EXHIBIT 99.1
IDEX CORPORATION
MODERATOR: SUSAN FISHER
APRIL 19, 2007
1:30 PM CT
Operator: Good afternoon. My name is Lynn and I will be your
conference operator today. At this time, I would like to
welcome everyone to the IDEX Corp. first quarter '07
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 one on your telephone keypad.
Thank you. I would now like to turn the conference over to
Ms. 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 First Quarter '07
financial results. Earlier today, we issued a press
release outlining IDEX's financial and operating
performance for the three month period ending March 31st
'07. That press release, along with presentation slides to
be used during today's webcast, can be accessed on our
company home page at 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 will be as follows: First,
Larry will update you on our progress during the first
quarter across the company in our four business segments.
Dom will then take you through our financial results for
the quarter. Following our prepared remarks, we will then
open the call for your questions.
If you should need to exit this call for any reason, you
may access a complete replay, which will begin
approximately two hours after the call concludes, by
dialing the toll-free number 800-642-1687 and entering ID
number 5707718, or simply log on to our homepage for the
webcast replay.
As we begin, a brief reminder this call may contain
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 will now turn
this call over to our CEO, Larry Kingsley. Larry.
Larry Kingsley: Thanks, Susan. We executed very well for the quarter. We
delivered record orders and sales, excellent productivity
and operating leverage, very strong earnings growth.
The IDEX Board recently approved a 20% increase in our
company's quarterly dividends and a 3 for 2 stock split.
In the quarter, we completed the acquisition of Faure
Herman as part of our strategic plan to serve the
infrastructure markets within fluid metering. This
broadens our capability in energy, particularly downstream
oil as well as other metering applications. I will provide
more detail on the acquisition in just a moment.
A quick summary of our operating performance for the
quarter. Orders were up 23%. Sales were up 25% - that's on
a 10% organic growth rate. Operating margin was up 60
basis points, and that's 90 basis points when you exclude
the severance costs within dispensing. EPS is up 24% to
$0.68.
We are pleased with our execution for the quarter. Beyond
performing well, we are laying the groundwork for future
growth. Our business model and strategy of niche market
applied products continues to yield us great results.
As you know, we are targeting the same business profile in
the acquisitions that we are making. And those
acquisitions continue to enable us to further build out
our strategic offering on a product, on a target market
segment, and on a geographic expansion basis.
I will run through each of the four segments. I'm on Slide
7, if you are following along. Our fluid metering business
operates within a large available market. We move,
measure, and control fluids and processes, which tend to
entail either a high accuracy, and/or severe duty. We
serve a broad market, but our focused segments are the
markets of refined fuels and gases, alternative energy,
chemical processing, water treatments, and other specific
processes, pharmaceutical and food applications.
The international markets for fluid metering are very
strong. And the global and market drivers continue to bode
well for sustained fluid metering growth.
Those drivers continue to be the high cost of energy,
coupled with the capital investment that's now required to
de-bottleneck the processing in the supply of refined
fuels; the development of the fossil fuel alternatives,
the need to address the water and the waste water
infrastructure issues; the continued investment in higher
performance process control for chemical production;
growth and power generation and mining exploration; and
increasingly stringent standards for food safety and
security.
Our fluid metering Asian sales grew in the mid-20% range
for the quarter. The European business grew in the
midteens. Beyond core fluid metering markets, we continue
to build our presence with the agricultural OEMs, the Ag
implant processes and the agricultural after markets, as a
result of our acquired Banjo presence.
As an example, we just introduced a new magnetic flow
meter that meets the needs of the Banjo's traditional
markets. But the product also serves applications in our
broader fluid metering industrial markets. Within the
chemical, oil, and gas markets, we continue to gain share
through our expanded capability and product line of
corrosion resistant pump and metering technologies.
We've already begun to expand and leverage our Toptech
product offering. We just introduced a new generation,
single meter control product that can function either as
an independent, low load rack control in refined fuels
distribution applications. Or it can be used in
conjunction with a supervisory Toptech controller to
construct a distributed control architecture for complete
terminal automation.
The new metering device is aimed at ease of use. Partly
for applications that we would traditionally serve with
our Liquid Controls group of products. Beyond refined
fuels distribution, the product also further enhances our
ability to reach and fully penetrate other applications
from aviation and fleet refueling, to chemical loading, to
truck and barge loading. So not just refined fuels, but
also other high value liquids and gases. Dom is going to
review this segment performance in quite a bit of detail.
But in summary, fluid metering grew 34% in Q1, of which
12% was organic. Operating leverage was outstanding with
an operating margin at just under 22%. We continue to find
and execute attractive acquisitions, which in turn,
deliver great organic growth opportunities when coupled
with our other products and with our global reach.
Slide 8 is the most recent example of our fluid metering
acquisition strategy at work. Faure Herman is a provider
of leading technology flow meters used in the oil and gas
industry. They're based in La Ferte Bernard, France.
That's just outside of Lemans. Faure Herman's ultrasonic
fluid metering technology and their product experience are
all industry leading. They have the ability to accurately
measure flow rates in a variety of oil and gas
applications where traditional technologies are
functionally limited.
Beyond their superior ultrasonic technology, they also
bring new turban flow meter technologies to our offering.
Faure Herman currently has sales of approximately $22
million. We intend to quickly expand Faure Herman's global
rates and expand our served markets to include other
high-value fluid processing applications.
So this acquisition stems from the same strategy that the
Toptech acquisition did. Faure Herman's capabilities
dovetail perfectly with our new terminal automation and
controls, and our pump offering. In addition, Faure Herman
expands our European presence to better serve both the
Western and Eastern Europe refined fuels and gas markets.
It's important to note that Faure Herman is not just a
portfolio addition; it is a critical part of our energy
market build-out plan within the fluid metering group.
I will turn now to health and science, we are on Slide 9.
As you know, we serve a large addressable market here as
well. We continue... We target small scale, high accurate
pumps, valves, fittings and medical devices, as well as
subsystems for fluid and gas handling. The primary market
segments are analytical instrumentation, clinical
diagnostics, and medical technology products.
The underlying market drivers are all the end market
drivers that you typically find for drug discovery and
product development, as well as the health care
applications. And in addition to health care, the business
also applies similar technology to select other
applications that require small, accurate fluidic
solutions.
Beyond the Western world market opportunity, developing
countries are moving toward more progressive health care
systems, which increases the need for clinical test
equipment to diagnose infectious disease common in
developing regions. Drug discovery instrumentation and
clinical test equipment suppliers look to IDEX to design
and supply their fluidic systems, sub assemblies, and the
key enabling components.
We continue to see solid market performance within the
health and science segment. For the quarter, revenues
increased 28%. Operating margin was down versus last year,
driven by the impact of the '06 acquisitions, and due to
continued growth focus investments in the business.
We also want to point out that in Q1 and for the next two
or three quarters in health and science, we will see some
relatively minor organic growth impact associated with to
specific OEMs. Both of these were assumed in our internal
plan. One relates to the customer's natural product line,
and the other is essentially a timing issue. We have very
high expectations for health and science for '07 and
beyond. This segment should lead our long-term growth
performance and deliver IDEX-like margins.
Market outlook is positive. And we continue to focus on
acquiring and building out differentiated technologies to
attract -- to address the attractive niches.
In dispensing, we're the global leader, as you know, in
automated dispensing and mixing equipment used primarily
today in the paints and coatings market. Our focus in
dispensing continues to be on developing the right applied
solution for our customer. Encompassing complex color
formulations, increasingly precise 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 expansion, as well as to respond to
changing regulations. Through our expanding range of
automatic dispense offerings; we are also in an excellent
position to support the paint manufacturers and the
hardware cooperatives, who are increasingly moving to
automation as a tool to increase volumes.
We continue to see strong demand in North America, both on
a specific new equipment project basis, and via the
replenishment cycles. Western Europe is stable. And while
Eastern Europe is actually growing very nicely.
In Q1, we achieved organic growth of 10%. We reduced costs
for our international operations within dispensing in the
quarter, which resulted in about $1 million in
severance-related costs. Excluding those expenses, the
operating margin within dispensing improved by 160 basis
points, versus a year ago. Our ability to reduce fixed
expenses is as a result of our increasingly global product
footprint. The newer products are enabling us to build a
common platform wherever in the world we are cost
advantaged, but still regionally configure the machines to
meet the needs of the local market.
I will move now to fire and safety. As you know, we
provide highly engineered pumps, valves and control
devices used in fire trucks and on emergency vehicles, as
well as the rescue tools used by first responders. This
segment also includes our engineered band clamping
business. The fire and safety segment is making terrific
progress. Both the fire and rescue elements, as well as
the band clamping business delivered excellent performance
for the quarter.
Within fire suppression, our compressed air foam systems
and pump modules continue to be specified and gain
acceptance worldwide. Not only do we receive broad base of
new orders that will serve domestic municipalities, we are
growing throughout the developing world. We are already
supplying compressed air foam systems to mid-sized cities
in China. In fact, our CAFS technology is becoming a key
differentiator for us to pull through pumps and pump
modules.
Our Asian business development is tracking right to plan.
And we are very pleased with the market's response to our
product offering.
Within rescue tools much the same story. We continue to
drive international market expansion. We won multiple new
orders in both Asia and the Middle East during the
quarter. In addition, our strategy to modify rescue tools
for the industrial market is going very well. We are
selling product to stabilize and support mining
operations. We've also developed and very successfully
sold a tool that is being utilized as a backup braking
device for wind energy emergency situations.
Our band clamping business introduced a new system for
insulation, application for the industrial process
requirement. Better insulation and manufacturing processes
is required to improve process control for product quality
assurance, and to decrease energy utilization. The system
entails a power application tool, and a color coded set of
clamping devices, which enables easier identification of
what's inside the insulation. As process plants upgrade,
or replace insulation, we see an excellent sales
opportunity to displace the traditional insulation binding
methodologies.
So again, fire and safety performed well for the quarter,
with organic growth at 9% and operating income in excess
of 22%.
Dom is going to now review the financial results for the
quarter, including more detail with regard to our segment
operating performance. So with that, I will turn it over
to Dom.
Dom Romeo: Thanks, Larry, and good afternoon everyone. I'm on page 12
-- orders and sales. Orders of 363 million increased 23%
from last year and 9% organically. Monthly orders were
$125 million in January, $112 million in February, and
$126 million in March -- so very consistent throughout the
quarter.
By segment, the Q1 organic orders growth rate was as
follows: First, with fluid metering technologies. After a
fourth quarter at 14%, which, as we mentioned, did include
a modest level of blanket orders. FMT posted just under
11% in the first quarter -- so solid momentum.
Health and science was up 4%. Impacted by the timing of
two OEM programs that will impact the growth within the
next few quarters within this segment by approximately 2%.
Dispensing -- and again, due to the benefit from both
strong project demand in North America, and stable
conditions in Europe, was up 21%.
And lastly, fire safety and diversified products. After a
fourth quarter at 16%, that again included orders of the
second half of '07, FSD was up 5% in Q1. But when we look
at our backlog and also our pipeline, FSD is also very
well-positioned for growth.
Sales of $333 million was an all-time high. An increase
25% in total and organic growth was 10%. As Larry
mentioned, we had organic growth in all four segments, led
by fluid metering and also dispensing. And we will provide
more details on sales when I review each of the segment's
performance.
Turning next to operating margin -- page 13. Operating
margin at 18.5% increased 60 basis points from last year.
As mentioned in Q1, we had an impact for about $1 million
of severance-related expenses within the dispensing
segment. Thus, on an adjusted basis, operating margin
increased by 90 basis points.
In addition, on a consolidated basis, we did achieve 30% +
flow-through on organic growth for the quarter. And let me
walk you through that calculation.
Sales in total increased $67 million, versus last year.
Within that, acquisitions provided $34 million of revenue
at just over 18% operating margin. Currency added $7
million to revenue, with an estimated flow through in the
low-to-mid teens. Thus, organic revenue was about $26
million, and the associated operating income was $8
million or a flow-through of just over 30%.
Turning next to income -- page 14. Income from continuing
operations was up 25%, and EPS of $0.68 is 24% higher than
last year. The effective tax rate was 34% in Q1. For the
year, we estimate the ETR in the 34 to 35% range. And as I
mentioned in the past, the biggest driver in terms of
impact on the ETR will be our geographic mix of income.
Additionally, the severance cost in dispensing had about
one penny of impact to EPS. So, all in, from an EPS
perspective, a very strong performance of 24%.
Turning next to page 15, balance sheet highlights -- debt
to capitalization continues to be 27% and our balance
sheet is strong.
As we have mentioned in the past the first quarter free
cash flow is typically our lowest due to timing of payment
of incentive compensation and the funding of our deferred
contribution plans.
From a working capital perspective, sequential revenue
increased about $30 million or 10% from Q4 of last year.
Inventory performance showed improved turns as inventory
-- the inventory increase at about 5% was versus the 10%
sequential revenue increase.
The accounts receivable increase is due to increase in
sales coupled with the timing of revenue within the
quarter.
Let's turn to page 16, Fluid and Metering Technologies.
Orders were up 33% in the quarter, again just under 11% on
an organic basis. Sales increased 34%, 21% from recent
acquisitions and 12% on organic basis.
A bit more detail on growth -- growth rates in the U.S.
continue to be strong at just under 10%. We continue to
make great progress on a global basis as Larry mentioned.
For FMT, Asia increased 27% in the quarter. Additionally,
Europe was up double digits.
On the acquisition side, sales as I mentioned increase 21%
from the combination of Banjo, Toptech, and Faure Herman.
From an operating margin perspective, acquisitions were
essentially equal to that of the segment and from a volume
perspective, performed well.
Banjo compared to a year ago grew at almost 15%. Operating
income of just under $30 million was a 51% increase from
last year, up 240 basis points from last year.
Page 17, Health and Science Technologies -- for the
quarter, orders were up 20% and sales increased 28%.
Organic growth was 7%. Operating income increased 13%.
Operating margin of 17.2% was down versus last year.
And as Larry referenced, we have two OEM contracts. One on
the science side and another within our medical product
lines that, for Q1 and for the next two or three quarters,
will impact segment growth by approximately $2 million or
2 to 3%.
This was built into our planning assumptions and has
obviously a much lower impact to organic growth rates when
we look at the total company. However, this will impact
our reported organic growth for HST.
On operating margin, acquisitions diluted our 2006
reported margin of 19.5% by just under 200 basis points,
half of which relates to the amortization of intangibles.
To a lesser extent, our continued investment in medical
products also impacted operating margins.
Turning to Dispensing, page 18, orders in the quarter were
up 26%, again 21% on an organic basis. Sales increased 16%
and we achieved double digit organic growth at just over
10%. Organic growth was 18% in North America and 4% in
Europe.
As we mentioned in the release, we continue to benefit
from strong project orders in North America and Europe has
stabilized. On margin, the 24.4% included about a million
in severance related costs so adjusting for that
comparable operating margin increased by 160 basis points.
Turning to Fire Safety and Diversified products, for the
quarter orders were up 9%. Sales increased 13% and organic
growth was 9%. And as Larry mentioned, growth for this
segment is driven by global market expansion combined with
new product introductions. Operating income grew 13%
versus last year and margin at just over 22% was
essentially flat with last year.
With that I'll turn it back to Larry for a wrap up.
Larry Kingsley: Thanks, Dom. So in summary we're off to a terrific start
in '07. With very strong orders in sales growth at 23% and
25% respectively and continued organic across all business
segments.
Our end markets are very strong. Our international
business in outpacing U.S. but it's strong across the
globe.
We continue to drive margin and leveraged earnings
expansion. We're reinvesting for the future both by way of
the organic initiatives and the strategic acquisitions
that we can subsequently build out.
Faure Herman is a great addition to the company and good
example of the strategy at work. Commercial and
operational excellence continue to develop and yield
outstanding results.
In summary, we looked forward to more of the same for the
full year. That is good organic performance, strategic
acquisitions to further enable our growth capability,
solid and consistent operational execution and excellent
income potential.
And with that we'll be happy to take your questions.
Operator: At this time, I would like to remind everyone in order 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 comes from Michael Schneider with
Robert W. Baird.
Michael Schneider: Good afternoon.
Larry Kingsley: Hi, Mike.
Michael Schneider: Maybe first we can spend a minute on Dispensing. North
America projects seem to be driving that number. I think
you had said orders were at 21% organically.
Can you give us some color as to what's rampant because I
think this has got to be more than just the couple of roll
outs we had talked about in past quarters?
Larry Kingsley: Well, you know, Mike, we've talked about the fact that
Dispensing's a project based business. And it is lumpy
sequentially -- it is even lumpy if you look at it in a
year over year basis.
The solid growth that we're seeing in Dispensing is out of
the same retail channel expansion dynamic that we've been
talking about for quite a few quarters now.
And essentially what we saw was good performance out of
the DIYs. Very good performance out of the hardware
cooperatives and a continued on schedule roll out of the
multi-year Wal-mart program that you're familiar with.
So we frankly see some pretty strong investment indicators
right now for that equipment even given the residential
construction market environment, for that matter even some
of the paint company performance.
Michael Schneider: Okay and then switching just to margins, probably the one
margin that seems still light to me just even due to the
acquisitions is Health and Science. Can you walk us
through the math as what's weighing most on that segment
margins in terms of acquisitions? Are there step up costs
in there? New product roll out costs? What's behind the
190 basis point hit?
Larry Kingsley: Sure, Mike, it basically is the two acquisitions in '06.
If you were to exclude those two acquisitions and just
look at normalized operating performance -- for that
matter you can pull out a little bit of the medical
reinvestments that we've been pushing hard on, you see
operating margins increase on a year over year basis. In
terms of the acquisitions specific impact and the step up
associated, its really not step up per se.
Dom Romeo: No, Mike, if you look at the year on year, acquisitions
diluted us by about 200 basis points. About half of that
is amortization of good will and so the balance of the
operating margin declined plus what you'd expect as normal
flow through is the investment we're making in the current
organic growth and the product lines that exist today.
Michael Schneider: But why didn't we see this in the fourth quarter?
Operating margins were actually up 150 basis points in Q4.
In this quarter, you know, they're down 230. It's a pretty
big swing for acquisitions that were done in early and mid
'06.
Dom Romeo: Right, to some extent you saw lesser investment in the
medical product lines in Q4. That's ramped up somewhat in
first quarter, Mike, as well as the amortization of
intangibles to a lesser extent. And then mix does play a
part here within these multiple product lines on a
sequential basis.
Michael Schneider: So were there additional amortization expenses, investment
expenses that hit Q1 versus Q4 to explain that difference?
Dom Romeo: More additional investment expense, Mike, versus
amortization sequentially.
Michael Schneider: Okay, can you give us some sense as to where the money is
being spent in those -- I presume it's a (unintelligible)
EPI?
Larry Kingsley: Well, the medical investment, Mike, is actually for the
medical technologies piece within Health and Sciences.
Sales front end and marketing front end resources to drive
long term growth for the medical device business. Some of
that is front end capability to support EPI. Some of
that's to support our IDEX business, which as you know we
acquired in '04.
Michael Schneider: Right.
Larry Kingsley: '03, actually?
Michael Schneider: Okay. So that's the investments and then I guess I'm still
a little confused, Dom. Maybe if acquisitions hit you 190,
200 basis points this quarter, do you know what the Q4 hit
was? It must have been substantially lower.
Dom Romeo: It was substantially, Mike. As I mentioned the sequential
margin is primarily impacted by investment. Year over year
it's the 200 basis points, which is the dilution of the
acquisitions plus the amortization of intangibles.
Michael Schneider: Okay. Okay. Thank you again and great quarter.
Dom Romeo: Thank you, Mike. It's fine.
Operator: Your next question comes from Jim Lucas with Janney.
Larry Kingsley: Hey, Jim.
Jim Lucas: Thanks, good afternoon. Couple of questions. Could you
just housekeeping -- international as a percent of sales
today?
Larry Kingsley: Forty-four percent, Jim.
Jim Lucas: Forty-four. And looking at two businesses in particular,
Dispensing on the Europe side, are there any upcoming
regulatory changes in the pipeline?
Larry Kingsley: Not within the European Union.
Jim Lucas: Okay.
Larry Kingsley: But we do think there will be regulatory impact as it
applies to some of the Eastern European markets. And for
that matter, the Eastern European dynamic that I talked a
bit about, Jim, is more just -- now it's the wide open
market that hasn't automated its paint dispensing to any
degree and we're seeing some pretty nice, new
opportunities for that channel.
Jim Lucas: All right. And within the Fluid business, if you look at
the international drivers, I mean clearly there's a lot of
positive backdrop across the entire portfolio. But if you
look at America's versus Europe versus Asia, are there
different drivers by geography or is it pretty broad
based?
Larry Kingsley: I would tell you, Jim, it's basically just different
magnitude of drivers relative to the regional impact. But
the global segment drivers are pretty consistent with what
we've been talking about for the last year or better.
So if you look at by market segments, you know, downstream
oil and the investment there is strong. In North America,
it's even stronger. In some parts of Europe right now and
some of the custody transfer applications in Asia on a
growth rate basis are, you know, substantially stronger
than any where else in the world.
If you look at water, the water infrastructure investment
is strongest in Asia probably right now followed by Europe
and then North America maybe somewhat counter intuitively
relative to the last two.
And on chemical, I'd say it's pretty globally consistent
across the three regions. Farm and food is also I'd say
more globally consistent across the three regions.
Jim Lucas: Okay. And...
Larry Kingsley: Does that answer your question, Jim?
Jim Lucas: ...Yes, it does. And finally just from a balance sheet
standpoint, clearly you're in very good shape here. And
could you just give any update and any color you can
provide from what you're seeing on the acquisition side in
particular from a valuation standpoint?
Larry Kingsley: Well, specific to the valuation standpoint, we're seeing
prices pick back up a little bit. We saw things somewhat
plateauing between the third and fourth quarter last year.
Obviously there's a lot of capital out there and we're
seeing things now I'd say pick back up a touch.
For most of the space that we're targeting, the smaller
size bolt-on acquisitions for now anyway, the pricing is
still, you know, reasonable from a standpoint of we can
get a great return on those properties. The larger size
acquisitions, you know, unfortunately are just too pricey
in many cases.
And so our strategy remains pretty consistent. We're after
those that we can make good organic growers out of. And
for the short term we'll probably see more of the, you
know, $20 million in annual sales to $50 million in annual
sales in size acquisitions.
Jim Lucas: And how would you characterize your pipeline as to those
-- is it as full as its been or?
Larry Kingsley: The pipeline's good.
Jim Lucas: Oh.
Larry Kingsley: Pipelines good. The team's cultivating all the time. And,
we're fortunate that not always but typically we've got
multiple acquisitions to chose from. And as you know we're
focused more so on the proprietary deals versus the
auctions as we can make those happen.
Jim Lucas: Okay, great. Thank you.
Larry Kingsley: Yes.
Operator: Your next question comes from Scott Graham with Bear
Stearns.
Scott Graham: Yes, good afternoon.
Larry Kingsley: Hi, Scott.
Scott Graham: I really have no income statement questions because there
-- there's really I don't think much to question there.
What I wanted to ask you about, Larry and Dom, was now
that we're about 18 months into the implementation of
mixed model Lean, I would -- I guess I'm expecting at some
point to start to see some more meaningful improvements in
working capital turn over ratios.
Could you talk us through that inventory? And even
accounts receivable where I know, Larry, that's kind of a
sticking point with you?
But inventory turnover obviously diluted some from the
recent acquisitions it's hard to -- from the outside
looking in to understand, you know, that ratio per se on
the -- in the core business.
But could you talk through inventory turnovers or where
you expect that number to go? And maybe what you're doing
more specifically to that end as well as the AR terms?
Larry Kingsley: Sure and, just for the record, accounts receivable issues
are also a stickling point for Dom as well.
Scott Graham: There are now, I know that.
Dom Romeo: They always have been.
Larry Kingsley: We're doing very well in terms of inventory improvement
certainly a lot of that driven by a mixed model. As you
saw we improved quite a bit sequentially here Q4 to Q1.
And you're right -- you answered a good chunk of the
question yourself in terms of the acquisitions having a
dilutive operating performance impact to our inventory
metrics.
But that's somewhat good news because as you know, you
know, you get a nice cash kicker out of the fact that you
can improve that inventory performance over time with
those acquisitions.
The businesses are all measuring their flow through their
shops. And they're measuring inventory term -- turns as a
primary metric to determine whether or not we're getting
the right results, the appropriately sized results out of
the work that's going on to transform the various value
streams in the plants. And some plants are doing better
than others but I'd say we're making progress just about
everywhere.
Relative to receivables -- I think Dom mentioned it in his
prepared remarks and I'll let him further comment. But
bottom line is that the biggest impact that we're seeing
here -- well, two I guess is the growth quarter to quarter
and then it's the timing sequentially for the months
within the quarter.
Dom, if you want to add to that?
Dom Romeo: Sure, and, Scott, maybe to give you a little bit more
granularity on the inventory side. If you look at year
end, we had just under $161 million of inventory. And that
increased about $4 million from the acquisition of Faure
Herman.
So when we look at sequential growth in the quarter, we
actually made some very nice product -- projects process
improvement in Q1 with inventory on a 165 basis on an
organic basis. So, you know, nominally a 10% increase in
revenue and 4% increase in sequential inventory.
On receivables, it's as simple as saying the revenue
within the quarter -- the profile was much different than
it was in the fourth quarter. We look at the quality of
our receivables, the past dues and our average terms.
And there's really no deterioration there other than to
speak of the timing of the revenue in the quarter. So we
expect to have a terrific second quarter. We've actually
already seen a nice April in terms of free cash flow
relative to collection.
Scott Graham: Okay, that obviously is very difficult to see from, you
know -- from just looking at the financials theirselves.
Here's maybe two specific questions, if I may, because I'm
hoping for a little bit more on this.
Could you maybe talk through a couple of your larger
business units? What they're doing in inventory, be it
gas, Viking, a couple of the others.
And also from the standpoint of a cash receivable and
accounts payable, I mean, again including acquisitions,
you know, DSOs are up year over year and accounts payable
float is down year over year so I guess I would have
thought that maybe the business units would be better
matching that up. So I guess I'm looking for a little bit
more granularity, you know, Pulsafeeder, Viking, whatever
you can tell us by business unit what they're doing.
Dom Romeo: I'll start with inventory, Scott. And just to give you
some examples of, you know, kind of core inventory
reduction from some of our big units in the quarter and I
think, you know, perhaps the one to highlight would be for
example Viking. Viking had phenomenal order input growth
and also organic growth and essentially held inventory
flat sequentially.
So without going into, you know, all the detailed projects
when we look at some of our larger units relative to those
early comments it is coming from the fluid and metering
side in terms of inventory improvement performance.
If you look at receivables, and I don't have the detail of
the DSO by unit in front of me but acquisitions do drive a
piece of this, companies like Banjo, to some extent Faure
Herman and to a lesser extent Toptech. But Banjo had its
not greatest DSO performance yet and their inventory
performance was okay in the quarter.
On payables we've been basically kind of in the 50 day
range for quite some time so you're not going to see a
huge, huge move there sequentially. When we do look at the
acquisitions there is an opportunity there as well. But
again it depends how you calculate DSO.
If you look at the profile of revenue as simple as revenue
by month in the quarter, you're going to see that December
versus March revenue is higher increase primarily in our
receivable balance when I look at my organic growth
relative to the existing units ex-acquisition. So, you
know, we didn't really have a deterioration in DSO when
you look at it on a quarterly basis. Year over year you're
absolutely right.
Scott Graham: All right, good enough. Well thank you.
Larry Kingsley: Thank you, Scott.
Operator: Your next question comes from Ned Armstrong with FBR
Company.
Ned Armstrong: Thank you, good afternoon. I wanted to go back to some of
the investments that you alluded to particularly in the
health and sciences area. Can you just talk a little bit
about what type they are, you know, new product versus
expansion of distribution and so forth?
Larry Kingsley: The main investment, Ned, is people. Its people that drive
sales growth both short and long term. So it's not so much
specific product programs although we have continued to
invest in development in the business. It's more sales and
marketing that drive global opportunities for health and
science.
Ned Armstrong: And are you getting those people from within the industry
or are you just getting people that are good marketing and
sales people that may be from outside the business and are
coming in to so to speak, you know, kind of put their
touch on things with what they have learned elsewhere?
Larry Kingsley: The answer is yes. We've brought most of the people in
from the industry so they're, you know, industry
applications experts in a number of different fields. And
you need that kind of talent when you're driving a new
product into basically what are newly created market
opportunities every step of the way. So you need to go get
the technical talent.
Most of these folks are multi-degreed, you know, they're
very savvy and they're sales professionals so they're
obviously fairly expensive folks and they generate great
opportunities for us.
Ned Armstrong: Okay and then a second question had to do with
divestitures. I mean, I know you've talked a lot about
acquisitions have been fairly active there. On the
divesting front how are you thinking about things relative
to your overall portfolio?
Larry Kingsley: We're pretty pleased with the portfolio right now, Ned.
Ned Armstrong: Okay good, thank you.
Larry Kingsley: You bet.
Operator: Your next question comes from Charley Brady of BMO Capital
Markets.
Charley Brady: Hi thanks, good afternoon guys. Back on some of your
earlier comments on the dispensing segment, I think you
said you really weren't feeling I guess the effects from
residential but, you know, given commentary coming out of
Sherwin Williams and this morning and what Home Depot has
said, I understand maybe (unintelligible).
Are you hearing from your customer base or getting
indications down the road that, you know, you may at some
point get a little bit of whiff of that over the next, you
know, two or three quarters?
Larry Kingsley: It's a great question, Charley. You know, we have asked
the question obviously about two dozen times. Even though
as you know the correlation for our performance for
dispensing has a lot more to do with enabling. It's the
capability to go ahead and allow the store to dispense
what is a relatively profitable product.
If you look at what all the paint companies are releasing
in the way of their results, their sales aren't stellar
principally driven by the fact that present construction
is soft but their margins are actually still pretty good.
And we hear the same frankly out of the retail channel.
So whether it's a DIY or a paint company owned store or
one of the newer channel entities, they're all relatively
pleased with margins in paint versus some of the other
product lines. So the capital equipment investment for
them to buy or to buy up in the case of IDEX dispensing
equipment is a really relatively small investment to
enable them to go dispense a fairly high margin product.
So we frankly think that the dynamic right now in the
channel in North America and in other places will remain
quite strong and that again it will just be a project
basis for what we see in the way of the relatively lumpy
revenue.
Charley Brady: Thanks, that's great clarification, I appreciate it. And
just one more on the fire segment you talked about, you
know, your sales up 5% but looking at your backlog your
commentary sort of implied that you would expect organic
order rates in coming quarters to perhaps exceed Q1
organic order growth rate. I'm just trying to see if I
understood that correctly.
Dom Romeo: Yeah and just to clarify the numbers, in Q1 - I'm sorry Q4
organic orders within the segment were up 16% and we
highlighted that we had some orders that were blankets for
'07. Q1 we're up 5% organically. But when I bake that all
into how we see the backlog we're up near double digit
backlog as we look at the end of the quarter going into
the rest of the year. So when we add that to our pipeline
we feel very good about the order intake thus far relative
to FSD.
Charley Brady: Thanks very much, that's all I had.
Operator: Your next question comes from Jack Kelly with Goldman
Sachs.
Jack Kelly: Good afternoon.
Larry Kingsley: Hello, Jack.
Jack Kelly: Hey Larry, I just want to expand that prior question in
terms of what are you hearing from customers, not so much
just in housing but more broadly speaking. I mean,
obviously it didn't show up in your organic order growth
of 9% but, you know, so far in the reporting period we've
heard some comments from companies where things kind of
slowed down in March. Again, it didn't impact you but did
you hear any of that kind of commentary broadly speaking?
Larry Kingsley: Not at all Jack. We saw as Dom mentioned, January was
extremely strong, February was a little bit softer but not
tremendously so, and then March is back up and frankly I
think the sentiment is pretty strong right now. I think,
you know, when you get outside of U.S. residential
construction and the U.S. automotive segments we still see
very strong investments and particularly internationally.
But I would have to tell you that our global growth rates
as I said earlier across the regions for the target
segments were in for fluid metering, for health and
science, essentially across the board don't vary that
much. We think we're going to have a good opportunity
based on the end market drivers frankly for the full year.
Jack Kelly: Okay also in terms of dispensing in Europe, you know, up
until a quarter or two ago there was kind of logjam in
terms of spending. You're up 4% organically in this latest
quarter. Do you have any visibility there now or are you
just keeping your fingers crossed where you don't go back
to where we were six months ago?
Larry Kingsley: Well, we always have some degree of visibility and I would
say our performance now I think is indicative of a couple
of things. One, we're bringing some nice new products to
market and some that are particularly well suited for the
Eastern European market.
We've launched a new bench top dispenser, that's the TM
300 which is a lower cost, lower end sequential automatic
dispenser that we can build either in Europe or we can
build in China that's doing very well in Eastern Europe
and I
think we've got now with our global platform as I referred
to in my prepared comments the ability to get product to
market on even a more cost effective basis.
So I think we'll still see a similar market dynamic in
Western Europe. There's no huge reg driven revenue
opportunity but I think we're in pretty good shape to take
advantage of, you know, what is a lower growth rate than
what we see for most of the IDEX end market growth.
Jack Kelly: Okay, your comments on fire and safety were fairly upbeat.
With regard to government spending whether at the state
and local level, I mean, is that in your opinion slowing
as it should at this point or is there another leg up that
could come in future months?
Larry Kingsley: It is slowing, Jack. What we saw if you remember, I think
actually you asked the question last quarter about the
relative fourth quarter calendar year release of funds
versus what had been the historical run rate.
Jack Kelly: Right.
Larry Kingsley: What we saw through the first quarter was a bit of
catch-up and we're still seeing that activity so I think
we'll see the full deployment of the funds as legislated.
And for our U.S. rescue tools business we're seeing that
in the way of project activity. So I think when we wind up
the fiscal year here we'll have been able to say, you
know, we got our appropriate share, hopefully more than
our appropriate share of the federally funded rescue tool
opportunity.
Jack Kelly: Okay. I just want to revisit the margin question in the
health area. The impact from acquisitions you had
indicated was 200 basis points, half of which came from
amortization. So in the first quarter there was a step-up
in that from the fourth quarter or it was the same?
Dom Romeo: No Jack, my comments on the acquisitions are year over
year, Q1 versus last year. That's the 200 basis points.
But the primary drivers on the sequential are mix and our
additional investment in medical versus Q4.
Jack Kelly: Okay, got it. Okay thank you.
Larry Kingsley: Thank you Jack.
Operator: Your next question comes from Robert LaGaipa with CIBC
World Markets.
Robert LaGaipa: Hi, good afternoon. I just had a few questions, you know,
a couple just to follow up on the previous questions. I
guess, you know, one, with regard to the health and
science margins again, I hate to beat a dead horse here
but, you know, in terms of the investments in the quarter
I understand that that's the major, you know, change in
addition to mix like you had just said sequentially.
How about investments moving forward? Have you added the
people that are necessary for the growth of the business
moving forward or should we expect this higher level of
investments from here on out and if so, you know, how
long?
Dom Romeo: You know, Bob, we're not going to get into giving specific
guidance on future margins but I think the run rate you
look at now I don't - we see that as being a pretty
appropriate run rate based on the investment and the
growth that we see. So it could wiggle either way but I
wouldn't expect to see it going down based on additional
investments.
Robert LaGaipa: Okay so these ...
Dom Romeo: (Unintelligible) margin rate.
Robert LaGaipa: Yeah, I mean, just, you know, not even ...
Dom Romeo: The way to think about this you will lever that investment
as we see growth. It's a growth question as well and we're
not going to get into second half growth rates for HST at
this point. But obviously this has been a significant
growth story for the company and the investments we look
at, you know, a mix of R&D and sales force and direct
sales force, this is money well spent as we see the
future.
Robert LaGaipa: So should I take that to mean that the costs in this
quarter are going to be the same, not just the margins,
just the cost end of things. Are the costs going to be
different moving forward? Are they going to be kind of at
the same level at least for the next several quarters?
Larry Kingsley: I think the short answer to your question Bob, it may be
fixed cost investments that we think we can make
particularly in medical to support the growth rate, the
opportunity that we see in that business. And the same
statement would apply for the complete health and science
segment.
So, you know, this was in our plan, we knew we wanted to
hire these folks. We're building out a platform that we
like a lot and with the right growth we should be able to
leverage that as Dom said.
Robert LaGaipa: Okay and one other question with regard to the health and
science. You know, the contracts that you mentioned with
the OEMs, the $2 million for the next few quarters, you
know, what is that a result of? Is it the completion of a
contract, you're waiting for it to get renewed, is it
something different, you know, can you just provide maybe
a little bit more color there?
Larry Kingsley: Sure, the health and science business is an OEM business
so we're principally supplying components or multiple
components to customers' OEM product lines. Those OEM
product lines have various life cycles that apply and the
comment was that for the first quarter and for the next
two or three quarters based on OEM product life cycles
timing essentially that we think we'll see 2% or so of
organic - adverse organic impact.
So it has a pretty minor impact relative to health and
science and a very minor impact relative to the total
company. But we just wanted to be transparent about it
given the fact that we obviously have been talking about
health and science's great growth opportunity.
Robert LaGaipa: In the particular end market is it tech related?
Larry Kingsley: No, it's customer specific. It's really programmatic and
customer specific. The end market for health and science
is in real good shape.
Robert LaGaipa: Okay and last question if I could, again circle back to
fire products, you know, segment and the government
funding. You know, the fact that the sales are fairly flat
sequentially and again, you know, you mentioned last
quarter the fact that there was this buildup in funding
and you're mentioning now the fact that the backlog levels
are fairly high.
You know, is this benefit because of the fiscal year end I
think it's in September, around that range? Should we see
a significant up tick as a result of that, you know, in
the June and September quarter that it should be
compressed or is there a chance that, you know, this
backlog is spread out further?
Larry Kingsley: No if you look at it Bob, well first of all you're correct
about the fiscal year timing. In terms of current order
backlog and, you know, some kind of bubble for now through
the end of the fiscal year, there could be some positive
impact.
But frankly as I think we've talked about before, the
growth, you know the existing backlog within fire and
safety is much more driven by the international market
expansion. That's where we're seeing the biggest new
programs, that's where we're seeing the best
opportunities.
And if you look at our domestic market performance a lot
of it, you know, is basically base market performance
whereas the largest impact as a function of the fire
spending is in the rescue tools business just within the
U.S. And that on a contributing basis to the total
business could present us with some upside for sure for
the rest of the year. But I think you'll see the better
performing contribution out of what our - what we're doing
internationally.
Robert LaGaipa: Terrific, thanks very much.
Larry Kingsley: You bet.
Operator: Again I would like to remind everyone, in order to ask a
question press Star 1 on your telephone keypad. We'll
pause for just a moment to compile the Q&A roster. There
are no further questions. Ms. Fisher, are there any
closing remarks?
Susan Fisher: Yes, thank you for joining our call today. We're very
pleased with our first quarter results and look forward to
updating you on our progress as we move through '07.
Thanks again.
Larry Kingsley: Thank you, everybody.
Operator: Thank you. This concludes the IDEX Corp. First Quarter '07
Earnings Release conference call. You may now disconnect.
END