藝達思 (IEX) 2006 Q2 法說會逐字稿

At this time I would like to welcome everyone to the IDEX Corporation second quarter earnings release conference call. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Ms. Susan Fisher, Director of Investor Relations.

Thanks, Whitney and good afternoon everyone. Thanks for joining us today for our discussion of IDEX's second quarter '06 financial results.

Earlier today we issued a press release outlining our company's financial and operating performance for the three and six-month periods ending June 30, '06. That press release along with presentation slides to be used during today's Web cast can be accessed on our company Web site at IDEXCorp.com. Joining me today from IDEX management are Larry Kingsley, Chairman and Chief Executive Officer, and Dom Romeo, Vice President and Chief Executive Officer.

The format for our call today is as follows: First Larry has some opening comments on the recent alignment of our business segments and other developments related to our business portfolio.

Next, Dom will walk you through our financial results for the quarter and year to date including the segment results. Larry will then provide an update on our progress and operational excellence as well as on our growth and innovation initiatives within our four segments.

Following our prepared remarks today we will then 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 two hours after our call concludes by dialing toll free number, (800)642-1687, and entering the conference I.D. which is 408-9519 or simply log on to our company home page 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 today's press release as well as in our company's filings with the SEC. With that I am now pleased to turn this call over to our CEO, Larry Kingsley. Larry?

Thank you, Susan. We are pleased with our performance for the quarter and year to date. Excellent total growth, solid organic growth, strong profit performance as well as just great cash generation. We've acquired significant growth potential and the integration of those businesses is going well.

Before I jump into our prepared remarks, though, I would like to set the tone for what we will reinforce today given what appear to be concerns regarding the general industrial markets. To give you a sense for how we currently see the market and our growth opportunity, the fundamentals in the settle we serve indicate continued market growth that's significantly better than GDP. We see our growth opportunity as better than market based on our ability to capture share and new application niches, as we have.

Simply stated we think the growth environment is actually very good. We track committed projects and programs. We track quote value, quote volume, quote value by industry segment, patterns by segment and capital commitment for various end use segments and sub segments. The internal indicators and the industry data for those segments we serve support a second half environment that is consistent with what we see on a year to date basis.

As you know, the IDEX performance model is organic growth in the mid to high single-digit range, organic operating margin flow through of 30% to 35%. We generate lots of free cash, and we target high organic growth uses for our capital. That's our definition of success and against that model we have performed and remain confident about our ability to perform. So with that said, in the quarter we announced the expansion to four operating segments.

The new segments are fluid meeting technologies which was a portion of the former pump group, health and science which was the other side of the pump group, fire and safety, which was formerly other engineered, and dispensing, under the same name.

There are multiple reasons for moving to the four segments but the primary reason is that the new segments and the segment names reflect our strategic thinking and our business development priorities. The creation of the new segments also represent a more logical representation of our current portfolio, health and science in particular we felt should be broken out as it represents 27% of our sales.

Actually I would say the most important message relative to all four of our segments for us to communicate today is that we continue to execute our niche market strategy, particularly as it pertains to the fluid metering and the health and science businesses.

As you know we have strong positions and have targeted expanded applications and customer positions in the industrial, what I'll call infrastructure segments, such as fossil fuels, alternative fuels, water and wastewater, as well as our focus on primary and secondary chemical processing. I am going to come back to that later in the call.

During the quarter we completed the acquisition of eastern plastics or EPI. EPI is a global leader in high precision integrative fluidics. The EPI products are used in a variety of health and science fluidic applications but most significantly in clinical diagnostic instrumentation. We will also apply EPIs specialty material engineering and production capability to our expanding medical device and implantable group. EPI is a great addition to the health and science platform and the EPI team led by Tom Brackett is well regarded in the industry.

It is very knowledgeable and they have been innovating within their niche for many years. So I will walk you through the businesses progress report here shortly but now I am going to turn it over to Dom who will review our financial performance. Dom?

Thanks, Larry and good afternoon everyone. As Larry mentioned we are executing here at a very, very nice level. Sales, net income and operating margins in our second quarter were all time highs. For those of you following along I am now on slide six. For the quarter, orders were 290.5 million. That was a 10% increase from the second quarter of '05. Organically order growth was 5% for the quarter. Now, importantly, within the quarter monthly orders were 88 million in April, 100 million in May and accelerate to 103 million in June.

I'll provide more color on the organic order rate when we review each segment but as you recall we benefited in Q1 from some blanket OEM orders. In Q1 our organic order rate growth was 16%. So we don't view this 5% organic growth in the second quarter as indicative. In fact, the opposite is true. Our second quarter backlog is extremely strong, and July orders are in line with our views. Sales were up 12%, sales increased 7% on an organic basis, and Larry will discuss some of the market trends and how we continue to be very well-positioned, later in our presentation. So clearly from a sales and orders perspective we are executing at a high level in terms of both innovation and growth and we are very optimistic about the second half.

Turning next to operating margin we are also clearly initiating this growth and executing our operating initiatives. For the second quarter the operating margin was 19%. That's up 100 basis points versus last year and the Q2 operating margin when you exclude the impact of stock option expensing was 19.7%. Gross margin of 41.4% was equal to that of the second quarter of last year and the favorable impact from our operating initiatives was offset by both acquisitions and mix.

Total SG&A expense as a percent of sales decreased from the second quarter of '05 by 100 basis points. In dollar terms total SG&A increased due to volume acquisitions and impact of stock option expensing. So again even after stock option expense we are seeing still seeing improvement in SG&A as a percent of sales. As you all know we continue to closely monitor our flow through on incremental organic sales. Flow through was 37% inclusive of stock option expense. So from an operating perspective solid performance and operating leverage are at an all time high in terms of profitability.

Taking a look at net income and EPS on slide nine, income from operations was 34.4 million. That was an all time high and we increased income by 20% from last year. Diluted EPS improved by $0.10 to $0.64 per share, and, again, the $0.64 excludes our divestiture of Lubriquip which has been treated as discontinued operation. They've had about $0.01 of EPS in the second quarter: Again from an EPS perspective very strong performance and year to date net income is up 24%. Moving now to the balance sheet as you all know we generated terrific cash flow and have a strong balance sheet. We continue to apply strong discipline towards our acquisition activities based on both their strategic and financial merits.

We will also continue to have a discipline towards bringing new companies into our portfolio. The pipeline is solid and in the quarter acquisitions contributed 5% to our growth rate. We view both EPI and Junair as excellent accretive acquisitions to our company. Moving to inventory, from year end we've increased inventories by 14.6 million on a reported basis. However, 12.3 million of that is due to acquisitions. So comparable inventory is up slightly at 2% but with higher volume. We did achieve a slight improvement in turns of inventory. On accounts receivable, again, if we adjust for acquisitions the increase from year end essentially follows sales.

Our DSO remains consistent in the mid 40s. Capex was 54 million for the quarter. We still feel our full year range is somewhere between 25 million and 28 million. And our balance sheet remains extremely strong, debt to cap is 18%. In the quarter we generated $39 million of free cash flow. That represented a 30% increase from last year in its conversion to net income of 113%. So in summary our cash flow performance was just outstanding.

Moving now to the segments -- and I'm now on slide ten -- was fluid and metering technologies. Here we continue to experience solid growth in just outstanding margin expansion. And again specifically in this segment as relates to orders, the 5% improvement in the second quarter was as I mentioned earlier impacted by blanket orders we received in the first quarter. As you recall from our first quarter call, orders increased 20% for the segment we previously called pumps and organic sales growth in the quarter was 14%. So we built backlog from Q1 to Q2.

So when we impact blanket orders, when we review in a detailed level our backlog and specific product offerings, we believe our growth in the second half here continues to be a positive. Again, organic growth here was 9% for the quarter and year to date 10% and as you can see from the margin, fluid and metering were flowing very well especially in terms of expansion at 180 basis points. And most importantly we still continue to have an opportunity here to leverage our existing cost structure and at the same time we are adding incremental high margin new business opportunities.

I'm now on slide 11, our newest segment, health and science technologies. Again it's important here to note this segment now represents 27% of the Company's revenue base. For the first quarter and first half this segment had a 14% and 17% organic order and growth rates. As Larry will detail these businesses participate in what we believe to be a variety of high growth markets and obviously we are seeing that in our first half growth rates. In addition, with the acquisitions of EPI and Junair, we've increased our revenue base within this segment by over 20%. Operating income of 14.5 million increased 44% and is just under 18 percent of sales, up 90 basis points from last year.

Turning now to dispensing; organic orders increased 4% while sales were down 4%. We again experienced solid domestic growth due to the combination of increased market share and new product applications within our core paints and coatings markets. This was offset by European market conditions. The overall operating margin, though, as you see this nw longer includes Lubriquip. It's 23.3% and while down 150 basis points due to volume and mix you can see still a very profitable, profitable segment.

Turning next to fire and safety and diversified products on slide thirteen, orders increased by 6% and sales increased by 5%. Orders were up 10% and sales were up 9% on a year to date basis. So year to date this segment is performing with our range but the organic growth in the second quarter is lower than that of the first quarter. There is a project nature to a portion of our business here. Specifically within rescue tools, and that can be impacted by timing of funding and also some specific projects that we are looking at. Larry will talk more about funding in a few moments but to sum it up the short answer here is we see the funding element as a tail wind for this segment in the second half of the year.

The Q2 operating margin is another great story. It increased 16% to over 25%, up 240 basis points over last year. So when we sum it up all up financially for the strong very strong performance in the second quarter and we frankly continue to build a lot of momentum to what we see will be just a terrific 2006. With that I will turn it back to Larry.

Thanks, Dom. Great. We are now on slide 14. While we've reorganized our segment structure, and continue to evolve our strategy we have not changed our core operating philosophy nor the discipline that delivers results, as you can see. However, our business profile continues to evolve based on our recognition of those core strengths that we have; that is, the ability to serve engineered applications specific niches and that coupled with further penetration into higher growth segments. Operational excellence and Mixed Model Lean in particular are enabling elements that allow to us flexibly respond to drive growth.

The segments and the niche applications we serve force us to operate in a unique lean production environment but the reverse is also true, and increasingly significant. Mixed Model Lean actually enables us to quickly enter some of these applications that allows to us customize products and remain very nimble as a competitive supplier. The IDEX business is all get operational excellence as a mindset and mix model is a growing critical element both to our operating strategy and to our niche market capability. And operational excellence as you know is also the means for how we expand margins and generate strong cash flow that weary invest in the form of new organic opportunities.

I'm now over to slide 15. Mixed Model Lean is core to how we achieve sustainable results. We track performance relative to labor and material savings as well as several other P&L and balance sheet metrics. We consistently achieved our annual targets with traceable part savings in the $20 million plus or minus range and '06 is no different. We are realizing those sustainable savings. I'm very pleased with the team's operating performance during the quarter particularly in the face of both material and labor inflation.

Mixed Model Lean allows us to produce multiple product types including new products utilizing shared resources so in most cases we are capable of quickly ramping to maximize new business opportunities. We are constantly asked in investor meetings how far along are we in the mix model deployment and the conversation is circular, we are 25% applied but will not be done. Mixed model will be part of our culture and a critical enabler to our strategy for a very long time to come. It will enable continued margin expansion and just great cash flow.

To give you a sense for our productivity performance, direct labor for the Company is essentially flat to where it was two years ago despite sales growth of about 20%. We continue to create capacity and currently have available capacity for well into the foreseeable future. Our most successful mixed model value streams are seeing as much as 300 to 400 basis points of project margin improvement and that's from a very profitable basis, obviously. Liquid controls is a good example. We are now just beginning to see improved sustained performance including reduced assembly times at LC from three weeks to three to five days. LC, to give you an idea, will improved their whip [ph] and inventory turns by 2.5 turns this year. Again while customer responsiveness and operating metrics are critical and our performance is excellent, relative to future performance it's also about enabling strategic growth, highly flexible production, shared resources, the ability to quickly take advantage of emerging opportunities and to efficiently convert them.

So I am going to turn our attention now to the segments and I am on slide 16. Per some of the current conversation regarding the markets, if you were to group the industrial fluid and metering sales, that's the former industrial side of the pump group again, and to represent the infrastructure associated revenue content and that would include the segments of water, wastewater, all the energy applications and the chemical processing segments, those segments represent approximately 2/3 of the fluid and metering technologies business today. I think it's important to draw the distinction because we anticipate ongoing very solid industry performance based on where we're positioned in fluid and metering. Actually let me run through that again just to be very clear. When you segment our fluid and metering sales by infrastructure versus non infrastructure, and non infrastructure would still include attractive global positions in food and beverage and other machinery and things of the sort, roughly 2/3 of our fluid and metering business is in infrastructure associated segments.

So we view the segment growth opportunities and the niches in what I'm calling the infrastructure segments for fluid and metering as key to sustaining better than industry average growth and profitability. The segment is up 10% organically year to date. Again, as we look at the current order book, as Dom said, we remain confident that the fundamentals for growth remain positive and we state that confidently because the process industries that we serve remain strong and our new business capture rate is excellent.

The great example of how we are executing well within fluid and metering would be our liquid controls business and how they expanded their position in downstream oil and alternative fuels. The LC group which consists of several IDEX brands is expanding their position both within the production plants and in the distribution system. LC is winning alternative fuel applications where they are now applying pumps to the fuel brewing process in the ethanol plants. Their meters are applied to the various material movement applications. They are on the loading terminals and we are now even adding turbine meters to the supply Co2 byproduct capture and also the Co2 custody transfer applications.

Similarly, Pulsafeeder is building on their market position in water to now offer water treatment sub-systems which entail expanded opportunity for pull through product for a variety of the IDEX fluid and metering capabilities. Our focus in water and wastewater is to win the whole municipal plants as it applies to our pumps, metering and the other key process components that we have. Over at Viking, still within fluid and metering, we are now introducing a family of stainless steel vein pumps that like the very successive eclipse products introduced by Pulsafeeder last fall are also targeted at corrosive chemical applications.

The stainless steel vein pumps will be a great complement to our existing products to serve low viscosity and primary and specialty chemical applications. As you can see the IDEX fluid metering strategy is evolving but is based on a very capable platform and very attractive segments. We are also focusing our investment to gain more European share and capitalize on growth in Asia. Europe and Asia were 7% and 16% respectively for fluid metering in the second quarter. Given our position and focus in the segment, we feel good about our prospects as we move into the second half, as Dom mentioned.

Turning now to slide 17. Our newly defined health and science business continues to just absolutely knock the cover off the ball. They are winning in both their targeted process industry segments and in the various OEM applications as well as further penetrating into adjacent product areas. At 17% organic growth performance year to date we feel quite good about the underlying fundamentals and also the excellent execution.

Again, at about 27% of our total sales, this is a significant revenue and profit contributor today and is an excellent platform from which we will acquire attractive new engineered niche positions. With an analytical instrumentation, we are seeing the increased demand from instrument manufacturers seeking next-generation projects to support their contingent growth in life sciences and generic drug discovery. At the same time our OEM customers continue to look for improvements to their supply chain which is related to higher value-added assemblies and integrated solutions.

For example, we introduced a new integrated pump and belt module in the invitro diagnostics market along with a new nanoflow sensor and new de-gassing offerings to our analytical instrumentation customers. As I said EPIs expertise in complex, close [inaudible] fold systems provides us further opportunity to move toward a more integrated single source solutions within various instrumentation segments. Outside of instrumentation, Micropump continues to win new OEM segment business. The product position that we established within the commercial and consumer printing areas coupled with disruptive technology, at least disruptive in terms of positive displacement pumps, has created a whole host of new commercial segment applications.

The team at Micropump has further developed that less than $20 gear pump capability and even more competitive precision peristaltic pumps to the extent we can now look at OEM segment applications that we couldn't even have dreamed of two years ago. In medical applications with the Upchurch and EPI businesses, we are now a preferred supplier to five spinal cage OEMs and are in production on medical grade tubing as an example that's used in MRI tumor detection, from a mammography and other applications of the sort. So all in, just outstanding growth and solid performance in health and sciences as we continue to create our own opportunities through innovation and OEM specific niche solutions.

Turning now to dispensing. Organic sales were down, they are down 4% year to date. They are up 10% domestically and down internationally by 11%. As you recall our dispensing business is project based in nature and the international performance in the segment reflects a continuation of the relatively unfavorable European market conditions for dispensing. That we've seen for the past several quarters. Domestically demands remains quite strong driven by growing competition among the North America retailers for the do it yourself customer. This dynamic that we talked about before has led to even more retailers getting into customized paints and coatings; as well as an overall move to automating dispensing and equipment upgrades. Ultimately this trend will lead to higher service associated revenues as well.

As we move forward, the natural replenishment cycle which is roughly seven years in the U.S., as well as the changing environmental regulations, such as California's new environmental paint regulations implemented this month actually, should also continue to drive order activity within the segment. During the second half of '06 we will benefit from easier year over year comps in dispensing as well. So not IDEX like in terms of stellar we do anticipate some level of growth in the segment.

Organic sales growth year to date for fire and safety, 9%. We continue to experience strong global demands for our hydraulic rescue tools, fire suppression equipment, and the engineer band clamping systems. Within fire suppression and rescue tools we closely monitor the various government funding sources specifically for our rescue tools business. We believe the second half to be strong as the Federal and state funding has now begun to be disbursed down to the municipal level. The current proposed funding from Congress for the '07 fiscal year, for the Fire Act as you may know is now projected to be consistent with '06 levels.

The market conditions for rescue tools in Europe appear to be strengthening and we also continue to gain great traction in China through our facility there in Tianxin as you heard us talk about.

Across the segment, we also continue to earn our way toward organic growth through new product innovation which represents 24% now of total segment sales. As an example we are seeing increased OEM interest in fire truck pump modules still, along with a noticeable increase in portable pump sales driven by the last few years of North American wildfire activity. Within Band-it, rising energy prices continue to drive demands for subsea marine offerings that support under water pipelines for offshore drilling. We are also experiencing strong sales worldwide for band clamping applications used in oil rig and ship platforms both in repair and for new construction.

So in summary, we are pleased with our performance in Q2 and year to date. Double-digit sales growth, solid organic growth, strong profit performance and great cash generation. We've recently acquired significant growth potential in those integration opportunities, those integrations are going well. We continue to produce both hard savings and significant operating leverage through our commitment to continuous process improvement and our high mix environment. At the same time we continue to evolve a strategy to grow our position and apply fluidic and mechanical situations and to do so in high growth niches. We have a new segment structure that better depicts our business and supports our market driven approach.

As we move forward we are well-positioned in attractive end markets where the underlying fundamentals remain strong, especially in health and sciences and in our core infrastructure markets within fluid and metering from fossil fuels, alternative fuels, water, chemical. Our global fire and rescue business continues to grow nicely based on content capture and stable funding. And with program activity that provides a tail wind for us for the second half. Within dispensing we anticipate continued strength in North America and easier comps in Europe in the second half. We believe this should translate to modest growth in dispensing as we finish out the year. So with that we will be happy to take your questions.

OPERATOR INSTRUCTIONS] Our first question comes from Scott Graham with Bear Stearns.

Good afternoon, Larry, Dom and Susan. I have two questions and one is based on the sales growth that was recorded this quarter and the quarter orders I just want to make sure , here you say it again, there's really nothing out there that suggests to you that any of your end markets are keeping you up at night or mix is running so negatively that that will continue to impact sales? In fact, second half may be quite to the contrary.

Scott, let me restate it again just to make it very clear. There has been I guess some potential concerns stated by some with respect to the potential slowing of some of the general industrial markets and also some of the process industry segments. I'm hopeful that my remarks were clear. But one of the reasons that we several weeks ago decide to do first brake out health and science to make sure it was appropriately representative for all how much of our total business is in those areas first versus some of the industrial segments. And the comment I just made on the call, Scott, with regard to within fluid metering how our sales breakdown.

Again, it's about two-thirds of the fluid metering sales content which is the water, the energy markets, the primary, secondary and even the tertiary chemical applications which we feel very good about. And that other third of the fluid metering business is we don't view dramatically decelerating in any way. so for the process piece we see sustained and improved conditions in the marketplace with respect to what I've been calling the infrastructure segments. For the other piece we still think we've got great opportunities for the remainder of the year and beyond.

Outside of the two things that is health and science and fluid metering for fire and safety, fire and safety is fire and rescue, about three quarters of that business and then the Band-It business. Our view of those markets remain strong. We see great opportunities.

They are project driven and so we have a little bit of visibility from a market perspective as to where the project activity is and it supports a pretty healthy outlook, not just for the second half. From a markets perspective for dispensing we don't see a real change versus the markets run rate that we've seen for now what, I guess 15 months or so, Dom?

Right.

And we see a lot of that in our retail based expansion opportunities in the U.S. They are going to continue to drive growth. You heard us talk, Scott, about some of the opportunities in recent calls where there's new retailers coming into the market. That dynamic continues to play out and we also continue to see based on some of the continually evolving volatile organic carbon concerns in various markets new opportunities for serving what are new paint chemistries, essentially driving machinery replenishment. I would tell you for the IDEX, the world that we live in we feel strong about the market opportunity. We feel just as good as ever regarding our ability to capture our fair share.

I appreciate you've made that very clear and I want to move off the subject in fact and maybe talk about mixed model manufacturing. Having experienced some of this myself earlier this year, just sort of wondering, Larry, what this does for that sort of 20 plus or minus cost reduction target, whatever you want to call that that you've achieved over the last several years and continue to? Is that something that makes that number a sustainable cost take out? Is that something that can enhance the number a little bit? Maybe give us a feel for what that means over let's say the next three years.

Sure, Scott. Good question. First of all remember the reason that we apply what we call Mixed Model Lean because that's an IDEX thing largely, is that strategically we like the market niches where there is a high degree of customization in the product. I like them for the following reasons: One, you can get in, differentiate quickly, sustain or improve price and generate value on an ongoing basis much more so than you can in a market that is going to be more product commoditized in nature. So from a strategic perspective we are position to do serve markets that require us to operate this way.

Now if you look at the IDEX pedigree of operational excellence starting with Six Sigma and what we've done with Six Sigma and design for Six Sigma, that's a big part of our foundation. Then we moved to Lean. Now we've applied Lean in our plants. We understand standard work and how to eliminate waste and how to apply balance to the work cells and to the product line production areas. Really for us what mixed model was was a graduation for the next level for us to continuing to at cost, to go at it in a sustained fashion, but also, and frankly it's even more important now, it enables us to continually go at niche opportunities to get in quicker, to be very nimble, ramp up quickly, customize product, go after opportunities that we don't think many others can.

So while the $20 million plus or minus I think is a good number for you to assume for a number of years out what I will you is the more important of what mixed model means to us is it's a means for us to go after growth. What we can do when we get growth is convert it.

Just to that same end and I know that you don't give guidance but to the extent that you are able to answer this question, Larry, it would be helpful. The operating margin year over year has been running up 200 to 300 basis points in '04, about 150 in '05 and north of 100 so far year to date in 2006. I don't know if I would expect 100 basis points to continue for the next three years. But, you know, is it a 50 to 100 maybe pushing 100 basis points of continuing expansion we could see all things being equal?

I would tell you first, again, you framed it appropriately: We don't provide guidance but we do certainly believe that we have the capability to continue to lever our existing infrastructure. And we think that there are first from a price perspective and from a cost opportunity set many reasons why we can continue to lever our margin improvement to the operating line. And I don't think your numbers are out of whack but I will let Dom comment.

No, Scott, I would anticipate us coming off our view of the 30% to 35% flow through being a key element of this financial equation for the years ahead. So that math does translate to over 100 basis points a year based on whatever level of growth you've built into your model.

Thank you, both.

Thanks, Scott.

You're welcome.

Your next question comes from Jack Kelly with Goldman Sachs.

Good afternoon. Larry, just trying to translate the words in terms of what might happen in the second half in terms of orders both on your part and Dom. The first half organic orders were up 9%, 10%. It sounds like we are going to get an acceleration in fluid and metering, in pick up and dispensing at least year over year, meaning market conditions stay the same but comparisons maybe a little bit easier and fire and rescue tools comes back because of the Homeland Security money. Does that put us in the maybe the 8% to 10% kind of numbers for the second half? Clearly you are expecting more than 5% because you are looking for an acceleration and the question really is, can we do it in the second half what we really did in the first which was close to 10%?

Jack, I think, yes, the answer is yes in terms of short answer. Let me back it up a little bit. First, I think there is, it's a highlighted with respect to sequential orders. If you look back in the IDEX history you will see choppiness in orders over the last three years. Dom mentioned it and I think very specifically that we feel good about the in quarter sequential rate.

We feel very good about the end of quarter backlog position. I feel very good based upon what you just heard me talk about based on with respect to what we hear from businesses we serve. I made the comment earlier I see the second half environment pretty consistent with the first. So the answer is yes.

Great. With regard to Europe and dispensing the overall order pattern was down 10% for the entire business. Can you give us a sense, Larry, how it broke out between Europe and U.S., and is the disparity widening, narrowing? Obviously the U.S. remains solid as you said, but it sounds like Europe year over year was a bit worse.

Domestically year to date, up 10%--

Okay, I missed that.

And down internationally by 11%.

Okay.

And Jack, we actually had a modest uptick in the quarter, the second quarter for dispensing of about 4% organically.

Okay. And, assuming market conditions remain flat as you characterize the it, Larry, how does that map out year over year on the second half?

Remember, the second quarter for dispensing was a particularly difficult comp, right?

Right.

There is no question about that. The second half, as I said the comp gets better, but in terms of just the marketplace demands we see pretty nice conditions out of the U.S. marketplace based on the retail expansion. We see paint as an attractive product line driving growth and it's beyond the second half.

You heard us talk about Wal-Mart in the last quarter call. That continues to go very well. Wal-Mart's plan is to continuing to go after their entire store population is in sync with what we talked about before and that's a four to five-year time horizon. The other big boxes continue to make an investment in paint as well as all the specialty retailers. As long as paint is a comparatively attractive product line we see the interest in investing in our equipment.

The other drivers are a number of the specialty retailers continues to move from manual dispensers to automated dispensers which means that one, we play better and it's obviously a higher price tag item. And we think that there is an ongoing concern with respect to some of the environmental issues and regs are driving it both in North America and in Europe that basically mean good things for us for some time to come. So I don't know if that answers your question.

Yeah, it does. So the order input numbers for dispensing get better because domestic remains strong and Europe year over year gets less negative. Is that a fair way to look at it?

Bingo.

Got it. And last given the dislocation of the stock today, Larry, any first thoughts on stock repurchase?

I would say no, the answer is no. The stock is a great buy.

But you should be buying it if you think we should. Only a suggestion.

We will take the suggestion.

Okay. Thank you. That's it for me, thanks.

Thank you, Jack.

Your next question comes from Wendy Caplan with Wachovia Securities.

Hi, Wendy.

Hi, good morning -- good afternoon. Can we talk about working capital, Dom? As you look out over the year, what is the focus, what's your focus in terms of improvement here? Are there pockets of issues anywhere in the Company that you can identify?

Wendy, I wouldn't call them issues but if you look at receivables, we've been constant in the mid 40s in terms of DSO, the key initiative in focus here related to mixed model is obviously inventory. As I mentioned in my comments we increased slightly from year end with all the growth we've had. I think we are doing a pretty fine job there but Larry and I would be the first to tell you we can do better. We are targeting about a turn a year as kind of a go forward number. Also if you look at our current balance sheet you have to take acquisitions out of the variance from year end so when you do that we are essentially flat with year end. That's the key focus. Payables, we've consistently done a nice job there but I would say inventory is the primary focus and will continue to be for many years.

Okay. And you know the issue of cash deployment has been raised again and again. Arguably your balance sheet is really too good. Can you, I think the one area that we haven't seen really enough of is if I can speak for myself, is acquisitions. Can we talk about, you said the pipeline is full. Can we talk about where the opportunities are. I know we just did EPI but are there big ones out there? Are we focused in the health and science area, fire and rescue? Can you give us some color on that, please?

Yeah, Wendy, let me jump in there. First of all, the interest is obviously there. Certainly to your point we would agree with your argument, the balance sheet is too good. The opportunities are also there. The real issue is the opportunities to close the ones that we see as most attractive as fast as possible. The only thing that gets in the way, it's really just two things, it's our due diligent process and as Dom said in his comments we remained very disciplined in our approach and sometimes diligence picks up things that we don't like. And secondly current valuations.

All that said we still feel very good about acquisition opportunities first and that's where our first priorities are in health and science and there's a number of them. As a matter of fact, I'm leaving as soon as the call is over to go have dinner with someone tonight who I think represents a great opportunity. We've got a number going on in fluid metering as well and we see some very good opportunities to go into, further into some of those stronger, secular opportunities in fluid and metering that I mention were there weed where we already have good leadership position if you look at Pulsafeeder and clearly the market pump for water and wastewater product now that's their technology and their position. What Pulsafeeder has in a way of their product complement versus what we can bring in in the way of other products that are used in a similar kind of system application, we see some great opportunities within fluid and meter.

So those would be the first two areas of priority. We also see some niche opportunities in both fire and safety and in dispensing. First in fire and safety right now. But I won't go into those in specific because they are specific enough in product type that it would be kind of discussing it very publicly in a way that wouldn't be wise at this point. The size of the opportunities to your question ranges from larger ones to what I will call very attractive organic bolt ons that are in the EPI size range or a little bit bigger, the $30 million plus range.

Right now there are more opportunities in that smaller, higher organic growth, attractive bolt on opportunity profile than there are in the larger ones and we are good with that short term because there's some great returns out there that we think can make happen. And as the market normalizes for some of the larger properties we will take advantage of those, too. The only other comment I would make just to make sure it's clear for everybody is that I feel good about our expanding capability to operate these businesses. That means that we should be able to acquire larger businesses and bring in the IDEX team to run them without significant challenges. So there is certainly nothing from an operational perspective that disqualifies anybody out there as long as we see the good market demand top line growth opportunity in the acquisition. My message to you today wouldn't be any different than what you heard last quarter or what you've heard in between. We have got a better pipeline. We have a lot of good opportunities and we are going to remain very disciplined in how we go after them.

Your comment that health and science was a priority, are we, in that space one would assume that we are being asked to pay up a bit for those relative to, say, fluid. Is that fair?

I would say that the valuations are more a function of the size of the companies right now. And oddly enough some of the geographic locations of the companies, where they are. Some of the North American properties in the middle market are more expensive than some of the other European country markets. All that said, there's a fairly large difference between some areas of Europe versus others based on where there is more private equity activity. So it's probably more a function of size than it is of the two groups because we are not really interested in mature, cyclical technologies in those acquisitions in the fluid and metering space. We are interested in those that we think have great sustainable growth opportunities. So those businesses are going to come in at reasonably attractive prices.

Thanks very much.

Thank you.

Your next question comes from Robert Ligapo [ph] with CIBC World Markets.

Good afternoon , a couple of questions, one not to beat a dead horse but to circle back to the growth that you expect moving forward. You mentioned you expect it to be a little bit better or at least similar for the rest of this year. But if we look at the organic growth rates over time, certainly in the September quarter last year, the comp gets quite a bit easier and I guess what I'm trying to nail down here is on a go forward basis how much is the anticipated stable to increase in growth that you're looking for associated with just an easier comp as opposed to activity actually improving?

Now, the comments with respect to comps was just to make sure we were all clear on dispensing.

Sure.

I will tell you this to be very clear, again, when you look at first the markets that we're in because I think there's kind of a broad brush view of one general industry that maybe folks are applying that doesn't make a lot of sense. And, two, even within the process industries doesn't make a lot of sense. We feel very good about our position.

I will say it again, within health and sciences we think we have very strong underlying incrementals. We have very strong generic drug discovery driving instrumentation sales which is very strong. We see good, life science, biotech base sales activity now. In the OEM segments that we serve, it's a combination of those OEM segments growing nicely plus they are really entirely new segments for us so it's essentially all gain and we see a number of them, four, five, what we would call adjacent sessions to where we played out of the micropump group principally.

And in fluid and metering I would just make sure that it's clear for all of us, is there a potential for food and beverage and process to slow down? Perhaps. But I certainly don't see it in the energy markets. I certainly don't see it in water and wastewater and I certainly don't see it any time soon in the chemical segments. Both the basic, organic chemicals as well as the petro chem.

We actually think the market looks very good. There's more discretionary spend project activity within those infrastructure segments now than there has been. And without going into any more detail I would just tell you that we don't see a dramatically slowing organic orders rate in any of those segments. Now there could have been some concern I think potentially applied to the prime rescue fire and rescue business if the funds had gone slowed even though we really don't see that as a big impact because where we tends to win, particularly on the rescue tool side, is in the plastic driven nature of our business. And that's going very well and we've got I would say at least reasonable visibility to the market performance and we are not concerned about the market for rescue tools.

On the fire and truck, which is the other side of that business, you heard us talk before about what we've done to expand our position on the truck, that is the pump modules versus the pumps and the components that go with the pumps. If we do it right on an application where we are getting a module sale, we will get 2.5 to three times the value in the module that we will in the components. So even if you were in, a flat unit volume environment for trucks, I got to tell you I feel pretty good about our ability to capture new sales opportunities on a content basis. And our relationships with our truck OEM customers are extremely strong. We are providing them with a very competitive product position.

So now I think the opportunity for fire and safety is good. The Band-It group also within that business is absolutely amazing in their ability to continue to bring in new product to market and do a stellar job in bringing it to niche applications. And you've heard us talk about many of those historically, too. So the only question and the reason that we talked about comps earlier was just to make sure we were clear around dispensing. But again we don't see doom and gloom in dispensing, we just see: how do we make sure that we convert what are those known opportunities based on retail and based on the environmental issues that still certainly apply?

Another question. I guess the follow up to that is with regards to the blanket orders that you received in the first quarter from the OEMs, can you just maybe characterize what drove the blanket orders that you received? Of those orders, do they leak into the second quarter just in terms of production? And maybe if you could just talk about if there's been a difference in terms of demand with the OEMs versus the distribution channel, I think many of us heard some of the distributors talking about somewhat stellar sales growth for the rest of this year. Has there been a difference between those two end markets for you?

Well, you have four or five questions there. Let me start and I will ask Dom to jump in. First as Dom mentioned, we carried our backlog position very nicely through the quarter and within the quarter our sequential orders performance was good. So we absolutely see that there's still strong orders. We don't see debooking activities of any sort and I would apply that statement to our industry segment distribution as well as the OEM. There's not a difference between the ends market channels for our product. We do serve some of the gen practical industrial distribution outer there.

For instance, we will go through a market through one of the larger national wholesalers for a couple of different products of sorts. That's a very, very small percentage of our sales. Our sales are almost exclusively if they are through a channel to some form of systems integrator or technical applied product wholesaler who is usually regional or local and who is within a segment. So they are typically taking our product, combining it with other products, solving a system problem and applying it to industrial water or wastewater or an application of the sort. And that channel is not showing signs of concern. So when we look at the big picture macro, yes, I feel pretty good. When we look at the channel input right now, not a few signs to be alarmed about when they look at the Q2 activity and water right, pretty strong, but let me have Dom to further comment.

I think that characterizes it. The other key thing to note this all translate to backlog at the end of the quarter that's substantially higher than it was last year. And I gave you the month in month to order rates of 88, 1,103,000,000 for April, May and June. So even within the quarter we saw some acceleration which indeed versus the first quarter sequentially translate to higher backlog at the end of Q2. So that's the math on that equation.

One last question if I could. This one is for you, Dom, in light of the divestiture of Lubriquip, the sale to and the fact that it did account for five sense of earnings last year, $0.01 or so this quarter, the other acquisitions that you've done this year, the Junair and the EPI, the Chris from those acquisitions make up for the loss of income associated with Lubriquip for the rest of this year?

Yes.

Terrific. Thank you very much.

Your next question comes from Michael Schneider with Robert W. Baird.

Good afternoon, guys.

Hi, Mike.

Well, Larry, this is the closest we have gotten to you giving guidance and I guess I am proud of this group for that. Larry, your comment about the seconds half orders essentially matching the 10% of the first half, just your confidence in saying that I'm wondering what's changed about the business or what's changed in your maybe internal evaluation process to come out and I guess say that with confidence because one thing that in following IDEX since the mid 90s it's been clear it's a very short cycle business and while you don't see the slow down today, frankly I wouldn't expect IDEX to see the slow down until it actually occurs.

One of the things I think we should make sure we draw the distinction on is fact that we are a short business cycle business, meaning our book in turn is a very efficient book in turn; versus the market cycle that we participate in which can for that matter be pretty long market cycles.

Sure.

And the health and science and the infrastructure segments were still mid cycle and fair many long market cycles. So I think everyone is on the same page. But the fact that we are a pretty rapid book to turn business doesn't necessarily mean that we don't have some level of visibility into what's going on in markets around us and I think what's changed, what's improved over time for sure is that we've done a much better job building indicators with respect to the fluid and metering business. Are we perfect? Absolutely not. But we have a pretty good view of what we think the indicators are as they have applied historically and as we look forward and what it comes down to is understanding quote demographics.

As I said earlier, quote volume, quotes by segment, what we see as the potential for those quotes to pull in or push out. I think, and we have a pretty consistent analysis that we apply and I would tell you that, again, we are not professing to be perfect but with what I am saying, what Dom and I are saying, with see right now pretty decent indications that that activity remains pretty strong. And the other comments that I made with respect to why we think the macro environment as it applies to us is good or as good is that I think the general concern around machinery slowing down or around some of the more consumer goods associated process segments slowing down, that might be very valid. Very valid. But that's a very small percentage of our sales. If you take fluid metering and take that 1/3 of fluid metering and apply that third of fluid meter to all of IDEX, it's, what, 10% or so of our sales.

So if there's a deceleration in the markets we serve in those fluid and metering applications, the question is, is there at least a preservation or potentially an acceleration in some of the other segments. And beyond that I think versus IDEX depending on what you are thinking of as the past or how long ago you look, we have certainly moved our business into other Asian such as the health and science areas which areas, which cycle at a different point than do some of the once that folks are concerned about now. And I think the municipal markets and all those, certainly the dispensing equipment markets, do not cycle consistent with what people expect out of some of the industrial B. to B. issues of the sort.

Fair enough.

Mike, I think that we are not capable of crystal ball forecasting for sure. However, at the same time we felt that there was way too much pessimism in terms of macro form that was being applied to what is the IDEX served set of segments.

Very fair thank you. And just a couple of specifics. First the health and science, the orders were up 25% this quarter, Dom, do you have the organic number for that.

Had you look at the chart, the total sales were about 37%, organic was 14%, acquisition 13%, so those percentages, I would say 12%, 13% kind of order growth in that quarter. But again they, were influenced by some blankets in the first quarter as well. So the same comments hold true that we also mentioned on fluids and metering.

Finally just pricing, can you just give us a sense of where you are in kind of the materials and pricing curve, if indeed you are still getting squeezed by it and what if any pricing actions you've taken as of late.

Mike, we are still for the quarter the entire company just over 2% and that has been more than adequate to cover our in declaration near side of the equation as you can see from the margin expansion. Gross margin was flat compared to the last quarter but if you look at mix within dispensing specifically and also the acquisitions we still levered operating income but gross margins were flat but we did do a nice job on the inflation side versus price.

Okay. Thank you.

I would only add from an inflation standpoint I just want to commend the team, they are doing an outstanding job. With what we moved to Asia and had the potential to continue to move to Asia, the copper content issue, Mike, as it applies to us I'm feeling fairly strong that we are a in a good position right now.

Our motor suppliers know that they can't increase prices tremendously to us. And the real issues that we are focused on right now would be principal by the aluminums and all the nickel based products, such as the alloys and the stainless products, that is what we have a watchful I out for but to Dom's point not just from a pipeline but a rate preservation standpoint we feel good.

Thanks, Dom.

Your next question comes from Amit Daryanani with RBC Capital Markets.

Thanks. Good afternoon, guys.

Good afternoon.

A question on the growth rates, you mentioned pretty good numbers on month over month gains from Q2. How have they trended so far in the month of July versus expectation which is typical seasonality so far.

We are not going to provide specific numbers for July but I will leave it to say that we feel July is indicative of all the comments we've made today. So so far July is just fine.

All right. And then I mean are you guys expecting any big uptick in raw material cost for the remainder of the year, or are you going to start benefiting that some of the raw materials have actually started to come down and the raw material increases will hold for the rest of the year?

I would say first our price increases should hold. We don't for the most part apply surcharge kind of pricing actions. They are true price avenue adjustments. I don't think we will see a rate improvement for the second half of the year based on favorable margin but as I said to Mike's question we don't see it as a negative impact, either.

And then just looking at your working capital, there seems to be a negative five days delta between your AR and AP days, essentially look like supplies until you get money from your customers. Is there something structurally that we could do different that would shift the difference to positive.

I think when you carve out acquisitions I think you are going to fine the way I look at it the core company X acquisition does not have that trend and what you see when you look at the year over year numbers because of the acquisition they indeed do have shorter payable cycles. Obviously whenever we look at a new acquisition that is one of the opportunities. But net/net the core companies that's been an initiative for quiet sometime. You have to take acquisitions out to get the proper analysis there.

Got you. Thanks a lot, guys.

You're welcome.

Your next question comes from Charlie Brady with BMO Capital Markets.

Thanks, good afternoon. On the dispensing side of the business now that we don't have Lubriquip in there, would you say that about 60% or so total international side, is it fair to saw assume that that slides up a little bit 65%, closer to 70% more international now?

It's actually roughly 65% but again depending on the growth with the domestic side over time that could balance up but right now I would call it about 65%.

Okay. And given --

Which is about 55% is Europe.

Okay. Lubriquip then and given that business is probably not the highest margin business than some of your segment, is it fair to say over time given particularly the growth of your North America and some of the retailing that despite what you are seeing in Europe even though you are losing a chunk of the North American sales of Lubriquip your overall market segment would probably go up because some of the sales you're losing actually were below segment average.

If you look at the 26.3% average that we reported for Q2 we treated Lubriquip for discontinued operations so the comp is without Lubriquip as well, we highlighted this 26% business is quite good and you still have room to expand margin and all of our new products are at great product margins as well. So the numbers you see today are without Lubriquip on both quarters and as we obviously issue each Q you will see the comparisons without Lubriquip as well.

Switching over to the Band-It, how much of Band-Its business is tied into oil and gas markets?

Band-It goes to market through and incredibly broad set of local wholesalers globally and so it's tough for us to peg the exact number. But a pretty large percentage of the stainless steel product is applied into harsh environments so if you were to break it down it's in chemical, petro chem, all of the energy markets and then a lot of general, industrial harsh environment, kind of severe duty application if you will. So you do finds it first and foremost where there's aggressive atmospheres but then in a fairly broad distribution. If I gave you a number I would probably be wrong but it's a pretty strong piece of it given the nature of the product.

Thanks. Final question on your tax rate, are you still looking at a 34%, 35% rate for the remainder of the year?

Yes, year to date we are at 33.8%, for the quarter, 33.6%, it's going to level between 33% and 35%, internally we are using 34% for our second half forecast.

Thanks very much.

You're welcome.

That concludes the question and answer period. Mr. Kingsley, are there any closing remarks?

I would like to say that I think, I hope everyone understands the profile of the markets we serve well. Certainly we believe given where we play that we are in a relatively attractive position right now looking forward. We like the market segments that health and science serves. We like the market segments that are predominant for the fluid metering business is in. We feel good about our opportunities in fire and safety. And we feel good about what we can do to continue to drive principally channel based growth for dispensing.

So just want to make sure it's clear for all. We think very highly of the space we are in and we feel very good about our ability to win in the space. I want to thank everybody. We look forward to talking to you in October.

This concludes today's IDEX Corporation second quarter earnings release conference call. You may now disconnect.