IDEX Corporation

Greetings and welcome to the IDEX Corporation second quarter 2020 earnings 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. I would now like to turn the conference over to your host, Mr. Mike Yates, Vice President and Chief Accounting Officer for IDEX. Thank you. You may begin.

Great. Thank you, Melissa. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for our discussion of the IDEX second quarter 2020 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending June 30, 2020. The press release, along with the presentation slides to be used During today's webcast can be accessed on our company's website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO, and Bill Grogan, our Chief Financial Officer. The format for our call today follows. We will begin with Andy providing an overview of IDEX's second quarter performance in addressing the impact of the COVID-19 pandemic on our operations as well as the company's response to date. He will then provide an overview of our primary end markets. Bill will then discuss our second quarter 2020 financial results and walk you through a review of the company's cost actions, liquidity, and financial durability. And finally, Andy will conclude with our current framework for the third quarter and closing remarks. Following these prepared remarks, we'll 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 877-660-6853 and entering conference ID number 1369-4805. Or you may simply log on to our company's 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 IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our Chairman and Chief Executive Officer, Andy Silvernail. Andy?

Thanks, Mike. I want to start by thanking all the people across IDEX. They've really stepped up with the challenges that COVID-19 has presented and have embraced the evolving protocols along the way. As COVID-19 has impacted families globally, we've not been spared loss here at IDEX. And I want to make sure that all of our teams know how proud we are of their contributions. In a crisis, especially one as devastating as this, your true values are exposed and the culture that we've built at IDEXX is stronger than ever. We continue to supply our customers with critically enabling products across the globe, meeting their challenging demands, and partnering with them to rapidly support and develop innovative new products to battle COVID-19. I'm going to share one of those examples here in a few minutes. Our businesses continue to deliver during this pandemic. With our internal safety protocols and resilient supply chain, we've been able to deliver product with limited interruptions. When issues have arisen, the teams have been able to react quickly and mitigate the impact on our business and customers. While we have experienced significant sales decreases, our balanced end market exposure and mission-critical product offerings have limited these declines. The diversification into various life sciences, pharma, and municipal applications have lessened the more cyclical declines in energy and general industrial end markets. Also, our operating and finance teams across the globe did an excellent job of deleveraging the balance sheet and helping to drive record second quarter free cash flow. We converted at 193% of adjusted net income. Finally, we continue to be proactive on mitigating the bottom line impact from the historical economic dislocation created by the virus. We've ramped down all non-essential expenses to mitigate our organic decrementals at less than 40%. We're leveraging and restructuring actions that we took in 2019, along with new actions that were required in several of our businesses that will see more prolonged volume impacts. As these organizations right size for the new normal, we've increased investments in several other businesses to capitalize on several short-term COVID-19 opportunities, as well as invest in projects that will support our longer-term growth. We've made swift and smart decisions to keep our people safe, keep our business moving, and ensure our financial performance, making sure that we do everything we can to help win the COVID-19 fight. Turning to slide seven. We outlined four key strategies to operate in the COVID-19 world in early March. Focusing on this framework has been a key part of our ability to perform across our businesses. From a safety perspective, Protecting our teams as we remain open has been our priority. The standards we've implemented globally have been effective in keeping our operations consistently running with minimal work stoppages across our facilities. We've evolved our protocols and have implemented mandatory face coverings in all of our facilities to protect our employees and limit the spread of COVID-19. As I mentioned earlier, our operations and supply chain team have done an excellent job ensuring business continuity. We continue to improve our operation preparedness and bolster our supply chain with plans to help avoid business disruptions. We anticipate continued volatility in the months ahead, and the dynamic planning support structure we've built should serve our businesses well. Our actions in the second quarter have minimized any concerns we have with liquidity. We issued $500 million of new bonds to pay off our 2020 notes and bolster our cash position. We had record second quarter cash flow, and we have $746 million of cash on our balance sheet and full capacity on our revolver. The efforts of our teams have put us in great financial position, and we have more than enough capital to fund all of our operational needs through the pandemic, as well as position us to take advantage of other capital deployment opportunities. Lastly, our leaders are spending more time playing offense. Our teams continue to innovate and bring new products to market that capture short-term opportunities, but also lever our portfolio to capitalize on longer-term secular trends that are evolving as a result of the pandemic, particularly around testing for viruses and antibodies as well as the creation of a vaccine. I will go into more detail on one of those opportunities here in a minute. We also see the M&A markets open up with more deals starting to come through. While it's still going to be a challenging year from an M&A perspective, we're more optimistic on our ability to get a deal done than we were 90 days ago. With that update on the status of the COVID-19 playbook, I'd like to spend a few minutes walking you through one of the products that's a critical technology in the mass production of vaccines. I'm on slide eight. In the HST segment, products from our microfluidics product line within our material process technologies business are keys to help bring a vaccine for COVID-19 to market. Our microfluidizer processors are a key technology used to manufacture the vaccine adjuvants required for several of the vaccine trials. Vaccine adjuvants are immune stimulators added to many vaccines commonly used today. By using an adjuvant in a vaccine, the body can produce a better immune response to the antigen or the germ. while also allowing vaccine manufacturers to be able to produce more doses of vaccine with less antigen. In addition to vaccine adjuvants, microfluidizer processors can be used to manufacture lipid nanoparticles that are a key ingredient with the new mRNA-style vaccines currently in the pipeline. The team at MPT has done a fantastic job responding to the increasing demands in the market for COVID-19 vaccine testing and pre-production. and has quickly aligned priorities to meet this market need and participate in the fight against the pandemic. This highlights just one of the ways IDEXX businesses have answered the call and wholeheartedly embraced our mission of trusted solutions, improving lives. We're moving now to slide nine. We've outlined here how we're seeing the current environment impact our primary end markets. In our fluid metering technology segment, We've seen a broader industrial softness that we called out at the end of 19 become exacerbated by the pandemic, as well as volatility in the oil and gas markets. Our industrial businesses have seen a decline in volume due to the lack of capital investment from our customers. While we've seen the like-for-like replacement sales in these businesses hold up well because of the critical nature of the components, the impact of the soft market impact pandemic and delaying capital projects has led to broader declines. Our water business, while down year over year, has held up well as municipal projects have largely been continuing, with some delays as municipalities have responded to critical needs of the communities that they serve. Similarly, agriculture has held up reasonably well, given a stronger spring season in the U.S. and relatively optimistic demand from growers. In the health and science technology segment, we've seen two bright spots coming from both the opportunities I discussed previously, as well as a strong rebound in the semiconductor market in 2020, which has largely been driven by demand for 5G products. We've seen Semicon come out of the downward cycle that they had experienced over the past 18 months. On the other hand, analytical instrumentation, industrial, and automotive markets have been impacted significantly. In AI, as the medical industry focused on COVID-19, Other investments in lab equipment were delayed, and we're just now seeing those investments start to pick up. Ottawa experienced a wide-ranging production shutdown, significantly impacting our ceiling business. We expect some modest sequential improvement as we move into Q3, but expect these markets to remain challenged in the short and medium term. Moving to fire safety and diversified, we also saw the automotive and aerospace industry shutdown in the U.S. significantly impact our banded business. Additionally, we've seen lower capital spending globally impact our dispensing business as many customers are delaying replacement and upgrades as they assess the pandemic's impact on their business. Our fire and rescue businesses, while counter-cyclical similar to other municipal businesses, saw non-committed capital projects pushed out due to municipalities prioritizing COVID-19 response and only engaged in mandatory equipment purchases. Previously funded projects continue to go and demand for our new products and offerings in fire and rescue are partially offsetting these project delays. As I mentioned previously, we firmly believe in the strength of the IDEXX business model. While there will be continued softness in some of our harder hit businesses, our diversified end market offerings will mitigate the impact of some of the cyclical declines that we've experienced. Our investments in life sciences, pharma, and municipal markets have helped provide counter cyclical opportunities that we believe will continue to somewhat offset the weakness in these markets. With that, let me stop here, and Bill, I'll turn it over to you for the financial results for the quarter.