Q4 2021 IDEX Corp Earnings Call

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Yeah.

Greetings and welcome to IDEXX Corporation fourth quarter 2022.

<unk> earnings Conference call at 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 introduce your host Allison losses, Vice President and Chief Accounting Officer. Thank you you may begin.

Good morning, everyone. This is Allison <unk>, Vice President and Chief Accounting Officer for IDEXX Corporation. Thank.

Thank you for joining us for our discussion of the IDEXX fourth quarter and full year 2021 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the three months and year ending December 31 2021.

The press release, along with the presentation slides to be used during today's webcast can be accessed on our company website at IDEXX corporate Dot com.

Joining me today is Eric Ashman, our Chief Executive Officer, and President and Bill Grogan, Our Chief Financial Officer.

The format for our call today is as follows we will begin with Eric providing an overview of the state of IDEXX <unk> business, including a recap of our recent performance and our 2022 outlook.

Bill will then discuss our fourth quarter and full year 2021 financial results.

And we'll conclude with our outlook for the first quarter and full year 2022.

Lastly, Eric will close with comments around our focus areas for 2022.

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 76606.

853, and entering conference I D.

137 to 4802 or simply log on to our company 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 and in <unk> filings with the Securities and Exchange Commission.

With that I'll now turn this call over to our CEO Eric Ashlin.

Thank you Allison I'm on slide six 2021 was another record year for IDEXX, we hit all time highs in most of our key metrics.

Demand for our differentiated technology remains strong this underlying momentum combined with our targeted growth initiatives and ability to capture price drove a strong rebound from 2020.

Across most of our portfolio, we saw an expansion beyond pre pandemic revenue levels in the fourth quarter, we achieved a record for orders and sales and our backlog position is very strong as we enter 2022.

We expanded our margins in a highly inflationary environment, we levered well on the previous investments, we made to optimize our cost position and executed on our productivity funnel, we maintained positive price cost, albeit at a compressed level versus historic performance, we remain diligent in controlling our discretionary spend and used our 80 20 principles to allocate resources to our most.

Promising opportunities.

Our strategic focus purposeful resourcing and strong operating cash flow enabled us to deploy record capital we acquired Apple pumps in Aerotech and made a collaborative investment in a technology company driving advancements in connected products. We also invested across the portfolio to support growth and productivity.

We optimized our cost position within our fluid metering technology segment through a consolidation of our Italy facilities, and our energy businesses and delivered on operational productivity projects across the segment.

All of this drove a record year in orders sales margins earnings and capital deployment. We've said in the past that we built IDEXX to outperform through a cycle and we continue to find ourselves in a very challenging one characterized by supply chain disruptions and labor scarcity exacerbated throughout the year by the emergence of new COVID-19 variance our view continues to be that we do.

Don't see gradients of bad rather the supply chain environment is very tough and numerous challenges persist as pockets of issues improve they tend to be replaced by new obstacles.

Our teams have done an excellent job navigating these day to day operational issues and I'd like to take a moment to thank our IDEXX employees around the globe for their dedication and perseverance throughout this prolonged period of disruption the agility of our teams adjusting to new issues. Almost every day has been and continues to be outstanding as.

As we look forward to 2022, we did not see any near term near term signs of diminishing supply chain related headwinds and the impact of COVID-19 remains highly variable in the short term. These conditions have and will impact our ability to efficiently ramp production and have created significant pockets of disruption for our customers and suppliers as well we expect that.

These challenges will remain at a high level at least through the first half of 2022.

Regardless of the near term challenges our overall IDEXX strategy remains focused on the horizon. The core of what makes IDEXX strong highly engineered specialized products used in mission critical applications remains a solid driver for long term success.

We will continue to deploy capital and invest in the resources necessary to drive organic growth in order to capitalize on a robust demand environment. Our balance sheet has ample capacity and we will leverage its strength to continue to play offense and M&A.

Of that and we expect to close on the acquisition of NEC site later this quarter the technologies and capabilities within their business segments will nicely complement our water platform within FMT.

Okay.

With that I will turn to our outlook for our segments on page seven and our fluid <unk> metering technology segment, we anticipate growth in our industrial day rate businesses in 2022 with a return of larger projects towards the latter half of the year and the short term large projects continue to lag as our customers have limited capacity to execute larger upgrades or expansions.

Agriculture is expected to perform well due to high crop prices strong farmer sentiment and limited availability of new equipment driving aftermarket demand.

Our municipal water business is stable, we see improved optimism in the market and project project planning activities, increasing we are expecting an uptick in the energy and chemical markets. The North American mobile truck market is improving due to a strong construction market and home heating oil prices and North American pipelines are reporting modest increased capital budgets for 2020.

Two we see international oil and gas quote activity outpacing domestic demand and opportunity we are well positioned to capitalize on.

FMT continues to be in a strong position to realize price and we expect this to drive improved margins in 2022. Likewise the projects, we completed last year to optimize our cost position as well as new operational productivity projects will yield strong flow through in 2022 tempered by a discretionary spending rebound and continued resource investment in this segment.

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Moving to the health and Science Technology segment, we expect the strongest growth in HST of all our three segments and we plan to make the largest resource investments in HST to support that growth, we anticipate margin improvement driven by volume leverage parts, partly offset by these resource additions.

<unk> continues to have robust demand across all of our major end markets semiconductor food and pharma analytical instrument instrumentation and life Sciences are all expected to perform well.

Next Gen sequencing instrument demand is growing with research and clinical applications outpacing COVID-19 detection and surveillance our ability to execute in the current environment continues to distinguish us from our competition and improve our share position on the semiconductor side, we continue to capitalize on <unk> generated from global broadband and satellite communication trends.

And auto supply chain issues that our customers, especially around semiconductors mute our growth.

Underlying market demand remains favorable and we expect our results to improve the supply chain issues. He's the industrial businesses within the segment face similar trends to FMT.

Finally, we expect that our fire and safety diversified products segment will be our most challenged next year in fire and safety North American Oems are experiencing significant supply chain constraints around chassis and component availability, which limit their production.

On the rescue side, we anticipate that larger tenders will lag compounded by China localization policies that are driving delays, we do not anticipate near term easing of these conditions and see the potential for recovery towards the latter part of 2022 and our band it business like in HST, we see auto supply chain issues dampening current demand. Despite this.

Our business continues to outperform the broader market due to our content on key vehicle models lastly in the near term, we expect continued momentum within our dispensing business as customer capital investments are deployed in early 2022. However for the year, we will see a non repeat of North America projects as we reached the end of the replenishment cycle. This year.

It is composed to last year.

We anticipate that the unfavorable price cost position, we experienced last year, where we will rebound this year as annual contracts are renewed at current pricing. We see this improvement tempered a bit by some mix pressure as dispensing volumes reduced and we make some targeted investments to summarize.

We see favorable conditions across the majority of our end markets. However, the degree to which our customers and our facilities will be impacted by rolling supply chain and Covid related disruptions remains highly variable we will continue to monitor conditions and be as prepared as we can be for potential interruptions. Despite these short term headwinds we are optimistic about our growth potential and the trajectory.

Of our end markets with that I'd like to turn it over to bill to discuss our financial results.

Thanks, Eric I'll start with our consolidated financial results on slide nine.

Fourth quarter orders of $795 million were up 17% overall and up 13% organically organic orders increased across each of our segments for the year orders were up 26% overall and up 21% organically, we experienced a strong rebound in demand for our products across all our segments and steadily.

Our backlog in each quarter of 2021 totaling $266 million for the year.

Relative to full year 2019 organic orders were up 15%.

Q4 sales of $715 million were up 16% overall and up 11% organically, we experienced a strong demand rebound from 2020, but our results were tempered by supply chain and Covid production limitations full year sales of $2 8 billion were up 18% overall and up 12% organically.

We saw favorable results across all our segments and again strong performance relative to full year 2019 with organic sales up 4%.

Fourth quarter gross margins expanded 20 basis points to 44%.

For the full year gross margins expanded 60 basis points and adjusted gross margins expanded 80 basis points to 44, 7%, primarily driven by strong volume leverage.

Q4 operating margin was 22, 7% up 10 basis points compared to prior year adjusted.

Operating margin declined 60 basis points, driven by a rebound in discretionary spending targeted resource investments and the dilutive impact of acquisition related intangible amortization, partially offset by volume leverage.

Full year operating margin was 23% up 90 basis points compared to the prior year. Adjusted operating margin was 23, 9% up 110 basis points compared to prior year I'll discuss the drivers of adjusted operating income on the next slide.

Our fourth quarter effective tax rate was 22, 5% relatively flat compared to the prior year ETR of 22, 2%.

Our full year effective tax rate was 22, 5% compared to 19, 7% in the prior year due to lower tax benefits associated with executive compensation and the non repeat of benefits associated with the finalization of the global intangible low income tax regulations in 2020.

Q4, net income was $119 million, which resulted in EPS of $1 55.

Adjusted net income was also a $119 million with adjusted EPS of $1, 55, which was up 18 or 13% over prior year adjusted EPS.

Full year net income was $449 million, which resulted in EPS of $5 88.

Adjusted net income was $482 million, resulting in an adjusted EPS of $6 30.

Up $1 11, or 21% over prior year adjusted EPS the tax rate movement, I mentioned drives a 20 <unk> differential in EPS as compared to the prior year.

Said differently, our EPS would have expanded by a $1 34.

Or 26% at 2021 been taxed at the 2020 right.

Finally free cash flow for the quarter was $136 million.

115% of adjusted net income for the year free cash flow was $493 million down 5% versus last year and was 102% of adjusted net income.

This result was impacted by a volume driven working capital build and higher capex, partially offset by our higher earnings we spent over $70 million on capital projects. This year, an increase of over $20 million versus 2020.

Moving on to slide 10, which details the drivers of our adjusted operating income.

Adjusted operating income increased $125 million for the year compared to 2020.

Our 12% organic growth contributed approximately $106 million flowing through at a prior year gross margin rate.

We levered well on this volume increase and our teams drove operational productivity to help mitigate the profit headwinds we experienced from increased supply chain costs and the associated inefficiencies.

Although we have maintained positive price cost for the year inflation continues to ramp and we saw compressed price cost spread versus historic levels, which pressured our op margin rate and flow through percentages.

The positive mix is primarily a result of the portfolio and business mix normalizing to pre pandemic levels that had a negative impact on our results last year.

We reinvested $35 million back into the business is taking the form of a partial rebound in discretionary spending to pre pandemic levels higher variable compensation expenses and targeted reinvestment in resources to drive growth.

Despite this incremental spend in a challenging supply chain environment, we achieved a solid 38% organic flow through for the year.

Flow through is that negatively impacted by the dilutive impact of acquisitions and FX getting us to our reported flow through of 30%.

With that I'd like to provide an update on our outlook for the first quarter and full year 2022.

I'm on slide 11, as a reminder, going forward we will be.

We will be adjusting EPS for acquisition related intangible amortization and both our guidance and results our fourth quarter adjusted EPS under this definition would have been $1 71 per share while our full year 2021, adjusted EPS would have been $6 87 per share.

Under this new definition for the first quarter of 2022, we are projecting GAAP EPS of $1 57 to $1 60, and adjusted EPS to range from $1 73 to $1 76.

We expect organic revenue growth of 6% to 7% for the first quarter and operating margin of approximately 23%.

Q1 expected results incorporate headwinds arising from Covid, driven absenteeism and supply chain production constraints.

The first quarter effective tax rate is expected to be approximately 22, 5%, we expect FX to be unfavorable to our top line by 1% and acquisitions to provide a 4% benefit.

Corporate costs in the first quarter expected to be around $19 million.

Turning to the full year 2022.

We project GAAP EPS of $6 70 to $7 and adjusted EPS to range from $7 33 to $7 63.

We expect full year organic revenue growth of 5% to 8% and operating margins to be around 24%.

We expect FX to be unfavorable to our top line by 1% and acquisitions to provide a 2% benefit.

The full year effective tax rate is expected to be around 22, 5%.

Capital expenditures are anticipated to be around $90 million, an increase over 2021, as we continue to identify opportunities to reinvest in our core businesses.

Free cash flow is expected to be approximately 105% of adjusted net income and corporate costs are expected to be approximately $80 million for the year.

Our earnings guidance excludes impacts from future acquisitions, and any future restructuring charges next site is excluded from the figures above as the transaction has yet to close.

Next I will provide some additional details regarding our 2022 guidance for the full year.

I'm on slide 12.

On an operational basis, we expect supply chain constraints to mitigate our output for the first half of the year, meaning an otherwise strong demand environment.

Therefore, we are projecting organic revenue for the year to be up 5% to 8%, which translates to an EPS impact of $60 to 95.

Depending on the topline results. This range also assumes improving price cost.

We continue to drive operational productivity across the portfolio and expect to see benefits from our 2021 restructuring actions.

This will drive 20 to 25, a favorability next year.

We also continue to invest in the resources required to grow in the current year and beyond.

These investments will reduce EPS by 20% to 25.

And are funded by the productivity gains I mentioned previously.

Our discretionary spend partially recovered to pre pandemic levels in 2021.

And we expect this spending to be fully recovered by the end of 2022, the unfavorably impacts EPS by 20 to 25.

I will note that we are ramping spend of pre pandemic levels, but with 20% higher revenues.

Abel has one partial quarter in <unk> two quarters inorganic results included in our guidance.

We expect acquisitions to contribute $54 million of revenue and eight cents of EPS.

The incremental amortization that we see in 2022 versus 2021 is largely related to these acquisitions.

And we will provide an additional <unk> of EPS.

Now, let's take a look at a couple of non operational items first our guide assumes no impact from taxes, our guided rate is flat year over year.

We expect a 1% headwind from FX, providing seven of EPS pressure.

So in summary, we are projecting organic revenue growth of 5% to 8% for the year adjusted EPS expectations are in the range of $7 33 to $7 63 a.

7% to 11% growth over 2021.

Implied in our guidance is mid to high <unk> year over year flow through on the low end and 30% on the high end.

With that I'll throw it back to Eric for some final thoughts.

Thanks, Bill I'm on the final slide Slide 13, before we open the call up for questions I'd like to wrap up with a summary of our most critical 2022 focus areas in an environment characterized by uncertainty and disruption it's important not to lose sight of who we are as a company.

First and foremost we are a portfolio of great businesses that leveraged 80, 20 with an obsessive focus to serve our customers we refer to that simple model as the IDEXX difference we're committed to navigating the challenges of the short term landscape, but remain focused on the longer term, we must continue to utilize our 80 20 toolkit to create efficient innovative.

Creating businesses in a world with this level of variability of the simpler you are at the more successful youll be we remain committed to investing in the resources needed. So our businesses are poised to take advantage of the growth potential in front of us.

We're a company committed to its core values and we will continue to develop top performing teams as part of an inspiring company culture diversity equity and inclusion continues to be an area of focus creating environments, where people feel they belong and are comfortable bringing their true selves to work every day.

Our strong operating cash flow and balance sheet put us in a great position to continue to put capital to work and we've already identified several high return organic investment opportunities across the company that will push us past, our 2021 Capex record levels, we have invested in new industrial automation that will improve efficiency and expand capacity for growth we're suppose.

Supporting focused digitalization efforts across our installed base to solidify our superior positions and expand share of wallet our facility expansions in China, and India are well underway effectively doubling future capacity to support growth across Asia.

Lastly, our M&A opportunity pipeline continues to be strong and we look forward to deploying additional capital in 2022 welcoming new businesses to the IDEXX family.

With that let me pause and turn it over to the operator for your questions.

Thank you ladies and gentlemen at this time, we will 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 Allison <unk> with Wells Fargo. Please proceed with your question.

Hey, good morning.

Eric you talked about projects lagging in the first half in FMT.

Could you maybe give us some color in terms of your customer conversation.

The rest of it is it sort of gets laid in.

Definitely at this point just the urgency around getting some of these projects going just any thoughts around that.

Yes.

Allison So I mean, it's a bit of a continuation of the theme that we've seen now for a while there's there's plenty of confidence out there that there's lots of demand support to get things done it is really difficult to do.

To just frankly bring together all the resources that you need to.

To take a really complex project and take it from beginning to end winding up material lining up resources things like that so what we are starting to see frankly are kind of smaller to medium sized versions of that slight expansion things you can kind of do on the fly and then continued staging for projects that are of those slightly larger incremental.

Scale aspects as people talk about that I mean.

Quite honestly, it's kind of the same thing that we're going through in our own business. I mean, we've got a couple of critical big projects that we've deployed they were really hard to put together and then all over the place where kind of while we're running doing those things that give you that little bit of 3% to 5% output lift as we go so I think thats really the nature of it.

And of course, it varies depending on certain markets or.

Further out ahead of that a little bit more positive some are lagging even further because they're just inherently involve larger chunks of infrastructure, but I was going to summarize it I would put it I would describe it that way.

No. That's helpful. And then just the free cash flow guidance, you talked about Capex and the increased spend there which makes sense.

Working capital you said some increases in 'twenty, one should we expect a similar level of 22, just given the ongoing challenges that you guys are if anything I'm just trying to get some color on sort of.

Allison This is bill I think it taper down a little bit obviously here as we progress through the year, a little bit of inventory build to support the.

Higher revenue load, but I don't think it'll be as big of a build as we experienced last year.

Efficiency metrics are down a little bit, but some of that is just related to increased inventory to buffer extended lead times that we have across our vendor base.

Got it and I guess along with that.

You guys are still in the midst of it so it's probably not a fair question, but are you guys kind of revisiting some of your processes and such to deal with some of these shocks.

I'm good I'm, just any thoughts on that.

Allison Youre asking about just supply chain shocks in general yeah, the supply chain shocks.

Trying to think of things differently going forward just to kind of.

Some of that stuff.

It's a great question and something we revisit it continuously as we gone through this I mean, we are I think we're from a high level, we're positioned really really well I mean, we do a lot of local supply close proximity with people that we've known for a long long time deep relationships a lot of trust there.

Very collaborative so I like that topology, I don't think we would try to change that or move it farther away.

Any frankly any change right now is difficult because everybody is bandwidth constricted. So a couple of places we're looking at that it's kind of at the sharpest reason why we just we have to do something different and we've got resources allocated there I will say the one thing we're spending a lot of time working on and I mentioned it in the opening comments is simplification.

You can generally see our businesses that have done the most there are frankly, having the easiest time of it we have a highly customized model at the company and so that's always the inherent challenge for us. So I think one of the things we've learned here and we've gotten better at as we've gone along is trying to find a way to say is there a simpler way to do it more modular simpler design that is easier to reproduce.

Against kind of a given supply base that will probably stay pretty similar for us as we go forward.

Got it thanks, so much I'll pass it along.

Mhm.

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

Hey, good morning, everyone.

Hi, Mike.

Kind of related Allison's first question or at least a tack on to it.

When you think about some of the delays youre seeing in some of these capex decisions just because because of bandwidth.

You also put it in the context of the supply chain challenges and everything everything seem to linger a little bit longer than people were thinking.

How do you thinking about the risk of demand degradation or at least pipeline degradation that could materialize related to all of those moving pieces.

Well.

It's inherently always a little bit more risk as you extend things out than any other externality can jump into the mix and start to inflect decisions along the way. So I think thats there I mean, as we've kind of thought of the projects that we're working with.

When you consider a project across a long term cycle once I feel the most assured about where where you can just see there's not enough capacity or there's a lot of labor challenges I mean, those things aren't going to go away in the long term.

And when you sort of see that condition, let's say if thats in a food market. That's somebody recognizing theres a lot of demand here were struggling to meet it we know it's going to be there in the long run while the projects themselves can be delayed and they keep extending honestly the conversation stay pretty active the transfer of documents and data and things is still going on to kind of put those into a different cat.

<unk> the things that you can just tell her a little bit more susceptible to shocks new technology. It's a launch it's dependent upon certain conditions to be there, we'd probably put that in a slightly more variable category, but I honestly think over the long term there is a lot more than the first but ultimately everybody would love to do if they could and we've now seen and certainly we've talked.

About before on this call I think we're seeing the impact of not having it deployed as we've tried to recover from now just essentially.

Above levels that we're sort of we're here originally before the pandemic.

No. That's super helpful. And then sticking kind of with the concept of moving pieces and how youre thinking about guidance for the year.

These first quarter challenges with absenteeism and everything else and then.

On the price cost curve and how that works itself out through the year in the context of everything so.

When you think about the guidance specifically both on the on the margin side as well as on the revenue side.

How would you think about profitability versus call. It a normal sequential curve through the year or is it a little bit more slope to normal in <unk>.

Best guess for when do you think you can start getting to something more normalized I'm not necessarily saying back to 19 levels of smoothness, but at least more repeatable or better understanding of what the process can look like.

Hey, Mike it's thought that some of that's to be determined how the year plays out, but our what's implied in our guidance as you know from a ramp as we progress through the year.

Obviously more weighted towards later in the year, but if you look at the second quarter, it's kind of a couple percent ramp and output versus the first quarter and then it has to hold there for the balance of the year, so relative to where we're at here and the challenges we have in the first quarter.

The assumption that those were resolved.

We do have some of the discretionary costs that have just built through 2021 that are in our current run rate for the second quarter and as we ramp volume will lever on that incremental cost I think youre youll see our margin profile continue to expand sequentially as we progress through the year.

So the point, though is that theres not theres not a massive assumption that there is normalization through the year. There is a step up on Q2, because some identifiable things at normalize out but beyond that it's a little bit more wait and see.

Pretty pretty normal sequential from call it <unk> run rate.

Yes, so I'd say, there's not some huge switch that needs to be flipped I think we're comfortable with the ramp that we see here in the short term the second quarter seasonally always goes up for us. So we've got that on top of some of just the output relief I think we'll get and then it's less something.

<unk> created some headwind to decelerate, we should be in a reasonable position.

I appreciate it bill Thanks, Eric.

Thanks, Bob.

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

Good morning, everyone.

Hey, I'd like to put the spotlight on these buckets of discretionary spending reinvestment growth investment if we could so just so were true up.

What was how much of that went into the fourth quarter. So on slide 10 that $35 million did you kind of frontload any of that spending into the fourth quarter.

Or was that level throughout the year.

Dana it ramped throughout the year I think Q3.

Q4, there is a marginal increase in the fourth quarter, we talked about that in Q.

Q3 call that some things have moved from Q3 to Q4.

That's one of the issues we have with the first quarter is just last year, we were still extremely diligent and then spend a whole heck of a lot and then ramped two three and four so there is a little bit of a ramp here as we progress from Q4 to Q1.

But it's not overly material got it and then on slide 12 for your 22 bridge, you've got the two buckets growth investments and discretionary spend rebound.

I mean collectively that 40 to 50 in your guide they both feel a little bit discretionary by definition right. So just.

Where and how is that being targeted is that level throughout the year.

Is it a contingency in any way.

And what would be the expected returns that you would get on some of these growth investments sure. So a couple of things there I mean.

One in general the nature of this kind of spend let's say today versus where it was three years ago and there are some differences there was actually some productivity that we're all going to enjoy as we've learned how to work in different ways travel won't be as high as it ever was.

Certainly marketing and digital ways to get messages out to customers much more efficient than we've seen before and so that's one of the reasons, even with the slight increases here in the ramp up we're basically a kind of a level. We were three years ago with 400 million more dollars of sales in the company.

What it's targeted towards is a lot of our investments frankly, its people and its people on the front end of business and the technology side of the business tied to the parts of the company that we think have the most favorable wind at their backs in terms of our positioning in the end markets that they are sitting in so we talked before about kind of the top 25, thats across IDEXX that that lift.

Ebbs and flows from year to year, but about two thirds of it holds constant in many of the resources that are here. Some ways. They are identified a year year and a half ago.

We kind of let the last year play out we're really really careful with things, but at some point start to see that hey, we've got some real momentum here with the.

The nature of people driving the investments they've gotta get in they've got to learn the company they've got to learn the markets and then start to add some value.

The return as it often is in anything we do when we're supporting organic growth is really really strong.

On investments of that type because it's people dependent it also makes it pretty easy to be careful with as you go forward. So as Bill said.

We start to see things all of a sudden take a turn or there's something that comes into the mix. It none of us expected.

By nature, we can hold off we can do more with less we can ask people to redeploy towards other areas across IDEXX. So I think what youre seeing here a little bit is it probably we would've liked to have more of that onboard in a more of an even ramp through the year last year again, because a lot of its people its as everybody knows it's hard to hard to find when you find them I think you want to.

Be careful and make sure you bring them on board when you can so that's part of the mix too.

That's real helpful. And then just in context of the building backlog.

I might have missed this I apologize did you can you calibrate how many and a way of revenues could not be shipped either you didn't have the products on hand, our customers Werent ready.

So you got finished goods, but.

Have you calibrated what that would have been yes.

We haven't but in the fourth quarter is probably 3% to 5% organic that we could have had incrementally to what we delivered if we had full availability of parts and labor.

Got it that's real helpful and have you given the quick overview of next side. It sounds like a really interesting addition to your water business.

No I mean, it's a business we've known for a long long time, and we've partnered with them with our sewer robots franchise, there they've been kind of closer to the customer and a partner for us.

Frankly, their predominant partner over the years.

So.

Essentially theyre going to market here in North America predominantly they do a lot of things around sewer inspection have a few other ancillary products that go with that Theres. Some tremendous software capability embedded within that business. That's used in that space and we think has appropriation abilities elsewhere in the kind of water technology area.

And a couple of other interesting Nathan extensions that they've they've launched that we also are interested in potentially opening the door for us. So it's a really really nice fit.

For a partner that we've known for a long time and it was just the time is right to bring them into the IDEXX family.

Great, we're hearing lots and lots of focus on the storm water from municipalities.

There's just such a need right now and there's loss.

Our regulatory pressures as well finds that'll be imposed on municipalities that they don't address it so hot area and nice to see that investment. Thank you yeah can come compliance as a driver for our businesses in that space, yes. Thank you.

Thanks, Dan.

Our next question comes from the line of Rob Widmer with Melius Research. Please proceed with your question.

Thanks, Good morning, everyone.

Yeah.

So my question is pretty simple one yet.

Price cost in two segments negative in fire safety and maybe some of the distinctions are obvious there, but could you just kind of walk through the pace of <unk>.

How things flow through on pricing changes if its all due to that.

Is there any inherent.

The pricing power differential that'd be helpful too, but maybe just talk to the dynamics and what you do there. Thank you.

Yes, sure. So the dynamics of price cost is obviously it varies across the portfolio between the segments and the businesses Holistically Fmt's, our strongest price cost relative to a lot of their business goes through channel our ability to move price through there.

As favorable obviously, they've got more exposure to heavy casting metal motor inflation.

But they have the power to offset it hst's, which more OEM focused so there's opportunities, but more on an annual basis.

On that side of it and the stuff that looks like the FMT. The industrial parts of it are similar dynamics FSD has been the challenge primarily in our fire and rescue businesses, we've talked about the fire OEM challenges in their large backlogs that they are sitting on.

In excess of 12 to 18 months and what we've priced that on.

Haven't been able to reprice. It. So we continue to work through the lower margin profile on that through the back half of the year and most likely through the first half of this year they've gone out with significant price increases here recently at any of the annual contracts that they have so they're poised for a large recovery in <unk>.

<unk> improvement as we progress through the year, but still challenged in the first half dispensing is fairly strong.

Band it relative to their steel exposure in their automotive and Eric.

Aerospace <unk>.

Customer base, they were challenged as well.

So they were significantly under on the price cost weighing down the overall organization, but a lot of good effort from the teams.

Managed through it and I think are much better positioned as we stand here today.

To progress through the rest of the year.

Okay. That's helpful and is there anything sort of structural changing on how you think about those long lead times backlogs and how you price.

And then just one more quick one omicron, you mentioned <unk>, which is universal I suppose on <unk> is that already crested in trading so that your until.

Until the next way have you seen the risk continue to <unk> or maybe January February and I'll stop there. Thank you.

Yeah, Rob so the nature of pricing I mean, I will say I think we and everybody else are looking at kind of the historical ways that long term pricing has been done and are finding ways to make sure that we've got more opportunities for adjustment along the way.

I would suspect though given the.

Pressure in the volume and that's just the nature of that space, that's probably going to take a while but that isn't the mix in terms of innovation in different ways to handle it on the on the on the virus.

They were plateaued slight decrease but we're such a we got such a global topography that.

Is it decreases in one area it kind of comes up and another one so I'd say kind of level right now not increasing anywhere.

But still at a higher rate than we've seen in any of the other episodes that have come across.

Thank you.

Thanks, Rob.

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

Good morning, everyone.

Hi, Nathan.

I wanted to start with a couple of questions. Following up on <unk> line on discretionary spend rebound does it relate to two large buckets in 2022.

Dragging the incremental down from kind of the level that we would normally expect from IDEXX.

Specifically you guys said that you are.

Back to 2019 investment levels on 400 million more revenue IDEXX has always been a big investor in growth does that mean that we should expect.

Potentially more incremental growth investments in 2023 or are you able to leverage those growth investments better and you think gives you a kind of a one year ramp up and I assume the discretionary spend rebound he's probably anticipate it to be.

Back to normal levels by the end of 2022.

Yeah Yeah.

Again, because of the nature of kind of our model and what those investments usually are in terms of people.

Sure.

Honestly, there's kind of a bandwidth limit on the upper side that also govern some of this is these are not the kind of businesses, where you can sort of just endlessly pool people in there and it all works better is there super Super targeted around and aligned highly to the bets that we're talking about and then sort of everything else, we leveraged a lot of that productivity that actually.

We support those investments.

And kind of run the company that way at a pretty consistent level. So I really do think of this more along the lines of rebuilding a basic base to fuel growth of the company and the highly targeted way that we do it more than let's say a next chapter spend profiling for the company, we don't need to do that.

So long term I think you guys have always talked about when you were at low single digit you get 35% incremental margins, maybe getting to 40%. If you got mid to high single digit organic growth.

Nothing's changed structurally in that outlook guy with a longtime wages in a period of.

Bringing investments back after a period of Underinvestment Boston you by God.

Yes, exactly Nathan I think your point on the discretionary is that being somewhat.

The catch up here as we progress through the last two years that will fall off there'll be nominal increases on that going forward and then as Eric said, it's our normal investment profile. So if you normalize for the discretionary ramp we're at our traditional.

Mid <unk> type of flow through.

Okay.

Just one on capital deployment record level of acquisition spending in 2021.

But you still have reached paper problems over there.

Under Levered balance sheet and it would take several years of spending that record level of capital on acquisitions.

To get you into it more.

A more optimal balance sheet structure.

Is the pipeline robust enough and are there enough opportunities at the right prices out there for you to look to deploy similar amounts of capital in 'twenty one as we go forward over the next few years.

Yes, Nathan I mean, that's.

<unk> exactly the target and the expectation here I mean, we talked I know for the last several quarters about the intentionality we've put on this some.

The investments and resources are focused in this particular area because they have to be.

The achievements that we made in 'twenty one I think it was a direct result of that they are all high quality I can assure you we looked at a lot more than those companies to get the ones that we brought in on the board and that's the way we're thinking about going forward. We will consider evaluations will be high competition will be fierce and we have to make sure we get plenty of that back as we go at it and hold our discipline at the same time.

But we've kind of talked are ideal spot here would begin to level load at this higher level at a minimum this higher level of deployment that actually helps you build a more uniform resource base as you do the work.

We are always looking for the potential to expand it if in fact, we can do that efficiently manage that change across the company. So it is definitely an intentional travel due to a higher level yes.

Yeah.

Thanks, very much for taking my questions.

Thanks, David.

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

Thanks, given some of the pluses and minuses you talk about with respect to.

The margins as we progress through the year across the segments, how should we be thinking about the incremental margin at the segment level relative to kind of the full year guidance range you talked about bill at the high and low end can you give a little more color there.

Yes, obviously, our first quarter is going to look fairly similar to that.

In the fourth quarter.

With ramp I think youre going to see margin profile improve on.

Basis point perspective more than FMT.

Our highest margin improvement as well and obviously, we had the challenges within the <unk> business. This year with the Capex reduction of them being significantly lower from a volume perspective, it had several site consolidations and the incremental costs associated with that.

And then just that business levers extremely well as they progress. So I would say FMT margins building throughout the year HST is still extremely strong, but moderated relative to a lot of the investments we're making are on that side of the house and then.

<unk> recovering on the price cost side being a primary driver of that.

Their margin improvement for the full year with pressure here in the first half like I mentioned earlier with.

Rob's question.

And then just as a follow up just to be clear how much price you anticipate achieving in 'twenty two versus maybe what you achieved in 21. Thank you.

So more I mean last year, we were about 200 basis points and we will be in excess of that here in 2022.

Got it thank you.

Sure.

Our next question comes from the line of Andrew Buscaglia with Bahrenburg. Please proceed with your question.

Good morning, guys.

Looking into <unk>.

More into your HST segment.

And that your guidance doesn't.

It does imply some.

I'm pretty pretty decent growth, despite really tough comps. This year. So I'm wondering what exactly in there I mean, you can be lapping I think tough comps in <unk> and life Sciences, and it sounds like auto could be source of upside but are there other areas that just haven't recovered that are really.

Theres a lot of juice left.

But I don't know that the story is really that one where it's you know folks coming off the pandemic, Matt or something like that I mean these are just inherently strong sectors that we think are going to continue which we've seen good.

Good good good ramping in 'twenty, one and it's honestly, it's market dynamics are going to drive it in 'twenty two so yes the.

Pharma space, which you didn't mention I mean that is a really good space that we participate there we make vaccines more effective as you can imagine that's going really really well.

That's where we're seeing some of the medium term.

Capital projects I spoke of sometimes not the biggest ones, but these smaller to medium projects to get expansion out there. That's an area, where we're seeing a lot of that our optical technologies businesses is really really well positioned for some great applications in broadband accesses.

Coming down from space and things that are really kind of out there.

And then I would say just.

Stuff right down the middle of the Fairway is really good for US next Gen sequencing of course, there is all of the growth aspects that we're always there as part of that space, but let's be honest all this COVID-19 surveillance and varian identification.

That's doing it.

The world. So this is just this is a story of strong markets, we're well positioned and they continue to be needed more than ever more than it is in any way kind of a recovery aspect I mean again I always remind people. There's some industrial businesses in there that might have or FMT like aspects, but for what I think the spirit of the question is the heart of it.

It's a continuation of a theme that we think is going to continue.

Okay.

Yes.

Similar question, though I think.

FMT and <unk> seen that kind of have.

It seems to be somewhat influenced by energy and that even though it may not be a direct exposure indirect impact, which now seem to be kind of more topical.

That area coming back we think.

So what about you something maybe in FMT with an energy recovery, helping that business.

Maybe maybe exceed your expectations.

What are your thoughts there.

Well I mean, so a couple of things in energy in general I mean, it's our single digit exposure. There is localized largely in FMT that is a story of recovering off of pandemic lows no doubt because of commodity pricing and some other things and just delayed investments it's.

A little different than it was two or three years ago, but it's positive and that'll help and Youre also right. It's always hard to identify but no doubt there are derivative impacts of that.

That sector in terms of just the up and down the street industrial businesses that are throughout our FMT. So we do think we have that factored in the mis mix, but to the extent any of that overachieve. That's the area that we would see upside.

Okay got it thank you.

Thanks.

Yes.

Our next question comes from the line of Connor <unk> with Morgan Stanley . Please proceed with your question.

Yes. Thank you.

I was wondering if we could return to the capital allocation question.

Particularly the.

Step up in M&A allocation that you're targeting over the next couple of years I'm wondering if you could frame or are there any specific end markets that you see as you sort of look at the.

The pipeline right now where you're overweight underweight, how do you sort of overlay a view on end markets and cycles to that framework.

It probably doesn't map as cleanly as you might imagine because I mean, you know when we think about the markets that we're going after they are often defined by kind of niche application sets.

And so you can see those in any one of our three segments and in some ways they might even strike you as kind of counterintuitive.

So in general there.

Obviously looking at areas that we think have more fundamental growth tailwind behind them.

And so a lot of it just would be exactly where do you think it would lots of focus in the HST world lots of focus as we've just seen here and water technology in spaces like that but there are some great industrial franchises.

That have done a great job of targeting into certain applications spaces that make a lot of sense to that are sitting in places that you might not otherwise think two other examples in 'twenty. One are actually great. Examples of that Apple pumps for example, tied to mining as one of its core markets. That's actually really attractive now because of all the mining that's going on.

To support alternative energy applications, then you look at aerotech, which from far away. It looks like kind of just an industrial compression business or a blower business and yet they tuned very nicely to some alternative energy applications as well. So it really does it plays out at that kind of specific work to be done and then how well that lines up often too.

High level macro trend, but we very quickly kind of bring that down into the you know the.

The niche kind of environments that were comfortable with and we can see that across any one of our overall segments.

Got it maybe.

Maybe switching gears a little bit here, you mentioned labor being a constraint I'm just curious.

Some of the increase in costs you are targeting related to outright increases in wages are you just seeing availability is more of the issue. How are you thinking about that as we move through 2022 here.

Yeah. So a couple of things there I mean, I always remind people we have a pretty.

Light intensity in terms of labor, it's important but it's not a huge driver in our P&L that being said I think everybody expects a little bit more wage inflation, we have as well here this year to be honest, we probably see more of it tangibly in terms of premium costs and things that we're doing with the existing basis, we're scrambling.

Bling to try to make things on Saturdays are Fridays in a disruptive manner.

Here today, so what matters for us, but it's not a it's not a massive driver on the P&L.

It is a driver of course as it comes in and supply components, where that same dimension is applying the businesses outside so it.

It certainly we're not immune to it.

We counteracted with pricing price capture on the top and manage it that way.

Understood. Thanks for the color.

You bet.

Our next question comes from the line of Jeff Sprague with vertical research. Please proceed with your question.

Thank you and good morning, everyone. Good.

Good morning.

Couple from me if I could just first on FMT.

Segment color you provided in the appendix.

At the annual headwind from flow MD.

It wasn't also headwind in Q4 or is that business now stabilized.

Yes, it's fairly neutral in Q4, I think their current run rate now.

Bottom down in the third quarter, and we see progression as we progress as we go over the next couple of quarters.

And then on next site.

Could you just provide a little bit of color on the expected accretion.

And also just.

So modeling guidance on what we should expect on the amortization that comes into the adjusted EPS equation as a result.

Jeff once we close we'll add that to the guide we have said, it's $50 million business with about 20% EBITDA margins.

Frame it out a little bit for you and then we'll nail it down once we close later this quarter and included in our.

Revised guidance in April .

Great and then just finally just back to labor.

I appreciate that additional color could you just size it though.

Roughly as a percent of Cogs.

The.

The cost of labor.

And are so for our direct labor, so things directly associated with the product builds about seven or 8%.

Right great. Thanks for the color I appreciate it.

You bet.

Our next question comes from the line of blood by sticky with Citigroup. Please proceed with your question.

Good morning, everyone. Thanks for taking more time.

So just I just wanted to go back to your comments on sort of capacity constraints and lead times I think during <unk> you talked about some extended lead times, but also said you felt you were pretty well positioned competitively.

Others in the industry. So can you just give us an update or comment on how you think you're performing versus key competitors across the portfolio and whether theres any specific businesses, where you think you are more challenged versus peers.

I appreciate the question.

This is something you have to kind of gauge every single business. One by one so we do that when we're talking with them and when we go out there.

Our model of generally as always designed to be more reactive and quicker than almost any competitor. We have that's why we have local supply and all the things that we've talked about here.

I would say from a performance perspective, probably just like everybody else. We're most where we're most challenged just inherently are those places that are more electronics.

Specific where were dependent on that probably most constraining a single commodity that everybody is customized it's very hard to scramble and get something different.

Things like spun boards and those things.

Now the people, we're competing against they've got the same electronic content that we do so I don't see that as a net competitive disadvantage is a great example, there frankly in that space, where I know, we outperformed our dispensing business had a really really strong back half push.

Some of the most electronics intensive products that we have in the entire company. They did a phenomenal job largely because their suppliers are very local and it's they've done a great job simplifying the architecture over time, so as I go down the list.

I don't see too many places where folks are pointing to conversion and suppliers that are that are beating us.

For a couple of dimensions I do think we performed very very well, it's frustrating right now, but I think we're still in a good spot.

Super well positioned and a lot of what goes into what IDEXX solution. It's customized nature of the long history of it there's kind of a natural defenses that's part of it.

Okay. That's really helpful color and then just maybe one more for me.

Just going back to the Capex ramp that you're expecting again here in 'twenty. Two can you talk about sort of where you're seeing the.

Best opportunities to deploy this capital is it mainly in areas like automation.

Productivity and then how should we think about this.

Ramp.

Reflective of some chunkier onetime things or is this kind of a more sustainable level.

Okay.

Well, there's definitely a piece of it in there that's a little chunky in nature, because it's related to the facility expansion that we have talked about here for the emerging markets. I mean, we're simultaneously effectively doubling capacity over there to support growth across all of Asia that we wouldn't do all the time.

I will say, though that it is stepped up a bit as things like industrial automation becomes more important for companies like us and others.

They're not too. Many places you can go automate away from people standing on a production floor in our environment, but where there are quite cost effective to deploy that technology and we're doing it more than we have before.

There are some great capex related to supporting growth in some interesting ways digitalization is a chapter is something that wouldn't have been in there 10 years ago or 20 years ago is a chapter now.

So I think it's a fairly typical profile certainly reasonable capacity expansion you'd expect given the growth that.

That we had last year and we project to have in the future, but there are a couple of these extra chapters in there one sort of one time related to facility, but I think the other ones will become part of the mix as we go forward.

Great that's really helpful. Thanks.

Yeah.

Our next question comes from the line of Brett Linzey with Mizuho America. Please proceed with your question.

Thanks, and good morning, everyone.

Okay.

I wanted to come back to the wins you called out in life Sciences, and semiconductor are the life science wins, COVID-19 related or something outside that spectrum and I was hoping you could put a finer point on how IDEXX might be positioned with some of this forthcoming capacity build out within semiconductor.

Quantification would be great too.

Okay, well I mean, a few things there so from from a life science perspective, certainly the lingering nature of Covid, it's in the mix, but I wouldn't say, it's the predominant driver anywhere.

We talked about next gen sequencing and variance surveillance.

Part of it but it's not the majority by any means it still comes back to.

A quick cancer detection point of care medicine, I mean broader trends that have long been in.

Important and are even more important as we get more focused on health care.

Really don't see the kind of current pandemic as being a significant driver of this is really broad based and we think has a lot of.

Room to run for us in that space on the semi side. It's interesting I mean, we actually participate in kind of two places there in sort of the classic infrastructure build out.

And we do that attack it from the ceiling perspective, so actually manufacturing things, we're part of that process and then in the optical side, we do more of it on the sort of metrology and.

Sort of after production quality side of it so we see it from sort of two angles.

And in terms of its its run out as you might suspect here, we've got a long way to go until capacity comes to where it needs to be for that particular sector Ah.

There's things still just being announced now that we're all seeing that are exciting for all of us. So we think that that's going to continue for quite a y in quite a while and most of it is located and our HST segment our exposure.

Thanks for that and the other question on orders another strong year in really finish to 'twenty. One I'm just curious as your team's drill down on the order book are there any signs of double ordering in any of the businesses or pull forward as customers try to secure a spot in line.

Any color would be great.

Yes.

It's a small percentage, mainly because of the kind of highly customized nature of what we make.

That's kind of a risky bet in your everybody is and betting on capacity that may or may not come around again, just because of the way that we attack it with the products and the kind of products.

Product structure that we have so it's typically not a high level. It's barely anything most days I think we've pointed to it could be a percentage point at the current levels I think thats pretty consistent there as you know for high volume things that people can depend on there's probably a little bit of that.

But it's not that's not the majority of what we do here it never has been.

Okay, great appreciate it.

Thanks.

Our next question comes from the line of Scott Graham with Loop capital markets. Please proceed with your question.

Hey, Good morning, Eric Bill, Alex Hi, Scott.

So let me just ask the harder one first in line that up for Bill.

I'm looking at the SMT margin.

In the quarter, we were down essentially 180 basis points, whereas in the third quarter, we were up.

Over.

100 basis points and the contribution this quarter from Abel revenue wise was less and it looks like.

S M T FMT had a less negative impact on sales in the fourth quarter than the third so.

Why was the FMT margins down that much.

Sequentially Q3, Q4 to Q3.

<unk> over year.

Well both of course, bright, but well I would say I would say two things if you normalize so just year over year, if you normalize FMT and take out F. M D and Abel you're roughly flat on an op margin perspective.

I think from a quarter three to quarter four there is a couple of things one.

FMT less working days in some of the vertically integrated businesses. So they have less absorption, which is seasonal happens in most years.

We had the final costs associated with the facility consolidations that we had a little bit on their margins in the third quarter and then just some premium overtime and freight at the end of the year to get some stuff out for customers was dilutive so.

Those three things on the sequential piece in year over year, it's really the X F M D and Abel that's pressuring the margins.

And so theres not an acceleration in supply chain issues there.

No.

Okay. Great. Thanks. The second question is more for you Eric.

Bill was kind enough to share with us.

What the supply chain held you back on organically 5%.

And it doesn't look like you're expecting much difference in your second half organic than your first.

Just kind of wondering.

How you are thinking.

About that 3% to 5% in the fourth quarter and how it affects <unk>.

Sort of your first half versus second half thinking.

Doesn't that lessen in the second half of the year and therefore, maybe you're being conservative on the implied second half guide.

Yeah, well I mean, well so a couple of things I mean, I think we are definitely have a frame and a view that Q4 was tougher in a lot of regards because of the things that bill talked about in terms of as he does he put some boundaries around it clearly we have more absenteeism here than we'd seen in any other point in the year and we know the same thing was happening in suppliers.

Logistic networks, and those kind of things and to the extent that we see that same trend kind of lagging over into the first quarter, we've extended it there.

We're making certain assumptions here as we go forward and one we always get a seasonal uptick in our business. There are certain businesses that just this is the quietest time for them because they can't do their work outside we know those come online not all of those are labor dependent anyways or supplier driven so there's things like that that are out there and then look we were that we're already seeing some signs of that.

This current wave is going to subside come down we are seeing more evidence that people are wanting to get back into the workforce. So those kind of those pieces as well and it's always easier to run the place when it's warmer out.

So there's a few things in there and I don't think the ramp is so significant that it sort of stands in the way of those expectations.

Okay. Good color. Thank you both.

Hum.

Okay.

Our next question comes from the line of Joe Giordano with Cowen <unk> Company. Please proceed with your question.

Good morning, this is Michael on us to see when Joe.

Hi, Michael.

Thanks for the color on the next side, you mentioned sales would be roughly $50 million annually.

Percentages from the software component is there a portion of that is recurring in nature.

Well I mean, it's an interesting thing because it's embedded in a lot of the products. So it wouldn't be as identifiable as that.

For purpose definable piece its an extension of capabilities that then realised in the products that we go to market with but.

We love that capability.

Yeah.

Great. Thank you.

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

Okay, well. Thank you all for joining the call today I appreciate the questions as we went there and the interest in IDEXX.

A couple of things to frame it all out.

No doubt tough environment out there for for everyone as we've seen and talked about I mean, the IDEXX model in some ways. It doesn't make that an easier we've got a lot of iterative and innovation and customization short lead times as a standard expectation high reliance on value added suppliers.

I put a button here thats important that also strengthen us for the short and the long term I mean, we're an agile company, where creative we solve problems very quickly on the fly and that supply chain that we're dependent upon as I said a few times here today I mean, it's it's it's very close to home. We've known these folks for a long time and there are deep relationships and trust.

There are mutual trust. So that's a huge asset for us all of that comes together. So we're going to attack the current situation and deliver outperformance and continued to do our best here and there.

The months ahead, but we also want to do that notwithstanding what we're building ultimately for the future.

Glad we had a chance to talk about that as well.

We are going to strengthen the growth prospects that we have in our most advanced advantaged verticals through organic and inorganic efforts going to use the balance sheet to go do that and support it.

We're going to continue to optimize the footprint of the company. We've got some great work over the last few years to build these more simple scalable outposts out there that are for IDEXX, we stripped out a lot of complexity, that's going to lever really really well for us in terms of supporting growth and driving financials and then lastly, we're going to inspire supported.

All with a I think a very inspiring culture that strives to expand the impact of our mission, which is trusted solutions improving lives. So thanks for your time today I wish you all a great day.

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.

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