EXHIBIT 99.1
IDEX CORPORATION
MODERATOR: SUSAN FISHER
JANUARY 30, 2007
1:30 PM CT
Operator: Good afternoon. My name is Meredith and I'll be your
conference operator today. At this time I would like to
welcome everyone to the IDEX Corporation Fourth Quarter
2006 Earnings Release conference call.
All lines have been placed on mute to prevent any
background noise. After the speaker's remarks there will
be a question and answer session.
If you would like to ask a question during this time,
simply press star then the number 1 on your telephone
keypad.
If you would like to withdraw your question, press star
then the number 2 on your telephone keypad. Thank you. I
would now like to turn the conference over to Susan
Fisher, Director of Investor Relations. Please go ahead
ma'am.
Susan Fisher: Good afternoon and thank you everyone for joining us for
our discussion today of the IDEX Fourth Quarter and Full
Year '06 financial results.
Earlier this morning we issued a press release outlining
our company's financial and operating performance for the
three and 12 month period ending December 31, '06.
That press release along with presentation slides to be
used during today's Web cast can be accessed on our
company home page at www.idexcorp.com.
Joining me today from IDEX management are Larry Kingsley,
Chairman and Chief Executive Officer and Dom Romeo, Vice
President and Chief Financial Officer.
The format for our call today is as follows. First, Larry
will update you on our progress during the fourth quarter
and '06 across our company in four business segments.
Dom will then take you through our financial results for
the quarter and year. Following our prepared remarks,
we'll open the line 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 this call concludes by dialing the toll-free
number, 800-642-1687 and entering the conference ID number
5707350. Or simply log on to our company home page for the
Web cast 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 our
company's filings with the SEC.
With that I'd like to turn this call now over to our CEO,
Larry Kingsley. Larry?
Larry Kingsley: Thanks Susan. As Susan mentioned, the format of the call
today is to provide you with a progress report of the
company and that is to help you build an understanding of
how our portfolio is evolving and how our strategy is
delivering results and why we're so positive on prospects
for continued strong performance as we look into '07.
Before I walk through the progress report, I'll summarize
the quarter of the year though. For the quarter, orders
were up 25%. Sales were up 19%. Operating margin was up
100 basis points. And that's 150 basis points when you
factor out the impact of option expense.
EPS was up 26% to 67 cents. And for the year, orders were
up 16%, sales up 14%, operating margin up 160 basis points
on an apples to apples basis. And EPS is up 20%.
You have the performance information on Slide 6 and 7 for
your reference. So obviously a very strong finish to just
a super year. And most importantly we finished with a
strong order book headed into the new year.
Later in our prepared remarks, Dom will walk you through
the quarter and all the detail that we typically do and
also break out the segment results.
We executed all around the company and realized terrific
performance versus our stated metrics as well as our
internal plans.
We continue to achieve our operational excellence
associated savings with annual incremental savings in the
$20 million range. And that's real materials and labor
productivity.
Our price realization for the year was standard IDEX fare
at about 2%. Again, we didn't see large inputs as
increases for the fourth quarter similar to what we've
seen on a full year basis.
Free cash was strong again for the year at 1.1 times
income.
Beyond the bottom line performance that we're achieving,
we are meeting or we're exceeding our customer's
expectations.
Our business model of niche market applied custom products
continues to differentiate us and frame the acquisition
criteria for our business development group.
We completed five acquisitions in '06 which added $125 to
$130 million in annualized revenue. Airshore, acquired at
the beginning of the year, brings pneumatic and mechanical
struts to our respite tools capability.
JUNAIR, acquired in February, has been a good addition to
our Health and Science, clean, quiet air product
capabilities.
EPI, acquired in May, continues to open many new Health
and Science applications.
Banjo and now Toptech are adding to our Fluid and Metering
capability.
All the acquisitions will be excellent long term growth
additions for us and they will all generate fantastic
economic returns.
So with that performance summary in mind, I'll begin our
progress report with Fluid and Metering. And I'm on Slide
8.
Our Fluid Metering business operates within a large
available market -- about an $8 billion segment.
We provide highly engineered applied solutions to systems
which serve end markets like refined fuels and gases,
chemical, water treatment and many other attractive
application specific solutions such as sanitary fluid
components for pharma and food production systems.
Building from our core fluid movement and management
products, we see excellent opportunities to continue to
expand our addressable market by way of acquisition still
focusing within the higher growth end use segments.
Fluid Metering is making solid progress on their internal
initiatives with organic growth of 10% for the quarter and
year.
Through the implementation of our operational excellence
initiative mix model lean and strategic sourcing, we
continue to leverage our existing fixed cost structure and
we see similar leverage looking forward.
Operating margin for '06 expanded to 20.6% -- an
improvement of 170 basis points versus '05.
Fluid Metering ended the year very strong with Q4 organic
orders growth of 14%. We continue to see solid orders
growth driven primarily by infrastructure repair and
expansion, but also by solid industrial end market
demands.
The fundamentals for capital commitment associated with
downstream oil and gas remained especially strong as does
the demand by - driven by expansion of the fossil fuel
alternatives.
Current energy based demand is coming from a variety of
new applications building on our original custody transfer
market focus.
In addition to the broader application base, we're
realizing a much broader geographic base for the order
from Africa, the Middle East, Eastern Europe and Russia.
The chemical market leading indicators are very positive
as we look into '07 as well. Our pumps and meters remain a
key enabling technology in the production, processing and
transport of organic and petrochemicals.
We recently expanded our liquid vane pump series within
this market to address the need for accurate reliable
pumping of a variety of low viscosity flammable and
corrosive chemicals.
U.S. and European capital commitments and maintenance
remain strong and Asian capital commitment continues to
outpace the rest of the world.
The worldwide need for clean water continues to drive
demand for dosing pumps, flow meters, sludge handling
pumps, controls and instrumentation as well as completely
integrated systems.
In the water market, our applications range from municipal
water and waste water treatment to cooling towers and
power generation plants.
During the fourth quarter, in water, as was the case in
energy, we saw a broader geographic base for the new
business.
The development country infrastructure and applications
are generating an increasing percentage of the new project
activity. China, in particular, is devoting significant
funding to bring their systems up to modern standards.
Within sanitary, multi-nationals in the food and beverage
and the pharmaceutical markets continue to pursue
operational productivity improvement as a way to expand
margins while increasing their global footprint and more
competitive faster growing emerging markets.
The generic pharmaceuticals continue to spend while the
market leaders are looking to counter the impending
competitive impact of products coming off patent
protection. As a result, we're seeing continued process
re-engineering and new plant opportunities.
In the other Fluid and Metering serve segments, our
business continues to grow very nicely such as in
specialty engine and turbine applications.
Core drivers here are supplemental power generation,
alternative energy, and development to improve large
engine efficiency.
So, in summary for the Fluid and Metering business at this
stage, our strategic initiatives are providing great
returns. We've made some very good choices in terms of
attractive market segments to build our way into.
The new business opportunities are broad based with more
international content. As a matter of fact, about 10% of
FMT sales are now are Asian born.
Mostly importantly, the size of the addressable market
continues to expand nicely with great acquisition
potential.
I'm now going to dive into a specific Fluid and Metering
initiative to illustrate how we've transformed our
thinking and how it impacts the portfolio. If you have the
slides, you'll flip to Slide 9.
We acquired Liquid Controls in the first quarter of 2001.
At the time LC was a $50 million business.
LC historically provided pumps and controls used in
downstream oil custody transfer applications in North
America which was - and is- a nice niche.
We built on the LC base by acquiring a couple other small
businesses. And by 2004, LC was an $85 million business.
More recently, we decided that we had the kernel, but
needed to rethink the strategy and the scope of what we
were targeting.
So we assembled a very strong new leadership team. We
reassessed our global opportunity and market access
including changes required to develop the international
chain.
We built a new European manufacturing center. We
reconfigured portions of our supply chain to lower cost
regions including expanding the content of what we make in
our Indian facility.
We expanded our product offering. We mapped out all of
what we needed to build out a complete solution for
precision measurement and management of downstream refined
fuels and gases.
We're now acquiring the strategic complement to our base
product.
So exclusive of '07 acquisitions, LC today is $125 million
global business.
From a North American product-based business with a narrow
focus to a global platform focused on precision
measurements and management of energy associated liquids
and gases. And that's anywhere in the world.
It's easy for us to envision how we can now expand the LC
strategy again, beyond energy to other high valued fluids.
New initiatives like what we've done to dramatically
expand the scope of the Liquid Controls group, our Fluid
and Metering businesses are evolving well beyond pumps,
valves, flow meters and discrete components to more of a
systems approach encompassing all security, data
management and control.
Commercial excellence is evolving at IDEX. It's evolving
to rival our never- ending dedication to operational
excellence.
Our strategic mapping process which is the backbone to
what we've done to transform Liquid Controls is one of the
key commercial excellence tools helping us build and
transform the company.
To continue in this vein, I'll turn to Toptech now, our
most recent acquisition in December.
If you look at Slide 10, it will help you understand how
Toptech dovetails with our expanded Liquid Control
strategy.
Toptech was not for sale, however we, together with a
Toptech team, determined that it was an excellent fit for
their business and a tremendous enabler for our strategy.
Toptech's expertise and terminal automation and terminal
management will become the supervisory control system to
our existing precision metering and control capability.
Through Toptech we are building are on core FMT strength,
terminal automation and transaction management are
becoming increasingly important given the growing
complexity of the fuel mixtures.
More additives and more shared terminals at multiple
company products per terminal,but also there's a drive
toward global system standardization among the global
producers and the distributors.
The Toptech systems are the terminal management control
system of choice in North America and will establish that
same position globally over the next couple of years.
Toptech is already opening up new terminal automation and
fuel blending opportunities for us with their customers
and increasing the system content opportunity with our
pre-existing customers and major oil companies and the
distributors.
So this is not just a natural fit, but an expansion of our
capability that will further enable us to automate the
terminal and move into a much higher value contribution
for how we participate in a variety of downstream energy
applications.
Let's turn now to Health and Science. As you know we serve
a large addressable market here as well. We target small
scale highly accurate pumps, valves, fittings, medical
devices as well as sub-systems for fluid and gas handling.
The market segments are analytical instrumentation,
clinical diagnostics, and medical technology products.
Organic growth in Health and Science for '06 was very
strong at 13% while operating margins improved 80 basis
points to 19.1%.
We also completed and integrated the acquisitions of EPI
and JUN-AIR including these new businesses and the five
other businesses we acquired since 2000, Health and
Science now represents 26% of the total company revenues.
Beyond the inherent growth that we're realizing within
Health and Science, the end market diversification is key
to how we intend to build and sustain our overall growth
model.
The underlying market drivers here are all the end market
drivers that you typically find within healthcare - both
privately and publicly funded - for pharmaceutical
research and drug discovery and clinical testing. It's
also medical and dental equipment and implantable devices.
Much of what is driving the market growth for our products
specifically is a need for repeatable, very accurate
measurement of smaller sample sizes, coupled with a desire
for faster sample analysis, and it's particularly in the
analytical instrumentation applications.
So we've developed and are the world leader for
new-generation high pressure and high temperature valves,
pumps, tubings and fittings. These next generation
technologies are allowing analysis times to improve four
to seven times.
The application base for this instrumentation continues to
broaden as more global applications are continually
developed to discretely separate the chemical constituents
of various compounds - that's to validate and monitor drug
formulations including water quality, as well industrial
quality control applications.
The Health and Science business is growing as a more
global end customer application base as well. We also
continue to broaden our product base for our pumps,
injection valves, check valves, new gassing systems,
liquid end assemblies and flow cells many of which are
customized configurations designed together with the
instrument manufacturers.
For the strategy here, it's similar to Fluid and Metering
- target high growth market segments and build out all
that is related to the fluid path - that's every element
for the entire integrated fluid path which may include
enabling measurement and control capability and then
expand the global reach of the business while applying our
commercial and operational excellence model to accelerate
growth and total business performance.
EPI, the business we acquired last spring, continues to
open new doors for a much more integrated fluid path
design approach. We're now applying micro-scale manifold
based systems for bio-tech and clinical equipment
applications.
As an example we built a relationship with a leading
bio-tech firm to supply virtually all of the fluid path
for their new instrumentation used in micro- array DNA
screening. It's the same approach for the clinical
instrument applications. We're building out all of the
critical components of the fluid paths both the liquid and
gas paths.
So if you look at slide 12, what you see there is
equipment that you would find in a diagnostics lab such as
for screening in a hospital. The surrounding elements to
the core picture illustrate the family of components and
assemblies that IDEX has acquired and internally developed
as we continue to build out the offering here.
Obviously all the specialty pumps but also the valves, the
tubing, the fittings, the fluid manifold, the air handling
equipment and a variety of custom components - all
critical enabling elements of the fluid path.
Our addressable market will continue to expand here as,
one, the market continues to rapidly expand but also, two,
as we build out associated technologies - so again it's
more the footprint and it's built on our proprietary
technology.
In Dispensing, we are the global leader in automated
dispensing and mixing equipment used - today - primarily
in the paints and coatings market. Orders and sales growth
within Dispensing for '06 were 2% and 1%, respectively, in
the fourth quarter, orders grew 10% and sales grew 5%,
respectively.
Within that we continue to see strong organic growth
domestically and Europe, while soft, is now stable.
Although this project-based business remains our lumpiest
segment for sales and orders, Dispensing remains very
profitable with a full year operating margin contribution
of just under 24%.
Our focus in Dispensing is on developing the right applied
solution for our customer, encompassing complex color
formulation, increasingly precise and reliable custom
dispensing technology and the ability to gather valuable
transactional data supported by 24/7 customer service and
support.
Our leading product position enables us to support the
continued U.S. retail paint expansion as well to respond
to changing regulations and the natural replenishment
cycle.
I'll move on to Fire and Safety. As you know, we provide
highly engineered pumps, valves, and control devices used
in fire trucks and emergency vehicles as well as the
rescue tools used by first responders.
The segment also includes our engineered band clamping
business BAND-IT which, like our Fluid Metering business,
is experiencing particular growth due to increased oil and
gas, as well as other process industry, investment.
Overall the Fire and Safety segment is making terrific
progress on innovation- based growth of 8% for '06 - well
ahead of the market. It is also an extremely profitable
segment with an operating margin of over 24%. We've made
significant progress establishing our fire and rescue
tools business as a true global provider.
As you know we operate throughout the world and recently
we opened up our newest manufacturing facility - another
one in China. This segment is rapidly approaching 50% of
its revenue on an international basis about 30% of the
revenue is European, 8% Asia and 8% rest of the world.
Here again, just to give you an example of the expanding
global nature of the business, we received Q4 orders for
lifting bags in Turkey for the mining industry and in
Canada for the military; pumps and related product in
Malaysia for 200 trucks; in Saudi Arabia 197 tanker
commitments and we also received rescue tool orders there.
We took orders for a number of new Chinese customers both
fire suppression and for rescue equipment. In the U.S.,
the Fire Act funding release for the previously-approved
grants was slower than anticipated in the quarter but, as
you can see even with slower than anticipated fire act
based spend, our Fire and Safety business had a great
quarter and again this year performed extremely well
without as much market help.
As we look forward into '07, we anticipate continued
outstanding global performance and the release of U.S.
funds to generate the very healthy market environment.
Before we get into the quarter, I'd like to direct your
attention to slide 15. We want to provide some perspective
regarding our financial performance to reinforce the
strategic execution that we've just talked about - and
that over the last five years.
If you look at slide 15, you quickly realize not just how
fast we're growing but how consistently we bring it to the
bottom line. For those of you who don't have access to the
slide, the sales have grown from $719 million in '02 to
$1.15 billion in '06 a compounded annual growth rate of
13%, our operating margin has expanded from 14.5% in '02
to just under 19% in '06.
We've more than doubled our EPS from $1.13 in '02 to $2.48
in '06 an annual growth rate of 22%. Obviously we think
we've got a long way to go, our balance sheet remains very
strong, we have a capacity in place to continue to
leverage growth to the bottom line and our execution is
continuously improving.
So with that I'll turn it over to Dom to walk us through
the quarter.
Dominic Romeo: Thanks Larry and good afternoon everyone. Orders in the
fourth quarter grew nicely and as Larry mentioned we have
solid momentum moving into 2007.
Orders in the quarter were up 25% overall and 12%
organically. Sales increased 19%, organic growth was 7%
while acquisitions added 10% and currency added 2%.
Now let me just give a little bit more color behind the
fourth quarter order input rates. Monthly orders were $103
million in October, $108 million in November, and $104
million in December so fairly consistent flow throughout
the quarter.
The Q4 composition of the 12% organic orders growth by
segment is as follows: 16% in Fire and Safety/Diversified
Products, 14% in Fluid Metering technologies, 10% in
Health and Sciences and 5% within Dispensing.
Within both FMT and Fire and Safety, we did experience
some level of Q4 orders that relate to the second half of
2007 deliveries. The impact of this would be to reduce our
overall reported 12% still to the high single digit range,
so still very nice growth.
Sales of $302.1 million was an all-time high that was led
by Fluid Metering with organic growth of 10%, Health and
Science of 7%, Fire and Safety of 6%, we were flat within
Dispensing.
Turning next to operating margin on slide 17, the 19.5% in
the fourth quarter is a 100 basis point improvement from
last year and this also includes a 50 basis point impact
from the expensing of options, so here just terrific
execution both in terms of our operating initiatives and
the contribution from our 2006 acquisition.
Flow through on organic growth was just over 35% for the
quarter, gross margin companywide was 41.6% - that was up
70 basis points versus last year -and SG&A including the
50 basis point impact from stock option expenses still
improved by 30 basis points versus that of last year, so
again from anoperating margin perspective very, very
strong execution.
Slide 18 income and EPS, income from continuing operations
of $36.2 million is a 28% increase from last year. Diluted
EPS of 67 cents improved by 14 cents or 26% from last year
and again from an EPS perspective very strong performance
not only for the quarter but for the year.
The full year EPS of $2.48 is again an all-time high for
the company. I'll mention, too, the effective tax rate for
the year is just under 34%; in the fourth quarter that was
32%. Our Q4 ETR was favorably impacted by the renewal of
the research and development credit for 2007. We are using
34% for planning purposes.
Turning to slide 19, we continue to generate terrific cash
flow, for the year free cash flow of $144 million is 20%
higher than last year and, again, an all- time high. Our
conversion rate was 1.1 times income for the year.
On working capital when you adjust for acquisition
comparable inventory is up about 7% from year end so with
roughly 9% organic sales growth we did have a slight
improvement in inventory turns.
Our receivables, our DSO, continues in the mid-40s. CAPEX
for the year was $21 million and our balance sheet, as you
all know, continues to be very strong with debt to cap of
27% at year end. Net debt - that's a cap inclusive of cash
- is 21% at year end.
Now a little bit more color on the segments, turning to
Slide 20, Fluid Metering Technologies. I mentioned the
details behind the strong order growth rate earlier. We
also experienced consistent growth across all the markets
that Larry mentioned earlier. And organic order growth was
14% within this segment. Sales were up 26%, 10% on the
organic basis and 15% from acquisition. Currency was 1%.
Larry detailed the market trends in our strategic
initiatives but Q4 also marked the 11th straight quarter
where our organic growth here has been at least 8% or
higher.
Flow through, again, a great story in margin. FMT posted
an impressed 21.6% operating margin. That's up 160 basis
points, and again flow through organically was about 30%.
So clearly FMT is executing at a very high level and is
extremely well positioned.
Moving to Slide 21, Health and Sciences, orders grew 31%
in total and 10% organically. Sales increased 27% in the
quarter. Acquisitions added 20%, while organic growth was
7% and for the full year organic growth was 13%.
Operating income of $16.9 million increased 36% from last
year and our operating margin of 21.4% for the fourth
quarter was up 150 basis points versus last year. And
again, the story here is not only our strong growth and
margin expansion, but also the impact that HST now has on
our portfolio as we move forward.
Turning next to Dispensing on Slide 22, orders were up 10%
and sales were up 5% for the quarter. Excluding currency,
we were flat in terms of organic sales growth. And as we
mentioned in the past, Dispensing is our lumpiest segment
due to its project nature. And we also highlighted in our
earnings release in Q4, there was an impact on revenue due
to timing of project based orders in North America.
And, as Larry mentioned, we did have a 7% organic growth
domestically within the full year within dispensing. And
on margin, the $7.6 million was 21% of sales and increased
about 30 basis points from last year.
Lastly, Chart 23, Fire and Safety, order rates here
increased by 20% and 16% organically. So very, very
strong. And again, as Larry mentioned, global order
intake. For the quarter, sales were up 10% in total and 6%
on an organic basis. And again, Fire and Safety grew for
the year at 8% organically. Operating income of $16.9
million was up 5%, and while the 24.5% is solid, it was
down versus last year in part due to start-up expenses
associated with the opening of our new facility for rescue
tools in China.
So to sum up the quarter companywide, organic growth is
nicely complemented with our strategic acquisitions and we
continue to expand margin and generate very strong free
cash flow. With that, I'll turn it back over to Larry.
Larry Kingsley: Thanks Dom. We're going to continue our practice of not
providing quarterly or annual earnings guidance, but I
think it's important to restate our company's long term
objectives.
We continue to focus on applied products where we're
differentiated. We will expand our footprint in high
growth markets building on our fluidics core expertise.
We're targeting mid to high single digit organic growth,
coupled with similar acquisitioned based annual growth,
incremental organic operating margin expansion, as you
know in the 30 to 35% range, and great cash conversion, as
measured by free cash and excess in net income.
Based on the continued infrastructure associated demand
and our strong execution in Fluid Metering, the market
dynamics and the expanding breadth of our portfolio within
Health and Science, the continued channel expansion of
paints and Dispensing and the global expansion of Fire and
Safety, we continue to have the opportunity to post
exceptional growth.
So... just the beginning. We expect much more of the same
outstanding performance. And with that, we'll open the
lines for questions.
Operator: At this time I would like to remind everyone, if you would
like to ask a question, press star then the number 1 on
your telephone keypad. We'll pause for just a moment to
compile the Q&A roster.
Your first question is from Scott Graham with Bear
Stearns.
Scott Graham: Good afternoon. I have two or three questions. First of
the Fluid and Metering organic growth double digit, and I
was wondering if from your comments, Larry, it sounded
like it was extremely broad based. Is there any division
in particular in Fluid and Metering that has really been a
real standout performer? Any end market in particular,
either/or?
Larry Kingsley: Scott, the short answer is the growth was very broad
based. And there were operating units within FMT,
essentially all of them contributing to that broad growth
base. We basically looked at it by segments, as we
typically do and that's market-based segments, so we
understand what's going on within the industrial segment
and where we see the product base execution results as
well.
And I will tell you that there wasn't one any very large
single order as associated with any one of them. And if
you were to go through them, Warren Rupp, Viking,
Pulsafeeder, all the brands you're familiar with, you'd
see very strong growth essentially across the entire
group.
The industry's segment performance was basically pretty
strong, too, across all those process associated segments
and in particular the ones that are more
infrastructure-associated. So, as I said in my prepared
remarks, the water, chemical, the downstream energy
markets were all very strong and continue to look great.
Scott Graham: Okay. Sort of the opposite question for Health and
Science. That's a business that I think that internally,
you guys have high hopes for that to be a double digit - a
continuous double digit organic grower, and that really
hasn't been the case the last couple of quarters. Can you
maybe give us some color as to why you think that's the
case, Larry?
Larry Kingsley: Basically, if you look at just the fourth quarter, I think
you could make that comment, but the Health and Science
platform is definitely going to be a strong organic growth
contributor for us for a long time to come, Scott.
The business is doing just great and there is a little bit
of OEM-like lumpiness to their business, so you do see
some organic cyclicality, if you will, in a given year,
but if you look at it, it's a nice year-on-year steady
growth business.
We have no concerns there relative to our organic
capability.
Scott Graham: My confusion in asking the question, I assumed that you
got about a point of price last quarter suggesting that
the real growth was maybe more like 9 as opposed to 10.
That's really all I was referring to. So you would
attribute that to sort of maybe a little bit of lumpiness
within that business, if you were -
Larry Kingsley: Yes. I suspect a little bit of lumpiness, a little bit of
issue of the comps. We definitely see strong continued
growth.
Scott Graham: That's fine. My last question -
Larry Kingsley: Scott, just to be clear, too, if you look at the orders
growth rate, you see a really strong healthy - very
healthy orders growth rate.
Scott Graham: Yes. I did see that. Final question is the one I ask all
the time, you're still comfortable with doing a $20
million cost save in 2007, something in or around there?
Larry Kingsley: Absolutely Scott. Absolutely. We made a lot of progress
with regard to operational excellence this year. We've
added significantly to the regional staff that we have now
in terms of directors of operational excellence and the
strategic sourcing team.
We opened a new expanded Asian sourcing office to serve
the entire corporation just last week in China. And if you
look at both the labor and material productivity
assumptions that we have in our internal plans, you
wouldn't draw any different conclusions relative to our
ability to perform as we have historically.
Scott Graham: Very good. Thank you.
Operator: Your next question is from Jim Lucas with Janney
Montgomery Scott.
Jim Lucas: Thanks. Good afternoon.
Larry Kingsley: Hi Jim.
Jim Lucas: Two questions. First, on Dispensing, could you give us a
little bit of additional color on North America and Europe
of what you're seeing there, your comments about Europe
stabilizing in particular? And secondly, one of the things
that really is indicative of IDEX is the process structure
that's put in place, that you're continuously evolving.
And could you perhaps share a little bit of the
acquisition integration side if indeed the process is
there and what you can show us on the outside?
Larry Kingsley: Sure. We can talk a little bit about that. Let me go back
to your Dispensing question, first. We continue to see on
the North American side of Dispensing solid growth based
on the retail channel expansion. And that's all facets of
it, the hardware store chains, the specialty stores, the
DIYs, new store openings and replenishment is still
consistent with our expectations.
We definitely still continue to see lumpiness and we
talked a little bit about the fact that we didn't realize
fourth quarter orders and sales in Dispensing based on
that which we still see that opportunity in the same kind
of lumpiness fashion moving forward as good news.
There is really nothing there in terms of a negative at
all in the domestic dispensing world. You know, the
Wal-Mart rollout continues to go quite well. They're very
pleased with how this has enhanced their ability to serve
that segment. And we think the ongoing competition,
essentially, Jim, within the paint segment is going to
continue to drive machine purchases.
So there really is no change in dynamic there. It's a
great one. And as a matter of fact, we still see other
retail interest as we go forward in that equipment.
In Europe, in terms of the comments of things stabilizing,
definitely see that the market is stable, it's solid.
Where we've come off in Europe- the combination of
regulation driven growth on top of a replenishment cycle -
we see opportunities now moving forward for replenishment
and we see opportunities to bring new equipment to market
that we think enhances our position. So there should be
some share gain opportunity there as we look forward.
So stable I think is a good way to put it and there should
be some good growth opportunities as we look out into the
future for European dispensing.
With regard to your other question, what we do to drive
process, how that applies to acquisition integration, if
you look at what we do so well as a company, it's
basically attack the material and labor productivity
consistently at the business unit level for the most part
on the factory floor, and we don't count any form of
savings until we really get out and that means get it out
in the way of either overtime reduction, labor reduction,
or if it's growth that we're leveraging, we measure that
but we measure it and differentiate it versus the real
cost opportunities.
Same on the material side. And I think it's the diligence
of how we go at that and how closely we measure it and how
well we've done that that we can take into new acquisition
and apply the same kinds of opportunities. So if you look
at our '06 acquisitions, JUN-AIR and EPI earlier in the
year, those businesses are moving along very nicely
adopting our operational excellence capabilities, the
tools, the measurement systems.
They put together their annual operating plans for '07
using the standard IDEX approach now. We had good give and
take on what we expect and the way of productivity
improvements out of both those businesses. And they've got
a very clear, multi-year path ahead of them as to how they
can continue to grow and bring it to the bottom line.
If you think about the actual process of integration and
what we do there when we buy a company and how that
applies, it really applies differently to each and every
entity. There isn't a standard approach we take for every
acquisition.
Some of them that have good process in place, they have a
good sense of their direction and they have a very clear
market niche that's something that we can leverage going
forward, basically by bringing them into the portfolio,
we're not going to get as involved. It's going to be a
little less intrusive process.
And you could say Banjo would be a great example of that.
Others whereby way of what we think the upside entails and
what we can do to help them drive costs, or continue to
drive differentiation.
For that matter, you know it's going to be a much more
actively engaged process where we bring people into the
functional positions and those people are on-site
full-time, bringing the tool set in an extremely
aggressive fashion.
So I would say to you that I basically think the only way
to think through proper acquisition integration in a
company like ours, where you've got diverse opportunities
and diverse performance coming in the door, is to think
about each one independently and build the right approach
as a function of what you're going to bring to them.
Jim Lucas: Okay. Thank you very much.
Operator: Your next question is from Mike Snyder with Robert W.
Baird.
Mike Snyder: Good afternoon.
Larry Kingsley: Hi ,Mike.
Mike Snyder: Maybe you first can address just the comment
(unintelligible) made earlier, maybe you could just repeat
it about the orders that were either pushed our or taken
in from the second half of '07. I guess I didn't
understand the comment.
Larry Kingsley: Sure Mike. If you look at the organic order growth rate
for the fourth quarter it was about 12% and in the quarter
this was a fairly slight impact. In the quarter we had
some Q4 orders that as we look at those they were late the
second half of 2007 sales and/or deliveries, so if you
were to adjust that out.
And again it was primarily within Fluid and Metering and
Fire and Safety. Fire and Safety grew 16% organically in
the quarter and FMT was at 14%, so if you adjust those out
from the company total, it had about a 2% impact on the
order growth rate, but still very, very solid. But we
wanted to make sure we highlighted that we had some timing
mismatch there within orders.
Mike Snyder: Okay. And then last quarter, Dom, you did talk about the
fact that you thought actually pulled some orders forward
and I believe you were actually cautioning us that the
order growth rate this quarter for the company might be
less or so because of it. Can you describe, you know, in
actuality orders accelerated, kind of the puts and takes
there?
Dominic Romeo: Mike, I don't recall the third quarter analysis you just
described. I think what we were trying to point out in the
fourth quarter is what I just described, which is the 16%
in Fire and Safety and the 14% would be a bit lower if you
adjust out orders that relate for '07.
I'm sorry, second half of '07 not the first quarter. But
again the message here, Mike, is very, very strong growth
and orders within both FMT and Fire and Safety - well in
that range of our sales growth that we've seen in the last
several quarters for Fire and Safety and for FMT
specifically.
Mike Snyder: Agreed. In fact I was surprised by again the sequential
acceleration in orders again given your comments I believe
from last quarter about the pull forward. But nevertheless
just switching into Dispensing, can you describe how much
was actually pushed out in Dispensing in dollar terms in
orders or shipments?
Dominic Romeo: I don't think we want to quantify that Mike. It was a
fairly significant order for the group, but you know we're
not going to go there.
Mike Snyder: Okay. And in Fire and Safety margin is now because I
believe almost solely the China facility have been down
year over year both third quarter and fourth quarter. How
long do those ramp up expenses continue? And I guess when
do you the corner and begin to show year over year
improvement, Dom?
Dominic Romeo: Yeah, Mike, most of the costs in the third and fourth
quarters have been training, recruiting and the like, so I
would say '07 we feel very good about the margin flow
through and the contribution from Dinglee - so primarily
in '06 second half discussion, not a '07 discussion.
Mike Snyder: Okay, so in other words in first quarter yes you think you
can turn the corner and show year over year improvement,
Dom?
Dominic Romeo: We're not going to get into giving forward looking
guidance on the quarter, but I will say the startup costs
for Dinglee should be diminished.
Mike Snyder: Okay. And can you give us an update on the Banjo
acquisition?
Dominic Romeo: It's going extremely well, Mike. If you look at sales
achieved, you know, under our ownership - basically very
much on target with our internal expectations -- at just
under $12 million.
Their margins are great and we think we've got a real
winner here in terms of ability to take this product line
globally and also to leverage the channel exposure we've
got both ways - both to FMT and some FMT products by way
of the Banjo channel so things are going extremely well.
There's really not a single nit or negative that I could
pick out.
Mike Snyder: Okay. And the entire discussion around ethanol and its
impact on Banjo's growth opportunities; have you done any
fresh analysis now, given what's coming out of Washington?
Larry Kingsley: Yes, we have. There's a lot of conflicting stuff coming
out right now with respect to alternative fuels in general
and ethanol in particular. On the one side of the
equation, I would tell you that we still see huge capital
investment.
And, frankly, to get to the kinds of numbers that the
President suggested last week of 20% within 10 years that
would require a much, much larger infrastructure
investment. Now where we are with many of our process
applications, frankly, is more along the lines of how to
make more ethanol out of a given bushel of corn.
And we've seen with some of the newer processes that our
equipment is on that we're not yielding - the firm is
yielding just under three gallons per bushel versus under
two to where they were.
So we think the efficiency issue is really going to drive
ethanol in particular and continue to drive new systems
investment for capital equipment that's going to entail
our various Fluid Metering products.
The regulations driving bio-diesel, Mike, are also
continuing as you know and there's a lot more in the way
of low sulfur diesel that's coming into the marketplace in
cars that are being designed around a low-sulfur diesel
again.
So I think that, irrespective of the current, a
$55-per-barrel kind of number, which is still, frankly, a
good number, the downstream investment for alternative
fuel is just going to be quite large and we're going to
continue to see short and long-term some nice investment
around continued process reinvestment, particularly around
the efficiency issue.
On top of that, as I mentioned, in the Toptech comments,
you know Toptech is a super acquisition. This business
tremendously broadens our ability to go after the
logistics of both fossil fuels and alternative fuels. And
where we see Toptech applications for continued expansion,
irrespective of oil and gas segment growth.
It's all around the terminals, the numbers of terminals
that we think are out there and available for new total
systems, the number of pumps and flow meters and the other
discrete components that we can apply by way of pull
through, now having that Top Tech capability.
So if you look at downstream energy in total, we think
it's a very attractive segment to begin with and we've got
an excellent play now - much, much more tremendously
expanded by way of what we've gotten with the Toptech
capability.
And frankly, there are some other product segments that
we'd like as well to continue to add on to that capability
so that whole Liquid Controls group becomes a pretty large
strategic interest for us.
Dominic Romeo: Hey, Mike, I had a chance to look back over the third
quarter and you were right. Within Fluid and Metering as
you recall we reported organic orders in the third quarter
up 17% and we highlighted that if you adjusted for '07
inputs that would be 13 to 14%.
So the 14% this quarter is a similar type of analysis. So,
sequentially tremendous growth and year on year as well,
very consistent in terms of the double digit type growth
in orders when you adjust for the '07 inputs in '06.
Mike Snyder: Got it. Thank you, again.
Dominic Romeo: You're welcome.
Larry Kingsley: We gave you several answers to your several questions.
Operator: Your next question is from Jack Kelly with Goldman Sachs.
Jack Kelly: Good afternoon.
Larry Kingsley: Hi, Jack.
Jack Kelly: Larry, just on the fire suppression and rescue equipment,
given the Fire Act, which has been literally hanging for
it seems like a year in terms of the funds flowing, and
now you say they are, can you just maybe size the
opportunity looking on the fire suppression side and on
the rescue tool side?
I mean, do you know how much money might be flowing to
those areas and how much might it translate through to
those two divisions for you.
Larry Kingsley: Yeah sure, Jack. Let me get there in just a second. You
know the bottom line for us for Fire and Safety, though,
for the quarter was that we saw fantastic orders growth
and really solid sales growth as a function of the global
expansion.
So, you know, we see as we look into this year great
opportunities. I don't want to say irrespective of the
Fire Act, but based on what we're doing to grow that
business.
Now frankly without the Fire Act support, all that said,
I'll give you the numbers. The funds released rate through
the end of the calendar year '06 versus the funds released
rate through the calendar year '05 was about half the
pace, just under half the pace.
Jack Kelly: So that was quarter over quarter, Larry, or for the full
year '06?
Larry Kingsley: For the full year, calendar year '06 versus the equivalent
'05.
Jack Kelly: Okay.
Larry Kingsley: At the point of approval versus that released rate and the
total amount released by year end. So if you think about
it, the actual number is 46%. You know there has not been
the release or the approval to specific projects of the
funds to this point for those that were already
legislated.
And so we've got the opportunity frankly for improved '07
support there. We're not banking on it frankly. We think
we've got a great growth opportunity otherwise.
And while the mix of what we see coming out of Fire Act
based or Fire Act grant status is going to we think
actually continue to help our overall sales because more
of the equipment that we sell versus other things such as
training and other things in general that had historically
supported.
I would just tell you that we're working more on our
global expansion within Fire and Safety than anything
else.
Jack Kelly: Just so I understand the flow of funds, so the rate was
down significantly in '06 and why is it going to turn and
when is it going to turn in '07?
Larry Kingsley: The original approved funding...
Jack Kelly: Right.
Larry Kingsley: ... was at the same total amount at $650 plus or minus
million than it had been, so it's a relatively flat number
on a year over year basis. But the rate at which the
specific projects had been approved, and which funding had
been released has been running at about half the pace that
it had been on a prior year basis.
So funding is approved. It's already been legislated, but
what's been released through the end of the calendar year
'06 is only about half of what had been released in the
comparative period a year ago.
Jack Kelly: Okay, and do you have any sense if it did turn or the
release rate increases, what it could mean to those two
divisions? Notwithstanding and I know you're doing well
overseas, but just kind of again focusing on the U.S.
part.
Larry Kingsley: Obviously it's upside. It's upside. You know we've gotten
a lot of mixed signals out of D.C. relative to what
projects are going to be approved and at which rate. We've
got good visibility into where we play on most of the
larger projects anyway. But a catch-up scenario in '07
would yield a better growth opportunity for us.
Jack Kelly: Just looking at pricing across the company, could you -
and that's been kind of running 1% or 2%. Maybe you could
just update us on that number for '07?
And then secondly, I know there are a lot of factors that
could point to this, but if we looked at the price cost
dynamic for IDEX in '07 versus '02, so let's assume prices
were up the same amount in '07 as they were in '02, is the
cost structure or it's commodities, etc., going to be a
lot better than it was or is it, you know, still, you
know, whatever equilibrium there was in '06, it's the same
as in '07?
Larry Kingsley: Yeah. I'd have to give you the real - the appropriate
answer, Jack, I think we ought to do the analysis around,
you know, mix '06 versus '02. I don't think though that
you're going to see tremendous inputs difference in the
mix of '02 versus mix of '06.
There's certainly a different sales base with some of the
acquired products. But if you think about steel and the
nickel components and aluminum and copper, without having
all that analysis in front of me, I'll tell you, I don't
think that's tremendously different.
Jack Kelly: Okay. And I guess just one follow-up question on
Dispensing. I think in the third quarter, Larry, you used
the word stabilize for Europe in terms of sales in
Dispensing but they were actually up - it was actually up
3% or 4% or somewhere around maybe a mid-single digit
number. Was that the experience in the fourth quarter
also?
Larry Kingsley: Not the same number, no. But it's - the comments in terms
of stable where we certainly don't see year-over-year
decline as we look at the European Dispensing business.
It's going to bounce around a little bit as does the
entire Dispensing business quarter-to-quarter. But it's
certainly not going to be an ongoing decline in business
opportunity for us...
Jack Kelly: Okay.
Larry Kingsley: ...or business scenario for us.
Jack Kelly: So in the fourth quarter, it was up but maybe not by the
amount I suggested.
Larry Kingsley: Actually, no. It was not.
Dominic Romeo: It was down slightly, Jack.
Larry Kingsley: Yeah, but not very significantly.
Jack Kelly: Okay. All right, good. All right, thank you.
Larry Kingsley: Thank you.
Operator: Your next question is from Charles Brady with BMO Capital
Markets.
Charles Brady: Thanks. Good afternoon.
Larry Kingsley: Hi.
Charles Brady: Could you guys quantify in Fire what the margin impact was
for the China cost?
Larry Kingsley: Yeah.
Dominic Romeo: It's roughly a half a million or so year-over-year in
terms of incremental cost in the quarter.
Charles Brady: Thanks. And just to start on Toptech, I'm trying to
understand their business. Do they have sales outside of
North America?
Larry Kingsley: Very little; very little. The Toptech business is - has
been principally a North American business. They do have a
presence in Europe. But, obviously, with the IDEX channel
now available to them, not just in Europe but in all parts
of the world, that's a tremendous advantage for how we can
together take those product opportunities and push
forward.
Charles Brady: Is there a similar set of API standards that govern
European data exchange as, you know, has sort of been the
key to them in the U.S. is they've got this database that
sort of helps their customer base out. Is there a similar
opportunity for them to go in and establish for their own
Toptech standard and then push that out to a European
customer base as in North America or is it - the Europeans
kind of following what the API does in the U.S.?
Larry Kingsley: It's very much the same type of standard. And, obviously,
that's driven in the case of the global oil companies by
those companies and their desire to have that capability
wherever they are in the world, be it Europe, North
America, you know, Eastern Europe for that matter, or
Asia.
So the standards are the same, the transactional concern,
protecting against fraud, all the issues that apply to
terminal management and particularly the transaction
management avail, that kind of opportunities globally,
that essentially Toptech has become the preferred solution
for North America.
Charles Brady: So there's no real specific barrier that would prevent
them from sort of taking this platform, this idea and
applying it to a European standard.
Larry Kingsley: Not at all. There's not a standard barrier in any fashion,
there's not a product specification issue that we need to
work around; it's essentially taking the software and
hardware capability, appropriately packaging it for the
system design that makes sense for the particular
customer, some of that is a little different country to
country. But for the most part, it's the capability that
we have and taking it by way of our channel to market.
Charles Brady: Thanks very much.
Larry Kingsley: You're welcome.
Operator: Your next question is from Ned Borland with Next
Generation Equity Research.
Ned Borland: Hi, guys. Hi, Larry, Dom.
Larry Kingsley: Hi, Ned.
Ned Borland: One quick one here on the Fluid & Metering margins. I'm
just trying to get a sense for how much of the 160-basis
point improvement, how much of that was attributable to
say mix issues with the inclusion of the high margin Banjo
acquisition?
Dominic Romeo: Yeah. The way to think about it, if you go back to Slide
20, the incremental sales in total were about $25 million
inclusive of acquisition and our operating income was up
$6.8 million. If you adjust for currency which doesn't
flow, the overall flow-through is about 30%. So you kind
of see the equal impact. And as we've discussed, Banjo is
tremendously profitable.
So you can see organic was 10% in terms of revenue growth
and Acquisition 15. So clearly, the unit got flow-through
of 30% or so on its organic and, obviously, Banjo, as we
mentioned in the past, is very profitable, so you're
seeing the impact of both.
Ned Borland: Okay, great. That's all I had.
Larry Kingsley: Thanks, Ned.
Operator: Your next question is from Walt Liptak with Barrington.
Walt Liptak: Hi, thanks, and good afternoon.
Larry Kingsley: Hi, Walt.
Walt Liptak: My question is about, you know, the order trend in the
fourth quarter, the pickup. And, you know, it sounds like
you continue to drive the businesses like Liquid Controls
towards system sales. And as you do that, can you breakout
the sales that you have that are going towards
distribution, OEM, or some kind of a breakout in systems
versus book and ship?
Larry Kingsley: A number of questions there within your statement or your
one question. Walt, the most important thing for us in
terms of what we're expanding in any of the businesses is
where we've got a great niche, what we're always looking
at is how can we take advantage of the core capability
that we've got and expand the target markets and trying to
do so tremendously?
With the couple of examples that I talked about today,
both what we're doing within the Liquid Controls Group and
also Health and Science example, now those are already
winning, they're generating huge returns for us. And,
frankly, the channel strategy that we think about in terms
of how we size up those growth opportunities is secondary
to what is the inherent end-mark growth potential.
So we don't really go into an opportunity thinking about,
how do we want to compartmentalize this in terms of direct
versus distribution sales and that doesn't change the
relative attractiveness necessarily because our
profitability both by way of OEM and distribution sales is
pretty close to the same, all over the company.
In terms of breaking it out basically and thinking about
lumpiness or issues of the sort, the newer higher growth
business opportunities are not going to be, for the most
part, big one-off kinds of orders, they're going to be
mid-size product or system commitments that are either
going to be direct or they're going to be by way of
distribution and we'll see it in a way of just good
constant growth and, particularly, with regard to Fluid
and Metering.
In the Health and Science space, as you know, from time to
time there, we do get larger one-off kinds of OEM
commitments. So the dynamic there is a little different.
If you think about the profile of the overall company and
where the growth is coming from, that doesn't tremendously
change the mix of direct versus distribution sales
content.
Walt Liptak: Okay. Well, as I see it, going out of your year, you've
got more larger systems commitments. And the sort of
phenomena happened in the first quarter of 2006 where you
had some lumpy order trends that, you know, appeared to be
slowing into the second quarter; they weren't, it was
because the first quarter was so strong for systems.
What does the visibility look like beyond December? Or
what does the Pipeline Systems business look like, whether
it's in the H&S segment or in, you know, Fire & Rescue?
Larry Kingsley: Well, first, on the first quarter '06 comment, that was
more so relative to the Health and Science OEM customer
blanket commitments versus a systems set of order
commitments. So that's really the OEMs that are in that
space who place more in the way of annual blankets in the
first quarter of '06 than they had traditionally done and
that happens from time to time depending on how they're
managing what they see as their - principally their
equipment product sales.
I'm not going to comment on '07 and certainly not relative
to what we saw in the way of Q4 '06 exit order rates. But
I will simply tell you that our order rates ended the year
strong and we feel really good about the business.
Walt Liptak: Okay. Okay, great. Thanks very much.
Larry Kingsley: Bye, Walt.
Operator: Your final question is from Amit Daryanani with RBC
Capital Markets.
Amit Daryanani: Thanks a lot. Hey, just a question on the Dispensing
segment. It looks like timing of deliveries impacted the
year-over-year growth. I realize you don't want to
quantify the impact. But I guess should we expect an
uptick in Q1 into the sales of that segment or is it
getting pushed out beyond Q1?
Dominic Romeo: We're not going to quantify it as we said earlier. The Q4
order will have a favorable impact to the first half of
'07.
Amit Daryanani: All right. And now just look at commodity prices, you
know, things somewhat looked a little bit more benign
versus last year. I'm just wondering, does that give you
better margin expansion potential this year since your
price increases will probably not only just offset the raw
materials inflation but may also help expanding margins? I
mean how should we think about that?
Larry Kingsley: Yeah, yeah; potentially. I don't think you ought to bake
in a very large variable margin expansion based on that
because, again, we didn't see the kinds of inputs
increases - material inputs increases last year that some
other companies did.
Probably the only material component wildcard that applies
to us as we go into '07 that we're watchful on are the
stainless components with nickel in particular. Most of
the rest of the metal commodities I think we're in better
shape on, there's not quite as much variance built into
the various different forecasts from the various
economists that we track.
And so - now our ability to get price is, again, more a
function of our business model than a direct correlation
to the changes in inputs. So if you think about that, your
theory is probably correct but there is a margin
opportunity there.
Amit Daryanani: Fair enough. Just the last question, could you guys just
talk about your cap ex expectation and plan for '07?
Larry Kingsley: Sure. As you saw, '06 versus '05 was basically flat,
actually slightly down. And Dom, correct me if I'm wrong,
we've got a little bit of an increase baked into '07 but
it's not significant.
Dominic Romeo: Yeah. Probably in the 25 to 30 range, 30 being extremely
high; I think 25 is where we'll probably end up. But we'll
look at acquisitions very closely as well in terms of cap
ex.
Amit Daryanani: All right. Thanks a lot.
Larry Kingsley: Thank you.
Susan Fisher: Thanks for joining us today. If we didn't get to your
questions, we'll be around the remainder of the afternoon
for follow-ups. And the replay again is 800-642-1687 with
a passcode of 5707350.
Operator: This concludes today's conference call. You may now
disconnect.
END