藝達思 (IEX) 2015 Q3 法說會逐字稿

Greetings, and welcome to the third-quarter 2015 IDEX Corporation earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions).

I would now like to turn the conference over to your host, Michael Yates, VP and Chief Accounting Officer. Thank you. Mr. Yates, you may begin.

Thank you Tim. Good morning everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX third-quarter financial highlights.

Last night, we issued a press release outlining our Company's financial and operating performance for the three-month period ending September 30, 2015. The press release along with the presentation slides to be used during today's webcast can be accessed on our Company's website at www.IDEXCorp.com.

Joining me today is Andy Silvernail our Chairman and CEO, and Heath Mitts, our CFO.

The format for our call today is as follows. We will begin with Andy providing an overview of the third-quarter financial results, and then he will provide an update on what we are seeing in the world and discuss our capital deployment. He will then walk you through the operating performance within each of our segments. And finally, we will wrap up with an outlook for the fourth quarter and full year 2015. Following our prepared remarks, we will 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 2 hours after the call concludes by dialing the toll-free number 877-660-6853 and entering conference ID 13604137, or you simply may log into the Company's homepage 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 and Exchange Commission.

With that, I'll turn this call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike, and good morning everybody. I appreciate you joining us here for the third-quarter 2015 call.

As we all know, 2015 has been pretty challenging. We talked about in previous calls the softness we've seen in the ag market, in oil and gas, and the strong US dollar. In the second quarter, we noted that we had seen some slippage in industrial distribution in the first half of the quarter, and we definitely saw that come back in the third quarter. While these market conditions are out there and they remain, we have been very focused on delivering quality of earnings and cash flow, making sure we are funding our best investments internally, and also really leveraging the benefits of our well-positioned diversified portfolio.

I'm pleased overall with the execution that we had in the third quarter and we saw some pretty decent numbers, given the conditions. We delivered $0.89 of adjusted EPS, which is $0.01 ahead of last year. We had operating margins that were 21.5%, which is 70 basis points better than last year.

In particular, we had impressive margins increase of 460 basis points in fire safety and diversified, and I'll take some time here a little bit later in the call to give some more color there.

We also had free cash flow of $105 million, which was 132% of net income. And we continue to focus on capital deployment.

We closed the CiDRA acquisition. We divested a small product line business in Ismatec that had an $18.1 million gain. And we repurchased 911,000 shares for $66 million in the quarter.

As I talked about in the second quarter, we've also taken further steps to improve our cost structure through restructuring in all segments. In total, we now expect to spend about $8 million to $10 million in the year with significant savings in 2016. For the full year, we now expect EPS to be $3.50 to $3.53, and even though we have the challenges that I've noted here in 2015, we're going to take them head-on. We're going to continue to invest in our businesses. We're going to grow in select areas and we're going to drive productivity across all segments.

Again, I'll give some color here more in a moment but before I do that, let me talk about what we are seeing in regions around the world, some end markets and also talk about capital deployment. In North America, as we all know, oil and gas in the ag market continue to be pretty difficult. As I mentioned before, industrial distribution did soften in the second quarter and continued into the third and we do expect these conditions to continue here in the fourth quarter.

Europe remains stable although we have seen pockets of growth, particularly in water and dispensing, and we have seen some uptick in our energy business coming out of our European units. This has been offset by the continued weakness we are seeing in Eastern Europe from the political instability.

China, the story really remains the same. It's been in line with our expectations. It has been weak here for some time, but we don't expect it to deteriorate any further from here.

Even though we are seeing some headwinds, there are some pretty nice -- there is some pretty nice momentum across geographies in a number of markets, and these include life sciences, municipal and in dispensing. In total, we think that our current guidance captures the market conditions that I have talked about here.

With that, let me turn to capital deployment. This has been a real highlight for us in 2015. As we've talked about here for quite some time, we have a four-pronged approach to capital deployment. Number one is really maximizing organic growth; two, consistent dividends; three, repurchasing shares when we believe it's below the intrinsic value of the Company; and four, importantly, strategic M&A.

On the organic growth front, we have been investing aggressively. And these conditions, although they can be difficult, they really are fertile times for investing in organic growth. You see a lot of indiscriminate cutting by a lot of different competitors. And what we are able to do is really focus on driving productivity, reinvesting into growth areas and continuing to expand margins and cash flow.

We're going to continue to reallocate people and resources towards our best opportunities where we can drive differentiation, we can drive growth, and we can gain high relative market share. Some examples here in 2015 are the Viking motor speed pump, our fluidics systems for life sciences, our Gast 86/87 rocking piston and our StrongArm in rescue that we launch earlier in the year.

Turning to dividends and share repurchase, in the past three years, we've increased our dividend by two-thirds, and in the recent quarter here, we are declaring our $0.32 dividend. And for the year, we have repurchased 2.4 million shares for $179 million, and you could expect to see about a 3% share reduction here in 2015.

In terms of M&A, we deployed about $200 million this year in three acquisitions -- Novotema, Alfa Valvole, and CiDRA Precision Services -- and those lay across three different businesses within IDEX.

And the M&A funnel continues to be strong. We've got opportunities across our segments. Going forward, you should expect to see us continuing to leverage our balance sheet and strong free cash flows in this important strategic priority.

All right. Let me now turn to the third-quarter results. I'm on Slide 4.

Orders were $485 million. They were down 4% in total, down 2% organically. For the quarter, revenues were $504 million, down 6%, down 4% organically. We've talked about the major contributors in terms of oil and gas, the ag markets and slowing North American industrial. However, op margins of free cash flow were both very strong in the quarter. Operating margins, as I noted, were up 70 basis points to 21.5%. Free cash flow was $105 million converting to 132% of net income. And as I said, EPS for the quarter was $0.89, up $0.01 from last year. Again, overall, I'm pleased with the execution and pleased with the discipline that our teams are bringing to this challenging marketplace.

With that, let me turn to the segment discussions. I'm on Slide 5 and I'll start with fluid metering. FMT organic orders decreased 3% in the quarter. Organic sales were down 4%, primarily due to the challenges I've already discussed. Operating margins were down 120 basis points in the quarter due to lower volume and non-cash acquisition charges.

Let me note, however, that if you remove the impact of the acquisition inventory charges for Alfa, FMT margins were actually flat year-over-year, so that's nice performance in the face of some volume declines.

In water services, we've had a strong global municipal market. In particular in the US, we saw municipal business up about mid-single digits for the quarter.

The UK has also had improvements in the marketplace and we have won share with new products. And across the platform, we've had margin expansion, and I expect to see that performance continue really through the balance of this year and into 2016.

In industrial, I've already talk about what we are seeing in the overall markets, and this is true in our pump business, and we do expect those conditions to continue through the year. However, if you look at North America and Europe, particularly in the chemical businesses, we're seeing low single digits growth and we're seeing nice momentum as we enter 2016.

In energy, we've actually had a surprisingly good story here. Overall topline remain stable in this environment. We've kept price, and we've seen some business uptick in the European and Middle East, some downstream products that have rebounded here recently. This has been offset, however, by the issues we are seeing in North American oil and gas.

Outside of large projects, if you look at North America, we are seeing strength in aviation due to lower fuel prices, but our mobile business has been a little bit slack here as we expect the truck builds to slow down in 2015 and in 2016.

On the ag front, you know the story very well. We have had weakness throughout the year, as we expected. We do expect that to continue in 2016. But again, this is a business that long-term has been favorable for us and we believe will continue to be over time.

All right. Let me turn to Slide 6. We are talking about health and science. In the quarter, organic order growth was up 2%. Organic sales were down 3%. Margins, op margins decreased 40 basis points really driven by business mix.

And in terms of the different platforms, scientific fluidics really continues to be a bright spot for us. We've seen strength in analytical instrumentation, in fire, and in the IBD markets, and we expect this demand to continue in 2015 and into 2016.

In sealing, that's been a little bit of a mixed bag. We've seen some nice share wins in semiconductor although that has been offset by the weakness in upstream oil and gas. And we expect these conditions really to continue throughout the balance of this year.

Optics and photonics has been stable in the quarter. We saw the industrial and the laser optics business weaker, but underlying life science demand has been very solid. And again, profitability continues to expand in this platform.

HST industrial looks a lot like what we talked about in FMT with distribution softening, but the team has done an excellent job winning business in adjacent markets and continued to improve productivity.

In material process, it was actually a strong quarter for MPT. We saw strong orders and momentum going into the fourth quarter really across a number of markets, particularly in Asia. We expect to see the benefits of this in the early part of 2016. As you know, this is a lumpier business for IDEX. We are seeing capital spending spotty over time, but this is a good news story right now and into the early part of 2016.

All right. Let me move on to the final segment. I'm on diversified on Slide 7. Organic orders were down 8% and they decreased -- organic sales were down 5%. The decline is princely driven by tough comps compared to the fire trailers of last year and softness with BAND-IT really with the depressed energy prices. As I mentioned earlier, we had operating margin that increased 460 basis points, and this is obviously a very impressive performance for the team, but I will caution you not to set that as a new benchmark.

In the last two quarters, we've had outstanding business mix, specifically within the dispensing and the fire businesses. And we expect in the future to see more normalized profitability.

Dispensing has been a good news story for us across the globe. We've seen strength in North America, in Western Europe, and in Asia. The wins that we are seeing have been driven by the improvement in overall construction markets, but very importantly, the strength of our X-SMART product, which is going to grow another 25% this year over last year.

In fire suppression, the core North American and UK businesses have been in decent shape. And although we don't expect any particularly large projects this year, we are continuing to see nice wins in those domestic businesses and excellent profitability driven by productivity across the platform.

In rescue, we did see some delays in projects internationally, but the North American business has continued to be strong. eDRAULIC 2.0 has taken share consistently. And we launched our StrongArm tool, which is a utility tool for fire and for law enforcement markets, and we think this is going to have nice momentum going into 2016.

Finally, looking at BAND-IT, as we talked about, the conditions have been difficult. The industrial distribution and the oil and gas businesses have been challenging to BAND-IT, but the transportation segment has continued to grow. BAND-IT has been a bellwether for us, continues to perform and we have high expectations for the business going forward.

All right. Let me conclude now with the fourth-quarter and the full-year 2015 guidance. I'm on Slide 8. For the fourth quarter, we now expect EPS to be $0.88 to $0.91 and operating margins of 20.5%. The Q4 tax rate should be around 27% to 27.5%, and we expect about a 3% topline headwind from FX. As I mentioned earlier, we now expect full-year EPS to be $3.50 to $3.53, and we expect revenue growth to decline about 2% to 3% and full-year operating margins to be about 21%.

Just a couple of other modeling items for you for the full year. We now expect FX to impact us by about $90 million for the year compared to $95 million from prior guidance, and that's about $0.20 of EPS impact for the full year compared to 2014. CapEx should be about $45 million, free cash flow about 120% of net income, and again, share repurchases should decrease the share count by about 3% for the year.

Finally, as always, we need to exclude the impact of acquisitions, both positive and negative, and also take out the impact of restructuring charges and the gain of sale from the Ismatec product line.

With that, Tim, let me turn it over to you for questions from our audience.

At this time, we will be conducting a question-and-answer session. (Operator Instructions). Mike Halloran, Robert W. Baird.

So, a couple of ones here. First, on the HST side, I was a little surprised that organic revenue declined in the quarter, but obviously the orders were pretty solid. So maybe talk a little bit about if there was any blips in the quarter specifically that would've maybe changed what the run rate is in that business, and how you're thinking about the progression as we move into the fourth quarter and 2016.

So Mike, on HST in particular, things that were touching the scientific world, life sciences in particular, we saw nice strength. Anything touching food we had strength in. It really -- any weakness we saw in the quarter was due to the industrial portion of it, principally around Gast. As you know, that behaves a lot more like FMT, and that is any slowness we had there. The core scientific and health pieces of the business performed very well.

And as you think about that on a run rate going forward, is this an area where you're expecting organic growth in the fourth quarter, or is that something that might normalize out as you hit next year and some of those MPT projects that you mentioned start rolling through?

So, if you think about 2016, I would expect that to be the case. I think you've got my strength and life sciences, and we still see in the early part of the year the benefit of the projects for MPT shifting. In the fourth quarter, net-net, I think you end up being flat year-over-year.

And then more broadly as you work into 2016 here --

(multiple speakers)

No, I understand completely. You're still going to have FX headwinds. As you work into 2016, maybe you can just talk about some of the thoughts you guys are having internally going into next year. What are the buckets where you think that growth is going to be achievable as you hit next year? And where do you think the headwinds are going to persist as we go into next year? Essentially just an early read on what you're seeing an environment today and what that tells you about next year.

I think the biggest headwinds we're going to see are going to be in the first and second quarter, which I think they will be meaningful. So the fall off in spending that I think everyone has experienced relative to capital projects in oil and gas, I think they really in terms of from a comp perspective they're going to be tougher in the first and early in the second quarter and get a little bit easy as you get into the third and the fourth quarter next year. I think that will absolutely be the case.

Ag is a little bit of a wildcard to be honest with you. It's a little bit tough to find the bottom there. I think everyone has worked through that. You've seen what happened with the big capital producers. But net-net, I don't see that as a big negative going into next year.

I think the biggest question mark is going to be what happens with industrial, kind of the North American industrial business, and what happens with China. Those are the two things I think are the biggest question marks going into really the fourth quarter. I think the fourth quarter we got pretty dialed in, but I think, as you go into next year, those are the biggest things.

In terms of upside, I think municipal is going to continue to be good. All signs continue to point to that. I think the scientific piece of our business in life sciences. Whether it's analytical instrumention or bio IBD, those are good news stories really across the board.

And you have had a lot of headwind from FX that we start to laugh here as we get into the back half of this year, back half of the fourth quarter first part of next year, and we will see how that plays itself out. But Mike, I've said pretty consistently that I expect 2016 to be a slugfest. I don't think it's going -- the market conditions are going to be meaningfully different from what we've seen, and it's going to be about being very smart with internal capital deployment, meaning where we invest in our businesses, driving productivity and very smart external capital deployment.

It makes a lot of sense. One last one for me. Obviously great FSD margins. Recognizing that those aren't sustainable, you highlighted the normalization you expect. How do you define normalization? Is that towards something, that 26% kind of range for that segment on the margin line, or should we be thinking about it a little bit different now?

I think modeling it, given the relative size of the segment within the portfolio, $1 million here or there can swing the percentages around quite a bit. So, I think modeling it probably between that 26% and 28% range is fair.

Thanks guys. Appreciate it.

Steven Winokur, Bernstein.

Hi everybody. This is Peter Lennox-King on for Steve. I was wondering if you could maybe talk me through a little bit more detail on the restructuring front. Is the allocation between the segments for the remaining $3 million to $5 million or so that's in the guidance, is that allocation going to be similar to what you had in Q3? And then could you talk through a little bit of the payback timing, the magnitude, and where -- how big the benefits will be for each segment as much as you can?

I think the spread, as you noticed in our adjustments that we made by segment, was a little heavier towards FMT and HST in the third quarter with the fire and safety, the diversified business, only receiving about $300,000 of that charge. It will probably be a little bit more ratable in the fourth quarter, but still heavier towards FMT and HST.

In terms of the aggregate payback for that, so we're going to end up taking a charge of somewhere between $8 million and $10 million in the second half of the year. You can assume that that payback has somewhere less than a one-year payback. So obviously the benefit from that, which we will quantify as we go into next year's guidance here on our January call, will be somewhere north of the charge.

Okay, thanks. And then maybe shifting gears a little bit back to capital deployment, can you talk a little bit about the M&A pipeline? How are you thinking about getting more aggressive, less aggressive in the current environment with all of the volatility? And then again, as much as you can, which segments you're sort of targeting, or which businesses you are looking to really move on?

In terms of the segments, we actually are looking at things across the three segments. And there are some things that we've been cultivating for quite some time, and some things that have developed in the recent past that make our pipeline pretty attractive. We feel good about where our pipeline is generally, both in the near-term and in the longer-term. And so we feel pretty good here about our ability to execute on M&A. Maybe in the balance of this year, maybe not. We will see. As you know, these things move around quite a bit. But certainly as we go into 2016, we have an expectation of doing so.

And as you know, we made an important organizational change here earlier this year, and a big piece of it was really freeing the organization to be more aggressive around M&A. We've got a great balance sheet, as you know. Cash flows are terrific, and we think that we have the organizational structure to do it.

The environment is an interesting one, because this is an environment, as you pointed out, that is very volatile. At the same time, as you say, sometimes you've got to take the cookies when they are passed. And there are some pretty nice properties that are out there. You may not buy them at the perfect time, but at the same time, we understand what we are looking for and we are looking for businesses that are structurally fit over the very, very long-term and are going to deliver high returns for shareholders.

Great. Thank you. And just one final follow-up there. The aggregate spend over time that you're looking at, is that still thinking about the same sort of size range there and the same individual -- size of individual deals as well?

Yes. Our sweet spot is that kind of $50 million to $200 million, $250 million. That really is our sweet spot. As I've said in the past, there are a few things that are larger that are north of $1 billion that we look at consistently. Those are few and far between, but there are some that are out there. Our sweet spot and where we really drive value for shareholders is in that $50 million to $250 million range.

Great. Thank you very much.

Matt McConnell, RBC Capital Markets.

Thank you. Good morning guys. So, guidance for the fourth quarter, it seems like organic revenue declines are moderating. Is that what you intended to incorporate into the outlook? And how much of that is coming from an easier comp in fire and safety versus any kind of stabilization or sequential improvement in the other two segments?

We are not expecting sequential improvement. It really comes down to comps when you look at the fourth quarter. I think this environment right now is squishy enough that any belief that we're going to see a material change in the external environment in the fourth quarter, I think that would be misplaced.

Okay, great. Thanks. And just a quick follow-up, Andy, you made a comment that China you don't expect to deteriorate from here. Is that based on specific customer conversations, or just what gives you the confidence to make that kind of declaration?

We've had a pretty tight beat on China here. If you remember, if you go back even a year or 18 months ago, we started talking about the fact that we thought China was meaningfully weaker than call it the headline commentary. And for us, it really is kind of looking at the underlying business and where we are seeing demand. Our Richter business in particular continues to be strong in China, and that's been a real winner for us. We do expect our rescue business to pick up here as we look at the balance of this year and into 2016. So, it's much more specific to the businesses that we are in versus a call in the China economy.

Yes. Okay, great. Thanks. And last one, just a follow-up on the capital allocation question, because you've been real aggressive with the buybacks but clearly pretty happy about the M&A pipeline and opportunity. Is there a self-imposed leverage threshold where you might slow down the buybacks, or what kind of deal do you have capacity for right now, given that you've spent quite a bit of your free cash flow this year?

We are still only sitting at just north of a turn in net debt. So we've got a great balance sheet. So I'm not awfully concerned about that. And obviously the free cash flow is very, very strong.

When it's all said and done, when you put the two side by side, our preference is strategic M&A. It certainly creates more value unless you have a major dislocation in the stock price. So obviously, as we move down that path and as deals come through, we would naturally slow down M&A. But -- excuse me, slow down repurchases.

But let me note really clearly our repurchase program is 100% driven on what we believe the intrinsic value is of the Company. And you'll see our acceleration or deceleration based on a very, very well thought out analysis of what we think that is. So as an example, when we saw the stock kind of drop down into the $60s earlier this year, we were a lot more aggressive than we are today. When the stock was up closer to $80, we were then buying back closer to 0.5% to 1%.

So strategic M&A is, number one, we've got plenty of capacity to do that and share buybacks are driven 100% above value.

Great. Thanks very much.

Kevin Maczka, BB&T Capital Markets.

Thanks. Good morning. So some kind of encouraging comments here within FMT on the muni water side and really on the energy side too. I'm wondering if you can say a little bit more about that muni water spend, what you are seeing, how you think that plays out going into next year, if there's any kind of submarkets that are driving that. And then on the European energy side, what's driving the pickup there?

Sure. On the muni side, a couple of things -- number one, a general uptick in overall spending driven by tax receipts. And we've talked about for a long time that there is -- any time you start to see major movements in tax receipts, there's kind of a 12- to 24-month lag or a leadtime depending upon which side of the cycle you're on. And so those tax receipts are starting to lift all boats, so to speak. There's just more money in the CapEx and in the OpEx budgets in the Western parts of the world than there were 12, 24 months ago. So that's one thing.

The second thing is really our strategy in particular in water services has paid off. So, we have continued to win share in our target markets and target applications. And that's what's driving the success above and beyond market.

So, as I look at 2016, we know what's in the quote pipeline, we know what we have won, and we believe, we feel pretty confident that the market is going to be better than it was this year and certainly better than it's been in the last couple of years. So in combination, it's not like it's roaring at high single digit or double digit, but a solid mid-single-digit in the US in municipal water, that's a good piece of news generally.

In terms of the energy side, I wouldn't get too excited about that. And what I mean by that is our holding our topline, you've got to remember a couple of things. First, we really don't play very much in the downhole side of the world. So as we've said in the past, that's been 2%, 3% of our total portfolio for IDEX. Obviously, that 2% or 3% has been battered this year with the reductions that you are seeing. But we mostly play in that midstream market that has held up better, so that's kind of one thing to remember.

The second thing is we've had some really nice wins in aviation that have been really share wins for us, and we've seen that across the globe.

The third is there are a number of projects that we've been on top of that in the past we've talked about the fact that they got pushed out and we didn't win. And we're starting to see those flow through in Europe and the Middle East. I would not say that is commentary about the health of the overall market, but more so our business unit performance.

Got it. Andy, in terms of price, it sounds like you've held price on the energy side. Are there some other areas, whether it's in FMT or beyond, where you've been able to get some price, or maybe you've had some pressure?

Actually, no pressure. We get the letters that everybody else gets from our customers. But at the end of the day, we will command what, Heath, north of 1 point this year?

Right around 1 point.

We'll get 1 point of price here before inflationary impact in terms of -- to net it out, but we will get a point of price this year with no significant places of price pressure.

Got it. And finally from me on mix, so that -- from time to time, it can be such a big margin mover. This quarter, of course we saw it in FSD, and it doesn't sound like you're expecting that to sustain. I'm just wondering, kind of across the portfolio, is there anything in terms of the visibility that you do have that we ought to be aware of in terms of mix, either positive or negative, as we look at Q4 or maybe even into next year?

A few things. Generally, as a portfolio, the only place we see mix impact us significantly is in FSD. In the last two quarters, that has been -- obviously has been a good news story for us and we are cautioning you guys not to build margin assumptions north of that 28% range. The 26% to 28% that Heath gave earlier, I think that's a healthy place to be.

In terms of FMT or HST, I don't expect there to be major mix shifts within those businesses, here or there, but not enough to long-term change the trajectory of the business.

Within FSD in particular, the margins there, if you go back in time, the margins there have been moving up substantially. We've really improved the profit profile of fire and of dispensing, and that has changed the overall profit profile of FSD. We are at the point now where I don't expect the kind of gains we've had to replicate themselves, and I think we are in a pretty good spot there in particular.

Okay. Thank you.

Allison Poliniak, Wells Fargo.

Hi guys. Good morning. Just going back to MPT obviously more positive on there, when you talk about the order growth, was it essentially projects that we should've seen in 2015 got pushed to 2016? And I guess what's the risk, if that's the case, to 2016 orders right now?

So, as you know, Allison, this is -- if we have anyplace that's lumpy, this is it. And you can see some pretty significant swings that can move the organic orders and organic sales for HST in a quarter in a more meaningful way than some of the other businesses.

So what you are seeing right now is we had some nice wins here in the quarter. That helps certainly on the organic order front. And they are really going to shift in the second part -- excuse me, in the first part of 2016.

In terms of what that means looking forward, at this point, we don't have visibility for the fourth quarter or third quarter in orders that might look like this. We've got a lot of stuff in the hopper but there's nothing that makes me particularly excited or particularly concerned relative to that and how it may play out in the fourth quarter and therefore later in 2016.

Great, that's helpful. And sorry to go back to the FSD margin. If I'm looking at that nice expansion this quarter, I guess, based on your commentary, can I assume half of that was driven by mix with the balance being the productivity efforts, or is my math off?

It's probably a little bit more than that. In general, the mix impact I would say looks probably more like two-thirds to three-quarters, and I'm kind of thumb nailing it here. But productivity, we definitely saw nice productivity, but we did have a meaningful mix shift in those two businesses.

Great. Thank you.

Joe Radigan, KeyBanc.

Thanks. Good morning guys. The sequential margin decline in FMT and HST, was that largely a function of the inventory step-up? And then more generally, how do you think about margin sustainability across IDEX in what looks like it's going to be a relatively protected slow growth environment going forward here?

So specific to FMT, the step-up, that was a meaningful impact from quarter to quarter. And as I said, if you actually normalized for the inventory step-up charge on a year-over-year basis, FMT margins would have been flat. So you can kind of back into what that tells you there. So really on volume being down modestly, pretty nice performance in the business in terms of profitability.

From an HST perspective, nothing really meaningful in there. There's nothing that I would say signals one way or the other any change in margin profile.

If you look at the longer-term, we've said pretty consistently that, in a low growth environment, call it 2%, 3%, somewhere in there, we can get 50 to 80 basis points, maybe even up to 100 basis points depending upon what happens in profit improvement. But if you look at that, if you're in the 2% range, you're probably looking at 50 basis points a year. In the 3% range, you're probably looking at 80 basis points of expansion just because our contribution margins are in the low 60s%. So that plays itself through very helpfully and we continue to invest in the business.

Obviously, if we get a benefit and see things pick up faster, you're going to reinvest even more but you're still going to see really, really nice margin expansion. So even if we continue to be in this environment, I feel good that, if we see just modest improvements in topline, we're going to continue to expand markets in the core portfolio.

Okay. And then within the optics and photonics business, that I think commentary for the last few quarters has been stable, maybe it weakened a little bit this quarter. But what needs to happen for that business to start growing again? Is it really the industrial end market that's holding it back, or any commentary there?

It is. So if you look at -- if you separate out the life science piece, which is performing -- continues to perform well in the core life science markets, you are now talking about the industrial and the semiconductor market. And in both of those, neither one of those have been particularly strong.

And also, to be fair to our team running the business there, we have been really tight on making sure that we are going after attractive business. And so part of it has been self-imposed to make sure we are going after the right business there, but if you get an improvement in the industrial and the electronics world, you will see some nice pickup.

Okay. And then maybe lastly, as you look at acquisitions, how do you get comfortable with the forward projections in this sort of demand environment? Has that been an impediment in getting deals to the finish line, or how do you think about that?

So the way I kind of think of it is what is a business going to look like through a cycle? And you will never buy perfectly, but what you're trying to avoid is buying something that's going to have kind of a really aggressive secular downturn, number one, or something where you are really buying on come. And those are the two situations that you get yourself into trouble in terms of kind of building in any type of -- from a growth perspective.

Generally, we are looking at businesses -- I'll use Alfa as an example. Alfa is a business with a 30-plus-year installed base. You can kind of look at it through a cycle, and even if you don't buy it perfectly, buy it from a perfect time in the cycle, by the time you get on the back half of any kind of slowdown, you are still thrilled you own the business. So you have high cash-on-cash returns, high cash flow businesses. You know what a cycle general is going to look like. You may not pick it perfectly, but if you are buying what I will call an IDEX-like business, you don't have to time the market perfectly or get the price exactly right to have it be a huge winner for you over time. And so we are more looking for the quality of the business to recycle, high cash-on-cash returns in a business, strong repeat business installed base, a big moat defensibility and high relative market share. When you get that right, timing becomes less of an issue than one might think.

Good. Thank you.

Bhupender Bohra, Jefferies.

Good morning. You guys actually spoke about industrial distribution business kind of weakness, what we have seen here. Could you talk about like destocking? Is that one of the issues within that, the end market? And how long do you think if you have an ability in that, like destocking or the slowdown within the distribution channel will last?

So as we've said in the past, unlike I think some of our peers, we don't have kind of what I would call the traditional industrial distribution channel, so we are not dealing with big catalog houses per se. We are dealing much more with value-added distributors. So we don't have huge stocking levels in the channel anyway. You have some obviously that's driving leadtimes and on-time delivery, but you don't have months and months and months of stocking in the channel. So, while I'm sure that is part of it, and I'm sure part of what we are experiencing right now and others are experiencing has to do with them being tighter, I do think that you are seeing overall demand slacking. And then inventory in the end market I think is tightening substantially.

So, if you want to put the destocking moniker on something, I would say it's more at the end-user who's gotten cautious. You're seeing the ripple effects, just like we are. We're tightening down on working capital as things are slowing, and you are seeing that play out across the landscape. And I do expect that to be tight. And just like we've seen in the past, when that starts to lose again, you'll see a nice pop, and that will be a surprising upside in a quarter at some point. But right now, I really think that what we are all seeing is mostly a slowing of aggregate demand with a little bit of impact of the concept of destocking.

Okay, thanks a lot. And the other question, we have about $8 million to $10 million restructuring this year. Let's say I don't know how much visibility we have for 2016, but can we actually, if need be, if the environment actually slows down further as we are looking at North America, which is half of your business, seeing some slowdown here again this morning, like there were many other reports which came out talking about weakness in the North American market, like what kind of cost cuts we can further kind of depend on, or can tap into some of the buckets, if you can talk about it?

Rest assured that if we continue to see the market downturn, we will continue to drive those types of savings that we need. I think you've seen that over time with IDEX and know this. It's built into the way that we think about reacting to positions in terms of where we sit cost structure-wise.

But also know that we do have areas that we need to continue to invest in. And We are not starving those parts of the business. It's important for the types of businesses that we have where we get spec-ed on to platforms and instruments and so forth that we continue to invest and not miss those cycles. So the balancing act as always is to continue to make sure we free up the dollars to invest in the growth areas and the areas that are strategic and require incremental investments and then go after the areas that tend to be more volume-based. And so, yes, we do have pockets we can go after if need be. We feel pretty good about the actions we have relative to our assumptions set for 2016, and we will quantify some of that in the January call.

Okay. That's all. Thank you very much.

Joe Giordano, Cowen.

Good morning. Just to follow on with the destocking question, I fully understand, appreciate what you said about where you guys fall within that. But do you get the sense that your customers are more -- are they destocking in an anticipatory fashion, like more so than actual demand might require this time? Are they anticipating even further declines from here? Do you get that feel?

It's hard to gauge that. Obviously, we are pretty close to our customers. I think cautiousness is out there across the board, and so there probably is some of that. Probably the best way to think of it is look at ourselves and how we are behaving. And as we see this environment, we are tightening down on our overall inventory and being more cautious about what we bring in and what goes out. So I think there is a level of cautiousness out there that can start to feed on itself a little bit.

But to be candid, Joe, I don't think I have a tight enough bead to be able to call that, exactly what's the mix of actual demand versus cautiousness. Typically, as we always see, people react too slowly at first and too quickly at the end, so there's always a mix of that. But I think, right now, I think we've got a pretty good bead on certainly what the fourth quarter looks like, and I think that next year is going to be a pretty slow growth environment.

Great. Appreciate it. Thanks guys.

Matt Summerville, Olympic Global Advisors.

Thanks. Good morning guys. A couple of questions. First, just in terms of the global chemical market, it's not an inconsequential end market for you guys. It's about 20% or so of FMT. Can you give a little more specificity regionally what you're seeing there, and I guess, again, high-level, I get it, how you're thinking about that for 2016? And then I also have a follow-up.

What we are seeing in North America and in Europe is I'm going to call it a low single-digit growth environment. And so it's holding up pretty well. China has been a little bit better, but I think that's driven more by our own actions, particularly with the Richter brand, than it is necessarily what we are seeing in the end markets. And India has been pretty good for us too. So really across the board in the markets that we play in, chemical has been I'm going to call it a good news story in a slow growth world. So it's not like it's racing ahead, but it's been solid. And I expect that to continue into 2016. If you look at the business in terms of the pipeline of what we are looking at and our expectations coming out of our units, I think expecting a low single-digit environment, 2% to 3%, is probably a good place to put your bets.

And then just with respect to China, since you specifically brought it up talking about chemical, when you came into 2015, what did you expect your organic growth rate to be in China, and where do you actually think it ends up for the year?

You're talking about chemical, or are you talking about China in total?

Total IDEX China.

Okay, so total IDEX China. We expected kind of mid-single-digit growth in China for the year. And remember that's -- China is kind of 5%, 6%, 7% of our total business, so it doesn't necessarily move the needle in total at that level. And we have been plus or minus in that area. We have not been particularly disappointed, nor are we overly pleased, so it's about at our expectation so far this year.

And then just one last one with respect to oil and gas. If you look across all of the businesses that get impacted, whether they be in FMT, HST or FSD, if you look at that 11% to 12% of total revenue that's in oil and gas, you mentioned that you're going to be relatively flat for the full year. Can you bracket that a little bit? Upstream is going to be down X percent, mid and down are going to be up X percent, if that be the case? Just a little more granularity there please. Thank you.

I'm going to be spit-balling a little bit here, so don't take this as gospel. But I know well exactly what's going on. It's across our portfolio. If you look at the upstream piece, again, that was kind of 3% of our total business coming into the year. It's more like 2% of our total business as we exit the year. So you are talking that's down a third, things that are upstream.

The midstream is going to be decent. So we don't play a lot. As you get towards the pump, so to speak, we don't play a lot there. But in the midstream, which is the bulk of our business, that's going to be kind of flattish. With our aero business being strong, and our mobile business was actually strong in the first half of the year and it's going to soften here in the second half of the year, particularly as we look at truck builds. So net-net, that probably ends up being flat for the year.

Got it. Thanks a lot guys.

Brian Konigsberg, Vertical Research Partners.

Close enough. Thanks. Good morning. I just want to touch just a little bit more on price cost. Maybe I'm just reading a little too much into it, but I guess I'm used to you guys getting a little bit of net price through the year, maybe about 50 basis points net of inflation. It sounds like you're saying that's kind of more flattish now. Has that deteriorated a little bit, or is it just the way we're describing it?

I'm sorry if you're confused by that at all, if we didn't communicate that well. No, we will get 1 point of price, and we will certainly get our typical half of that net of inflation. So when it's all said and done, it will be margin accretive to us for the year.

Okay. So about 50 basis points for the year is still the expectation? Is that fair?

That's right. And that's net of material inflation.

Net of material and bureaucratic inflation?

You referring to (multiple speakers)

Labor, yes.

No, net of material inflation is how we think about it.

Okay, net of materials. Got it. And then just secondly, just on working capital, so there's just been some discussion about, on the energy side, which may not affect you as much as some tightening in collecting receivables, just with the industrial environment, the way it is, are you guys seeing any stress kind of collections within the customer base that might pose a challenge in working capital?

We haven't. Now, we have a pretty conservative approach to places of the world that would tend to have in terms of more receivable risk in the emerging markets where we tend to do things on letter of credit or cash in advance. But in the more mature markets where credit terms are issued, we have not seen any degradation there. You have to remember we are dealing a lot of times with people that -- larger customers and people that we've done business with for many years.

Got it. Great. That's it for me. Thanks.

At this time, there are no further questions in the audio portion of this conference. With that being said, I would like to turn the call back over to Andy Silvernail for closing remarks.

Thanks Tim. I appreciate it. Once again, I thank everybody for participating in this call and certainly for the support and the interest in IDEX.

Obviously, we are facing a world that is challenging. We've got some headwinds here and we expect that those will continue in the balance of the year and into 2016. But across the board, I'm very pleased with how we are executing and really focusing on where we're going to put our resources in terms of organic growth and margin expansion and on the M&A front. So I appreciate it once again, and we will talk to you here in 90 days. Take care.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful rest of your day.