Q2 2022 IDEX Corp Earnings Call
Greetings and welcome to IDEXX Corporation second quarter 2022 earnings Conference call.
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A question and answer session will follow the formal presentation.
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Now my pleasure to introduce your host Alastair losses, Vice President and Chief Accounting Officer. Thank you you may begin.
Good morning, everyone. This is Alison losses, Vice President and Chief Accounting Officer for IDEXX Corporation.
You for joining us for our discussion of the IDEXX second quarter 2022 financial highlights last night, we issued a press release outlining our company's financial and operating performance for the three months ended June 30th 2022.
The press release, along with the presentation slides to be used during today's webcast can be accessed on our company website at IDEXX Corp Dotcom.
Joining me today are 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 as business.
Then bill will discuss IDEXX second quarter financial results and update on segment performance in the markets they serve and our outlook for the third quarter and full year 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 8776606853, and entering conference I'd 137, Q4, 804 or Sim.
Log onto 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 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 and President Eric Ashwin. Thank.
Thank you Alison and good morning, everyone I'm on slide six.
IDEXX delivered outstanding results in the second quarter, we achieved record sales levels, 12% organic growth supported by double digit contributions from each of our operating segments.
Our backlog grew by $43 million and we now sit at record levels to continue momentum into Q3 core profitability continues to be strong.
Even as we returned to more normal discretionary spend levels, allowing us to fully invest in our best growth investments.
We delivered record adjusted EPS of $2 <unk>, an increase of 15% over the prior year's second quarter.
Last quarter I described how our IDEXX teams leveraged 80, 20 to accelerate throughput within a challenging supply chain environment that positive momentum continued into the second quarter as our teams improve their ability to execute and deliver for our customers.
Our decentralized operating model, which aligns decision, making at the point of impact close to the customer drives the speed and agility required for us to outperform.
Our lead times, where our competitive advantage and enabled share gain in pockets across the company.
Inflationary pressures remain but the rate of increase decelerated, while we continue to capture price equivalent with our differentiation gross price capture increased and we expanded our price cost spread trending back towards historic levels.
We remain committed to our capital deployment strategy and M&A remains a top priority for us this quarter. We closed on the acquisition of case eval, a complement to our agriculture business with N F M T.
Our pipeline is strong and we continue to evaluate opportunities in higher growth markets that support our style of competition. We have a healthy balance sheet and are confident that we can continue to put our capital to work where.
We're also deploying capital organically across our portfolio to drive operational efficiencies and increase capacity to support our growth.
We continue to make investments in commercial engineering, and M&A resources to enable us to execute on our strategy.
During the quarter, we increased our share repurchases and deployed $88 million to buy back 475000 shares of IDEXX stock.
We remain disciplined with our methodology to create long term value for shareholders. When we see a disconnect between our intrinsic assessment of IDEXX enterprise value and our public valuation.
Lastly, in the second quarter, our board approved an 11% increase in our dividend.
Rising interest rates continued inflation and geopolitical dynamics all presents some uncertainty for us as we consider and head into the second half of the year, but we're not yet seeing any major signals of near term slowing within our commercial environments. We have good line of sight to the next 90 days and we continue to see strength in almost all our end markets as well.
Look across the industries, we serve and our portfolio of differentiated technologies, we're confident that IDEXX is well positioned to outperform during any short term market volatility.
It's been a really strong first half of the year and our teams have a lot to be proud of but it's not easy to over deliver in this environment I'd like to thank our IDEXX employees around the globe for their hard work diligence and agility as they execute for all our stakeholders with that let me turn it over to bill to discuss our financial results. Thanks, Eric I'll start with our consolidated <unk>.
<unk> results on slide eight.
Q2 orders of 839 million were up 12% overall and up 7% organically, we experienced strong orders growth in H S. T. In FMT, but saw contraction in FSD driven by dispensing North America's strong replenishment orders received last year.
Second quarter sales of $796 million were up 16% overall and up 12% organically, we experienced record sales with double digit increases across all three of our segments.
Second quarter operating margin was 23, 4% up 30 basis points compared to prior year.
Adjusted operating margin was 23, 8% down 60 basis points incremental amortization related to Aerotech next site and Casey valve acquisitions unfavorably impacted adjusted operating margin by 80 basis points.
Second quarter net income was 138 million, which resulted in EPS of $1 81, adjusted net income was $154 million, resulting in an adjusted EPS of $2.02 up 27 or 15% over prior year.
Finally free cash flow for the quarter was $97 million or 63% of adjusted net income. This reflects higher accounts receivables driven by the significant increase in sales versus last year as well as elevated inventory levels inventory.
Inventory has increased to buffer supply chain challenges and leveraged material availability as a competitive tool to take share in the market. We have spent a lot of time with our teams reviewing their inventory reduction plans and are targeting to bleed down our inventory positions in the second half of the year.
Moving on to slide nine which details the drivers of our adjusted operating income.
Second quarter, adjusted operating income increased $23 million compared to last year or 12% organic growth contributed approximately $22 million flowing through at our prior year gross margin rate.
We levered well on the volume increase our teams drove operational productivity and we had strong price capture to offset inflation headwinds.
This cost was accretive to margins and is trending towards our historic levels.
We experienced positive mix of $2 million across the portfolio.
We reinvested $4 million, mainly in the form of engineering and commercial resources to drive long term growth and additional resources to support our accelerated M&A activity.
Lastly, discretionary spending increased by $9 million versus last year and up $7 million versus the first quarter of 2022.
Our teams across the globe backed in person partnering with our customers actively marketing our products and investing to support innovation.
As we look ahead to the second half of the year, we do not expect this level of sequential increase to continue we've now ramped to our pre pandemic spending rate, but on significantly higher sales.
Our organic flow through was 23% in line with the flow through expectations, we set at the beginning of the year, but most likely the lowest rate we will experience this year.
Flow through is that negatively impacted by the dilutive impact of acquisitions and FX getting us to our reported flow through of 21%.
With that I'd like to provide a deeper look at our segment performance.
I'm on page 10.
And our fluid <unk> metering technology segment, we experienced a strong second quarter for both orders and sales with organic growth of eight and 13% respectively.
F N T. Adjusted operating margin expanded by 170 basis points versus last year.
The increase included 60 basis points of headwind due to incremental amortization related to the next site and Casey valve acquisitions.
Volume leverage strong operational productivity and favorable price cost were the main drivers of the increased adjusted operating margin.
Our industrial markets are exhibiting stable demand with consistent quote activity over the last few quarters.
We are seeing small to mid sized projects coming through in the oil and gas and petrochemical markets as well as in applications tied to mining asphalt and lithium ion battery production.
Agriculture continues to perform well farmers are experiencing record inflation and look to our technology in precision AG to drive productivity.
The KC valve integration is going extremely well and our automation project at banjo is on track.
Market conditions remain favorable and our municipal water business, we continue to see a strong commercial funnel and long term optimism driven by government funding and ESG initiatives.
On the energy side upstream markets are experiencing healthy demand with oprah prices, providing strong support.
Midstream investments have yet to see a bump in activity due to customer supply chain constraints constraints and caution on long term price sustainability.
Moving on to health <unk> Science and technology.
Stellar commercial performance continues with organic orders up 13% and organic sales up 12%.
H S T. Adjusted operating margin contracted by 130 basis points versus the second quarter of 2021.
Incremental amortization related to the air Tech acquisition unfavorably impacted adjusted operating margin by 130 basis points.
Additionally, adjusted operating margin was driven by strong volume leverage and positive price cost.
Largely offset by increased employee related costs discretionary spending and resource investments.
HST continues to benefit from strong secular growth trends within life science analytical instrumentation semiconductor and food and pharma markets.
The life Sciences market is experiencing strong demand for next gen sequencing instruments and consistent core diagnostic market performance.
Analytical instrumentation and material processing results remained strong and continued pharma and biopharma demand.
On the semiconductor side, we continue to see growth, but at a slower pace, we've been able to offer shorter lead times than our competitors, enabling share gain across a variety of applications.
We continue to see strong growth in our optics business is tied to broadband satellite technology and strength in our industrial business is similar to the F. N T results.
Finally, turning to our fire safety and diversified product segment orders contracted by 5%, but sales were strong with the organic increase of 11%.
F S D. Adjusted operating margin contracted by 280 basis points versus the second quarter of last year.
This was driven by higher volume being more than offset by higher employee related costs and discretionary spending as well as pressure on price cost due to age the OEM backlogs on the fire side and automotive exposure with more metal content within band it.
As we noted in prior calls we have taken action to address this gap and expect the price cost will improve in the second half of 2022 as those increases pull through our backlog.
Our dispensing business performed well driven by delivery of North American project volume and an overall positive global paint market.
And it had strong results across the industrial automotive and oil and gas markets on the automotive side, we continue to outperform the market and capture share on new platforms and energy, we see strong downhole market demand and capture share due to material availability with shorter lead times for our customers.
Within fire and safety, we're seeing strong demand with our E. Three rescue tools on the fire side core North American and European markets remain choppy due to OEM supply chain constraints, but we are starting to see some modest improvement.
With that ill provide like to provide an outlook for the third quarter and our full year 2022 results.
I'm on slide 11, which lays out our updated guidance.
For the third quarter of 2022, we are projecting organic revenue growth of 9% to 10% and operating margin of approximately 24%.
Q3 forecasted up margin is up slightly versus second quarter due to improved price cost, partially offset by lower seasonal volume leverage.
We expect GAAP EPS to range from $1 80 to $1 85, and adjusted EPS to range from $1 98 to $2.03.
Turning to the full year, given our strong performance in the first half of the year, we are raising our full year guidance. We now expect full year organic revenue growth of approximately 10%.
This reflects our confidence in line of sight for the third quarter, but some caution in the fourth quarter due to the short cycle nature of our business.
We expect GAAP EPS to range between $7.19 to $7 29, and adjusted EPS to range from $7 88 to.
The $7 98.
Our operating margin for the full year is expected to be approximately 24%.
We're expecting free cash flow as a percent of adjusted net income to range from 75% to 80% down from our previous guidance.
With our higher revenue expectations for the back half of the year elevating our year end receivables balance and a slower than expected inventory bleed. This is our best estimate as we head into the second half of the year. Our long term goal remains to be above 100% and consider the current guidance reflection of the volatile external environment versus a structural shift.
And our cash generation capabilities.
With that let me pause and turn it over to the operator for your questions.
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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.
Good morning, everyone.
Good morning, Mike.
So let's start with the commentary that you said, you're really not seeing anything yet.
In terms of deterioration and things are going well and you can certainly hear that from all the end market commentary you guys gave him and then balance that with the guidance outlook that says you've taken a little bit more of a cautious outlook into the fourth quarter given the short cycle business and you don't know what you don't know so yeah maybe.
Maybe just talk about those two competing things and what things you're looking for in your portfolio to just say that things are going to keep this pace maybe decelerate.
Could be the band it business could be something else, but we would love to kind of compare contrast, all that stuff.
Yeah, well. So we you know we're always always looking at what we refer to as our canaries in the coal mine businesses. So those are the shortest cycle.
Our more industrial businesses that are very very close to the actual consumption that's going on out there in the industrial landscape.
Those have held up really really well I mean, I think that's the story of this whole post pandemic recovery is just the industrial system, that's been working feverishly.
To try to catch up so that for US is always something that we're looking at first to see if there is an indicator of weakness there that you know usually sends up a signal and then you start to see things come after that and so far you know as I said in the comments that is holding in and then I'm sure. We'll talk about this more in the call. But then we balance that with some of the exposure we have across a whole host of mark.
That's on the project side.
That's more of a an indicator for us of overall future confidence, where our people are tilting towards uncertainty those things and.
And you know Theres a couple of places where we've seen that slow down I mean, it's an interesting story overall, you know where in many ways. It's that kind of business as just struggled to get traction and this whole recovery cycle, but.
Other than a few indicators in pockets, there with ending point out a bit further into the future we sort of keep a look at all of those and then look at our own backlog support on top of all of it that gives us at least the assurance in our in the short term and of course, we'll always adjust that and recalibrate it and that's the joy of a short cycle business. You can you can do that pretty quick.
To frame that I mean, our implied guidance, Mike is kind of a one percentage sequential deceleration in Q4. So it's small just a little bit of noise that it could potentially be out there, but right now what we have line of sight too and the confidence that our order patterns. Yeah. We still think the back half is going to be really strong.
No that makes sense and in and I think you said the backlog build in the quarter by three 9 million something like that is that are you.
You're seeing lead times extend come in is that is that more reflection of that underlying order strength through the quarter, maybe just talk a little bit about the backlog piece I mean, it's it's really broad based where we're looking at the other day to see if it was coming in pockets in chunks and it's not I mean, it's kind of layered across a lot of things you know our lead times.
In aggregate our.
Holding or decelerating I mean, we made a made a comment there that we are seeing some pockets, where frankly, our advantage lead times that are reducing our giving us an opportunity to go grab some share and things. So I'd say on balance you know, we're not doing anything to drive that in the wrong direction its going in the right direction and <unk> and the backlog build is very very broad based.
Last question for me you made a comment in there that you invested to support accelerated M&A processes is that a reflection of a pretty healthy pipeline I know the environment has gotten a little more challenging on the M&A side, so like to understand what you're seeing and what you hope is investments can get ya.
Yeah, I'd say I mean, I look I think the environment for high quality assets has held up pretty well as we've gone through this but a lot of this is very deliberate work on our part to say that we want to we want to go deeper and frankly into our insight into those sort of concentric circles that surround our best applications. So is it purposeful step.
And work of that type.
Both resources and some things we're doing with third party analytics to make sure that we understand it as well as we can in an environment. That's so far is holding up pretty well for high quality assets.
It makes a lot of sense. Thanks really appreciate it thank.
Thank you Mike.
Our next question comes from the line of Deane Dray with RBC capital markets. Please proceed with your question. Thank you and good morning, everyone.
Morning, David Hey, maybe we can start with the free cash flow our guidance cut there and look we're seeing this across the sector. This is getting.
Getting to be pretty familiar.
But the idea of carrying more buffer inventory and then the expectation when all of this demand are likely resulting in higher receivables towards yearend. So we get the way the math works, but bill can you expand on the the timeframe for bleeding the inventory down I guess, it really does depend on how the <unk>.
Ply chain begins to normalize, but just take us through the math on that.
Yes no.
That's exactly right as we sit here now and lead times as Eric just talked about on our side are improving we're starting to see that across the broader aspects of our supply chain. So our increased purchases to buffer some of the longer lead times to continue to deliver for our customers is shrinking now lets just catching up with our production.
And getting through that get getting that through our system. So yeah. As we look at third quarter there'll be some improvement, but more material decreases in the fourth quarter, leading into the first part of next year. So you know again, we spent a lot of time with the teams to understand and calibrate around still having this robust demand.
And what our vendors are and their capabilities are from a lead time perspective, and then drawing down our open pose and then increasing the throughput as we have here in the second quarter to the first and maintaining that as we progress through the back half of the year.
Is there anything on product.
That shortage is semiconductor related where your inventory is you've got nearly finished goods, but they're waiting on them.
The particular product that's adding to your inventory is that an issue at all yeah. Yeah that is a component as we've had customers who.
Other.
Suppliers for them Havent vanished capable to produce has held up some of their receipt. So we have finished goods at a higher level than we have had historically.
Because of issues our customers are facing with other suppliers and then maybe dean Dean to the extent you were I think you were also asking about maybe unfinished things that we have in our own factories or something waiting on a part much like you see in the auto world.
And I wouldn't say that it's completely devoid of our environments, but you won't see it all that often because we have we have.
A pretty quick rapid turn you know one piece flow kind of bill so it doesn't do well with something that's half down there's really nowhere to put it in our production process is quick enough you're better off not starting it.
Because in general most of our businesses, that's how we that's how we produce things.
That's that's helpful color there cause you do here like for the autos are where they've got all these cars lined up that still need semiconductors and yeah. We did not we wouldnt, we wouldnt notice for something and ended up building schedule, because well make 40 of them in a couple of hours those kind of things good all right last question.
For me Eric are you kind of beg the question early yard to Mikes. When he was asking about the macro where you said there are some pockets of slowing on projects, so and and absolutely. That's a reflection of kind of what we say CEO confidence are they going to move ahead I think he made it.
Reference to midstream.
And we've heard plenty of that Ah I, just really hasn't realized in and full kind of spending given the oil prices, but where and how would you describe some of these pockets of projects slowing or just yeah.
Not getting that the release that you thought you were going to get.
Yeah, I'd say I'd say, probably more of the second category not getting their release or not coming on a line you know something we've been thinking about or projecting for a while now.
Some of them just get extended out.
So you mentioned the midstream side of minutes in pockets in our chemical markets, our exposure would be more on the European side than elsewhere.
Well, you know a little bit in the paint dispensing area, we're just kind of coming off the end of a big replenishment cycle there.
And then there's a few things and just specific industrial markets, yes, food expansion in places like that I mean, they're pretty isolated it's not a massive part of our business, but there you know the good indicators things to watch and I would just say that.
An interesting over over the cycle here is because this category never really took off.
I think in the beginning it was very much clouded with uncertainty you know the nature of the recovery then it turned into a kind of a bandwidth issue can anybody put together the materials at the time and energy to work on it maybe here in the in the later innings of it. It's it's sort of all of those factors uncertainty creeping in back a bit the bandwidth issue is still there and now inflation in the cost of these.
Projects is causing some recalibration for in certain markets, where people have to kind of go back and run the math again.
That's real helpful. Thank you.
Thanks, Tim.
Our next question comes from the line of Allison Polymeric with Wells Fargo. Please proceed with your question.
Hey, guys good morning.
Keeping in mind that that project comment you know I know you talked verticals, but is it any like weighted toward a specific geography or is it seemed very broad based by vertical at this point just in terms of what you're saying.
Well I mean, I'd say, it's broad based in terms of the way I. Just described it you know I mean, we are seeing a bit more geographic strength in North America than Europe for all the reasons I think we would suspect in terms of things people are watching there on the geopolitical side the energy side those things, but both are positive for us.
If I had to call it I would say a little bit more positive on the north American side than Europe .
Great and then just kind of going back to the free cash flow and just capex in general.
It started to sort of that the approach that $90 million and he talked about banjo and then investment in emerging markets. I mean are those still on track or is it kind of risks that someone that gets pushed to next year, just because of the uncertainty right now.
That's what's going to drive the increased spend in the back half, we're expecting both India and China facilities to open later this year and then banjo.
I think you just get a late third quarter early fourth quarter. So there is those projects I think are on track, obviously thats a subset of the $60 million ramp.
$30 million ramp 60 million spent in the back half that relative to supply chain delays and things we have seen some some items smaller it was pushed from the first half of the second so theres a little bit of play in that number but for the large ones. We're confident that those will hit here in the next couple of months.
Great. Thank you.
Our next question comes from the line of Rob where the Myer with Melius Research. Please proceed with your question.
Hi, Thanks, good morning, everybody.
Hi, Rob.
My question is just a little bit more on M&A can you talk about just what the feel is like from potential sellers out there whether I don't know whether things get repriced as you're kind of edge through different parts of the process and the market's corrected and interest rates are higher I don't know if there's a standoff as people adjust to different pricing or not and then any comments you'd make on how big your funnel.
And kind of pipeline are versus prior periods. Thanks, yeah. So as I said before I mean, all of this is bracketed a bit why by the step up in intentionality and work that we're doing so.
That respect again Theres a lot of things we're looking at a lot of analysis that we're doing and a lot of conversations that were happening you would say are you know that just activity level is north of where it has been much of it driven by our work now in those conversations you know probably much like the conversations you have there there is definitely more discussions around near term prospects.
What's going on with the forecast and how do you see the <unk>.
Sales tracking out and to the extent that all links back to valuation is just more intense than it has been for all the reasons you suspect as bill and I have always said, though you know when you're looking at assets of our quality that we look at you know youre generally looking at our history, that's very sharp well positioned you know driving driving and strong.
Strong ways, and then a reasonable projection path, especially if we're the owners that kind of picks that up again so.
That doesn't mean that both sides are going to be able to see that and get through it. So yeah. That's always a possibility, but our perspective is very long term in nature for the kind of assets that we're looking at so long story short more activity on our part which means you know I think a strong funnel for us a lot of activity engaging with people more you know near term discuss.
<unk> around what this all means and where it's going to go but then kind of just take a deep breath stair over the horizon. It would be confident that for quality you know I think ideally both sides see it that way and stay engaged.
Perfect. Thank you and if I can I guess follow up on that.
Uncertainty and so forth you touched on backlog earlier I don't know if you're willing to give any more color on where your backlog stands versus prior cycles or versus prior record levels et cetera. It seems there's a.
A bit of a standoff and then everybody's uncertain about the future, but the future doesn't look bad currently I don't know if the backlog will help us triangulate that a bit.
No definitely I mean, our backlogs kind of two acts of what it has been historically and normally we would go into a quarter with 50% of the quarter sales and backlog we've got.
Close to two thirds now so we have a lot more visibility to temper any dramatic short term fall off so so again relative to the next couple of months, we're fairly confident in our numbers. So I don't think there's a huge pause that would come because our backlog can support any short term decrease in orders.
Thank you I'll turn it over thanks.
Our next question comes from the line of Matt Summerville with D. A Davidson. Please proceed with your question.
Okay.
Thanks, just a couple of quick questions with respect to price can you comment on where you were pretty fertilization second quarter year over year and how much incrementally on top of that you expect to realize in the back half.
Yeah.
We were a little over 4% here in the second quarter, which ramped from a little over 3% in the first quarter. We don't guide the balance of the year price, but we're really confident in what the teams have gone out with to combat inflation, which seems to have leveled off. So I mentioned, we have an expectation that our price cost is going to continue to improve.
<unk> through the back half of the year to support some some of our higher margin profile expectations.
In certain areas of the car.
I'm on any market certainly in metal steel aluminum copper things have come off their highs pretty materially I'm still elevated from historical standards, but certainly off peak, one, but some of that start to actually add some incremental benefit to your P&L.
I would say a couple of things one relative to we only have a couple of businesses that have direct exposure to commodity prices from a materiality level. Yeah. We were buying components that are a couple of phases through that that value stream. So obviously, we didn't have the vast inflate.
<unk> impact on the way in that a lot of other companies did again, 4% price increase is still price cost positive and we're building so yeah.
I think we and out over time, it will be a material impact but.
But we will keep all of the incremental pricing that we've had again, we holistically gone out with.
Price increases versus surcharge, so or we like where we're positioned.
Here going forward.
Understood. Thank you very much.
Sure.
Our next question comes from the line of Jeff Sprague with vertical research. Please proceed with your question.
Hey, Thanks, Good morning, everyone, Eric could we come back to you know, what we said really on deal cultivation right in the.
Activity being more of a function of your internal efforts and maybe you could elaborate on that if you are significantly up resource the deal teams.
Heavy level of activity.
Indicate any interest in pursuing new adjacencies.
Maybe a little bit of you know kind of strategic and tactical color on what's going on there.
I mean, you know we're not a we're not a massive center led kind of organization never have been so you know this might sound more dramatic than it probably is from a head count perspective, I mean, it's a few well position adds from the outside some work that we're doing as a third a third party side and then.
Frankly, the biggest component is just the higher level of engagement overall business to business. I mean, this is something we've been driving now for a couple of years.
And so we really focused our combined growth outperformance on top of our just sort of institutional grade well deserved execution shops.
And so a lot of it a lot of it's that way in terms of you know, we're we're looking and what it looks like I mean, we've always favoured I always come back to this analogy of concentric circles around these applications that we kind of currently sit in.
We know these environments really well, we know what's the right or left of US and you know the best word for me is really starting to understand you know what whereas this market heading should we make a move slightly left or right and how would we do that the recent acquisitions that we've layered into the company are perfect examples of that.
As I said before it you know we're also thinking about the.
Broader world in general and where our problems are presenting themselves and where IDEXX like.
Styles of competition could come in play and maybe that would open up you know.
Flank for us and in some some applications that are new to the company. So that's in the mix as well, but if you really had to over generalize it and think of it think of it as just radiating circles from the best parts of the company with more intensity a lot of it from the ground up that's the way we like to do it yes, I think those actions.
The quality of the funnel is probably at an all time high.
That work that the team has done across a variety of different end market applications as concentric circles that Erik highlighted.
One of the main reasons why we are so confident in our ability to deploy capital much more consistently as we progress.
Great and Oh unrelated just back to this I mean everybody's got their ear to the ground and trying to shift issue with the economy.
Any gut feel that actually these improving lead times are actually the Canary in the coal mine.
Anything happening and just kind of the supply dynamics and kind of what are the shipment dynamics or anything that maybe are earlier precursor of some deceleration.
But I. It's a good question I mean, it's hard to say, though because in many ways we've been running.
Others, such a hot level, it's pretty abnormal.
Pulling back from that and anyway, even if it's just simply the deceleration of the.
You know like a tremendous acceleration we've been feeling is going to have a material noticeable impact inside just how it feels and site and in the business.
But I don't know that that's the same thing in say a broader call on economic conditions may be more than its just okay. It's not at peak levels. We can catch their breath, we can actually be a little bit more plan full mindful.
And that's for us and that's for others as well so I think of it more in those terms then let's say well since there's nothing else to do.
We can get product quicker I don't see it as an indicator of that.
Great appreciate the color. Thank you.
Yeah.
Our next question comes from the line of Rod Lache Tricky with Citigroup. Please proceed with your question.
Good morning, everyone. Thanks for taking my call.
Hi, Brett.
So I just wanted to ask kind of following up on these macro related questions in your in your.
Businesses that go through distribution can you give us some color on what youre seeing and hearing in terms of distributor inventories and whether there are any areas, where you're more concerned about a potential for destocking in the event of a slowdown.
Yeah, well I always kind of preface. This question with a reminder, that we have a lot of configured customized products with quick replenishment, which means there's not a ton of our inventory on shelves.
You know so its a small number I will say you know we've got some good visibility to what line of sight and minimum you can see it visually when you go visit them.
And so you can see you can see some slight increases there for our product I would assume that's applicable to two more stock about components as well.
Our world, we think of that as if ultimately that bleeds off over time in some ways, it's pretty similar to the way that it works in our own business. It is it takes a while because of the wide variety of Skus that are out there none of it's really clumped around a standard solution that if he made a deterministic call on it would just flow out.
And a big pocket or chunk. So when we think about it a lot for IDEXX, mainly just as more of an indicator of health overall, but from a you know a.
Meaningful impact to the numbers up or down it extends over a large time horizon, it's not a giant piece of the business and it usually is kind of Washington that math to be honest.
Okay. That's.
That's helpful. And then maybe just stepping back so you talked about obviously the intent to bleed down some inventory.
Here over the back half and into 'twenty three.
But your availability has been.
I think a competitive advantage for us can you talk about what you're seeing in terms of your own supply chain availability and logistics that gives you the confidence to begin to bring down inventory without giving up any of the competitive competitive advantage that you've that you've gained through the recovery.
Yeah, well I mean, some of it you know the inputs are fact based so we can see and we track our own you know our suppliers' performance and their lead times in their on time delivery to us. So you know you basically start there and say well we can see factually some improvement the logistics loops are quite a bit better than where they had been on the first part of the year and frankly our teams.
Our really good now navigating them when they when they kind of run a stray.
I think I think the biggest thing for us and anybody that wants to go tackle. This now is some ways you've got to take advantage of the ability to take a breath I would say is we've improved throughput momentum and you know we're executing stronger here that does bias a little bit of time space and energy to go back and recalibrate the systems, which is what you actually have to do to go attack.
Inventory, you've Gotta go change demand signals, that's part by part. It's you know you do it on.
On lines of paper laid out across the desk and so when bill talks about our engagement with our teams. That's the kind of work, we're making sure it is happening.
People are kind of racking and stacking at Ata's, Twenty's and making the calls based on fact based patterns that they can see and taken advantage of the time and energy they have to go do it.
Some of the areas you have been able to take share. It's because we have an 80 position with that vendor and we're getting a higher allocation and some of our smaller competitors. So if they don't have the material availability, we're able to go in and take their volume.
Yes.
Perfect. That's really helpful color guys. Thanks.
Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.
Good morning, everyone.
Hi, Nathan.
Yes.
What was the question on health and science and the organic order growth that you are saying that yeah, everybody focused on the economy going up and down at the moment, but that that's a business that's less cyclical per year and still showing extremely strong orders. Maybe you can just talk in a bit more detail about what's driving those a b product cycles that.
You don't have a specific duration and what the outlook is for continued growth. There just any more color you can give us on on the strength around that business.
Yeah, I mean, it's it's exactly the way you described it I mean, you know, it's it's very much tied to strong trends that we're going to I think see run out for quite some time here. So we like everything else in IDEXX, we break it down into all sorts of little components and drivers in specific application sets and some of the ones that are that are going well there the AI space.
As healthy that's a decent part of the business analytical sorry analytical instrumentation and then the genomics space has been very very active and a lot of that is involving initially COVID-19 and COVID-19 surveillance I think now as the pandemic has kind of moved on and entering its third year.
You know, we're seeing we're seeing now some some more targeted work around taking some of that technology and applying it for things like targeted medicine and all the things that we're always out there for that field of study. So those had been healthy as well. We continue we have some isolated pockets, where we do support for vaccines and things of that nature.
That stayed strong through the duration as they're continuing to work on different.
Different targeted vaccines and things like that for both Covid as well as other things. So you know.
It's a it's definitely picking up most of the macro dynamics and trends that we have long known are out there and it's why we spend a lot of time investing in it and talking about it.
Thanks for that maybe one on gross margins I mean, you obviously had very strong gross margins for an industrial company to begin right they've been pretty consistent over the last PVH, NIS 45, plus or minus kind of range.
Is there a negative impact that you've seen the gross margins with all of the disruptions around Iran.
Around supply chain and probably bid.
That that maybe are less related to price cost, but might be seen efficiencies within your manufacturing.
Maybe go away that could lead to higher gross margins or anywhere else that you see opportunities to expand gross margins.
Yeah, No I think the biggest pressure it has been price cost with 45% gross margins you have to have a price cost spread well in excess of that.
Expand so that has put constant pressure and then we continue to invest in engineering resources, which to remind everyone that is included in our gross margin number. So yeah, we've been able to maintain through robust productivity across the portfolio to offset some of those headwinds so I do think.
You know price cost getting back to historical levels and then our continued.
Volume leverage that we get in the high contribution margins, we have in our business once we stabilize a little bit from an operations perspective, we will be able to pull through some increases.
With again, just a very difficult operating environment, we've been in.
The ability to have discrete productivity projects across the portfolio that we've historically been able to execute on has been muted a little bit too here is another point, so I think as things normalize what we'll get another kicker off of that.
Great. Thanks for taking the questions.
Thanks, David.
Our next question comes from the line of Scott Graham with Loop capital. Please proceed with your question.
Thank you for taking the question good morning all.
And congratulations on what was a really good quarter from you guys.
Oh, I I have a.
One quick one for bill kind of.
Could you give us an idea of where sort of your sales are running opex versus capex.
Yeah, we.
We don't really disclose that externally and to be honest, we don't look at it internally it goes a little bit to the.
You know project comment that Eric talked about a little bit earlier, it's not a huge part of our business. Yeah. So I would say holistically most of our projects are opex, replacing like for like current IDEXX volume and then some incremental market share gains that we have.
The Capex, yes, we have some some specific things that we would be able to realize with.
Plant expansions, new new plant creation, but overall relative to our portfolio, it's not overly material number so.
The short answer would be Holistically, it's more opex related on our sales.
Thank you so now I want to maybe understand dispensing a little bit there's a comment in the deck talks about non repeat orders you know quarter back maybe two quarters back you talked about how dispatching should weaken.
Fairly materially in the second half of this year.
Just trying to triangulate what that means now for the second half.
Of the year, how does dispensing well because it doesn't look better now or not.
No I think it's in line with our expectations.
You know that we had at the beginning of the year I mean orders pressure in the second quarter that have more pressure in the third.
They'll continue to have sales growth in the third quarter with sales finally fallen off a little bit kind of post those replenishment projects in the fourth quarter. So still a great business very global so 11 wins in emerging markets. The launch of new technologies on the software side, so, although they're going to lose the replenishment there.
Our core business continues to grow so it's Ben.
Cyclical over it.
Lifespan, but I'm a little bit of pressure in the short term as those projects roll off but holistically lots of additional opportunities through software and emerging markets growth.
Got it and if I could just squeeze this last one.
Fire business, where you know the Oems you're customers are still saying that there you know pretty supply chain restrained has anything changed in the last couple of quarters. They are because it's a pretty good business for you guys, particularly now with your you know having a nice little beachhead in Europe could you give us an idea of where that.
This goes in the next couple of quarters.
Yeah, I'd say the headlines there the supply chain constraints and for the larger folks that are in that space are still they're still challenging stone still fighting that off.
To say that there's kind of smaller to medium specialty players have done a decent job jumping in so that's helped us a bit just not the biggest part of the market. We remain really really focused in that business on technology.
So you know there's only so much we can do to help out on the supply chain side eventually that will come to a better place as it does we want to be ready with all of the automation that we've been talking about not only the pieces that we have in the in the water path of the mobile platform, but you know we've got a novel now that Scott connectivity in it in diagnostics, we're doing the same thing on the.
The rescue tools piece. So we've got some really really good things there I just presented in a giant global show here in the second quarter. So that for US is kind of the you know the longer term headline on a an industry that we think will ultimately start to dial in and improve.
Thank you.
Thanks Scott.
Our next question comes from the line of Britain Lindsay with Mizuho. Please proceed with your question.
Hi, Good morning, all just.
Just wanted to come back to the orders so the underlying run rates in the corner you know very strong even more encouraging on a two year stack basis, what is your expectation for year over year order growth in the in the second half.
Customers are no longer advance ordering or some of this backlog in wind I mean do you think you can grow orders and anything that July would inform me here.
So obviously your back half, we got much tougher comps in the third quarter at least relative to what we have visibility. We think we will still be positive from an organic perspective, you highlighted a little bit of the dispensing pressure that'll that'll continue but overall IDEXX still positive you know from a July perspective, no no no.
No material changes versus the trends that we've experienced here.
The portfolio.
Okay, Great and then just was hoping you could spend a moment on the KZ valve acquisition, how that performed on a standalone basis heading into the close.
Relative to your expectations and then what are you calibrating for accretion within within the guidance framework for this year.
Sure I'll cover kind of the general state of the business, let bill answer the financial question. So I mean that is that has been a really really strong acquisitions strong integration process. It is a very very close complement to our.
Banjo franchise in the AG space with an F N T.
Not very far away and so the teams are really attacked it it's performed strong as all our agricultural businesses have both in North America and Europe .
So you know this is Ben.
Some ways one of the easier integrations because the commercial linkage is so strong in the business and everybody is speaking the same on the same page with technology and the broader market supports it so very very strong out of the gate excited on the long term prospects here and I'll, let bill talk about the specific EPS in the back half two to three yep.
Okay got it thanks for the questions you bet.
Our next question comes from the line of Michael Anastasia with Cowen. Please proceed with your question.
Good morning, Congrats on the strong quarter. Thank.
Thank you.
You mentioned the strength youre seeing more broadly, but obviously the macro.
Is is deteriorating.
What types of initiatives are you doing internally to prepare for those macro data points ultimately if they start impacting the business.
Yeah, no no thanks for that and so I mean, yeah. We we've seen a lot of these cycles before we have kind of a standard way that we look at it I think you know for us its the first lever would be looking at discretionary spend.
We've called that out a few times, because we came off a base with almost none of it now we are out engaging with customers going to trade shows so its elevated a bit but we know frankly, if we learned anything over the last couple of years, you can make it through with a much lower level of discretionary spending that'd be the first lever is.
Bill mentioned you know I think there is an opportunity here for you know a pretty hard look at productivity across a factory setting if things were to cool off a bit and we actually got some bandwidth back on the team's perspective rethought how flow is working a different product lines or in different positions and where they may have been a couple of years ago. So we go there next year.
The one area that might be a little bit different we talked about it a lot is on the head count side on the people side, you know I mean, even today, we still have we're still looking for people to war on talent is real some of the communities. We you know, we we live and work and it's been harder to find labor I mean, that's improved here more recently, but its still.
Theres still pressure in that area. So that's probably the area given all the focus we have on growing the company long term and that dynamic we would be the most thoughtful about you know, where we would make choices investments and things along the way.
Otherwise I would say, it's a pretty familiar process for us the short cycle nature helps us get at it fast and.
So it's never far away the playbook to run that anything do you add there no I think you said it is at least our expectation for for Decrementals would be a little bit higher than they have been historically.
Because of.
Relative to current profit levels in the war on talent that Erik highlighted so maybe we would have historically been in the low thirties, we're probably closer to 40% here. If there is a slight pick up here as we progress over the next couple of quarters.
Thanks, that's really helpful. Just one more if I may.
You had mentioned orders before but declining sequentially over the past quarter. What are you seeing from a cadence perspective going forward.
Yeah, I think there is always our first quarter, we generally get our annual blankets from a lot of our customers. So it's generally inflated relative to sequential profile of our of the balance of the year. So that's that's the real the real driver from the Q1 to Q2.
For US now, it's kind of leveling off with keep.
Keeping an eye on just our daily order rates, which have sustained here in a.
Month of July .
Yeah.
Great. Thank you.
There are no further questions in the queue I would like to hand, the call back to management for closing remarks.
Okay, well, thanks, everybody for joining today, and where we're really really proud of our first half performance here and as I close just I guess, the one thing I would want you to take away is it's you know, it's really a story of and not or here at IDEXX. I mean, we've we've long I think earned a reputation for tactical execution good times difficult.
Times, we're seeing that in the performance that we are addressing here today and you know we're working deliberately to drive growth our performance as an additive component of value creation on top of it.
Basically do that by picking up the top bets that align really really well to you know to them to the macro trends that are going to be great over the long haul we rally resources around those and then here as I spoke a few times, we very deliberately complemented those efforts with organic and inorganic investments and we will continue to do that as we go forward. So.
I think you're seeing it play out you're seeing it play out and the acquisitions, we've made that celebrate precision AG or alternative energy and the nomadic space or you know water solutions and what that can be so you're seeing that come together and I just want to highlight that they they additive component of those two things and we'll continue to talk about that as we move forward. Thanks very much for your <unk>.
Triste enjoying today.
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.