藝達思 (IEX) 2016 Q2 法說會逐字稿

Greetings and welcome to the second-quarter 2016 IDEX Corporation earnings conference call. At this time, all participants are in a listen-only mode (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Yates, Vice President and Chief Accounting Officer.

Thank you, Mr. Yates. You may now begin.

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

Last night, we issued a press release outlining our Company's financial and operating performance for the three-month period ending June 30, 2016. 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 Chief Financial Officer.

The format for our call today is as follows. We will begin with Andy providing an overview of the second-quarter financial results, and then he will provide an update on our markets, 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 third quarter and the full-year 2016.

Following our prepared remarks, we will 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, 877-660-6853, and entering conference ID 13620006, or you may simply log onto 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 will turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike. I appreciate everyone joining us here for our second-quarter 2016 discussion.

As Mike said, I am going to start off here with just a little bit of an overview before getting into some more detailed commentary.

Just as a highlight, as an overview here, we had strong execution, especially from the bottomline perspective, here in the second quarter. The second-quarter economic picture is still pretty mixed. If you look at the North American industrial markets, especially on a year-over-year basis, that continues to be pretty soft.

However, we have started to see some sequential improvement in those markets, specifically within FMT and with HST, which gives us some positive reaction.

If you look at our consumer-facing businesses or those things that touched the consumer in one way or another -- Life Sciences, Automotive, Dispensing -- and if you look at the municipal-facing businesses of Water, Fire & Rescue, those all remained pretty solid. The question marks that really exist out there on top of the overall North American industrial environment and the direction that's what to take is really around China, which continues to be soft. And obviously the questions around Brexit, and how that's going to impact the overall European economic condition.

And as we look at the industrial markets, and we think about the impact and the derivative impacts of the oil and gas business, how that's going to play out here for the balance of the year.

The bottom line, however, is given continued questionable market conditions, I think our team has done a very good job in the second quarter in terms of execution.

As I mentioned, we did see some sequential improvement. We saw throughout the quarter a ratable increase in business. We had $168 million May, $177 million -- excuse me, $168 million April, $177 million May, and $184 million June in terms of orders. And in June, we delivered about $200 million in sales, which drove most of the operational improvement we talked about.

So we are still very cognizant of the challenges that are out there in the marketplace. We have done a great job controlling costs and driving margin. And overall, this has produced pretty strong results that we saw in the quarter.

Orders and sales were up 5% and 7%, respectively. Organically, they were down 2% and 1%, respectively. A GAAP EPS was $0.99, which is up $0.10, 11% higher than a year ago. And we had operating margin of 20.6%, which was down 70 basis points.

I will get into that here in a little bit, but that was really impacted by the fair value step-up for Akron Brass and the remaining contingent consideration for CiDRA, but again, I will talk about that in more detail in a minute.

In terms of our commitment to strategic acquisitions, we continue to drive that strategic priority. On July 1, we completed the acquisition of AWG. They are a leader in the European fire safety markets and they are a terrific fit with Akron Brass in our existing Fire & Rescue platform. So really, it's wonderful to invite AWG into our family.

Additionally in the second quarter, we completed the private placement of $200 million of senior notes. Our quarterly dividend of $0.34 was up 6% year over year and we continue to, albeit at a slower pace, our repurchase plan and our M&A pipeline remains robust.

Like I think everybody out there in the marketplace, we are still not certain exactly what Brexit is going to mean for us in the longer term. In the shorter term, it did have an impact on us in the quarter. And as we look at the second half, if we assume that the rates remain the same between the dollar, the pound, and the euro, we will have some translation pressure in the second half of the year.

Let me turn now talk a little bit about core markets and geographies and what we are seeing out there. In terms of energy, the lack of demand is still a headwind for us, specifically in our energy platform at BAND-IT and at Ceiling Solutions. And as we have stated before, the lower energy prices, they do impact our industrial businesses from a derivative effect, and that's still a condition in the marketplace.

As we think about the industrial businesses, industrial distribution remains challenged, especially when compared to a year ago. But as I said a second ago, we have seen signs of stabilization in the marketplace.

Ag continues to be a challenge also. Commodity prices have remained depressed in the second quarter. We don't expect that to rebound, as we've said, for some time. But, we have seen some stabilization there, too.

Scientific Fluidics continues to be strong across our markets in bio, analytical instrumentation and IVD, and we expect that to remain the same through the balance of the year. And as I said a moment ago, Municipal has been a good story for us.

In terms of regions, in North America, the story really all is about Industrial Distribution and how that's playing out. The signs of stability are a good note, but the picture remains pretty much the same as we've been talking about here for a couple of quarters.

In Europe, we actually have -- we've overdelivered in Europe around our Dispensing and our Water businesses in a tough environment. But certainly, the Brexit decision leaves some question marks that will have to play out here over the coming quarters.

And finally in Asia, it's really a story of two major economies. One is China. That continues to be -- continues to struggle. That's not a surprise at all. We are managing that well. But the good news story for us has been India, and we have seen strong demand with Fire, Rescue, Energy and Dispensing as we've executed throughout that region.

Let me turn to capital deployment for a moment here. Our capital deployment strategies for investing in long-term growth, disciplined M&A, consistent dividends and opportunistic share repurchases remains unchanged. And as we look at our ability to deploy capital here in the future, we are in a really good position.

We completed the $200 million private placement, the proceeds of which we paid down our revolver. Today, we have about $500 million of availability on our revolver.

That availability plus cash on hand gives us a lot of capability. In fact, we paid for the AWG transaction completely out of cash from a balance sheet. So when you put together our balance sheet availability, cash on hand, and what will be more than $500 million of free cash flow after paying dividends and after investing fully in the Company, we are going to have north of $1 billion to deploy here over the next three years.

In terms of organic growth, the story remains the same. We continue to make investments to drive profitable growth for years to come. This year in particular we have made specific bets in Scientific Fluidics, Sealing, and our Fire businesses, and they are all positioned well for the long-term growth.

In terms of dividend, as I mentioned, we announced a $0.34 dividend here in the quarter which is 6% above last year. In terms of share repurchases, we have bought back 726,000 shares this year for $56 million, and that is at about $77 a share on average.

In terms of M&A, we've had an active year, as you know. We purchased AWG on July 1 for EUR46 million, which has about $36 million of sales and that complements well with Akron, which fits into our Fire & Rescue platform and together, along with our existing businesses, really makes a market-leading platform in that space.

In terms of M&A, the pipeline continues to be strong; really no change from what we discussed earlier in the year. All the work that we've done and continue to cultivate our M&A pipeline has certainly paid off for us and we expect it to do so again in the future.

Okay, with that, let's switch now to talk about results for the quarter. I'm on slide 4.

In Q2, we had $550 million of revenue, which was up 7%, down 1% organically. Orders were $529 million, which were up 5% and down 2% organically. On an organic basis, in both orders and sales, it has been challenged. However, as we look at the second half of the year, we are facing easier comps. So we do expect either flat overall organic growth for the year.

Operating margin, as I mentioned earlier, was 20.6%, down 70 basis points year over year. Similar to last quarter, our 2Q results include a few moving parts that I will get to here on the next slide.

Overall again, I'm very, very impressed with our team's ability to execute in the challenging environment.

Free cash flow is $80 million. This is [160%] of net income. It was down $6 million from last year, but that's entirely due to the timing of some tax payments here in the US, and so we will get the benefit on a comparable basis here in the back half of the year.

And finally, net income came in at $75 million with GAAP EPS at $0.99, up $0.10 or 11% from last year.

So, let me just take a minute now and I want to bridge for you the $0.99 of EPS on slide 5 here, compared to the midpoint of the bridge or the midpoint of the guidance that we gave you last quarter. So turn to slide 5 for me and you will see the bridge.

The midpoint of the guidance from a quarter ago was $0.92 and we delivered $0.99. And let me just walk you through the elements of the bridge.

First was very solid execution. That gave us about 2 points better -- beat in the quarter. Lower inventory step-up gave us another $0.02 from Akron Brass's lower-than-expected. We had the reversal of a contingent consideration of $1 million from CiDRA. That gave us $0.01 of benefit. We had a lower tax rate from an excess tax benefit for the new accounting for share-based compensation that gave us $0.01. And we also got $0.01 from the rapid change in the exchange rate between the dollar and the British pound here with the Brexit announcement, and that gave us $0.01 too.

So all told, when you add that up, that is the $0.07 of beat versus the midpoint of our expectations.

Let me transition now to the segment discussion. I am on slide 6 and we will start with Fluid & Metering.

In the second quarter, organic orders decreased 1 point while organic sales increased 1%. I know it's a small number, but this is the first increase in organic sales we have had at FMT since the first quarter of 2015. Margins were up 20 basis points, driven by an increase in volume and energy.

Specifically within energy, we saw a stronger aviation market that was offset with the mobile market that was softer, and we did ship a few large international projects in the second quarter that have been delayed for several quarters, and we had mentioned that in the past. But those kind of all came here in the second quarter.

And these -- the delivery of this business really was the bulk of the overperformance here in terms of operational overperformance.

Water had another good quarter. Sequentially they continue to improve -- and they have over the last few quarters. The municipal market remain favorable, and we have had just a great profit execution out of the team at Water.

Industrial, as I mentioned before, continues to be soft on a year-over-year basis, but we are seeing some signs of stability which is encouraging. We have done really a great job around cost control and profit execution in our industrial businesses in FMT.

And then finally, Ag continues to be soft. We expect it to be so for the balance of the year. But it is certainly not deteriorating any further.

With that, let's turn to slide 7 and we will talk about Health and Science.

Overall, the Life Sciences and the scientific markets remain strong and steady with softness in those businesses that are facing the industrial marketplace. Organic sales were -- excuse me, Organic orders were flat in the quarter and Organic sales were down 2%, and operating margins were down 30 basis points really from the lower volume in the Industrial portion of the segment. Scientific Fluidics continues to be a good news story. Orders and sales continue to be up in all markets over 2015.

We've seen strength in Analytical Instrumentation, Bio and IVD. All of those marketplaces continue to deliver and, again, we expect that to do so for the balance of the year.

In terms of Sealing Solutions, we had an uptick in Q2, really coming out of strength in our Semiconductor business, although it was offset in many parts by weakness in oil and gas and heavy equipment. HST Industrial, which I mentioned earlier, that has had dynamics in a very, very similar to what we've seen within FMT. So we are still seeing negatives on a year-over-year basis. But again, some signs of stability on a sequential basis.

And then finally at MPT we had some strength in Asia with some shipments of some projects so we had a decent quarter at MPT.

Okay, I'm on our final segment, Diversified, on slide 8. Organic orders were down 9 points in the quarter with sales -- organic sales down 1 point and operating margins were down 400 basis points versus prior year.

That being said, the real impact here came from the remaining inventory step-up at Akron Brass, which was $3.6 million. If you exclude that, operating margins came in at 26.6%, which is down 150 basis points versus last year. But remember, this is our first full quarter having Akron into the business, and I would also ask you to remember that, in the second quarter we are going to see $2 million more of fair value inventory step-up for AWG.

Dispensing continues to outperform. X-SMART has been a true success story for us, especially in developing markets. We shipped our 25,000th unit in the quarter. And remember, we launched this just three years ago.

This is a great example of our team's ability to drive organic growth.

In Fire & Rescue, again we welcomed AWG and Akron into the family. It gives us a terrific market-leading position. Rescue continues to struggle in the international markets and has for several quarters now. But, we've had a great launch of our StrongArm technology which we think is going to be a real success for us.

Finally BAND-IT, the Transportation business within BAND-IT has been strong, but general Industrial and Oil & Gas continue to be challenged overall. We did see, interestingly enough, some improvement in businesses as oil prices reached over $50.

And while I certainly wouldn't call it a recovery, it is certainly an interesting data point to see how that tracked so closely as we saw oil break $50 a barrel in the quarter until it settled back down.

Okay, I am on the final slide, slide 9. Let me give you some guidance here for the third quarter and also for the balance of 2016.

In Q3, we expect EPS to be $0.90 to $0.92, but just please remember that includes $0.02 of inventory charge associated with AWG and we are going to get $0.01 of pressure from the additional interest expense from the private placement that we did in June.

Operating margins will come in at about 20.5%. We expect organic revenue to be flat. In Q3 the tax rate should be about 27%.

If you look at the full year, we are maintaining a guidance at $3.70 to $3.75. Also remember we are going to have $0.02 of interest expense from the private placement as well as any incremental impact from AWG for the fair value step-up charges, and we will also have some impact from purchase accounting amortization.

For the full year, we are still expecting revenue to be approximately flat. Operating margins should come in at 20.5% to 21%. CapEx should be $40 million to $45 million. Free cash flow we are expecting to be at about 120% of net income. And for the full year, we are expecting a share reduction of about 1% for the year.

As always, remember to exclude any impact from our guidance from acquisitions, either the cost or the benefits in the future.

With that, Rob, let me stop here and let's turn it over for questions.

(Operator Instructions) Nathan Jones, Stifel.

Andy, could you just start by telling us how much those international energy projects contributed to the quarter?

Yes, it was about $6 million in total that we shipped pretty much in the last week of the month. So it was substantial and it flowed through at some pretty decent levels, and so that is a big piece of the operational execution.

And just remember, Nathan, this is stuff that has been sitting in backlog for an awful long time. It is pretty unpredictable when it ships, and both -- actually two or three of them just kind of broke at the exact same time.

Is there more that is still delayed sitting in backlog? Are there any other orders sitting in backlog or is this truly something we should be thinking about as discrete?

It's not of substance, Nathan. We've got some smaller things here and there.

As you know, who we don't have a lot of large things that tend to sit in backlog. These are things that are being shipped to North Africa and the Middle East and they require letters of credit and incredibly painful process typically to get them shipped. And frankly, they are incredibly unpredictable. And we had not had them in our forecast. We actually had them in a forecast for later in the year, and they happened to break in the second quarter.

Okay, and then just on the guidance for the rest of the year, you had about 2% organic decline in the first half. To get to flat, you need plus 2% in the second half. I don't think the comps are that much easier in the second half than they are in the first half. Organic orders is still running negative.

Where does that incremental demand come from that can get you to flat organically for the year?

Nathan, this is Heath Mitts. Largely, it's the things that we have visibility to in the fourth quarter.

As you know, there is a little bit of seasonality in some of our businesses, specifically around Oil & Gas and a few things on the rescue tool side. So it's our current outlook in terms of where we see third and fourth quarter coming in.

But most of that growth is going to come from the fourth quarter -- the fourth-quarter numbers. And obviously we will get smarter over the next 90 days and sharpen our pencil if that changes.

Okay, and I don't know that you are going to be able to answer this question. You talk about Industrial Distribution stabilizing or maybe getting a little bit better sequentially. Do you have any visibility into what kind of end markets are helping there? Or do you lose visibility once it gets into the distribution channel?

You certainly lose visibility into the distribution channel, although I will say that the businesses that we saw it in tend to be pretty good predictors for us.

So, with the exception of one. So we saw strength at [Viking meaning] -- when I say strength I mean stability. So not improvement necessarily, Nathan, but certainly the decrease stopped at Viking, at Rupp, and at the Industrial businesses within -- or the Industrial Distribution business within BAND-IT.

The one counter to that is we still saw some softness at Gas. And typically, Gas kind of goes along with those other three, so that was the one contra indicator. But those other three were good signs.

And then I wonder if you could just give me a little bit more color on the comment that you made that you saw some improvement in oil and gas markets when the price got to $50 a barrel. Can you talk about where the demand improvement stabilization, whatever you want to call it here, came from being it upstream, midstream, downstream, MRO, you know (multiple speakers)

The comment was really specific to BAND-IT which has very, very short cycle delivery, and it was more around the MRO marketplace. So I think again, I want to be really clear. We are not calling for any kind of recovery.

It really struck us how tightly correlated the improvement in the BAND-IT MRO business was when that ticked above $50. So what that tells me is just how tight the overall supply chain is and the fact that when you do see recovery, I think it's going to be -- it's going to come at a pace that is going to move pretty quickly, especially around parts and service.

That's very helpful. I will jump back in the line.

Steve Winoker, Bernstein Global.

Just one, want to push on one of your answers to that last question. I think that second half not only is it a couple of percent, but the fourth quarter is -- means 4% implied. And in fact, quarter to quarter, there really is no comp difference in total from getting easier.

So can you push a little harder there to give us some comfort level that all of a sudden we jump to 4%?

Yes, I think first of all, Steve, you've got to keep it in perspective. To get there, that is a $550 million quarter, which is what we just did.

Now we did burn some backlog in the second quarter. We would expect that to reverse itself to some degree. So it's not -- while the flat versus 4% or down 1% versus 4% seems like a giant number, recognize that when you look at it from a comp perspective and you look on the sequential perspective, it's not that big a number. It's the same number we delivered this quarter.

Okay, that's fair. And then just getting a little bit into that FSDP order decline, the 9%, I think I understood what happened on the sales front. Are you seeing the same dynamics, though, in the order? Would you attribute it to the same areas, then?

You know, that is just more -- remember, that is the most lumpy of our business when it comes right down to it. So you'll see that disconnect between order and sales that you don't see in the other businesses. There's nothing there that jumps out to you that says that that is -- has a significant disconnect from history or that's a big red flag in the future. I don't see that happening.

Steve, obviously that's the smallest segment. It's a little bit of the tyranny of small numbers a little bit in terms of just a couple million can swing it either way. So I would not read anything into that.

Okay, and one more question I've been debating with investors is, in your last financial reporting, one of the things you guys had talked about was how revenue from new products introduced in the last three years has dropped to 8%. Where is that -- and I think it used to be 20% in prior years. Where is that trending these days, and what has been driving that number down?

I think you may have us confused with somebody else. We have not reported any new product sales numbers in years. (multiple speakers)

It's in the last -- it's in the 10-K on page 8 from this year.

I will have to look. I'm not sure what you are referencing. I apologize. (multiple speakers) I am happy to follow up with you on that, but (multiple speakers)

No problem, but it is there on page 8. It says new products from -- revenues from new products introduced in the last three years, so it's an MPVI reference and I looked at it this morning. I would love to understand that. (multiple speakers)

(multiple speakers) sorry.

Okay, okay, that's fine. We will follow up off-line. I will pass it on. Thanks.

Matt McConnell, RBC.

Thank you, good morning. You talked about the order ramped through the quarter and certainly each month got better. How does that compare to the normal seasonality within it? So, was that ramp up in orders through quarter the same as what you typically would see? Or were underlying trends better?

It was a little bit stronger than what we had seen. Now typically, you will see some difference between early on in the month or early on in the quarter to later on in the quarter. But it did improve, especially on a sales basis. But even on the orders, it was a little bit better than what we had seen in the past.

Okay, great. And then on the balance sheet, how much of your cash is accessible right now? Because you did the private placement ahead of a pretty strong cash generation period over the next couple quarters, I would expect.

So, of that $360 million, how much is available if you were to have US needs?

Well, Matt, this is [CP]. Most of that, as you can imagine, is offshore. And most of it resides in Europe with some in China as well. So it would be fair to say we can probably pretty easily get our hands on about $200 million of it without having to do too much on the tax side in terms of dividending things back and forth. But it somewhere between $150 million and $200 million would be easily accessible, and then all of a sudden it gets a little more challenging.

Okay, great. Thanks very much.

Mike Halloran, Robert W Baird.

Just a quick follow-up on Matt's first question. When you look at orders as they track through the quarter, did orders turn positive as you got to that June month with that ramp to the quarter, or are you still tracking modestly negative by the end of the quarter? (multiple speakers) on a month-to-month basis?

June versus June comparison?

Yes, year-over-year, sorry.

Yes, let me go back and look at that. I am going to say yes, but I don't have a number right in front of me. Just by the nature of where it was coming out in April versus where we ended for the quarter, the answer to that is going to be yes. But I got -- let me caution you on that. Any one month of orders and/or sales is not a good barometer for direction.

No, no, absolutely, but orders turning positive for the first time in a while, just curious if that was the case. And then on the CapEx side, you guys lowered that from [50] to I think you said on the call [40 to 45]. The deck says 45. Anything behind that, Andy, or is that just kind of normal machinations?

No, it's just normal stuff. You end up typically -- you come into the year with a pretty large wish list, and as the year gets down, as you look at the ability of the units to actually absorb the capital, it just tightens over time. That is a pretty natural pattern for us.

All right, so it's tightening and not incremental concern from your perspective on the environment (multiple speakers) ability.

No, not at all.

Great, appreciate it.

Allison Poliniak, Wells Fargo.

Andy, can we just go back? I think it was Nathan who asked the question on stabilization. I think last quarter when we talked, you noted some stabilization. But you still thought there was a lot of risk versus opportunities out there right now. Has that changed at all for you and your thoughts?

Yes, I think the bottom has come up a little bit. So, I certainly am not going to take away all the concern that I had.

If I look back toward last quarter, the big concerns that I really had were around softness on the industrial side potentially moving into a recession. And then the really big questions on China, and then finally just kind of the constant concerns in Europe.

And so, if I were to step forward and say what has changed since then, China, I would say, is exactly the same. I think Europe, we've actually performed better. We've had pretty strong performance, specifically in dispensing and in water. But the Brexit stuff, it just puts a level of uncertainty that frankly it's hard to get your arms around what exactly that could mean.

So I would say -- in total, I would say that's modestly worse than where we were a quarter ago. And in the US, with another quarter of stabilization in Industrial distribution, I think that is modestly better.

No, that's great, thanks. And then just on acquisitions, you brought in obviously your pipeline. Is there any area that's maybe looking particularly more attractive in this environment or a product category that you guys are a little bit more focused on in that pipeline?

Not necessarily. As you know, we kind of think about our pipeline around four major areas. So industrial fluids, HST components, engineered fastening, and then around fire and safety. So if you look at our pipeline, it's pretty decent throughout.

I will say that within the HST world, things are still at really frothy levels, and so you are just not seeing as many opportunities, nor is the cultivation kind of moving along it along as rapidly as you would love. That being said, in the other three areas, it's pretty good. So we are continuing to work that.

We work it every single month, so it's just an ongoing strategic process for us. And right now, it looks pretty decent.

That's great. Thank you, guys.

Charley Brady, SunTrust Robinson.

I just want to comment on the commentary around the Brexit commentary. Are you hearing anything specific subsequent to that vote from customers or have you seen any movement in terms of projects being slowed or pushed out? Or is it just kind of -- you don't know what's going to happen yet, but nothing definitive from a customer base standpoint?

Yes, it's nothing definitive. And just to give you some sense of what it all looks like, so if you look at our total revenue, it's about 5% or so of the business that's moving through the UK.

Our cost base is actually on a comparative basis a little bit higher, so we actually have a decent hedge there all in all. So I don't think we are going to get pounded from a transactional or a translational perspective. It's pretty well hedged.

And so far, we haven't seen that play itself through, except for how are currencies have moved, and what that has done on a translational basis. I think the bigger concern for me, is if that starts contagion. That's the -- I think the UK in and of itself is not a huge concern. The bigger concern is if it starts to kind of snowball starts to roll here throughout Europe.

Right, thanks. That's helpful. And just one more on HST. Can you give us a little more granularity on the Industrial piece of the business? How much was that off? And did you see in terms of stabilization of that business, improvement through the quarter as well? Or was it just kind of soft throughout?

Well, except for Gas. So Gas is a pretty good size business for us, and it's a good profit generator. And unlike what we saw in FMT where we saw Viking and Rupp, we saw some really nice stabilization there.

We did see continued softness in Gas. Remember Gas has a good chunk of its business is going into the scientific world, and then it's got the majority of its business, frankly, that is General Industrial. And it's the General Industrial piece that continued to be soft.

And so we are keeping an eye on it. But if you look at four things that we kind of look at as early indicators, Viking, Rupp, Gas and BAND-IT, three of the four certainly saw some positive signs of stabilization. Gas was the outlier.

Thanks.

Scott Graham, BMO Capital Markets.

Good morning. So you indicated that during the quarter you felt better about orders. And I know you have talked about that more on a sequential basis than, I think, others and are asking, and I was going to ask the same thing about the year-over-year. And you cited in particular feeling better about distribution, yet the distributors are kind of thing it went the other way in the middle of the quarter.

So I am hoping you can help us without a little bit, particularly (multiple speakers) year-over-years would be helpful [and] the month.

You've got to remember, Scott, when you -- the stuff that came out this morning for some of the distributors are the commodity distributors. And we play very minimally there. We are playing more in the value-added side of distribution, that bring engineering content to work.

So I fully recognize that what you saw specifically out of Granger here in this morning flies in the face of some of the stuff that we saw in the quarter. But remember, we just don't play a lot in their world of distribution.

Okay, I just would add that MSC Industrial and [Fastener], which are maybe a little bit more engineer than that I think (multiple speakers)

No, they're really not, Scott. Those guys all play in that same world of pretty much commoditized piece parts. So (multiple speakers)

Okay, fair enough.

We touch them very modestly. Now that being said, I fully -- we pay attention to them, too, and what's going on with -- in the marketplace. And so I think that's -- you are making an important point here.

What we are seeing are signs of stability. To be very, very clear, we are not seeing signs of continued erosion. And I think what we are seeing in the marketplace, and everybody had been seeing in the marketplace, certainly around anything that was commodities-related, and then the derivative impact, had been continued negatives. And where we are seeing some stability, I know that's not exactly the most encouraging statement in the world, but stability to me is encouraging, given what we had been experiencing.

Look, stability is the new up, Andy.

(laughter) (multiple speakers) doesn't feel very good, does it?

No, it doesn't. The other question I have is around pricing. Are you guys still pricing positive?

We are. Yes, we are.

And there is still a gap between that and inflation?

For sure, Scott, this is Heath. The numbers in Q2 were very consistent with what we've seen in the past, both on the absolute gross pricing as well as the spread that we would see in this environment.

That's great. And maybe more specific to Allison's question earlier, is there something that you think in the second half that you guys could close, anything -- you're maybe in the -- further down the funnel that you would say maybe we could get another nice-size deal closed in the second half?

Listen, Scott, we are going to -- I'm going to give you an unfulfilling answer, and that is that we are always in different levels of diligence for a variety of different things, and some things break our way and some things don't, and we will see. But you would expect that the process that we followed historically would be consistent with what we would do for the remainder of this year. And going forward.

Yes, unfulfilling, okay. Thanks. (laughter) Thank you, guys.

[Bhupender Bohra], Jefferies.

A question on the fourth quarter here. You guys mentioned as we look -- we are looking at core sales decline in the first half and core sales is expected to improve in the second half now. That is more like fourth quarter-driven here.

Can you give us some more clarity from segment perspective? What is going to drive, which segment do you -- that we should think about?

Do you mean to get to the $550 million for the fourth quarter?

Yes.

Yes, so again the answer, let me touch two things and then I will take -- to the question. The first is to recognize that the $550 million is the identical number to what we just delivered. So it's not like we are looking at a big -- a giant step up here.

I think it's important to note that we are not calling for some massive breakout in sequential economic performance here in the fourth quarter.

That being said, we do have some visibility with some of the larger chunks of business that Heath mentioned earlier, that we see kind of moving us sequentially to the number. We do have some natural seasonality. So, when you put those two things together, it's just not a huge reach to get to that $550 million. And so is it $445 million, is it $555 million? Plus or minus, but around that number feels pretty good.

Right, yes, because the second quarter you just mentioned about like Oil & Gas, few projects which came in the last week of the quarter here, right? So I am just thinking about like are there any big buckets which you are looking at, whether it will be in FMT or HST? We have just seen [if] FST kind of organically retail for the first two quarters and should we think about some improvement in those markets? Or should we bank more on the FMT side of the business to kind of drive?

Our visibility in the fourth quarter is not dependent upon a lot of project activity. There are some natural things that would be more seasonal in nature in, for instance, the energy business. But not necessarily project activity in that regard. But if you go back over time, I think you would see that Q2 and Q4 largely have similar profiles.

Yes, Andrew, the pattern that we are talking about is not abnormal at all.

Okay. Okay. And another question on the capital spending here. Somebody did mention that you lowered the CapEx here. Any particular segment, or was it kind of broad-based here, the $10 million?

We are fully funding the things that we outlined for the year. We are moving forward with the investment in the facility in China that we had talked about, and we are actively investing in and pursuing investments. So this is more, Andrew, just a tightening of expectations given what we see, how people are going to absorb capital here for the balance of the year.

Okay, and lastly, just some questions on the incremental interest expense and the AWG step-up inventory charge for the third quarter. I think you did give some numbers. I just wanted to clarify. If you can give those again.

This is Mike Yates. In the third quarter, we will have a $2 million, approximately $2 million charge within cost of sales for the AWG step-up for value inventory charge. And for the back half of the year, interest expense will increase about $0.02, about $1 million each quarter as a result of the $200 million private placement that we completed in June. And that's just the difference between the blended rate on the private placement of about 3.3% compared to the revolving credit facility rate, because we use the proceeds to repay down the revolver. The revolver is about 1.5%, 1.55%. So that delta drives about $0.02 of incremental interest over the back half.

Okay, thanks a lot, Mike.

Brett Linzey, Vertical Research Partners.

I just wanted to come back to Fire & Safety. I was a little bit surprised down revenues against a down 11% comp. Certainly have some pressures in the rescue side of the business. Could you unbundle the different businesses and talk about those trends? And do you see any firming in some of the more challenged pieces as we look into the back half here?

Yes, so first of all, again as I mentioned before, the disconnect between the 9% down organic in orders and -- is in the 1% in sales, that's a very typical -- that gap between those two things is not substantial.

As you look across the businesses, again, the places that have been -- have shown strength, dispensing showed strength, BAND-IT has continued to be weaker, right? Whether -- because of the industrial exposure compared to last year. Rescue has been weaker, really, with the international rescue tools marketplace continuing to be soft. And the Fire business has been okay generally.

So when you put that together, that's the bulk of the split.

Okay, and then I guess as you look at the BAND-IT piece and the rescue international, as we look into the back half here, do the comps start to ease? Or do you think that sort of rolls into 2017?

Yes. They do to some degree. From a BAND-IT perspective, it gets easier really around the Oil & Gas side of the marketplace.

Rescue is a little bit of a wild card, just because -- you know, it's been soft now. We are into year and a half here, frankly, of the Rescue business. The international Rescue business being soft. Mind you, the US business has been terrific and eDRAULIC 2.0 and now, StrongArm have continued to be good pieces of business for us.

It's really around countries that are buying through Central Purchasing that you have seen the weakness. Obviously in the Middle East and in Asia with a lot of the crisis and -- that has gone on around the world there, that has been the weak part. '

So, while theoretically there are easy comps, we are expecting that business to be pretty soft to get to the back half of the year.

I think on the organic front, the comps specifically for Fire & Safety and Diversified segment get much, much easier in the fourth quarter, so (multiple speakers)

In total for the segment.

So I think in the third quarter we could still see some pressure just based on where the prior year came in. But in the fourth quarter, without much sequential improvement, we do see quite a step up on the organic side.

Okay, great. And then I just wanted to come back to AWG and [Akron]. You've on the businesses for a couple of months now. You are kind of working to the integration process. I guess what is the margin opportunity you see today? And separately, as you look at some of the selling channels, the topline opportunities as you poll through some of those different products, how are you thinking about the business and sort of the go-forward here?

I think with both of them, we are targeting about a 500 basis point profit improvement over a three-year period. And, obviously, we would work to bring that forward as much as possible. So, the basic economics of both businesses look very, very similar to our original fire business. And our fire business has meaningfully better overall economics that we think we can get close to both Akron and the AWG over time.

So we are going to see a nice improvement in profitability, and therefore driving returns on capital in both those businesses from that.

On the commercial side, the benefits on the commercial side are, certainly in the US as you look at the Akron business and our existing Fire business, there is a lot of channel overlap, and I think there's a lot of opportunity to bring a better overall product portfolio to market, and to be able to do that in a way where we are bringing all of the high-value content from a flow perspective to the OEMs and to the marketplace.

So, I think there is definitely some benefit there.

In terms of AWG, AWG and Akron were both the leading players in their respective markets, and so you've got the number one player in the US, the number one player in Europe. There are some materials and technology differences that will take some time to play through. You're not going to just willy-nilly integrate things that don't make sense. You want to be really sensible about that. And the channel overlaps it a little bit less there, although there are some nice benefits of having it within the LUKAS umbrella, AWG within our LUKAS umbrella, which is our principal rescue tool business.

Okay, great. If I could just sneak one more in here. So you've restructured the business to some degree. You've done a real good job on productivity.

If we do see some modest inflection within this industrial complex, I guess, how should we think about incremental margins, relative to the 30% to 35% that you guys have talked about in that sort of modest improvement environment?

There is absolutely no reason that we would not achieve those targets. If you assume that you move from what has been a flattish world to a 2% to 3% world, there's no reason that we would not be able to deliver at those rates.

If you saw something that was better than that, say 3% to 4%, I believe for some period of time, you would see even higher incrementals.

That make sense. That's all I had. I appreciate it.

Matthew Mishan, KeyBanc.

Looks like you caught like $6 million in the quarter from those delayed energy products -- projects, and I am assuming those were not included in guidance for the second quarter. And you still -- even with those, you still came in at a decline of 1% organically versus flat guidance.

Does that mean the quarter was actually coming in worse leading up to those orders of the variant of the quarter? And how does that reconcile with the commentary where you are seeing the kind of stability and some level of improvement?

Matthew, I think you're mixing and matching a few things, so let me separate them out. The first one is around those projects specifically. About half of that $6 million we had baked into our expectations, and about half wasn't. Obviously you guys would not have any insight into that going into the quarter.

And so, you are talking $3 million-ish or so of revenue that was a little better than expected, plus or minus.

In terms of that relative to the commentary of stability, you're really talking about two very different markets. One is the projects we were talking about were principally around energy and things that had set in backlog for quite some time. And the comments around stability were really around North American industrial markets. So, two different pieces that I think it's important to distinguish.

Okay, got it. And then what are you hearing from your Life Science customers around the timing of spending from increased NIH budgets and what they are spending on?

Nothing that is material. That has been a good news story for that part of the business here for a couple of years now as spending started to increase. As you know, the aggregate spending itself is not that big a deal, so how much is being spent by the NIH is not that big a deal. It tends to be a catalyst for the industry, so the $35 billion or so spent by NIH and it gets distributed incredibly broadly across scientific complex in and of itself does not drive a lot of business.

It is really -- what it does to catalyze the industry around research and around production. So it's -- in my view, it continues to be a net positive. But I don't think it is something that is an inflection.

All right, got it. And last question for me is, I think you brought down your net share repurchase to 1% from 2% for the full year. Is that a function of where the stock is? Or is that a function of the acquisition pipeline?

The pipeline has been pretty good already with AWG and with Akron in total. We put a decent amount of money to work and we've laid out a very clear capital deployment strategy for people and how we thought about share repurchase. And the combination of those two things are part of our discipline.

All right, thank you very much.

Jim Giannakouros, Oppenheimer.

Sorry if I missed numbers to this, but just to better understand the trends that you are seeing in HST, if that segment is roughly 2/3 Life Science, etc., 1/3 Industrial, what are the order growth trends that you are seeing in each of those buckets that gets you to that flat that you printed for Q2?

Or what are the growth expectations for each bucket in the second half? Just to better understand orders of magnitude that are contributing to your outlook in HST, thanks.

Jim, we don't break it down that finitely. But just to give you just some bigger picture, about half of it you will call industrial and about half you would call truly scientific. And so you can kind of piece together that the scientific stuff is up low- to mid-single-digit generally and the industrial stuff is kind of down the same, plus or minus in the quarter. And I think what you get is you get some firming from the industrial side in the back half and about the same kind of rate on the scientific side as you think about the back half. And (multiple speakers) very general numbers.

Fair enough. That's in line with how I was thinking about the scientific side, just given what the OE guys are thing.

One follow-up if I may, not to harp on Europe, but just to get a better understanding if you can provide it on the end markets, whether -- you said water is the source of strength. I believe you cited Europe as well as North America. But in Europe, specifically, just given your views that breaks it, just adds another layer of uncertainty, where would you say are you more uncertain or there is more risk?

Would you say that muni and commercial are just as much at risk or maybe muni-related type of spending might be a little bit more stickier?

I think in the short term, I think the muni spend generally has to have more stickiness to it, Jim, just because the budget cycles move much slower. And I think that is true in Europe as well as in the United States. So, with big economic shifts of any kind, municipal tends to be a laggard in one way or the other, whether it's a positive laggard or a negative laggard.

That being said, the concern that I have, that concern around contagion, if that were to play itself out, it's going to be a tough world, there. And so far, there aren't screaming indicators of that being the case, but obviously we are watching pretty closely. If we start to see it unraveling, if you start to see two or three other significant countries decide that they no longer want to play, our view is that that gets messy pretty fast.

Fantastic, thank you.

Walter Liptak, Seaport Global.

I wanted to ask about this kind of a follow-up to an earlier question about the new products. I will phrase it this way. You guys have done a great job with the operational performance in getting margin even with revenue declines last year and a half or so.

Are there programs in place for organic growth? And I guess asking about the processes that might be different from the past for new products, new markets that might help you get more revenue growth in this very slow growth environment.

I would not put it in the phrase of programs or processes. It's just -- it's what we do, and it's just how you run the businesses. And there's no doubt that the economic conditions have been challenging, and we have faced that, too.

But when you lay us out against our peer group and I actually think we -- even though I am not very thrilled with the performance, I think we performed pretty well organically, even though it's been a challenge. And if you kind of lay that out against our peer group that we call it in our proxy, or really the peer group that we compare it against, I think you would see we have pretty favorable results, both organically and in total.

That being said, how we think about this wall is we've got about 2/3 of our businesses that I have squarely put in the growth category and in our businesses that we are going to continue to very, very aggressively fund and drive organic performance. And then we've got about 25% that I have put in the world of fix, where there's something substantially that needs to be changed in those businesses to position them for future growth.

And then you've got some stuff that's kind of the middle that you are really asking to hold their own in the marketplace, and certainly win. But you are not asking for giant ambitions around growth.

And so our process is really around differentiating where different businesses fit in that world, and then investing in having expectations that are differential. That's how we think about our portfolio and that's how we think about driving performance.

So, in those businesses that are in that fixed category, our expectation is really around total profit growth, expansion and margin in total profit growth. And those businesses that are in the growth category, it's around finding product and market entrance and applications that you can drive it differentially.

So that's how we break it down. And think of it, not so much as a program or new process.

Okay, got it.

Matt Summerville, Alembic Global.

Just a couple things. First, just in terms of maybe talk about the underlying trend you're seeing as we think about bidding activity in oil, gas and chemical more of those process-oriented markets, just the absolute level, but also then the conversion rates that you are seeing now in terms of converting a bid to an order, and an order to a shipment for getting the quarter end benefit that you guys have. If you can comment on that, that would be great.

Yes, sure. So Matt, as you know, we don't touch that very closely. It's a very, very small part of our business. You're talking 2%, 3% that plays in that world generally that is playing in that large-scale bid world. So we don't have -- we are not going to be the experts on visibility into that world.

Except to say for those places that we do touch it, there has not been a material increase. So, the benefit that we got at BAND-IT around MRO as you saw kind of oil spike, in terms of the other small pieces where we play upstream, there has been no -- nothing materially changed in overall activity rate. I know rig counts have inched up here recently, but we haven't seen anything that would tell us a significant turnaround on the near horizon.

And then just lastly, you hit on this briefly with one of your recent responses, but how are you thinking about both secular and cyclical factors that impact kind of life sciences side of things, and the water/muni side of things? What inning are we in, in each one of those? This is more a question on not necessarily Q3, but just looking out over the next 12 to 18 months, how to think about that.

When it comes to the life science side, the cycles tend to be driven more around new products than on market demand. Market demand in many, many ways is defined by new product introduction.

So, as you are able to cure, to test, to develop new things with new technology, that tends to be the stimulant for demand around the life science world. And I think we are in a pretty good phase right now, where new products are launching. I think there is a pretty good cycle here in 2016, 2017, so I expect it to be pretty decent.

With that being said, we have seen in the past as you get a bulk of new product introductions, sometimes you will see a quarter or so pause as they are ramping up to move through their channels. So we keep an eye out for that. There is nothing that tells us that is imminent, but we do have to keep an eye on it. But I think, generally, we are still in the early to mid innings of that phase there.

I think on the municipal side map, we are still pretty early. What I mean by that is you have just got to remember how tight municipal spending was for so long. So, certainly in the Western world, where -- what are we thinking, two years in to the expansion here? (multiple speakers) I think we've got another at least 3 or so years, maybe even longer, assuming you don't get a major macroeconomic shut down. That would tighten budgets and that would tighten municipal spending. But there still is -- there is a lot of backlog in municipal spending in the Western world right now.

Great, thanks a lot.

Jim Foung, Gabelli & Co.

Good quarter. Just a couple questions on the Brexit impact. Where would you see this, if the effects unfold? Not as good as you know, as expected.

Again, I am not as worried about the UK itself so to speak, because I feel like we are in a pretty good position where -- when you compare our revenue base and our cost base, I think we are in a pretty good spot. So depending upon how dramatic currencies change, depending on whether or not you start to see inflation in the UK, the places that you could see is we've got 5% of our business in the UK. You can see some inflation ramp up there, so you've got to keep your head around that.

And then the other part, whether it's how demand switches pattern, I don't see a big issue with that, again because of the hedges, the natural hedge that we have between where we build and where we sell. Again, Jim, I think the bigger concern for me is if this starts to roll itself through broader Europe. That is my bigger concern.

So you eventually just come down to the order rates. Right? (multiple speakers) But you did not see anything in the June order, right, because we saw good numbers growing sequentially (multiple speakers).

We haven't seen anything yet. It's just -- there's just a lot of noise and so when you see that amount of noise, and I am also realistic about the European Union, with everything that has gone on, it's still -- there is a lot of fragility to it, and a major player deciding it doesn't want to play anymore is -- it can have the effects of starting to unravel some pretty important pieces.

Are you currently seeing delay in potential orders if we don't get the worse case scenario with Brexit, some of these orders could (multiple speakers)

Not yet, Jim, we haven't seen anything yet.

Haven't seen anything, okay. And then just moving on just to the energy shipments, what drove the customers to take delivery in Q2? Is it because of the confidence in the higher ore prices relative to the past or (multiple speakers) budgets?

Ultimately, it's a little hard to tell, and these are things that require cash on hand and letter of credit (multiple speakers) so (technical difficulty).

Okay, thank you very much.

Joe Giordano, Cowen and Company.

Quick for me, I think you mentioned with Akron like a 500 basis points margin opportunity over the next three years. Would that get you to kind of where the segment is now, or is that a little bit -- get you a little bit below (multiple speakers)

It would be a little lower, but it would be very attractive.

Okay. And then just the capital deployment bent more recently towards Fire & Rescue, is that more indicative of just the valuation in that market, or rather than like the necessarily the forward prospects? Or is that just where you are seeing the best long-term value based on what sellers are asking for?

Well, obviously with both AWG and with Akron, we got -- we bought the businesses at reasonable valuations. A lot of it has to do with when properties are available. So obviously with AWG -- excuse me, with Akron, that was driven by the seller's need. As I think we've mentioned in the past, we had been talking to them about the business for some time, and as they decide strategically with they need to do, that really opened up the opportunity.

And then of course, Akron was owned -- excuse me, AWG was owned by a private equity firm, and as pieces and parts start to move in any one industry, it tends to capitalize other movement. And it had been owned for a few years and whatnot, and they had done some good things with it. So I think our purchase of Akron probably started to open of that market a little bit, and we were the natural buyer in both cases.

If another property of size in that market was to become available, was that something you would pounce on, despite you put in a lot of capital into those markets over the last year?

First of all, I don't see that happening. There is nothing -- there's lots of little things, but there's nothing that would fit the definition today. So I would not expect it today. Obviously if the greatest thing in the world at a very cheap price were to come up, certainly we would consider it.

But as it looks right now, I don't see anything on the immediate horizon like you described.

Thanks, guys, appreciate it.

Thank you. At this time I will turn the floor back to Andy Silvernail for any closing remarks.

Thank you all very much. I appreciate the questions here today and I appreciate your interest in IDEX and the support of the business. When it's all said and done, the conditions that remain today are very similar to what we've seen in the past year or so with some benefits of some industrial stability here in the United States that we saw in the quarter. But mostly, it's really around the team's ability to execute, and that is what I am most proud of, is our ability to continue to drive performance in an environment that is still murky.

So I really appreciate my team and I thank them for all their performance and I look forward to talking to you all again here in 90 days. Thank you.

Thank you. This concludes today's conference. Thank you for your participation and you may now disconnect your lines at this time.