藝達思 (IEX) 2004 Q2 法說會逐字稿

Hello, and welcome to the IDEX teleconference. Following today’s presentation, there will be a formal question and answer session. Until that time, all lines will remain in a listen-only fashion. Today’s conference is being recorded for instant replay purposes. If there are any objections, you may disconnect at this time. I would now like to introduce today’s conference host, Miss Susan Fisher.

Thank you. Good afternoon and thank you to all of you for joining us for IDEX’s second quarter and first half 2004 earnings conference call. Earlier today our company issued a press release outlining our financial and operating performance for the three and six-month periods ended June 30. We also issued a separate release today announcing the appointment of Larry Kingsley as Chief Operating Officer for the company. Copies of both releases can be accessed on our company website at www.IDEXCorp.com.

Joining me on today’s call are Dennis Williams, Chairman, President and CEO and Dom Romeo, VP and Chief Financial Officer.

The format for this call will include management’s review of the quarter and first half of 2004. We’ll then open the call for your questions. If you need for any reason to access a replay of this call, it will be available beginning roughly two hours after the call concludes through August 5 at 800-839-3139. The pass code for the replay is IDEX.

Before we begin, I would remind you that this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today’s press release and in our company’s filings with the Securities and Exchange Commission.

With that, I’ll turn this call over to Dennis Williams.

Thanks, Susan. I’d like to welcome everyone to our conference call. Here’s the agenda I’ll follow today: second quarter and first half results, some comments on the three groups, progress report on initiatives, operational excellence, global sourcing, an update on China, including the acquisition of Ding Lee (sp), the leading manufacturer of rescue tools in China, comments on our recent acquisitions, Systec and Scivex, and then some brief comments on outlook.

Before moving into the quarterly results, I’d like to call to your attention today’s announcement on the appointment of Larry Kingsley to the newly created position of Chief Operating Officer. We are extremely pleased to have Larry join IDEX. IDEX has changed significantly over the last four years. We’re larger and more complex; we’re more global; we’re driving rapid process improvement and developing new best practices every month that can be leveraged across the company. Innovation is the key focus as we expand R&D spending and drive organic growth to a higher level. Larry brings terrific experience and leadership in all of these areas. As you’ve seen in the press release issued today, he was most recently Group Executive for the Industrial Controls Group at Danaher Corporation.

Our operational excellence initiatives and other key business processes are very similar to the key elements of the Danaher Business system. Consequently, the changes we have been driving will be enhanced and accelerated through Larry’s leadership. Larry brings great global perspective, having run global businesses, plus having lived and worked outside the U.S. He comes from a performance-driven culture where entrepreneurial leadership, innovation and execution are the norm. In short, the Board and I feel Larry will be a great fit at IDEX. Many of you will have a chance to meet Larry in the coming months and I’m sure you'll be impressed by his skills, his leadership and his presence. He’s a true leader and a real gentleman.

Now, turning to the company’s second quarter results. Orders and sales increased nicely year-over-year and we delivered our tenth consecutive quarter of year-over-year gross margin expansion. We also set an all-time record for net income. Orders were 13 percent higher than a year ago, with base business orders up 5 percent, while sales set a new record at 233.6 million. We are encouraged by the seventh consecutive quarter of year-over-year organic growth.

We experienced a broad-based improvement in demand, both domestically and globally; 13 of the 15 units, which now include Scivex, reported year-over-year sales increases. The base revenue growth we experienced in pump products and engineered products more than offset the decline we experienced in dispensing equipment sales in Europe, versus the record quarter that they delivered one year ago. We’re especially pleased to note a 9 percent day-sales increase in pump products.

In the second quarter, gross margins climbed above the 40 percent mark to 40.2 percent. It’s the highest level in five years. Clearly, we are reaping the benefits of both volume leverage and our focused operational excellence initiatives.

As we go through the presentation, I’ll provide some details on the achievement in the second quarter. Looking first at orders in a little more detail, orders of nearly 231 million were up 13 percent year-over-year excluding acquisitions. In currency, orders were up over 5 percent. It may also be helpful to look at the monthly order rates. In April, we had orders of 77 million; May was 70 million; and June was 84 million.

Order rates in this business tend to be somewhat lumpy, but we experienced no indication of a downward trend through the quarter. Order rates during the quarter improved in pumps and engineered products, and were notably strong across our industrial pump units. This marks the third consecutive quarter in which we’ve experienced year-over-year order growth within pumps. Order rates at Hale, our fire and rescue business, also continue to show strength worldwide.

Turning to sales, sales of nearly 234 million were up 13 percent year-over-year. excluding and acquisitions, sales were up 5 percent. This has now been seven consecutive quarters of organic growth. Year-over-year, the base business in pump products grew 9 percent; engineered products grew 4 percent; and days-sales in dispensing equipment were down 5 percent versus a record quarter in 2003. This decline is primarily due to lower production rates of the dispenser for Axo-Novell (sp).

Looking at the foreign sales content, excluding foreign exchange and acquisitions, foreign sales were 45 percent of total sales versus the record 48 percent last year. The geographic mix changed somewhat, as U.S. sales grew 2 percent and Europe declined by the same amount. In the second quarter of 2004, Europe represented 28 percent of sales; Asia was 9 percent of sales; and the Americas, excluding the U.S., were 7 percent.

Looking next at margins, for the second quarter of 2004, gross margins were 40.2 percent, up 60 basis points year-over-year. This is our highest gross margin since the second quarter of 1999 and the company’s tenth consecutive quarter of year-over-year gross margin increases. The gross margin expansion is a direct result of volume leverage, coupled with our global sourcing and operational excellence activities.

Total SG&A of 54 million was up 3 percent over last year due to acquisitions, but partially offset by savings due to our ongoing cost control efforts. In the second quarter, SG&A as a percentage of sales, was down 210 basis points versus the year-ago period.

Turning to operations or operating margins, the operating margin percentage was up 270 basis points year-over-year. The 17 percent operating margin is the highest operating margin we have achieved since the third quarter of 2000. In addition, EBITDA for the quarter exceeded 20 percent.

Looking at net income and EPS, that income increased 35 percent on a year-over-year basis. It is an all-time high for the company. The second quarter and the first half, we’re seeing terrific volume leverage on our cost structure, with increased volume profit flow-through for every dollar of increased volume is about 40 percent. In fact, it was 41 percent in the first quarter and 39 in the second, so the business is clearly executing at a high level.

The second quarter EPS of 44 cents, we’re up 10 cents or 29 percent year-over-year. Free cash flow during the quarter was strong at 28.3 million, up 11 percent year-over-year. This free cash flow equates to about 1.2 times net income. Total working capital was reduced nearly 100 basis points to about 13 percent of sales versus about 14 percent last year. Due to the Systec and Scivex acquisitions, debt to total capitalization rose to 31 percent at quarter end from 29 percent a year ago and 25 percent in the first quarter.

So the shorthand comparison for the second quarter of ‘04 versus the second quarter of ‘03 is orders are up 13 percent, sales up 13, net income up 35 percent and earnings per share up 10 cents.

During the first half, excluding acquisitions and foreign exchange, we saw a 6 percent increase in base business orders and a 4 percent increase in base business sales. Domestic sales were up 7 percent, while international sales were down 2 percent. Year-to-date, free cash flow remains strong at 42.4 million, just over 1 times net income, and was up 10 percent versus the first six months of last year.

Adjusting for the first quarter pension contribution of nearly 7 million, year-to-date free cash flow was 122 percent of net income, so a very high quality of earnings. Year-to-date gross margins were 40.1 percent, up 130 basis points. Year-to-date SG&A as a percent of sales was 24.2 percent, down 140 basis points. Year-to-date operating margin was 15.9 percent, up 270 basis points.

So the shorthand version for the first half, orders up 14 percent, sales up 11, net income up 37 percent, EPS up 32 percent or 19 cents.

We’re very pleased with our second quarter and first half performance. We’ve seen evidence of the recovery across our businesses and the company continues to perform very well operationally. We’re delivering very solid results to the bottom line.

Now let’s look at the groups and we’ll start with pumps. Pumps represents 57 percent of sales and 51 percent of income. In the second quarter, orders of 132 million were up 18 percent and that’s comprised of 9 percent base growth, 7 percent from acquisition and 2 percent from currency.

Second quarter sales were also up 18 percent year-over-year, 9 percent base business growth, 1 percent currency and 8 percent due to acquisition.

It’s interesting to note that both the industrial pumps and the precision flow sectors grew at the same rate in orders and sales during the quarter. Operating income of 23.2 million, or 17.3 percent of sales, rose 310 basis points year-over-year due to volume leverage and our corporate initiatives.

For the first half comparison, pump orders were up 16 percent and that’s 9 percent base, 5 percent acquisition and 2 percent currency. Pump sales were up 14 percent, 7 percent base increase, 5 percent due to acquisitions and 2 percent from currency.

The operating margin for pumps was 16.4 percent versus 14.2 percent a year ago, an increase of 220 basis points. All of our pump units are driving hard in four areas: new products, improved distribution, keen OEM focus and globalization.

As in the past, I’ll give you a few new product examples. It’s just an example from a few of our businesses, but we continue to see the benefit of innovation. At Gast, production has ramped up on our home medical oxygen therapy product where we offered improvements to the OEM in power consumption, flow, sound and life of the product. We’ve also ramped up production on a controlled atmosphere product for shipboard containers where we delivered improvements again to the OEM in corrosion resistance quality and product life.

At Warren Rupp, the natural gas-driven diaphragm pumps are selling very, very well. Sales for the first six months are 25 percent ahead of last year’s total sales. This is the only CSA certified products for use in potentially explosive environments.

Viking recently introduced a new magnetic, high torque drive for higher pressure applications and pumps, and we’ve got that available for both metric and English versions, so we can sell it around the world.

Our Liquid Controls (inaudible) business continues to enjoy great success with their bundled systems of meters, pumps and registers for the vehicle OEM.

Two new products have recently been introduced, a refined petroleum pump and a high pressure LPG pump. Both of these open up two new market segments for the bundled system.

At Pulsafeeder, the hypo-pump that I’ve talked about before continues to sell quite well. We’re continuing to run 30 percent ahead of our plan. Classic Engineering, a recent acquisition, has signed an agreement with another new chemical company in which Classic will provide all of the complete systems for that chemical company. So a great win there for that recently acquired business.

All of our units are enhancing distribution. We’re constantly looking for new distributors in our main markets, both domestic and global, looking for new niche distribution. We’re providing better selling tools, broader sales coverage. Our industrial distributors continue to report higher quoting levels and project activity. We’ve added resources to gain OEM business and it’s truly paying off.

We’ve seen some great gains globally, especially in Asia. including acquisitions, our pump business increased 28 percent year-over-year in Asia.

In the second quarter, about 12 percent of sales from the pump group are from new products, new applications and new territories introduced since January, 2001.

Turning now to dispensing equipment, it represents 19 percent of sales and 23 percent of income. Starting first with the quarterly comparison, orders declined 4 percent year-over-year and that’s comprised of the 6 percent base decline and a 2 percent currency gain versus the record quarter that they experienced a year ago. Sales declined 3 percent year-over-year, a 5 percent base decline, 2 percent currency gain and again, versus a record quarter in 2003.

Due to the corporate initiatives, operating income within dispensing group, 15 percent year-over-year, and the second quarter operating margin reached 24.7 percent, up 390 basis points year-over-year.

First half comparison, dispensing orders for the first half were up 7 percent and that’s a positive 1 percent base gain and a 6 percent currency gain. Sales were up 1 percent, which is a 5 percent base decline and a 6 percent currency gain.

The operating margin for the first half of 2004 was 22 percent versus 17 percent a year ago. This 500 basis point improvement is due to our operational excellence activities, as well as volume improvement in our domestic units.

We’ll give you an update now on dispensing products, the new areas we’ve talked about in the past. First in personal care products, in hair colorants, starting next month, there will be a beta test in at least six retail drugstore chains in North America. This will be an assisted sale in the store. the proven Sempra (sp) coloring system from German will be used. All of the current 150 or so machines that we have in operation in Europe are in salons, so this will be the first test marketing for hair colorant in a retail store.

In cosmetics, the Reflect (sp) testing is going quite well. Reflect has three stores open today and we’ll add another 10 or so stores by year-end. And we’re working with a new shampoo-conditioner hair care company in the U.K. that is aggressively starting focus group testing in August using our equipment. We continue to have a number of prototype units being tested in several different personal care products and we remain pretty excited the market potential and we are encouraged by the test results to date.

In the area of paint, the all-in-one paint dispensing system continues to perform well. We’ll ship two to three units this quarter and we should see it ramp up to a 10 to 15 unit level in the fourth quarter, and it’s important to note that all of these units will have a full service contact, building on a nice and growing business we have here in the Americas on the service side.

Other companies are showing a lot of interest in this concept because of the shelf space savings and the efficiency that it brings to the retailer. The sample machine that I mentioned before, the test marketing is going quite well. Color blending is extremely accurate and the company doing the test marketing has seen a ramp up from the number of daily samples produced. The test currently is being conducted in four locations and that will soon be expanded to 15 or 16 stores.

On the service front, we were just awarded the service contract for all the dispensing equipment for the major paint supplier in Brazil. We’ll build a profitable service organization there, as we have in the U.S.

And another example of how this business is thinking about itself differently, we were recently approached by a major chemical company and asked whether we could accurately blend powders. They accepted the challenge and produced a prototype that very accurately and precisely blends powders. It’s not clear to us whether this new area will proceed and if it does, how large it will be, but it’s a great example of how this business is thinking differently.

For the second quarter about 29 percent of sales in the dispensing group are from new products and applications introduced since January of ’01.

Turning to our engineered products, 24 percent of sales and 26 percent of income, first the quarterly comparison. Orders improved 18 percent year-over-year. That’s 8 percent base, 7 percent from acquisitions and 3 percent from currency. We continue to see strength in both rescue tools and fire suppression, as well as in our custom banding business. Our sales are up year-over-year by 15 percent, 4 percent base, 8 percent acquisition, 3 percent currency. Operating income grew 24 percent year-over-year and operating margins during the quarter were 20 percent, up 140 basis points year-over-year.

For the first half comparison, orders were up 16 percent. that’s 7 percent base, 4 percent acquisition and 5 percent currency, versus the first six months of last year. Sales improved 15 percent, 5 percent base and 5 percent from acquisition and currency. Operating income grew 35 percent and the operating margin for the first half was 20.2 percent versus 17.1 percent a year ago. That’s a 310 basis point improvement.

In fire suppression, we continue to see really great global activity. Recent sales in Bangladesh, India, the Middle East, Poland, Spain and Italy. Our pumps, our modules and our kits continue to sell very well. We’ve shipped 76 year-to-date versus 62 in total last year and our current backlog is 63 units. Our stainless Max fire truck pumps are starting to be specified in vehicles and we expect to see orders starting to ramp up later this year, as we move from a quoting cycle into an order cycle.

Our Command Master vehicle display is in production for both inside the truck cab and also for the pump panel controls. We even had one fire department change its pump spec over to Hale because of the Command Master. So we believe that all of these new products and the modules are helping us gain share in this important market area.

In rescue tools, business remained strong in the U.S. due in part to the Fire Act grant money. The Mother of All Cutters continues to sell very well. We’ve introduced a second variant of it and our MiniMate Portable Power Packs are selling very well also, plus the battery operated tools. All of the new products are helping us gain share and there are a lot of additional new products in the pipeline.

The hydraulic (inaudible) equipment is selling well also, with large orders to Germany and India shipped in June. There’s also a very high level of activity in the U.S. where historically, the business did not participate.

At Detter (sp), we introduced what I would call a new jumping rescue cushion. That’s a rescue cushion that’s used to rescue people from burning buildings. When they introduced it, they anticipated selling 50 units in the first year. They’ve already received 40 orders in the first three months, so this product looks like it’s really hit the market well. Bandit continued to do well with their move into automotive OEMs. In engineered products, sales from new applications and new products introduced since January of ’01 were 23 percent of total sales.

Turning to the initiatives, over the past three years, this company has progressed from learning new tools to truly running the business in a different way. We continue to find more and more new best practices that we can leverage across the company. The proof of the success is measured in margins, in growth and in cash. The volumes increased in the last two quarters and we’ve seen great incremental flow-through, which is the real benefit of the hard work and the changes that have occurred over the last three years. we will continue to keep score on key initiatives, like Kaizen and Lean, Six Sigma and global sourcing, but the real measure of these is in gross margin.

For the first six months of this year, we generated 5.7 million of savings from Kaizen and Lean and Six Sigma and 6.6 million in global sourcing savings, and that represents a 26 percent savings versus prior source. We continue to train new belts and move our experienced belts into critical operating positions, where they can put their experience to work and drive change in the business.

Turning to our China initiative, we continue to ramp up our Suchow (sp) operations based on local market opportunities and our business unit needs. And we’re currently producing 13 different products from seven different business units in Suchow. An additional six products will be moved in the third quarter and eight more are scheduled for the fourth quarter. So we’re very pleased with the progress that we’ve made there.

We’re also very pleased to announce today the acquisition of Ding Lee, a leading manufacturer of rescue tools in China. The rescue tool market in China is small, but growing rapidly, and Ding Lee, which is located in Tianjen (sp) gives us on-the-ground manufacturing, product development and marketing capabilities that will be of considerable help in our effort to further penetrate the Asian rescue tool market. We plan to sell both locally manufactured and imported through Ding Lee. The company is also well positioned to be a component supplier to our North American and European rescue tool businesses. The addition of Ding Lee gives us a true global presence in rescue tools.

Now a few comments on Systec and Scivex. During the second quarter, we closed two transactions in the higher growth, analytical instrument and life science area, Systec and Scivex. Both fit very nicely with Rheodyne, Micropump, Ismatec and Trebor. Together this gives us $100-plus-million presence in these higher tech, higher growth rate markets.

Systec manufactures vacuum degassing products used in labs and analytical instruments. We’re already expanding the Systec business in the analytical market by leveraging the great presence of some of our other business units and we also see some interesting potential in new market areas. Systec’s technology allows them to accomplish degassing of liquids in smaller space, which is important in the analytical industry and in laboratories.

Scivex is a leading provider in fluidic components and systems for the analytical instrument, diagnostics, medical research and medical devices. A combination of Rheodyne, Scivex and Systec enables us to offer a complete system of pumps, valves, degassing and all the connected tubing and fittings. We also have a small position in disposable medical products in clinical diagnostics that offer interesting growth potential for the future. Scivex’s competencies are molding and extruding polymers and fabricating products from hard materials, such as sapphire and ceramics. We see a lot of exciting opportunities to grow this business in the medical and analytical instrument area, as well as in some industrial areas.

We’re very, very pleased that we were able to acquire these two very high quality businesses.

Turning to the outlook, we are encouraged by our base business sales increases and earnings growth in the second quarter. The economy is clearly improving. I’m confident we will deliver improved performance as the recovery builds momentum. However, as a short cycle business, our performance is dependent upon the incoming order rate for each month of the year. We enter every month with 50 to 60 percent of that month’s sales in backlog; consequently, we have limited visibility for the rest of 2004.

In summary, we saw improvements in the second quarter in nearly every business unit in sales and operating income. We continue to execute our strategy and are as confident as ever that we are working on the right things. We continue to benefit from more global focus and new product innovations in all of our business units. We believe our strategy is working well. Finally, we are encouraged by what we’ve seen in the last three quarters and we’re hopeful that this trend will continue. I’ll now open this up for questions.

Operator, we’re ready for questions.

Thank you. At this time, we’ll take questions. (Call instructions). Your first question comes from (audio gap) --

Hello?

-- of Wachovia.

I guess that’s me. I didn’t hear it all. It’s Wendy Caplan from Wachovia. Could you talk a little bit about the impact or the meaning, I guess, of the sequential decline in book-to-bill in the second quarter and you know, the fact that it’s up slightly only, below 1, and should we read anything into that, and I guess, it’s dispensing equipment. Can you help us understand a little bit more about what happened in orders in that segment?

Okay, sure. Let me take them one at a time. You know, the first quarter, we tend to get some OEM blanket orders that would to bias the first quarter to be a little higher number, so they might be six months or a one-year blanket. And as you know, the second quarter is the highest sales quarter, so I think we probably would tend to see some of those orders in the latter part of the first quarter. So there’s a couple of reasons why you might see a slight decline in the first and second quarter.

If you look at the dispensing side of the business, the decline was in total in Europe and if you look at the European performance from a year ago, it was an all-time record for the European businesses, the two businesses there, the one in Amsterdam and one in Milan. And you know, the business tends to be somewhat lumpy. I don’t read a lot into it, to be honest. I think for the first six months, the orders were actually up a percent there, so I guess I’m not too concerned about what I see there.

There’s a lot of things in the latter half of the year that I think are positive for that business. In the Americas side, we’ll see the benefit of the store openings, the majority of the store openings, at Home Depot and Lowe’s, plus we’ve got the All-in-One machine ramping up, which you know, has a sale price of in the mid-40s, so we’ll start to see that ramp up. There’s a lot of other new product in the pipeline, plus, you know, there’s still the wild card in the deck of what happens in the personal care side of whether that will take off or not. And as I've said before, I think it’s either a home run or it’s a zero. I’m not sure there’s much in between.

but we’re pretty encouraged by what we see so far, and I think the test marketing in the retail environment in the drugstore chain is going to be quite interesting because it’s the first move onto that side. Everything else that’s in use today, the 150 or so machines that are in use today, are in salons. This will still be an assisted sale, but it will be in a drugstore chain. So we’re quite interested in what that will turn into.

But the main part of your question, I guess if you look at the data for the first and second quarter from an order standpoint, tend to be in a sort of flat from one quarter to the next. One year, it may be up a little bit; the next year, it may be down a little bit, so I don’t read a great deal into it.

And I guess there was a comment in the press release that the backlog was over a month and usually you say four to six weeks. Is it particularly lower at the end of -- was it particularly lower at the end of June just because of it being a high sales quarter?

No, I don’t think so. You know, it tends to run at 1.1, 1.2 months and I think we’re still pretty much there, end of Q1, at the same level, but don’t read anything into that. We just, I guess, weren’t as precise as what we are sometimes.

And finally, is that test equipment coming to a drugstore near me or where it’ll be?

I can't tell you the exact locations, but if it’s coming to a store near you Wendy, I will let you know.

Our next question comes from Ned Armstrong of FBR.

Could you comment a little bit on the nature of the business you're seeing from the chemical end markets that you serve?

Yeah. we’ve seen -- the industrial pump side has done quite well in the last couple of quarters and a portion of that comes from the chemical side of the business. As a matter of fact, this morning I looked at the latest figures out of the government for capacity utilization, and for the last three months, chemical processing, as they report it anyway, has been flat, but it’s up 4-plus points from its low. So it seems to have come up and stabilized, at least from that report, and it’s a little hard for us to split out, you know, the exact percent of sales coming from distribution that might go to that end market.

but I can tell you that we’ve just received nearly $1 million order in Viking for a new chemical plant in China, which is, I think, more typical of what we’re seeing now, of projects going offshore and because of our global presence, we’re able to do reasonably well there, and I think, keep our market share quite nicely. So I think it’s moving offshore. It’s better than what it was. The data would indicate that utilization is higher. There is continuing new investment, most of it outside of the U.S. I think what goes on in the U.S. is more debottlenecking and trying to improve efficiencies, and the major projects are going into Asia by and large.

Okay. With regard to margins, I think in the past, you’ve commented that you’d like to get back up to 22.5 percent EBITDA, which were your peak margins?

Right.

I was wondering, with the advent of Lean and Six Sigma and global sourcing really kicking in, do you think that with the aid of those initiatives, that you can exceed the 22.5 percent, and if so, by what type of magnitude?

Well, if you look at the historic average for the company, it’s been 22 percent and in this quarter, we were 20.2, so we’re just over 20 percent, and we’ve commented in the past that we think we can certainly get back to that level as volumes return, especially in the pump side of the business and perhaps exceed it. So I think it’s going to depend on mix and a few other things, but I think there’s a good chance we could exceed the 22 percent historic EBITDA levels.

I mean, by the magnitude of your exceeding it, would it be -- is that a matter of 100 or 150 basis points or 300, 350 basis points?

You know, it’s really a volume question more than anything else because you can see from the kind of leverage we’re generating here on our cost structure that the volume comes -- we’ve been delivering 40 cents on the dollar pretax.

Okay.

It’s a volume question and I’d love to be able to give you a specific answer, but it’s really dependent upon the volume.

Our next question comes from Mike Schneider of Robert Baird.

First, maybe I guess I’d like to focus on pump margins. Along Ned’s line of thinking here about peak margins, back in 2000 when you had less precisions influence from some of the acquisitions, you did 18.6 percent margins. I’m wondering if the core industrial pump companies today are even near those peak margins they did back in 2000, or are they still quite a ways off?

We’ve not really commented on the breakdown of the margins of industrial versus the precision side of the business, and to be honest, I haven’t got that data here in front of me. So I can't answer the question.

But is it your sense that the industrial pump companies are still below the peak margins they posted in 2000?

I believe they are because the volume hasn’t fully returned yet.

Okay. And just again maybe some color about specific colors, are the industrial pump companies better or lower margin businesses than the precision companies as a group today?

I haven’t got that data in front of me either, but I would say that they're both very nice margin businesses.

Okay. And dispensing margins, I’m intrigued by the number you posted this quarter, obviously phenomenal at 24.7 percent dispensing margin. With the lower European mix, should I read into that that it’s just evidence how much more profitable the U.S. fluid management business is versus the European counterparts?

That would be a wrong conclusion.

Okay. So what explains the significant leap in margins year-over-year, sequentially, in all regards. You’ve actually got down revenue of $2 million, yet operating margins are up 400 basis points.

It’s really the power of the tool kit that we’ve brought to bear and I think it’s fair to say that the majority of the improvements have been in the European operations. So it’s really a question of Kaizen and Lean. If I showed you the way the product used to be assembled in the Netherlands, for example, versus how it’s assembled today and the way the product is designed that enables a more efficient production environment, I mean, it’s dramatically different. And as we’ve phased out the old design product and phased in the new, we’ve seen some nice efficiency gains. The tool kit works; global sourcing works. And net-net, we’ve been able to drive margins up there very nicely in that business.

I guess I’m a little skeptical though that something that must be benefiting mix or maybe the lack of shipments to this OEM that you did last year has benefited margins, because operating profits of $1.5 million when sales are down $1.5 million, it’s a pretty good incremental margin.

It is and it’s not because of the mix shift.

Okay.

The sales to Axo may be worth commenting on. They started in to their retrofit program driven by the EU mandate to go to a different collaring system and initially, they were buying more machines than what they did in the second quarter of this year, you know, comparatively. But we make decent margin on that equipment, so it’s really not -- you shouldn’t read anything into that volume decline, other than a significant portion of the decline was with that particular customer.

Okay. Well, then (inaudible) the question for the second half in dispensing. Should we assume 20-plus percent operating margins are sustainable, even on the lower volume that comes with seasonal weakness?

Well, it depends on how low the volume goes. I mean, it’s -- if the volume stayed flat, would we expect to see a continuation of good margins? The answer is yes.

But you won't for seasonal reasons, right?

Well, we don’t know. We don’t know what the volume is going to be in the second half because we’ve got some thing that work on the increasing side and some things that argue in the other direction. So we’re going to have to wait and see how it all comes out. We’ve got -- I mentioned, I think to Wendy, we’ve got Depot and Lowe’s stores. The new stores tend to be skewed to the latter half of the year. They were last year; they are this year. And there’s some other volume upside potentials that we see out there that may or may not happen, so we’re really going to have to wait and see what the volume is. But there’s no trick in the second quarter on margins in dispensing.

Okay.

If the volume is there, the margins will be there.

Then a final question just on acquisitions. You’ve done three deals now, continue to hear that there’s a record number of properties being shopped, primarily as private equity guys exit, and yet also continue to hear that multiples are probably at record levels as well. What’s your thought and how do you make these acquisitions work if you're paying high single digit EBITDA multiples for them?

Well, not every one will work and we’ve walked away from a few where the number simply didn’t work. The ones we have done, we think will work. We look at certainly, an accretive test. If you're (inaudible), it has to be accretive, but that’s not much of a hurdle these days, but it has to pass that and then it has to get back to our cost to capital in a relatively short period of time. So whether it’s, you know, two years or three years, you may find that it’s dilutive to ROIC below your cost of capital for the first year or two or maybe three. But I mean, you would certainly expect things to be back and really accretive after that and it’s a function of what you think you can do with the business from a growth standpoint and from other cost synergies.

When we look at these, we don’t delude ourselves with huge amounts of synergies. You can -- if you want to talk yourself into a deal, it’s easy to do that. You just kind of ramp up the synergies and do it on that basis. We don’t do that. We look at a very conservative business case and then put a stretch business case in front of the businesses and try to beat it.

Okay. And what do you use as your cost of capital?

It’s around 10 percent.

Our next question comes from Charlie Brady [Hibernia Southcoast Capital].

Could you just comment -- I just want to come back again to perhaps to what Mike’s question was on dispensing. Would you expect in Europe in third quarter and fourth quarter for the sales level to be up year-on-year because you don’t have the same sort of tough comparison you did in the second quarter?

Don’t know. Our visibility in that business is not much better than what it is in even our shortest cycle business, but I just don’t know. I can't answer the question because, you know, this gets back to why we don’t provide guidance --

Right.

-- I can't answer that question. I just don’t know.

All right. let me put it another way then. If the operating margin in the second quarter was up by around 400 basis points, would you expect similar year-over-year increase in operating margins? I mean, last year, obviously, those sales went down the second half as expected, but you still had increases (inaudible) based on operating margins, would you expect now that the operating margin has ramped up significant in the second quarter year-over-year, that you would still have that same sort of delta in the margin increase in the second half of this year?

Again, it’s going to depend on volume, but there will be an increment because the business is fundamentally better, so there will be some increment. There’s no question about it. It’s just a question of -- what’s the volume piece of it.

Okay. Can you comment on what July orders look like across the company?

No. we don’t -- if you look at the monthly numbers that I gave you just for the second quarter of -- what are they, 76 to 70 to 84, the numbers do bounce around somewhat, so you can't take any one month and draw a conclusion. The reason I wanted to at least offer up those numbers is to -- you know, there’s been a lot in the press about things are slowing down and we haven’t seen it. in the aggregate, we haven’t seen it and the numbers certainly support that it’s not slowing down, but we don’t comment on orders in any given month during a quarter. Its just part of what we do.

Can you comment in regard to service revenue? You made a few comments about you’ve gotten some service contracts. I don't know if I’m just reading it incorrectly, but it sort of sounds as though service might be becoming more of a focus than it had historically been. Is that (inaudible) and where do you see that directionally going?

It’s more of a focus in dispensing. Today in the Americas, we do service for a lot of our customers, so we have people in trucks that do emergency repairs and preventive maintenance and we do service contracts on the machines. And it’s a nice service -- excuse me -- a nice service business for us. One of the comments I made was that with these all-in-one machines, every one of those today, we’re selling with a service contract. Will it always be that way? I don't know. It’s going to depend on the end customer, but the current end customer wants a service contract with ever one, so that’s how leverage is the installed base of equipment that we have out there and will enhance its profitability over time.

The other comment I made on service, we’ve been after some service business in South America and we were recently awarded all of the maintenance work for the largest paint provider in Brazil. And that, we think, will be a very nice business for us and a continuing revenue stream in the future. So in that business, service, I think, will become a more important piece of it. If you believe that personal care products go ahead, their service will be an extraordinarily important play because none of the -- you know, none of the drugstores, none of the salons, none of the places where this equipment will go, have service capability. So I would imagine that every one of these machines will have a service element that goes along with it.

In addition, there’s another revenue stream on that side of the business that’s quite interesting and we’ve done this in a couple of different areas, where it’s almost getting into the razor blade business. In the personal care product units, there are like 28 flexible packs that have airtight click-in, click-out connectors, and we have the exclusive patent rights to that connector in several different end markets, including all the personal care area and in the hot tub market, where we’re using the same connector, and in paints and coatings where we’re using the same connector.

We’ve recently introduced this connector to the paint industry. It’s in the paint sample machine, for example, so the paint industry has now seen something that they find quite intriguing, and we have the exclusive rights to the patents for that connector. We control that interface and can control, therefore, perhaps even the bags and whether we want to fill the bags and distribute bags as a service business. I don't know, but we have the means now to control that interface and maybe consider that as a service business. So as a minimum, it’s a razor blade and it might even turn into a broader play, either in reagents for hot tubs or something on the hair colorant or personal care product side or in paints.

But certainly, I mean -- this is kind of a long answer, but I think it’s an important one. Service is, in my estimation, an important part of every business. We’re not going to see the same kind of service play in pumps because there, we do service through authorized service centers, so we provide parts, but we don’t do the work ourselves. But in some of the system level work, there is a bigger and bigger service opportunity, I think.

And my last question, I’ll get back in the queue. Back on the Ding Lee acquisition, can you give us a sense of the revenues in that business?

Yeah. these guys are the leading supplier in China, but the market in China is not big yet. It’s growing. You know, there are 1.5 million, plus or minus, but the important thing is that it gives us a true global presence in that business, in U.S., Germany and now China, and China isn’t just a machine shop. There’s design capability there and marketing capability, as well as manufacturing capability. So it really opens up a lot of interesting opportunities to leverage the Detter investment, for example, of taking pneumatic rescue product into Asia through China. So I think it’s a great move forward for that part of the business and we’re pretty excited about it.

And (inaudible) just into the Chinese market?

Mainly, yeah, that’s correct.

Our next question comes from Scott Graham of Bear Stearns.

I have three housekeeping-only questions, nothing forward-looking or value oriented, I promise.

I’m disappointed.

(Inaudible), what was pricing?

I’m sorry?

Pricing?

You know, we don’t capture it on a quarterly basis, but in virtually every business unit, Scott, we have raised prices or put surcharges in place to at least cover off the kinds of increases we’ve seen on the material side.

Okay. On your cash flow statement, if you could read me two numbers if you have them handy, the year-to-date investment in acquisitions and the year-to-date change in working capital.

The year-to-date investment in acquisitions is just north of 160 million and working capital, I’d have to add about -- it’s roughly flat year-to-date if you take out the impact of exchange, Scott. So from a cash flow perspective, we’re doing quite well on turns and DSO.

Inventory turns are up a little bit. If you look at -- if you take acquisitions out and look apples-and-apples, we’re probably up a half a turn year-over-year and we’re probably down a day or so in DSOs.

Right, 160 in year-to-date acquisitions. Is that right?

Yes.

Right.

So then my numbers show a 40 in the first quarter, suggesting a 120 in the second quarter, which would imply that Scivex did not come cheaply.

Oh, we made two acquisitions there that are both in higher growth end markets.

Right.

And, you know, if you look at the multiples for those kinds of properties, they probably range in the 12 to 15 to 18 kind of multiple trailing 12 months because of the growth rates. I can tell you we didn’t pay anywhere near that.

(Inaudible) point, okay.

So relative to what the market is, I would say we did quite well.

So you're saying below the low end of the range you just provided?

Yes.

And our next question comes from Jamie Cooke of CSFB.

My first question, back to Scott’s question on pricing, Dennis, when you look at the EBITDA margin of, you know, historic piece, I think you said it was around 22 percent. how much pricing do you think you need to achieve there or do you think you just get that due to the volume and the operational initiatives you’ve put in place? And then second, can you talk if you’d had any in the quarter, if you’ve had any issues with suppliers and has that impacted your manufacturing at all?

From a pricing standpoint, if you look at the history of the company, we probably averaged, I’m going to say between 1 and 2 percent a year net price increase over the years. two years ago, we were probably about flat. We were probably up a smidge last year, so historically, the company has always gone after price. It’s one of the benefits you have as a market leader, that if anyone is going to price, you're going to get price. So we tend to push pricing fairly hard. So I would say that price will always be a component of what we do here, simply by the very nature of the business, niche market, more engineered products. It’s what gives you some pricing power.

And I think price, in combination with volume and all the other things we’re doing from an operational standpoint, all those things are important, so I can't shred it out bit by bit and tell you I’m going to get this much here and that much there. You know, it’s just not that precise. So I would say pricing is an element of it and you know, might amount to a point or so in a year in today’s environment. And your second question was?

With the suppliers, are you having any issues?

Oh, suppliers, you know, we’ve seen price increases like other people have. Stainless is probably one of the biggest movers because of nickel pricing. Nickel is what tends to drive the stainless steel pricing. Bandit, their product is stainless steel, so we’ve seen more price there. We’ve had, you know, some tug of wars with the suppliers, but in the second quarter there was no production disruptions or anything, but we have put price increases and surcharges in that business to offset the price of raw materials.

What about availability though?

We haven’t had any production interruptions.

Okay. And then my second question, has there been any -- you talked a little bit -- you know, in terms of end markets, you talked a little bit about the chemical end market. Has there been any notable change in any of the end markets since last quarter, notable change in strength or weakness, I guess?

Not that I would point to. I think all the end markets seem to be more or less the same. You see, you know, in fire and rescue, in this last quarter, we saw a strength in different countries globally, but you would expect to see that because it’s kind of a project business. So you know, the U.K. is going through a consolidation, for example, where they used to have -- I don’t know if I have the numbers exactly right, but there were like 64 different fire company regions throughout the country. They consolidated it to eight. So that had an impact in that country.

But we saw for the first time ever a pretty sizeable order in Poland for a compressed air (inaudible) systems for vehicles there. So I would say the market is, you know, still about the same. It’s just that sales are happening in some different countries globally, but I wouldn’t -- I guess I wouldn’t point at any single market and say, you know, this one’s really changed dramatically. We’ve seen nice strength pretty well across the board.

Our next question comes from Walt Liptak of McDonald & Co.

The question I’ve got, I guess, is more of a clarification on the solution that you talked about for these acquisitions. Was that specifically -- you were saying that it might take two to three years before you start seeing accretion from these three deals?

Let me try to clarify that, Walt. We expect every acquisition to be accretive to earnings out of the box year one and they all are. The comment was relative to ROIC in year one and two perhaps, where the ROIC might be less than the rest of the company. So it would be somewhat diluted for the ROIC calculation for the corporation.

Okay, great.

Did that clarify it for you?

On an EPS basis then, have you talked about the accretion from the deals?

I’m sorry?

What kind of accretions should be expect from the three acquisitions?

Positive.

Can you quantify that?

We haven’t.

Okay. Corporate sense, it was down sequentially about $.5 million. What can we expect in the second half?

I think what we saw in the second quarter was some volume leverage on SG&A. SG&A is a continuing target for us. We have programs trying to reduce SG&A, especially the G&A portion. We have added some to the “S” as we’ve tried to ramp up the sales activity in some of our businesses. So you know, we saw 20 -- 24.2 percent in the first half and you know, if the volume stays relatively flat, you know, that percent is probably a reasonable percent in the second half. It’s a function of the volume. That’s going to be the main swinger (phonetic), not whether we get a half a million out of SG&A here or there. It’s more a volume question.

Okay. And then CapEx was a little bit lower. Is that a run rate for the rest of the year?

No. I’d still say the 24 or 26 typically the first half is a little lower, but we were about 4.4 in the second quarter, Walt.

Okay. And then just another couple of clarifying things. I think you mentioned that there was a paint contract that you got out of Brazil?

The service contract.

Oh, it’s just a service contract?

Right.

Does it matter? Should we try and get it -- can you quantify it for us?

Yeah. my guess is that that’ll be half a million or more per year, that kind of a number.

And then on the, you know, the Home Depot and Lowe’s installations in the second half of ‘04, can you quantify those?

You’d have to -- I haven’t got those numbers on the top of my head, but as I recall, the majority are in the third and fourth quarter. You’d really -- I suspect Depot and Lowe’s have got -- you know, got it delineated how many and when they're opening them. I haven’t got that data here in front of me, but as I recall, especially with Home Depot, it’s more skewed to the latter half of the year.

Our next question comes from Ned Armstrong from FBR.

My follow-up questions have been answered. Thank you.

Our next question comes from (audio gap) [John Franzreb, Sidoti & Co.].

Hi, this is IDEX. Who’s this?

This is John Franzreb (inaudible). how are you doing?

Hi, John, how are you?

I was wondering about the timing of the price increases. First the -- when you implemented them, was it able to offset all the raw material price increases that you had to absorb in the quarter? And if not, can we expect maybe a better gross margin in the second half facing the timing of the price increases?

You know, every business unit has implemented prices in a somewhat different fashion. You know, we didn’t as a corporation say that everyone will institute a price increase on a certain date. This is really up to the local business unit to make a determination of how much and when on what part of their business. So it’s really hard to answer the question of when were they effective and on what products, and what’s the mix that we would expect? The intense -- we track what we call PPV, or purchase price variation, very, very closely, so we try to keep an eye on what our material inflations have been to make sure that our pricing actions as a minimum offset those, and to the extent possible, we actually gain on it a little bit.

And so, the general answer I would give you is that we will offset material price increases along the way through the year as we see them and maybe gain a little bit on it on a year-over-year basis, but I would not expect, based on our history anyway, that we would be able to generate more than 1 point of price increase in any of our business units or in the aggregate.

And our next question comes from Charlie Brady of Hibernia Southcoast Capital.

Could you give us a breakdown geographically in the three business units on a revenue basis?

I don’t have that.

We haven’t got it here, sorry. Any numbers I gave you off the top of my head probably wouldn’t be all that accurate. We can do a follow-up on that, but I haven’t got the data here.

Okay, fair enough. And on the all-in-one, have you disclosed where those units are going to?

The company we’ve been working with is Microblend. We’ve disclosed that. They have been selling those units to independent, large independent paint suppliers and there’s certainly a lot of increase in some of the retailers because what this thing does is essentially free up shelf space, and it makes the dispensing of paint more efficient. And it also gives you the ability to mix other than in a discrete gallon liter increments, so if you wanted 2.5 gallons or 2.75 gallons in a 5-gallon tote, they can do it and send it accurately. But the retailers are interested in this because it frees up shelf space and shelf space, you know, has a real value to them if they’ve got other products they could put on those shelves to sell. And it eliminates all of the cans of the base tints that you find when you walk into any kind of a paint department in one of the major big boxes or into any of the retailers. It eliminates all of those.

So is it fair to say that Home Depot, Lowe’s, I guess particularly Home Depot, would be showing an interest in this? And the second part of this is, to what extent would a sale of an all-in-one unit, say a Home Depot, have on the other products’ part of cannibalization?

Well, let me start with the second one first. If we cannibalize the sale of another machine, we cannibalize it with a machine that sells for in the mid-40s versus one that might sell for 10 to 15. so this kind of cannibalization, I could live with for a long time.

Got you.

You know, the second part of the answer I would give you is that it has the potential to drive demand earlier than what a normal replacement cycle might be. You know, if a Lowe’s or a Home Depot were to decide, boy, this is the right thing to do, then that’s a change out of equipment that, you know, might have another three, four, five, six, eight years of life on it. So generally, I would say it’s -- from a cannibalization standpoint, it’s a positive story, rather than a negative one, and it’s really a question of the value that the retailer would put on the shelf space and their ability to negotiate, you know, a favorable deal with their paint supplier. You know, every one of these big boxes has independent paint contracts, but they go and secure their supply of paint independent of the equipment. And then we make sure that the equipment is compatible with the pigment system.

So you know, it’s an interesting new idea that has gained a lot of interest. The other thing we’ve found, there’s some compounding benefits on the side that we had all sorts of wonderful scientific explanations for. It turns out that the batch or the can-to-can tint quality, repeatability, is better and so we had all sorts of theories about aging of paints and all sorts of fancy things. And it’s no more complex than the fact that if you go down to a Depot today and open up a few cans on the shelf, you're going to probably find a plus or minus 5 percent variation in volume of base paint, just because they don’t fill the cans that accurately.

Right.

That makes the tinting can-to-can better using this different technique, so it’s a lot of interesting benefits. Microblend is quite pleased with it and their users are quite pleased with it, and where it goes from here, we’re going to have to wait and see. But to the extent there is cannibalization, I think I could live with it.

Our next question comes from Cindy (sic) [Wendy] Caplan of Wachovia.

Thank you. Actually, it’s Wendy. Your hire of Larry Kingsley, and I’m not sure if you can or will answer this, but is it -- was it based on your need for a Chief Operating Officer or was it more a way to establish a succession plan?

Wendy, it’s really both. You know, as I mentioned in the comments, the business in the last four years, has gotten a lot more complex. There’s a lot more good ideas that we’re finding every month that we’d like to leverage faster across the company, that it just -- it really cries out for more talent in the company to drive some of the improvements that we see. The opportunities that we’re turning over in terms of things we could spend R&D dollars on is increasing pretty dramatically, as the businesses are thinking differently. So we really needed more management capability in the company and that was the driving force. It also has a wonderful benefit of bringing someone in that can fit in in succession planning.

Should we anticipate other operating changes in the company, whether it be management or strategy?

Well, I think the strategy that we’ve been following really hasn’t changed in the last four years. you know, we’ve been driving operational excellence to generate the ability to increase investment in R&D and you know, we’re at 2 -- between 2 and 2.5 percent as a percent of sales for R&D and we want to take that up further. So that strategy remains in place. I think one of the great attractions that I had when we first started talking with Larry is the fact that what Danaher does, the so-called DBS, is nearly identical with what we do. So it’s kind of seamless. We don’t -- you know, he’s not coming in with a different view of how a company ought to be run. He’s coming in with -- this kind of looks like, feels like, what I’ve been doing and that’s great.

So I don’t see any change in what I would call the tactics or the overall strategy of what we’re trying to do in the company, but I see it as an accelerator. I would expect that we could move further faster with the things we have underway. you know, under the leadership that he’ll bring, we should be able to accelerate, and that’s my hope.

(Call instructions). And at this time, I’m showing no further questions or comments.

Okay. Well, great. You know, I’m really appreciative of your attendance here. We think we had a great quarter. We think we’ve had a great first half and if the economy stays strong, we think we’ll have a great second half as well. I appreciate your attendance and look forward to talking with you next quarter. Thanks very much.

Thank you for participating in today’s teleconference and have a good day. You may disconnect at this time.

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