Q3 2022 IDEX Corp Earnings Call

October 26, 2022

[music].

Greetings and welcome to IDEXX Corporation's third quarter 2022 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 Alison Lewis, Vice President and Chief Accounting Officer for IDEXX Corporation.

Thank you for joining us for our discussion of the IDEXX third quarter 2022 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the three months ending September 30th 2020 to.

The press release, along with the presentation slides to be used during today's webcast can be accessed on our company web site at Fedex Corp Dotcom.

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

Today, we'll begin with Eric providing an overview on the state of IDEXX. This business then.

And then bill will discuss IDEXX third quarter financial results provide an update on segment performance in the markets they serve and discuss our outlook for the fourth 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 870, 76606853, and entering conference I D 137 to four eight.

Zero, four or simply 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 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 and President Eric Ashlin.

Thank you Alison and good morning, everyone I'm on slide six our.

Our global teams achieved excellent results in the third quarter, we delivered record sales adjusted EPS and free cash flow.

Organic sales grew 15% with double digit record growth across all three of our segments.

Orders moderated a bit in the quarter, but backlog positions remain robust overall.

It's been a strong record setting year, so far for IDEXX not easy to achieve in this environment I'd like to thank all our IDEXX employees around the globe for their outstanding efforts.

On the capital deployment side last month, we announced our intent to acquire the Milan group for 700 million euros, marking our largest acquisition to date.

We won't expands upon our growing core of market, leading precision components technologies and area of the portfolio, we continue to invest in both organically and inorganically.

<unk> technical capabilities like many others with an IDEXX are well position differentiated and tunable towards high growth niche applications within broader megatrends.

On technology solve critical problems within the most demanding application sets of semi manufacturing patient care within med Tech food production and other high quality markets.

This acquisition demonstrates the success of our expanded M&A strategy.

We combine bottoms up business intelligence with analysis and insights from a small strategic community across IDEXX to build conviction within a grid of high quality niche applications.

Increasingly as we build and optimize the portfolio, we find that we can drive growth within a target vertical from multiple points organically from with at IDEXX businesses and externally via M&A.

We think this approach is unique and advantaged. It leverages 80, 20th segmentation, our operating model and the quality and strength of our diverse collection of businesses.

We also completed the sale of our night LLC business in the third quarter Knight supports cleaning and standardization within hospitality and janitorial markets as we've discussed in the past we continually seek to optimize our portfolio when we identify businesses or product lines that would grow and thrive for other owners, we've divested those assets I want to express my.

<unk> to the 19 for all they've contributed in there 25 years with IDEXX.

Next I wanted to share some exciting organizational news I'm.

I'm happy to announce that Melissa Aquino recently joined <unk> as senior Vice President group executive for FMT and FSD.

Melissa has a broad understanding of what it takes to grow and succeed as a team and manufacturing having served in a wide variety of commercial operational and leadership roles.

She has scale and depth of experience across multiple industries, including consumer industrial diagnostic and life Sciences.

Although we are aligning these segments under a single leader internally they will continue to be separate reportable segments.

I'd also like to take a moment to celebrate the tenure and accomplishments of our H S. T Group executive Mark Lululemon, we've seen outstanding results under his more than 10 years of leadership at IDEXX, driving organic growth operational excellence and capital deployment and our fastest growing segment.

Finally, we recognize that because theres considerable churn in the global economy, right now whether tied to geopolitical uncertainty inflation interest rates or the fear of a recession there.

There are several scenarios that could play out ranging from continued industrial growth to a shallow short term pull back to a deeper recession, we have a plan of attack for each and I'm confident we'll outperform as we have in the past our teams are smart and agile so quickly adjust and put their best resources on the best opportunities. That's at the core of our operating approach.

We've made great progress in building, a strong and sustainable growth engine. It sits on top of a solid foundation of execution within any environment, that's the and not or that we talk about all the time at IDEXX, we're leaning in as a team towards the challenges and opportunities ahead with that let me turn it over to bill to discuss our financial results.

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

Q3 orders of $781 million were up 1% overall and down 1% organically, we experienced orders growth in FMT, but some contraction in HST and FSD, primarily driven by timing of some larger orders core demand rates remained positive across the segments.

Third quarter sales of $824 million were up 16% overall and up 15% organically, we experienced record sales with double digit organic increases across all three of our segments and strong performance across all geographies.

Third quarter gross margin expanded by 250 basis points and adjusted gross margin expanded by 10 basis points compared to the prior year at 45, 1%.

Driven by strong volume leverage and favorable price cost, partially offset by higher employee related costs.

Third quarter operating margin was 24, 5% up 190 basis points compared to the prior year.

Adjusted operating margin was 24, 9% up 60 basis points incremental amortization related to the next site and Casey valve acquisitions unfavorably impacted adjusted operating margin by 30 basis points I will discuss additional drivers of adjusted operating income on the next slide.

Our Q3 effective tax rate was 21, 8% decrease compared to the prior year ETR of 23, 4%, primarily driven due to the tax benefits associated with the sale of the Knight business.

Third quarter net income was $179 million, which resulted in an EPS of $2 36.

Adjusted net income was $162 million, resulting in an EPS and adjusted EPS of $2 14.

Up 35 or 20% over prior year.

Finally free cash flow for the quarter was $182 million, 112% of adjusted net income. This was a record free cash flow for us mainly driven by higher earnings we are seeing inventory levels stabilize and expect further reductions as we exit the year.

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

Third quarter, adjusted operating income increased $28 million compared to last year are 15% organic growth contributed approximately $26 million flowing through at a prior year adjusted gross margin rate.

We levered well on the volume increase and we had strong price capture to offset inflation headwinds price cost was accretive to margins and has returned to historic levels, driven by our FMT and HST segments, with FSD and making improvements sequentially versus the second quarter.

We experienced slight positive mix of $2 million in various parts of the portfolio.

We reinvested $6 million, taking the form of engineering and commercial resources in the businesses and M&A in DNI resources at corporate tracking to the 'twenty to 'twenty five a full year spend we highlighted at the beginning of the year.

Lastly, discretionary spending increased by $6 billion versus last year, which is slightly below the second quarter of 2022, as we said last quarter. We have reached a more normalized post COVID-19 spend rate and significantly higher sales volume.

This delivered a strong organic flow through of 31% in the quarter.

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

With that I'll provide a deeper look at our segment performance.

Yeah.

I'm on page 10.

In our fluid metering technology segment, we experienced excellent order and sales performance with organic growth of 2% and 17% respectively.

FMT adjusted operating margin expanded by 250 basis points versus last year. The increase included 80 basis points of headwind due to the incremental amortization related to the next site and Casey valve acquisitions.

We experienced continued strong volume leverage and operational productivity as well as favorable price cost.

Our industrial markets continue to exhibit steady demand with tailwind from energy mining and infrastructure tempered a bit by some European softness.

I'll look for our municipal water business is continues to be positive, we see healthy quoting activities in sync with underlying market trends of growing urbanization further CCTV inspection adoption and infrastructure investments in the U S.

Agriculture remains strong we are seeing positive signals from both our Oems and distributors commodity prices remained high and increased fuel and fertilizer costs or incentive farmers to invest and precision technologies.

Our investment in Banjos process automation have improved our delivery putting us in a good position to capture share and we continue to leverage KZ valves expertise and technology to enhance our product offerings.

Our energy business is performing well with strong oil and LPG price support we continue to see favorable results upstream with midstream investments lagging a bit due to supply chain constraints at our customers and larger project spend delays.

Moving onto the health and technology segment orders contracted by 4%, but sales were strong at 13% our backlog position remains robust.

The contraction in orders was driven by several large orders that the laid out of the quarter European capital goods softness and tough comparable comparable from the prior year, where we grew orders organically by 44%.

H S T. Adjusted operating margin contracted by 70 basis points versus last year. The segment experienced strong volume leverage and positive price cost, which was more than offset by increased engineering and resource investments higher discretionary spending and some inefficiencies incurred as we continue to onboard labor to meet demand and navigate supply chain challenges.

We continue to experience strong demand for analytical instrumentation in chromatography and mass spectrometry as well as Nextgen sequencing technology for oncology testing and research.

Our targeted growth initiatives tied to global broadband and energy efficient fuel cells are performing very well two great. Examples of how we're leveraging our tech and fast growing niche markets.

The semiconductor market remains steady, we see customer who related supply chain issues driving some slowing.

Well, we are offsetting this headwind through share gains, we provide consumables and technology to drive fab efficiency buffer and asked for some of the capex slowdown on the new equipment side.

Our materials processing business remained strong and continued pharma and Biopharma demand, we are seeing some order slow down due to investment delays by our customers, but our funnel remains strong and of high quality.

Our HST industrial market performance is very much like the experienced in FMT.

Finally, turning to our fire safety and diversified products segment orders were flat year over year is a difficult quarter over quarter comparable in our dispensing business was offset by strong growth by the balance of the portfolio sales were quite strong with an organic increase of 14%.

<unk> adjusted operating margin expanded by 70 basis points versus the third quarter of 2021, driven by strong volume leverage partly offset by pressure on price cost and higher employee related costs, although price cost is still dilutive to margins it did improve sequentially.

Dispensing business.

Business performed well with the delivery of North American project volume and continued strength in the global architectural paint market, but orders were down 30% year over year due to a large north America replenishment orders that we received last year.

Within our fire business Oems continue to struggle with supply chain constraints, but we did see positive organic growth from price realization improved execution and favorable performance in loose equipment on.

On the rescue side, we continue to win with our latest generation <unk> tool, bringing enhanced tool features to the market.

Finally band it experienced strong results across the industrial automotive and energy markets. We continue to win share by having shorter lead times and material availability on.

On the auto side, we were outperforming the market by capturing share on new platforms, and winning contact content on priority high volume vehicles.

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

Okay.

I'm on slide 11, which lays out our updated guidance.

For the fourth quarter of 2022, we are projecting organic revenue growth of approximately 9% and operating margin of approximately 23, 5%. We expect that the volume will decrease sequentially from the third to fourth quarter due to normal seasonality and scheduled maintenance shutdowns Q.

Q4 forecasted op margin is down versus Q3 due to lost leverage on lower revenues.

We expect GAAP EPS to range from $1 75 to $1 80, and adjusted EPS to range from $1 92 to $1 97.

Turning to the full year.

Given our strong performance in the prior three quarters, we are raising our full year guidance. We now expect full year organic revenue growth of approximately 12%, we expect GAAP EPS to range between $7 75 to $7.80 and expect EPS to range from $8.04.

The $8.09.

Operating margin for the full year is expected to be approximately 24% and we expect free cash flow as a percent of adjusted net income to range from 75% to 80%.

With that I would like to turn it back to Eric for closing remarks.

Thanks, Bill as we wrap up I'd like to share my thoughts are with our pulse of theater team and put their go to Florida.

Who continue to cope with the aftermath of hurricane in all of our employees are safe and our values shine through as our other IDEXX businesses banded together to provide relief supplies to our colleagues there and our IDEXX Foundation Board of directors approved a large donation to the American Red Cross our facility did sustained some damage, but we have returned to operations.

I would also like to extend my public congratulations to Katrina Helmkamp, who is replace Bill Cook as the Nonexecutive chair of our board of directors.

And I have both worked closely with Katrina since she joined our board in 2015, and we look forward to continuing to lever her strong operating leadership skills and experience across multiple markets and technologies to drive IDEXX forward.

Also like to thank Bill Cook, who has been a valuable contributor to our company our board and my personal development throughout his 14 year tenure.

With that I'll turn the call over to the operator for your questions.

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One moment, please pull for questions.

Our first question today is from my Colorado of Robert W. Baird. Please proceed with your question.

Hey, good morning, everyone.

Mike So so a couple of questions here more on the demand order side of things first on the order side.

Slash orders against really tough multiyear stack comps here it seems like a good outcome.

Sequentially lower.

When I think about those order numbers is there anything in there from a from a weakening perspective, we should think about and then.

How much of that sequential change as seasonality or just a normal air pocket that develops as lead times start normalizing to kind of historically normal levels.

Yep.

You you hit a lot of the elements there I mean, there's there's a piece of this that we always suspected was going to be there as we start to come off of an incredibly high backlog positions, especially for a short cycle quick lead time business like ourselves.

So there's a piece of it that no doubt will be that and we'll keep an eye on the rate of travel a bit as it runs out there is in some of our kind of summer months seasonality that that's in there as well I would say from a categorical softness standpoint, probably the one area we'd point to it covers a lot of IDEXX businesses would be just some general softening on the European front, it's probably.

Isn't too surprising.

And then I'm sure. We'll talk later here about projects large projects and things of that nature.

That's an interesting story I mean they were.

At the beginning of this whole recovery I mean, there was there was a lot of caution on People's part sort of held them back.

In the middle part or a lot of the duration honestly there was just not enough time and energy to get at it or resources and now you're kind of seeing that tilt back probably its more of a cautionary tone again, you know we've got a few things that have moved out and placed themselves decisions into Q1 of next year things of that nature as well so.

A few things that we can point to some things that are sort of normal based on where we are from a backlog position in time of year, but underneath in the round all of that in a really really strong support across the board.

Thanks, that's super helpful.

In the prepared remarks, you talked about.

The ability for IDEXX to manage with whatever kind of environment turned away in 'twenty, three and certainly your track record supports that pretty aggressively.

Is the base case is you guys are thinking about it today as we move into next year, obviously, we've talked a lot about the need and.

And the opportunity for strong industrial cycle. It doesn't mean, you can't get some weakness as we move into next year. So as you look through your pretty varied end markets going into next year. How are you thinking about that setup and what's the opportunity set for growth.

Yeah, well look I.

As I said in the prepared remarks, you can see a few passed it would run out here I mean, one it's more positive something that's short term in kind of a short term pullback and then obviously, maybe something with a catalyst that's more negative that none of us can imagine I just always come back you know what when we talk about that in the company I mean, we literally scenario play every one of those we under.

Stan kind of what's variable, what's not variable across all our businesses. We always go back to the top growth Thats in the company.

Almost all of which we can kind of see traveling across the duration here, we factor that in as well.

We certainly learned a lot like every company of about how low you can take discretionary spend.

He was lower than we would have thought possible before we know where that floor is and kind of how we would stack that against any of those scenarios. We've talked for a while on that on the head count side, we'd be careful you know.

It's hard to get I mean, we're not really at a flush position there anyways, we're actually still pretty lean and we'd be very careful there and then honestly, we would we would rotate towards the strong and we'd go pretty lean on areas that are weaker.

And so I don't want to be too predictive here, because I think it's still pretty variable in our minds, but our approach to each one of those perhaps is not we actually know exactly what that is.

Thanks for that really appreciate it.

Thank you.

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

Good morning, everyone.

I wanted to start with some.

Some price cost discussion.

You guys have said that price cost has been.

Dilutive to margins in 2022 is that something you talked about recapturing in 2023 as we've started to see costs moderate do you believe you can recapture that margin that was lost in 2022 the price cost.

Yeah, No definitely you know as we said in the prepared remarks, we're back to historical levels here in the third quarter as we continue to ramp our price capture and some inflation hasn't gone down, but it has moderated a bit.

So as we look forward to the stickiness of the price that we implemented here as we progress through 2022, that's sticking in 'twenty three.

Optimistic about our ability to keep above our historical levels.

Okay, and maybe you could just talk a little bit about some of the allocated in your shorter cycle businesses. I know you guys have a few businesses that tend to be canaries in the coal mine I think you said band it still remains pretty strong, but any commentary you can give us on those businesses that you continue to be leading indicators in the order cadence there.

Yeah.

Still really strong I mean, they have held steady.

Many many places and it was four or five of them and we've done a really nice job on putting some strategic inventory together, our natural ability to replenish fastest has allowed us to go capture some share in some orders and then it turned them and converting them to sales pretty quick on top of it. So you know.

No real pressure signs coming from that very short cycle stuff that we always talk about you know we look at that constantly.

That's holding up Theres still an awful lot of demand for it a lot of capacity that's got to lay in and it's always been pretty indicative of kind of a level that the industrial machine is working out because a lot of it is one for one replacement.

I think I mean, all of our clients are working pretty fast, but I suspect. That's the case out in a lot of the places we supply to so that's holding up well.

And one last one just on your own inventory levels.

Everybody has been carrying a bit of extra inventory through our through these disruptive times plans on where you think that goes to in 2023, and what kind of cash generation, we should be looking at for next year.

Yes in the third quarter was the first time in the last several that we actually didn't build in incremental inventory. We've started we've stabilized over current levels will look to bleed here in the fourth quarter progressing into the first half of next year. Obviously, we set our long term goal is to be at over 100% cash flow conversion and I think we will progress to that level.

Over the next couple of quarters, you know first half is always a little bit light from a cash flow perspective on timing and we're more back half loaded, but yes, we look to continue to progress our inventory balances down here over the next six months.

Thank you very much for taking my questions.

Thanks Nathan.

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

Good morning, everyone.

Hey, like to follow up on Nathan's last question there for Bill is there any way to quantify.

Tori that you're carrying that would be considered more buffer inventory.

That is lead times begin to normalize you can start to sell that down as and then Eric just talked about being aggressive with the opportunity on some of the fast a short cycle business is that the inventory ready to go so that's kind of how it would be offsetting to that but.

Can you quantify for us what that opportunity would be to normalized working capital.

Internally, we are targeting to get somewhere between a half a turn and a turn as we progressed or more historic levels.

The buffer inventories probably at the lower end of that that will keep some of that is the.

Businesses look on the strategic side, where we've been able to take share with some of that inventory level will keep that and the focus is just as we've built up inventory to buffer <unk> have had to increase inventory levels based upon quantities, we have to commit to you or customers that have.

Paused some of their shipments as they've worked out supply chain issues on their side, we've built up a little bit of finished goods. Those those parts will be the first part to bleed and the things that we think are strategic to enable some of the share capture will hold on to that.

Alright, that's helpful. And then can we just go through it at whatever level you'd like to share the whole cancellation of the customer Covid test application.

I think your frame for how it was how that came about and the impairment that you talk is that the end of it in terms of has it been completely written off and you did include it in your operating results, which we appreciate.

Yes, that's the end of it I mean, they're small some small shipments here in the fourth quarter, but fundamentally it was an initiative that we started and highlighted back in 2020, we partnered with that customer and had a great relationship relative to the partnership on developing the technology in them committing a significant amount of capital to support our production capabilities and obviously.

As they've moved in a different direction have gone out of the testing caused the impairment and the recognition of all the deferred revenue here within the quarter. So.

Most of the noise is.

They have been taken here in the third quarter, we've kind of move past.

With significant knowledge gained in terms of production capabilities and technology that will continue to leverage as we move forward.

Real helpful. Thank you.

Sure.

Okay.

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

Hi, good morning.

Well it looks a little more color on the decision to align FSD in FMT under one leader.

Does that indicate sort of maybe potentially more divestitures as you kind of let you refined the portfolio going forward just any thoughts there.

No I appreciate the question what I was really trying to emphasize in the remarks is where we were looking for a leader with frankly experience scale and depth of experiences and the <unk>.

Reach which would line up well with where we want to go with the company.

And so that by sort of combining those.

Those businesses at least under under her watch.

It allows us to essentially positioned to scale attracts somebody of that caliber and put somebody on the team.

Honestly it got some experience and some of the areas, where we want to go.

Lately about that everything else underneath our Melissa is identical to what we've seen before we kept very separate and distinct we run at exactly the same but it allows one person to come onto the team with them.

Very very good capabilities.

Great and then.

Just going back to the HST orders I think you kind of alluded to the fact that they were just there were some orders that were essentially just a question to take him for how they've been executed on how they turned into orders or is it something we are still waiting to come forward here yes.

No not not.

The teams are still negotiating final pricing for things going into next year or so if we get them in Q4 first part of Q1, we'll get them. It's just a matter of timing.

Great. Thank you.

Sure.

Our next question comes from the line of Brooklyn Z with Mizuho. Please proceed with your question.

Hi, good morning, all.

Right.

Hey, I was hoping you might be able to parse out how youre thinking about accretion. This year in next on a carryover basis for the two recent acquisitions more on its easy.

In terms of incremental EPS.

Yes, so the EPS accretion baked into the guide for this year and then what Youre thinking about for next year carryover.

This year, it's just a couple of cents here in the back half.

And then we'll have a couple of cents there in the first half of next year as it will.

Comp as we progress into Q3 and Q4.

Okay, Great and then I was hoping maybe you could just give a little bit of color on the regional dynamic within orders and then specifically what the pace of that looks like through the through the quarter on a monthly basis and what Youre seeing in October in Europe , specifically.

Okay.

I'm, sorry, Brett the cadence of orders within each month in the third quarter.

Yes, I was thinking more on a regional basis, what the cadence of monthly orders was and how that progressed into October as well by the different regions.

I would say the third quarter Scott.

Seasonality and historically relative to.

European holidays and slowness within August .

You know relative to normal order patterns or anything that was a significant outlier relative to what we've seen over the years as Eric talked about fundamental orders in our book and ship businesses were strong throughout the quarter. It continued to be strong here in October most of the softness like we said a little bit on the book and ship stuff in Europe , and then some of the <unk>.

Project related business and some of the ordering.

Probably the bigger item within our European geographical look North America, and Asia still remains really really strong.

October pretty consistent with what we saw in Q3.

Okay, Great I'll pass it along thanks.

Our next question comes from the line of Thomas Jonsson with Morgan Stanley . Please proceed with your question.

Hi, Thanks, congratulations on the strong quarter I just had.

Question on kind of near term results here specific to the HST business and you provided some pretty helpful commentary for us.

Some of those main drivers of lower productivity and some of the discretionary investments that offset volume and improving price cost from a margin standpoint in <unk>.

So it would be helpful. If there was any way that you could kind of quantify.

How that impacted EBIT margins on a sequential basis, just trying to think through the evolution from <unk> to <unk> from those headwinds and maybe how you see that progressing moving through the remainder of the year. Thanks.

I would probably highlight just some of the productivity challenges as we ramped on some of the higher tech stuff in a couple of businesses within HST.

Yes sequentially it was down versus the second quarter, we think it will ramp back up here as the business continues to progress and normalize and get more efficient.

Several of the facilities that we will see a pickup in the fourth quarter.

Great. Thanks, that's all for me.

Our next question comes from the line of led by Shcherbitsky with Citigroup. Please proceed with your question.

Good morning, guys. Thanks for taking my call.

Hey, Glenn.

Okay.

<unk>.

So can you just talk about.

You've obviously talked throughout the recovery about taking some share.

Even your ability to service customers in your availability so.

As we're starting to see.

Our supply chain constraints gradually ease.

Can you talk about.

How you expect.

Share trends to evolve as some of your competitors, who were maybe more hamstrung at times are coming.

Coming back more online to normalized service levels.

Sure.

There's probably two elements there I want to cover there's one that I would argue we kind of carry most days we.

We generally have shorter lead times than a lot of the people we compete against when things are <unk> and <unk>.

<unk> state I mean, we engineer the businesses to run that way and it's kind of all set up there what what's actually happened for us.

Here with a lot of the share capture over the last couple of quarters. So we made some really sharp calls on some inventory that's it's pretty specific highly technical and not in an wide supply where we can see some things coming the businesses to their credit without frankly approval loops and things that you know, we don't need in a company like ours.

They said Hey, we know how critical this is we can kind of see where it's going to go we're going to lay some in.

And so almost all of the share capture that we talk about you can kind of take it right back into very specialized material that we accumulated so I think that's important because otherwise you might just thank you.

You know very benign stuff in metal bits in brackets and things like that where we just have to have them laying around that actually would normalize as things improve this is actually very very strategic inventory that these businesses accumulate. It. So that's an advantaged state out of the gate Thats what were largely referring to here, but then as we go and things normally.

As we normalize and contained and maintain that advantage. The natural advantage, we have in many of our businesses. So.

It's just an area that we always emphasize it's kind of been dramatically positive for us because of really really good choices and businesses.

Okay.

Okay. That's that's really helpful color and then maybe just.

As we think about organic sales.

Obviously.

Surprised to the upside here over the past couple of quarters and just raised your 'twenty two organic growth outlook.

So.

Can you just maybe parse out a little more whats driving that better topline growth how much of it is.

Incremental better pricing than you expected versus just better volume driven growth.

Well, yeah, I mean, there are certainly components of outperformance that are here, so I'm glad that you're bringing that up I mean, our pricing is at the highest level. We've had all throughout the year. We've been pushing that continuously. This is the kind of environment, where our differentiated products are going to command the.

Highest level of pricing. So that is that is no doubt a component of it and thats competitively advantaged.

We talk a lot about the top bets in the company the top best.

Growth bets, they're the highest quality, we've had and so interspersed in all of the numbers that we're talking about.

You see great things like broadband in outer space and things, we're doing in genomics and some other things going on in water in precision AG and through FMT and.

Now some acceleration that we've been waiting for and the fire businesses and FSD. So those bets are layered in with higher unit of measure than we've seen historically on top of you know recovering markets and well positioned businesses. That's kind of the entitlement that we have really strong price capture and a great stack up of that's across the <unk>.

Company.

Yeah.

That's helpful Great great quarter, Thanks, guys.

Thank you.

Yes.

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

Good morning, everyone.

Good morning.

So I just have a general question I Wonder if you might tell us I guess the story of Mullen group acquisition and how it shows by the new process you know multiples on other opportunities you have whether it soaks up a lot of availability or whether you're still active just kind of walk through how obviously you've had pretty strong success in acquisitions lately and that's our focus.

So I'd just like to get.

No color on that.

You know how to.

Transpire.

Yeah, well, it's it's a business we've known for a few years.

It's very much an IDEXX business I mean, it's a it's a highly precise niche component doing wonderful jobs for a variety of high end markets, including the ones that we had identified in the prepared remarks, I gave a lot of credit to mark with a lot who I referenced.

In my opening remarks.

The Netherlands based business Mark is located in the Netherlands, and he kept a very active cadence with this team over the last few years.

We found.

Found a time in a space, where you know we were able to generate some action ability.

And got the got the deal done mainly because we could get our head around it very very quickly based on the work we've done over the last few years and our familiarity with it.

Great about a business like this one is and the reason I say, it's so IDEXX like cause its actual it's actually very tunable. That's one of the reasons. We liked these precise components businesses.

Oh, it pings into some very high quality areas semi con.

There's some great applications in medical devices.

Food production high end food production all areas that we study and participate in across the business. So we can leverage that insights and then apply it on a high quality niche business like this one.

Longer term down the road. This actually sits next to a lot of things we have in our scientific fluidics and optics spaces.

There's some commercial relationships that we could leverage there there's actually some very interesting technical questions and things that we're going to explore together over a longer duration and then honestly and when you think of value creation. We can start to fly the way we run things that I'd ask you can take a high quality business like that we would start with 80 20.

You know it's.

Not all applications are created equal we have a way of thinking about that that we can teach to others.

Things like you know value capture with customers when we do that really well and so there's a whole bunch of leverages will assets as well just that you apply against an already.

Very very strong business, that's got a demonstrated history of growth so.

I think we're really really excited about it I think it's indicative of the kinds of things that we're looking at and looking for and.

Yeah, well see well certainly talk to you about it as we go and then Rob to your capacity comments I mean after the completion of move on will have spent about $1 billion over the last two years with really taking on a minimal amount of incremental leverage so.

So we will have $1 billion have dollars to spend here over the next 12 months.

With a robust funnel of lot of actionable assets within that funnel.

No that was a comprehensive answer thank you and any commentary on whether that's an abnormally large asset within your funnel or whether it's.

We're through with big and small and without I won't stop.

Yeah, No I mean, it's a little larger than we've seen before but I mean, the nature of these kind of high quality niches. They tend to be in very similar spaces and then the kind of the top end of the size of them is actually relatively constant across even the wide variety of businesses that we have a well positioned business that's closer to the top end.

High quality niche like we think think about is often this size so.

It's a little a little higher than we've seen before but there's certainly more of them like it out there.

Yeah.

Great. Thank you thank.

Thank you.

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

Thanks, just a couple of quick ones here with F. S. D. How far behind is that business in terms of price cost, meaning no how much more margin can we look forward to as you.

Fully close that gap and then sticking with that business on the dispensing side, how much of a revenue hole should we expect in 'twenty three from those big projects that revenue. This year and then I have one follow up.

Sure I think we look for FSD to continue its ramp we had said last quarter. It had bottomed out and it will continue to progress as we move forward.

With the caveat that we still need to assess the project funnel for next year for dispensing.

Right now, we don't think Theres, a huge hole there'll be some softness on the replenishment side.

If we werent able to fill.

Some of those larger projects that we would put a little bit of pressure on FSD margins relative to the progress that fire and rescue has made so right now we're still evaluating the impact of what the project funnel is for dispensing and obviously will give you more detail here as we get into the guide in January .

And then just.

A modeling question the divestiture that night divestiture can you disclose the financial profile of that business.

Yeah, I mean, it was less than 1% of revenue and obviously the non material amount of profit for us.

Got it that's all for me thank you.

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

Yes, hi, good morning, and congratulations.

Congratulations on another standout quarter.

Yeah I.

I have questions.

Just sort of a broad based question on organic first.

With the supply chain.

Improving a little bit.

Several quarters ago, Eric you were able to take your best guess of quantifying what the negative was what.

The improvement in the chain can you maybe quantify what's positive horizontal organic this quarter.

I think from a from a share capture and things we're able to do I mean, its actually trying to maybe share capture as part of its sure, but you know kind of more like.

Backlog.

Depletion things.

<unk> is getting out that worse hung up in backlog that maybe you didn't expect.

I am assuming that there was a bit additive too.

Two organic from a better chain.

I think it's.

A small amount Scott I think we've stabilized relative to our production output levels as you look at where we bet, where we've been from a revenue perspective, it's slightly elevated so a.

A point or two at most we've burned a little bit of backlog within the quarter, but backlog position is still pretty high pretty high it was a pretty minor burden there.

Got you Okay, great that was helpful. Thank you.

Also and I hope this doesn't count as a follow up.

What was pricing if I didn't hear it if you said it.

No no we didn't so second quarter, we were at 4% we ramped here in the third little over 5%.

Okay. Thank you and then just a question about the water business, it's a pretty big business year.

You called it out is certainly an area of strength.

Kind of talk about the dynamics of the growth in the quarter and is that a market that maybe would be a clear sort of green shoot market for you next year as well.

I mean, it's a good market I always remind people that the work that we do there is on the analytical side of supporting whether you know the infrastructure's ability to work well so that kind of work.

It maps well with a lot of digital solutions that are out there that's where some of our more digital businesses are so robo crawlers and flow monitoring to Brent overflows and things that could harm the environment. That's the work that we're doing the bulk of it of course made an acquisition to deepen that here recently, so we got some very good assets than we think.

Long term obviously, there's no question the work needs to be done it's long overdue.

There's a decent amount of stimulus and government support that's out there that always takes longer to find its way into projects than people imagine, but that actually extends that over multiple years too. So it's just we kind of put that in a positive side I'd agree on the green shoots side of it.

Very very well positioned we're doing continuing integration work with the acquisition that we have to deepen all of it in our major geographies and we view it as very favorable.

Got it hey, thanks again.

Thank you.

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

Good morning, this is Michael on for Joe.

Hey, Michael.

In the prepared remarks, you mentioned strength around the energy can you just dive a bit into the LNG outlook for a cup of tea.

If theres any future alternative energy opportunities I know historically.

That's been an area of inorganic growth.

Yeah, well I mean, I think our energy businesses have recovered pretty nicely throughout the year I mean, we've seen a few we don't have a ton of upstream presence, but that's been stronger here lately I think the midstream has got some delays and things on the project side and supply chain some of the classic stuff, but probably lines up behind it because theres some things that are.

Our overdue there.

We've got you know I mean, we've got kind of a classic custody transfer business a lot of it fast fossil fuel dependent with the current assets.

That technology, we're actually asking all the questions as you might imagine of how transferable is to other alternative energy sources and things that might be out there whatever it is you know, whether it's hydrogen or some other gases and liquids.

To need our people are going to need to get paid and we're gonna need to measure that custody transfer happens.

It's kind of work that we long have done and are excited about you know there are actually other areas of IDEXX that map against some of those same vectors in a way that it's probably would strike folks from the outside is kind of unusual as well. That's one of the ways. We think of a trend like that as we kind of draw lines and tentacles into different verticals within IDEXX and then we sort of lever.

<unk> insight around how the work is done how things are shaping up and then distributed across a variety of IDEXX businesses that might be.

Ball, they may not be going to market together, they might not even be in the same room, but actually some of the same dynamics are meaningful for them in terms of why they would want to invest in it. So it's an area of interest for us in terms of how this will ultimately play out over time.

But I think for now the kind of core things that we have are doing pretty well with a decent road and runway ahead.

Thanks, that's helpful and just one follow up if I may are there any product adjacencies that you know.

Within the energy sphere that you you see more favorable.

It's something that's sort of in the funnel for I've been here over the next 12 months or so.

I know, we've got some great projects there they as you might imagine go very very niche very very quickly as.

As an example, we've got a great application that makes sure that when you offload a railcar.

Propane you get all of it out of the bottom.

It seems kind of funny you didn't suspect everybody with respect that actually happens it doesn't and so our team developed something that guarantees that 100% of the fuel is taken out of the car and then that's available is productivity for a variety of people. So it's that kind of work that's sort of that's the unit of measure of things, we think about and develop for customers.

And there are others, along the way, but that's just one we happen to take a look at about a month ago, it's really really interesting.

Thank you.

That's all the time, we have for questions I'd like to hand, the call back to management for closing remarks.

Well. Thanks, I appreciate the comments and a reflection on what we think was a very strong quarter here for any of the IDEXX team members that are listening I want to thank you all again personally.

For your hard work certainly difficult circumstances, a lot of change happening quarter over quarter month over month, but as I said in the end of my remarks, and this is a company, where we really lean into that.

Anytime the world gets difficult their problems worth solving and when they when we solve them with well positioned businesses.

It is a huge financial benefit for ourselves and our shareholders. So thanks for your interest and look forward to talking to you more along the way.

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.

[music].

Yes.

Greetings and welcome to IDEXX Corporation's third quarter 2022 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 Alison Lewis, Vice President and Chief Accounting Officer for IDEXX Corporation. Thank.

Thank you for joining us for our discussion of the IDEXX third quarter 2022 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the three months ending September 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 Ashlin, our Chief Executive Officer, and President and Bill Grogan, Our Chief Financial Officer.

Yeah.

Today, we'll begin with Eric providing an overview on the state of the IDEXX as business, then Bill will discuss IDEXX third quarter financial results provide an update on segment performance in the markets they serve and discuss our outlook for the fourth quarter and full year 2022.

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

Zero, four or simply log onto our company homepage for the webcast replay.

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

Thank you Alison and good morning, everyone I'm on slide six our.

Our global teams achieved excellent results in the third quarter, we delivered record sales adjusted EPS and free cash flow organic sales grew 15% with double digit record growth across all three of our segments.

Orders moderated a bit in the quarter, but backlog positions remain robust overall.

It's been a strong record setting year, so far for IDEXX not easy to achieve in this environment I'd like to thank all our IDEXX employees around the globe for their outstanding efforts.

On the capital deployment side last month, we announced our intent to acquire the Milan group for 700 million euros marketing our largest acquisition to date.

Well and expands upon our growing core of market, leading precision components technologies and area of the portfolio, we continue to invest in both organically and inorganically.

<unk> technical capabilities like many others with an IDEXX are well position differentiated and tunable towards high growth niche applications within broader megatrends.

We won technology solve critical problems within the most demanding application sets of semi manufacturing patient care with med Tech food production and other high quality markets.

This acquisition demonstrates the success of our expanded M&A strategy.

We combine bottoms up business intelligence with analysis and insights from a small strategic community across IDEXX to build conviction within a grid of high quality niche applications.

Increasingly as we build and optimize the portfolio, we find that we can drive growth within a target vertical from multiple points organically from within IDEXX businesses and externally via M&A.

We think this approach is unique and advantaged and Leverages 80, 20, and segmentation, our operating model and the quality and strength of our diverse collection of businesses.

We also completed the sale of our night LLC business in the third quarter Knight supports cleaning and standardization within hospitality and janitorial markets as we've discussed in the past we continually seek to optimize our portfolio when we identify businesses or product lines that would grow and thrive for other owners. We've divested those assets I want to express my appreciation.

<unk> to the 19 for all they have contributed in there 25 years with IDEXX.

Next I want to share some exciting organizational news I'm.

I'm happy to announce that Melissa Aquino recently joined <unk> as senior Vice President and group executive for FMT and FSD.

Melissa has a broad understanding of what it takes to grow and succeed as a team and manufacturing having served in a wide variety of commercial operational and leadership roles.

She has scale and depth of experience across multiple industries, including consumer industrial diagnostic and life Sciences.

Although we are aligning these segments under a single leader internally they will continue to be separate reportable segments.

I'd also like to take a moment to celebrate the tenure and accomplishments of our HST group Executive Mark Lululemon, we've seen outstanding results under his more than 10 years of leadership at IDEXX, driving organic growth operational excellence and capital deployment and our fastest growing segment.

Finally, we recognize that because there is considerable churn in the global economy, right now whether tied to geopolitical uncertainty inflation interest rates or the fear of a recession there.

There are several scenarios that could play out ranging from continued industrial growth to a shallow short term pull back to a deeper recession, we have a plan of attack for each and I'm confident we'll outperform as we have in the past our teams are smart and agile they'll quickly adjust and put their best resources on the best opportunities. That's at the core of our operating approach.

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

Third quarter gross margin expanded by 250 basis points and adjusted gross margin expanded by 10 basis points compared to the prior year at 45, 1%.

Driven by strong volume leverage and favorable price cost, partially offset by higher employee related costs.

Third quarter operating margin was 24, 5% up 190 basis points compared to the prior year.

Our Q3 effective tax rate was 21, 8% decrease compared to the prior year ETR of 23, 4%, primarily driven due to the tax benefits associated with the sale of the Knight business.

Third quarter net income was $179 million, which resulted in an EPS of $2 36.

Adjusted net income was $162 million, resulting in an EPS and adjusted EPS of $2 14.

Up 35 or 20% over prior year.

Finally free cash flow for the quarter was $182 million, 112% of adjusted net income. This was a record free cash flow for us mainly driven by higher earnings.

We are seeing inventory levels stabilize and expect further reductions as we exit the year.

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

We experienced slight positive mix of $2 million in various parts of the portfolio.

Lastly, discretionary spending increased by $6 million versus last year, which is slightly below the second quarter of 2022, as we said last quarter. We have reached a more normalized post COVID-19 spend rate and significantly higher sales volume.

<unk> delivered a strong organic flow through of 31% in the quarter.

Flow through has been negatively impacted by the dilutive impact of acquisitions divestitures, and FX getting us to our reported flow through of 30%.

With that I'll provide a deeper look at our segment performance.

I'm on page 10.

Our fluid metering technology segment, we experienced excellent order and sales performance with organic growth of 2% and 17% respectively.

We experienced continued strong volume leverage and operational productivity as well as favorable price cost.

Our industrial markets continue to exhibit steady demand with tailwind from energy mining and infrastructure tempered a bit by some European softness.

Our outlook for our municipal water business is continues to be positive, we see healthy quoting activities in sync with underlying market trends of growing urbanization further CCTV inspection adoption and infrastructure investments in the U S.

Our investment in Banjos process automation have improved our delivery putting us in a good position to capture share and we continue to leverage Casey valves expertise and technology to enhance our product offerings.

Moving on to the health and technology segment orders contracted by 4%, but sales were strong at 13% our backlog position remains robust.

Contraction in orders was driven by several large orders that the laid out of the quarter European capital goods softness and tough comparable comparable from the prior year, where we grew orders organically by 44%.

<unk> adjusted operating margin contracted by 70 basis points versus last year. The segment experienced strong volume leverage and positive price cost, which was more than offset by increased engineering and resource investments higher discretionary spending and some inefficiencies incurred as we continue to onboard labor to meet demand and navigate supply chain challenges.

We continue to experience strong demand for analytical instrumentation in chromatography and mass spectrometry as well as next Gen sequencing technology for oncology testing and research.

Our targeted growth initiatives tied to global broadband and energy efficient fuel cells are performing very well two great. Examples of how we are leveraging our tech and fast growing niche markets.

The semiconductor market remains steady, we see customer related supply chain issues driving some slowing.

But we are offsetting this headwind through share gains, we provide consumables and technology to drive fab efficiency buffer in the us for some of the Capex slowdown on the new equipment side.

Our material processing business remained strong and continued pharma and Biopharma demand, we are seeing some order slowdown due to investment delays by our customers, but our funnel remains strong and of high quality.

Our HST industrial market performance is very much like the experience in FMT.

The dispensing business performed well with the delivery of North American project volume and continued strength in the global architectural paint market, but orders were down 30% year over year due to large North America replenishment orders that we received last year.

On the rescue side, we continue to win with our latest generation <unk> tool, bringing enhanced tool features to the market.

Finally band it experienced strong results across the industrial automotive and energy markets. We continue to win share by having shorter lead times and material availability on.

On the auto side, we were outperforming the market by capturing share on new platforms, and winning contact content on priority high volume vehicles.

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

I'm on slide 11, which lays out our updated guidance.

Q4 forecasted op margin is down versus Q3 due to lost leverage on lower revenues.

We expect GAAP EPS to range from $1 75 to $1 80, and adjusted EPS to range from $1 92 to $1 97.

Turning to the full year.

And expect EPS to range from $8 <unk>.

The $8 nine.

Operating margin for the full year is expected to be approximately 24% and we expect free cash flow as a percent of adjusted net income to range from 75% to 80%.

With that I would like to turn it back to Eric for closing remarks.

Thanks, Bill as we wrap up I'd like to share with my thoughts are with our pulse of Peter team and put together a Florida.

We continue to cope with the aftermath of hurricane in all of our employees are safe and our values shine through as our other IDEXX businesses banded together to provide relief supplies to our colleagues there and our IDEXX Foundation Board of directors approved a large donation to the American Red Cross our facility did sustained some damage, but we have returned to operations.

I would also like to extend my public congratulations to Katrina Helmkamp, who is replace Bill Cook as the Nonexecutive chair of our board of directors.

Greg and I have both worked closely with Katrina and she joined our board in 2015, and we look forward to continuing to lever as strong operating leadership skills and experience across multiple markets and technologies to drive IDEXX forward.

Also like to thank Bill Cook, who has been an invaluable contributor to our company our board and my personal development throughout his 14 year tenure.

With that I'll turn the call over to the operator for your questions.

At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

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One moment, please pull for questions.

Our first question today is from my Colorado of Robert W. Baird. Please proceed with your question.

Hey, good morning, everyone.

So a couple of questions here more on the demand order side of things first on the order side.

Flash orders against really tough multiyear stack comps here it seems like a good outcome.

Sequentially lower.

When I think about those order numbers is there anything in there from a from a weakening perspective, we should think about and then.

How much of that sequential change in seasonality or just a normal air pocket that develops as lead times start normalizing to kind of historically normal levels.

Yeah, I mean, you hit a lot of the elements. There I mean, there is there is a piece of this that we always suspected was going to be there as we start to come off of an incredibly high backlog positions, especially for a short cycle quick lead time business like ourselves.

There is a piece of it that no doubt will be that and we will keep an eye on the rate of travel of it as it runs out there is some some of them are kind of summer months seasonality that that's in there as well I would say from a categorical softness standpoint, probably the one area we'd point to it covers a lot of IDEXX businesses would be just some general softening on the European front, it's probably.

Isn't too surprising.

And then I'm sure. We'll talk later here about projects large projects and things of that nature.

That's an interesting story I mean, they were going.

The beginning of this whole recovery I mean, there was a lot of caution on People's part sort of held them back I think in the middle part a lot of the duration honestly there was just not enough time and energy to get at it our resources and now you've kind of seen that has held back probably its more of a cautionary tone again.

We've got a few things that have moved out and placed themselves decisions into Q1 of next year things of that nature as well. So a few things that we can point to some things that are sort of normal based on where we are from a backlog position in time of the year, but underneath in the round all of that in a really really strong support across the board.

Thanks, Thats Super helpful.

In the prepared remarks, you talked about the.

The ability for IDEXX to manage with whatever kind of environment certainly way in 'twenty, three and certainly your track record supports that pretty aggressively.

What is the base case that you guys are thinking about it today as we move into next year, obviously, we've talked a lot about the need and.

Yeah, well look I think as I said in the prepared remarks, you can see a few past that would run out here I mean, one it's more positive something that's short term in kind of a short term pullback and then obviously, maybe something with a catalyst its more negative that none of us can imagine I just always come back when we talk about that in the company I mean, we lit.

Early scenario play every one of those we understand kind of what's variable what's not variable across all our businesses. We always go back to the top growth Thats in the company.

Most all of which we can kind of see traveling across the duration here, we factor that in as well.

We certainly learned a lot like every company of about how low you can take discretionary spend anyways lower than we would have thought possible before we know where that floor is and kind of how we would stack that against any of those scenarios.

We talked for a while on the head count side, we'd be careful.

Talent is hard to get I mean, we're not really at a flush position there anyways, we're actually still pretty lean and we'd be very careful there and then honestly, we would we would rotate towards the strong and we'd go pretty lean on areas that are weaker.

And so I don't want to be too predictive here, because I think it's still pretty variable in our minds, but our approach to each one of those paths is not we actually know exactly what that is.

Thanks for that really appreciate it.

Thank you.

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

Good morning, everyone.

Yes.

I wanted to start with.

Some price cost discussion.

You guys have said that price cost.

It has been.

Dilutive to margins in 2022 is that something you Todd that recapturing in 2023.

We started to see costs moderate do you believe you can recapture that margin that was lost in 2022 depressed cost.

Yeah, no definitely as we said in the prepared remarks, we're back to historical levels here in the third quarter as we continue to ramp our price capture in food inflation hasn't gone down, but it has moderated a bit.

So as we look forward to the stickiness of the price that we implemented here as we progress through 2022, that's sticking in 'twenty three.

Optimistic about our ability to keep above our historical levels.

Okay.

Okay, and maybe you could just talk a little bit about some of the deal located in your shorter cycle businesses. I know you guys have a few businesses that tend to be canaries in the coal mine I think you said band it still remains pretty strong, but any commentary you can give us on those businesses that you continue to be leading indicators in the order cadence there.

Yes.

There is still really strong.

I have held steady.

In many places.

Four or five of them and we've done a really nice job on putting some strategic inventory together, our natural ability to replenish fastest has allowed us to go capture some share in some orders and then it turned out and converted them to sales pretty quick on top of it so.

No real pressure signs coming from that very short cycle stuff that we always talk about we look at that constantly.

That's holding up Theres still an awful lot of demand for it a lot of capacity that's got to lay in.

It's always been pretty indicative of kind of the level that the industrial machine is working at because a lot of it is one for one replacement and I think I mean, all of our plants are working pretty fast, but I suspect. That's the case that a lot of the places we supply to so that's holding up well.

And one last one just on your own inventory levels, obviously everybody's been carrying a bit of extra inventory through three.

Through these disruptive times plans on where you think that goes to in 2023, and what kind of cash generation, we should be looking at for next year.

Yes in the third quarter was the first time in the last several that we actually didn't build incremental inventory that we stabilize our current levels will look to bleed here in the fourth quarter progressing into the first half of next year. Obviously, we set our long term goal is to be at over 100% cash flow conversion and I think well progressed to that level.

Over the next couple of quarters first half is always a little bit light from a cash flow perspective on timing and we're more back half loaded, but yes, we look to continue to progress our inventory balances down here over the next six months.

Thank you very much for taking my questions.

Thanks Nathan.

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

Good morning, everyone.

Hey, like to follow up on Nathan's last question there for Bill is there any way to quantify.

Inventory that youre carrying that would be considered more buffer inventory.

That is lead times begin to normalize you can start to sell that down.

And then Eric just talked about being aggressive with the opportunity on some of the fast a short cycle business is that the inventory ready to go. So that's kind of how it would be offsetting to that but can you quantify for us what that opportunity would be to normalized working capital.

Internally, we are targeting to get somewhere between a half a turn and a turn as we've progressed or more historic levels.

The buffer inventories probably at the lower end of that that will keep some of that is the.

Businesses look on the strategic side, where we've been able to take share with some of that inventory level will keep that and the focus is just as we've built up inventory buffer <unk> have had to increase inventory levels based upon quantities, we have to commit to or customers that have.

Hold on to that.

Alright, that's helpful and then.

Can we just go through it at whatever level you'd like to share the whole cancellation of the customer Covid test application.

Thank you frame for how it was how that came about and the impairment that you talk is that the end of it in terms of has it been completely written off.

And you did included in your operating results, which we appreciate it.

Yes, that's the end of it I mean, there is small some small shipments here in the fourth quarter, but fundamentally it was an initiative that we started and highlighted back in 2020, we partnered with that customer and had a great relationship relative to the partnership on developing the technology in them committing a significant amount of capital to support our production capabilities and obviously.

As they've moved in a different direction have gone out of the testing caused the impairment and the recognition of all the deferred revenue here within the quarter. So.

Most of the noise is.

They have been taken here in the third quarter, we've kind of moved past.

With significant knowledge gained in terms of production capabilities and technology that will continue to leverage as we move forward.

That's real helpful. Thank you.

Sure.

Okay.

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

Hi, good morning.

Alright.

Let's look a little more color on the decision to align FSD in FMT under one leader.

Does it indicate sort of maybe potentially more divestitures as you kind of look to refine the portfolio going forward just any thoughts there.

No I appreciate the question what I was really trying to emphasize in the remarks.

We were looking for a leader with frankly experience scale and depth of experiences in a broad reach which would line up well with where we want to go with the company.

So that by sort of combining those.

Those businesses at least under under her watch.

It allows us to essentially positioned to scale attracts somebody of that caliber and put somebody on the team.

Honestly it got some experience and some of the areas, where we want to go.

Lately about that everything else underneath Melissa.

Melissa is identical to what we've seen before we kept very separate and distinct we run at exactly the same but it allows one person to come onto the team was.

Very very good capabilities.

Great and then.

Just going back to the HST orders I think you kind of alluded to the fact that they were just there were some orders that were essentially just a question to <unk> for how they've been executed on how they turned into orders or is it something we are still waiting to come forward here yes.

No not not.

The teams are still negotiating final pricing for things going into next year or so if we get them in Q4 first part of Q1, we'll get them. It's just a matter of timing.

Great. Thank you.

Sure.

Our next question comes from the line of Brooklyn Z with Mizuho. Please proceed with your question.

Hi, good morning, all.

Right.

Hey, I was hoping you might be able to parse out how youre thinking about accretion. This year in next on a carryover basis for the two recent acquisitions more on its easy.

In terms of incremental EPS.

Yes, so the EPS accretion baked into the guide for this year and then what Youre thinking about for next year carryover.

This year, it's just a couple of cents here in the back half.

And then we will have a couple of cents there in the first half of next year as it will.

Comp as we progress into Q3 and Q4.

Okay, Alright, and then I was hoping maybe you could just give a little bit of color on the regional dynamic within orders and then specifically what the pace of that looks like through the through the quarter on a monthly basis and what Youre seeing in October in Europe , specifically.

Okay.

I'm, sorry, Brett the cadence of orders within each month in the third quarter.

Yes, I was thinking more on a regional basis, what the cadence of monthly orders was and how that progressed into October as well by the different regions.

I would say the third quarter Scott.

Seasonality and historically relative to.

European holidays and slowness within August .

Relative to normal order patterns or anything that was a significant outlier relative to what we've seen over the years as Eric talked about fundamental orders in our book and ship businesses were strong throughout the quarter. They continue to be strong here in October most.

Most of the softness like we said a little bit on the book and ship stuff in Europe , and then some of the project related business and some of the ordering was probably the bigger item within our European geographical look North America, and Asia still remains really really strong.

October pretty consistent with what we saw in Q3.

Okay, Great I'll pass it along thanks.

Our next question comes from the line of Thomas Jonsson with Morgan Stanley . Please proceed with your question.

Hi, Thanks, congratulations on the strong quarter I just had.

A question on kind of near term results here specific to the HST business you provided some pretty helpful commentary for us on some of those main drivers of lower productivity and some of the discretionary investments that offset volume and improving price cost from a margin standpoint in <unk>. So it would be helpful.

If there is any way that you could kind of quantify.

Yes, I would probably highlight just some of the productivity challenges as we ramped on some of the higher tech stuff in a couple of businesses within HST.

Yes sequentially it was down versus the second quarter, we think it will ramp back up here as the business continues to progress and normalize and get more efficient and several of the facilities that we will see a pickup in the fourth quarter.

Great. Thanks, that's all for me.

Our next question comes from the line of led by Shcherbitsky with Citigroup. Please proceed with your question.

Good morning, guys. Thanks for taking my call.

Hey, Glenn.

Okay.

No.

So can you just talk about you.

You've obviously talked throughout the recovery about taking some share.

Given your ability to service customers in your availability so as we're starting to see.

Supply chain constraints gradually ease.

Can you talk about.

How you expect.

Share trends to evolve.

Some of your competitors, who were maybe more hamstrung at times are.

Coming back more online to normalized service levels.

Sure.

There's probably two elements there I want to cover there is one that I would argue we kind of carry most days.

We generally have shorter lead times than a lot of the people we compete against when things are in <unk>.

<unk> state I mean, we engineered the businesses to run that way and it's kind of all set up there what what's actually happened for us.

Here with a lot of the share capture over the last couple of quarters. So we made some really sharp calls on some inventory that's it's pretty specific highly technical and not in wide supply, where we can see some things coming the businesses to their credit without frankly approval loops and things that we don't need in a company like ours.

They said Hey, we know how critical this is we can kind of see where it's going to go we're going to lay some in.

And so almost all of the share capture that we talked about you can kind of take it right back into very specialized material that we accumulated so I think that's important because otherwise you might just think it's.

Very benign stuff in metal bits and brackets and things like that where we just have to have them laying around that actually would normalize as things improve this is actually very very strategic inventory that these businesses accumulated so that's an advantaged state out of the gate Thats what were largely referring to here, but then as we go and things normalize we nor.

<unk> and container and maintain that advantage the natural advantage, we have in many of our businesses. So.

It's just an area that we always emphasize it's kind of been dramatically positive for us because of really really good choices and businesses.

Okay.

Okay. That's that's really helpful color and then maybe just.

As we think about organic sales.

Obviously.

Surprised to the upside here over the past couple of quarters and just raised your 'twenty two organic growth outlook.

So can.

Can you just maybe parse out a little more whats driving that better topline growth how much of it is.

Mental better pricing than you expected versus just better volume driven growth.

Well, yes.

There are certainly components of outperformance that are here, so I'm glad that you're bringing that up I mean, our pricing is at the highest level. We've had out throughout the year. We've been pushing that continuously. This is the kind of environment, where our differentiated products are going to command the <unk>.

Highest level of pricing. So that is that is no doubt a component and thats competitively advantaged.

We talk a lot about the top best in the company the top best growth bets, they're the highest quality, we've had and so interspersed in all of the numbers that we're talking about.

I see great things like broadband in outer space and things, we're doing in genomics and some other things going on in water in precision AG and through FMT.

Now some acceleration we've been waiting for and the fire businesses and FSD. So those bets are layered in with higher unit of measure than we've seen historically on top of recovering markets and well positioned businesses thats kind of the entitlement that we have really strong price capture and a great stack up of that's across the <unk>.

Company.

Okay.

That's helpful Great great quarter. Thank you.

Thank you.

Yes.

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

Good morning, everyone.

Good morning.

So I just have a general question I Wonder if you might tell the I guess the story of one group acquisition and how it shows by the new process.

Multiples on other opportunities you have whether it soaks up a lot of the availability of where they are still active just kind of walk through how obviously you've had pretty strong success in acquisitions lately and that's been our focus and I'd just like to get.

Color on that.

Transpire.

Yeah, well, it's a business we've known for a few years.

It's very much an IDEXX business I mean, it's it's a highly precise niche component doing wonderful jobs for a variety of high end markets, including the ones that we had identified in the prepared remarks.

A lot of credit to Mark with a lot who I referenced.

In my opening remarks, it's a Netherlands.

Netherlands based business Mark is located in the Netherlands, and he kept a very active cadence with this team over the last few years.

We found.

Found a time in a space, where we were able to generate some action ability.

And got the got the deal done mainly because we could get our head around it very very quickly based on the work we've done over the last few years and our familiarity with it what's great about a business like this one is and the reason I say, it's so IDEXX like is its actual it's actually very tunable. That's one of the reasons, we like these precise components businesses.

So it pings into some very high quality areas of semi con theres.

There is some great applications in medical devices.

Production high end food production all areas that we study and participate in across the business. So we can leverage that insights and then apply it on a high quality niche business like this one.

Longer term down the road. This actually sits next to a lot of things we have in our scientific fluidics and optics spaces.

There's some commercial relationships that we could leverage there is actually some very interesting technical questions and things that we're going to explore together over a longer duration and then honestly and when you think of value creation. We can start to fly the way we run things that I'd ask you can take a high quality business like that we would start with 80 20.

It's not all applications are created equal we have a way of thinking about that that we can teach to others.

Things like value capture with customers when we do that really well and so there's a whole bunch of leverages will assets as well just that you apply against an already.

Very strong business, that's got a demonstrated history of growth so.

<unk>.

We're really really excited about it I think it's indicative of the kind of things that we're looking at and looking for and.

Yeah, well see well certainly talk to you about it as we go and then Rob to your capacity comments I mean after the completion of move on we will have spent about $1 billion to $5 over the last two years with really taking on a minimal amount of incremental leverage.

So we will have a $1 billion $5 to spend here over the next 12 months.

With a robust funnel of lot of actionable.

Assets within that funnel.

No that wasn't a comprehensive answer thank you and any commentary on whether that's an abnormally large asset within your funnel or whether it's peppered through with big and small and without I won't stop.

Yes, no I mean, it's a little larger than we've seen before but I mean, the nature of these kind of high quality niches. They tend to be in very similar spaces and then the kind of the top end of the size of them is actually relatively constant across even the wide variety of businesses that we have a well positioned business that's closer to the top end.

High quality niche like we think think about is often this size so.

It's a little higher than we've seen before but there's certainly more of them like it out there.

Okay.

Great. Thank you thank.

Thank you.

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

Thanks, just a couple of quick ones here with FSD, how far behind is that business in terms of price cost, meaning how much more margin can we look forward to as you.

Sure I think we look for FSD to continue its ramp we had said last quarter. It had bottomed out and it will continue to progress as we move forward.

With the caveat that we still need to assess the project funnel for next year for dispensing.

Right now, we don't think Theres, a huge hole there'll be some softness on the replenishment side.

If we werent able to fill.

Some of those larger projects that we would put a little bit of pressure on FSD margins relative to the progress that fire and rescue has made so.

Right now we're still evaluating the impact of what the project funnel is for dispensing and I'm sure can give you more detail here as we get into the guide in January .

And then just a more.

Modeling question, the divestiture that night divestiture.

Disclose the financial profile of that business.

Yes, I mean, it was less than 1% of revenue and obviously the non material amount of profit for us.

Got it that's all for me thank you.

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

Yes, hi, good morning.

Congratulations on another standout quarter.

Hi, Scott.

I have questions.

Just sort of a broad based question on organic first.

With the supply chain.

Improving a little bit.

Several quarters ago, Eric you were able to.

Take your best guess at quantifying what the negative was.

With the improvement in the chain can you maybe quantify what's positive horizontal organic this quarter.

I think from a from a share capture and things we're able to do I mean, it's actually trying to maybe sure.

Captures part of assure but kind of more like.

Backlog.

Depletion.

He is getting out.

At worse hung up in backlog that maybe you didn't expect.

I am assuming that there was a bit additive.

Two organic from a better chain.

I think it's.

A small amount Scott I think we've stabilized relative to our production output levels as you look at where we bet, where we've been from a revenue perspective, it's slightly elevated so.

A point or two at most we've burned a little bit of backlog within the quarter, but backlog position is still pretty high pretty high it was a pretty minor burden there.

Got you Okay, great that was helpful. Thank you.

Also and I hope this doesn't count as a follow up.

What was pricing if I didn't hear it if you said it.

No no we didn't so second quarter, we were at 4% we ramped here in the third little over 5%.

Okay. Thank you and then just a question about the water business, it's a pretty big business year.

You called it out is certainly an area of strength.

Kind of talk about the dynamics of the growth in the quarter and is that a market that maybe it would be a clear sort of green shoot market for you next year as well.

Yes.

It's a good market I always remind people that the work that we do there is on the analytical side up supporting whether the infrastructure's ability to work well so that kind of work I mean, it maps well with a lot of digital solutions that are out there that's where some of our more digital businesses are so robo crawlers and flow monitor.

During to prevent overflows and things that can harm the environment. That's the work that we're doing the bulk of it of course made an acquisition to deepen that here recently, so we got some very good assets that we think long term. Obviously, there's no question the work needs to be done it's long overdue.

Very very well positioned we're doing continuing integration work with the acquisition that we have to deepen all of it in our major geographies and we view it as very favorable.

Got it hey, thanks again.

Thank you.

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

Good morning, this is Michael on for Joe.

Hey, Michael.

In the prepared remarks, you mentioned strength around energy.

Can you just dive a bit into the LNG outlook for S&P.

If there is any future alternative energy opportunities I know historically.

Been an area of inorganic growth.

Yeah, well I mean I think.

Our energy business has recovered pretty nicely throughout the year.

I have a ton of upstream presence, but thats been stronger here lately I think the midstream has got some delays and things on the project side and supply chain some of the classic stuff, but probably lines up behind it because theres. Some things that are overdue there we've got.

I mean, we've got kind of a classic custody transfer business a lot of it fast fossil fuel dependent with the current assets a lot of that technology.

We're actually asking all the questions as you might imagine of how transferable is to other alternative energy sources and things that might be out there.

It is whether its hydrogen or some other gases and liquids, it's going to need people are going to need to get paid and we're going to need to measure that custody transfer happens and that's kind of work that we long have done and are excited about.

There are actually other areas of IDEXX that map against some of those same vectors in a way that it's probably what strike folks from the outside is kind of unusual as well. That's one of the ways. We think of a trend like that as we kind of draw lines and tentacles into different verticals within IDEXX and then we sort of leverage insight around how the work is done how things are shaping up and then.

Distributed across a variety of IDEXX businesses that might be involved they may not be going to market together they might not even be in the same room, but actually some of the same dynamics are meaningful for them in terms of why they would want to invest in it. So it's an area of interest for us in terms of how this will ultimately play out over time.

But I think for now the kind of core things that we have are doing pretty well.

With a decent road and runway ahead.

Thanks, that's helpful and just one follow up if I may are there any product adjacencies that.

Within the energy spear that you see more favorable.

It is something that's sort of in the funnel for.

Over the next 12 months or so.

I know, we've got some great projects there they as you might imagine go very very niche very very quickly is.

As an example, we've got a great application that make sure that when you offload the railcar.

Propane you get all of it out of the bottom.

It seems kind of funny you'd suspect everybody with respect that actually happens it doesn't and so our team developed something that guarantees that 100% of the fuel is taken out of the car and then that's available is productivity for a variety of people. So it's that kind of work that's sort of that's the unit of measure of things, we think about and develop for customers.

And there are others, along the way, but that's just one we happen to take a look at about a month ago. It was really really interesting.

Thank you.

That's all the time, we have for questions I'd like to hand, the call back to management for closing remarks.

Well. Thanks, I appreciate the comments and the reflection on what we think was a very strong quarter here for any of the IDEXX team members that are listening I want to thank you all again personally.

For your hard work certainly difficult circumstances, a lot of change happening quarter over quarter month over month, but as I said in the end of my remarks, and as a company, where we really lean into that.

Anytime the world gets difficult their problems worth solving and when they when we solve them with well positioned businesses.

It is a huge financial benefit for ourselves and our shareholders. So thanks for your interest look forward to talking to you more along the way.

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.

Q3 2022 IDEX Corp Earnings Call

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