., Inc., Research Division

Okay, that was very helpful. And actually I was going to ask you about European CAG and APAC and you got to those with your answer. Maybe 1 or 2 other quick questions. I thought what was interesting, you mentioned that it was the biggest quarter competitive win, I think the number was 55%. So what was behind that? Because it seems like it's still a little bit early since you're just going through the sales force transformation. Is that a VetConnect PLUS phenomenon? You mentioned the guys being more comfortable on trying to take away some competitive wins. So what was behind that big number in the quarter?

Jonathan W. Ayers

Yes. Well, I think the highest number that we had before the second quarter in North America for competitive, for our new Catalyst placements was 45%. So it was a nice jump from 45% to 55%. Now that number has been growing, really, over the last couple of years, but that was a pretty big jump between the first and the second quarter. And obviously, we still have 80% of our sales organization in the old role, so you can't really attribute that to the sales force transformation yet. I think we really attribute that to the fact that the sales organization is getting more and more comfortable with selling the unique benefits associated with our in-house offering and the benefits of that combined with our reference lab offering and VetConnect PLUS. But it's not just VetConnect PLUS. We have a Real-Time Care value proposition that only IDEXX can provide. We're the only ones that can provide the ease of use and turnaround of sample within a 20-minute patient exam. So I think there are a number of things that we have put in place that help our sales reps communicate the unique value to the IDEXX diagnostic offering, that we really put in place over the last 6 to 9 months that we saw the benefit of in the second quarter. So it's nice to see that momentum and why I would expect that to continue into the second half of the year.

Operator

Your next question comes from the line of Ben Haynor from Feltl and Company.

Ben C. Haynor - Feltl and Company, Inc., Research Division

Just curious on how much of the organic lab growth was price realization in the quarter?

Willard R. Blanche

Sure. So breaking that out, it's about -- for the total company, it's about -- roughly half. But probably closer to 60% of the growth comes from volume and 40% from price.

Jonathan W. Ayers

On a global basis.

Willard R. Blanche

On a global basis.

Ben C. Haynor - Feltl and Company, Inc., Research Division

Okay, great. It looks like you guys had a really nice quarter in terms of competitive installs. But the guidance, you're looking for kind of flat hematology and low single digits on chemistry. If you're going to be able to generate that double-digit type consumable growth, how much do you see that coming from growth in testing versus, perhaps, the price realization there?

Jonathan W. Ayers

Yes. The vast majority of that is volume growth. I think it's a very, very small portion of it which is price. But you mentioned the competitive placements, which are, of course, fully contributing to the additional growth. But even when we upgrade existing customers, we see a growth of 25% or more in utilization because of its -- because of the capabilities of the instrument. So we get growth in both types of placements. Of course, the momentum in the first half, this is a momentum business. It doesn't change overnight. You're not going to see -- you're never going to see the change in instrument consumable growth that much from -- on an underlying basis, adjusting for changes in distributor inventory, very much because it's really a quarter's growth is the result of the last 4 or 5 quarters of placement and customer activity. So the fact that we achieved 14% growth in the second quarter tells us -- gives us some confidence for the momentum of going into the second half of the year.

Operator

Your next question comes from the line of Nicholas Jansen from Raymond James.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

A lot of discussion so far, but it's all limited to 1 or 2. But in terms of the MWI agreement, I know you gave some color on 1Q about their level of commitment and kind of the revenue growth that you saw. Any step-down or any kind of changes with regards to their commitment 2 quarters into the new change?

Jonathan W. Ayers

Yes. Thank you. Nick, we continue -- there's really absolutely no change in the story from what we said in the first quarter. We continue to be pleased with all of our distributor partners. We look at our distributors very carefully in terms of their -- the revenue that they generate, as well as the engagement their field sales organization have with initiatives that are IDEXX-specific, typically program types and initiatives or initiatives of writing with our -- and working with our sales organization. And when we look at all of those, again, we saw really no change or no difference in these metrics with our nonexclusive versus our exclusive distributors in the second quarter, just as we saw no change. And we really didn't expect any change as we did in the first quarter. What I am excited about going forward is with the new sales -- our direct sales model, where we have a single sales rep for a territory, smaller territory. They now have the opportunity to work with fewer distributor reps because they're not carrying -- covering as large a territory in a more intense basis. And I'm looking forward to that partnership between our rep and our distributor reps in helping the customer grow the practice. And this is what we really need. We know that customers want that help. When they get that help, that their practice responds. And in this economy, they can take control of their destiny a lot more than sometimes they appreciate just by the -- what they're doing with their practice. And so when we partner with our distributors, we can make that happen. And I think that partnership is going to be -- there's going to be a much greater opportunity with that partnership in our new sales -- into CAG diagnostics account manager-type sales model.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

And then maybe secondly, on Europe, obviously, a pretty solid performance there. You didn't mention Leipzig, Germany, the new reference lab, how is that tracking and kind of how much of that is contributing to the sequential rebound in organic growth relative to 1Q?

Jonathan W. Ayers

Yes. Leipzig is tracking very, very well. We extended it to several more countries in the second quarter as we expected. We like the performance of Leipzig and then the other area that's performing quite well, where we had quite a bit of growth was the Nordic countries, where we went direct. And I don't know, Will, maybe you have the growth in Nordic countries, but it's a pretty high number in the second quarter, as we really came on -- we had a pretty good number in the first quarter but the second quarter is even more unbelievable. So we're very pleased with that initiative. And the Nordic countries are -- these are countries where our diagnostic solutions work very well. They're sophisticated practices. They have a strong -- the pet-owning population has a strong bond with their pets, and their economies are strong. So these are very appropriate markets for us to have an effective solution, where we can combine both the in-house and the reference lab offering. And of course, part of it is we're able to go direct with in-house. The other part of it is that we have the Leipzig lab, which is helping us in those Nordic countries with a very, very attractive and heretofore unknown turnaround time. But we also had good performance in some other parts of Europe. Of course, Europe has got a lot of different economies, and some are doing better than others. For example, we have a very good performance in Italy. Leipzig is actually helping us in Italy. And who would have thought Italy, given the economic situation there. So we're pleased and we have a very experienced management team and set of country managers in Europe, and they're really taking the strategy with a lot of excitement.

Willard R. Blanche

Jon, as far the Nordics, we saw high double-digit growth in the Nordics. So in...

Jonathan W. Ayers

High double digits.

Willard R. Blanche

High teens, high teens.

Nicholas Jansen - Raymond James & Associates, Inc., Research Division

Okay. Lastly, maybe just quickly for you, Will. In terms of gross margins, you've been up over 100 basis points in each of the last 2 quarters. And I think even back to 2012, you're up 100 basis points in the back half of the year as well. Now your guidance for full year would suggest less of an improvement in the back half. Is that more attributed to the mix? Or is there anything -- considering the customer utilization pull-through and kind of still flattish like instrument numbers, I would have anticipated this level of success to continue going forward.

Willard R. Blanche

Sure. There are definitely some mix dynamics because we do expect the instrument placements to rebound a bit in the back half of the year, and so I think certainly that is...

Jonathan W. Ayers

That's in the second half of the year versus first half.

Willard R. Blanche

Second half of the year versus first half.

Jonathan W. Ayers

So we did get mix dynamics in the second half of the year versus the prior year because of the higher proportion of consumables versus instruments. With the drop in instrument revenues, you actually improve your gross margin mix. So I would expect that -- we've seen that sort of sequential step-up in meeting up year-over-year step-up in margin that we saw in the second half of last year and first half of this year. We've kind of gone through that now. So I think we'll continue to enjoy that. But I wouldn't expect it to see a significant further year-over-year increase in the second half of the year, other than what we are achieving in lab versus our productivity.

Operator

And sir, there are no further questions. Please continue.

Jonathan W. Ayers

Okay. Well, thank you, everybody. Great questions. I just want to also congratulate everybody on their performance. The company's been working hard on some of these very, very large transformations, certainly, transformation, the way our customers enjoy the benefits of IDEXX diagnostics and then the transformation on our sales organizations around the world. And so I think it really sets us up well for the second half, and we look forward to continuing to report our progress at the next earnings call in October. And with that, we'll complete the call.

Operator

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

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