Q1 2020 Earnings Call

Greetings and welcome to the IODEX Corporation first quarter 2020, <unk> earnings Conference call.

This time all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference Press Star zero on your telephone keypad.

Please note that this conference is being recorded.

I'll now turn the conference over to our host Mike Yates, Vice President and Chief Accounting Officer. Thank you you may begin.

Thank you Diego good morning, everyone would like Yates, Vice President and Chief Accounting Officer projects Corporation.

Start by saying, Thank you for joining us for a discussion at the I guess first quarter 2020 financial highlights.

We issued a press release outlining our Companys financial and operating performance for three months ending March 31st 2020.

Press release, along with the presentation slides can be used during todays webcast can be accessed on our company's website at www Dot IDEXX Corp Dot com.

Joining me today, it's Andy Silvernail, our chairman and CEO and build Grogan, our Chief Financial Officer.

The format for a call today. This follows will begin with Andy providing an overview of IDEXX performance drivers and dressy knit impacted the cobot 19 pandemic on our operations as well as the company's response to date.

Bill will then discuss our first quarter 2020 financial results and walk me through an assessment of the company's liquidity and financial durability to several scenarios and finally and Eddie will conclude.

Our current framework for second quarter in closing remarks.

Following our prepared remarks, well open the call for your questions.

If you shouldn't need to exit the called for any reason you may access a complete replay beginning approximately two hours after the call conclude by dialing the toll free number 877.

Six year old six eight Fivethree and entering conference I'd number 1369 core eight zero for are you may simply log on to our company's home page for the webcast replay.

Before we begin a brief reminder, this call may contain certain forward looking statements that are subject to the safe Harbor language in last Night's press release, and then I guess, it's filings with the Securities and Exchange Commission with that I'll turn the call over to our chairman and Chief Executive Officer, Andy Silvernail.

Thank you Mike I appreciate everyone joining the I'd ask you want earnings call today I'm starting off on slide six.

Well spending with great uncertainty, but actually this call today I want you to fill certain about one thing I'd actually is well positioned to survive and thrive do this covert 19 crisis.

We have the quality of businesses, we have to people and we have the financial wherever it all.

We divested our company aggressively over the years to build a very special organization.

Most importantly, we build a culture built a culture of an incredibly talented teams who run great businesses that mattered to the world.

Our culture has helped us react very early this crisis, we've made swept in smart decisions to keep our people see.

Deeper businesses moving.

And in cheery liquidity, making sure that we do everything we can to help when the scope of 19 fight.

I think that's an important mission that we capture and for word trusted solutions improving lives. Our mission has never been more important.

In a world consumed the physical emotional and financial impact of coking 19, Iducs plays a critical role in keeping people seek unhealthy will help me directly with the fight to defeated.

I'm going to move now to slide seven.

There are so many ways that I'd actually didn't this fight and our fluid metering segment, we enable food energy and industrial supply chains.

And fire safety diversified we've acted swiftly to quadruple the production of our mobile medical pets use My hospital said they struggled to handle the surgeon covert 19 cases.

And the health and science technology, we're making compressor Houston ventilators mobile card to produce hospital grade Air works not available and compressors for mobile disinfecting sprayers.

And of course, we're also a critical supplier, enabling the genetic sequencing decoded the arent able to krona virus, enabling the development test for Cobot 19, a teeny bodies as well as funny therapies, and hopefully had eventual vaccine.

There are dozens more examples across the company, where we bring essential products to market the need.

I'm, turning now to slide eight.

I want to pause here for a moment and thank all of our people across IDEXX, especially those in manufacturing shipping and other roles that require a presence in our facilities.

We have robust safety protocols at our sites worldwide to protect our people performing central jobs. The safety of our people will always be the most important consideration as we continue in this new environment.

In a crisis, especially one is devastating is this your true values are exposed I've never been prouder of the people buy direct from the first sign up the cobot 19 crisis in China, our teams have been collaborating problem solving and acting.

Well break strategy is or is a product of this crisis. We're also seeing the bastard who we are.

Now moving on to slide nine.

On March 20, I held the conference call with investors, where I laid out our operating context, and our priorities to steer iducs assessed successfully through this crisis.

Much of change in five weeks, but our point of view and our priorities remain the same.

We built our strategy and our operating plans based on four phases of this evolving crisis I believe we're now moving now to phase one the acute phase and interface to which will be a period of ongoing uncertainty and significant challenge for the next three to six months.

There'll be a little visibility as quarantines are lifted and they all work to gradually restart the economy safely.

During this phase, we expect to see a significant drop in demand and production capability as customers suppliers and our own teams are regularly impacted by shutdowns and shortages.

The third phase will be learning to live and work with Covance 19. This will require significant changes to much of what we do and this period will extend until there is a solution that gives people confidence to engage socially and professionally without fear.

Well this phase will not be easy we've seen from our businesses in China, which have rebounded quickly then we can successfully pivot our approach.

The final phase will be the post virus World I know, we all look forward to this day when normal returns I'm convinced however, the normal will be redefine just as it has been another severe crisis.

Like the Great Depression, the second World War 911 in the financial crisis there'll be significant in permanent suicidal an economic changes the current buyers will shape our lives in our economy and countless ways some easily predictable and other jet unknown.

The next 12 to 18 months as we move through these pages, it's our job as leaders to successfully transverse phases 123 and interface for the company. This financially strong and an organization that has positioned to thrive.

Now turning to slide 10.

We've outlined for strategy the guide our way to a better future.

Our top priority you see protecting our teams as we tried to remain open to serve customers that are central to our society.

Well, we are normally highly decentralized. This is a time when we have carefully weighed safety protocols and mandated certain standards worldwide. These have included temperature checks at beginning of all shifts guidelines for peace coverings cleaning <unk> sanitizing practices and processes for addressing a variety of scenarios from cobot 19 cases to possible exposures.

Our covert 19 issues in response team has led the way and regularly provides guidance our local sites as issues arise and because of the strong procedures, we haven't place and the handful vinces where employees have contracted the virus few if any co workers have been quarantined not only is it's good for business, but it's great for the health well being and morale of arm.

Please.

Glad to report that every Iducs employee who is contracted cobot 19 has so far recovered.

To ensure business continuity, which is our second priority. We have developed plans for each site to using the advent of a ramp down of operations well I'm sure. These are handled smoothly in a way to prepares the business to return quickly to operations.

We're also regularly addressing supply chain can charge water supply chains are generally shorter than many of our other global manufacturers. We have quickly address issues from walk down to travel restrictions so far our business continuity planning like our security plans and help us avoid more significant business disruptions.

In the months ahead, we expect will be Choppier. This extensive planning support structure, we've built should serve our business as well.

Our third area of focus is liquidity.

I just entered this time of the strong cash position and we have we and we have remained cash flow positive since the beginning at the crisis. Our goal is to remain so driving protecting our liquidity and our balance sheet.

We're working with our businesses and finance leaders to help them manage their period. Unlike anything we've seen in their careers Bill Grogan. Our CFO has instituted daily cash management practices that he's working with all of our leaders across the globe.

Finally, we're playing offense that means different things in different areas of our business in some instances it means pivoting to focus on the needs of customers, who are now blooming as they're selling a central products and other instances, it's met helping businesses in need like we did in Nova team. That's just outside Bergamo in Italy that was closed our sister company P.

<unk> in England stepped in and produce fields for medical got all your manufacturer as that nobody chemo struggling.

Playing offense also means being prepared to accelerate acquisitions when the market on freezes thoughtful approach to share repurchases.

With that I'm in a pause here I'm going to turn things over to bill and he's going to walk you through an overview of our financials and liquidity.

Thanks, Jamie I'll start with our consolidated financial results on slide 12.

You want to orders of 645 million were down 2% overall and organically.

Slowdown in our industrial end markets that we discussed during our previous call was compounded by the impact of the pandemic. Most of our geography is an end markets. However, there was positive momentum in our life Sciences and pharma businesses. The backlog. We've built will help fill the decrease in orders we expect into Q2.

First quarter sales of 594 million were 4% were down 4% overall and 5% organically.

Results early in the quarter were better than expected in most areas of the business outside of China, but at the impact of Cobot 19 ramped most of our businesses with the exception of life Sciences, and pharma took a negative turn and robust the low end of our guide.

Do you want to gross margins expanded 10 basis points to 45.7% and were off at all three segments.

Primarily driven by strong price capture continued productivity initiatives and discretionary cost control. These actions more than offset the negative margin impact of lower volume leverage.

Operating margin was 23.5% that 30 basis points from the prior year.

Mainly driven by the dilutive impact of the vote for acquisition, which had op margin of 8%, but EBITDA margin of 25% and lower volume leverage. This was offset by a gross margin expansion NSG. They cost actions, we took in the fourth quarter of last year.

Our Q1 effective tax rate was 20%, which was higher than a nice you didn't have presented in the prior year due to reduction in excess tax benefits related to share based compensation.

First quarter net income was what under 2 million, resulting in then if you asked of $1.33 that 11 cents or 8% compared to the prior year, yes.

Finally free cash flow was 72 million down 5% compared to the prior year, but was 71% or net income compared to 69% last year.

Turning to slide 13 on liquidity.

Free cash flow for the trailing 12 months ending March 31st was $473 million or a 113% of net income.

We continue to be well positioned to whether the current environment IDEXX has consistently generated positive free cash flow in excess of net income through margin expansion I'm going to working capital initiatives at an effective capital allocation philosophy.

LTM adjusted leverage is 1.5 times, providing sufficient capacity to fund all of our business needs and allowing us to quickly pivot to offset the economic environment improves.

Leverage increased slightly in the quarter as which are $150 million on a revolver in late March response to temporary challenges in the short term funding markets.

Cash and cash equivalents totaled 569 million at the end of the quarter. We also have $642 million of availability under our 800 million dollar revolving credit facility.

With cash on hand available financing and conservative leverage we're confident in our ability to continue to meet our obligations fund operations and make critical investments in the business.

In relation to 300 million up notes due at the end of year, we're currently exploring potential options, including availing ourselves to the capital markets.

As Eddie mentioned, we have put in place additional processes to enhance our focus on liquidity and we've actively monitoring conditions with our customers and suppliers to ensure that we're able to maintain positive cash flow and mitigate the impact to the challenging environment on tasha working capital.

We're taking all necessary actions to make sure it properly positioned to operate effectively during this period.

Moving on to slide 14.

Well, we believe that we are well suited to operate in this environment. We're continually monitoring the impact of coven 19 out or operations that are modeling a number of possible scenarios.

These examples are meant to give our investors a picture of our durability not a reflection of what we expect for full year sales.

Under our current cost structure, which reflects the structural actions we took to the fourth quarter of 2019, we believe that our annualized breakeven revenue the pointed which we continue to generate positive cash flow is approximately 1.8 billion or 30% decrease to our 2019 sales results.

To be proactive in this uncertain environment, we have developed a playbook with actions to reduce that breakeven point.

Identified approximately $120 million worth of additional cost reductions, which will drive our breakeven revenue closer to down 35%. This would include bonus actions, eliminating travel marketing and supplies and many other discretionary cost items.

If the conditions warrant it we're prepared to take structural cost actions and generate an additional $40 million of reductions, resulting in a breakeven revenue point of down 40%.

Lastly, although we intend to fund or dividend, if we were to suspended our breakeven point would be as low as 50% down on an annualized basis.

We're taking all prudent actions to manage discretionary spending as we continue to gauge the impact of this volatile environment. At this point, we do not believe that further structural actions are necessary, but we're staying closely tuned into our end markets that supply chains and are prepared to take additional steps if necessary.

With that I'll turn it back over to Andy to review, our current view on the second quarter.

Thanks, Bill everybody I'm on slide 15, as I mentioned in my opening remarks, we believe the next three to six months are gonna be extremely challenging.

Everyone will face the same uncertainty as we reopened the economy safely and execute an environment, where cobot 19 exists and impacts operations potentially in waves.

While we believe strongly that its business model and we're very well positioned we acknowledge the challenges that we face across our business units. We expect revenue in the second quarter could be down as much as 15% to 25%.

We know that some of our end markets will be significantly challenged but those headwinds will be somewhat offset as we continued to deliver mission critical components to essential customers worldwide.

We've taken prudent actions to significantly reduce our discretionary cost across our businesses and the steps. We took in the fourth quarter of 2019 have positioned us to react to a market that is significantly more challenging than we expected. When we started the year, we're closely monitoring our markets in our businesses and we will react quickly the changes.

To conclude.

Extremely proud of how our employees have responded to this crisis and even though the next 12 to 18 months will be challenging for all of US I know that we will meet this challenge and come out stronger on the other side with that let me pause here and turn it over two questions from the audience. Thank you.

Thank you.

At this time will be conducting our question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Sure move your question from the Q Press Star to on your telephone keypad for participants do you think speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Once again Tosic question Press Star one on your telephone keypad.

Our first question comes from Deane Dray with RBC. Please state your question.

Thank you good morning, everyone Marty.

Hey, it's great to hear the IODEX team and wishing everyone. The best.

Appreciate the Oh, all the details in terms of the potential scenarios. This morning, and and the first question really picks up where bill left off on page 14 on those scenarios because you know I want to say for the past year, you've been asked about the IODEX playbook for a normal risk.

Fashion [laughter] feels like I don't even know what that is anymore because were far [laughter] do we dean so.

It's just the idea here as you you'd said if things progress or get worse. It just feels like we're already there.

I'll talk about it and I know this that's a tough conversation, but the D deeper cuts that you're likely going to have to take like is that 120 million of cost out is that enough. What's what are the milestones that you're looking for here and then maybe some comments on Sacramento.

You bet.

So first of all that first look at a 120 million that stuff that we are very actively putting our arms around and taking cost out of and obviously you can see that that even impacted in a positive way to some degree in the first quarter. Because we started those actions really as we are you know.

Coming into February and early part of marks and so there's there's some benefits there so where we're grabbing that lever already and more grabbing it very aggressively Deane. So that's that's the first thing.

One of the main priorities that I have going through this crisis.

Is to maintain as much of the structure and the talent that we can and IDEXX appropriately and so.

I am willing for a short period of time.

To eat some of the incremental costing to maintain that talent base and to position the company well.

That being said as you know were very diversified to decentralized business. Since you have companies that some companies are as absolutely growing in this environment and some are really taking it on the on the Chen and so we'll have to get the appropriate footprint in the appropriate places.

Depending upon how much deeper and how much longer this goes and Ah, but but our first priority is to certainly keep the integrity of IDEXX and intact as much as possible.

So I look at that that secondary group of actions you know that the incremental 40 million as steps that we will take if we have to but would prefer not to need in terms of decrementals.

If you look at on a sequential basis versus year over year, I think thats, probably a good way to look at it.

Obviously were very high contribution margin company, so where we have a contribution margins in the low sixtys and so if we can offset a good chunk of that and end up in a in that 40 or 50 without having to make massive structural changes to the company. We would do so in the short term but.

Obviously in the longer term you've got to have the appropriate cost structure.

That's really helpful. And then I just I appreciate the four phases that you've laid out and I don't want to minimize how much.

Heavy lifting and frankly, some pain to get through all four of these phases, but looking beyond into that new normal and.

Maybe the idea of wind you will start to shift to offsets.

And you've got balance sheet now you didn't chase expensive deals for the last couple of years.

When does M&A makes sense.

We know markets have to normalize a bit but when do you start to flip the switch in play offense here.

Well some of that is in our control and some is not in terms of overall playing offense. We're doing some of it right. Now we are if you look across our businesses those places where essential products are booming. So disinfection many of our health and science markets.

Pharma Reashure worrying, which we think is gonna be a major trend.

We are we're playing offense now we have redirected our people and investment and are making sure that weekend first and foremost help with this fight, but also make sure that we're doing the right things for our shareholders our owners and so some of that's happening now as it regards to M&A, they're really two challenges with them.

First the first one is having enough confidence in your own situation to deploy that liquidity and that balance sheet and the second is that you have a willing sellers.

We are doing an awful lot of work right now on both sides of that equation. So let me talk about the liquidity side.

So there's there's liquidity that is to survive that a lot of people are having to utilize.

And at the end of this they will have a stretch balance sheet and a very difficult circumstances that is not our situation and I don't want it to be our situation our drive and why we have so much focus on this breakeven level of cash flow is because I want me balance sheet that is deployable aggressively deploy.

Soluble as the world starts to settle itself and so.

If we can maintain this this north of $1 billion of liquidity.

As cash flow has become more certain and the market stabilize we will get aggressive no doubt about that now the other side of that equation is who are the sellers and so you can imagine right now and you guys are talking to a lot of folks.

That's frozen it's just a frozen marketplace I think it will take through a quarter or so but that does start to unfreeze when boards of directors and families are going to look at the situation and recognize that it's going to take awhile and at an attractive price in this in this marketplace might make sense, but I think it will take a little.

At the time being.

Thank you and best of luck to everyone. Thanks Deane.

Thanks. Our next question comes from Mike Halloran with Baird. Please state your question.

Hey, good morning, everyone.

Morning, Mike.

So couple of things first.

When you when you look at that down 15% to 25%.

You know what's that predicated on is that based on what you're seeing now or are there are signs of stability. After that initial shock downward any any kind of context on and what kind of logic use and get to the 15 to 25 down.

Yes, so so I would I'd first say the 15 is our experience.

As March unfolded, and what we're seeing here in early April and.

Being a short cycle business, we certainly saw the reaction pretty quickly both on the ups and downs by the way in terms of things that are struggling.

The industrial businesses are certainly take me on the Chen.

More so than had been other businesses. So if you look at FMT you I did just going to be more painful there you've got the combination of the current virus impact and then of course, what's happening in the energy World.

It's unfolding. So so that 15 is what we've experienced here for call. It six seven weeks Mike.

My view is it's likely to get worse than the 15, and Ah and we see kind of slippage happening in a number of places that especially have more.

You know impact if you've got say, if you're in energy and transportation a those places in particular are really getting pounded and others are holding up so I feel pretty comfortable with that range bike.

And then you alluded to it earlier, but maybe just talked about how you guys are thinking about what the structural changes could look like here.

What are some of the seems that you're thinking you might rotate to obviously some of the pharma medical stuff you've already mentioned.

Unless you're thinking about and then how do you prepare for in the short term here and bounce that with all the other things as you have up in year.

Yeah, you know I think one of the things that really works in our favor in this environment is our structure.

It could be an impediment, we put that rapid response team in place very early on because we knew that that our decentralization and and in terms of kind of how were structured worldwide. We knew that we could end up with kind of 45 different answers and so there were certain things that you just couldn't have 45 different answers on and we've been able to move.

Very quickly in this case in terms of playing offense, Mike our structure helps us a ton because the places that are that are really struggling.

With massive demand fall off you can isolate them, specifically and you can start redirecting resources.

To get things that are exciting I'll give you. An example, so in the world of of thought and health and science.

We have a significant demand for engineering right now.

Because of all the new things that are developing whether it's from you know testing what you're seeing PCR test take off what would that we're we're helping with we need to engineering and we actually redirected engineering from our.

From our business in rescue to help our business in health and science and so we're doing a bunch of things like that Mike. So we're definitely moving.

To those opportunities and moving people and resources.

In terms of the big structural changes there I think they're going to happen around.

A lot of type things touching our health and science World I think if I think about say the food supply chain, that's going to be an area that I think will be impacted there's a lot of talk of re shoring in terms of moving things I would have more difficult or more risky environments and that will happen that was already happening, but it's not like a big boom Mike.

It's it's a relatively slow phase.

But overall I feel I feel like we're positioned well and our structure really helps us move to the areas, where we're opportunity in demand are likely to be and move away from places, they're likely to be hit harder.

Thanks for that and then one just clarification on slide 14 breakeven cash flow is that a free cash flow before capex or after capex after.

All right great correct. Thank you appreciate it still that's right.

Yeah, Yeah, yeah, great I thought so just wanted to make sure appreciate it.

Thanks.

Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question.

Hey, good morning, and as usual Andy Thank you for your frankness and clarity and thanks, Scott. So sure. So I just want to make sure that you know where the on the least thinking about what you're saying about decrementals correctly. So if we're at 15% to 20%.

Thinking for decline in this quarter sales.

If I choose the midpoint and say minus 20, just for example sake.

Yeah, I'm thinking that number multiplying it by 50% and that's your decline and operating income this quarter, it's as simple as that right.

Yeah, plus or minus yeah.

Okay, that's close and dip and within that how much of the 120.

Scoresheet Aerie are we talking about another words, what I'm trying to get two years that Oh I got 50. This quarter next quarter. It could be 40 cents someone that would be helpful. Okay. I think I understand your question, Scott, but if I don't get it right.

You know just just.

Reiterate or help me out here, so the one twentys and annual number right and because we're not that seasonal and our and our fixed cost structure doesn't isn't that that variable you could basically take the $30 million a quarter.

And that's going to come out of there and that's that's pretty much coming out now it might be a little bit more as time goes on but that's coming up pretty darn rapidly and that's what enables you to go from instead of having to be 62 or 63% negative flow through that's it helps you kind of ratchet that down.

Over time, so a bill as anything you'd add there.

No I think so some of the items, maybe a little bit less in the second quarter, they would that would ramp up but it's close.

Okay. Okay, that's how I answer your questions Scott.

Yes for all intents and purposes, the 30 million.

Quarterly is kind of the exit rate right now.

Yeah. Its we'd give me we've clamped down so hard here that you know, we're not spending money on things that don't have kind of a direct that aren't essential right that that hundred 20 million is it really cranking that down.

Okay got you two other questions.

What would be the trigger for the 40 what level of sales is it this 35% to 40% decline and sales that's to trigger for the structural you know there is to some degree Scott it is an amount but more than anything else. It's it's what we think the duration is going to look like right.

So if if we if we're going to reset the business, let's just say down 20, let's let's just use that number just as an example.

And you're no longer a two and a half billion dollar company are now a 2 billion dollar company you have to have a different cost structure right. If you think thats going to be sustained for a period of time and so that's what we're really trying to evaluate is what we think the duration and the depth is likely to be it the combination of those two that would.

That would trigger us to two to look at the 40 million, we didnt feel like we had to do that today, we felt like we should by ourselves some time and we have with that with 120 million and so we'll continue to to evaluate that as you know we took out a big chunk here in the fall, we took out 15 million and we had another.

For 5 million, which obviously, we gone and got so we were although we hadn't predicted this we did predict a tough year and so we went and proactively got that 20 million out and so we'll decide on depth and duration here as we go through this quarter to figure out whether or not we want to.

Take out the of the 40 million.

No I got to that's very clear and then I think you actually in that answer just answered my third question.

Which was sort of the way that.

Slide 14 was structured to do 30, 35, 40% and you know higher.

Revenue declines.

That is both.

That is both depth and duration.

In these numbers. It is is it right yeah your organic you're thinking for the second quarter. If it's minus 15 to 25, even if it ends up at 25, what you were talking about here is on an annualized basis, there would be duration here that would get us to these numbers.

That's right Scott and I want to be very clear Bill said that in his in his remarks, but just so everyone hears this correctly. It we're not do not use these as as guidance for where we think the world is going.

This is really for example, only and we're trying to get a couple of messages across here and I think probably they have landed but but just in case.

Message. One was you know there's a lot that can happen in this world before we become.

Well, we have a cash flow issue and therefore.

We don't have liquidity issue, we have tons of liquidity, but we're not going ahead I don't believe we're going after utilized that liquidity to stay afloat.

I want to utilize that quoted let liquidity to play really aggressive on offense.

And so hopefully that came across the number one where a great position from a cash flow standpoint, and number two our liquidity is really being pointed towards playing offense. When the moment is correct aggressively.

Yep.

Page 14 as much clear to me now thank you guys great. Thanks Scott.

Our next question comes from Nathan Jones with Stifel. Please state your question.

Good morning, everyone.

Hey, Nathan.

I guess I'll go a little further on the cash flow side, you know slide 14 here by looking at revenue changes and expense changes, maybe we can look at the working capital side of this.

I guess you should clearly have some.

Source of cash out of inventory, maybe you could you talk about you know what you're expecting there if you're seeing any slowdown in dsos or changes in receivable collections or any changes in customer behaviors, maybe they're getting stressed out anymore color you can give us on on that side of your question.

Yeah I'll comment on this and then and then Bill I'll, let you comment on it also.

In terms of of how we're managing this I I think this in a in a couple of ways. The first one is inventory we got to make sure comes out naturally as volume gets affected right that that is that has been a winning move in any slowdown for us and historically we have.

Yeah, you know taken out inventory and that's obviously had a very positive cash effect in any kind of slow down. So you should expect us to continue to do that and Ah and take cash off the balance sheet, our cash had an inventory rather it and on the balance sheet.

In terms of of payables and receivables my philosophy here is don't be the bank.

Meaning we can't get caught between customers and suppliers at the same time I want to be very careful about not damaging customers and suppliers and here. So if we can if we can end up neutral in that regard.

And really play that strategically I think thats important obviously, we've got suppliers that we want to make sure. They are healthy there. Our partners. This is not have time to you know to beat on them and when it when they're struggling.

At the same time, we can't finance them and so as our customers are coming to us and asking for for relief, we're really weighing that against what we can do across the working capital spectrum and so we're we're being pretty firm. We've got excellent service levels, We've got great lead times competitively.

We're not going to become the bank.

Okay. So the target payables and receivables net cash neutral and inventory as a source.

Yes.

I've got my second question is on pricing you guys have reported positive net pricing every year for as long as I can remember including 2009.

This is clearly a little different things, maybe a little steeper in the short time here do you guys. Thank you can still be net net price positive or at least net price neutral in these kind of environment.

I'm pretty hopeful that we can stay positive you know the price that we put out we began years up was already out and going and so I don't see why that won't stick I think there will be some challenges next year as we think about pricing about whether or not we can how aggressive we can we can be there have bill on those two topics do you all you want to give your.

You.

Yeah, I would say our price capture in the first quarter was inline with what we experienced for for most of last year and I guess my only comment on other working capital pieces. Yeah. There are there are some selective businesses that took some actions at target.

To build some buffer stock relative to supply chains in certain countries that we're shutting down. So you know first quarter inventory performance was was good impacted slightly based upon some of those builds and Genish play we fully anticipate to believe that off during the second quarter.

But price capture still strong across the portfolio.

Bill What's your view of price here as we think about the.

This year unfolds.

Yeah, I mean, obviously, we'll get more challenging as we go through the balance of the years customers are more impacted but I think our or core pricing initiatives that we have across the portfolio will remain positive does it come down slightly potentially but overall price cost still positive for us.

Yes.

Okay. Thanks, a lot I'll pass it on.

Thanks Nathan.

Our next question comes from Allison Poliniak with Wells Fargo. Please state your question.

Hi, guys good morning, everybody else.

So you did talk maybe higher level, you know IDEXX you've done a really solid foundation here you talked about that and then he mentions rainy season, particularly if you go to that long <unk>. The new normal is there anything that's really coming to light here in terms of portfolio growth. It sounds like you're starting to pay that some of that near term memory care organic investment to somebody's new applications and.

Trying to get us that's it that's temporary or if it's sort of potentially new direction here fried acts.

Yeah, So I think.

We've had a lot of things come at us Allison in terms of opportunities that where people have come to us.

On on I'm trying to help with.

Very specific things relative to the cobot 19 crisis and as we have evaluated those we've been pretty careful and what I mean by that is well. We don't want to do is take a bunch of people and resources and ship them to something.

Where the lead time is so long that effectively when you bring your solution to bear it doesn't matter anymore, and so they're going to be a bunch of boom and bust cycles. In this of different things that are coming to market. Both because they're very effective and then there is no longer needed or they weren't particularly effective and they.

The wash away and so we're trying to avoid those kinds of things and we're trying to to move the portfolio to things that are really about helping to fight where we have capabilities.

And we can ramp really quickly I'll use the the mobile medical tense that of our better unit in Germany. You know we sold more of the month of margin we sold as much in the month month of March as we sold all of last year and so we've ramped that up they've literally quadrupled.

They are overall.

Passing here as we go through the rest of this year and so that makes a ton of sense. It doesn't take any major investment or capability that we don't have so so we're moving to those sorts of things very aggressively as we think longer term I think there are some trends here that are very natural for us. So obviously.

Around.

Global testing.

That was already a trend that that was that was growing and it was what we had positioned ourselves behind and Iducs health and science.

And that is going to accelerate I think thats indefinite out and what I mean by testing is testing it kind of anything and everything that analytical equipment is used for and and bio diagnostic testing is used for that stuff is just going to continue to grow very aggressively and we're going to continue to position ourselves again.

That.

And then things like I think because I think the pharma re shoring is the real deal and so our material process business as an example.

Absolutely play in that.

And I think thats going to be a long term trends can take a long time for that to happen, but I believe that that sort of thing is going to develop.

And then you have kind of all those other trends that I think are gonna get accelerated because people frankly have have had to change their lives. So much that it's going to be easier to move into some of these trends I'm thinking trends like digitization.

Mobile communications and how that impacts even say you know biking pump.

Where the customer is going to become a lot more comfortable.

Hi, utilizing and expecting digital results and information based results and I think that will move some of those things forward faster.

Great. That's helpful. And then he mentioned China, you know it sounds like you know that's coming out and it's coming through that thing I mean to the recovery phase.

This rules three you know globally, yeah, any lesson learned or you know your approach has it evolved differently at each region based on what's been going on in China any color. There yeah. That's a good to great question, Allison and and I think kind of moving from east to West and in terms of how this has this this crisis has unfolded we've been learning along the.

Way and we've done a few things so our Chinese businesses.

They really led the way here in and creating protocols for safe working and we have every single one of our plant is up right now I'm not everything is at full capacity, but even our places in northern Italy are up and working and I'll give a lot of credit to that because we learn very early on how to ramp down.

Had a ramp back up and how to work in an environment, where the the virus is with you and we created a protocol and a playbook out of that we then.

You know change that and augmented that for different parts of the world and we actually very soon we actually shared that with the with the May tie group the manufacturing lines for productivity and innovation, we shared with them that and they shared it with all of their their members.

And our team just did a great job, putting that together and so that's the basis of that and continuing to learn.

We also here.

I guess it was last week, we did.

A general managers call a global General Motors insight managers call and we had a four of our general managers from Italy on that call taking people through their experience and I mean, the physical experience of what they've gone through the emotional side of it had a key people safe we did I cover a a virtual lunch and learn forever.

Peabody around those learnings and so one of the things that we're trying to leverage here is the is the network effect of having so many sites around the world, where we can learn and share and get the best practices out in People's hands. So we've been trying to do that really intently Allison.

That sounds great. Thanks, everybody. Thanks. Thank you also.

Thank you. Our next question comes from Joe Giordano with Cowen. Please state your question.

Hey, good morning.

Good morning go.

So you guys just close in energy deal.

This is kind of a specific niche technology can you just talk about your overall exposure there what you're seeing in the way you guys play in energy markets.

Yes, so Joe I think as you know we are principally of midstream player and so we're not really anywhere near the wellhead to the most part we have some things here and there, but not a ton.

Yes look across the energy business, which today is sub 10% of our total portfolio.

We have an expectation that that's really going to get hammered here. So far we haven't had that that.

It hasn't been as severe as we expected to be but we are certainly seen all those those indicators now on the order front.

And so we'll have to get our cost structure right in and an overall footprint right.

To make sure that we can sustain there.

Yes, I think everybody learned a lesson in 2015 2016 that the overall impact of capital spending and how the energy economy impacts the global economy can't be overestimated right. It's it's a it's you know that that's going to be it's can.

See you can exacerbate this whole situation.

And and we're gonna have to make sure that our businesses are positioned correctly as we go forward, but thankfully we're not in the in the on the wellhead and seeing some of these just ridiculous declines and we will see declines, but it won't be like we're seeing upstream.

Well when you think about I mean is harder now to think about like new investments you have to make wonder we're trying to reduce costs in the same time, but as you think about your your global footprint.

Does something like this make you have to step back in like.

Rethink the way you even heavier facility set up like the work flow has to look different in the future do you have to yeah.

The head count have to be totally different and that has to be more automated like what kind of how do you just think about how your global clients look coming out of the.

You know Joe I think that question as we move.

Now through that what I called phase three.

Is going to be one of the most important questions that we are we're wrestling with because when you think about manufacturing facility, especially one that is principally.

Assembly and test I mean, obviously, we do have businesses that are more than that but where we tend to be like machining Assembly and test and we have a couple of businesses that have that boundaries and that's that's pretty unusual though.

And then world like that obviously, we've all embraced lean manufacturing here for for many decades and and the natural.

Output of of lean manufacturing is cellular manufacturing, which did not work with social dispensing. The way. It's constructed today people are not six feet apart.

And so we are we're already has been the process and do that's how do you see the elements.

How do you get the elements of lean manufacturing, which is the elimination of waste and and bringing down lead times, how do you keep those while having the principles of social distancing in place and that's something that we're working on I know a lot of people are and.

We're not going to move to batch manufacturing, we're not going to do that sort of thing and destroyed three decades of great work, but but it does change how people work and not just in the manufacturing environments and change in the office environment.

It's going to change it how we interact with customers. So many things like that are going to change in tell people have that comfort.

To be closer together again.

That's what color.

Thank you Joe.

Thank you and just a reminder to ask a question press star one under telephone keypad.

Our next question comes from Andrew Buscaglia with Birenberg. Please state your question.

Hi, guys.

Andrew if you could.

You can talk you know I'm getting a sense Directionally you know for the year FMT gets hit probably the worst and then fire and safety, maybe second worst health and sign.

Maybe third because there's some partial offsetting factors would you agree with that I would.

Okay.

In there was other segments.

Are there you know you're talking about some partially offsetting factors, maybe a health and science are there any in the other two segments is there anything else you're seeing that because.

Go the other way as a positive.

Yeah, Yeah. So I think as you as you look at say, let's look at FMT first.

I think that that obviously, the the whole agricultural space has been really beaten up.

But I do believe that that food supply chains are going to be continue to be really critical.

And and so I think that's an overall a good trend as you talk about AG in terms of where we play there and that would be both of them material handling business material process business and for banjo I put in both those.

Our Ats business, we are seeing some some benefits of actually.

There's some some very interesting analytics that can be done.

For what's going on in sewer systems believe or not I know that sounds incredibly strange but.

There's there's a whole bunch of modeling that an analytics that are that are allowed to where it can happen because of our ability to monitor those system. So our mds business.

We think we'll we'll probably hold up pretty well in there.

And then I think the more industrial facing kind of general industrial is going to have a bunch of things that are pretty negative offset by small things. They're positive. So example, if you're if you're.

Selling into to the chemical industry. Obviously, there are some chemicals around disinfectants and things like that that are absolutely blooming and then you have other things that are going into large capex that are likely to to really struggle. So so there are few trends there over in diversified on the fire side.

Interestingly enough there are a number of applications, where you can use some of that technology for disinfectant. So you'll see some some of that you've got a really long.

Very very.

Long pipeline of for the in the fire business for us for trucks in the U.S., particularly you've got over a year or backlog.

What we don't know yet is whether or not we'll see cancellations, we have not seen that yet, but we'll have to monitor that pretty closely.

We've seen in China, the rescue business pick back up aggressively have slowed down as tenders to slow down and it has picked back up aggressively and so I think those hold up a band it and dispensing both I think take it on the Chen here in the in the the short term.

Because their exposure one you all around.

Yeah, the retail space and a four dispensing and then for for band it you've got some exposure to transportation and oil and gas that will that will get hit but other parts will do quite well.

Okay. That's good that's good color.

If you could if you could maybe I'm just one last question on.

Same question, but.

Related to margins I would think FMT would get hit hardest because it seems like an fire and safety you got some you've made some changes there that structurally and maybe they maybe those are okay or not okay, but.

Fair better than FMT that safe to say.

Like that Cline, well see yeah, I think FMC welfare will be the most challenged and then and then diversified then and then health side.

Yeah, Okay got it. Thank you yeah. Thanks, Andrew.

Our next question comes from Brett Linzey with.

Vertical research partners. Please state your question.

Hey, good morning, everyone.

Right.

I wanted to come back to your comment on the past six to seven weeks you mentioned.

You are running down mid teens, what we know what does the range. It looked like there and then just thinking about the complexity across the geographies as we do reopen commerce.

How are you thinking about the pace of return between the U.S. and Europe.

Just to make sure I understand Brett the question, you're asking are you asking kind of the range of outcomes kind of business by business, how bad to how good is that what you're well I mean, yeah, I mean, you're saying on average things around mid teens I mean, there's probably some growth in there, which does imply and theres. Some business is down 30, 40% is that.

Yeah, We've got a couple businesses that we think are going to be down in that 40% range I'm not very few are is it that severe but they you do have a couple and again its IDT energy transportation exposure.

Yeah, we don't have really hospitality exposure so to speak so don't have that but that but we do have some businesses that are down there that much and we expect will probably in the next quarter or two we'll have that kind of impact. We don't think that will stay long and I think that tier your question our experience in China has been.

Then.

A very very aggressive snap back and adopt and but it's actually bifurcated you have businesses that are kind of covin facing so to speak that are they are helping with the fight that are growing like crazy and then you've got a few businesses that are kind of really in the in the dumpsters, but but it's actually.

Come back pretty quickly.

I don't think that that's the model for that for the rest of the world and for a number of reasons, obviously, China has some very unique circumstances in how they are able to manage desktop people and and businesses and and and democracies just don't have those those tools.

And that set the cost of democracy, which is I think a good cost.

And so I think it's going to look a lot more like we're seeing in Europe, which is you're going to see.

People starting to figure out how to live with this virus and figure out how can you still have social distancing, but get back to work to get back to friends and family.

And so that means it just takes longer and that's what we're seeing certainly in Italy, and that's what I expect here and just to be clear you know our expectation here is that this is going to be fits and starts out I am not someone who has.

Bought into you know a super aggressive everything gets find in the fall sort of thing I think that's crazy talk and I think we have to face the reality that's in front of bus and you know what if we get lucky and for some reason this goes away with weather or something else or vaccine is found more quickly than me think or.

You have very very effective treatments, great news I don't think anybody should bank on that and and I certainly wouldn't manage the company I'm expecting that.

Okay, Great and appreciate the and then just one last one was hoping you could spend just a moment on the evolution the portfolio not so much from a product standpoint, you give a lot of good examples of that earlier, but just in terms of service or the recurring limits the portfolio. What's that makes it look like today I mean, obviously services is going to be impacted here near term.

Kind of in a new normal what what is the recurring a little bit IODEX look like.

Yeah, Yeah, we've never been a company that has the classic sort of high recurring revenue so to speak and the reason I say that is is is that we don't have a big parks business.

But we tend to sell into like for like very very high percentage of our applications and so you know bill I don't know, what's your estimate of total sort of recurring how would you how would you characterize that.

That's greater than 50%.

I agree with that and so you know looking when you when you had the financial crisis.

Our total business was down 14% during that that that year.

Right after that over the entire year, our health and science business was down five and I think our industrial businesses were down say 20.

And those in those environments, which.

Set set us up off we have a better portfolio positioning than we did then I mean, it's less cyclical and that is more health and science in the mix and so I feel I feel good about that so overall I think our portfolio our position is pretty good, albeit there will be a couple places that will get hit really hard.

Okay, Great I really appreciate all the due to Oh.

Yes.

Thank you.

Thank you I just are minor tacit question Press Star One our next question comes from Walter Liptak with Seaport Global Please state your question.

Hi, Thanks, Good morning, guys good morning wall.

I wanted to ask.

A question about the municipal businesses your comments so far that.

Fire, Okay, China picked up pretty quick.

I wonder how the.

The municipal businesses, you think we'll do this time theres anything different more challenging weather financially or maybe benefits I think you mentioned the the store business could have some benefits sooner we can just talked out.

Yeah, I think historically the on the municipal businesses have had.

18 month to two year lag time compared to other businesses and that's really driven by receipt right, especially in the western World.

You know the as you as their seats come in that that really sets the overall operating and capital budgets and so.

I expect there to be a little bit quicker reaction then he saw and in the financial crisis on that in the financial crisis that took time I remember that well where the municipal business has held up really well is that as we went into that crisis and then they started to really struggle as you've got into 2008 to that excuse me 2000.

10, 2011, it at that took some time for that to make its way through and then had obviously had has had a pretty strong overall Ron.

I expect that will generally follows a similar path, although I think it'll be more I think people act faster just because it's been set to a shock to the global system and everybody is top of mind that municipalities are guy will probably clamp down a little more quickly on their spending.

Expect to see that but but I do think it will still lag the overall industrial economy.

Great. Thanks again.

Well, that's one for me just about the share buyback wonderfully in.

Just remind us how much is left Oh, yeah, the share repurchase purchase authorization, how you're thinking about it.

In the second quarter second house.

Hey bet. So we did by just over $100 million of shares we had a tenbfive one in place.

Going into this and so we did by just over $100 million, we did shut that tenbfive one down as we as we looked at that the value of liquidity and the uncertainty that we were and we value the certainty more than we did the incremental share buyback. So we did pause that.

Look I know, there's going to be a lot of people going to be looking really hard at those who buy back shares I know it in some ways is turning into a political.

Football I don't think that we are in that category number one obviously, we're kind of pretty low and on the overall visibility food chain here.

So I don't worry too much about that second we're not going to be a company that takes.

Cash from a government I can't see where where we're going to do that in a way that restrict access in any way to our behaviors and then finally.

Look where we are going to utilize our our liquidity the best way, we can to help all of our stakeholders and if what that means is to buy back shares than than we will do so appropriately.

In terms of what we have in total I can say, we have the 500 million that we got authorization for back a few weeks ago, plus you had that on I think bill to what about it's a low threes.

For 700 million over.

Over 700 million.

Yep.

Okay, great. Okay. Thanks missed thank you.

Thank you are in next.

Thank you our next question comes.

Comes from Matt Summerville with D.A. Davidson. Please state your question.

Thanks, just a quick one most lunch had been answered, but just with respect to life sciences and far loved the strength you're seeing there is that I hope. It may 18 related or is that something else. We could you put that in the context of the 50 million dollar improvement I believe you saw in overall backlog how.

That component plays out looking forward.

Yeah, you've got there are two stories in there Matt. So the first one is yes. There is absolutely a pickup from covert related activities is no no doubt about that and that we're seeing in life Sciences, but also we have you know a number of very important customers that.

Have programs that are that are ramping and we have won some substantial business and we had some really nice orders here in the quarter relative to that and so that's been that's been strong. So it's both an ongoing programs that are that are really important and and then you've got the impact of.

Covert 19 to get to the going at once.

And Bill I don't know in total what does that make up of the 50 million of backlog build.

It was a little over Thirtys from HST yeah.

I'll give you a sense Matt.

Thank you.

Thank you, ladies and gentlemen, there no further questions at this time I'll turn it back to management for closing remarks, great. Yeah. Thank you very much and thank you all four for being on the call I know that that we're sitting in a time that has shaken us in many ways and I think.

I'd like to close with a couple of comments. My first one is that as I said in my prepared remarks, I could not be more proud of how the team here at IDEXX has handled this I have seen a level of collaboration and teamwork and positivity that it really didn't really warms the heart just incredible.

When you see that.

Sometimes in the new cycles have a tendency to get you down and but when you see how people are coming together in the real world and tackling. This it is awesome and that's why I am in business.

I believe that the purpose of businesses to make like better and I could not be more proud of the team at IDEXX for what they've done it's just remarkable.

Second I'd like to say, thank you everybody who is on this call and your interest in IDEXX we.

While while the IODEX brand is not well known in the consumer World. We play a very important role in a lot of places that really do matter in that mission that I talked about a trusted solutions and improving lives. We lived that here at IDEXX and and were seen in this in this crisis in this fight with Cobot 19, how important that is and I.

I want to thank the people who are investors in the company or and prospective investors for Europe. Your support your partnership as we move through this and we will move through this and we will get the other side and we will have a very strong accompany this positioned extremely well. So thank you everybody I appreciate it and look forward to discussions as we go forward take care.

Thank you. This concludes todays conference all parties may disconnect have a great day.