IDEX Corporation

Greetings and welcome to IDEXX Corporation's third quarter 2020 earnings conference call. At this time, all participants are on 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 turn the conference over to your host, Mike Yates. Thank you. You may begin.

Great. Thank you, Rob. 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 our discussion of the IDEX third quarter 2020 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. 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.idex.gov. I-D-E-X-C-O-R-P.com. Joining me today is Andy Silvernail and Bill Grogan. Additionally, Eric Asherman, our president and recently announced a CEO of IDEX, will be joining us as well.

Thanks, Mike. Good morning, everyone. Before we dive into our third quarter results, I'd like to take a moment and talk about the leadership transition we announced yesterday. After 12 wonderful years at IDEX and nearly a decade as Chief Executive Officer, I'm stepping down as Chairman and CEO in mid-December. I'm delighted that the Board of Directors has selected our President and COO, Eric Ashleman, as IDEX's new CEO effective December 15, 2020. Eric is a uniquely capable leader who has a clear choice for the role. He and I have worked closely together since I joined IDEX. We work side by side to establish our strategy, build our culture, and deliver value for all of our stakeholders. Eric brings extensive knowledge of our business, deep insights into our markets, and a passion for bringing out the best of our people. My decision comes after deep reflection. Leading IDEX has been the greatest privilege of my career. It's a significantly different company today than when I joined in 2009. We've accelerated our transformation from an acquisition-based holding company to into a high performing global enterprise that improves lives on a daily basis. With this strong foundation, IDEX is positioned for continued growth and value creation. So it's a good time for change for two reasons. First, IDEX is ready. We've led a remarkable company through this pandemic crisis. Our mission has never mattered more, our culture and financial position have never been stronger, and our team has never been more capable. To that end, we're fortunate to have Eric as the next IDEX CEO, He's a proven leader who has delivered excellence for our shareholders and our broader stakeholders for the past 13 years. Second, I'm ready. For the last couple of years, many of you have asked me about my career thoughts. I've always said that I love IDEX, but I thought 10 years is about the right shelf life for a public company CEO. I could never have dreamed what we would accomplish over this span. We've built an organization that advances and saves lives of millions of people around the globe. We have created a highly engaged organization that is among the best in the world. We've impacted our communities through compassion and generosity with the support of the IDEXX Foundation. And we have delivered for our owners, producing total shareholder return of greater than 530%. For me personally, I'm excited for a new phase of life that brings along new challenges and opportunities for me and my family. I'm going to become chairman, CEO, and an owner of Madison Industries, one of the world's largest private companies. This new opportunity offers a chance to build another great organization and make positive change in the world over a very long horizon. I'm confident now is the right time to pass the torch and welcome IDEX's next generation of leadership. On a personal note, Eric has been a true partner and a dear friend to me, and I'm confident that this transition to CEO will be seamless for our company, employees, and all of our stakeholders. As this is my last earnings call, I want to say how grateful I am to have worked alongside our incredibly talented team the last 12 years. It has been an honor to serve as chairman and CEO and to be part of a company like IDEX. I also want to thank all of our investors and analysts on the phone who are with us today for the support through the years. The future of IDEX is very bright. We have reached new levels of industry leadership and sustained value creation, and we will do so again under Eric as our CEO. As Mike mentioned, Eric is joining Bill and I for the earnings call. Bill and I will walk through our assessment and analysis and view of the future as we normally do. We'll then turn to Q&A and Eric will join the conversation and talk about the future. I'll now turn to our results for the third quarter. We continue to see a strong sequential rebound in orders with September 2020 topping the same month last year. That's a good sign. I want to thank all of our people around the globe who have risen to the occasion. In a year no one could have predicted, our people continue to shine. So to all of the IDEX team members listening on this call, thank you. A time like this truly tests the culture of a company. Are you rooted in strong values that people really live and believe? If so, you'll be better prepared to survive and even thrive. IDEX is this kind of company, and it's serving us well. Because of the protocols we've put in place, the disruptions we've seen in our operations have been limited. We have protected our people within the workplace and we will do so even if the COVID trends are moving in the wrong way. We continue to focus on solving our customers' greatest challenges, many of which have shifted this year. That has reinforced the need to stay close to our customers, even when we have to remain socially distanced to understand their needs. Bill will walk through the details shortly, but as you've seen, our organic sales are down 12% year-over-year, falling at the better end of our predicted range. Importantly, organic orders were down only 5% and continued to improve sequentially, a trend that is continuing in October. Being a diversified company helps a great deal in times like these. While certain sectors like energy continue to struggle, other aspects of the economy are booming. This diversity gives us strength, limiting our exposure to any one sector. The financial controls we put in place early continue to serve us well. We are delivering strong profitability and exceptional cash flow. As we have pivoted to growth, We have ramped up our capital spending and investment to support some really exciting initiatives. We've also seen activity in the M&A market start to pick up. While those pillars of safety, business continuity, and liquidity are all still part of our pandemic operating focus, it is time to aggressively play offense. I'm turning to slide seven. That increased focus on playing offense has us involved in some exciting new opportunities. A variety of our businesses are producing new solutions for cleaning and disinfecting public spaces. One shining example is a sprayer that uses electrostatically charged particles to envelop a surface, not just hit the side facing the sprayer. We anticipate solutions like this will continue to be in demand, not just during this pandemic, but for years to come, as public demands for cleaning and disinfection will be forever changed by this period of time. We also have an exciting new opportunity to partner with customers to develop a highly accurate point of care solution for diagnostic testing for COVID-19. Our IDEXX Health and Science team is hard at work ramping up. With public health experts increasingly predicting that the coronavirus will be like influenza, remaining in circulation even after vaccines are widely available, we anticipate this will be a significant new program for our company for the foreseeable future. I'll share more about that in a moment. We also continue to see machines used in production of pharmaceuticals and vaccines. Insourcing critical API manufacturing is a key initiative for several countries, and last quarter we shared how our microfluidizer processors are a key technology for manufacturing vaccine adjuvants. Vaccine adjuvants are an immune stimulator added to many vaccines commonly used today. By using adjuvants in a vaccine, the body can often produce a better immune response to the antigen. while also allowing vaccine manufacturers to be able to produce more doses of vaccine with less antigen. Our team was excited to recently deliver machines for use in producing advanced supplies of one of the leading vaccines in testing today. We are also working actively with other vaccine manufacturers as the world prepares for an unprecedented race for production and distribution of this critical piece of the puzzle for solving the COVID-19 crisis. I'm moving to slide eight. In health and science, Our products are being used to help and enable rapid, highly accurate testing for COVID-19. Our Thinx microfluidic cartridges are a key technology used to diagnose COVID-19 infection in the point of care molecular market, which allows testing to be done near the patient versus being sent to a laboratory. Our technology enables the miniaturization of complex laboratory workflows by integrating pumps, valves, sample, reagent management, and signal detection in order to provide a simple workflow for the operator of the instrument. This instrument operator only needs to add the patient's sample to the cartridge, insert it in the instrument, and then push a button to run the test. Our microfluidics capabilities allow for high volume production and consistent, repeatable results that are needed to combat COVID-19. In addition, IHNS has optical filters and several diagnostic instruments that are used for COVID-19 testing. We provide various fluid components designed and in vitro diagnostic instruments used for COVID-19. We have degassers, pumps, manifolds, and fluidic connections in these IVD instruments that typically analyze blood samples. We also have both optics and fluidics assemblies and next generation DNA sequencers being used to analyze COVID-19 to better understand the virus and track its spread. I'm proud of how our businesses have answered the call over the past two quarters and work closely with our customers to innovate and deliver critical solutions to the marketplace. All right, I'm moving to slide nine. We provided an update on the state of our primary end markets. We saw a sequential improvement in most of our end markets, with some of our more challenged markets including auto and dispensing recovering faster than we anticipated. In fluid metering, the broader industrial softness and the volatility in oil and gas has continued, though we did see a pickup in daily order rates in the month of September, which provides optimism as we close out the year and we head into 2021. Significant capital investment by our customers continues to be on hold, pending a broader market recovery and reduction in global economic uncertainty. Our water business has continued to show resiliency, impacted only by timing delays in some municipal projects. As we called out last quarter, agriculture has performed well as growing optimism and investment held up in the quarter. In health and science, SEMICON has continued to outpace our expectations and was strong sequentially in year-over-year. Our ceiling business recovered nicely in the quarter due to the resumption of activity in the auto market. The product innovations I discussed earlier helped generate positive momentum for us in multiple end markets, including industrial. On the other side, in analytical instrumentation and some aspects of IVD bio, we continued to see that as medical industry has focused on COVID-19, other investments in lab equipment were delayed and we've not yet seen the activity materially pick up. Moving to fire safety and diversified. We saw a sequential improvement in most of our markets. Recovery in auto and retail were big stories, driving a rebound in our bandit and dispensing businesses. Fire and rescue continue to see strong performance, but we have been impacted by production delays at OEMs, pushing projects out and extending lead times for municipal deliveries. Backlog in these businesses continues to be strong, and we're working closely with our customers to monitor delivery schedules and assess the impact of COVID-19 on future year municipal budgets. Previously funded projects continue to go, and demand for our new products in these businesses has been strong. We are overall optimistic about the market recovery we've seen in the third quarter and continue to believe that the diversified nature of our businesses has helped mitigate the impact of the global economic decline. Our dedication to our customers and ability to respond and innovate quickly has continued to generate momentum for us to combat market declines. As we head into the fourth quarter, we expect to see a pickup in order rates, particularly in our day rate businesses, as an indicator of further recovery. Okay, I'm moving to slide 10. I want to provide some additional context to the organic order trends we've seen over the past two quarters. We saw a broad rebound in order rates in the third quarter, recovering from organic declines in as much as 23% in the second quarter, to organic growth in the month of September. All of our segments participated in this trend. FMT organic orders improved each month driven by strength in agriculture and stabilization in industrial, as well as a slight pickup in energy. was driven by recovery in the auto market and targeted new product initiatives, as well as the positive momentum in Semicon and Pharma that I mentioned earlier. Finally, diversified organic orders saw dramatic improvements at bandit and dispensing as auto and aerospace businesses opened back up and capital or spending returned in the paint markets. On top of the year-over-year improvements, we also experienced sequential increases with FMT up 12%, HST up 6%, and FSD up 11% versus the second quarter. With that, I'd like to turn it over to Bill to discuss our financial results for the quarter.