Earnings Call: Q3 2019

Oct 30, 2019

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Yates, Vice President and Chief Accounting Officer. Thank you, Mr. Yates. You may begin. Thank you, Doug. 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 Q3 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ending September 30, 2019, and later today, we will file our 10 Q. 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 is as follows. We will begin with Andy providing an overview of our operating performance in the quarter. Bill will then discuss our Q3 financial results and walk you through the operating performance within each of our segments. And finally, Andy will wrap up with an outlook for the Q4 and full year 2019. Following our prepared remarks, we'll open the call for your questions. If you should need to exit the call for any reason, you may access the complete replay beginning approximately 2 hours after the call concludes by dialing the toll free number 877-660-6853 and entering conference ID 13,684,164 or you may simply log on to our company's homepage for the web cast 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's filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our Chairman and CEO, Andy Silvernail. Thanks, Mike. Good morning, everybody. I appreciate you joining us to discuss our 2019 Q3 operating results. In a challenging macro environment, I'm extremely proud of my team. As you know, I've had concerns about the overall demand volatility and the potential for further erosion. We have a short cycle business. We go into any given quarter with only about 50% of the quarter booked. We were prepared, we got ahead of the challenges, and we're executing. In the quarter, our team delivered outstanding margin expansion, hitting all time highs for gross margin and operating margin. The healthy margin expansion helped us deliver another record quarter of adjusted EPS, and we reduced working capital to drive another record quarter of free cash flow. The results were achieved in a decelerating commercial environment. Organic sales were flat in the quarter. The global demand for industrial products definitely weakened in the 3rd quarter, with manufacturing activity contracting for the first time since 20 16, and we're certainly feeling it. Lingering trade tensions and uncertain trade policy have weighed on global growth with customers and business leaders hesitant to spend. This has led to a slowdown in most geographies. With that said, we remain confident in our ability to thrive in this environment. We're executing the playbook we've spoken about to you all year. We're being prudent about cost, and we're focusing on productivity, while continuing to invest aggressively our exceptional long term growth prospects. We've built IDEXX to perform throughout the cycle and we're doing the things that make IDEXX different. We're investing in great teams who focus on the critical few priorities within our outstanding businesses, all of which is in service to our customers. This is what separates IDEXX from our competition and allows us to deliver for our customers, employees and shareholders regardless of the macro environment. We're fortunate that our durable, diversified business model produces exceptional free cash flow, and we have an outstanding balance sheet. These facts allow us to have abundant capital to both invest aggressively in organic growth and drive returns through capital deployment. Let me take a moment to talk about capital deployment before turning it over to Bill for some color on the financial results. The integration of Alcora is going extremely well and the teams are delivering on the key value drivers. And as we get inside the business, I'm even more excited about the possibilities that Valkora brings to our sailing platform. M and A continues to be a top focus for us, but remains a challenge in the current environment due to valuation. Our teams are hard at work on both the cultivation and evaluation of several deals. With nearly $2,000,000,000 of capacity based on existing cash, availability under our revolver and a very healthy balance sheet, we have the capacity to support the right opportunities, while remaining disciplined within our return framework. We will only move forward on a deal when the target fits the IDEX criteria. Along with the acquisition of Alcor, we returned $38,000,000 to shareholders via dividends in the quarter. With that, let me pause here, and Bill, I'll turn it to you for a discussion of financial results and the segment details. Great. Thanks, Andy. I'll start with our Q3 financial results on Slide 4. Q3 orders of $586,000,000 were down 5%, both overall and organically, driven by softness across all segments and tough comps versus last year. Q3 sales of $624,000,000 were flat overall and organically. We did see growth in FMT and HST, but it was offset by a decline in FSD that was primarily driven by project timing. We expanded gross margins in the quarter by 20 basis points to 45.2%. However, excluding the $3,000,000 fair value inventory step up charge related to the VELCORA acquisition, adjusted gross margin was at an all time high of 45.7%, up 70 basis points. This was primarily due to strong price capture and productivity initiatives, partially offset by continued investments in engineering related to new product development. Q3 operating margin was 22.7%, but adjusting for both the fair value inventory step up and restructuring expenses, adjusted operating margin was 25.2%, an all time quarterly high for IDEXX and up 120 basis points compared with the adjusted prior year period, mainly driven by our gross margin expansion and lower SG and A costs, which were driven by decreased variable compensation expenses and tighter cost controls across the business. Included in the restructuring charges was an approximate $10,000,000 impairment charge related to the wind down of a small business line within HST. Our Q3 adjusted effective tax rate was 19.1%, which was lower than the 20.3% in the prior year period, mainly due to changes in U. S. Treasury regulations as well as the mix of global pre tax income among our jurisdictions. The adjusted ETR of 19.1% was also 3.40 basis points lower than our previously guided ETR due to a higher excess tax benefit from greater than expected stock option exercises as well as a favorable impact from the 2018 income tax return to provision adjustment. This lower ETR provided 0 point 0 $6 of EPS favorability in our quarterly results compared to our previous guide back in July. Q3 adjusted net income was $117,000,000 resulting in a record adjusted EPS of $1.52 up $0.11 or 8% over prior year adjusted EPS. Finally, free cash flow was very strong at $146,000,000 It was up 28% over last year and 125% of adjusted net income. This was our highest free cash flow of all time. I'll now turn to the segment discussion. I'm on Slide 5, starting with Fluid and Metering. Q3 orders were down 1% overall and flat organically, mainly driven by softening demand in the industrial market and continued declines in agriculture. Q3 sales were up 1% overall and up 2% organically. Attributable to the growth in our pumps, valves and energy businesses due to strong performance around our targeted growth initiatives, but partially offset by the slowdown in the industrial short cycle book and turn activity during the quarter. The municipal water business remains solid with stable spending projected for the remainder of 2019. In regards to the agriculture market, the market dynamics remain unchanged due to continued tariff pressures and depressed commodity prices, which has put pressure on the banjo business all year. Preseason orders are flat compared to prior year period, and we are not forecasting any near term change to the U. S. Agriculture market performance. Finally, operating margin was outstanding at 32.2%, up 2 70 basis points over the adjusted prior year quarter, mainly due to a widening price cost spread driven by the team's ability to continually capture value for their products and deliver on their productivity initiatives. FMT really executed during the quarter. Let's move on to Health Science, turning to Slide 6. Q3 orders were down 4% overall and 6% organically, mainly driven by continued market pressure in semicon and automotive as well as the industrial slowdown impacting about onethree of the sales in HST that are industrially exposed. Orders were also impacted by timing as a few large life science blankets got pushed into the 4th quarter. From a sales perspective, Q3 sales were up 3% overall and 1% organically, driven by strength in the life science business as they continue to experience growth tied to new product development and collaboration with our key customers. At gas, we continue to see MPD project wins, but as discussed earlier, we started to see challenging market conditions in the Q3 due to weakened North American industrial distribution demand. For MPT, strong results in Q3 were driven by shipments of some long lead time projects, reversing the negative trend we experienced in the first half of the year. We're seeing positive momentum within key pharma markets and our commercial funnel continues to grow. Expectations are to deliver positive growth for the year. Finally, within ceiling, pressure across the semiconductor, industrial and auto markets continue. Although we are beginning to see signals of reaching the bottom of the semi decline, their orders and sales are still challenged. From a margin perspective, excluding the fair value inventory step up charge and restructuring expenses, operating margin increased 30 basis points to 23.8%. This was primarily due to the higher volume and price capture, partially offset by higher growth investments and amortization related to the VELCORA acquisition. I'm now moving to our final segment, diversified. I'm on Slide 7. Q3 orders were down 10% overall and 9 percent organically, mainly driven by pressure on the project side of the business as customers remain cautious around making large investments, as well as tough comps in dispensing and rescue to large project orders in the prior year period. Both dispensing and rescue orders were down over 20% in the quarter. Q3 revenues were down 5% overall and 3% organically, and I'll provide a little bit more color on that in a minute. Adjusted operating margin of 27.2 percent decreased 50 basis points in the quarter. This was mainly due to the reduced project volume. Sequentially, the segment was up 10 basis points versus the 2nd quarter. FSD's performance was mainly driven by the following. On the fire side, core OEM and municipal markets continue to perform well. We're experiencing steady growth across our product offerings as well as continuing momentum around our new SAM product launch. Turning to rescue. Sales declined mainly due to project delays associated with political coupled with a tough comp from the prior year period. U. S. Performance was slow due to a delay in FEMA spending, but expectations are that we'll see a rebound in the Q4. Banda's performance remains strong based on wins with our targeted growth initiatives. Even as we see general softness in the auto and energy markets and pressure within the industrial space, Banda continues to take share and grow in these areas. Finally, dispensing story remains similar to the first half of the year due to a tough comp against some large project wins in 2018 with no new projects occurring this year. As such, the business was down double digits compared to prior year, but we do expect to cycle back to growth in 2020. I'll now pass it back to Andy to provide an update on our 2019 guidance. Thanks, Bill. So let me wrap things up and provide some details here regarding 2019 for both the Q4 and the full year. I'm on the last slide, that's Slide 8. In Q4, we're projecting EPS to be in the range of $1.33 to $1.35 with flat organic revenue. Operating margin should be about 23.5%. We're estimating about a $0.01 top line headwind from FX based on the September 30 rates. This translates to about $0.01 on the bottom line EPS headwind. The Q4 effective tax rate should be about 22% and corporate costs in the 4th quarter will be around $18,000,000 If we look at the full year 2019, we're projecting full year EPS of $5.80 to $5.82 Full year organic revenue is projected to be about 2% with operating margins at approximately 24%. We should have about a 2% headwind from FX based on the September 30 rates. The effective tax rate for the year should be about 20.5%. CapEx is anticipated to be about $55,000,000 and free cash flow should be about 105% of net income. And finally, corporate costs will be about $73,000,000 for the year. As always, these earnings guidance expectations exclude anything from acquisitions or restructuring. With that, Doug, let me turn it over to you, and we'll open it up for Our first question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question. Hey, good morning everyone. Good morning Mike. So let's start with the underlying trajectory, what you're seeing right now. Lots of puts and takes in the order numbers, FMT flattish, which is typically more typically sensitive business. Other pieces had some project timing related things. So maybe you could just talk about what you're seeing as like the core underlying demand characteristics today, what that trajectory looks like to the Q4 and then maybe some puts and takes on how you're looking at growth for 2020? Sure. So Mike, first of all, good question. That's the biggest one that's on our minds. If you you do have to kind of separate out the puts and takes, and this is the way I'd do it. You've got some project timing issues, meaning last year we had an exceptionally strong Q3, if you look at rescue and dispensing. And those are some pretty good sized numbers. And then in 2,000 last year, we got some larger orders in our life science blanket orders that we typically get that we're going to get in the Q4. If you take those three things and you neutralize those three things, you look at the underlying run rate of the business, it's basically flat to down 1%, about 0.5% if you just kind of look at the underlying day rate business. And I think that's pretty consistent with what we've seen. And so as we get into the Q4, I think you'll see some other puts and takes around there, but that day rate business, what we've seen in early October or in October so far is basically kind of meeting our expectations of where we went into the quarter. And so I think we're kind of holding at this flattish to down 1% right now on the core order rate of the businesses. So I don't see a reason for that trajectory right now to change meaningfully as we go out. Now that being said, we have an easier comp in the Q4 versus what you saw last year. And then you got 2 pretty tough comps in the first and the second quarter of next year. So if you assume that you don't get a change in trajectory, I think that kind of flattish revenue growth in the Q4 feels about right. And then you'll face some tougher comps in the first and second quarter with that getting easier in the third and the fourth quarter of year. That's kind of how we're looking at it. Look, it's early to call 2020 just based on our short cycle nature of our business. What I would say, the first pass of that looks like a tougher first half, easier second half, balanced out with somewhere in a range of, I want to say, plus 2% to negative 2%. That's what that feels like right now. But again, really early on, we're in the process of tightening up our 2020 annual plans, but that's what the first pass kind of looks like, Mike. No, that makes a lot of sense. And then on the margin side, very strong execution this quarter. Walk through any puts and takes you think that might help us on a forward basis to figure out sustainability of this level? Were there anything on the incentive comp that's different? Any other kind of one off things that would move this around one way or another? No, yes. I think overall, obviously, with the revised results for full year, there's a decrease in some of the variable compensation stuff. I think fundamentally, obviously, FMT's margins were really strong. That's where we're going to see probably the most decline is if we are in this industrial softness here recently. And they'll delever probably more than the other business, so that will put more pressure. I think for the Q3, we guided around 23.5%, which is probably what you'd see going forward at a consistent revenue run rate. Thanks guys. Appreciate it. Our next question comes from the line of Deane Dray with RBC Capital Markets. Andy, Ed, I appreciate that you made the comment that you were signaling that there was slowing going on. In fact, you were among the 1st senior guys back at the EPG conference in May to say a slowing was happening. So as so no one should be blindsided by this, but as you orders inflect negatively here, what does and I know you're short cycle, but you talked about customers hesitating to spend. What's the committing willingness to commit capital, the order rates as they look in the Q4? Are we going to stay negative or is it worsening versus the way we started the Q3? I don't see right now, Deane, that it's worsening. But let me kind of back up and talk a little bit about the hesitancy. And like you said, and we talked about this publicly at EPG. As you look at this, the issue at hand is that there's just a real hesitancy based on the uncertainty in the marketplace, right? There's no there aren't kind of big demand bubbles, meaning negative issues that things are kind of imploding outside of what I've talked about in the past, these kind human made issues that are around the world. But what that's doing is it's reverberating back and people are just hesitant to spend, they're hesitant to hire. You are seeing more layoffs in the manufacturing sector than we've seen here in quite some time. And so I think this world of uncertainty unfortunately doesn't isn't likely to resolve itself anytime soon, right? So you've got the constant back and forth regarding trade tensions that are out there. The folks who seem to if anybody knows what's going on, the folks who spend a lot of time on this are very doubtful that any meaningful positive improvement happens except for maybe a standoff, right? So it just doesn't get worse. So you've got that. And then really as you get into the election cycle next year, these are not areas of our money into either hiring or into capital in really uncertain times. So my view is that it's going to be bumpy here for quite some time. Right. So that macro commentary is really helpful, but let's pivot now into your end markets. And if we just go back to the Q2, when we talked about where the softening was showing up, it was auto, it was semicon, it was ag for you guys, and that was like 10% of the portfolio. It really does sound like that's still the kind of ground 0 of where you're seeing the slowing. Has that spread to these any other verticals? I think that's the change in the Q3 and if you remember that was what I said I was concerned about was you've seen those 3 continue to struggle and then you've seen the industrial start to come down, right. So FMT, which is 2 thirds of our industrial exposure or half our industrial exposure, you can see, although it's still good relative to I think the rest of the world is experiencing, you're definitely seeing that and I expect that to continue here for a little while. I think that the puts and the takes, right. So I think that the negatives are general industrial slowing, and I think we're going to face those headwinds here at least through the Q2 of next year. It's hard to imagine that that's not the case. And then you've got the question of whether ag, semi are bottoming. If you look at kind of the auto side, you're probably bottoming in China auto, and then you probably if you look at the expectations of auto builds, those are down for next year. So maybe a little more pressure there. But I do think that the net net, those are still going to start up for a little while until we see some uptick in semi, which by the way, we have seen some things that look like a bottom in semi. And I think it's still a question mark here until with the trade tensions. And then in municipal and sorry, municipal and health and science, those are going to hold in. Yes, that's exactly what we'd expect. And look, you cannot control the slowing on the end markets, but you're obviously doing a great job on margins and cash flow. So congrats on that. Thank you. Thanks, Deane. I think the important thing there is controlling our own destiny. We've talked to all of you guys about the playbook we've looked at in a slowing environment. We're certainly working that. We know how to deal in those environments and make sure that we deliver for our customers, our people and certainly our shareholders. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question. Come on, Andy, control the end markets. What you got, Nick? Question on working capital. I mean, it looks like you guys managed inventory really well in the quarter in the face of probably some slower revenue that you were anticipating. Maybe you can talk about whether you need to reduce your inventory levels here in the face of this slower demand environment, whether you can generate some cash over and above what your excellent free cash flow conversion normally is here in this environment? Yes, I think Nathan, so first of all, this is something from a business model standpoint we've talked about a lot, that even in times where you're getting pressure on the top line of the business and pressure on margins, the balance sheet delevers really nicely. And so from a cash EPS perspective, that will hold up well. I expect we'll see more delevering in the 4th quarter, and then we'll kind of see where we are in terms of what we're planning for next year. But certainly in the Q4, I expect more delevering. Kind of plus 2 to minus 2 2020 outlook. Kind of plus 2 to minus 2 2020 outlook. Are there any meaningful cost action plans that you take here? Are there particular businesses where you're seeing worse demand, where you think you need to take some cost actions and maybe what those would be? Yes, you absolutely do. And to be clear, in this kind of environment and really for IDEXX in total, these kinds of things are never broad based, right? We are never we are not a company that does these kind of wacky 5% reductions across the board. The key to any kind of facing environment like this is number 1, you want to invest in the things that drive long term sustainable competitive advantage and value. And for us, that really comes down to 2 big things. The first are people. And we view people as being central to the business model. It's what scales in this company. And so we're going to continue to invest in the leadership development around the company and making sure that we're very focused on that. 2nd, it's really kind of innovation in our core markets. If you think about the eightytwenty and the segmentation work that we do around where are the profit pools, how you continue to make those growth bets going forward. And then what you do is you look kind of around that outside of those core strategic areas and you just have to be prudent, right? There are places that were already making targeted cost reductions. We're going to have to do some more of that if we see some weakening there. And that's just the right thing to do for the long term competitiveness of the company. 2020 is a pretty 2020 is a pretty tough comp in Q1, Q2 and then an easier comp in the back half weighing out to that kind of plus 2 to 2 to -two. Our next question comes from the line of Matt Summerville from D. Please proceed with your question. Thanks. A couple of questions. First, can you maybe give a little bit more geographic granularity in terms of incoming orders and organic performance in the quarter? Yes, Matt. Bill, you want to tackle it? Yes, sure. No, I think it was Europe has basically maintained its lower level that we've seen over the last couple of quarters. It was really more declines in North America, and we started to see that broader orders number down. We actually did outperform a bit in some of the emerging markets. But again, relative to the fundamental macro situations within in India and in China, our teams really delivered on their targeted growth initiatives and grew in the upper single digits in those areas. Yes. So the incremental softening added has really been around North America. Exactly. Got it. And then just back maybe to FMT margins, up 270 sequentially, up I think 170 year over year, up 170 sequentially. On a sequential basis, that's on lower revenue. So can you talk about, are you pushing more price through that business? Are your input costs coming down meaningfully? Maybe just kind of parse out how you're getting that margin and what the right way to think about FMT margins are kind of going forward at what you're calling kind of a more subdued general industrial environment for that business? Yes, I would say 30% is probably closer to what its normal run rate is. Those businesses, even on lower volume, are running lights out with the remaining of some projects that they had. And then the input costs have decreased. I think the teams as they look to where they're getting some pressure from tariffs, they've been able to come up with some supply chain solutions to reduce the impact of those. And the pricing that we put out last year in Q3 to offset some of those just levered better within the quarter. Got it. That's all for me. Thank you, guys. Thanks, Matt. Our next question comes from the line of Brett Linzey with Vertical Research Partners. Please proceed with your question. Hi, good morning guys. Good morning, Brett. Hey, just wanted to come back to price cost. It sounds like you got very good price traction in the quarter. You do start to lap a tough like unlike price in Q4 next year. But given the moderating commodities, does price start to flatten out as we get into 2020? Or do you still think you can achieve positive price in some of those businesses? Brent, we'll get positive price in 2020. I feel very confident in that. The nature of the business model, the nature of our competitive positioning, it will be lighter than certainly in 2019. There's no doubt about it. But I don't see any reason why we won't sustain that kind of 30 bps to 40 bps price cost leverage that we've gotten in the past. Bill, anything else you'd add to that? Yes. I think the spread as we come into the back half is higher than that. But next year, as we calibrate around our 2020 pricing actions, it will come down a bit. But to Andy's point, I think we'll still be significantly positive on the price cost differential. Okay, great. And then just shifting to the funding delays in RESQUE, it sounds like that gets resolved in Q4. What informs that, I guess? And then have you seen any type of funding delays broaden to other agencies as we enter this election cycle? Yes. So with Rescue in particular, there are kind of 2 things you saw. One is just around the world, we've seen this in the past. It's happened many, many times. You get either the sovereign governments who are buying product from us, as things get tight, they can pull back. And so we're seeing that relieve. Why? Because we're very close to our customers and we know when money is going to be relieved just generally. So we feel pretty good about that. And then you've got the FEMA issue that Bill referenced. For some reason, and we don't quite understand why FEMA money got tied up here in the Q3 and it feels like it's been released already. There's no reason to believe that that's not going to happen or hasn't happened already. Okay, got it. I'll pass it along. Thanks guys. Thanks. Our next question comes from the line of Andrew Buscaglia with Berenberg Capital Markets. Please proceed with your question. Hey, guys. Can you comment more, you said that you think semis was showing signs of bottoming and that's can you just remind us first of what how big is that as a percentage of your sales at this point and then what why you say that or what are you seeing specifically? Yes. So it's not a big chunk, isn't it? About 3%. 3% in total for the business. The biggest impact there is in our ceiling business, and then we have a small pump business that faces that also. And when I say bottoming or inflecting, there's no reason to believe that this thing is picking up dramatically, but we've gotten significant signals from a handful of the big players that they're projecting stronger demand. Now that is mixed with a couple of other things that they see some softening in there, but we're converting a lot of customers over time. And so it's a lot of that has been a share game on top of kind of what's happening to the market. So in other words, Andrew, we're getting direct signals from people on higher demand to get our supply chains ready. But to be clear, I would not use us as a bellwether for semiconductor market. We are not the right people to talk to about that. Got it. Okay. And then then I know people are kind of picking up this question a bit, but it's you grew your sales only about 2%, or you'll do about 2% this year. Yes. And you really you drove a really impressive incremental margin off of that. It's on the heels of strong incrementals in the prior year. So the question is how long can you keep this up? If you're only it sounds like you correct me if I'm wrong, you're implying about 2% plus or minus in 2020 for the top line. So it just seems unrealistic that expansion is likely. Yes, I think so there are a couple of things that really matter there. The first one is the overall top line, when you when we are I want to call 2% is kind of the tipping point, right? And 2%, you're covering your inflation, you can still get incremental margins, you get north of 2%, 3%, 4%, and you start to really drive those incremental margins in that 30% to 35% range. But 2% is about where you hit parity with just offsetting normal inflation that happens in the business. So overall, the kind of that volume number matters. 2nd, that price cost, what you get between price and cost, if we can keep that $30,000,000 to $40,000,000 that will play into that first part and certainly adds to any kind of expansion that you drive for here going out. So look, if we're sub-two percent growth rates, it's going to be harder to get any kind of expansion and we'd work to really hold the line is what we'd work to do. And if you get north of 2%, we'll absolutely get expansion just with the normal contribution and the price leverage that we get. Yes, okay. And I guess the flip side is you sound like it's unlikely margins will degrade much, if anything. So let's take the other scenario. So let's say we're down next year and we've talked about kind of how we thought about that and I'm going to bore you guys for a second. But our overall playbook is looking at what I'll call a vanilla recession, looks at kind of 5% down, that's one looks at kind of 5% down, that's $125,000,000 of top line coming down, that would be about $75,000,000 unabated that would hit the bottom line. Our goal would be to offset that by about $25,000,000 of cost reductions. And so you can do the math on how that works out. We're in that kind of environment, we're going to be super thoughtful. I mean, could you go further? Could you go deeper? Have we done that in the past? We have, But we won't do that. And as I've said to you all in the past, if that scenario plays out that I'm talking about, we are going to make sure that we keep reinvesting aggressively in the business. And so that $25,000,000 range is about what you can do and not have to make other very, very hard trade offs. And so we would make sure that we're super thoughtful. Again, we're investing in those critical priorities around our people and the really attractive businesses we have in terms of innovating in those profit pools. But that's how we were thinking about it in general. Okay. Yes, that's really helpful. Thank you. You bet. Our next question comes from the line of Joe Giordano with Cowen. Please proceed with your question. Hey, guys. Good morning. Good morning, Joe. Hey, and apologies in advance you might have covered this. I got disconnected for a little bit in the beginning of the Q and A here. But when I look at your CapEx, generally it scales up in the second half of the year. Clearly, you have some markets moving other ways and you're being cautious. But should we think about that level for the rest of the year and into next year? Yes. So we're going to be about $55,000,000 which is about $5,000,000 less that was not our intention. It's a matter of timing and the ability to actually get some stuff in within the 4th quarter. So that $55,000,000 $60,000,000 range, that's a healthy range with our business right now and I would expect that to be similar going into next year plus or minus. Okay. And then is your Q4 in HSD, know some of it has seemed timing related with the order decline there, but is that like a direct impact into the revenue number that you anticipate for 4Q there? I don't think it's a big, big impact. It's just that timing of that order, those things are blankets that are going to be in the future. I'm not I don't think that's a real impact to the Q4. Yes. I mean, OEMs when they place it, we've had some volatility between Q3, Q4 and Q1 that have created some noise in the comps there. Okay. And then if I could just clarify something, Andy, I think in your downside analysis that you just ran through on a 5% decline, did you say $75,000,000 would come off like unabated to the bottom line on $125,000,000 decline? Did I just do that? Yes. I'm just using the contribution. If you do nothing, right, and effectively it flows through at what we call material margin, right? So material contribution or value added, that's what it would be if you did nothing, right? Okay. 60% revenue like that. Just the contribution margins of the company. There are no other questions in the queue. I'd like to hand the call back to management for closing remarks. Well, thank you very much, Doug. I appreciate it. And thank you all for your time and attention here on our call. Again, in this kind of volatile environment that we've all been living in, I could not be more proud of the team in terms of how they have executed delivered really for our customers first and then for our people and also for you, our shareholders. So we're thrilled about that. We appreciate the support that we get from the investment community. And with that, we will say goodbye and talk to you here again in 90 days. Take care. 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.