藝達思 (IEX) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the IDEX second quarter 2009 earnings results conference call. This call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Heath Mitts, Vice President of Corporate Finance. Please go ahead, sir.

Thank you Danielle.

Good morning and thank you for joining our discussion of the IDEX second quarter 2009 financial results. Yesterday we issued a press release outlining our Company's financial and operating performance for the three-month period ending June 30th, 2009. The press release along with the presentation slides to be used during today's webcast can be accessed on our Company website at www.idexcorp.com. Joining me today from IDEX management are Larry Kingsley, Chairman and CEO and Dom Romeo, Vice President and CFO.

The format for our call today is as follows. We'll begin with an update on our overall performance for the quarter, and then provide detail on our four business segments. We will then wrap-up with the outlook for 2009 and the third quarter. Following our prepared remarks, we'll then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes, by dialing the toll-free number 888-203-1112, and entering conference ID 6940348 or simply log on to our Company home page for the webcast replay.

As 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 and in IDEX's filings with the Securities & Exchange Commission. With that, I'll turn this call over to our Chairman and CEO, Larry Kingsley. Larry?

Thanks, Heath. Good morning, everyone. Before we get started with the slides, I'll give you a brief update on the market conditions that we are seeing and anticipating for the remainder of the year.

First as we discussed in our last earnings call, we thought we were finding the bottom in most of our end market, and that was indeed the case. In general we have seen a leveling off in demand, and while year-over-years results are still unfavorable, the majority of our end markets have stabilized. In our earnings release, you probably noted that we took down the top end or our '09 EPS guidance from $1.55 to $1.45. As you will recall from our first quarter earnings call, our forecast assumption to reach the higher end of our EPS guidance assumed some level of second-half recovery. We do not see a broad-based recovery at the present time. However, we have positioned ourselves very well through the counter measures taken over the past few quarters. We will be in a very strong position coming out of this economic downturn.

And the restructuring actions required for us to achieve our earnings guidance are essentially completed. Our operating margins have been protected and our cash flow is very strong. So while our lowered -- while we lowered our top end of EPS estimates, due to strong execution, we have raised our profitability and free cash flow estimates. Adjusted operating margins should end the year near 15%, and we would expect free cash flow to exceed 120% of net income. Our new products are on track. Although we have undertaken aggressive restructuring actions, we have protected our new product and growth initiatives. Our customers remain our number one focus and we have maintained or improved our market share through the downturn. In general, coming out of this, we are in great shape for profitable growth as our end markets do improve.

So now I'll jump into the presentation and talk about the quarter. And I'm on the slide titled "Q2 2009 Financial Performance". For the quarter, orders were down 21% and sales were down 15%. That's down 17% organically. First quarter(Sic-see presentation slides) adjusted operating margin of 14.9% was down 320 basis points due to the lower revenue offset by the cost actions taken. Adjusted EPS of $0.37 for the quarter was down 31%. Free cash flow was $50 million, which included approximately $4 million of restructuring-related payments, and $6 million of pension contribution, which fulfills our full-year pension obligation.

Overall, as I said, I'm very pleased with the results of our restructuring efforts. Despite the top-line pressures, we have been able to hold operating margins in the mid-teens, which is a direct result of our inherent flexibility in the operating model. Our operating teams have stepped up to meet the underlying market challenges and quickly right sized our cost structure while preserving the resources to support our growth initiatives. I'm also very pleased with our cash flow. Since the end of the first quarter, our inventory is down 9% and we made solid improvement in our receivables. CapEx requirements remain very IDEX like, which is consistently $5 million to $6 million per quarter, mainly to support new products in cost-reduction activities. Again, our operating teams have responded well to the challenges, and we look forward to continued progress as our strong cash generation facilitates future growth.

So we'll walk through the results by segment. I'm now turning to the slide number five. For the Fluid Metering segment, orders were down 17% in the quarter, organic orders were down 24%, reflecting CapEx constraints that are present in most of the process and equipment markets. Sales decreased 12%, down 20% on an organic basis. Adjusted operating margin of 17.2% was down 140 basis points from Q2 of last year.

The chemical end markets, which represent about 25% of the FMT segment sales were down the most in the quarter. Going forward, or sequentially, we expect the major chemical end markets to be flat to down slightly in the second half of '09. And with regard to the other FMT markets -- water, which is also roughly 25% of the segment -- improved in the second quarter versus the first quarter. However, much of our water business is still being constrained by municipal budgets that are anticipating Federal assistance. So while we have seen a very nice increase in quote activity, we're only anticipating a moderate sequential improvement in second half of '09. As you probably read the Federal stimulus dollars have been slow to reach the market, and we're seeing the same with projected stimulus impact coming late in '09 and more likely in 2010.

The energy end markets, again, roughly 25% of the segment, have experienced less top-line pressure due to global project demand. Again we saw modest sequential improvement in the second quarter. Going forward our project activity -- that's primarily outside of the US -- will support second half sequential growth. So in summary, for the FMT segment, energy and water should see conditions improve, albeit modestly, in the second half. The other half of the segment -- chemical, industrial automation, and the products that serve some of the food and beverage end markets -- may lag in recovery given the overcapacity and lack of demands from some of those end consumers.

In our Health & Science segment, total orders were down 21% for the quarter, and that's down 24% organically. Sales were down 15% in total and down 18% organically. Our core HST business which represents about 60% of the segment was down slightly, while the remaining more industrially focused or exposed HST businesses had a significant year-over-year decline. Operating margin of 15.7% was down 250 basis points compared to prior year, due to the lower revenue. Our outlook for HST has not changed. For the second half, we expect our core HST business to be roughly flat versus last year. However, in the 40% of the segment which is a bit more industrially exposed, we are seeing year-over-year declines, and they will be north of 20%. All in for HST, we expect the second half of '09 to be flat versus the first half. For the long term, our core market focus, those [flowdic] devices that are used in R&D applications and clinical diagnostic applications continue to provide a powerful platform for growth, and we anticipate that end-market demand for the new generation of equipment and our IDEX content on that equipment will drive our growth.

So in Dispensing on slide seven, total orders in the quarter were down 34%, organically down 27%. Sales decreased 19% and organically were down 13%. Adjusted operating margin of 21.9% improved significantly versus recent quarters due to cost reductions and higher revenue. In the second quarter we experienced the higher volume of the fulfillment of a replenishment order in a North American retail channel. This project has been largely completed.

Unfortunately in the underlying market conditions, though, for both North America and Europe remain soft. During the second quarter we saw demand in Europe drop off significantly. One bright spot in this space though is that the new paint chemistries, that is the low VOC chemistries, the environmentally safe products that are being introduced, require updated Dispensing capability. And we're beginning to see system upgrades, retrofits and replacements as a function of those new paint products. We anticipate that both North America and Europe sales will benefit from required changes. For the short-term as we move into the second half of '09 we are projecting sales to decline versus the first half, primarily due to no large retail projects that are committed over the next six months. In summary, for the segment, no big short-term programs, but the drivers will continue to drive upgrade and replacement and cost actions that we have taken to size the segment accordingly positions us well to ensure profitability and very strong cash generation.

Moving now over to Fire & Safety, and I'm on slide eight -- for the quarter, total orders were down 21%, down 16% organically. Sales were down 20%, organically sales were off 14%. Operating margin at 22.1% was down 230 basis points compared to prior year, and that's almost entirely due to volume. As anticipated global demand for rescue tools and fire suppression products drove performance in the second quarter. In the second half, we expect rescue tools to achieve flat to modest growth sequentially due to continued international market opportunities. The rescue tools team has done a really nice job of winning market share through new products and applications, as well as leveraging their global distribution footprint. Fire suppression had a strong first half as an expected now to remain stable through the remainder of the year, although we are keeping a close eye on the municipal spend that is uncommitted to projects in the fourth quarter of this year. The band clamping market -- again, within this segment -- appears to have bottomed out, and although it will be a couple of quarters until we see year-over-year growth, we do anticipate second half improvement for BAND-IT due to largely new product wins that we already have in site. So overall for the segment we expect flat to modest growth sequentially in the second half of '09.

So now I'm going to turn our attention to guidance. Slide nine summarizes our current view. Again, EPS in the $1.35 to $1.45 range. We feel our cost actions have ensured the bottom end of our range, and they have positioned us very well. Organic growth down approximately 15%. FX at current rates will have a negative impact on sales of approximately 3%. And acquisitions add 6% to 7%(Sic-see presentation slides).

Moving forward into the second half, we expect FMT, HST, and Fire & Safety to achieve flat to modest growth versus the first half of the year, and Dispensing to be down the second half. Adjusted operating margins should finish the year near 15% for the year, and our earnings projections exclude our estimate for additional cost actions of $0.02 to $0.03 in the second half of '09. And as far as other modeling items, the tax rate is anticipated to be 34%, CapEx will be $23 million to $25 million for the year, and we will continue to convert cash well in excess of that income. For Q3, our EPS range is $0.33 to $0.37 and within that, organic growth is assumed to be down approximately 17%. And, so that's it. Essentially with that, we'll open the line for questions. Operator?

(Operator Instructions). The first question will come from Jim Lucas with Janney Montgomery Scott.

Are you there?

We're there, Jim. How are you?

Okay. Great. Thank you.

With regards to the strong cash that you are generating, a balance sheet in good shape, could you maybe talk a little bit from a capital allocation standpoint where the priorities are today, and in particular on the M&A side, what you are seeing in the pipeline, particular areas of focus as well as -- have you seen any changes in the valuations that are out there?

Sure. Jim, first, just to restate -- and maybe quantify, we do think we are in great shape. The balance sheet, as you have already noted, has us in a great position relative to coverage ratio with net debt to cap at just under 26% or so, so -- we have got that as a very solid foundation.

Cash flow for the quarter is indicative of the fact that we're on top of working capital. We don't see huge CapEx requirements for the remainder of the year. As a matter of fact, as we look forward into 2010, just a little bit of visibility -- where we're just really pleased, frankly with where the cash position takes us. So, plenty of capacity and capability looking forward.

To get back to your question with regard to valuations on properties. There is a little bit of dislocation right now still in the market, I would say, and that is that seller's prices versus buyer's prices are a bit off. We do see that narrowing. We have a number of interesting very strategic things that we're working on right now, a couple of things that we're traveling for this summer, and they fit right in the square of the target of what we're after for existing segment build-out. As we think about the strategy for capitol allocation, it's -- essential we're after -- where the cash is flowing, as this economy does return, and we like the infrastructure position that we built out, both inquisitively and organically over the last couple of years. More of that to come, including where we would go spend quizitively. We like the initial position that we have put in place with respect to our AG space, which we never had prior to a couple of years ago, so there are a couple of things that make sense to complement our initial position as required there.

We also like the health and science space a lot, and there is some very interesting both organic reinvestment as well inquisitive investments there. That, again, a little bit of a current price dislocation -- transitional price dislocation -- but things narrowing to the point of where we'll have opportunities between now and the end of the year. We're not going to peg a number of transactions or a capital spend number for the remainder of the year. We're going to continue to chase the ones we like the most, and over the next 12 months or so, you will see the model at work.

Okay. And switching gears with regards to stimulus dollars. You mention on the water side, we have all noted how slow those dollars have been to flow down to the project level. Within HST have you seen any increase in quoting activity there with the potential for NIH funding increasing?

We have. We have begun to see just the beginning of it. There's new equipment that is likely to be purchased as a function of NIH budget increases. I was with one of our HST teams for a day last week, and certainly there's all forms of incremental spend that are being targeted, but we're seeing the beginnings of quote activity as a function of equipment buy, and that should start to ramp toward the end of the year.

Okay. Finally from a geographical basis, could you give us some color on what you are seeing in Europe and Asia, either overall geographically or any particular markets positive or negative standing out trendwise?

Yes. Not a demonstrable difference for us in the quarter with respect to Europe versus North America. North America being a bit better. When you take that Dispensing replenishment order out, the base rate was not hugely different.

With respect to Asia, we didn't see as much growth in Asia in the quarter as we would have liked. Some of that is a function of project-specific stuff when we look at year-on-year comps.

Looking forward for the three regions, we're expecting that North America outperforms Europe for the second half, and that Asia outperforms all of the above, but there's work to be done in all three regions to achieve a return to the sequential numbers that we talked about -- or the achievement of the sequential numbers that we talked about in our prepared marks.

Okay. Great. Thanks a lot Larry.

Sure.

Do you have anything further, Mr. Lucas?

I do not.

Next we'll hear from Mike Schneider with Robert W. Baird.

Maybe first we can address just the order rate of minus 22% this quarter. Can you give us a sense of what that looks like on a monthly basis? And indeed, what they were relative to your budget?

Relative to our budget?

Yes, just your expectations.

Yes, there's two elements to the organic orders in the quarter, Mike. And, I'll let Dom give you the linearity after I get started here. So one, there was the lack of a big dispensing order in the quarter. You had the dispensing sales in the quarter but not the order that generated those sales. Two, from a comp standpoint, you had principally FMT but also relatively tough comp. So, that's the issue that applies when you look at the two that construct that organic orders number for the quarter.

And then the linearity. Dom?

Sure, Mike, and if you address the Q1 versus Q2, if you take out the Dispensing order in Q1 it was a modest increase sequentially. But, in the quarter, orders were 101 in April, 107 in May, and 110 in June. And when you dig into that by enterprise, it pretty much supports the commentary we had with regard to how we see the second half. So a bit of an modest uptake if you take out the dispensing order that we booked in March.

Are you able to adjust for seasonality there? Would a typical Q2 look like this with June being the strongest month?

Typically that's correct, Mike. It would.

Okay. And then just drilling in to HST on Jim's question. The NIH money -- your customers in that segment, in the core business are looking for, I guess lesser single-digit declines in their business versus your earlier commentary, even going back to the beginning of this year of about minus 10 in that business.

Have you raised your expectations at all and is that in the new guidance, or can you give us some color as to why you are still believe you are going to be down more than your customer forecast?

We have yet to see all of our customer's forecasts as a result of this quarter's calls, and so we should tune in to those. But we have included the assumptions that you spoke of in our aggregate assumptions for the back half of the year. Within HST, we talked about some sequential improvement for the core business, which is obviously the NIH impacted element of the HST segment, and that's offset by what we think on the other side, Mike -- the gas business, and some of the other non-core businesses where we think the industrial exposure in some of the commercial markets exposure there will continue to be down, and maybe down demonstrably.

So the NIH money, that is incremental to the national spend rate -- I don't think we're going to see hit us in terms of our impact where we stand within the food chain until the very end of the year. So it's with that in mind that we don't see a big back half lift.

Okay. And then switching to Dispensing, so the margins here are very volatile as usual, and when you are running at about this $30 million to $32 million quarterly rate, the margins are usually down in the low double digits and then once you peak over this $40 million to $45 million rate you are up in the 20s. Can you give us a sense of how this is sustained with the Milan closure, and what we should be thinking about just on a new dollar threshold because I presume seasonally Dispensing will be down, especially with the absence of major programs. So are we back to the low $30 million rate and low double-digit margins, or does Milan make that number substantially higher than we are used to?

I don't want to get in to new break even points for the business, Mike, as a function of all of the costs that we have taken out over the last three quarters in particular. But there certainly is a lower break-even point for that business now, and the numbers that we can achieve on a $30 million top-line quarterly assumption basis are a little better than what you have just stated, not demonstrably so, but a couple of points better.

Put differently, what does Milan save you annually?

About $5 to $5.5 million. There is other cost action, obviously globally within Dispensing.

And Mike, that's already in the Q1 and Q2 run rates of the margin.

Right. Okay. Thank you.

Sure, Mike.

And the next question will come from Matt Summerville with KeyBanc. Please go ahead with your question.

Just to stick with Dispensing for a second. Larry, should we assume then -- I just want to make sure I understand the progressions first half or second half -- that we should assume the quarterly run rate in sales in Dispensing should be more in line with what you experienced for Q1 for the remainder of the year; is that accurate?

That's accurate.

And then you mentioned in your prepared remarks that there are changes that will be occurring in certain paint chemistries that you believe will drive some replacement and upgrade. Is there any timing, any way you can quantify how much of your install base might be subject to that?

The impact over time for both Europe and North America will be over 50% of the paint that's dispensed. The time horizon for which that takes place is probably two years or so.

Now it is yet to be determined based on the specific paint chemistries how much of the equipment gets replaced versus upgraded. In some cases existing equipment can get upgraded, in other cases it needs to be fully replaced. In a very robust economy, nearly all of it would get replaced. There may be some thinking towards trying to upgrade versus replaced until that economy supports this -- the full replacement activity. In terms of how it impacts the numbers, we don't think over the next six months it is going to be huge. As we work our way into 2010 it should be quarterly sequentially a bigger portion of what we see driving sales activity within the segment.

All right. And just one final question on HST, during the quarter you experienced a pretty flat sequential revenue run rate, around $74 million, margins were down a little over 100 basis points. Can you talk -- again sequentially -- can you talk about what you experienced there in terms of mix, because it sounded like the non-core businesses were absolutely down more dramatically than the instrumentation side of the business, and I guess I'm trying to understand what margin dynamics are at play there.

The primary issue is obviously volume versus mix. But Dom, give us a -- .

Yes, the margin from core versus the industrial are too far off so it's more of a volume based decline than anything with mix Matt.

Okay. Great. Thank you.

Okay.

Next in queue we have [Scott Graham with Ladenburg Thalman]. Please go ahead with your question.

Hi, good morning. It is kind of the same question that Mike asked earlier, in terms of progression during the quarter, but maybe more specific drilldowns into some of your larger markets. You can skip water because I'm pretty familiar with that. But refined fuels, and maybe even on the sanitary side of water, AI, DIY, just -- and general manufacturer chemical. Could you talk about Larry, Dom, how those orders progressed?

Okay. Yes, let me give you some more anecdotal than quantitative by specific sub-end market, but -- actually maybe the easiest thing to do would be to classify it in three tiers -- good, okay, and still lagging in terms of recovery. And that would apply to what we saw in terms of linearity in the quarter but also what we're going to see for the rest of the year.

Our energy business was robust in the quarter, and improved nicely, and we continue to see a good second half. A lot of that driven by international activity. Some project wins that certainly support that already. But also, there's infrastructure spend associated with some of the refined fuels applications. Even some of the LPG/CNG applications that might defy logic given the fact that some of that exploration is down. But on the downstream end of energy, there is still a pretty decent international spend assumption that we have built into the second half, and frankly seeing the evidence of that.

So I'll skip water because energy and water will lead FMT. AG, we remain watchful on short-term, but we think it comes back, certainly with the end of the year. The other good segments are obviously the core healthcare segments as I mentioned earlier, but that also would include, Scott, things like the dental equipment and biotech applications. Also within the good category in terms of where we thought we -- we -- excuse me -- where we saw good performance during the quarter, where we will see good second half performance would be rescue tools. Again, nice international project wins there, and pretty good line of sight to some nice projects that we'll see through the back half of the year.

On the -- what was relatively linear, we're not seeing current signs of big pickup, and probably not through the back half of the year, so the second tier, I would say food and bev is moving along, not dour, not certainly turning south, but not expecting to pick up any time too soon. Some of the big pharma spend we expect to continue to be flat for the back half. And then mix signals and semi conductor right now, where we do sell some equipment into the semi conductor space. Some of that is improving. Changes in CapEx requirements as they retool or reoutfit some of their manufacturing and in other cases, deferrals.

And then I would say also within the okay category, and probably flat assumptions for the back half of the year would be fire and BAND-IT for the prepared remarks. Fire had a great first half, their back half looks good, but we are watching the last portion of their year just based on how muny spend trends continue. And BAND-IT is already seeing a bottoming. We're not seeing a huge lift, but BAND-IT is starting to see signs of some positive growth in the markets that they serve. And it's a pretty broad-based set of industrial markets in their case.

And then on the ones that are lagging, and that we don't see coming back any time soon would be chemical, and I would say more of the factory automation equipment applications that we do serve to some degree. Those are going to lag the rest of our end markets in terms of recovery.

Okay. That's most helpful, Larry, and I guess the one thing that I -- it sounded like you are coloring that for the whole idea that second quarter is a little bit seasonally better than the first quarter, right? You discounted that within those comments?

Not as much this year as last year seasonally, but, yes, that is correct.

Right. Okay. Last question, the restructuring, was there anything -- I assume it remains, you are shooting for that 40-plus million linear progression in terms of the realizations -- is that fair -- if we were to just straightline that?

It is Scott. I will tell you that the numbers are consistent with what we said in the last quarter call. The good news is different from most of all of the companies that we talk to out there that were largely done. We have moved very quickly. Very aggressively. The team did an absolutely phenomenal job.

You would classify what we're going to do going forward is more tweaking, and stuff that improves our structural position so we can further leverage going forward as we grow. But for the heavy lifting a lot of it is already under bill. And the numbers that you have in, you can consistently model the probably $30 million to $35 million this year, and north of 40, certainly as an annual savings that we'll see out of the work done thus far.

Got it. Thanks very much.

You bet.

(Operator Instructions). The next question is from Christopher Glynn Oppenheimer. Please go ahead with your question.

Thanks, good morning.

Good morning.

On the operating margin guidance, 14% to 15% for the year. Larry you emphasized 15% at the beginning of the call. Maybe with the -- it's where you were in the second quarter, and with Dispensing falling back, what do you see filling that in?

Remember, Dispensing is about 10% of sales.

Yes.

And we're not saying that Dispensing is going to fall back to where it was in the fourth quarter of '08 or the first quarter of this year. It will perform better based on the cost actions taken. So it doesn't have to be a large lift otherwise to offset what is the lack of volume in Dispensing.

And then at FMT it looks like there was a bigger difference between the underlying and the reported this quarter than last. Did you have some incremental integration activities going on there? It looks like the acquisition was a little bit more of a drag. And what -- and how does that go sequentially?

If you look in the release we specify the restructuring that we incurred in the quarter. The -- you have that. The acquisitions in terms of operating margin performance are a bit of a drag, yes, for sure, when you take the amortization in accordingly. Is that -- am I getting at your question?

Yes. I think so. I mean, just kind of wondered if there was some more inventory amortization or --

Oh. No.

Okay. And then just pricing on process instrumentation in general?

In terms of our pricing or --?

Yes -- well, industry pricing. Is there any more competitive bidding for process work that you are seeing?

We're seeing a bit more competitive activity in the open-bid environment, so in some of the municipal spend -- associated projects than we have historically . In the classical portion -- the majority of the market structure that we serve -- and by way of how we go to that market, I would say it's not any different than what we have seen historically. Price was a very little bit of a positive during the quarter. We're not assuming any help from price in the back half of

Thanks for the help.

Yes.

The next comes from Walt Liptak with Barrington Research.

Good morning, everyone.

Hi, Walt.

My question, I would like to go back to HST and just ask the question in another way. The operating profit was about $1 million lower sequentially, but the sales were roughly the same, maybe down a little bit, and I understand -- your comments about underabsorption. Was there something else going on there with -- mix or -- or some other cost running through there that aren't going to be in the back half of the year?

No, Walt, just the normal mix, I would characterize it that way, but there's no abnormal cost increases or other items going through sequentially.

Okay. All right and then I want to ask about -- you mentioned the $30 million to $35 million run rate for cost takeout this year. On a quarterly basis where are you at? Are you at the full -- if you take the cost out for this quarter, annualize it, you are in that range right now? Or do you get a better cost takeout in the back half of the year?

You get a little better from a full realization. But assume what you saw in the second quarter is indicative of what we're already positioned to achieve.

Okay. And then, in your guidance, you don't assume a recovery which I guess in this environment is very prudent. But I wonder if there is something more behind that? Is there customer discussions? Is it just the corporate top-down view? How do you view the chances of a recovery?

No, I would tell you, Walt, that nothing is customer specific that is of the sort. Matter of fact, quote activity is actually pretty good. And the we way we would characterize it now is the same as we had in the last call. There's a stickiness right now to getting stuff to the point of action. Be it in the classical private sector form, the stuff we typically do, or in the open bid public project work that we do.

And I think what we're going to find, frankly is that there is going to be a lot of wait, wait, wait, and urgency to get things done pretty quickly. And we have talked a lot internally about how we need to be prepared for that. We are prepared for it in terms of resources to apply. And also how we need to probably work through the course of the recovery here to build our skid and systems capability in some of the businesses. Because in many cases, they are not -- the customers are not going to want to wait to get systems fully deployed, so we're not going to be in a position where we can sell component products, we're going to be developing and selling more of a systems content, and we are focused internally on how to take some of the available capacity and migrate it to that.

So we're taking a prudent approach by looking at the second half the way we are. At the same time there is nothing that's customer specific that's dour in any way. Things appear to be okay. I'm not to get into too much detail, but when we look at the month of July thus far, things are certainly okay, and when we look at 2010, we think at this point in the game, that there is good opportunity for some of the end markets that we're in to come back pretty nicely.

Okay. I hear you. But let's say in the back half the recovery doesn't happen. You mentioned there's still some tweaking going forward on leverage. I assume that means you are going to consolidate some operations. But if things get worse, how much more cost can you take out or are you done with the real heavy lifting within the operations?

Well, we can take out more cost. We do have additional levers, should we need to, that we can go apply. And we have things that are ready for us to go ahead and work.

However -- well, the approach we took was -- let's get to what is the appropriate cost structure, without impairing our ability to take share now or grow on the backside of this, so get right sized for the environment, not spend our -- the -- what is the exit of this recession trying to continually consolidate, but get to a position that we can build and highly leverage with a little bit of growth to the bottom line. If you look at where we are now, we do think that, against a pretty broad base of end markets, we're not going to see further falloff generally speaking. Some, little bit of sequential lift in the back half. Some, little bit of falloff.

But in 2010, certainly a prognosis for improvement. And the cost structures is already largely there. The tweaking has to do more with -- as you said -- finishing out integration activities with certain specific plans and a couple of small things that we think make sense to do that both improve our cost but also improve our customer-support capability. And with a little bit of sales growth, we ought to see a very, very nice flow through. So, that's the macro and IDEX specific view of our operations --.

Do you have a number for us on the -- the percentage flow-through?

Well, north of what we have said historically. Historically, we have said 35%, so we think our opportunity as growth returns it is much better than that.

So in the 40% to 50% range?

Yes, exactly.

All right. Thanks, guys.

Sure.

Next in queue we have Charles Brady with BMO Capital Markets. Please go ahead with your questions.

Good morning, this is actually Tom Brinkmann in for Charlie Brady. Just wanted to know about the sales mix within the fire and safety diversified products. How it turned out this quarter. You mentioned last quarter it had an impact on margins higher fire suppression, a little bit lower BAND-IT revenue, and just curious how it turned out this quarter.

The mix was pretty consistent with what we saw in the first quarter, in terms of a third, a third, a third. But fire has had a pretty decent first half. If you think about our commentary first half, second half, as fire, perhaps comes down, we replace that with tools, and with BAND-IT, we should see stable to maybe improving second half margins. Mix should be favorable in the second half.

Okay. Good. You had some upbeat comments about the outlook for downstream and energy markets in the second half on these international projects. Just curious if you can talk about what types of projects, is it new refineries, overhauls, expansions or non-refinery work, and what your visibility is in terms of the duration of those projects?

Where we're seeing the best opportunity now without getting in to too much specificity for market street reasons, but basically it's distribution of energy in areas of the world that are underserved today, so you can think about Asia, the Middle East, Europe, in some senses, where we think there are -- we know for that matter -- are good opportunities to continue to grow our presence and the projects have already got dollars allocated to them.

Okay. Thank you.

And next in queue, we will take a follow-up question from Mike Schneider with Robert W. Baird. Please go ahead with your question.

Hi Mike.

Hi. Dom, could you give us some sense on raw materials where you are on your curve and cost of goods sold and is there additional benefit versus price coming in Q3, versus Q2?

Mike, there is a bit of benefit in places like BAND-IT, but overall, I would say that the run-rate in terms of ongoing is consistent with the second quarter. We'll still see our continued global sourcing savings, which we discussed in the last call, but those have been fairly ratable over the first and second quarters. So I wouldn't expect to see a major margin impact favorable other than in places like BAND-IT where we have achieved some decent buying in terms of the first half versus the second half.

Sure. And then on BAND-IT, I was intrigued about your comments about BAND-IT getting better during the second quarter. I view that as the best leading indicator within your portfolio. Could you give us just some more color on BAND-IT specifically?

I said second quarter, I meant second half.

Okay.

Just to be clear. And BAND-IT is a pretty good proxy for base-rate spend. It is both project and MRO-based. And we don't see a huge return to growth in BAND-IT, but positive sign. Some of that again based on new products that we're introducing and some specific wins, but we think that BAND-IT toward the end of the year is going to have a much better view of growth for 2010 in particular.

And is that growth because of the new products or because markets are improving?

A little of both.

Okay. And then Dom on the guidance, am I right that the methodology has changed somewhat. Q1, you are including the Q1 charge, and expense, but excluding all future restructuring, and now the slides read that the annual guidance excludes all restructuring [sense] for the year, including going back to Q1?

No, the annual -- the current guidance excludes another $0.02 to $0.03 in the second half, Mike, that as Larry put it, we're still tweaking some of the potential additional actions. So I would think of is more our commentary with regard to how we did the bridging last time with regard to the second half recovery, that $25 million, and $0.13 on the Q1 chart is the number we have said we haven't seen that level of recovery at this point in the year.

The annual range now of $1.35 to $1.45, does that exclude the $0.05 of charges in the prior -- in last quarter, that is the first quarter?

Yes.

Okay. And finally on incremental margins. I calculated at least -- excluding acquisitions -- it looks like it was about a 31% incremental or decremental margin this quarter. Do you have that number ex-currency?

I don't have it in front of me Mike. The better way to maybe think about it is if you look at sequential Q1 to Q2, and that is in that 40% to 50% -- actually a little bit higher percent range on the upticks. So I would look at it more that way as you look at the go-forward cost structure than going back to the prior year, but, holding 31% on the decremental side with a 17% to 18% decrease organically, wasn't exactly easy.

Indeed. And impressive. Thanks again.

And with no further questions in queue, I would like to turn the call back to Larry Kingsley.

Okay. Thank you. Thank you all for joining.

In summary we would say we feel -- feel good about where we stand at this point, largely as a result of having completed the actions, as we just described. We're at a good position. We feel good about the fact that the markets are stable with signs of some potential improvement coming towards the very end of the year, and into 2010 and the team has done a solid job with operating performance, as you can see margin in a great place and cash flow for the quarter just fantastic. And a good position looking forward. Certainly watching the economy, but also working hard to make sure we guarantee our own success.

Thank for joining, and we look forward to talking to some of you through the course of the summer and everybody at next quarter's call.

Ladies and gentlemen, that does conclude today's teleconference. Thank you all, once again for your participation.