Q2 2020 IDEX Corp Earnings Call
This time all participants are in listen only mode. A question answer session will follow the formal presentation.
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I'd now like to turn the conference over to your host Mr., Mike Yates, Vice President and Chief Accounting Officer for IDEXX thinking you may begin.
Great. Thank you Melissa good morning, everyone looks like Yates, Vice President and Chief Accounting Officer Fried ex Corporation.
Let me start by saying Thank you for China, that's for discussion of the IODEX second quarter 2020 financial highlights.
Last night, we issued a press release outlining our Companys financial and operating performance for three months ending June 30.
2020.
That's really along with the presentation slides to be used.
During today's webcast can be accessed our company's website at www Dot IDEXX Corp. dot com.
Joining me today, it's Andy Silvernail, our chairman and CEO and Belgravia, our Chief Financial Officer.
The format for call. Today's follows we will begin with Andy providing an overview of IDEXX <unk> second quarter.
Formats, and addressing the impact of the cobot 19 pandemic on our operations as well as the company's response to date.
Well that provide an overview of our primary end markets.
I'll, then discuss our second quarter 2020 financial results and walk you through it with you the company's cost actions liquidity and financial stability and finally, Andy will conclude with our current framework from third quarter and closing remarks.
Following these prepared remarks will the call for your questions.
If you should do 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, 068, Fivethree entering conference I'd number 136, dying for 805 or you may simply ball.
Entre companies all paid the what category.
Before we begin a break from my guess is called May contain certain forward looking statements that are subject to the safe Harbor language in last Night's press release, and it IDEXX filings with the Securities and Exchange Commission.
With that I'll now turn this call over to our chairman and Chief Executive Officer, Andy Silvernail Andy.
Thanks, Mike.
I want to start thinks it all the people across either.
It really stepped up.
But the challenges of Cowen Nike has presented ever brace evolving articles along the way.
Let's go over Nike, that's impacted families globally Knott's Berry loss here at <unk> I don't want to make sure that all of our teams now how proud we are the contributions.
In a crisis, especially one of the devastating is this your true values are exposed to kind of culture that we've built at IDEXX is stronger than ever.
We continue to supply our customers are critically nailing product across the globe meeting their challenging demand and partner with after rapidly support and develop.
Innovative new products, the battle Cobot, Nike I'm not sure one of those examples here a few minutes.
Our businesses continued to deliver during this pandemic with our internal safety protocols are saying supply chain, we've been able to deliver products eliminating or interruptions.
When issues have arisen the teams have been able to react quickly and mitigate the impact on our business customers.
We have experienced significant sales decreases our balance end market exposure and mission critical product offerings have limited these declines.
The diversification into various like Sciences pharma miniscule applications have lessened the more cyclical clients in energy and general industrial end markets.
Also our operating a finance teams across the globe did an excellent job of de levering the balance sheet, helping to drive record second quarter free cash flow, we converted at 193% of adjusted net income.
Finally.
We continue to be proactive on mitigating the bottom line impact from the historical economic dislocation created by the virus, we've ramped down all non essential expenses to mitigate organic decrementals at less than 40%.
We're leveraging a restructuring actions that we took in 2019, along with new actions that were required and several of our businesses that we'll see more prolonged volume impacts.
These organizations rightsize, the new normal we've increased investments in several other businesses to capitalize on several short term Kobe banking opportunities as well as investment projects that will support our longer term growth.
We've made us we've made swift smart decisions to keep our people see keep our business moving and ensure our financial performance, making sure that we do everything we can help when the koby. Thank teams like.
Turning to slide seven.
We outlined four key strategies to operate in the code vaccine World in early March.
Focusing on this framework has been a key part of our ability to perform across our businesses.
From a safety perspective, protecting our teams that we remain open has been our priority list.
The standards, we have implemented globally has been affected and keep it operations consistently running with minimal work stoppages across our facility. We the baldor protocols and have implemented mandatory piece coverage and all of our facilities to protect our employees and limit the spread of cobot Nike.
As I mentioned earlier, our operations and supply chain team have done an excellent job churn business continuity, we continue to improve our operational preparedness and bolster our supply chain with plans to help avoid business disruptions. We anticipate continued volatility in the months ahead.
The dynamic planning support structure, we've built should serve our business as well.
Our access in the second quarter had minimize any concerns we have with liquidity, we issued $500 million, new boss to pay off or 2020 note and bolster our cash position.
We had record second quarter cash flow and we have $746 million catch our balance sheet.
Full capacity <unk>.
The efforts of our teams have put us in great financial position and we have more than enough capital up on all of our operational needs. A pandemic is well positioned to take advantage of other capital deployment opportunities.
Lastly, our leaders are spending more time plane office, our teams continue to innovate and bring new products to market. The capture short term opportunities, but also lever our portfolio to capitalize on longer term secular trends that are evolving as a result for pandemic, particularly around testing for viruses and antibodies as well the creation of a vaccine.
I will go into more detail on one of those opportunities here Matt.
We also see the M&A markets open up more deal starting to come through well still going to be a challenging year from an M&A perspective, we're more optimistic than our ability to get a deal done than we were 90 days ago.
With that update on the status of the cobot Mexican playbook I'd like to spend a few minutes walk me through one of the product that's a critical technology and the mass production of vaccines.
I'm on slide eight.
And you just see segment products for Microfluidics Firefly, they're not material process technologies business are keys to help bring a vaccine for cobot 19 to market.
Microport eyes are processors are a key technology used to manufacture the vaccine vaccine atokin required for several of the vaccine trials.
Vaccine that's been our immune stimulators added to many vaccines commonly used today.
Well, you say I didn't have vaccine the body can produce a better immune response to the antigen or the German while also allowing vaccine manufacturers to be able to produce more doses of vaccine the blessing antigen.
In addition to backing that had been Michael food Iser processors can be used to manufacture lippitt nano particles that are key ingredient with a new our MRM lifestyle vaccines currently in the pipeline.
She would M. P. <unk> MPT has done a fantastic job responding to the increasing demands in the market for cobot, Nike vaccine testing and pre production.
That's quickly aligned priorities to meet this market need and participate in the fight against the pandemic. This highlights it's one of the ways Rx businesses have answered the call wholeheartedly embraced our mission I've tried to solution that's improving lives.
We're moving now to slide nine.
We've outlined here how are seen the current environment impact our primary end markets.
And our fluid <unk> metering technology segment, we've seen a broader industrial softness that we called out at the end of 19 become exacerbated by the pandemic as well as volatility in the oil and gas markets. Our industrial businesses have seen a decline in volume due to lack of capital investment from our customers always seem to like for like replacement sales in these businesses hold up well up.
Because the critical matrix components, the impact of the soft market impact that pandemic into lane capital projects has led the broader declines.
Our water business well down year over year has held up well with municipal projects have largely been continuing with some delays as municipalities have responded to critical needs of the communities that they serve.
Similarly, agriculture has held up reasonably well given a stronger spring season, U.S. and relatively optimistic demand from growers.
And now concise technology segment, we've seen too bright spots card from both the opportunities I discussed previously as well as a strong rebound in the semiconductor market in 2020, which has largely been driven by demand for fiveg products.
I've seen semicon come out of the downward cycle that they had experienced over the past 18 months.
On the other hand analytical instrumentation industrial and automotive markets have been impacted significantly in AI at the medical industry focused like hope at 19, other investments and lab equipment were delayed or just now seen those investments start to pick up.
Auto experienced a wide ranging production shut down significantly impacting our sealing business. We expect some modest sequential improvement as we move into Q3, but expect expect these markets remain challenged in the short medium term.
Moving to fire safety diversified.
We also saw the automotive and aerospace industry shutdown in the U.S. significantly impact our band it business. Additionally, we've seen lower capital spending globally impact or dispensing business as many customers are delaying replacement and upgrade as they assess the panda pandemics impact on their business.
Fire rescue business more counter cyclical similar to other municipal businesses. So non committed capital projects pushed out did I Miss capacities prioritizing cobot, Nike response, and only engage a mandatory equipment purchases.
Previously funded projects continue to go and demand for new products and offerings and fire rescue are partially offsetting these project. Please.
As I mentioned previously we firmly believe in the strength of the IODEX business model, while there will be continued softness to sum up a harder hit businesses. Our diversified end market offerings will mitigate the impact of some of the cyclical declines that we've experienced our investments in life Sciences Barra municipal markets have helped provide counter cyclical opportunity that we believe will contain.
Can you just somewhat offset weakness in these markets.
With that let me stop here and Bill I'll turn it over to you for the financial results for the four.
Thanks, Andy I'll start with our consolidated financial results on slide 11.
Future orders, a 522 million were down 17% overall, 18% organically as Eddie just mentioned the slowdown in our industrial end markets volatility in oil and gas and the compounding impact to the pandemic drove year over year declines in most of our geographies and Denmark is.
Pacing for the quarter seemed to bottom out in May with April orders down, 18% made down 23% and you down 13%.
Second quarter sales of 561 million were down 13% overall at 17% organically.
While we were able to maintain operations effectively and avoid it extended facility shutdowns.
Interruption of automotive and transportation markets decreased capex spending in energy and in general industrial and weakness in dispensing led to the organic sales declines.
As mentioned before which are relative strength from a bounce back and semicon and new applications. We've developed in response to the pandemic.
Q2, adjusted gross margins declined 290 basis points to 42.6%, probably primarily driven by lower volume the dilutive impact of acquisitions and business mix, partially offset by strong price capture it cost actions, which I will detail out in the next slide.
Second quarter adjusted operating margin was 21.1% down 340 basis points from prior year, mainly driven by lower volume leverage and the impact of acquisitions, partially offset by a restructuring actions and discretionary cost controls.
Our Q2 effective tax rate was 22.7%, which was higher than the 21.7% in the prior year, primarily due to a decrease in the excess tax benefits related to share based compensation.
Second quarter adjusted net income was 84 million, resulting in EPS of $1.10 down 40 cents or 27% compared to the prior year GPS.
Finally free cash flow was a record of 161 million for the quarter up 36% compared to prior year period and was 193% of net income.
The strong performance result of significant focus and discipline on working capital management aided by federal tax payments pusher third quarter. The teams de lever the balance sheet with lower with the lower sales volume primarily through collecting cash from our customers passed away. Our was the lowest it's been in several years.
The reduction of receivables will stabilize with the sales volumes. So we do not do this level of free cash flow performance is sustainable going forward, but we are confident our ability to drive cash flow conversion in excess of 100% of net income.
Moving on to slide 12.
As we discussed or a Q1 earnings release, we did mentioned our cost structure and identify both discretionary structural cost actions, we could take to help mitigate the impact of reduced volume.
While our overall adjusted operating income declined 38 million in the quarter, we would've expected the 110 million organic sales decline data negative impact on operating income of 66 million at our robust 60% contribution margin rate.
This 66 million was offset by 25 million of executed operational actions.
5 million from the impact of restructuring taken in the fourth quarter 2019, combined with 15 million of discretionary cost controls taken in the quarter, along with 5 million a price a net productivity those partially offset by negative product product and business mix.
To reconcile the 15 million of discretionary cost actions for you. We identified 120 million of actions, we could take at revenue declines of 35% than our last call.
Quarterly impact would've been 30 million with sales down 17% roughly half of what our scenario depicted our discretionary so savings a 15 million is also about half of the target.
Well the teams did an excellent job in the second quarter mitigating a revenue declines we saw the need to take additional restructuring actions in several businesses.
Right size their organizations for their new normal.
The additional structural actions that were taken were focused in those businesses that we believe will be will experience a longer term impact from the pandemic and underlying market softness.
These businesses had to make some difficult decisions, but prudently responded to the existing economic circumstances, while also supporting their long term growth initiatives.
These actions will provide another $10 million of annualized savings for us starting in the third quarter.
Turning to slide 13 on liquidity.
Free cash flow for the trailing 12 months ending June thirtyth, with 516 $16 million or 138% of net income.
As mentioned before we continue to be well position to whether the current environment, we expect to generate free cash flow in excess of net income as we focus on cost containment and working capital management.
Cash and cash equivalents totaled 746 million at the end of the quarter.
We also have full availability of our 800 million dollar revolving credit facility.
Cash on hand available financing and conservative leverage we're confident our ability to continue to meet our obligations fund operations and make critical investments in the business.
We are addressed our prior 300 million 2020 notes during the quarter by issuing 500 million of 3% senior notes due in 2030, ensuring that we have adequate liquidity and capital as we pivoted office.
The proactive steps that we executed in the first half to enhance our focus on liquidity and working capital that resulted in record free cash flow for the quarter. Then although we are confident in our current position. We continue to actively monitor conditions with our customers and suppliers to ensure that we were able to react to any market condition.
With that I would like to turn it back over to Andy to summarize our Q3 expectations and provide some final thoughts.
Thanks, Phil.
On slide 14 folks.
As I mentioned last quarter, we believe we will continue to operate and challenging environment. We do not anticipate the economic recovery from this unprecedented situation will be a straight line and we expected. We will continue see certain markets remain challenged well others bounce back more quickly.
Hi. This is Frank is in our business model and our people and we will continue to make prudent decisions to navigate the environment effectively.
We feel strongly that the actions we've taken that position the company to weather the existing environment, but as importantly to rebound strongly as we come out of the other side.
We remain we remain well structured for operational talent financial perspective, but we acknowledge the challenges that we will face across all of our business unit and we expect revenue in the third quarter, it will be down 12% to 17% organically.
We expect modest sequential growth from Submarkets that has started to recover we know that some other markets will continue to be jealous.
We're focused on balancing the need to take responsible cost control actions, while investing in areas that will allow us to recover quickly look for two additional ways to play office and deploy solutions that help in the fight and provide opportunities for us to generate long term growth.
To conclude I'm extremely proud of how our employees have responded to this crisis. The team work that has been a slated to be rolled out evolving safety protocols responded quickly to volatile market conditions and ultimately deliver critical solutions for our customers is a testament to the mission and values.
The company and the Great people, who are central to the IODEX difference well, we've started to learn how to live in operating distant world there'll be further challenges that we face in coming months from what I've seen from our team I have no doubt that we'll continue to meet and overcome these challenges is it caught with that let me pause here, Melissa and turn it over for questions.
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Our first question comes from line of Mike Halloran with Baird. Please proceed with your question.
Hey, good morning, everyone hope everyone's doing well.
So let's start kind of where you left off there Andy you know not a linear recovery from here.
Maybe some thoughts on you know how july's shaped up what kind of assumptions are embedded as you think about the rest of your type curve for how you think things play out and then maybe little bit more timeframe. The next year year and a half what's the organization planning for as it sits are they obviously you guys are going to be.
And to be.
Very fluid and be able to tap the problems or opportunities as they come but what's the base case for improvements you guys with it and how you're planning season.
Thanks, Mike Mike, Let me I'll break this into two parts of that answer let me tackle the short term piece. So take that maybe had three parts what's happening right now what we expect the rest of the year and as best we can starting to take a little bit about about 21 and the ultimate recovery.
If you look short term July has continued to improve which is a good side. So.
We did all of our operating reviews here over the last week or so and that I would say pretty consistently across our businesses. We are seeing sequential improvement and that's what gives us confidence to believe that we did hit the bottom.
In May and you heard bill talked about sequentially kind of what this look like and July is looking a lot like June.
Little bit better than that and so.
Barring another kind of global shutdown indoor major issues with this serves that we're seeing I think we can expect to see this sequential improvement through the balance of the year and and I would guess that when we're talking 90 days from now we're talking about guidance in the in the single digit.
To to low double digit range on the topline that some hopeful for Mike but to be clear that is all with a big caveat of what's happening surge in the United States and also we're seeing really what is is a tragic situation in many parts of the emerging world. So.
There is there is a big caveat around all of this oh in terms of of the longer term recovery I I'm still very much where I have been since we talked in March.
On your conference call and that's that we're going to be in bumpy territory and tell there is a vaccine I really do believe that.
Obviously, what we're pretty close to some of the work that's being done here with a in our HST segment in particular I think the news. It is out there is good news on what we're seeing relative to the vaccine, but I think we're all learning real time that number one these vaccines may not be effective they may take longer.
And then then I'd say the very optimistic.
Scenarios that are out there right now.
And the virus community and so our current thinking is very much around you start to see.
Sequential improvement through the third and fourth quarter and I would expect the first quarter and then you assume you get a vaccine sometime in the first part of the year to get deployed.
Throughout I think Thats when you start to see a much more aggressive acceleration.
No no that's helpful and then second piece on the M&A side.
You know the prepared remarks tough environment, but a little bit more optimistic.
A couple of told here one what is the approach you guys are taking in this environment at a high level into what's what's driving the optimism behind the thought process.
Yes, so at a high level. It really is all about staying very close to your knitting, it's pretty hard to do a deal in this environment with something that is is an adjacency that you don't know very well and the reason for that is diligence is just a lot more challenging we're involved in Delhi.
Just in a couple different deals right now and one is is that is a European base business. One is in the U.S. and you just it's just not like it was six months ago, you can't kind of physically get out there and do this stuff that you need to do in the wage you have in the past and so you've got to.
You've got to know your markets really well and you've got to know the essential structure of that business and what you can do with that business at a pretty intimately in this environment. So that's kind of a high level.
What we've seen here in the past 60 days is simply more deal flow more people, who we talk to you for years and years and years and we've had relationships with the mid cultivating.
There's there's more conversation to be had if you recall one of the questions that was I was asked backlighting on our last call is how do you get confident and I said when you start to feel solid ground around cash flow and I feel really good about understanding the trajectory of our cash was obviously, we had a phenomenal cash flow.
Quarter.
We'll get some benefit of more de leveraging his third fourth quarter with inventory and so now I just I feel very very good about our underlying cash flows and then therefore, our ability to predict what a business that is similar to us is going to deal with this underlying cash flows.
So could then you put that also in context of all your bouncing M&A and then buybacks.
As we sit here today pull back on buybacks, because the environment not because of liquidity and door.
Maybe feel better about the M&A sites or a better place for capital any thoughts there yes.
To answer that two way. So first you know we slowed down we suspended buybacks in the in the middle of of the quarter or the beginning of the quarter really yeah, we bought pretty aggressively early on as the stock went down and then and then was that just incredible uncertainty we paused it.
We did have a tenbfive one in place in a in the second quarter and so we're open to to repurchase shares. So that is there's no doubt about it and we have plenty of both capital availability and authorization from our board. So so we can do it there you know as always.
Mike We would we would much prefer to acquire right. It builds a business strategically it allows us to compound capital it creates opportunity for our people and so that always remains the highest priority after fully funding our business and so we're going to continue to push there.
Prices have basically remain the same for the most part and so yeah. The tradeoff in interest rates and some drop in cash flows because of the pandemic are are kind of effectively balancing each other out in terms of valuation and so from a from overall value perspective, we're kind of where we were six months ago.
[laughter].
Now.
That makes a lot of sense I appreciate the done yes. Thanks, Mike.
Thank you. Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question.
Thank you good morning, everyone finding.
Andy you think back like a year and a half ago, we had a investor meetings with you and we talked about what the playbook was in a normal recession.
[laughter] yeah. So like clearly this is anything but normal, but there's still a playbook that you're running.
And maybe just want to refresh us on that so when I look on slide 12. This is very telling but just you could amplify a couple points for us we see the part you cannot control and that's the near term organic.
Volume and see what that drop through is now for the right we get the total flow through.
After all of your cost cutting.
And there's a lot of strategy now what you're going to cut how you're going to cut. So the first question is.
That to the far right. The total flow through is that an outcome.
Or is that a target so that's and as you answer. The question you addressed that and then where are we in terms of how deep will you caught how much of a growth opportunity are you protecting on the other side of that maybe we can start there yeah you bet you bet.
So.
If you the way to think about this is from a playbook perspective as you recall, we go into any given year with.
Really a a battle plan of what you do on the downside right. So you're building a contingency plan.
And we and we Oh, we executed on on that we viewed 2020 as having a relatively high likelihood for a mild recession right.
Thats, where we were in the fourth quarter of last year and so we took.
$15 million to $20 million of of actions and you can see that sitting in that that next line over financing cost actions that the 5 million that we got in.
Yeah in the quarter around that and then as you start moving over.
We laid out for people.
A plan or scenario as things got really ugly at the end of last quarter, we laid that out, saying, hey business went down as much as 35% there was $120 million of cost.
That we could go after call it discretionary or variable cost that we could go after which obviously was was very aggressive and unfortunately got misinterpreted. If we were going to execute that we had to clarify that some people and then another 40 million of call. It breaks the glass right.
And so as you start to move over to the right. We did execute about half of that discretionary. So that's a $15 million that you've got in the quarter and then you keep moving over to that to the right and we obviously a good mix of price productivity acquisitions, and then we also disk.
Sided deem that we have a number of businesses that we think are going to be challenged.
For considerably structurally the businesses now different and we did some incremental incremental restructuring in the quarter. What I would tell you right now is there's a little bit left to do and in the third quarter based on where we are today, it's not a time to little bit and then assuming that the bottom doesn't fall out.
We are in a very good spot right now we don't have more to do but we can right. We've got we've still got another half of that discretionary that we talked about thats available and that $40 million of of break the glass. So to speak. We are we are doing a little bit of that some businesses, but that is.
Not ubiquitous across dynamics.
That's real helpful.
And if I can switch gears and go back to the side on the Microfluidics, Yes second there I thought I was in a Danaher conference call.
[laughter] Arash, but just couple of questions. It allowed us to end markets, yes, Sir.
Couple of questions here on the the application and then broadly are are you seeing investments yet on this whole wave of the re shoring of the U.S. pharmaceutical production capacity. So two questions one for this.
Application on page eight are you both.
In vaccine discovery.
And also vaccine production and then all the farmer re shoring or you're seeing any of that yes. So the answer. Your first question is yes, and yes, or a questioning question be yes, and yes. So production at discovery and production of vaccine and then eventual production it gets used nimble.
Well so on that on the discovery piece of this it's more in our life science business, where we're playing and analytical instrumentation.
And and biotech via sequencing and if you did this example here with Michael fluid either.
It is this is not new technology, so to speak again, it's a it's just now being brought to us scale that weve never seen before and were in a very unique position to be able to scale up a market, leading technology and what is going to be a a unbelievable boom and this.
Business right around that because were to see lots of vaccines produce that actually never get used because all the money that's flowing through that system.
And so we are we've been a market leader here and and we will continue to be going forward.
Dan I'm, sorry can you repeat the second.
Pharmaceutical Resourcing Oh, yes, yes. There is there is that is definitely happening to a degree I think it's going to be slower than a lot of people think it's not easy just to pick everything out.
But we absolutely will play is that is that trend continues and there will be certainly along some of the more sensitive areas. There's no doubt that that's that's happening.
And we will benefit from that particularly in.
And AI, and our CBD and or our material process business. It will play a big role in that.
And then to some degree in our our analytical instrumentation and life Sciences business.
That's real helpful. Thank you. Thanks.
Thank you. Our next question comes online Matt Summerville with D.A. Davidson. Please proceed with your question.
Thanks.
So just more of a geographic question can you give a little bit of color in the quarter around the 17% organic what you experienced in North America versus Europe versus China. Similarly, maybe at least.
Qualification around Directionally, how things progress in mid geography, as those things shut down an open up during the quarter, just maybe more color around order rates there as well if you could.
Yes, sure. So if you look at the geographic breakdown.
The U.S. was a little bit worse.
Europe is kind of right on and and Asia was better China was actually positive for the quarter, which is was which was a good sign but we really got hammered India because it fundamentally just went to zero right. I mean, there was some sales, but the other such a massive shutdown in India and those are really the big markets.
That matter for us.
In terms of of how things flowed that those numbers that bill gave you around the.
The month that was pretty consistent around the world with what I would say is Asia getting better China, rather getting better faster.
So that was kind of one anomaly relative to the other data.
But then everything really has has followed.
The reopening so as you've seen reopenings, you've seen improvement as you've seen shutdowns.
You've seen business follow suit very very closely so that's kind of the best.
For water to what's going to happen to a business is whats happening relative to.
Business getting back to business or things being aggressively shutdown.
You mentioned micro fluidics type of opportunity, but it also sounds like you're stepping up growth investments elsewhere can you maybe frame some of those up and are there is there anyway to sort of size up the magnitude of potential opportunity here with me.
With what you're seeing.
Yes, so we've got some things that I'm going to call.
There there are not particularly high beta and we know how to do them today, meaning there's an application and we know how to do its I'll give you. An example in spring technologies in compressors or in the in the continued global ventilator build up.
Our gas business is playing in there those are those are pieces of business that are there kind of happening today and our you can you can see the path going forward they may come down.
But you know how to do it in the business is there and those are things that are in.
Those are those are over 10 million total that you're seeing right. The kind of that's the kind of size. We're talking about these are either big overall programs that are that are hitting.
And our you know are very attractive.
Then you've got some things on that that are that are a lot more at a much higher beta I'm. So we are doing a bunch of work on some revolutionary testing protocols, where we have some some really interesting technology and a lot of money is flowing from the outside towards these things and what I would say.
He is they're either going to be very big we're talking tens of millions or the technology don't work and they don't turn into anything. So there's just there's a lot more volatility around new technologies that were playing in a kind of where the end market goes how quickly this global testing.
Capability ramp up because when you think about testing capability, it's not just cobot testing that we're talking about.
There's a our thesis and I believe this is correct as you're going to see a reset of global testing capacity, because you're going to no. One wants to get caught with this again and so I think you're going to see a multiyear build up of testing capacity. So Q2 very different types of things, but you're talking in the tens.
Millions depending upon the success in the commercial markets.
Great. Thanks, Jamie Thanks that.
Thank you. Our next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question Hi, guys. Good morning Martin.
Build on Deans question around that the playbook that you talked about 13, obviously that perfectly with quite stressed in the quarter, but as he moves to that play but did anything come delayed in terms of a process a business or even a regional exposure that you kinda questioning now that you make kind of go back and have to revisit months things stabilize here do you mean, a first a busy.
Yes that became vulnerable or something like that is that what you mean, allison vulnerable or sort of the way you're doing business today that maybe have tended to rethink some of that process. You anything that came to light that is pretty unique as you kind of moved through distressed that we had this quarter maybe an early question here, especially going through right. Yeah. So I think a couple of things that regard Allison.
First thing I'd say is I'd make a general statements or not or adding specific business.
<unk> is.
Our ability to to work at a distance.
That we've just all proven that out right and I don't like the concept of of everyone thinking that you know we should all work remotely from now on I think thats a horrible idea.
But the ability to intimately work with customers and suppliers.
At a distance with.
I would say equal or better outcomes is I think is going to change a lot of things I think our ability to understand our customer better and at a more frequent clip with the comfort level that everyone has now built with technology I think thats actually a really big deal and it's important for bill.
Just like ours that so application centric so the ability to understand the problem the ability to serve the ability to problem fix in that in vitro.
I think that's actually pretty important so that's a big one.
Second I would say is.
The blessing and the curse at times of an index rate are these very very high contribution margins and we love them and we don't want to we obviously don't give them up but I think our ability to make some things more variable is important right and so I think it in some of our businesses where.
The fixed costs is wonderful when you're ramping boy when it turns or the way can get painful. So you've got a few business out there that I think over time, we're going to want to do more work on on can you make things more variable.
Then I guess I think maybe the last thing I'd say is I think everyone has been surprised or at least we have been surprised that what you think is fixed and what you think is variable. It's a lot more flexible than the maybe people had their head around and you know if you told me a year ago that we could do what we've done with our cost structure.
I'm not sure I would've believed it out to be candid with you.
And I think we've demonstrated to ourselves our ability to do that.
And I think going forward, how do you how do you keep those lessons learned.
And make sure that we have as dynamic APEA now and balance sheet as we can both on the upside in the downtime.
Oh, great great color. Thanks, and then I guess just a question on the municipal facing marketing. Obviously, you said you saw some pressure, but rescue entire water with holding in better.
Have you were talking to those customers or is there are concerns as we head into 21 that there could be incremental pressure on nothing obviously, we're seeing the news every day about various cities the municipality, becoming under financial stream. You know how are you feeling or that mark those markets and it's it's something that you would anticipate some number of doesn't match funding coming in at some point.
Yes, So I think look if you went back and looked at the financial crisis from 12 years ago.
Yes, the municipal business has held up well and then 18 months or so later you saw the suffering and I think I don't think it's got to take 18 months. This time I think everybody has learned how to react more quickly.
And I do expect there to be a whole around municipal budgets.
Globally.
And then I think what will happen as you are likely to get a some kind of us.
Of step in in terms of federal funding again is or sovereign funding.
From governments, because some of the stuff that's being delayed right now because they're moving people and money to covert related things, it's going to create actually a demand whole going into excuse me to create a hole that you're going to fill with demand next year and so there's a little bit a compound in its going to happen here. So I do think.
It will be.
I do think you'll see a whole here over the next 12 to 24 months.
It's likely we'll have some level of federal funding that will step in.
But I think either way there will be at a negative comp as you think about.
The next year or two.
Great. Thanks, that's helpful. Thank you.
Okay.
Thank you. Our next question comes from the line of Nathan Jones from Stifel. Please proceed with your question [noise].
Good morning, everyone.
I'd like to go back to slide 12 as well.
I'm going to ask you a few questions about what that might look like when we change into Q3.
Your your ask why 19 cost actions should still have five on that bar.
You said your but got about half of the discretionary costs out so should that discretionary cost Bobby.
In Q3 or should it be some number between 15 and.
No I'm sorry, Nathan if there's any confusion on that the 30 is what would have happened. If we had seen our business go down by 35% right. So in the quarter our business was down.
About 17% organically.
And and so that so we went after about half of that discretionary.
So just to make sure everyone on the phone understands exactly what we're talking about if you went back to our presentation in the after the first quarter 120 million that we outlined was.
Cost that we could potentially take out based on 35% volume decrease we had about half of that so we've got about half of the discretionary thats what that 15 is.
So as you gave you think about better you think about a third quarter I would expect something around the 15, but again volume dependent so if we do if we end up kind of closer to the 12, maybe that numbers a little bit lower but I think the 15th probably a good number bill would you concur with that yes.
I agree it will be pretty close to 15 next quarter, plus or minus yeah, but and then the price productivity in mix should be roughly the same maybe it's a little low.
You talked about maybe less than a point of Bryce.
This year, so maybe that's floral five something like that and then we have another two and a half.
From the structural cost actions you've taken into here.
Correct.
Okay. So your organic flow through number it's probably going to be something like a maybe a 35 or something like that by the time, we get to the end of Q3.
There within a ballpark I think that's yes in the ballpark.
Okay. Then the next question I want to docket is on these overall 12 to 17 organic guide.
Clearly you had the lowest order number in by you turn your inventory about every six weeks. So you should have basically work through that are already.
If not.
Early part of July you.
You got to 3.8 year comp year over year, we've talked about things getting sequentially a little bit better.
Maybe you talk about what would have to happen to be at the low end at that 17 that would seem to be you'd have to see some kind of disruption in supply chain, Joe shutdowns or something like that to be at minus 17.
And maybe what you would need to stay in order to get better than that minus 12, because it looks to me at the moment like you should be trending at least towards the better end of that range rather than the was that.
Yes. The answer this question is really straightforward Nathan I think to be at that at that though the the bottom end to that means that the negative 17. It would have to have to look like this past quarter effectively right in terms of how that bump along and to be better than the 12, which.
Honestly I don't see right now because we just there's no evidence to that and we did take down backlog in the quarter.
I think you'd have to see more sequential improvement that's why that 12 to 17 feels really feels right.
But I can see a scenario, there's a potential scenario, where that gets a little bit better and less the scenario, where it gets worse and it's worse than the 17 is we get a massive.
Shutdown and Mike one of the things to keep in mind here also is.
So you're seeing a surgeon and in cases in the U.S., Obviously Europe has done significantly better at managing this than the U.S. has.
Ah so there's a lot of uncertainty there and then frankly this presidential election is just starting to kick off.
And and I think it's it brings an awful lot of uncertainty into the world and so.
This is probably going to be the nastiest.
Presidential election, and that we've seen in our modern history.
And it's going to cause an awful lot of volatility I Don concerned about that so those are those are two things that could make it worse or but I don't I don't see that at this point I don't see it worse than the 17.
I know you guys plan for the West and hope to the best.
One last one would you expect to two been backlog during the third quarter or relatively stable.
Bill what do you think there.
Yes relatively stable.
Okay. Thanks, very much for some time thanks Nathan.
Thank you. Our next question comes from the line Scott Graham with Rosenblatt Securities. Please proceed with your question.
Good morning can you hear me.
Okay and Scott good morning.
Hey, good morning, So I have several questions around the the guidance as well first of all maybe go back to the second quarter guidance, which was minus 15 to 25 and yet you did a minus 17 see sort of came on the better end of that what surprised you versus the mid.
Point in the quarter.
Yes, so if you remember when we gave that guidance.
The World was just starting to unwind.
And frankly it was it was very hard to understand what that downside could be.
We felt like we could we could very easily understand what it took to get to 15.
We felt like it was very hard to understand what was coming.
Relative to.
The the low end of those expectations. So it was we were definitely in a world 90 days ago that our ability to to call the top line.
Was significantly worse than our ability right now there's still volatility in our businesses, but you are seeing if you look across our key industrial businesses. You are seeing the flattening of the order rates, which is a great sign.
As you know, we keep a very close watch on our on our short cycle businesses. They tend to tell us a lot.
The volatility that existed 90 days ago has definitely come down substantially in day rates.
And so we feel a lot better around calling this range. So we had a 10 point range at the end of last quarter, and we've now shrunk that down to a five point range and typically right, where where a two point range being a one to two and so I think our ability to call things is getting much better and assuming that this trend continue.
And we don't get a massive disruption I think you'll see us be able to keep tightening that range as we get 90 days from now.
Yes, I'll give you the only thing I'd add to that I think there was a there's the commercial variability, but then there was the unknown.
Operational uptime in supply chain uptime do I think we've got more comfortable those two aspects that helped us narrow the range in the things that Andy identified as potential risks within the quarter Kinda give us the range that we have no.
Right no I get that I guess.
Any nannies answer it sounds to me like the third quarter guidance, you feel better about.
Sort of its a little bit more scientific than the second quarter guidance I guess to that same and I would maybe wonder why if you're thinking the things improving sequentially.
It just seems like if you just did a minus 17 in what I think most of US thought was going to be the worst quarter in the history of history.
No I think bottomed out in May I guess I'm still.
I'm still not quite sure how.
There's even a 17 organic in that guidance I mean whats your caution here on that number but will look a couple of things. We have we have one and a half data points, meaning we have the month of June and we have part of July.
For things sequentially getting better.
And I think that if what we're seeing right now holds that negative 12 feels right right, so and that would be sequentially better.
Yes.
The downside the 17 is.
If you see some kind of significant.
Issue around again, the surge that we're seeing United States.
Just remember the actual numbers are worse today than they were when we were all panicked right.
The actual data is worse.
And in the United States in particular, and we're now just starting to see the effects in the emerging world.
So the 17 is basically saying that that things are backslide substantially and they and they look like the actually did in the in the in the second quarter now remember we were sitting here 90 days ago.
None of US had any idea what the real downside scenario was and I do feel like we've been able to bracket that and understand that in a much better way Scott that gives me confidence in that that 12 to 17 I have I have a lot more confidence in the 12 to 17 than I did in the 15 to 25.
A lot more confidence, yes, it sounds like that.
So just two other quick follow ups number one.
Let's just look at the minus 12, well, let's look at the midpoint of the Threeq guidance, which of the market. The end markets on that really cool page with the.
I think it's on page 12.
Yeah, I'm no not page 12, a nine which have a mark there which of the market to the swing factors that get you better could you tell us that you're talking about the checkerboard flight Scott Yeah.
Yeah, So I think look.
The things that have the most volatility and then right now are in FMT and diversified.
And so the.
If you if you look at where the negative volatility as Ben it's really been dominated around a general industrial and then things that are touching transportation effectively right and oil and gas obviously, we that's kind of it a different animal exacerbated by all this I think.
Thank the general industrial up a bottoming and starting to improve is what would drive a better outcome.
And and I'd also say that is that is the most vulnerable to a second downticks is going to the most volatility around industrial chemical.
Those to stand out to me and then I'd put dispensing if you over to fire safety dispensing in automotive dispensing is a little bit different animals, because it's actually something interesting happening there which is.
On the consumer side of dispensing that business is actually booming, meaning if you look at the big box retailers and the folks who are selling paint that business is actually booming, but they're just not buying.
Because they're pushing out their capital spend where I would say on the industrial side, it's actually it's more correlated.
With.
What's actually happening in the markets, but you could definitely see a meaningful uptick in dispensing of people.
Get more confidence in and then certainly around transportation.
Auto is starting to come back which is a great sign.
Clearly aerospace is is a different issue and our bandit business, which is great mix for us.
Has had some negatives relative to transportation specifically aerospace.
Hugely helpful. It would you mind, if I just not one more question here for propel so I guess I was a little bit curious about the break the glass $40 million potential.
I'm, assuming that that's a structural cost reduction number.
For potential and I'm wondering why it's not a.
Larger number than that.
Well I mean, its compounding on 20 million of actions. We took in Q4. So if you look at that total bucket that'd be 60 million.
Well, what I need to take longer.
Yes, 40 as potential.
You said I'm, just trying to understand like it if that structural and it's not please tell me if that structural would seem like theres would be up.
What does that number exactly break the glass.
You're taking out is a fundamental fixed cost of the business, which is.
Facilities and people you're right that is a that that's that's a really big number im just to give you a sense of it right when we.
When we laid out the 15 to 20 million.
The last year, yeah that was a sizable number and and meaningful but again kind of structured around a.
What we what we thought it might be a mild recession.
But to give you some some sense of it in 2008 2009, Bill I can't remember I want to say, we took out a 40 million total.
During that little bit less but around there and that was total Scott, including discretionary right and right. Now we are at a at a total run rate below that 90 million September.
Yes, if you add in the discretionary correct.
Yes.
Yes, I mean again, a discretionary will ramp down to sales improved so that would assume that kind of the current run rate revenue decline.
Yeah.
So you have been we have been hugely aggressive around it around cost out.
Well frame that way I understand it better thanks, a lot guys.
Thanks.
Thank you, ladies and gentlemen, as a reminder, if he'd like to during the question can you. Please press star one at this time.
Next question comes from line of Joe Giordano with Cowen and company. Please proceed with your question.
Hey, Good morning. This is Robert and for General entourage, just wanted to turn back to Hey, good morning.
Just want to turn back to M&A real quick.
I know this is kind of very strange downturn that we're seeing right here with.
Economics of companies.
That might have gone down dramatically, but the price the businesses that they're trying to sell have not so just wondering what you're seeing in terms of valuation and how people are thinking about like selling their companies and what price they deserve and just kind of how you're thinking about that situation.
Yeah. If you just can't look at the general Matt What I would say is the the when you balance off the the cash earnings decline that we're seeing in targets relative to the drop in interest rates. When you actually kind of do the math on valuations it actually neutralizes pretty close Robert.
With some gap to an increase in an aggregate valuation on a cash flow basis, a little bit, but but they do offset pretty closely.
So look people have not changed their expectations on on the on valuation that that has definitely not happened. The the down stroke was was it was too.
Two brief.
The public markets came back so aggressively that private sellers they tend to build their expectations are public markets and so at least anyone who sophisticated and so you know look is the valuation expectations have stayed elevated.
Okay. That's great. Thanks, very much I'll pass on X R.
Thank you. This concludes our question and answer session I'll turn the floor back to Mr. silver now for any final comment.
Thank you very much well. Thank you everybody for it for your time here and and your patience and understanding what's happening in the world. Obviously, we're all experiencing this together and by two things that I ask you to got takeaway number one number.
Admission of this company and the values of this company have been tested and I think everybody has been tested and I am just incredibly proud of how all the people across iducs. Her have responded to this they have responded with compassion. They have responded with action. They have responded.
Disciplined and prudent.
And it's just really warmed your heart as as a leader to see those values not only.
Stick, but deepened and in a moment like this.
Second.
Back over the last few years I've talked about what happens to a company like ours in difficult times and one of the things that I have I have been very proud about is that our ability to to maintain cash earnings in difficult times I have always claimed that thats something that we could do certainly.
The over a shorter period say given year and I think what you see here in the second quarter is exactly that right. We had an incredible cash flow performance.
And if you think of it it from a cash EPS standpoint.
That's really impressive and as we go through the rest of the you're obviously, we won't have the same opportunity with with they are that we had here in the last quarter, but we will with inventory and I expect us when we look back on this year. Obviously, we'll all think about this and the difficulty that we had but I think it will show once again, the durability of a company like.
Thanks, and the business model that this company has and I think it's really something else and I'm really it's a pleasure for me to have the ability to to lead this business. So with that I'll. Thank you all four attendee and look forward to talking to you all here over the next 90 days take care.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.