Q3 2020 IDEX Corp Earnings Call
[music].
Greetings and welcome to IDEXX corporations third quarter 2020 earnings conference call.
This time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
It is now my pleasure to turn the conference over to your host Mike Gates. Thank you you may begin.
Great. Thank you Rob Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer Products Corporation.
I'd start by saying thank you for joining our discussion of the IDEXX third quarter 2020 financial highlights last night, we issued a press release outlining our company's financial and operating performance for three months ending September Thirtyth 2020.
The press release, along with the presentation slides to be used during today's webcast can be accessed at our company's website at www Dot I'd. He acts C O RP dotcom joining.
Joining me today Daddy Silvernail, and Bill Grogan. Additionally, Eric Ashleman, our president and recently announced a CEO of IDEXX will be joining us as well.
Thanks, Mike Good morning, everyone.
Before we dive into I like it.
Let me dive into our third quarter results I'd like to take a moment and talk about the leadership transition we announced yesterday.
The 12 wonder for your genetic nearly a decade as chief Executive Officer, I'm stepping down as chairman and CEO in mid December I'm delighted that the board of directors has selected our president and COO, Eric Ashleman as Ive Nexus, New CEO effective December 15 2020.
Eric is uniquely capable leader, who has a clear choice for the role.
He and I have worked closely together since I joined IDEXX, we work side by side to establish our strategy build our culture and deliver value for all of our stakeholders.
Eric brings extensive knowledge of our business deep insights into our markets and a passion for bringing up the best of our people.
My decision comes after deep reflection.
Leaving IDEXX has been the greatest further to my career.
It's a significantly different company today than when I joined in 2009, we've accelerated our transformation from an acquisition based holding company into a high performing global enterprise that improves lives on a daily basis. This strong foundation I should say is and you can position for continued growth and value creation.
So it's a good time for change for two reasons first iducs is ready.
We've let a remarkable company through this pandemic crisis, our mission has never mattered more our culture and financial position have never been stronger and our team has never been more capable to that end. We're fortunate to have Eric is the next item CEO. He's a proven leader who has delivered excellent for our shareholders and our broad stakeholders for the past 13 years.
Second I'm ready.
For the last couple of years. Many of you have asked me about my career thought I've always said that I love IDEXX, but I thought 10 years is about the right shelf life for a public company CEO.
I could never have dream, but we will accomplish over the span.
We've built an organization that advances and save lives of millions of people around the globe.
We have created a highly engaged organization that is among the best in the world, we impacted our communities through compassion and generosity with the support of the IODEX Foundation, and we have delivered for our owners producing total shareholder return greater than 530%.
For me personally I am excited for a new phase of life that brings along new challenges and opportunities for me and my family.
Im going to become chairman CEO, and an owner of Madison industries, one of the world's largest private companies. This new opportunity offers a chance to build another great organization to make positive change in the world over a very long horizon.
I am confident now is the right time to pass the torch and welcome Iducs is next generation of leadership.
On a personal note Eric has been a true partner and a dear friend to me.
And I'm confident that this transition to CEO will be seamless for our company employees and all of our stakeholders.
As this is my last earnings call I want to say, how grateful I am to have worked alongside our incredibly talented team the last 12 years.
It has been an honor to serve as chairman and CEO and to be part of a company like IDEXX.
I also want to thank all of our investors and analysts on the phone who are with US today for the support through the years. The future of IDEXX is very bright we have reached new levels of industry leadership and sustained value creation, and we will do so again under Eric as our CEO.
As Mike mentioned, Eric is joining bill and I for the earnings call.
Bill and I will walk through our assessment and analysis and view of the future as we normally do.
Well, then turn to Q in AG in Europe will join the conversation and talk about the future.
Now turn to our results for the third quarter.
We continue to see strong sequential rebound in orders with September 2020, topping the same month last year. That's a good sign I want to thank all of our people around the globe.
Risen to the occasion and the year don't want could have predicted our people continued to shine.
So to all of the items team members listening on this call. Thank you.
A time like this truly test the culture of a company.
Are you rooted in strong values that people really live and believe if so you'll be better prepared to survive and even thrive IDEXX is this kind of company and it's serving us well.
Because of the protocols, we've put in place the disruptions we've seen our operations have been limited we have protected our people within the workplace and we will do so even if the current trends are moving in the wrong way.
We've continued to focus on solving our customers' greatest challenges many of which have shifted this year.
That has reinforced the need to stay close to our customers even when we have to remain socially distance to understand their needs.
Bill will walk through the details shortly but as you've seen our organic sales were down 12% year over year volume at the better end of our predicted range imports.
Importantly, organic orders were down only 5% and continued to improve sequentially a trend that is continuing in October.
Being a diversified company helps a great deal in times like these while certain sectors like energy continue to struggle other aspects of the economy are booming.
This diversity gives us strength limiting our exposure to any one sector.
The financial controls we put in place early continue to service well, we are delivering strong profitability and exceptional cash flow.
As we have pivoted to growth, we have ramped up our capital spending and investment to support some really exciting initiatives. We've also seen activity in the M&A market start to pick up.
While those pillars of safety business continuity and liquidity are also part of our pandemic operating focus it is time to aggressively play offense.
I'm turning to slide seven.
That increase focused on playing off ads has us involved in some exciting new opportunities abroad.
A variety of our businesses are producing new solutions for cleaning and disinfecting public spaces. One Shining example was a sprayer that uses electrostatic discharge particles to envelop of surface not just hit the side based the sprayer.
We anticipate solutions like this will continue to be demand not just during this pandemic, but for years to come as public demands for cleaning and disinfection will be forever changed by this period of time.
We also have an exciting new opportunity to partner with customers to develop a highly accurate point of care solution for diagnostic testing for COVID-19.
I think health and science team is hard at work ramping up with public health experts increasingly predicting that the corona buyers will be like influenza remaining circulation. Even after vaccines are widely available. We anticipate this will be a significant program for our company for the foreseeable future I will share more about that in a moment.
We also continue to see machines used in production of pharmaceuticals, and vaccines in sourcing critical API manufacturing is a key initiative for several countries and last quarter, we shared our micro fill up the food riser processors are key technology for manufacturing vaccine elements.
Vaccine Adjuvants are immune stimulator added to many vaccines commonly used today.
By using edge of into the vaccine the body can often produce a better immune response to the antigen, while also allowing vaccine manufacturers to be able to produce more doses of vaccine with less antigen.
Our team was excited to recently deliver machines for use in producing advanced supplies of one of the leading vaccines and testing today.
We are also working actively with other vaccine manufacturers as the world prepares for an unprecedented rates for production and distribution of this critical piece of the puzzle for solving the COVID-19 prices.
Moving to slide eight.
In health and science, our products are being used to help enable rapid highly accurate testing for COVID-19.
Our thinks Microfluidic carcasses are key technology used to diagnose COVID-19 infection and the point of care molecular market, which allows testing to be done near the patient versus being sent to a laboratory.
Our technology enables administration of complex laboratory workflows by integrating pumps valves sample reagent management and signal detection in order to provide a simple workflow for the operator of the instrument.
This instrument operator, only needs to add the patient samples of the cartridge inserted in the instrument and then push a button to run the test our microphones capabilities allow for high volume production and consistent repeatable results that are needed to combat COVID-19.
In addition in EPS is optical filters in several diagnostic instruments that are used for COVID-19 testing we provide various floater components designed and in vitro diagnostic instruments used for COVID-19.
We have to gases pumps manifold and fluid connections and these IBT instruments that typically analyzed blood samples.
We also have both optics and politics assemblies and next generation DNA sequencers being used to analyze COVID-19 to better understand the virus and track it spread.
I'm proud of how our businesses have answered the call over the past two quarters and work closely with our customers to innovate and deliver critical solutions to the marketplace.
Alright, I'm moving to slide nine.
We provide an update on the state of our primary end markets.
We saw sequential improvement in most of our end markets with some of our more challenged markets, including auto and dispensing recovering faster than we anticipated.
In fluid metering, the broader industrial softness and the volatility in oil gas has continued though we did see a pickup and daily order rates in the month of September which provides optimism as we close out the year and we head into 2021.
Significant capital investment by our customers continues to be on hold pending a broader market recovery and reduction in global economic uncertainty.
Our water business has continued to show resiliency impacted only by timing delays in some municipal projects as we called out last quarter Agriculture has performed well as growing optimism and investment held up in the quarter.
In health and Science Semicon, it's continued to outpace our expectations and was strong sequentially and year over year, our sealing business recovered nicely in the quarter to the resumption of activity and out in the auto market.
Additionally, the product innovations I discussed earlier helped generate positive momentum for us in multiple end markets, including industrial.
On the other side and analytical instrumentation and some aspects of IBT bio we continued to see that as medical industry is focused on COVID-19, other investments and lab equipment were delayed and we've not yet seen the activity materially pickup.
Moving to fire safety diversified.
We saw sequential improvement in most of our markets recovery in auto and retail were big stories, driving a rebound in our band it and dispensing businesses.
Fire rescue continued to see strong performance, but we have been impacted by production delays at Oems pushing projects out extending lead times for municipal deliveries.
Backlog in the businesses continues to be strong and working closely with our customers to monitor delivery schedules and assess the impact of COVID-19 foods future year municipal budgets.
Previously funded projects continue to go and demand for our new products in these businesses has been strong.
We are overall optimistic about the market recovery, we've seen in the third quarter and continue to believe that the diversified nature of our businesses helped mitigate the impact of the global economic decline.
Our dedication to our customers and ability to respond to innovate quickly has continued to generate momentum for us to combat market declines as we head into the fourth quarter, we expect to see a pickup in order rates, particularly in our day rate businesses as an indicator of further recovery.
Okay moving to slide 10.
I want to provide some additional context to the organic order trends weve seen over the past two quarters.
We saw broad rebound in order rates in the third quarter recovering from organic organic declines in as much as 23% in the second quarter to organic growth in this month of September all of our segments participated in this trend.
FMT organic orders improved each month, driven by strength agriculture, and stabilization in industrial as well as a slight pickup in energy.
Jesse was driven by recovery in the auto market and targeted new product initiatives as well as a positive momentum in semicon and farmer that I mentioned earlier.
Finally.
Diversified organic orders saw dramatic improvements at band it and dispensing as auto and aerospace businesses open backup and capital spending returned in the paint markets.
On top of the year over year improvement, we also experienced sequential increases with FMT up 12% HST up 6% in FSD up 11% versus the second quarter.
With that I'd like to turn it over to bill to discuss our financial results for the quarter.
Thanks, Andy I'll start with our consolidated financial results on Slide 12 Q.
Q3 orders of 570 million were down 3% overall, 5% organically as Andy just mentioned, we saw broad based bounce back in order rates across our businesses and monthly sequential improvement in organic order rates throughout the quarter.
Third quarter sales of $581 million were down, 7% overall and down 12% organically.
Industrial energy markets remain challenged in the quarter and were the main contributors of the organic declines.
As mentioned before we start recovering the auto dispensing markets as well as continued strength in semi in pharma that helped offset those headwinds coupled with the benefit of new applications innovations. We have made a response to COVID-19.
Able to drive organic sales for the top end of our previous estimates.
Q3, adjusted gross margin declined 190 basis points to 43.3%, primarily driven by lower volume the dilutive impact of acquisitions and business mix.
Mostly offset by price and the continued impact of cost control actions, we have taken.
Gross margin was up 70 basis points sequentially versus the second quarter.
Third quarter adjusted operating margin was 23.1% down 210 basis points from the prior year, mainly driven by lower volume leverage and the impact of acquisitions, partially offset by restructuring actions and discretionary cost controls.
We also saw sequential growth at an op margin, increasing 200 basis points from Q2.
Our Q3 effective tax rate was 14.4%, which was lower than the 18.6% in the prior year due to discrete benefits associated with the recent changes to the global intangible low tax income regulations. This was a multi year true up going back to the start of tax reform and all we have a minor benefit on a rate going forward.
Yeah.
Third quarter adjusted net income was 106 million, resulting in an adjusted EPS of $1.40.
Down 12 cents or 8% compared to prior year EPS.
When compared to our second quarter year to date tax rate the reduced our increased adjusted EPS by approximately 11 cents in the quarter.
Finally free cash flow was 135 million for the quarter down 7% compared to the prior year and was 128% of net income or conversion rate higher than last year.
The strong performance was a result of a significant focus and discipline on working capital management. The teams continue to drive rvs are lower and improve our pass through rate as well as increase our inventory turns we continue to demonstrate our ability to drive cash flow conversion an excess of net income.
Moving on to slide 13.
As we discussed in our previous earnings call. We continue to take the necessary steps to manage cost to mitigate the significant impact of reduced volumes.
Our adjusted operating income declined $23 million in the quarter with organic sales down $75 million, we would have expected a negative impact on operating income of approximately $45 million or roughly 60% contribution margin.
This 45 million was offset by $25 million of executed operational initiatives.
7 million from the impact of restructuring actions taken in Q4 of last year in the second quarter of this year $30 million of discretionary cost control items and $5 million of price. The net productivity that was partially offset by $6 million of negative product and business mix primarily associated with FMTV.
The $30 million of discretionary cost actions in the quarter was lower compared to the $15 million, we referenced last quarter, primarily due to modest increases in spend to support and service our customers as well as some targeted investments we made in growth initiatives.
Overall, our teams continue to do an exceptional job of managing cost to mitigate revenue declines as Andy discussed earlier, we have ensured that we are well positioned to pivot to office and continue to invest in initiatives to generate growth in the fourth quarter and beyond.
With that I'd like to turn it back over to Andy to summarize our Q4 expectations and provide some final thoughts.
Thank you Bill I'm on slide 14, everyone.
As I mentioned earlier, we are firmly what I have called phase three of the pandemic response living with the virus.
I'm proud of how our teams have adapted and innovated in this environment. Our teams have embraced our mission and our values and had been diligent executing our COVID-19 playbook, we maintain optimism that market recovery. We have experienced will continue and we've seen the benefit of the proactive steps. We took at the end of last year throughout the early phases of pandemic physician Iducs remain strong while taking advantage.
These new opportunities.
We expect that revenue in the fourth quarter will be down between three and 5% organically based on our current backlog position and expected daily order rates we.
We are close contact with our customer base and we continue to look for signs of competency capital spending that will be a catalyst for sustained recovery.
We continue to make strategic investments in our business just for further long term growth will remain disciplined in our effort to manage costs.
To conclude this quarter was a great display of the strength of the IODEX business model from the resiliency of our base business to our ability to respond to challenges quickly and deliver deliver innovative solutions to our customers I continue to remain optimistic about our prospects to come and think about coming out of this crisis, even stronger than we entered it with new opportunities for growth on the horizon.
With that let me pause and turn it over to the operator for your questions.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation till indicate your line is in the question queue. You May press star to feel like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Our first question comes from Deane Dray with RBC capital markets. Please proceed with your question. Thanks.
Thank you good morning, everyone and congrats to Eric and we wish and all the best of luck.
Thank you Dean packaging.
First question would be for Eric and look no one should be surprised that you were pick to take the helm based upon your role as COO for number of years and most recently as president So you've had the opportunity to be part of the leadership team for a number of years, but you've also had the opportunity to make your own assessment about the opportunities.
At IDEXX, so I'd be really interested in hearing just at the outset, what kinds of changes might you be considering we're just at least the areas of focus that you think you'd be taking initially and I'd be remiss. If I didn't ask you about your commitment to the 80 20 business system. Thank your reserve.
Thank you Dana it's great. It's great to talk a great to talk with you and great to talk with everybody here I'm excited to get going.
Look I think as we think about focus and priorities.
I want to make sure that we all appreciate that this is a story of continuity alongside purposeful evolution.
So I have worked for Andy for 12 years everyday has been part of IDEXX I've essentially in reporting to do it.
And for the last five years and I've I've served as the COO of the company and so side by side I mean, we have been partners and all the major decisions that we made along the way that have evolved the company to where we are today and that certainly includes 80 20, I mean that is at the cornerstone of what we call the IODEX difference.
And so maybe maybe less appreciated is the evolution the organizational evolution. That's happened alongside all of that so in these five years I mean, we've been very very deliberate to work on developing other voices that are now part of the senior team and have been frankly, our group executives joined our senior team over a year ago.
I look down the table here at Bill Bill was my original operating partner and finance. So so this is a team effort. It has been a team effort and so the strategy. That's in my head is the same one that we've been working on all these years now that being said look the world is definitely in a dynamic spot now theres a pandemic in front of us theres.
Things like digitalization that are happening all over the place.
And we've got to think of things like aggressive capital deployment and how we're going to work all of that in this environment. So those priorities were here before this day. They remain very firmly in front of me as we go forward and I absolutely am an advocate of 80 20, it's a way of thinking as much as it's a part of the operating model.
That's great to hear.
And just second question would be more along the lines of.
The issues at hand, and I'm, especially interested in getting some more color on these coded.
Business products and service opportunities I know youve sized it at 25 to a 100 million.
Maybe you can give us some additional color about the potential time to revenue.
And will this all be organic in terms of the investment.
Might there be any jvs acquisitions, along the way, but if you can start with time to revenue. Thanks, Yes, Sir shirt. So look there's there's multiple phases. I mean this was no doubt a dynamic world I mean this most of these applications didnt exist in our minds.
Good sooner than March of this year. So we.
We have we have some elements some components that are that they're moving now they're part of the fight today, they're embedded in our and our sales numbers that you're looking at I would say the bulk of the opportunities and some of the things that we talked about here today, they're a little further out.
They are compressed development cycles, theyre very very active now and.
And we would see a lot of them starting to get some initial market traction in early.
2021.
But some very very important milestones along the way that we're working with different partners and customers bring those to bear they are organic in nature now.
Certainly as things continue to develop and evolve that inorganic opportunities to make them bigger and more impactful would be something we'd absolutely consider.
Great again, congrats to everyone Andy all the best and you will be missed thank you.
Our next question is from Mike Halloran with Baird. Please proceed with your question.
Hey, good morning, everyone, Eric Congratulations very well deserved Andy.
It's been a good decade inventories.
Working with you it's been a pleasure. Thank you all right you're going to do awesome and Madison, obviously, but we'll Miss you here, It's me a great replacement, but.
Well definitely Miss you. So thanks. Thanks, Thanks for thanks for everything over the years so.
With that first question.
I know you partially answered this but just want to confirm you with.
With Air do you taking over I'm guessing the willingness desire.
Ability to push forward on the M&A strategy doesn't really change so just confirm that and give me thoughts on how you're thinking about the funnel as we sit here today actionability and ability to convert.
Yeah, well well absolutely.
The focus remains very very high on that front I mean, ultimately iducs was built that way through acquisition. So.
I think.
It was the pandemic unfolded, obviously things froze up in the early days, we've seen things free up now the process as you might imagine is quite different I mean, where none of us are in airplanes, we're doing a lot of it remotely and virtually but we've adapted just as we've adapted our business is in that way.
And I think as we as we look forward to this this is an area of huge focus for our team. The group executives one of the big reasons, we brought them onto our senior team is the frankly, we can get more hands on the on the on the opportunity itself.
And so were looking aggressively I think we're looking for properties that are they've got to be good IDEXX businesses, that's something that we're always going to keep firmly in our sites.
You could imagine in times like this that this is a complex operating environment and businesses that might not be able to handle it quite as well, but are very very differentiated would be something that we think we can bring a lot of value to and so we're considering that as an extension of sort of our normal course, and the normal filters that we use as we think about businesses, we'd like to own but I can assure you it absolutely remain.
And a fundamental piece of the of the day and a priority for us.
And secondarily good to see the sequential trends continued October here, maybe some initial thoughts on next year and how you're handicapping things internally, obviously, one of IDEXX. His mantra is to be able to.
You know adjust and adapt to whatever the environment looks like but how are you thinking about linearity trends into next year.
In in any kind of thoughts along those lines at this point yes.
Yes, Mike maybe I'll just touch on it first and then ill, let Eric go deeper on it so really no real difference from how we thought about it last quarter.
If you look at the sequential improvement that we've seen go back from.
Second quarter first quarter third quarter second quarter third quarter and that sequential gain and we are now in that 3% to 5% down that the last really tough comp will be Q1 of next year and I think we'll know a lot more going into that quarter, but I will say going into the fourth quarter.
We always look at the backlog load and that gives us a confidence level and were at the higher end of our normal backlog load going into the quarter. So that's a really good sign it gives a lot of.
Port around that 3% to 5% organic first.
First quarter will be a tough comp and then but if you keep thinking about the sequentials and you think about that acceleration.
Thats that puts us in a good spot for the entire year to think about it I know Eric you've put a lot of thought into this as we're prepping for our budgets and gold District plan, Yeah, Yeah, and absolutely Mike you know us well I mean, we stay agile and reactive along the way that that always serves as well so.
As we think about the variability that's still in front of us at least in the next quarter or two so we get a handle on where the pandemic is going to go I mean, we've set up and operating cadence that allows us to course, correct and adjust really really well and so I mean, a good example of that you can see in our opening comments and that we've got we've taken the structural actions, where we need to really fast in fact.
We took some of them even before the pandemic.
First showed up in the early spring and at the same time, we've been able to rally and pivot resources around the opportunities that we outlined as we talked about fighting the pandemic. That's the way, we do business and it works equally well for.
Things on the downside because more variability or opportunities that are accelerating and in front of us even sooner and so that's that's how we're going to run the company and and follow that course.
Great appreciate it best of luck Andy. Thank you Congrats again, Eric Thank you.
Our next question comes from Allison Poliniak with Wells Fargo. Please proceed with your question.
Hi, guys. Congrats Eric can you know Echo Everybodys comments, Andy is tied to seek out the best of luck there. Thanks.
You know just kind of reflecting back over your tenure Andy.
No as you had this vision for IDEXX. When you first took the home you.
How far off has has been veered off of that vision, obviously very successful style and then also what surprised you over the years the most with the enterprise I see as he went through that tenure.
Yes, Allison you're asking that question a good time, you can imagine pretty reflective right now about everything we've done together.
I think that.
The early kernels, yeah, I'll remember back in the folks from IDEXX are listening to this call. There remember we are a global leadership meeting in March of 2012.
And when you look at what Eric just referred to is what we internally call. The IODEX difference, which is around great teams 80, 20, and obsessive focus on the customer we started laying those kernels out that and from there. They grew and what you found was that is that colonel grew and you dug in deeper.
You saw that the the levers that really matter are actually very few when you when you get right down to it that the levers that matter are very few in Eric and I have had about 10000 conversations over the years and offices in airplanes in conference.
At each other's houses talking about how to make that real and talking about how to how do you get these big concepts as sound like frankly stupid corporate speak.
Down to the people, who actually do the work and and that's where we've dug in really deep until the levers that matter. The first thing is do you have a mission that people care about it right did to people actually care about the work that they're doing and how they are impacting the world and when you get a compelling mission it aligns everybody really.
Quickly set.
Second is do you have good businesses are bad businesses.
I've been in good businesses that pin pad business and Eric I know has been some its a pretty bad ones too and those are those are instructive right because bad businesses you spend a lot of time on problems that you can you can absolutely frankly never fixed and so position yourself into good businesses and that means acquisition and it also means that approached 82.
20, all along has within any business there are great business and this bad business and you got to work through that on a constant basis.
And you got to move resources right you got to move resources to the things that matter, most where profits really exist, where you have a differentiated position.
The last one was the next one is great teams.
We have one of the interesting things about I'd actually a 45 business, we have 45 corner offices, and we've seen time and again when you put a great leader in it is like a light switch it's not slow it's fast how what they do with the business and if you combine that great leader and leadership team with a great business there.
A magic that happens there that is just incredible and then I'd say the last thing is.
Process discipline.
And if you think about this as an exponential equation right and you bring process discipline to bear for us that happens to be the elements of the IODEX difference.
That really is the the formula where the equation that Eric and I and the team have been putting together for years and years and years.
Yes, and in terms of some of the learning they all go into those buckets. If I could go back in time and pull in change a couple of things look there have been times when I moved to slow with leaders, who weren't getting it done and and I've learned that you can't do that right people either buying or they don't it's very hard to convince somebody that they should.
Do something that they are opposed to out of the gate.
And so you got to get people, who are excited and you got to ride those forces.
Asset choices.
Look I really do believe that in this next phase of life and Eric is incredibly well positioned to do this acquisitions are going to matter a lot and we've made some really good asset choices, we made a couple of bad ones.
And again kind of choosing good and bad when you choose bad hurt and we choose good it's amazing what they do and I'll just I'll reference one the first business we bought.
I bought as part of IDEXX was PB and that was in 2010, I wasn't CEO, yet and as it is a little business in.
In England, and what you saw there was where all the elements of what makes IDEXX special and we've gone from that little business in England to a $300 million platform that is is just an incredible part of our business. That's the model that I think we need to follow here going forward and so Alan I appreciate the question.
It definitely is a reflective time.
Great. Thanks for the perspective and.
And just turning to that today, you know comment around sort of living with the virus makes sense is that reflected in sort of your current order trends that you're seeing from customers. You know, we're just seeing Germany going back into the lock down here just trying to I guess that I understand how you're thinking about that potential volatility here with the resurgence happening at this point.
Well I'll take that one Allison so.
Look I think ever since the pandemic started here I mean, we've seen that volume volatility enter our order book and we know it's going to have to wait that we delineate. It we've got kind of that everyday replenishment cycle that that happens in a lot of our component businesses and that honestly as long as the system is on stays pretty constant and so irrespective of.
Four to closings and other things that generally has held up pretty well what tends to move on us is our our little bit more project intensive businesses larger unit units of measure and they're very much affected by the view of the world around us. So I think I think as we as we see this.
No doubt I think it I think this next wave will be different than the one we saw in March because everybody kind of recognizes the economic consequence of that and everybody has done a better job of tooling organizations up to be able to to live with it and coexist with it. So so we're expecting more volatility is the is the cases go up but I don't see that it should knock us off the tree.
One path that we're on.
As we just continue to live with it and that those products that goes for any other any other business.
Great. That's helpful. Thanks, So much guys. Thank you. Thank you.
Our next question comes from Matt Summerville with D.A. Davidson. Please proceed with your question.
Yes, Echo everyone's Simon congrats to everyone.
So question on the COVID-19 opportunities you identified the 25 to 100 I assume that's kind of an ongoing run rate you're looking for I guess organically what sort of spend that is associated with going out you know to.
To get that revenue and what sort of defines the high and low end of that range.
So maybe I'll take a first shot at that I would say we've made some initial investments in the quarter from an investment perspective, as we've worked with our customers to get some of these things get some traction and early development. Obviously, we've invested in some capital support some initiatives relative the tooling.
Some of these opportunities relative that range could be sizeable.
Obviously, we've got multiple partners with each of the applications.
The volatility we've talked about who is ultimately going to end up winning is is one factor and then to the commercial viability of whoever wins in the marketplace will also be another variable. So that's why it's a wide range for now obviously, Eric highlighted we were spending a ton of time on these initiatives across several different businesses.
Yes, and I think we'll have more visibility coming out of the year in early first quarter Bill will size that up a little bit better for you.
When we talk about 2021.
Got it and then maybe just.
Other just quick question on M&A would you say in the last 90 days or so the action ability in the pipeline the actionability Arnold's actually getting better and what are you seeing from a multiple standpoint.
That was certainly the.
The action ability I think is quite a bit better I.
I think everybody has found a way to actually do the work.
And in a remote way.
In many ways everybody else kind of got their head around the fact that this is going to be with us for a while and yet things are going to continue and business is going to go on all of that helps and then of course. There is it seems like there is ample liquidity as well for certainly for us and for others. So.
So the Actionability is high the process is slightly different I would say on the on the valuation.
Not a lot of change it's high it's high and I think it's a long term view and certainly for the businesses that we're going to be attracted to you know they have tremendous long term potential.
And so those out years, if anything we're looking at.
We're anticipating we're going to be strong and the sellers or have a firm belief that that's the case as well.
Great. Thank you guys.
Our next question comes from Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone. Congratulations on the new role, Eric and Andy Congratulations on.
The phenomenal tenure, Ron has been my pleasure and privilege to work with you and get to know you.
Over that time, so I'd like to wish you and your family all the best Thank.
Thank you Nathan.
Just getting onto a few questions here on maybe some of the red dots on the end markets energy.
Energy in the analytical instrumentation, just like to get your thoughts on the potential timing of recovery. There I mean energy is probably a little bit longer than the anik analytical instrumentation side.
But I think Andy you talked about you know focused on the vaccine taking away from maybe some styles that looks like maybe were getting towards a point, where a vaccine is going to be out and available and production facilities will be put in place and maybe some of that focus moves around so just any thoughts you have on timing of recovery.
In both of those businesses, yes, I'll touch on it first and then let Eric kind of go from there. The interesting thing is both Eric and I were group executives in charge of that business at one point.
So we both know it really well.
Yeah look I think is what you're seeing here is counterintuitive, what's happening in that marketplace right. Because if you look at analytical instrumentation, one would think that immediately because their health related issues that it should be growing the reality is that a lot of the stuff that happens in that in that big AI space.
Is being pushed away right now because priorities are going over to other spend it's very much our expectation that as we get into I don't think any later than the midpoint next year that that starts to two to improve.
And so obviously, we had a lot of confidence it's a really good business for us So Eric your thoughts, yes, certainly the same thing and then of course, there's a there's a consumables dynamic there that kind of out ahead of us were generally making the componentry for the equipment. So even even as things recover there is a little bit of a lag there as you go through a consumable stream and then into the actual devices themselves.
But I agree with that.
Any comments on the energy market and potential pace of recovery that yes.
Yes, well on the energy side of course, as you know we tend to be more downstream.
Our downstream and its associated with things like custody transfer and mobile applications.
And so so less resilient or less tied to you know that.
The wellhead and places like that and.
So I think ultimately we've seen a little bit of improvement here now I mean, obviously that that took a hard hit initially and some of this is probably pent up demand that's coming back.
But I, but I think it's going to be a while it's going to be a while for the energy markets to kind of sort themselves out often when you get it down to where we do business. It depends on things like building trucks for mobile fleets that actually do the work of custody transfer and so what kind of decisions that have to be made the competence. It has to be there.
But certainly we're we're much happier to be a little further down the street that up in the front of it.
And given the top sorry go ahead, so that may be the only thing I'd add is we talk about a specific initiative, we had an energy relative to lot last year that was there was a huge initiative for us obviously that business. This year has seen significant contraction, which is I think weighing on FMTV.
A lot more than we had expected coming into the year. So.
Just as folks have pulled around a little bit on why inventories margins and volumes are down a little bit more with a run rate business improving that was fairly large for that group at all and that of course has a political question associated with it as well.
Exactly.
His vehicle miles traveled really the best indicator, we can look at for the energy business.
Mm.
I mean, let me jump in on that one one of the problems with any kind of big macro thing is.
We actually do business and a lot of the micro areas.
And and so if you're going to make a big energy call of course, that's going to influence us, but if you think about our business, where we're at the micro level.
Okay can you feel like the cost structure in those businesses that are struggling the most is aligned with demand now or there are they targeted cost actions that you can you can take it.
Yes, so look we're taking the opportunity now to make some of those actions. We we opened up a factory down in Oklahoma.
Actually ahead of the pandemic, that's been a big assist to US we intentionally built that with some extra floor space.
For any potential.
We're leveraging that now we're doing some structural work around the footprint of the company because I think this is a good time to think about sort of.
Taking taking it down situation and creating competitive advantage out of it and by moving some of the structure around the the way we are it actually allows us to augment or increase some of the innovative potential we have in a business while at the same time doing the right things on just base administration and so we're yes, we're we're pretty active efforts underway in this area right now.
Hi, Thanks, very much I'll pass it on thanks.
Thanks, Ed.
Our next question comes from Scott Graham with Rosenblatt Securities. Please proceed with your question.
Hey, good morning, I thought I was surprised when Larry resigned and you took over to Andy This is double that but for sure you've had an amazing run here to say that you've had a.
A good run is is an understatement great value creation, you and Eric are terrific team. So congrats to you Andy and Eric anyone that knows you noted that you're up for the challenge.
I loved your line about this being a story of continuity so.
Thanks for the last nine years, Andy and Eric look forward to the next and with you. Thanks Scott.
Hi. This is maybe more of the first question is maybe more of a question for bill the more whose I'm certain it's more of a mathematician than me, but could you walk us through the.
Organic flow through of 37, and then the total flow through of 53 on the you know on the operating income walk them I guess I'm, having a little trouble mass challenge that I can be on on how we get there on 3 million of sale 3 million of income, but maybe I'm just not understanding it yeah. So maybe we'll.
Start with that one acquisition and FX piece, that's extremely of income on roughly $30 million of sales. So you know only 10% contribution from that aspect, which is extremely dilutive to the overall margin. So when you exclude that if we just look at our core business like for like last year versus this year.
Right are the cost actions the things weve done within our core business.
Materially reduce the organic flow through to from what we'd expect 60% down to less than 40%.
Got you that makes a lot sense. So our next question is same for you again here, but what is the 13 million of discretionary look like in the fourth quarter and then you know sort of what are you looking at is sort of the reversals for next year with sales now start to get better.
Yes, I mean, we targeted a you know once we get back to normal run rate levels, obviously, the discretionary expense relative to doing business post cove, it will be different but adding back about two thirds of that on a consistent basis going forward. You know, we we ramped up our spend slightly in the third quarter, probably up slightly again here in the fourth quarter increased by.
Liam's, so although we will never come all the way back.
If you're doing modeling that's true roughly 80% of that cost coming back on a longer term basis.
Okay. That's great. Thanks, one other question if I may be.
$25 million to $100 million range, which we'll be talking about I didn't hear you say kind of where you are on that spectrum right. Now I can see how really you are focused on the areas that really are kinda for keeps area. So that does become a b.
What are the organic but where are you on that curve.
Well with revenues year to date, obviously, we're on we're below the low end thats a full full year run rate on an annualized basis. So we've got some wins that we started to experience obviously.
In the first half of the year that have continued on here in Q4, I think some of the items that will ramp up to the top end of the range of things again, we will have full visibility here until we get into 2021, and just trying to think about what those triggers are right. So some of them as bill said they are already there we're already winning it's already in the base business so to speak right.
You'll you'll you won't lap that till the second half of next year for the most part.
And then you've got some big digital events right. So that the work we're doing on Cobi testing the work we're doing on vaccines.
As I said last quarter, if those go in the right direction for us they are huge wins and we will get to the top end of the range fast.
But if they don't they're not there so I I caution anyone to build those into your models. The top end of that range and tell we have got meal. The nowhere, whether we're aligned with head wins and whether that has momentum.
That's great Andy. Thank you best of luck to you Eric Best of luck to you.
Thank you. Thank you.
Our next question comes from Brett Linzey with vertical Research partners. Please proceed with your question.
Hey, good morning, everyone.
Firstly I congrats Dandy appreciate all the years of insight and best of luck to Eric.
I wanted to come back to the order trends you are the improvement is encouraging were you able to.
Spike out how much of that improvement was market versus share gain and I imagine you had some of the cobot opportunity wins in.
September October orders any color you could you could give us there.
Yeah. So so look I think from a big piece of that is general market recovery because so much of what we do at IDEXX is a broad basket across a wide variety of industries, but no doubt when we can see and isolate the places where we know we're winning share one of which we talked about here in the cobot.
Story chapter in terms of some components that we already have placed that are helping that fight, but I would say that the bulk of what you're seeing here in the near term is sequential recovery of industrial markets that we participate in.
Okay got it great and then just wanted to shift back to the comments on the Muni budgets and some of the work you're doing there.
Do you expect a lag effect into next year as the backlogs get monetized they need to replenish and just curious what you know what some of that work that you're doing on budgets and those particular businesses is informing about the outlook there next year.
Yeah, I would say I mean, there's there's always a little bit of a lagging element in the municipal markets and it's not it's not ubiquitous you have some some towns in municipalities that are pretty aggressive in their thinking through now the consequences and the actions in some cases that actually accelerate some work as they are trying to spend money that they have available I'd say the bus.
Talk of most of the market that were interfaces with is stuck in the same variable variability that we are and are trying to imagine what could be in front of them. As we go into 2021 open questions of or in the case of the U.S. federal support or whether or not it comes or doesnt.
So I think theres going to be a lagging element there that we're thinking about but you know I we're.
We're very close to our customers you know, we kind of do this town by town jurisdictions. They can buy you know stayed province, and a municipality and so for US. It ultimately turns into a series of pins on the map a bunch of discrete discussions, but generally sum up the way I've described it but we navigate through that field of opportunity as we go.
Okay I appreciate that and best of luck to both you again. Thank you. Thank you.
Our next question is from Rob Wertheimer with Smelliest Research. Please proceed with your question.
Thanks, and good morning, everybody good morning, Mark.
Hi, Andy Thanks for the reflections on that on a on a great run. It was is a wonderful distillation and Eric on the comments on continuity in evolution and I'd like to see if I can encourage this little bit more of that.
Really my question is given all that you and the organization has done with margins. These expenses 80, 20, and how margins have come up but it does seem like you can add more value to pools of capital you acquire versus what you might have expected you know seven or 10 years ago, and so does that mean that you know acquisitions could have a larger role in the future Eric you touched on this briefly and.
Then you know do you have specific sort of changes you're making to the organization to push that along you know if so thanks, yes, Sir I appreciate the nature of the question I'll take it yes to both questions. So you know as we've become more evolved internally and a better understood.
The impact of all of the work that we've done around in 20, and the IODEX difference and we've seen us apply it to our own businesses and things that we've acquired along the way it makes us more confidence about what we can do on the outside world and so we've been very very purposely thinking about that we've built that into the modeling that we do is wherever we're looking at IDEXX like.
Businesses on the outside and again it from an organizational perspective, a lot of the work that the.
Certainly I've been working on in the last few years is to get a number of leaders ready to begin to spend a significant amount of their time on this work.
So we're doing that in the background and then I think going forward looked as we said earlier the valuations are high our discipline remains very very tight and focused and so.
You know, we're going to have to we're going to have to spend the time, beating the bushes to find these kind of opportunities get them in front of us and analyze them thoroughly and that's going to take some resources as well. So one of the things we're thinking about as the world improves and things lever up is making some purposeful investments to support the continued evolution of this work and keeping it at a very high priority.
Okay. That's a helpful answer. Thank you and then just if I if I can just add on one small one on the back of that I mean do you expect as you do all that that you'll have a.
Consistent cadence on acquisitions and flow or you know, you're obviously not not usually are still relatively small and can be opportunistic see you thinking it can study out of it or or is that not you know not part of the goal and just take opportunities where the comp and I'll stop thank you well.
Well I mean, I think there's always been a little bit of a sign wave at least in the time that I've been here it seems like wins break and it tends to come in clumps and so I think I think we are prepared to you know to have it continue that way I mean, we think about resourcing in a way that would support it.
So so maybe intentionally level loading it wouldn't be something that we would do.
As a purposeful way to sort of balance things out because what it might do is actually cause us to think about opportunities in a different way than we than we actually shut so I think there'll still be a little bit of you know kind of time to time, some clustering that we will see but we've set up the organization and we certainly have the capital resources to be able to handle it that way.
Great. Thanks, so much.
Thank you.
Our next question is from Joe Giordano with Cowen and company. Please proceed with your question.
Good afternoon and.
Right.
The Americas, both load is there an opportunity so that's about to you both.
Thanks, Yeah, I wanted to just I hear your comments on backlog going into the fourth quarter kind of at the higher end of what it normally might look like in the Gallup and touched on this earlier, but.
Are you currently hair cutting a little bit with what you're saying or at least internally how you're talking to your people in terms of budgeting about just some of the stuff you're seeing a little less.
Week in country, starting to shut down like how are you thinking about deployment of growth capital and things like that near term with some of these kind of more recent developments.
Well. So so look I think we have a general approach here that is.
It is very agile very reactive and to be honest. This what we're going through and what we're seeing here now we planned for this back in March I mean, you know as soon as people started to recognize that there would likely be a second call.
That anyway.
Thanks.
And so the fact that we're in right now yes.
Very cautious about the variability that's out there.
We're we're super hesitant unless we have to do it to put in kind of fixed costs back into the business. Given this environment. So let's treat it variably if we can but I have to say that while it's certainly concerning for all of us as citizens in many ways, we sort of set this up as a planned event, we thought would be here. It is it here and you know we're gonna stay is variable and agile.
As we can as we go through it.
And Eric you are taking over.
No relation that's in a in a really good spot.
And if you can replicate what's happening with 10 years and they can be pretty happy with it but just curious.
Hey, you're taking over an organization that's still there's like two at twice the size in terms of revenue is when when any did so what kind of different things you have to think about just given the size of the organization and what's happened over the last decade.
Yeah, no. Thanks, well certainly I mean, this is a well positioned company in a great spot I will take that [laughter] went for that I know it presents opportunities along the way the bar is high and we need to continue to raise it but I am very very thankful that it's in the state that it is now you know that that being said as we as we go forward. There's there's things that we have.
Talked about you know we are certainly more of a global company that today than we were even back when when Andy joined you know I think that even the things. We've we think of acquiring and we have acquired the unit of measure is a little larger.
No you know that the story that Andy talked about with our sealing business. You know, we've we've done the work to integrate that and bring it together with other like businesses and that will no doubt continue to be a chapter for us as we go forward and that's you know that's that's complex work that that takes certain skill sets that we have been building for so so as I said in the very beginning I see it.
Awful lot of continuity at play here to keep this company in a great a great.
Great position and take it forward, but there are those those those little nuances go along the way that I think are appropriate that are that we have in mind that are going to take it to the next level.
Thanks, guys.
Thank you thanks.
Our next question comes from Andrew Buscaglia with Aaron Berg. Please proceed with your question.
Hey, guys congrats.
Congrats the Andean Eric.
And yeah, good luck with the new moves.
Thank you. Thank you.
HM.
First off you know you were you guys had you know the colonies <unk> commentary is very interesting on HST segment with the 25 to 100 million dollar opportunity.
So how do we you know I I hesitate to like you said you know put that in the model at this point, but what I guess, what are some headlines or what should we be tracking to see if the likelihood of this is going forward or is this something that we cannot know what you guys would have no internally.
Yeah would wait for another update.
Well look I think there's a I think there is a few environmental things that we can all track you know this is we're making an assumption here that is Andy said in the beginning that we're gonna coexist with this virus for quite a while so you know even the vaccines that are planned to be here, we're anticipating that they're not going to iron ore wipe out necessarily that device.
Chris it's out there and there's going to be a continual need for testing of this type. So I think I think all of US tracking you know that.
The requirements than the necessary nature of the kind of work that we're doing on both fronts is an environmental factor that would support this but they're very specific I mean. These are this is really specific technology science and commercial adoption that that has to happen here and as Bill said I think you know certainly will give you an indication along the way when we reach different.
Milestones and it's starting to find its way into our sales stream order and sales stream sorry.
So I think there's a there's a slight environmental component, but a lot of it is very specific for us.
Yeah Okay.
Okay.
And and with regard to the orders in the quarter. So that's it's nice to see those trending in the right direction and exiting the quarter.
Were orders in any specific segment surprising to you throughout the quarter and how they trended specifically FMT I'm.
Curious how that trended each month, then and that just doesn't seem to be the laggard here.
Obviously important segment so the story.
Yes, I would say yeah, Andy referred to it we saw improvement across all three segments. Obviously FMT is lagging a little bit relative to the end market exposures, but the pickup we saw in a month to month basis was pretty.
Pretty close linearly to how we performed overall.
Okay.
Alright, thanks, guys.
Thank you. Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session. At this time I'd like to turn the call back over to Andrew Silvernail for closing comments.
Yes. Thank you very much look I do have a few closing comments one just around the business as a whole and to just a few thank you that I'd like to set out and then I'll turn it over to Eric for too to wrap it up.
So look.
As I exit this company.
Okay. Appreciate the position that we're in and the quality of this business. It is an awesome business and as I answered else's question and I walk through those four things quality of business matters, an awful lot and and mission matters, an awful lot and we're in a great spot.
Second we've got positive momentum.
Frankly, I would never have made the decision to.
To leave IDEXX, if a if we were in the spot we had been in at the end of the first quarter in the second quarter and it gives me great confidence and you know as long as I'm alive. My name is gonna be associate with IDEXX and I want this company to absolutely blow the doors off it and we have really good momentum.
And then the last thing is you know there is a great team.
Often times the investment community focus is on a singular person and it's just never sell and under my time as as the leader of this company. We have been successful because we've had a great team and Eric has a great team as we go forward. So I have a lot of competence in where this business is going and just a few.
Thank you.
First.
I want to thank everybody at IDEXX.
As I mentioned before this is just been a privilege and the highlight of my professional career to work with all of you I can't tell you how many days I've gone home and had conversations with my wife and conversations with my kids about the joy to work with the people at IDEXX.
You're just first rate, there's there's nobody in the world to hold a candle to you guys and.
And you brought me just incredible Joy and I just want to thank you very much.
To the Investor and analyst community, everybody on the phone here today, and and those who might listen.
You know.
Sometimes is a bad rap that between a company management and the investment community that somehow it says negative beef that exist and for me anyway. It just isn't true I'm here a lot of you guys on the phone today you guys are my friends and and you have helped me get better you have pushed us to get better you've asked a difficult questions and did.
Two quick questions are how you get better and it's one of the things we do at IDEXX. All the time, we ask the difficult question and part of that comes because you guys asked a difficult question and it's just been a privilege to work with you.
And then just to my friend Eric.
You know excuse me.
We have worked together for 12 years and people think about professional relationship and we obviously have that.
But he is also my dear friend and as much as I am glad that I've made him better as a leader. He has made me equally if not more better as a leader and there is not a better executive in the world that ever worked with and Eric and this company is in great hands.
Well. Thank you very much for that thanks very much for that.
As we often do we and we and done a lot of the same summary points. I think this this business is really really well position that I couldn't be more excited about where where it is now and where it's going to go.
This transition is smooth and seamless we are we're going to execute this everybody is leaning forward here and our priority priorities are constant you know Thats Reich feel really really good here and that's the first question I think is the right. One I mean, we know whats important we worked on it together and we're going to continue to legacy and the work that you've done Andy.
Do people I'd like to thank as well, but certainly like to thank all the hardworking folks across IDEXX I'm excited to be continuing the journey with them I'd like to thank our board for their confidence and support and then I absolutely would like to thank my friend Andy It has been an amazing run from that very first day. He came to my business in 2009 and introduce.
Just himself and so after a long time.
We're transitioning from boss and partner to mentor and continued front. Thank you very much.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.
[noise].