Q4 2022 IDEX Corp Earnings Call

February 1, 2023

Greetings and welcome to the fourth quarter 2022 IDEXX Corporation earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

What should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I would now like to turn the conference over to Alison 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 fourth quarter and full year 2022 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the three months and full year ending December 31 2022.

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

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

We will begin with Eric providing an overview of the state of IDEXX as business, including a recap of our recent performance.

He will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023.

Eric will then close the call with our key priorities for 2023.

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

If you should need to exit the call for any reason you may access a complete replay beginning approximately two hours. After the call concludes by dialing the toll free number 8776606853, and entering conference I D 13734461.

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 IDEXX as 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.

2022 was a record year for IDEXX, we experienced double digit organic growth every quarter driving all three of our segments to record sales levels and achieve strong record profitability driven by solid execution.

This year was not without its challenges, we experienced unprecedented inflation as well as a difficult supply chain environment.

Right. These obstacles, we achieved some of the strongest financial results, we've ever posted I'd like to thank our IDEXX employees around the globe for their efforts and hard work.

We also deployed more capital than ever before investing in our businesses acquiring new ones and returning capital to our shareholders. We deployed a record $950 million for the acquisitions of next site Casey Val and most recently the move on group, we reinvested back into our core business to increase capacity to support growth and drive.

The activity there.

We made investments in the commercial engineering and M&A resources that enabled us to execute on our best opportunities. We also repurchased 795000 shares of IDEXX stock for $148 million as we followed our opportunistic and disciplined approach to buybacks.

As we turn to 2023, we are prepared to build upon a very solid foundation, we have a strong backlog positions overall and we continue to leverage innovative technologies to drive targeted growth opportunities. We have healthy price carryover. In addition to new price actions to capture the value our products bring to our customers. Finally, we have an opportunity to drive strong.

Productivity as we bring process driven normalcy back to our operations through the application of the IDEXX operating model.

However, we are a short cycle business and with that comes limited visibility the broad based supply chain constraints experienced last year have created some new dynamics around order patterns and customer delivery timing and we predict that 2023 will be an uncertain period of transition as we dynamically calibrate with our customers. Additionally, there are likely to.

Pockets of demand softness due to a variety of intersecting economic and geopolitical factors regardless of these challenges, we will execute and deliver growth above market entitlements. The short cycle short cycle and decentralized nature of our business supports quick adaptation and alignment to shifting conditions, and we will course, correct quickly and effectively when need.

Good.

Our balance sheet has ample capacity to support our M&A strategy as well as organic reinvestment or extended M&A and strategy team continues to build conviction around our best opportunities in our funnel is strong and of high quality. We've also identified areas, where we will deploy capital organically to expand capacity capture market share and drive operational productivity.

IDEXX had a strong finish to an outstanding year in 2022, our agility real resiliency and our fundamental ability to execute has IDEXX exceptionally well positioned to outperform as we move forward with that I'll turn it over to bill to discuss the outlook for our segments on page seven.

Thanks, Eric and our food metering technology segment industrial day rates were steady in the fourth quarter and we expect they remain at this level in the near term with strong price support.

We've seen initial signs that customers are returning to a book and Bill order pattern consistent with pre pandemic behavior.

We continue to monitor day rates to evaluate longer term expectations. As this is our most short cycle market exposure.

We expect another strong year in agricultural business with strong farmer sentiment and high crop prices, we continue to see positive signals from both Oems and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs.

We are on our next phase of process automation, a banjo and see continued improvement in delivery inefficiencies, putting us in a good position to capture share.

Our outlook for our municipal water business continues to be favorable the healthy quoting activity, we experienced over the past few quarters is expected to translate into 2023 gross.

And we continue to identify opportunities to leverage our technology to capture new programs.

The EPA just received record funding and the infrastructure Bill could provide a tailwind in the back half of the year.

The chemical markets overall are soft we see opportunities for growth in U S Green energies and strong project activity in the middle East, but this is offset by softer European demand due to higher energy costs and cuts to production capacity.

In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support.

Over customers continued to delay larger investments as they focus on cost inventory and supply chain issues.

The strong price capture productivity achieved in 2022 as well as new pricing actions in 'twenty. Three we will continue to drive improvements in FMT margins with some risk of offset from lost volume leverage depending on the second half volumes.

Moving on to the health and Science Technology segment, we expect <unk> to remain our highest growth segment, our life Sciences and analytical instrumentation businesses will continue to grow in 'twenty three due to strong next gen sequencing applications and continued expansion of cell based therapies and various chromatography and mass spec.

<unk> in.

In the short term however, several of our OEM customers are holding excess inventory driving volume out of the first quarter and into the balance of the year. We believe this is a short term issue and the overall market outlook remains extremely positive for the sector.

Our targeted growth initiatives tied to a wide variety of applications from satellites and space to energy efficient fuel cells continue to perform well and our industrial businesses are seeing market trend similar to FMT.

We are seeing some slowing in semiconductor market driven by higher memory device inventory levels and declining customer chip spending.

Fabrication spending a new fab construction are both expected to be down for the year that said, we provide critical consumable components for a large installed base, which tends to be more stable despite end market and capex cycles.

Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market.

We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects customers are hesitant to make larger investments given inflation and higher interest rates.

India continues to accelerate and the easing of China restrictions could drive growth and recovery in the region to offset some.

Lastly, our auto business is expected to perform well global auto production is stable and our presence in premium vehicle segments in EV and hybrids is driving a faster recovery as compared to the overall market.

HST margins will expand in 'twenty, three due to pricing productivity and volume, partially offset by continued reinvestment in our highest growth businesses and some mix headwinds in the short term due to expected life science AI demand patterns.

Finally, we expect our fire safety and diversified products segment will experience growth towards the lower end of our guided range.

Fire and safety U S and European player OEM volumes remain constrained by supply chain and throughput issues, but backlogs are strong and volumes are steady we.

We expect continued share gain with smaller builders that are coming online to capture surplus demand.

Our rescue business remains positive with strong NPD and we continue to leverage our integrated model to drive distribution growth.

We expect our band it business to continue to outperform across industrial automotive and energy markets as it leverages its inventory and differentiation to capture share.

Finally, our dispensing business has achieved strong results for the last two years, but will be down in 2023, driven by lower North American project volume as customer equipment refresh cycles approach their final innings.

We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia.

For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in this segment.

With that I will discuss our financial results.

Moving on to our consolidated financial results on slide nine.

Q4 orders of $803 million were up 1% overall and up 1% organically. We experienced continued orders growth in FMT, driven by strong water and energy results and in FSD due to strong fire and rescue orders as well as the receipt of a large project order for dispensing in the quarter.

HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier for.

For the year orders were up 8% overall and up 5% organically, we experienced positive orders growth across all three of our segments.

Fourth quarter sales of $811 million were up 13% overall and up 12% organically, we experienced nearly 20% organic growth in HST and strong growth across both the FMT and FSD.

Full year sales of $3 $2 billion were up 15% overall and up 13% organically we.

We saw strong double digit growth across FMT, and HST and 9% growth in FSD.

Yeah.

Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021, and adjusted gross margin of 43, 6% contracted by 40 basis points.

This was driven by unfavorable mix within HST and FSD, the dilutive impact of acquisitions employee related inflation and unfavorable productivity and HST, partially offset by volume leverage and strong price cost.

For the full year gross margins expanded by 50 basis points and adjusted and adjusted gross margins expanded by 10 basis points to 44, 8%.

Primarily driven by strong volume leverage positive price cost and productivity more than offsetting employer related inflation in engineering resource investments.

Fourth quarter adjusted EBITDA margin was 27% up 10 basis points versus 2021, a bridge of Q4 adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation.

Full year adjusted EBITDA margin of 2027, 9% is up 20 basis points versus 2021, adjusted EBITDA of 27, 7%. This represents record profitability for IDEXX I'll discuss the drivers of full year adjusted EBITDA on the next slide.

Our Q4 effective tax rate of 25% decrease versus last year's effective tax rate of 22, 5% <unk>.

Primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Mulan group acquisition.

Our full year effective tax rate of 21, 7% also included tax benefits from the sale of our night business and was down from the 2021 effective tax rate of 22, 5%.

Fourth quarter net income was $130 million, which resulted in an EPS of $1 71 <unk>.

Adjusted net income was $153 million with an adjusted EPS of $2, <unk>, which was up 30 or 18% over prior year.

Full year net income was $587 million, which resulted in an EPS of $7 71.

Adjusted net income was $618 million, resulting in an EPS of $8 12.

$1 25, or 18% over prior year adjusted EPS.

Finally free cash flow for the quarter was $147 million, 96% of adjusted net income mainly driven by improved working capital performance for.

For the year free cash flow was $489 million down 1% versus last year and coming in at 79% of adjusted net income mainly.

Mainly driven by higher net working capital, partly offset by higher income.

As we as we exit the year, we made progress in reducing core business inventories and have momentum behind us to continue to drive further reduction into next year.

Moving on to slide 10, which details the drivers of our total year adjusted EBITDA.

Full year, adjusted EBITDA increased $119 million compared to 2021 or 13% organic growth contributed approximately $91 million flowing through at a prior year gross margin rate with.

We levered well on the volume increase and had record price capture to offset record inflation.

This cost was accretive to margins and has returned to historic levels as we exited the year all three of our segments posted positive price cost results, we drove operational productivity to offset supply chain, driven inefficiencies and realize the benefits of our energy and Italian site consolidations.

<unk> was a small positive for the year, we saw unfavorable mix pressure in the fourth quarter of about $3 million that were reversed a majority of the year to date favorability.

We invested $20 million, taking the form of engineering and commercial resources in the business and M&A and diversity equity inclusion resources incorporate tracking.

Tracking to the lower end of the $20 to 25, a full year spend we highlighted at the beginning of the year.

Discretionary spending increased by $25 million versus last year closer to the high end of the 20 to 25 range on significantly higher sales in our original guide.

We exited the year with a solid 30% organic flow through.

Abel next site hazy valve and Mulan acquisitions net of the night divestiture and FX contributed an additional $14 million of adjusted EBITDA.

Inclusive of acquisitions divestitures and FX, we also delivered 30% flow through with that I would like to provide an update on our outlook for the first quarter and full year 2023.

I'm on slide 11.

We expect full year organic revenue growth to be in the range of 1% to 5%. This range reflects the uncertainty in the second half of the year given the short cycle nature of our business.

This organic growth rate equates to 12% to 60, depending on the topline results.

This range includes price cost, which we anticipate will be positive for the year and some mixed pressure stemming from HST and dispensing volume in FSD.

We expect that our operational productivity will more than offset pressure from employee related wage and benefits inflation. We operated in a challenging supply chain environment in 2022, and we expect that easing of these conditions as well as driving our own internal productivity funnel will deliver six to eight <unk> of net productivity for the year.

In 2022, we return to a more sustainable level of discretionary spending post pandemic and invested in the people needed to drive our strategy.

Travel and external services did not fully rebound until the second quarter of 2022, and we hired at an increasing rate as we move through the year.

Although our spend is only moderately increased versus our <unk> exit rate, we will see pressure of approximately <unk> <unk> on a year over year basis. This impact is entirely felt in the first quarter of 2023.

Although not to the same level as in 2022, we will continue to invest for the future people new products as well as applications for existing products and these investments will provide up to <unk> of pressure in 2023, depending on topline results. The range indicates how we will focus on resource allocation and uncertain period in <unk>.

And our investments appropriately.

Net of the divestiture of our night business last year, we expect acquisitions to contribute $168 million of revenue and 43 of EPS.

Now, let's look at a couple of non operational items.

Interest expense associated with the move out acquisition represents a headwind of <unk> 12.

And we expect FX to be a small impact providing <unk> <unk> of EPS pressure.

So in summary, we are projecting organic revenue growth of one 1% to 5% for the year adjusted EPS expectations are in the range of $8 50 to $8 80.

Our 5% to 8% growth over 2022, the midpoint of our guidance applies a solid 30% adjusted EBITDA flow through.

Moving on to slide 12.

I'll now provide some additional details regarding our 2023 guidance for both the first quarter and full year.

In the first quarter, we are projecting GAAP EPS to range from $1 74 to $1 79, and adjusted EPS to range from $1 98 to $2 <unk>.

With organic revenue of 3% to 5% and adjusted EBITDA margins of approximately 27%.

Our guidance includes seven sensitive pressure from accelerated recognition of share based compensation as well as a delay in HST OEM shipments to the latter part of the second quarter that is lowering our organic growth expectations for the quarter. These.

These factors plus the carryover item I mentioned on the previous slide mutes, our year over year flow through for the quarter, but expected.

To deliver solid flow through for the year.

Turning to the full year 2023, we project GAAP EPS of $7 55 to $7 85 and.

And adjusted EPS to range from $8 50 to $8 80.

We expect full year organic revenue growth of 1% to 5% and adjusted EBITDA margins to be 28% or higher.

Capital expenditures are anticipated to be about $70 million in line with 2022 spending as we continue to identify opportunities to reinvest in our core businesses.

And free cash flow is expected to be 100% of adjusted net income.

With that I'll turn it back to Eric.

Thanks, Bill I'm on the final slide Slide 13, before we open the call for questions I'd like to wrap up with a summary of our 2023 focus areas.

We are refocusing our efforts on our foundational set of practices and tools that link us together the IDEXX operating model as we exit two intense years of double digit organic growth within an environment of temporal barriers and obstacles. This is a year to double down on the core execution elements that make us an excellent company they.

We use a daily management monthly business reviews goal deployment and other tools have long been a source of efficiency innovation and growth for IDEXX as market conditions, particularly within supply chain begin to return to historic norms, we must seize the opportunity to optimize our process driven fundamental business practices to best support future growth and outperform.

<unk>.

Second we are committed to growing our talent at an even faster rate to fuel future IDEXX growth are.

Excellent execution has led by incredible leaders around the world, who are committed to our core values to developing top performing talent and to creating an inspiring company culture that attracts and retains the best people.

Diversity equity and inclusion continues to be an area of focus creating environments, where people feel they belong and are comfortable bringing their true selves to work each and every day.

One note I wanted to address is the recent departure of Melissa Aquino. If you recall from our last session together I introduced her as the new leader of the FMT and FSD segment's Melissa made a difficult decision to go back to a previous employer to take an opportunity. She felt she could not pass up we wish her well in her new endeavors and continue the search for her replacement in the meantime.

GAAP has allowed me to step in getting closer to our businesses and spend time with an outstanding group of business leaders.

Lastly, we deployed $1 $5 billion over the last two years on high quality growth businesses, and we look forward to deploying additional capital in 2023.

Our M&A teams have made tremendous progress identifying compelling portfolio extensions. Our funnel is in the best shape. It's been over my tenure at IDEXX and our strong operating cash flow and balance sheet put us in a great position to continue to capitalize on those opportunities.

Although the short term economic picture might be uncertain, but could not be more excited as I consider the next few years of our story I believe we're headed into an extended period of growth and about above market performance fueled by a combination of technology, driven tailwind and our own high quality business potential our business is our first rate our teams are outstanding our culture.

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

Thank you I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment may be necessary to pick up your handset before pressing the star here.

Our first question is from Allison <unk> with Wells Fargo. Please proceed.

Hi, good morning.

All right.

I just wanted to go back to your comment on optimizing processes and how we should think about that inventory certainly one thats been a target just because you've had the bill does not have to deal with some of the supply chain issues and maybe a little more color about how you're thinking about that thanks.

That's probably the area with the Best example.

And often environment, where a lot of even the best intentional processes kind of turn into adjacent things looking for parts and waiting for the truck to come in at noon all of that kind of stuff. So is that as that moderates and gets better.

To be intentionally to make sure that we're going back and putting in those process based fundamentals the right people and the right room, having the right kind of conversations.

How are we going to.

We frankly made a nice turn here in the fourth quarter on inventory, we've got a long way to go but we're really excited about that potential for us moving forward.

I think it's just I think everybody should be very thoughtful of recognizing that the way things have worked the last couple of years, if youre not intentional about reorienting back to something that operates at a higher plane, it's going to lag and so we're taking that opportunity.

Got it and then just turning to free cash flow, it's still a little bit below historical performance for.

IDEXX in terms of that conversion is it really just had inventory holding it back I would say what would be the lever to drive it higher at this point and sort of back to normal for you guys.

Yes, so in the fourth quarter, we talked to the third quarter inventory has stabilized it wasn't a detriment to cash flow here in the fourth quarter. It added about $20 million free cash flow of the movement, we've made on inventory and our inventory position and we continue to see that momentum I think we've got line of sight to a half a turn to a full turn of inventory improvements as we progressed through the year will be <unk>.

Significant driver of our cash flow performance as we go from obviously, obviously less than historical averages on a free cash flow conversion to last year, being 100, plus percent, which will yield somewhere between 30, and 40% increase in free cash flow year over year. So I think that's a huge win as we progress through the year.

Perfect. Thanks, a lot.

Thanks.

Our next question is from Mike Halloran with Robert W. Baird. Please proceed.

Hi, good morning, everyone.

So so couple of questions here first one on the guidance obviously the commentary on the first quarter and some push outs.

That's a lot of the commentary about.

Basically expected volatility through the year, how have you cadence that guidance is it relative to normal seasonality I mean, how do you think about first half back half versus a normal year.

Not that we've had a lot of normal years lately, but any kind of context, you can give to how you're thinking about what that cadence looks like and how much kind of caution you may be put in there given what that backdrop looks like.

Yes, I think.

We're generally first half second half is fairly close $49 50 50.

<unk> 50, 149, something like that so.

This year I think the implied guide is a stronger first half with volume starting to decline in the back half.

We've got pretty strong price carryover and price capture.

That will put in place here in the first quarter that'll carry at least the price side and then just the implied volumes in the back half are down somewhere between 2% to 4%.

Great that's helpful and makes sense and then.

The comment on order volatility expected as you know the.

Essentially the booking to shipment time period, compresses and returns to normal.

Are you essentially suggesting that youre going to be seeing some pretty volatile order patterns through the year, but maybe a little bit more linear demand patterns as we work through the year relative to that kind of front half back common comments you just made bill.

Uh huh.

Is that basically a warning sign for in your view for what those order rates might be but don't over extrapolate relative to the underlying demand.

Yeah, No I think thats.

Well said I mean, it's a recalibration here just like we had dynamic recalibration on the way up.

The recovery from the pandemic and supply chain issues and things like that stimulus.

Now I think we're going to be returning to more normal patterns, but given the nature of IDEXX, that's liable to play out it differentiate differentiated rate. So yeah, we see some more of it as you would expect in some of those OEM centric markets within HST, where we're a lot closer to the customer it's more high velocity anyway, and you can see a bit of a pause there to take a breath.

It takes some take some inventory out of their system and then those are healthy markets on the other side of them. Some of our industrial businesses that are a little further away from the end customer of lots of distribution between us and them lots more fragmentation I think youll see some of those same things play out over time, but probably a little further down the road and so what we're kind of expecting here is that.

From a high level Youll see things return to more normal rates were up in the backlog and the order rates in the sales rates are pretty tightly linked for us unless were sort of beginning or ending the cycle, but I think that what's a little unusual here. It's just the way it will play out the nature of it given just the differentiated pockets of IDEXX and so we're.

Prepared for all of that what we're trying to do it on one side is look at it adjust to it of course correct, but then always looking on the other side. So that we don't over interpret something in the short end. Thank.

It means something thats sustainable for two or three years, when it doesn't and we keep resources aligned in places that have the best growth prospects for us.

I appreciate that one quick one just a clarification slide seven with the arrows within the range of those arrows, implying high end and more of the range for the HST in FSD.

Or are you, suggesting a little bit above a little bit below.

And then the green period clarified.

Clarification, yes exact HFC and the high end of the range FMT in the Middle and then FSD at the lower end of the range.

But still in the range I appreciate it thanks Bill thanks.

Thanks, David.

Our next question is from Nathan Jones with Stifel. Please proceed.

Good morning, everyone.

I'm, just going to I'm going to follow up on Mikes question last question there.

Follow up on this recalibration of orders and things like that.

IDEXX doesn't.

<unk> have a lot of inventory and a lot of channels.

Mhm.

But I'm sure there are some pockets of the business, where there are some inventory in the channels.

How are you thinking about the potential for your customers to destock some of their inventory and for that too.

Be a pause in demand for you guys is that something that you've baked into that down two to flow volume in the second half.

Yeah.

There's definitely some of that in there.

As you know, we're kind of low on the food chain, we do a lot of component work for people, who then turn it into subsystems in terms of the final system. So at any point along that food chain. There is the potential for accumulation.

And then frankly, the normalization of it along the way I think what we are.

Thinking about though is when you think of how order patterns are generated many of them are actually done in an automated way there actually isn't a lot of human intervention and the two the two factors that drive it. The most are of course lead times, and whether or not they're pulling in and we're seeing that we're seeing that kind of across the supply base.

Experienced thing as well a factor a lot of people don't consider as much though as volatility or variability and so even when lead times are pulling in and if you still have an inability to count on it it will tend to keep driving higher demand requirements through it throughout the system. So we're kind of monitoring both of those and as any one of them comes to Sun.

More normal almost always youre going to youre going to see an impact on that on the other side for a short cycle business like ourselves.

It's a massive number because as you say most of the things we make our customized in Stockwell anyway.

We're coming off of a pretty robust time here I do think this is calibration matters. It will play out over time through much of IDEXX again, I think the focus for us is to understand it and make sure that our own inventory positions and resources are calibrated right, but then be very very focused on end market demand and what's driving that what's the actual consumption rate.

On the other side because that ultimately is what you want to dial into.

I think maybe question on supply chain I think over the last couple of years generally all debate lead times have stretched out but for IDEXX.

The delays it really being your supply chain because you buy these highly value added stuff. So there's a number of steps for them to go through and as they compressed that's compressing the order to ship time. So can you talk about.

The way your supply chain is relative.

Relative to where it was in 2019, how much better it's got how much there is still to go.

And what your general assumption is now for getting back to something like normal that should happen in 'twenty three 'twenty four.

Sure I mean.

I would say in general.

<unk> improved a lot and pretty close to where we were in 2019 with a few commodity exception I would put it probably put electronics still at the top of that list.

But frankly, we're not the most electronics intensive business so it matters, but it's not widespread across the company.

I would also remind everybody on the call we have a lot of local supply. So we're typically dealing with people. We've known a long time that are not far away all through kind of.

The worst of it in many cases, we were helping them, we're sending people over to figure things out help improve their flow into those kind of relationships. So.

Given that that's sort of topology.

These are the kind of companies that can course, correct, a little better and generally have.

I would say we are not yet normalized 2019 levels all across all the cross side extra we're definitely past the halfway line.

So depending on how the year plays out you could see us basically articulating a normal condition I think closer to year end certainly as we begin the next year absent any other forest that we can't see.

Perfect. Thanks for taking my questions.

Thanks, Ed.

Our next question is from Deane Dray with RBC capital markets. Please proceed thank you and good morning, everyone.

I was hoping we could unpack the margins in HST I know you gave some of the color in the prepared remarks.

We had the.

The top line.

And but you didn't get the margin read through it sounds like price cost was positive.

You gave some of the other data points.

Mix a factor just yet.

How much of this was temporary versus how you expect it to play out the rest of this year.

I think there's three things there <unk> one.

We continue to face some of the inefficiencies we talked about here as you progress through the back half of the year. Some of those businesses have grown 20%. It's still calibrating on some of the manufacture ability of some of this cutting edge technology that they have to was some mix within the portfolio, we talked about some of the short term.

OEM push outs a lot of that has been kind of a book and ship components that are that are higher margin on and the last one just the addition of Mulan.

They were all in the portfolio for a month they were shut down and do a full physical inventory that that diluted margins a little bit more and we will go away in the first quarter I think we're making progress on the productivity piece, but the mix I think is still a component that we will experience in the first quarter.

Yes, so we've got the volume impact and then that mix carrying through at least through the next three months.

Got it that's helpful and just expectations on price cost into 'twenty three.

Or is there more pricing initiatives you need to put through or is this all carryover benefit.

Yes, we've got carryover and incremental pricing actions that we took to kickoff the year. Obviously, that's part of our normal processing cadence to continue to capture the value from our products. So I think we're in a really good position from a price cost and we said in the fourth quarter. We're back to historic levels and we think that will continue here as we progress through the year, if something were to change obviously.

We go back to the customers with an incremental increase but we're well positioned here as we kick off the year.

Just last question I'm not sure how specific you can get and I really appreciate the prepared remarks, and some of the earlier questions about fleshing out the transition period year.

Just.

Right from the supply chain normalizing changes order behavior, we get that but yeah. We just saw the ISI I'm, taking another step down new orders another step down with all your short cycle businesses. This is a great Canary in a coal mine company to like gauge lead time changes and you've given a fabulous caller here.

If we total up the collection of soft pockets of business is this a demand deterioration you're seeing broadly.

Would it be the early signs of it.

Or do you feel like these are more temporary just kind of step back and say okay from seeing these trends how does it look to you for the businesses that you touch play out for the course of the next couple of quarters.

Yes, I'd say Deane, it's still pretty early.

Everything we're kind of talking about here in near term that.

There was some exposure in Q4 and some carry into Q1, that's very much a temporary condition and otherwise very active and strong markets, where you can see hey people are taking a pause for all the reasons that you just suggested.

Bellwethers that we have on the industrial side.

Most of which their order side is coming through the small order flow side honestly those are holding up.

We're simply in some cases projecting that if you combine a couple of things we kind of know where there was inventory levels are we know how they think about planning we.

We know where we are from a lead time perspective.

At some point, we expect we will have some of that moderation there, but it really isn't in front of us as we as we sit here today and then back half of the year is more of a macro call than anything else as we think about kind of floor and top end of the range for all of <unk>. So I think your question is helpful. Because it helps us kind of parse that will well at least put out there. We're seeing some of these things from an early.

Indication standpoint, but most of them are in a temporal spot we can imagine some things that would be.

Bigger pieces of IDEXX more industrial in nature that would kind of follow the same calibration and then ultimately like everyone else, we're kind of thinking about what does the future go back half of the year, it's more of a macro question.

Yes, that's exactly the color I was looking for very helpful. Thank you.

Thanks, Dan.

Our next question is from Rob Wertheimer with Melius Research. Please proceed.

Thank you good morning, everybody hi.

Ralph you order commentary has been has been very clear and helpful. I appreciate it I am sorry to sneak in one more on it but.

Orders like coming in as people anticipated getting better I'm just wondering if that's already happened where people can feel more confidence in lead times.

I guess across the businesses.

Or whether it's in anticipation of that and then I had an M&A question.

Okay.

I think the first question I wouldn't say that those businesses in the HST world have more inventory I would say that they have more sophisticated planning.

We typically seen in any cycle, there theyre, just theyre bigger organizations, they're a little bit more formal they're usually a little quicker to react to cycles and when they do it that's more of a concentrated industry anyways. So it tends to be kind of amplified that way so.

There's nothing that tells me that somehow that they are sitting on more than anywhere else in it in any way frankly unusual from some other patterns, we've seen when things change.

That's number one.

Remind me again on the second question I'll make sure I get the exact essence, you talked about supply chain I'm sorry, It was just confidence.

Exactly yeah, so with our supply chain has already gotten better than that lots of people have more confidence in lead times, and thus destock a bit or whether that's not happening again.

Again, I think I think think of it as two variables. One is lead time compression that's absolutely and I think people are saying that theyre seeing that quoted to them when they can call and ask about things.

I would say the second component that I mentioned that is important though is the performance against those quotations.

Neither one of them, yet or kind of back to where they need to be there both improve but they both work together and frankly that second piece, the one about sort of assurance and delivery against the commitments has a huge psychological impact.

And I think it's one of the.

It's actually the more powerful the two so if people say hey, its still longer but I know I'm going to get it exactly wanted to ask for it they will actually make that move in a more fundamental way.

They are still getting surprised from time to time that tends to fuel a little bit of this I'm going to keep some things I'm going to protect some things. So both are moving and as we continue to talk through the year, you'll hear us talk about both sides of that.

Oh that was very helpful. Thank you.

Just in general we've had I think a reasonably solid level of deal activity you guys have done great over the last year your characterization of.

Buyers market.

Mood among.

Actual targets for acquisition and weather matters for you guys and whether there's less intense competition, there and I will stop thank you.

Yeah. So in general our story is a good one here I mean, we've had.

We've had some good performance over the last couple of years some great businesses that we brought in a I've talked from time to time about the intention of work we've done to sort of build strategic conviction in a really really form a way that contributes to the basic business intelligence that we have from all the businesses across IDEXX. So the things that we control are in a great spot as we think.

When engaging with the outside world I've always been careful to tell.

People understand that we're fishing in a very high quality universe.

I think in some ways holds up and it doesn't move around as much.

Terms of evaluations and uneven timing of transactions.

Particularly to do this work well so on the P/e front. They are often competing with us for properties like this they too are attracted to companies like us and I will say, it's probably a little less activity competitively there or people <unk> been able to raise funding and be in the game.

But we've long aspired with this work that we're doing to sort of be ahead of that anyway.

Cultivation on a proprietary nature or talking to people that we meet at the trade shows those kinds of things. So that we're not actually in kind of a classic bake off with lots of people anyways.

Efficient market. So it doesn't always happen when it does I think the dynamic around the <unk> activity is absolutely true valuations overall still pretty rich because again, we're looking for high quality companies like the last three that we brought into the business.

Thank you.

Our next question is from Scott Graham with loop capital markets. Please proceed.

Hey, good morning, Eric. Thank you for all that transparency that was that was great.

So the question is maybe I missed it because I was writing away because he takes talking saying so many things did you.

Tell us what pricing was in the quarter.

No no no one asked that it was over 5%.

And the gap was it.

Still about like 50 ish.

On price cost yes.

Yes, we said it was back to our historical level, so right around there.

Okay, and then the carryover for next year.

Can you tell us what that would be.

Yes, I mean overall price next year is somewhere around three or four 3% to 4%.

About half of it is carryover.

Got it.

So I was just wondering also with the thank you so.

I was just wondering also with the step down in the first quarter.

Organic is that <unk>.

Mostly.

FMT.

And maybe secondarily FSD in the organic.

No it's mostly HST.

We highlighted just some of the temporal moves from some of the Oems as they recalibrate order patterns and inventory levels. That's the major driver.

Okay, and then I guess my sort of last question here is also on the M&A environment seen in the past you guys have sort of talked about what's available.

A little bit about the funnel is there anything more you can say than what you've already said on M&A is that still.

The spreads.

<unk> kind of coming in a little bit or anything.

And you can change.

No I mean, as I said, just a minute ago.

We're still looking for high quality properties, those valuations tend to hold up over time.

Because of the long track record, usually predating, our conversation and the expectation you'll have a good trail on the other side.

I would just say from an availability front, we've got more than ample capacity, even though we've deployed a lot over the last two years.

A great part of the <unk> as we generate that capacity each and every day.

And then I think our targets, we really has not changed we are comfortable with a band of about half a billion to a $1 billion.

And long considered that to be a good target for us here in the next couple of years.

Regardless of cycle and they're generating all the right work to realize that.

Thank you I appreciate you taking the question.

Scott.

Our next question is from Bryan Blair with Oppenheimer and company. Please proceed.

Thanks, Good morning Arun.

Good morning, Brian .

I was wondering if you could offer a little more of a profile on Milan group, maybe a rough breakout of key.

Key end market exposures across stemming that tech food and beverage and others, where historical growth rates have been.

The current market environment impacts 23 expectations, and where there is the greatest opportunity to extend or accelerate growth within the IDEXX portfolio going forward.

Hey, Brian We've said about two thirds of the business is in those major categories. You started with the medical semi and food side of the balance in a variety of different applications. Yes. We've said it's grown at double digits here in the last several years. It's got line of sight to continue to do that here as we progress even with some of the noise out there in the semi cap.

Market, where they play in this space is still still healthy they've got innovative technology that the kit continued rollouts, we remain bullish on their growth profile.

Both on core products and some of the NPD applications that we've gotten to know a little bit more as we progressed through the last couple of months of our ownership.

And then really past that I mean, we did say there is some customer points that we have but they don't have that over time, we think are interesting and we can exploit those and that's a very interesting things on the kind of co development fronts, but the cycle of those are going to be further out in the future. So this all.

These kind of was it.

It's a game of capitalizing on the near term strength and success of that business in those markets with this additive element that we're going to work over time to enrich it with all the IDEXX assets.

Definitely makes sense and given the composition of Mullen group there.

And from what I can see it at least five businesses I'm not certain.

Divisions or platforms therein.

Are there any unique aspects of integrations that you would call out.

I guess just to level set obviously this is a growth opportunity.

But are there cost synergies.

I mean, not so much within the IDEXX topology and things like that are missing certain things, we do to leverage back office and being part of the company.

But it's not as if that kind of a classic story of us kind of putting things together and moving plants around.

Do you often see in businesses like this I mean, a lot of that technology is resident in people.

I think the single biggest lever that we anticipate pulling here absent that one is 80 20 I mean, it's just the implementation of that model and I can absolutely assure you their profile is very IDEXX like out of the gate, which means there are opportunities there to streamline and simplify it.

Okay excellent and then one last one if I can use you've called out increasing project activity in municipal water overall.

Recent quarters Theres, obviously, a lot of funding for domestic projects are you willing to offer some finer points on that front you know how much. The project funnel has expanded anticipated 2023 gross or anything along those lines.

Yeah.

It's.

Of course, it manifests itself across a series of franchises in very kind of different technologies that we have so I would probably just rolled back to very very positive quote activity has been strong here at the end of last year continues into this year for all of the dynamics that youre, citing everything from EPA funding and enforcement possibilities, which is.

He has been a catalyst for the businesses that we own now.

Just well as broader infrastructure support over time, which is always takes a little longer to land, but also has the potential to extend some of the growth timeframes that we're thinking about into the future. So we're well positioned.

Continuing to kind of work those assets together and then this is an area of focus for us as we think about deploying some capital too.

Okay I appreciate all the color. Thanks.

Thank you.

Our next question is from Brett Linzey with seasonal Americans. Please proceed.

Hi, good morning, all.

Good morning.

Just wanted to come back to the excess OEM inventory comment any any sense in terms of months or weeks of inventory on hand at those oes that needs to get worked down and then any color or specific product customer segments that youre, referring to there.

No no I think from a from a segment I think its most of.

We described within some of the comments within our life Sciences and medical instrumentation, the folks in that group.

From a magnitude perspective, and what they are holding in from inventory and wouldn't speak to that other than just conversations with them. There is a calibration period that we're going through Eric highlighted earlier on the call. This is an atypical to what we've seen historically when we've gone through a really robust cycles of growth there is a quarter.

Or two of Recalibration to normalize and then back off I think gives you hear any of the external commentary for those large customers, they're still bullish on their equipment deliveries and the growth that they're going to see in 2023.

All right makes sense and then just shifting to the resource investment you've contemplated for the for the guide zero to 20 cents I mean, certainly a wide range given the macro and understand that.

But historically I would say IDEXX consistently invested regardless of the the state of the environment what type of situation really drives you to that lower end and then maybe just a little color on some of the various projects that are being contemplated there yes.

Yes.

And.

We always think of investing and investing for the future and investing to grow.

One of the great things about a company like ours, though as we can we can move things around sideways.

A lot to help us kind of hit the lower end of that range and still make the right choices for the right businesses.

And so whenever you see us talking about something like a zero is actually still very dynamic here. It's just to be candid, we would take businesses that are in softer parts of.

The universe, and we would quite intentionally pull those down lead amount of lot and redistribute those costs elsewhere parts of IDEXX that a stronger sometimes literally taken the same people and putting them over and stronger parts of IDEXX. So we actually have that nice optionality down at the lower end of the range of what keeps it all moving and allows us to kind of weather.

Storm if it happens.

Got it I appreciate the insight thanks, a lot you.

You bet.

And our final question is from Joe Giordano with Cowen and company. Please proceed.

Hey, guys just a couple follow ups on orders year. So if I look at HST, obviously, the orders there on an organic basis, the weakest across the portfolio, but the growth for the year on revenue expected to be the best so when at what point kind of as you get through the year do you need to see orders start to stabilize.

Stabilize or start accelerating again before like you get a little bit more concerned about the organic revenue profile going forward.

Yes.

We have a while <unk> our biggest backlog they've built the most backlog out of the three segments. So really comfortable with our position here as we go through the first half of the year.

Said this calibration on the OEM inventory levels is generally a quarter maybe spreads into the second so we're confident that we're going to see that start to pick up and move as we progressing in the back half of the year.

And then similar on FMC I'm, sorry on diversified dispensing that headwinds.

This year on a revenue basis, but it looks like orders kind of pick back up to almost essentially peak levels that you saw.

Like a year ago so.

Are you starting to see that like do you feel more comfortable about the visibility on those like 'twenty four orders I guess essentially for dispensing that youre getting.

The Q4 rig up for dispensing, we'll book in the second and third quarter of this year, yes, especially the orders were up 25%, but their sales were down 20% in the fourth quarter. So this is yes that was the one last order to give us kind of a full set of visibility to still reasonable performance, but down that's going to mask a little bit.

The.

Strong organic growth that we expect from fire and safety and embed it next year.

So you would expect dispensing orders to move back down I mean, sorry, yes.

First of all <unk> orders to move back down from fourth quarter levels.

Yes, yes definitely.

Okay. Thanks, guys.

Yes.

We have reached the end of our question and answer session I would like to turn the conference back over to management for closing comments.

Okay, well, thank you all for joining and.

Listening to our story and.

I know there were a lot of moving pieces there in a environment Thats got some pluses and minuses in things that are playing out so I'll keep this really really simple.

Yeah, I want to again, thank all the folks from IDEXX in 2022 was a great year, I mean really really outstanding year incredible growth focused on the right things getting capital to work and we grew our people. We grew our culture I think 2020, there is going to be an equally great year and it really sets us up for the future to come.

And we talked a little bit in my last my last framing comments there about the power of execution. We're really excited about that we think we've got a we've got a chance here to go establish even a little bit more competitive advantages, we jumped on this and recalibrate to the world to come. So we're all over it we're doing that actively and.

Then just just as passionately we've got a number of teams that are thinking about the future. What comes in five years. What comes in 10 years, and we're going to make the choices that we have to to capitalize on those two so thanks for your support and interest and have a great day.

Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.

Okay.

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Greetings and welcome to the fourth quarter 2020 to IDEXX Corporation 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 <unk>.

On your telephone keypad. Please note this conference is being recorded.

Now I'd like to turn the conference over to Alison Vasquez, 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 fourth quarter and full year 2022 financial highlights.

Last night, we issued a press release outlining our company's financial and operating performance for the three months and full year ending December 31 2022.

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

Joining me today are Eric gasoline, our Chief Executive Officer, and President and.

Our Chief Financial Officer.

We will begin with Eric providing an overview of the state of IDEXX is dismal.

A recap of our recent performance.

Bill will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023.

Eric will then close the call with our key priorities for 2023.

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 8776.

606853, and entering conference I'd 13734461, 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.

Texas filings with Securities and Exchange Commission.

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

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

This year was not without its challenges, we experienced unprecedented inflation as well as a difficult supply chain environment. Despite these obstacles we achieved some of the strongest financial results we've ever posted I'd like to thank our IDEXX employees around the globe for their efforts and hard work.

We also deployed more capital than ever before investing in our businesses acquiring new ones and returning capital to our shareholders. We deployed a record $950 million for the acquisitions of next site Casey valve and most recently the move on group, we reinvested back into our core business to increase capacity to support growth and drive <unk>.

The activity.

As we turn to 2023, we are prepared to build upon a very solid foundation, we have a strong backlog position overall and we continue to leverage innovative technologies to drive targeted growth opportunities. We have healthy price carryover. In addition to new price actions to capture the value our products bring to our customers. Finally, we have an opportunity to drive strong.

Productivity as we bring process driven normalcy back to our operations through the application of the IDEXX operating model.

Pockets of demand softness due to a variety of intersecting economic and geopolitical factors.

Regardless of these challenges, we will execute and deliver growth above market entitlements, the short cycle short cycle and decentralized nature of our business supports quick adaptation and alignment to shifting conditions, and we will course, correct quickly and effectively when needed.

Thanks, Eric and our fluid metering technology segment industrial day rates were steady in the fourth quarter and we expect they remain at this level in the near term with strong price support.

We've seen initial signs that customers are returning to a book and Bill order pattern consistent with pre pandemic behavior.

We continue to monitor day rates to evaluate longer term expectations. As this is our most short cycle market exposure.

We expect another strong year in the agricultural business with strong farmer sentiment and high crop prices, we continue to see positive signals from both Oems and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs.

We are on our next phase of process automation, a banjo and see continued improvement in delivery inefficiencies, putting us in a good position to capture share.

Our outlook for our municipal water business continues to be favorable the healthy quoting activity, we experienced over the past few quarters is expected to translate into 2023 growth.

And we continue to identify opportunities to leverage our technology to capture new programs.

The EPA just received record funding and the infrastructure Bill could provide a tailwind in the back half of the year.

In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support.

Over customers continued to delay larger investments as they focus on cost inventory and supply chain issues.

<unk>.

We are seeing some slowing in semiconductor market driven by higher memory device inventory levels and declining customer chip spending.

Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market.

We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects customers are hesitant to make larger investments given inflation and higher interest rates.

India continues to accelerate and the easing of China restrictions could drive growth and recovery in the region to offset some.

Finally, we expect our fire safety diversified products segment will experience growth towards the lower end of our guided range.

Fire and safety U S and European player OEM volumes remain constrained by supply chain and throughput issues with backlogs are strong and volumes are steady.

We expect continued share gain with smaller builders that are coming online to capture surplus demand.

Our rescue business remains positive with strong NPD and we continue to leverage our integrated model to drive distribution growth.

We expect our band it business to continue to outperform across industrial automotive and energy markets as it leverages its inventory and differentiation to capture share.

We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia.

For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in this segment.

With that I will discuss our financial results.

Moving on to our consolidated financial results on slide nine.

HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier for.

For the year orders were up 8% overall and up 5% organically, we experienced positive orders growth across all three of our segments.

Fourth quarter sales of $811 million were up 13% overall and up 12% organically, we experienced nearly 20% organic growth in HST and strong growth across both the FMT and FSD.

Full year sales of $3 $2 billion were up 15% overall and up 13% organically, we saw strong double digit growth across FMT, and HST and 9% growth in FSD.

Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021, and adjusted gross margin of 43, 6% contracted by 40 basis points.

This was driven by unfavorable mix within HST in FSD.

<unk> impact of acquisitions employee related inflation and unfavorable productivity in HST, partially offset by volume leverage and strong price cost.

For the full year gross margins expanded by 50 basis points and adjusted and adjusted gross margins expanded by 10 basis points to 44, 8%.

Primarily driven by strong volume leverage positive price cost and productivity more than offsetting employee related inflation in engineering resource investments.

Fourth quarter, adjusted EBITDA margin was 27% up 10 basis points versus 2021.

Bridge of Q4, adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation full.

Our Q4 effective tax rate of 25% decrease versus last year's effective tax rate of 22, 5%.

Primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Mulan group acquisition.

Our full year effective tax rate of 21, 7% also included tax benefits from the sale of our night business and was down from the 2021 effective tax rate of 22, 5%.

Fourth quarter net income was $130 million, which resulted in an EPS of $1 71 <unk>.

Adjusted net income was $153 million with an adjusted EPS of $2, <unk>, which was up 30 or 18% over prior year.

Full year net income was $587 million, which resulted in an EPS of $7 71.

Adjusted net income was $618 million, resulting in an EPS of $8 12.

Of $1 25, or 18% over prior year adjusted EPS.

Finally free cash flow for the quarter was $147 million, 96% of adjusted net income.

Mainly driven by improved working capital performance.