Q4 2019 Earnings Call
Sure.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to turn the conference over to your host like eight. Thank you you may begin.
Thank you Rob Good morning, everyone. This is Mike Yates, Vice President Chief Accounting Officer Fried ex Corporation.
Start by saying, thank you for joining us for a discussion or the IDEXX fourth quarter in full year 2019 financial highlights.
Last night, we issued a press release outlining a companys financial and operating performance for the three months and the year ending December 31st 2019, the press release, along with the presentation slides to be used during today's webcast can be accessed on our company's website at www dot.
He acts C O R P dot com.
Joining me today is Andy Silvernail, our chairman and CEO and build Grogan arch Chief Financial Officer.
The format for college as follows we will begin with Andy providing an overview of operating performance in the quarter and for the full year.
I will then walk you through the fourth quarter and full year 2019 financial results and the operating performance within each of our segments and finally, Andy will wrap up with an outlook for the first quarter and full year 20 Twond.
Following our prepared remarks, we will open the call for your questions.
If you shouldn't need to exit the call for any reason you may access a complete replay beginning approximately two hours after the call conclude by dialing the toll free number 87766, 0685 story and entering conference I'd number 136948, yeah.
Three.
Are you may simply log onto the company's home page for a webcast replay.
Before we begin a brief reminder, that this call may contain certain forward looking statements that are subject to the safe Harbor language in last Night's press release and in IDEXX is filings with the service journeys in Exchange Commission.
That I'll now turn the call over to our chairman and CEO Andy Silvernail.
Thanks, Mike Hi, Good morning, everyone. I appreciate you joining us discussed our 2019 fourth quarter and full year operating results.
What do you like team was another record year products, we hit all time highs on most of our key metrics, we continue to grow organically through our target growth initiatives and our ability to capture value through strategic pricing.
We expanded margins by leveraging our topline we executed well in a productivity bundle. Our efforts resulted in records and sales margin earnings free cash flow and return on invested capital.
We build our next outperform over a cycle and we're doing the things to make iducs differently, we're investing a great teams, who focus on the critical priorities within our standing businesses.
All the which is in service to our customers. This is what separates I'd extra competition and allows us to lever for our customers employees and shareholders.
We've been candid our view of the weakening global economy discontinued Q4, and we believe it will for the next quarter or too.
The phase one trade deal with signed customers up and down the supply chain remain hesitant to spend in the face of uncertainty. Additionally in 2020, we'll have three very successful multiyear growth initiatives, where $30 million that aren't repeating.
Our funnel growth initiatives, a strong, but we'll face additional headwinds, especially in the first half.
Understanding the challenging environment, we proactively executed on the playbook. We previously discussed with you want to ensure that but we're well positioned to perform and invest for long term profitable growth to that end, we execute or restructuring the fourth quarter will result in $15 million of savings in 2020.
The current environment is challenging, but well control our destiny through focus and execution I'm confident our capabilities the strength of our diversified portfolio and the quality of our teams are fully demonstrated in these times.
Our proactive cost reductions along with strong balance sheet, but it's in a great position to continue to deliver long term value for our shareholders during volatile times.
We have the team the strategy and a capital available to perform to take advantage of opportunities as they Brett present themselves.
One such opportunity is is the flow M.D. acquisition, we announced last night.
Flow management devices is a leading provider small volume improvers used to ensure flow accuracy, a critical applications in the oil and gas industry.
FMT has annual sales were approximately $60 million in EBITDA margins of about 20%.
I think their innovative technology will provide above market growth and this will complement our ability to execute our operational efficiencies. We believe there at least 500 basis points of margin expansion opportunities and we're excited to have them as part of the attics family.
The rest of remedy that pipeline is solid and we continue to actively assess several opportunities, but nearly $2 billion a capital available we'll aggressively pursue the right opportunities while remaining disciplined within our return framework.
As for the other tenants of capital deployment or Capex was down slightly compared to last year much of the decline was due the timing of a few projects moving into 2020.
We continue to invest aggressively and opportunities to stimulate organic growth and drive margin expansion.
We will also continue to focus on returning value to our shareholders and 2019, we returned $147 million to shareholders via dividends, a 16% increase over last year, and we bought back $55 million of stock at an average price of $140.52.
We remain focused our capital deployment strategy, a significant source of value creation.
I'm going to pause here I'm going to turn it over to build is going to talk about the financial results in the segment discussion.
Thanks, Andy how are the consolidated financial results on slide four.
Q4's, Ssix hundred 17 million were up 1% overall flat organically.
More detail it through the second discussions hell or high level slowdown in our industrial end markets negatively impacted a significant portion of our portfolio. This was offset by positive momentum in our life Sciences fire and rescue and pharma businesses for the year orders were flat both overall and organically was strong.
Orders in the first half the year offset by the slowdown we experienced in the back half.
Q4 sales absorption on 6 million or down offer so overall, a down 2% organically.
Industrial market softness and the run off and targeted growth initiatives negatively impacted us in the fourth quarter.
Following our sales up 2.5 billion were flat overall and up 1% organically driven by price and strong target growth performance in several businesses.
Set my short cycle industrial volume declines and the softness we saw in semi auto in AG throughout the year.
Q4, gross margins contracted 60 basis points to 44% in the quarter driven by declining volume and unfavorable sales mix on the here how are your full gross margins expanded 10 basis points. However, assuming the impact of a third quarter. So core inventory step up adjusted gross margins expanded 20.
The basis points to 45.2%.
Driven by price and productivity more than offsetting the volume and mix pressure and our continued investments in engineering.
Q4, operating margin was 22.1% and full year margin was 23.2%.
Adjusting for restructuring expenses and the fair value step up in Q3, adjusted operating margin was 23.3% in the fourth quarter and 24.2% for the year.
The 23.3% Q4 margin was flat to 2018, and the full year, 24.2% increased 80 basis points compared with the adjusted prior year.
Mainly driven by our gross margin expansion and lower estimated costs from decreased variable compensation expenses and overall tighter cost controls.
Our Q4 effective tax rate was 20.6%, which was lower than the 23.8% in the prior year period due to certain onetime charges related to tax reform incurred in the fourth quarter of 2018.
Several small discrete tax benefits in 2019.
For the year, our effective tax rate also benefited from discrete items, we realized in 2019 associated with equity investing an option exercise.
Q4, adjusted net income was 102 million, resulting in adjusted EPS of $1.33 obtuse answer 2% over prior year adjusted EPS, Yes.
Full year adjusted net income was 444 million, resulting in adjusted EPS, a $5 in 80 cents up 39 cents or seven per cent compared to prior year.
Finally free cash flow was 137 million flat compared to prior year, but was 134% of adjusted net income.
For the year free cash flow was 477 million a record fried ex up 13% versus last year and was 100% hundred 7% of adjusted net income.
I'll now turn of the segment discussion I'm on slide five starting with fluid and mentoring.
Q4 orders were down 5% overall and down 4% organically, mainly driven by softening demand on the industrial market and continued declines in agriculture.
Full year orders were flat overall, but up 2% organically.
Chemical due to chemical market strength and targeted growth once more than offsetting weaker industrial and act performance.
So far sales were down 4% overall, it down 3% organically.
How about industrial market softness and run off I'm target growth initiatives.
Full year sales were up 1% overall in 2% organically during the strong targeted growth performance in the first three quarters of the year, along with strong chemical market and stable municipal and energy markets again more than offsetting the industrial and actually softness we experienced.
In regard to our agricultural market.
Market dynamics remain unchanged due to continued tariff pressures and depressed commodity prices, which put pressure on our banjo business. While there is cautious optimism from the phase one trade deal, we're not forecasting any near term change the U.S. AG market OEM forecasts have improved but are still magnus.
As it relates to the industrial space December and December we saw US industrial production post a loss results on a decade.
The contraction in your European markets, we have seen over the last few quarters continued and we see this pressure in both North America in Europe carrying into 2020.
Finally, adjusted operating margin for the quarter. It was 28% down 110 basis points compared to the prior year driven by volume.
Bob My mom declines in sales Max almost startup costs associated with the new plan opening within our energy platform.
Full year adjusted operating margin was 30.1% an increase of 90 basis points year over year, mainly driven by price capture and delivering on productivity initiatives across the segment.
Let's move on to health science, turning to slide six.
Q4 orders were up 6% overall, 3% organically driven by our life science Oems and strengthen MPT.
Your orders were flat overall and down 1% organically due to soft semiconductor auto and industrial markets offset by poor performance in life Sciences and pharma markets.
From a sales perspective, Q4 sales were up 1% overall and down 3% organically.
Full year sales were up 2% overall, and 1% organically driven by strength in our life Sciences business for the quarter and full year.
We continue to experience growth tied to new product development in collaboration with key customers on a comparable basis like Ryan's life Sciences grew 6% for the year.
Yes, we continue to see challenging market conditions, and the fourth quarter due to weaken north American and European industrial distribution.
On the run off of targeted growth initiatives that began in 2018 and ended in Q3 of this year.
For the full year gas was up organically doing a strong performance without initiatives.
Wrapping team from our performance continuing into Q4, as we continued momentum within our key pharma markets amputees backlog puts them in a great position for the first half from Tony Tony.
Finally within sealing some pressure in the industrial and oil and gas markets.
Some growth in semicon late in the quarter and are cautiously optimistic for that to continue into 2020.
From a margin perspective, excluding restructuring expenses fourth quarter, adjusted operating margin decreased 60 basis points to 22.8%.
I was primarily due to the volume decline and engineering investments in the business full year adjusted operating margin increased 20 basis points to 23.8% due to price and cost control efforts.
I'll now moving our final segment diversified I'm on slide seven.
Q4 orders were up 1% overall in 2% organically full year orders were down 2% overall and flat organically, mostly due to the project nature of dispensing.
Q4 sales were flat, but up 1% organically.
Full year sales were down, 2% and flat organically as well, primarily driven by 11% decrease at dispensing the balance of the segment was up low single digits for the year.
Adjusted operating margin of 26.2% decreased 30 basis points in the corner.
Full year adjusted operating margin of 26.6% was down 20 basis points, primarily due to sales management dispensing.
As such these performance was mainly driven by on the Fireside, North American OEM and municipal markets continue to perform well.
Parents seeing steady growth across our offerings as well as continuing momentum on the new Sam products.
In rescue we saw a bounce back in Q4 with the release of FEMA spending we discussed last quarter as well as high demand for the new watertight tool they launched earlier in the year.
And this performance moderated in the quarter with relative strength and transportation being offset by softness in industrial and oil and gas markets filing dispensing story continue with top tough comps against project wins in 2019, a lack of new projects entering this year for 2020, we do not see a recovery now and expect dispensing and.
Be flat for the year.
Ill pass it back to Andy and provide an update our 2020 guidance. Thanks, Bill pay everybody I'm on slide eight.
All right operational basis, as we look at the year.
We expect market headwinds to persist in the first half and overall for the year, we expect organic revenue to be flat to down 2%. We expect this to translate SB up nine cents to possibly being down 30 cents, depending upon the topline results, we have price capture by 80 basis points baked into the guide.
We expect a productivity initiatives to more than offset inflation, providing two sets of benefit.
And as I mentioned earlier, our focus continues to be to investing organic opportunities. These growth investments will be about a four cents headwind in 2020.
As I mentioned the cost actions that we took in the fourth quarter. This will result in a 15 cents a benefit. Additionally, we can get up to 20 cents if market conditions worsen.
We anticipate a 60 temperate 10 cents headwind from variable compensation as various reset our incentive comp for 2020.
We expect about core acquisition provide once that excuse me, 1% of growth on the topline and three cents of benefits DBS.
As we look at some of the non operational items FX in share count should offset.
And we expect that 10 cents headwind from tax primarily related to discrete benefits, we got from associated with the equity vesting and options exercising.
So in summary, we are projecting revenue to be flat to down, 2% and 2020 and EPS to be in the range of 555 to 585.
So let me wrap things up I'll provide some additional details regarding our 2020 guidance for both the first quarter and the full year I'm on the last slide that slide nine.
In Q1, we expect SP in the range of 130 to 134, but market headwinds contributing 4% to 5% organic revenue decline in operating margins of about 23%.
We do we don't expect any significant impact from FX, we expect that corporate tax rate to be about 20% in Q1 corporate costs to be about $20 million.
If you look at the full year 2020, again, we expect EPS to be 555 to 585.
Full year revenue is projected to be flat to down 2%.
Arjun should be somewhere between 23, eight and 24.5%.
We don't expect FX to have a significant impact and for the year, we expect tax would be at about 22%.
Capex is anticipated to be about $55 million and free cash flow should be around 105% to 110% of net income and finally corporate costs should be around $75 million for the year as always our earnings guidance excludes any cost associated with future acquisitions or future restructuring with that Rob Let me turn it over to you.
And we'll take questions.
Thank you.
At this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Information Tony will indicate your line is in the question Q.
Hey Press Star too if you like to remove your question from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment. Please why we poll for questions.
My first question comes from Mike Halloran with Baird. Please proceed with your question.
Hey, good morning, everyone sort of Mike how are you.
Good them all good so could you help understand help understand that the dynamic as you're seeing it today.
You look at the back half of the year orders that you know down five or so the third flattish in the fourth.
The first quarter guide implies something worse than that trajectory maybe implies a major comps are part of the part of the variability there, but talk about what you're seeing the short term that kind of leads to that decline if you're still seeing some deceleration the market and.
Customers, taking as you see it today.
Yes, Mike so from from where we are right now we don't see the industrial markets in particular getting worse. There is no indication that it's getting worse.
You've got a couple and I think and that's I think thats, probably the most important thing as you saw the deceleration in the fourth quarter, particularly towards the end of year of the industrials that was the biggest negative for us in the fourth quarter actually really in the back half of all of last year.
We've been doing our our annual planning we find it finished up what we call our true up.
Just just recently and for what we can see we're not seeing a further deceleration in industrials. So so the question have little how does that turn into a negative for negative five and there are really a few pieces to that the first is you're right. It's a tough comp we had we had a pretty strong first quarter of last year.
Second.
The or the overall order order rate in the fourth quarter is a little bit masked by the fact that we had real strength in HST and so that it was if you remember in the third quarter. We said that we felt like there was a blanket that usually land somewhere between the third fourth or the first quarter. It came in the in the fourth quarter.
So if you kind of if you separate out from that or is there a little bit weaker overall and of course that that sale is going to happen kind of later in this year, possibly even bleeding over to the first quarter of next year.
Got comps you get if you've got that you've got just the general industrial softness that we see generally bottling right now.
Makes sense and then.
When you think about the guidance for the full year.
What's sort of environments embedded in another words is there any improvement assumed in the underlying fundamentals or is it grow to stability sequentially and then secondarily in related what do you guys looking for to get a little bit more confidence that customer base as can be willing to put more capex dollars to work that I'm assuming.
Look at a lot of the same quantitative things bed, but anything qualitative on that side would be would be helpful. Yeah. Mike. So I think if you take our topline guidance zero to down to one if you remember we were at the Baird Conference we bracketed around.
Plus two to negative two right so.
That's that's kind of but our view for awhile. So we're now it kind of zero debt to negative too. So let me talk about what I think would have to happen to land at one end or the other.
So two to landed zero you'd have to have a modest improvement I mean very modest improvement in the second half of the year. So.
We were expecting the first half to be week with all the stuff I just I just talked about and a very modest improvement part of that is we're going to have that larger life science sale happening in the back half of the year, which is which is a positive.
And then a very very modest improvement coming up against much easier comps in that in the second half. So there's there's no hockey stick, there's no aggressive improvement assumed it's pretty dang modest to get to the zero.
The negative to assumes that what we're experiencing in the fourth quarter continues the entire year.
So you kind of look you flat line from here.
Thats the negative too.
Appreciate it thank you Andy Yep no problem Mike.
Our next question comes from Allison Poliniak with Wells Fargo. Please proceed with your question.
Hi, guys. Good morning, I also just.
I just want to go back to your comment about the targeted growth initiatives rolling off 10 eight.
Kind of like there's stuff behind the based team there is to.
Market, you know ticket rocket say that a little bit yes. So if you went back to kind of 2018 or so and when we're okay. We are blowing the doors off of growth than we said hey, we can get we can talk discreetly about where thats coming from.
That's what we call targeted growth so.
And what was happening wise, we are winning above where we thought we would win plus things being sticking and kind of building into the run rate.
And so what we're seeing right now as we had three of those initiatives to that are in HST.
I have one in FMT.
That.
Our frankly as the market is softening, we're not seeing that happen again in one of them is very much is very much discrete relative to go into to a more consumer facing.
ER business, so so thats kind of the $30 million headwind.
To your point, we have in any year, we're tracking about 25 discrete growth initiatives at the at the corporate level that are worth anywhere from call it $50 million to $100 million. That's the kind of range that you're looking at and for us to hit our our stated goal of trying to be 2% above our core markets.
You got to win about half of those and so I'm not worried about what we're winning this year I'm actually feel very good about what we're winning we just have a bigger whole than we historically have had an asset $30 million I think the thing to add to some of those projects are just taking a little bit longer.
You know to materialize with the end market. So as the end products. When we launched by customers. Those have just been delayed a little bit yes. That's a good point Bill you do see kind of uptake or market acceptance.
Slower and softer and market conditions like this.
Great. That's helpful and then turning to the acquisition and it sounds like I said for IODEX, what does it bring to the table that maybe you didn't have already coming to your south.
Yes, so we definitely could not have done this ourselves. It's it's so we think of custody transfer we're in the custody transfer business already.
But it's in its in a different market segment in oil and gas and this is kind of a perfect IDEXX product where.
We're going into the custody transfer market with a very distinctive niche technology that some of the bigger players in larger applications.
Don't have in the market and will be tough to develop and it has some intellectual property associated with it. So it's an adjacency to our customers transfer businesses in adjacent C to our lack business and it kind of gives us a classic IDEXX like wonderful innovative technology, that's at a faster growing overall segment then the marketplace.
And terrific positioning with good competitive modes.
Perfect. Thank you thanks Allison.
Our next question comes from Scott Graham with Rosenblatt Securities. Please proceed with your question.
Hey, good morning, Hey, Scott.
So just the first one is that sort of a 40000 foot question. If I look at the you know on a full year basis your organic was.
Points.
And you know I know your pricing was probably landed in the 1% to 2% territory, suggesting that no. One a full year basis volumes were flat, maybe even slightly down and I. Just you know we can certainly triangulate where that came from <unk>. What's the plan there I know what it's it's not the goal even when you talk about the fixed business.
Just to have a potential negative volume what are you thinking there Andy yep. So it really its entire is the marketplace right. So if you look at industrial production. If you and we obviously, we we track pretty closely to industrial production in terms of our markets.
If you if you're to track IDEXX is organic growth.
Relative to industrial production over a long period of time, what you'd see as you'd see when industrial production in flex.
One way or the other up or down we tend to be slightly exaggerated.
In both cases right. So when industrial production in flex down we tend to be a little bit worse now our markets tend to be a little worse than that and when that in flex up we tend to be better than that wed relatively stable our markets track to it pretty closely. So if you got to think of it as a graph thats what that would look like and what we're experiencing right now Scott is that inflection downward price. If you look at the highest down.
Look industrial production overall, that's what we've been seeing here and if you remember back. This time last year, we were calling that we said look that's what it looks like going to play out to us and it is whats played out.
And that's why we've been preparing really for the balance of this year to execute a restructuring if we needed to add so that.
When it gets me really simplify it that's what's going on in the World I feel really good about how we're executing and what we're doing relative to those markets I like our positioning I like our our ability to get price.
Our our overall moats around our business in competitive advantage, our highly durable. So it's just a function of the markets.
I think the other thing I'd add is obviously dispensing had some significant pressure this year being down almost $15 million that contributed to some of that volume decline along with some of the very specific things we had within semi semicon, an AG and put probably close to another $20 million of pressure on this year's volume.
Understood. Thank you.
As a great answers I really appreciate that the problem, but of course I had for you is on your bridge here, where you know I since it's a tougher question to ask of course, but can you explain a little bit more on the variable compensation why that's a negative for 2020, given the guidance maybe explain gas so it's actually pretty straightforward.
You don't hit your goals your your comp comes down for the company and and then it basically kind of reset as you go into the year. So you've got that headwind between the two.
Okay, nothing nothing more than that does not like.
Something that's news part of the comp plan mono.
Were pretty steady Eddie around that stuff.
Great and if you don't mind I I'd love to sneak in one more here could you tell us what exactly pricing was in the quarter and you know you've always been able to do this or less several years at least this 30 40 basis point spread versus some data tools inflation, you expect to be able to maintain that next year, but also of course, what was pricing this quarter.
Yes, so very consistent with the year. So so just north of a point.
And and we did for the year would get a little bit better than 30 to 40.
We were we had really very strong productivity execution and inflation came in a little bit lower than we thought it was actually pretty hot coming into last year.
So it was a little bit better than our normal 30 to 40 as you look at this year, we've got as I said in my remarks, you've got about 80 basis points built into the guide right now.
With that same 30 to 40 spread so we expect it as we look at the World right now given the softness for us in the entire supply chain.
We expect inflation to be can be pretty low and overall, we actually expect to more than offset inflation with our normal productivity.
Got it. Thank you very much appreciate it thanks Scott.
Our next question comes from Nathan Jones with Stifel. Please proceed with your question.
Morning, everyone and Nathan.
Just a follow up to allison's questions on on the on the growth investments in the headwinds there talking about a 30 million dollar headwind in 2020.
Can you talk a little bit more about that that headwind or they were they sell those that are onetime in nature and go away. They don't build into the base and continue on that gets you to a 30 million headwind for for this year. So you actually got two different things you're talking about Nathan So I'm going to sign a separate of and hopefully I'll clarify so the investments that are go.
Going into this year, we go into any year deciding on incremental investments you've got an ongoing level investment that happens in the company around growth and then depending upon the opportunities in front of us, we decide whether or not we're going to put it kind of incremental above normal investments into some growth initiatives and.
Thats, what that that headwind is that we talked about that four cents headwind that we talked about and the way to think about this is none of this is it none of the investment that we're going to make in 2020 is going to do anything for us in 2020, right. It's going to its four for future growth and that's just the nature of our markets. So that's kind of the one side of it which is is where I continue investing.
In in our growth opportunities to help us outgrow them, our competitive marketplaces, and thats, what that that incremental investment as the 30 million that you're referring to.
Those are really things that have been in play for a very long time right. So the benefits of that we've gotten over the years, you're talking about stuff. That's been in play 567 years in many cases and what's happening is they are they're coming to us a natural and more broadly than we would normally see in our in our marketplace some of it.
Has to do some of it is for instance is in the in the lack of business, where the sensitivity to what's going on in oil and gas overall spendings down. So the uptake is there but to be clear that still that's gone from zero to a $30 million business for us in the last what three years Bill.
So it's still a very nice business, it's just going to be down versus versus last year. You. Another is in the on the gas side, where we were really took wonderful advantage.
The market opportunity will we get developed a unique technology, where they built out on the huge number of venues very very quickly and so we'll still get parts and service revenue from that but that that kind of two year really aggressive buildout wont wont replicate itself well do it in other places in the market, but it's going to be.
It's just not going to be the same size. It. It was in 2019 2018, so it's pretty unique for us to kind of have all those tailwinds all at the same time, and we're kind of facing a little bit of that you know in in 2020 as we go forward but.
If you just got to step back from all of this and you say is our strategy of investing for above market growth working.
The way I think of it as you think about the last three years anything to in total so 17 18 19.
We've had organic growth it's averaged about 5% when you look at all those with industrial production I want to say around 2.4% or so and so we're basically double industrial production, we're beating that 200 basis points that we've set a target.
I'm going to happen every single year, but over a three year period boy it should happen and it has happened.
Okay that makes sense.
And my follow up questions on the that caused the restructuring that you did in the fourth quarter, taking out 15 million Bucks.
Cost for a midpoint of down one organically, that's a bit more aggressive than I would've expected from you guys. I know you've always said its did you to wrap division is up then to wrap it down. So it is this kind of.
You've taken cost out if things are a bit less than you anticipated 2020, you've already kind of addressed that yes that that cost there.
You've got it exactly right Nathan when.
These are our painful there there are dramatic to businesses and we don't like to be in the business of pressing this button and so if you have to press that you press at once.
And our intention we've got about another $5 million of more variable stuff thats not people related that we can address if things get softer from here. That's why it goes up to 20 million in that down to scenario.
But.
A big piece of who we are as a company a big piece of our culture.
Is that we don't engage in these never ending restructurings that caused uncertainty big piece of our value proposition to the marketplace of Pete for people.
This is a company that grows this is a company that invest in people and our culture is a huge piece of who we are in terms of our identity and so we do this was real trepidation and you do at one time if you can.
Okay that makes sense, thanks, very much for the time I'll pass it on thanks Nathan.
Our next question comes from Matt Summerville with D.A. Davidson. Please proceed with your question.
Thanks, I'm just a question on HST first can you maybe talk about what kind of organic growth rates, you think you'll experience in life science and pharma business in 2019 or excuse me in 2020, and then Conversely, how much can traction you built into that industrial side of the business.
Yes, I think generally you're looking at 5% to 6%, Matt. If you look at the combination of of what we call Iducs Health and science, LLC, which is which is life science and and MPT, which is principally going into food pharma and food. So I think with those two combined you're looking at call. It five ish percent maybe.
A little bit better configured to six which I'd have to back into the math Bill you know what the math with David down for the other stuff down three.
Is that what that would keep asking about yes, I want to say down about three Matt.
Thats more kind of industrial facing.
Got it. Thank you and then you mentioned I think in your prepared remarks beyond flow and the that you do indeed have other things in the pipeline can you sort of talk about relative size magnitude of maybe actual actionability on those deals and maybe the end markets you're targeting yes. So it's really it's not a lot different the funnel doesn't look.
A lot different Dennis look for quite a long time.
It's.
We've got a few things that are that are.
Decent sized I wouldn't say got big but a decent sized that we're working on.
And it's hard to say Actionability right.
Two in particular that we're working on their bolt auctions.
As you know we have an incredibly disciplined methodology that we go about in terms of our ability to get to returns.
And if we're able to to make that happen then that would be exciting at the same time.
The discipline of our return framework is important and and we're not going to we're not going to break that.
Got it. Thank you guys. Thank you.
Our next question comes from Deane Dray with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone being good morning.
Hey.
And it was hoping you could comment on where you see things playing out in China with the Corona virus business disruptions are you baking anything in today's guidance for 2025 on what's going on there.
So David is you know it's a pretty.
Fluid situation, there's a lot going on what we've done so far is we have a pause travel to and from China.
And then of course everything within China. We're following the guidelines of what's happening there in terms of people.
Well movement.
And and just overall, what's happening with the lunar new year. We're just we're sticking to the policy that's that's out there.
You know because China isn't a big piece of our business right, its which now 6% Bill five 6%.
Yes, I don't expect it to be material.
And we don't have a huge supply chain coming directly from China or into China that being said, we will will face what everybody else spaces. If this gets really really significant and all of a sudden we see this.
Grow and spread across the globe, but I don't expect it to be.
Material in a differentiated way for us.
That's helpful and I also appreciate the first thing you led with was restricted travel.
'cause, it's your employee safety that that matters most here so I.
I appreciate that and then what more let's just say things do deteriorate further down and you are low to do restructuring what are kind of the trigger points for you because we've talked about the playbook here and this got discussed earlier, but what is it decrementals, where and how do you see.
Surgically make decisions if things were to worsen.
Yes. So if you remember what we've talked about for quite some time is we've looked at kind of a down five scenario and I won't I will walk through all the math again, but you are call kind of how we work through that was essentially we were down five we thought we could safely remove about $25 million from the.
Anthony.
Half regarding people investment and half regarding.
Variable investment and and so what I would say is that as we stand today, we've addressed the half that is going to impact people.
It's it but if this deteriorates further the next steps are not to take further actions, where we have to.
Restructure people out of the company, we've essentially addressed.
That the next 5 million that we have teed up we talked about earlier, we know exactly where that is we know exactly how to pull that debt and I mean like down to the pending we know exactly how to do that so thats pretty clear. The following 5 million, we have pretty good general buckets that had to do that.
And we'll monitor whether or not we have to get in there and get in and just pull that lever. We don't think we'll have to do that so so let's imagine deem that we go below the negative two scenario. If you go below the negative two scenario. There is about 5 million more and cost that we would go after.
And then from there frankly, we ride the Decrementals and they are as one of the wonderful things, but IDEXX is we have incredible incremental margins, but it is painful on the downside and so if we get kind of below 2% Apple will remove another 5 million. So we'd have about $25 million of cost out and then from there.
We'd probably ride that out to two down five if it's more than a down five we got a different scenario and we'll have to get more aggressive I I do not see a scenario where that happens.
Great I really appreciate you segmenting out head count versus fixed and that roadmap, but gives us.
Good color as to how you proceed going forward. So appreciate it thank you bedding.
Our next question comes from Andrew Buscaglia with bearing Burke. Please proceed with your question.
Hey, guys I'm just wanted to clarify something you. So you kind of walk down a preliminary God I know, it's a very early on but.
You are saying down to the but you have on plan, then Oh, you forget that flat to down too, but then.
You seven literally on the Kunaev that industrial not really getting worse.
So what can you can you got it seems like a guide implies that things you got your live more pessimistic here can you just kind of bifurcate bifurcate that.
Yes so.
Let me just I want to separate a little bit of what you say make sure I understand it well I think where you've got a question there that's about about.
Tightening up of our range and yet to the low end, yet and then about the impact on the full year and then I think there's something in there you're asking about the first half is that correct, Andrew yeah, or a if I thought you made the comment the industrial industrial.
If you will get worse from here, yes. So if so I think I answered when I when Mike asked the question earlier.
If you look at that guide of of zero to negative too so back in the fall. We thought the range was was was it was plus two to negative two depending upon what happened with the industrials industrials weaken further so that's what that's what's really brought up to the zero to negative to set that the first part of it.
When Mike was asking kind of what would have to happen relative to two the year effectively if we stay exactly where we are today.
And things in the industrial is continue to be as weak as they were at the end of the fourth quarter.
That's where I would see at negative two scenario and that and that is I don't believe that's that is the basis of where we should be so that's why it's a low end of the range if things get a little bit better in the industrials.
In the second half of the year, that's how you get to the zero so that that ranges.
It really is what happens to the industrials for the balance of the year.
My expectation is because the comps are pretty tough in the first and second quarter.
Is that that's going to be a harder part of the year. So first and second for the first quarter being the hardest with very modest improvement in the second half of the year.
Got it okay.
Okay.
And then in health and Science technologies, you had good growth past couple of years and then there this year, a guy moderated, but it seems as though your.
From an.
EBITDA margins in margins in general are.
Well it will you on the EBITDA margin level they they flattened.
So what I guess what is there what is the long term goal for margins here or what what do you need to get those growing is M&A.
In the space something that.
You might be missing the missing link to push those margins higher yes. So in terms of in terms of growth we would expect over the long term, it's almost say.
Over a three four or five year period, so a good part of a cycle.
That HST is going to modestly outgrow the company as a whole we've kind of said overtime.
A point or so better in growth.
And I believe that will still hold I think that will be true over given period of time in any one quarter, who knows but.
In over over any given period of time, I think that will be the case.
In terms of margins the story at HST is no different than a start at the rest of the company.
Margin expansion comes.
When we were growing organically.
We have high variable margins and so we really get nice margin expansion, especially as we drive productivity, we have a little bit little bit less pricing flexibility in HST than we do in FMT.
But but still we get positive price in total in the pull in that portfolio. So I'd expect us to expand margins as we continue to grow the business.
You know acquisitions in HST.
We made several built the entire ceiling platform in the last.
Number of years.
And so we'll continue to do that.
I don't see that is that as a margin enhancement.
She us buying things at 30, and 40% EBITDA margins, what I would expect is things that have high structural barriers good fundamentals and things that we can improve margins overtime. So I'd expect us to buy things that are kind of in the high teens to low twentys EBITDA margins and things that we can get into the mid to high Twentys.
Okay. Thank you thank Andrew.
Our next question comes from Brett Linzey.
Vertical research partners. Please proceed with your question.
Good morning, everyone, Hey, Brett Hey, they could you just provide some context around inventory in the distribution network and specifically for for FMT, and I guess really how that stacks up against what you're seeing in Pos and sell through rates.
In January yeah, So so Brett as you guys know.
We don't have a lot of stocking inventory at that distributor. So our distributors generally are don't have a lot of our stuff on their shelves waiting to be sold so it's a little bit different model than some people who are selling to the classic big distributor. So so we don't we tend not to have.
That phenomenon of restocking destocking in a big way it happens in small ways, but it tends not to happen in big ways.
That being said.
There are places that we track Pos.
And it gives us some good information what I would say in those places is that inventories seem to be at about the right levels.
And so I don't expect some significant destocking I think sell through and sell in our pretty close right now.
That being said I think generally distribution is pretty hesitant I think there's an awful lot of hesitancy, having a distribution there watching their cash flows very very carefully. So the best thing that we can do in those things that drive lead times down right. So as we can drive lead times down.
Those folks you do have stocking distribution.
It's a better overall cash flow scenario for them and that drives differentiation. So if you look at some of our businesses that do sell into into distribution. There's an awful lot of focused on bringing down lead times as a piece of competitive advantage.
Okay, Great and just wanted to come back to restructuring was wondering.
You know you gave a little color around the nature of the actions you're taking but are these simply just shift reductions to help you navigate the near term and then as we think about the back half or even next year and grow starts to inflect positive. Some of these costs come back or are these structural moves that you think you can just do more with both less.
It's a little bit of bolt.
And at the balance between some corporate cost coming out and.
Cost coming out at the business units.
I would expect is that as business comes back there will be some cost that comes back for for volume related but I don't think all of that would come back kind of it.
Equivalent to revenue growth certainly in the short term right. So one of the things that we said very consistently is where a business that can react very very quickly on the upside and so we tend to hold back a little bit. So we don't find ourselves being over capacitized or having too much overhead structure. So I'd expect it to come back a little bit.
Brett.
But we'd probably if things improve what you would expect from us are better than average incremental margins on the upside in the near term.
Okay, great. Thanks for the color Thanks, Brett.
Our next question comes from Joe Giordano with Cowen and company. Please proceed with your question.
Morning, guys. This is trying to cease go on for Joe Francisco.
Hi, so.
Just wanted to get clarification on.
One of the remarks made on the Q4 highlight sofa FMT you guys mentioned, the chemical market and targeted initiatives driving positive sales in the quarter, but you expect the project funnel to decrease is this a funnel decrease specific to chemical or.
Broad based in general.
And do you have any expectation specific to the chemical market.
Yes, so it's very specific to the niche parts of the market that we serve I would not I would not use us as a great barometer for the chemical market, where we're probably not the best people to tell you what's going on strategically the chemical market.
We have had one business unit in particular that had a.
Wonderful penetration.
With new products, and new markets, specifically into into China, which has been a big win for us, but even just globally that business unit has really turned itself and one a bunch of market share like and I think that will continue.
And so we feel pretty good about that piece of business in the in those applications in the markets that we know well, but again I wouldn't use this as a general barometer Francisco.
Okay. That's helpful. Helpful. Thank you and then specific to the dispensing I know sales or have been challenging here and I think you guys said you expect that to be flat for the year. If we could just get a little more color on the nature of the of the market do you have recovery expectations on the longer term and and anymore details there.
On this actually the core markets are healthy. So if you just kind of look at the old core underlying markets. It does not significant deterioration of or anything like that and I don't think we're losing market share. It's really the nature of these projects that come in and out you'll take of the big purchasers that are out there now they tend to run in multiyear cycles.
And as we look at 2020, if you if you look at kind of the back half of 19. There was good we had a pretty good size order and 18 that we that we finished out 19 was obviously softer in the fourth quarter, a dual actually through the year terms as bigger things and we don't have an expectation that one is going to land in.
2020.
And so what that would say is probably as we think at 2021 is probably likely that we would see one of the big players come back to the market for a refreshed, but you just don't know so as we're planning right now we're planning on 2020 did not have.
A big refresh of any kind of.
Okay. That's very helpful. Thank you guys. Thank you.
Our next question comes from Brent Kieran any with Gabelli funds. Please proceed with your question.
Good morning, Thanks for taking my question you bet Brent.
Your fire business continues to perform well can you talk about what you're seeing in that area. Some of the municipal markets you serve and then how the Sam system as plugging into your overall efforts to serve fire customers.
No problem, so I would say that overall the municipal markets are kind of benign. There. There are not that are growing particularly quickly and there were not seeing a slowdown from where we've been so it's very similar.
Fire has been.
As we've really.
You go back to the Akron acquisition back in 2016, and then the small technology acquisition that we made here a little while ago.
It's a combination of those assets that has been driving.
Growth for Us and we do expect low single digit state to to continue.
It does the strategy that the team has put together there and is playing out in terms of being able to bring more high value content.
To customers.
Now moving more into.
Into technology, we think is a winning move is going to play out for a long time.
We have seen a lot of interest in Sam we do have some initial orders as I've said in the past its going to take a long time for this to seed the market to get to a tipping point just because the markets move so slowly and there's already a year backlog and so you got to kind of work through that but I would say the.
Initial signals for Sam are really encouraging.
Thanks, so much appreciate it.
Ladies and gentlemen, Weve reached the end of the question and answer session. At this time I'd like to turn the call back to Andy Silvernail for closing remarks.
Well. Thank you everybody I. Appreciate your time you. This morning, and your interest in IDEXX I mean, obviously the world that we're in right now is challenging but it's not unfamiliar we've seen this before and I think the key to it is our ability to really control our own destiny, so continuing to invest in growth continuing to drive productivity continuing to get.
Strategic pricing in the marketplace and most importantly in investing in our people that has been the differentiator for us around our culture and we're going to continue to do that and I'd like to thank everybody at IDEXX for the incredible work to they've done over time and really turning this into a a wonderful company. So I look forward to talking you all.
Again here in the next 90 days take care.
This concludes todays conference you may disconnect your lines at this time and we thank you for your participation.
The IODEX conference call has ended please disconnect your lines. Thank you.
[music].