Q1 2021 IDEX Corp Earnings Call

Okay.

Greetings and welcome to the IDEXX Corporation first quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.

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 introduce your host Michael Yates, Vice President and Chief Accounting Officer. Thank you you may begin thank you.

Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer Friday Corp. Let me start by saying Thank you for joining us for a discussion on the IDEXX first quarter 2021 financial highlights last night, we issued a press release outlining our company's financial and operating performance from three months ended March 31 2021.

The press release, along with the presentation slides to be used during today's webcast can be accessed on our company's website at www Dot I D. E X C. O R. P. Dot com joining me today is Eric Ashman, our Chief Executive Officer, and Bill Grogan, our Chief Financial Officer.

The format for our call today is as follows we will begin with the Arab providing an overview of the state of our business and update on our M&A activity and an overview of our order performance and outlook for our end markets.

He will then discuss our first quarter 2021 financial results and provide an update on our outlook for the second quarter and full year 2021.

Finally, Erik will conclude this on update on our sustainability diversity equity and inclusion program.

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

If you should need to exit the call for any reason you may access a complete replay beginning approximately two hours. After the call concludes by dialing the toll free number 870, 76606853, and entering conference I'd number one free 712089 or you may simply.

Log on to our Companys homepage for the webcast replay.

Before we begin a brief reminder, this call may contain certain forward looking statements that are subject to the safe Harbor language in last Night's press release at IDEXX as filings with the Securities and Exchange Commission with that I'll now turn the call over to our CEO Eric Ashland.

Thank you Mike once again, our teams across the IDEXX should be extremely proud of the results we've achieved together.

I don't think any of us would have imagine being at this point when viewing the state of the world a year ago, our diverse array of high performing businesses continues to serve US well, we're seeing most of our end markets either largely recovered our steadily improving at this point, we continue to build on the momentum we experienced in the fourth quarter and expect 2021 to be stronger than our expectations 90 days ago.

Although tremendous progress has been made in a recovery there are still some areas. We're keeping a close eye on our day rates have accelerated but we have yet to see larger projects in our industrial sector moving forward customers are more confident in their outlook, but are now trying to balance the surge in demand with capacity to make larger investments.

That's where COVID-19 the conditions vary widely around the world and the U K and the United States. The vaccination rate has been remarkable of light in China lots of life has been continuing as normal for many months now the situation in Europe, and India, where lockdowns and virus variance there is still a serious issue.

And us that we are not fully passed the societal and economic impact that the pandemic has had on our businesses.

The quarter was not without challenges from safety protocols, and lockdowns to sporadic shortages of parts and materials to rapidly changing logistics hurdles and a variety of staffing challenges. This was far from smooth sailing.

Recognizing all of that I want to thank every IDEXX and play on this call for their efforts in the past quarter I'm proud that our team successfully navigated many tough hurdles to achieve these results the operational excellence of our teams continues to pay off.

Pivoting a moment to capital deployment.

With the closure of the Abu pumps transaction this quarter and the announcement of the <unk> acquisition last night covered in more detail on a moment. We have started off 2021 on a strong note.

And we will build on this momentum as we further invest in M&A capabilities. We recently allocated some of our most talented resources towards focused strategy and business development roles and we engaged external expertise to expand our ability to identify assess when and successfully integrate new companies into IDEXX.

Our deal funnel is expanding as we look for more opportunities to acquire organizations that fit the IDEXX style of competition.

We think the both widen and deepen the moats around our best businesses as well as established positions within new market niches, where the capabilities of our teams will drive the most value for customers and shareholders. We are fortunate to have significant financial resources to deploy towards these efforts.

Moving on to slide seven and yesterday, we announced our intent to acquire Aerotech vacuum group from Eagle III capital for $470 million.

Aerotech engineers and manufactures high performance regenerative blowers pneumatic valves air compressors and vacuum pumps Aerotech had revenue of 85 million with EBITDA margin in the mid <unk> range. In 2020. It is a 16 times trailing deal and a 15 times deal, including acquired tax benefits within the IDEXX family of businesses.

Complement and expand upon the solutions provided by gas manufacturing, which produces fractional horsepower air moving products and systems that include air compressors vacuum pumps are motors in tank systems.

Well there are some overlaps and the solutions they provide much of their tax product lines will be complementary they will remain separate businesses with an IDEXX, but we anticipate collaboration and synergies from each company with shared expertise leading to further innovation. This.

This deal, which we expect to close in the second quarter will then create a $200 million pneumatics platform within our health and science technology segment.

Turning to our commercial results on slide eight the positive momentum in order trends continued on the first quarter, both compared to prior year on sequentially, allowing us to build $59 million of backlog in the quarter.

Most of our business units are at or approaching pre pandemic levels I'll go into more details on a minute.

Organic orders in the quarter exceeded the first quarter of 2020 and were an all time high for US Q1 orders were also up 4% organically versus Q1 of 2019.

As we look across our segments health <unk> science technologies, and fire and safety diversified products delivered strong organic order growth with fluid <unk> metering technology slightly lagging.

As growth rates on H S T and F. S. DP began to naturally level off we expect FMT will drive additional growth due to the return of project based businesses in the energy and industrial markets in the second half of the year.

These commercial results on the strength of our rebound highlight the resilience of our businesses and the critical importance of the solutions, we provide to our customers.

On slide nine we provide a deeper outlook for our primary end markets.

To level set we entered the year cautiously bullish about the state of our underlying markets and the velocity of the pandemic recovery our day rate businesses began to accelerate coming into the year and we continue to leverage our diversified portfolio to aggressively pursue opportunities to drive organic growth coming out of the pandemic. We are now measuring our markets against their pre pandemic.

<unk>.

Any of our markets are fully recovered and the majority of our markets are on track to have fully recovered by the end of the year as I mentioned earlier, we're not out of the woods, yet, but even with pockets of concern around supply chain disruptions in COVID-19 in certain geographies. We are optimistic about the outlook of our end markets.

Our fluid <unk> metering technology segment industrial day rates continue to increase throughout the quarter.

As I've mentioned, we will not be at full recovery until we see large capex capex projects resume but the underlying industrial markets are in a state of recovery trending back towards 2019 levels agriculture.

<unk> continues to drive outsized growth as crop prices and customer sentiment remains strong our water business is stable. We continue to assess any subsequent impact from the pandemic on municipal funding as well as tailwind that might come out of an infrastructure Bill.

Energy markets continue to lag 2019 levels, primarily due to limited capital investment in this sector.

Moving to the health and Science Technology segment, we experienced solid growth across almost all of our markets.

On icon and food and pharma continued to outperform driven by a strong market and winning share with our differentiated technology offerings. The overall automotive market faces many challenges, but we have won several new platforms driving our performance our AI and life science markets are on the rebound as the impact of the pandemic in the United States has improved.

The industrial businesses within the segment I'm seeing a similar result to F N T.

Day rates, improving but projects are lacking one last item for HST, we do see risk with the COVID-19 opportunities. We have been taking talking about in this segment specifically around testing. The <unk> application has yet to receive FDA approval, which will impact volumes for this year, we do believe that the strength in the rest of the segment will be able to offset most of that risk.

Finally in our fire and safety diversified products segment dispensing continues its rebound as large retailers free up capital and work through pent up demand for equipment much like our automotive exposure in HST the auto recovery in FSD at band It is driven by new platform wins, coupled with an improved market.

On fire and rescue we continue to assess municipal budget headwinds, especially in Europe, and India as budgets have not been released delaying tenders. The U S market has been better and we are optimistic about the impact of our business is from increased infrastructure spending the other lagging category in FSD is primarily band its energy and aerospace exposure along with some industrial applications.

In fire and rescue.

We continue to closely monitor market conditions and are focused on ensuring the stability of our supply chain is persistence from global supply chain issues threaten to create choppiness from the back half of the year.

Despite these factors we are confident enough in our outlook to raise our organic growth ex space to expectations for the year with that I would like to turn it over to bill to discuss our financial results for the quarter and full year.

Thanks, Eric I'll start with our consolidated financial results on Slide 11, Q1 orders of $711 million were up 10% overall net up 6% organically as we built $59 million of backlog on the quarter organic orders grew sequentially and year over year on each of our segments as highlighted by Eric on the prior slide.

First quarter sales of $652 million were up 10% overall and 6% organically, we experienced growth across all our segments with over 75% of our business units increasing year over year.

Strength in Semicon, food and pharma and dispensing where the notable highlights on the quarter.

Q1, gross margin contracted 80 basis points to 44, 9%.

But was up 110 basis points sequentially.

Do you ever day or decrease was primarily driven by the dilutive impact of acquisitions inventory step up associated with Abel mix and one time inventory reserves.

The inventory reserves were associated with our pandemic related electrostatic sprayer business is now materializing at the rate we expected.

<unk> acquisitions, and the inventory reserves gross margin would have been flat to prior year.

First quarter operating margin was 23, 9% up 40 basis points compared to prior year adjusted operating.

Operating margin was 24, 3% up 80 basis points compared to last year, driven by the increased volume and the impact of cost actions taken last year offset by the gross margin pressure I just mentioned.

I'll discuss the drivers of operating income in more detail on the following slide.

Our Q1 effective tax rate was 22, 6%, which was higher than the prior year ETR of 20% due to a decrease in the excess tax benefits from share based compensation. This drove a five cent headwind on EPS for the quarter.

First quarter adjusted net income was $115 million, resulting in adjusted EPS of $1 51 up 18 or 14% over prior year.

Excluding the <unk> <unk> tax headwind adjusted EPS would have been up 23 or 17%.

Finally free cash flow for the quarter was $95 million up 32% compared to prior year and was 82% of adjusted net income. The strong performance was driven by higher earnings and the continued impact of our working capital initiatives.

Moving on to Slide 12, as Eric mentioned, we entered the quarter cautiously optimistic about the pace of growth coming into 2021.

We knew that we're structurally well positioned to take advantage of improving market conditions from the cost actions and could discretionary controls we put in place last year.

Adjusted operating income increased $18 million for the quarter compared to prior year or 6% organic growth contributed approximately $13 million flowing through at our prior year gross margin rate.

The impact of previous discretionary cost controls contributed $5 million and we were able to net $4 million from price productivity, partially offset by inflation.

After accounting for $2 million of negative mix, our organic flow through was extremely strong at 58%.

Flow through was negatively impacted by the $3 million charge related to the inventory reserve I discussed on the last slide and the dilutive impact of acquisitions and FX getting to a reported flow through of 32%.

As we highlighted in prior calls we expect to reinvest aggressively in the business to drive both organic and inorganic opportunities. We have already started those investments and expect the associated costs from these initiatives will reduce our organic flow through in subsequent quarters.

With that I would like to provide an update on our outlook for the second quarter and full year 2021.

I'm on slide 13.

For the second quarter, we are projecting EPS to range from $1 60 to $1 63, with organic revenue growth of 18% to 20%.

And operating margins of approximately 24, 5%.

The second quarter effective tax rate is expected to be about 23%.

And we expect a 2% top line benefit from the impact of FX.

Corporate costs on the second quarter expected to be around $21 million with the increase primarily driven by the M&A investments we discussed earlier.

Turning to the full year outlook, we are increasing our full year EPS guidance from $5 65 to $5 95 up to $6 five to $6 20.

We are also increasing our full year organic revenue growth from 6% to 8% up to 9% to 10%, we expect operating margins of approximately 24, 5%.

We expect FX to provide a 1% benefit to top line results are.

Our full year effective tax rate is expected to be around 23%.

Capital expenditures are anticipated to be around $55 million.

Free cash flow is now expected to be 115% to 120% of net income and corporate costs are expected to be approximately $74 million for the full year.

Finally, our earnings guidance excludes any costs, our earnings associated with future acquisitions or restructuring charges.

Pump is now included in these estimates with the deal closed in the first quarter.

<unk> is not included in these estimates we will update our guidance accordingly, once the deal closes with that I'll throw it back to Eric for some final thoughts.

Thanks, Bill I'm on the final slide slide 14.

Before we open the call for questions I'd like to share an update on our ESG journey on the evolution of our company culture.

We recently published our second corporate social responsibility report. This report is our first to adopt the sustainable accounting standards Board sector standards also known as SaaS B, we have increased our disclosures in key areas, including health and safety diversity and environmental impact I would like to take this opportunity to thank Denise Cade, our general counsel.

On her cross functional team for their outstanding efforts to bring our hardworking commitments to light.

Diversity equity and inclusion continues to be a point of emphasis on our evolving company culture. Since we last met an outside facilitator conducted anonymous focus groups with employees from around the world from which we learned and we're able to begin developing more targeted goals for the company.

We are currently planning training sessions for all leaders to help them understand it become comfortable fostering dialogue on these important issues.

We are addressing our talent management processes, including our assessment of existing talent on our consideration of new talent through recruiting to help ensure our processes are free from unconscious bias and we are assessing our purchasing practice to expand our use of diverse suppliers.

IDEXX as a decentralized company with a diverse collection of businesses are superior economic model depends upon problem solving and decision, making at the point of impact closest to our customers. Our collective work within this important areas outlined on this report is an essential component of our next phase of business growth with that let me pause and turn it over to the op.

Greater for your questions.

Yes.

Thank you, ladies and gentlemen at this time well be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

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Our first question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question.

Hey, good morning, everyone.

Hi, Mike.

But let's just talk about what's embedded in guidance here, obviously, a really strong first quarter second quarter guide it seems where the uptick in guidance comes from between the first and second quarter maybe.

Maybe a little less moving in the back half of the year relative to prior expectations. So just kind of wanted to understand what the trajectory youre thinking about through the year is how youre viewing the recovery how much of what I. Just mentioned was true and what are some of the puts and takes you're thinking about because obviously the tone that youre striking is cautiously optimistic as we move into the back half of the year.

And just want to make sure I have all of those things balanced.

Yeah, well, thanks, Mike I mean look at I mean, it's an interesting time as I said in the opening comments there I mean, we've got we've got this broad based momentum.

We feel really good about and it's got these little chapters that lie over at whether that's shutdowns coming out of Christmas terrible weather.

Texas in February supply chain stuff now and I think I think that's going to be the story as we go.

And then that leaves over the IDEXX story, which always kind of had our second quarter is a high point for us and so we see that momentum.

Lining up nicely on our typically seasonally adjusted second quarter and on the back half I think that's going to be a story of we've got some projects and things that we know about on the inside that we feel good about we think day momentum certainly will continue but we would suspect we're still going to have a lot of these challenges out there that we'll have to navigate around.

And of course, then I think the typical seasonal patterns that we see around summer shutdowns and things in Europe are embedded on top of that so it's an interesting story with very broad based support early momentum. These kind of episodic challenges that we have to navigate around that we feel confident we will.

So on those challenges supply chain inflation price cost dynamics.

Maybe talk about how those are impacting you when do you think there's call. It peak pain from your perspective on all of these things hitting with debt first quarter margins were obviously excellent second quarter implied still very good. So just talk about how you're managing effectively and he did a ton of work coming into this to prepare for a lot of these challenges.

But I'd certainly like to understand how it's impacting you and when and how it phases through the year.

Yeah sure well.

Now look we this is where our model and our talent really helps us when we got a lot of local sourcing.

You know very close to where we produce very close to where we sell so we've got kind of an inherent advantage there.

And we got really really talented teams that used frankly, a lot of the lessons of the year's worth of severe acute phase of the pandemic to make some smart moves around supply chain to prepare us for that that being said.

I would say you know on the inflationary front.

On a spotty for us I mean remember we're a little further down the food chain, we don't buy a lot of giant quantities of base material, we buy things that have been converted so it does have a little bit of a lag for us.

And so we see the same thing that others are saying, where we buy lots of metals.

There's some inflationary pressure electronics a few other places.

But you know we're navigating around those on the freight side that that's certainly a challenge both on the on the price frankly more on the availability side.

We're not we're no different than anybody else trying to find sea containers trucking trains port facilities would have to unclog all of those things.

Our model helps us our folks out because I think as we go further out.

Larry pressure I actually think that's going to ramp up a bit you know for everybody.

On one of the things that you can still appreciate I see it in our own businesses as today, we still have a little bit on the benefit of our people are good scavengers.

Go round and they'll find some things over here find some places over there to take advantage of some inventory shelf stock eventually you kind of get back where you're right at the end of the factory.

And then you're kind of dealing with what everybody else is so we're planning for that we're making all the moves that we need to.

Certainly of course all of this for US you can never tell the story that I'm talking about price capture.

And so we've got these things aligned and as you'd suspect we're always trying to manage that spread and taken advantage of the price capture side as we sell and then executing the heck out of a difficult environment on the back end to maintain that spread as we go.

And doing it all with our customers top of mind and.

Considering and remembering remembering the lead time requirements that we have kind of where we fit the criticality of what we do that that's what drives all of it.

Yes, Michael.

We were pretty comfortable relative to where were sitting right now that we've maintained our historical price cost spread.

We have seen some businesses the inflation has ramped up here more quickly they've gone out proactively with incremental prices or surcharges on our customers. So our commercial teams are actively working with our supply chain teams to make sure that.

We have the ability to continue that spread as we progress through the year.

Thanks for the answers guys I appreciate it.

Thanks Pat.

Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question.

Thank you good morning, everyone.

Hey, there were a couple products cited in the prepared remarks COVID-19 related that were looking like they were lagging in terms of initial expectations. I know last year that was part of an IDEXX initiative. There were 25 to 100 million pets.

10 show revenue.

New COVID-19 products. It sounds like there's two of these were in that bucket. The H S. T. The COVID-19 tester Enver F M T. The electrostatic sprayer so just.

Give us an update as to those COVID-19 related initiatives, how many not all are going to come through right I get that but just.

Where does that stand in terms of expectations sure.

So I'll kind of start back in the beginning and just you know.

Walk this from high to low I mean, we originally talked about that range pretty quickly that moved to about $60 million. It was split pretty evenly between 2020 and in 'twenty. One. So now we're kind of talking about a $30 million bucket for this year and the two biggest components in there where the electrostatic sprayer application, which we talked about and you saw.

Paul on the margin walk I'll come back to that on the second and then the debt.

COVID-19 testing the diagnostic application, which was always a little bit more back end loaded and as you noted and we noted in our remarks, we've got some pressure points around both of those related frankly to the improving situation.

Situation that we see across the globe in terms of vaccination rates and some other things on the sprayer front. That's literally is buying areas from a change in thought of change and thought it.

It was a part of the CDC guidelines around the need for standardization not being as high as previously thought.

At a time pretty coincident with some of our launch planning so as you'd suspect you know we've taken a slightly different view of that business I think it's a good product line. There are still plenty of places a lot of it involved in transportation, where that's still going to be in a central piece of it but it is no doubt going to run out slower.

Do you want to pause for a second though and point out the <unk>.

Positive aspect of that that was it was one of our hardest hit businesses in terms of their core markets that rallied massively quickly put together a business.

Put together all of this product and got it ready to.

We live our mission and try to make the world a better place. So we we we celebrate that one.

And we were going to leverage that capability going forward on the other side on the on the testing from it's a little bit more complex.

We've got you know we've got some issues on FDA approvals with our partners and we have this backdrop of vaccinations and things rolling out across the world, but I must tell you I think you know where were viewing that a little less favorably as we go forward again with an eye towards what happens in the back half on the wall.

It still is not at the recommended level on the surveillance testing, where we're underneath it by more than half.

And we still think this has a role to play, but we wanted to at least point out that.

There is an impact on improving world to a couple of these applications, but overall couldn't be happier with how our teams responded and put together they are the solutions here.

Alright, Thats really helpful. Thanks for the update there and book, we'd much rather see you take these shots on goal because yeah. That's good.

Initiative in and Theres always some positives debt that will come out of it in terms of product development and other market opportunities. So appreciate all of that.

Second question I'm, just it's more for Bill just in terms of expectations on Incrementals for the balance of the year and I really appreciate how you highlight the on organic drop.

Drop through to separate out yeah. It was like the inventory reserve taken so just.

The expectation here both on reported Incrementals on an organic incrementals and what is baked in on on guidance here Yeah. Yeah. So maybe I'll speak to the organic obviously really healthy we look at core organic flow through at 58%.

I think relative to increasing guide, where we're at with our Reinvestments discretionary cost add backs, that's probably going to moderate around.

You know the low forties as we progressed through the second third and fourth quarters. Yeah. If you do the math, that's really what's implied with the revised EPS guidance.

That's real helpful. Thank you.

Right.

Our next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question Hi.

Good morning.

Good morning, just wanted to go back to your comments on the industry on more on that Big project. Okay. Just wanted to make sure I understand it you know it sounds like it's the first half so really flow second half youre getting some expectation that that could improve any color. There you know is it sort of confidence from customers increasing on quality of inquiries any any.

You can find on that side.

Yeah, absolutely I mean, it's an important piece of the business, especially as we think about the rest of the year I think actually the situation has changed their you know like the daily order rates of course, we pointed to that momentum and that's a great sign and that's a great sign that the system is working and that the momentum is there. The project side I think has shifted from one of confidence.

And in it and a lack of belief and lets say an improving outlook in the world on all of those things that's actually quite favorable now I think now it's actually caught up in a state.

Zone that people just trying to execute it and I look at my own businesses and see some of that same thing where you know some things larger projects, we've been thinking about a lot of the people that would've been moving those along or try and really really hard to ship product get things go on understanding bets on inventory all of that so as we engage with customers, particularly in that write down that fairway.

Industrials within FMT. This is this is the difference in tone you see a lot of optimism, but you also see a lot of very very busy people.

And that's especially true of the nature of the kind of projects. We have you know these are kind of those medium term expansions of facilities and things like that so we're pretty confident very confident that those are going to come back in some ways, but just maybe get a little bit more space to work on them continue to see the momentum that's already out there and then the lines.

Cross and we think that's an important part of our story going forward.

Great. That's helpful. Thank you and then just next M&A it sounds like a pretty active pipeline T. D. O. So far I guess two things one how are you balancing that managerial capacity to handle some of these incoming properties you know with activity increasing.

And then second is really around leveraging on any change to sort of that comfort level.

Well you know what there's some and what's even more interesting opportunities that come along here, but just any thoughts there yeah no great question.

So a couple of things and just capacity in general as you've seen on the comments for a couple of quarters here, we've been building that all along.

You know a lot of the optimization, we've done with IDEXX over the last five years gave us the muscle that we're now leading on.

We think about you know looking for acquiring and integrating companies. So that's that's something just at the foundational level rather just did the two transactions that we have here.

Both very good standalone businesses that while theyre going to require some integrated activity.

These are these are well positioned in good shape, and let's say a lighter touch in terms of demand from from IDEXX IDEXX talent across the board and so bottom line is I feel confident that we can continue to.

To work the funnel that we have with the intense debt.

We're driving you know if we were to kind of lap. This experience again on the back half I wouldn't see that as a problem in terms of you know our.

Our teams being able to go out and work on on acquisitions.

I will tell you we are as you'd suspect we always filter. These you know there are there are some properties that if we said, yes, and we were successful they take a lot more work than others and we would factor that in and we're always pretty aware of that but right. Now are in very good shape with an intense from a build on the AR on the bottom side and on the top two transactions that made fortunately are and kind of great.

Shape out of the gate.

And then relative to your second part of your question I would say yeah. We still think our balance sheet is most efficient added about two and a half time, so relative to the capital availability, we have on hand, plus additional leverage for us to go deploy another $2 billion post the aerotech closure is extremely reasonable so we have more than enough capacity to go.

After the things that are just mentioned.

Great. Thanks, so much from the kind of life.

Thank you.

Our next question comes from the line of Cotton along with Morgan Stanley. Please proceed with your question.

Yes. Thank you.

Wanted to talk about the <unk>.

Acquisition, just wondering if you could sort of provide a.

Overview of why you found this to be an attractive asset how we should think about the market structure and the and the competitive positioning of the firm.

Sure well. This is an exciting transaction. This is a really really phenomenal company.

And it fits very nicely next to the gas business that we illustrated there on the on the opening deck.

And the nature of that they're both involved with.

You know very very specialized air handling applications, but they're highly complementary so the strength of gas in different areas of compression are then balance very nicely with the regenerative blower side in the specialty in the valve piece of urtext. So there they sit together seamlessly, but I really really like about these businesses is they're both filled with.

Domain experts, who have just got phenomenal abilities to innovate.

You know are Texas has got a great growth track record as I said in my opening comments, it's very profitable very close to end markets that we're extremely interested in the gas side, we've got some of that as well and frankly, we've got a lot of channel strength and markets that I think are going to complement that business.

And then we've got a tool kit, we got a talent base on cultural based on an 80 20 tool kit that we know when you apply to IDEXX like businesses, particularly ones that are high quality can drive the whole thing further last piece of it as you know there there's other things out there in this world that could be interesting that the two businesses together may unlock for us that are part of our.

On the funnel and things that we're thinking about as we consider capital deployment in the future. So the suite of options, but around a all of it centered around our super attractive business that we could not be happier with.

Yeah understood, maybe just just to dive a little deeper on that could you could you help us understand sort of the big end markets that the business serves and just how you'd think about longer term you know ex COVID-19 normalization from type growth within the business sure sorry that I mean, the business has got it it's similar to GAAP in some respects it's got.

Kind of an industrial core it serves as a foundation piece.

Financially and in terms of scale and then you know on that in the markets that they've picked they've done some nice things in alternative energy they've done some great work within some specialty medical applications.

On some very interesting things around some technologies that are going to be important for the world going forward industrial Tech.

So they just again, it's a lot like IDEXX at it there are many of them are industrial like applications, but they really leverage being up at the tightest end of tolerance and beauty spectrum.

This business has a great filter in terms of how they bring those about so you know.

A lot of it is going to sum up to general industrial but when you pick out at that next level has always been the most important for us and you just see incredible little niche applications that line up really well with their capabilities and the financials of the business.

I appreciate it.

Thank you.

Our next question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.

Thanks, a couple questions first with respect to H S. T. It looked like that business delivered a pretty nice breakout performance from an operating margin standpoint can you talk about what what's sort of driving that and how you feel about the sustainability in that profit performance that you delivered here in Q1.

Yeah sure I'll take the first stab on and Eric can add no I think relative to the.

The actions that we took last year to restructure some of these assets.

And then the mix of the businesses within the portfolio that have performed extremely well here over the last couple of quarters. So the combination of a much better foundation to build off of they did have.

Significant growth.

And then the mix of sales within the different businesses were the primary drivers. So I would say, we would look for them to be at this level of profitability here going forward.

Got it and then just as a follow up to the price cost sort of question.

It came up earlier, how much price were you guys able to realize in Q1 and how much incremental price realization will you need in the balance of the year to keep that price cost spread where you want it. Thank you.

Well. So we were just north of a point in Q1.

That was that was fully in line with what we saw on the inbound side.

I actually think it'll.

We're going to aggressively target to ratchet that up a bit but we always do that you know with the indicators that we see and thinking a lot about the ultimate spread that we realized so I.

I don't know that we've got a number pegged, but we have a we have a method.

That we pegged it sort of you know it was very active follows along takes advantage of the short lead times that we have in the way that we were able to execute price. So I guess the shortest answer would be probably north of where we are here a lot of it dependent on where we see some of the underlying commodities and things heading for us but always on.

Always mindful of where that spread is but ultimately we want to keep that as a net positive item from the company.

Got it thank you guys.

Thanks Pat.

Our next question comes from the line of Joseph Giordano with Cowen. Please proceed with your question.

Hey, guys. Good morning. This is from CS go on for Joe.

Are you how are you guys seeing any impact.

I think to the semi shortage, whether it's specifically on that end market or any other markets that are sort of feeling the pain like automotive.

Yeah, I mean, we you know you waste we see it on both fronts. So there are those occasions, where end customers. It certainly got some issues automotives the easiest one to point to.

Yeah.

That's that's been more recent coming into our world and they are in the first quarter. We we look at that we figured out our exposure. There is very much program by program. So it literally comes down to kind of are they making trucks versus cars.

And so we you know.

Some of that enter them into the mix in Q1, and we talked about that from art from our side.

We don't have a ton of computerized elements of the products, we make we see it in sensors and some displays and some other places so its out there.

And you know, we're navigating just like everybody else, but it's been frankly, we've been able to move around at work around it and.

Altogether here.

Great. That's helpful. And then can you spend a little bit more on on the dispensing side are you seeing replenishment there.

Just expanding on the demand in general.

Well I think yeah, I think on the dispensing side you see a couple of things coming together I mean, you know one of the big drivers there has always been sort of life of the fleet.

And we were coming up at a point, where that you know we knew that that was going to be refreshed on top of that of course, we had a pandemic where.

Frankly, there even while we were locked down and shut down there was a lot of painting going on and you saw reluctance to say well lets go interrupt that stream with capital deployment. So now that we've kind of passed through that you've got kind of those two things coming together and you've got economies that are opening up on a global basis. Remember this is a really global business for us.

We're we're you know we're doing business all over the world here and so we're seeing kind of a bunch of positive forces come together.

All in one place on a business that has the potential over time. It does tend to get some cycles in some ballets and right now it's hitting many positive cycles.

That's helpful. Thank you.

Thank you.

Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Hi, Thanks, good morning, and monitoring solutions on the good quarter.

Wanted to see if we can get some insight on the M&A pipeline with your tech deal.

Was this a deal that you've been working on for a while clearly if there's a nice fit with gas maybe a sector to go after but was this a broker deal was this something that was you know kind of.

Went through a process or have you been working with our with aerotech for awhile to try and get something go on.

Yeah, I mean like a lot of the companies that are out here, we we've known about aerotech.

You know for a long time.

Honestly kind of watch them as they've grown very very well over the last half decade, or so so you know they were under private ownership lot of things came together and I would tell you. It moved pretty quickly in this particular case. This is as you might imagine one of the easier businesses for us to get our heads around and then as we did that and saw the quality of it it.

It moved quite a bit faster than some other transactions just because of a lot of those things lining up well for us.

Okay, Okay, great. Thanks for that.

And then you know in the past you guys have talked about you know the valuation multiples of them and many deals I Wonder you know how did you feel about the multiple that you'll be paying for this one and and you know the you mentioned 80 20 is like a value add that you can bring to the business.

Or is it too early to start talking about you know where you think what do you think you could do with it.

Well, it's very strong business you know valuations are high now.

Please where the transaction. That's that's why we did it I think you know from an 80 20 perspective, it's at.

It's interesting that you know this this many ways I think is going to this is representative of the sweet spot of what 80 20 can do you've got a business here. That's a lot like ours in terms of its filled with these incredible problem solvers full of passion. What 80 20 helps should do is just understand what are the things you're going to go after why is that.

How can you get disproportionately more of your resources over on the things that are the best I mean, it's a very simple framework and I'm thinking process that becomes intuitive over time and we're excited to.

To introduce it and work with their tech team on how it might help them improve and otherwise already good business you can use it for other things in different businesses in different states, but this one is very much around continuing to help a really strong business grow even better in the future and think about and use it as a lens to think.

The combinations and synergistic elements between the two companies together.

Okay.

Yeah relative to the multiple obviously, we focus on the returns and this is a high quality business that we think it's gonna be.

Drive returns well in excess of our cost of capital here as we proceed over the next couple of years. So, although it's a little bit on the higher side on the print number long term. This is a phenomenal transaction for us.

Okay Yep looks great. Thank you.

Thanks.

As a reminder, ladies and gentlemen, it is star one to ask a question. Our next question comes from the line on Scott Graham with Rosenblatt Securities. Please proceed with your question.

Hey, good morning, and Nice Corp, you guys. Thanks for taking my question on.

I apologize I.

It was sort of jumped on and off the call here.

Pete.

If I ask a question that's been asked I apologize in advance did you mentioned urtext sales specifically.

Yes, we did it in the opening comments around $85 million.

Thank you.

Additionally, I'm, Eric I noticed that you put in your markets some up a life sciences, she's sort of recovering.

And I know a couple of you know companies that are out there you know Pete alumina.

Danaher debt.

Proxies solemnized turnkey customer, but really had blowout first quarter results in some of their markets and I know, it's not perfectly like for like particularly with Danaher, but.

I was just curious as to why you have that and recovering as opposed to not recovered.

Well a couple of things that it's like like a lot of things are with IDEXX. It comes down to where we play and the products that we have there so.

A lot of companies have a lot more consumable exposure than we do and so that would be very clearly that's the piece that recovers first and a lot of the elements that are embedded in life Sciences.

Let's just take the kind of classic IBD space, you know as things open up and people go back in for testing you get a lot of action on the consumable stream, but it takes a while before youre going to do a large scale box replacement and that's what we supply. So you know.

We got we got a mixed bag here, we've got some places like that where we're going to have to wait and we certainly have some exciting stuff, especially on the microfluidics side and some of the stuff around AI as it involves itself in vaccine development and therapeutics. Okay. That's in a different place, but when you put it all together we sort of use. This this category to say you know recover.

But not quite there yet and we understand the elements that we're gonna have to find their way in there for us to moving into the next space.

Right right.

I guess right.

Just to you know a little.

A little bit different states and things move around within the space.

Would you be surprised if.

On the next quarter call that you know if you didn't have life sciences.

Oh.

On occupancy the recovery zone.

But if we consider the arrow to be moving in that direction a lot of it a lot of it would come down to you know.

IBD placement of machines and some of the Capex. It's in that park, whether that's a quarter from now or later I don't know, but it's hard to imagine that it wouldn't improve I mean, all the dynamics would suggest that we would follow much of what you cited there on those other companies.

Gotcha, Okay, yeah. Thank you so.

Another question again on that same page fire and rescue and you know this morning, one of your customers reported on a pretty robust fire number.

Which surprised me you might've, even surprised you.

I know that you know sort of muni spending and related was a bit of an area that you were watching coming into the quarter. It sounds like you're kind of still or could you update us a little bit on that market is there potentially maybe a refresh that's needed there as well given the number that that's that debt.

Customer reported this morning, where is that maybe just.

You know.

Sort of like.

It's sort of like the final good quarter, and maybe you think it slows down from here just on fire.

Yeah, well I mean.

I certainly couldn't talk too much about what what they said or what they might be saying, but I will say, it's an interesting space. Because you have you have a lot of things going on here you've got obviously the municipal spend profile side on a lot of that we're gonna have to wait and see where that goes. There's so many elements that are moving around concurrently. There's you know federal efforts to backstop things.

And that side of it are there some regulatory pieces. So what we'll see and then you've got this dynamic certainly in this market, where we've seen even ahead of some of the more recent supply chain stuff that we're talking about globally are very unique to that industry challenge around trucks from chassis and things.

Capped off some of the potential on on the sales side for end customers. So you know.

As that works itself out.

That's gonna be ultimately good for US we'll see how successful people are with that and then we'll have to see where the market itself on municipal market rides along underneath it and then you always have to throw in for us I hate to do add more and more variable, but this is a really massively global business and so you know they don't all move in step things going on.

In China, and India and emerging markets are not necessarily the same as what we would see here on the Midwest. So.

There's a lot of things working together I think it's safe to put it in the recovering it has improved not quite back where we would expect it to be and think it will be ultimately and then we will like you monitor a lot of these things coming together here to paint a clearer picture as we go.

That's very clear Eric Thank you.

Hey, Scott Thanks.

Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Hey, this is Matt on for Nathan Jones. This morning, I wanted to ask about orders orders were up 6% organically, 10% in total on can you just talk about kind of the cadence of orders through the quarter on what segments and end markets drove the improvement in order rates and then how it daily order rates trended so far.

In April.

Yeah, I mean honestly it you can kind of take the entire company and say in generally it improved as we moved through.

That first quarter.

Remind us again, each each month had its own chapter of externality that I guess all of them were somewhat equal.

Yeah, sorry, so brought improvement are kind of marching through the quarter and you know as we're looking at April I mean, I don't see anything that would change the story here Bill anything you'd add.

Yes from what drove the orders obviously all of the businesses within HST did extremely well.

Within FMT, obviously, we talked about that's probably the the group that's still lagging a bit across the portfolio outside of banjo debt that had a phenomenal quarter and it continues to outperform relative to the dynamics in that market and then within F. N F. S. D. You abandon dispensing dispensing specifically.

Did extremely well with fire and rescue.

Improving.

Relative to some of the things that Erik highlighted based on Scotts question, Yeah, So a little bit slower than the balance on the portfolio.

Okay great.

I wanted to ask a follow up with a muni I wonder what are your assumptions on muni budgets and spending and then what are your thoughts on the infrastructure spending bill on potential impact to demean Mark.

Yeah. So look I think we've got muni spending and generally in kind of a steady as she goes category until we know more and see it the infrastructure stuff is it's interesting as you'd suspect probably like everybody else you kind of go and Peel. It back headlined by headline then you've got to really work on a variable of timing like when do we think that that would find its way here.

And as always a lot of it is pretty unclear. So just that turn in itself. If it means roads and bridges means one thing for IDEXX, if it means underneath and sewers and what pipe and things like that that's different and I. It's hard for me to see how clear it is until it starts to become more actionable, which then I think supports I think it's going to take awhile to run out.

But I would say in general the fact that it exists as a positive element that should help on many IDEXX market. So we view it that way, we'll continue to paying it because we get some insight into things and start to see as driving trends within the business will surely call it out.

Got it thank you for taking my questions.

Sure.

There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.

Okay. Thanks, so much for those external to IDEXX I always want to thank you for your support and interest in the company.

There's a lot of IDEXX employees on on a call like this as well and so frankly I want to thank you again for your hard work its paying off clearly as we've talked about here, there's more hard work to come but.

And we've got a resilient business I think our positioning in these attractive niches continues to serve US well, we've got a team of people that are second to none here. So I think you can hear we're pretty optimistic about the AR on the path forward. We know there will be challenges things that are unexpected that'll come up along the way, but we're excited we're excited about the momentum there.

We're seeing where it will take us we're very excited about the story here with with bringing are tech into the IDEXX family alongside Apple pumps, and we're working hard to continue that momentum as well on top of it as we go forward and we are well look forward to talking to you all along the way as we make progress. Thanks, so much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.