EXHIBIT 99.1
IDEX CORPORATION
MODERATOR: HEATH MITTS
JULY 24, 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 Corporation Second Quarter
Earnings Release Conference Call. All lines have been
placed on mute to prevent any background noise. After the
speakers' 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 will now turn the conference over to Mr. Heath
Mitts, Vice President of Corporate Finance. Please go
ahead, sir.
Heath Mitts: Thank you operator. Good afternoon, and thank you for
joining our discussion of the IDEX 2nd Quarter and
year-to-date 2007 financial results. Earlier today we
issued a press release outlining our company's financial
and operating performance for the three- and six- month
periods ending June 30, 2007. The press release, along
with the presentation slides to be used during today's Web
cast can be accessed on our company's Web site at
www.IDEXcorp.com.
Joining me today from IDEX management are Larry Kingsley,
Chairman and CEO and Dom Romeo, Vice President and CFO.
The format for our call today is as follows: First Larry
will update you on our progress during the second quarter
across our company and four business segments. Then Dom
will take you through our financial results for the
quarter.
Following our prepared remarks, we'll then open your call
for your questions. If you should need to exit the call
for any reason, you may access a complete replay beginning
appropriately two hours after the call concludes by
dialing the toll free number 800-642-1687 and entering
Conference I.D. 5708063 or simply log onto 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
IDEX's filings with the Securities and Exchange
Commission. With that I'll now turn this call over to our
CEO, Larry Kingsley. Larry.
Larry Kingsley: Thanks, Heath. We achieved record sales, income and free
cash flows for the quarter. We also executed extremely
well with regard to our operating and customer service
initiatives. Operating margin expansion of 110 basis
points, is reflective of our ability to continue to
leverage both growth and process improvement.
In the quarter, we completed the acquisition of Quadro
Engineering, consistent with our plan to serve high growth
in each segment. Quadro extends their capabilities in
customized solutions for high value fluids which now
include (unintelligible) notably in the pharma and the
bio-pharmaceutical markets.
I'll provide more detail on the acquisition in just a
moment. A quick summary of our performance for the
quarter, though. Quarters were up 17%; sales were up 16%;
operating margin was up 110 basis points. EPS up 19% to 51
cents and free cash flow increased 42% to $58 million.
Most of the markets we serve are growing and forecast is
performed well both domestically and internationally into
'08.
As you know, we serve the process industries, specialty
capital equipment, health and science applications and the
retail channel for paint. All of the process industries,
that is energy, chemical, pharma, water and waste water,
the majority of the CAPEX equipment segments and the core
of our health and science markets, again are all
performing very well.
We're pleased with our results for the quarter and we're
laying the groundwork for future growth. Our business
model and strategy of niche market applied products
continues to yield just great results. And as you know,
we're targeting the same business profiles in the
acquisitions that we're making enabling us to further
build out our strategy in terms of new products, new
technologies, adjacent markets and new and developing
regions.
We will now run through each of the four segments, and
we're on Slide 7. Fluid and fluid metering; we serve a
large available market. We move, measure and control high
value liquids, gases and solids and processes particularly
where high accuracy and/or severe duty are critical. While
we serve a broad market, again, our focus is refined fuels
and gases, alternative energy, chemical processing, water
treatment, selective high growth sanitary applications
within the pharmaceutical and the food segments.
There are a number of market drivers that we see as
continuing, most notably, energy demands coupled with
constrained supply is driving capital investments to
increased capacity to de-bottleneck for both processing
and the supply of the refined fuels.
The ongoing growth and power generation and also in mining
exploration continued investment and higher performance,
process controls and instrumentation for chemical
production, environmental regulations for clean air and
water, as well as a need to address the water supply and
wastewater infrastructure issues and the increasingly
stringent standards for food and pharmaceutical safety and
security.
In additional to the strong and market drivers, our
expanding international capability are serving us well, as
we see outstanding growth for most of the international
markets. Within water and wastewater treatment markets, we
continue to gain share through our expanding systems
capability, and with recent orders from a very broad
number of municipalities.
Similarly continued growth in the refined fuels and gas
markets continues to drive demand for pumps, flow meters,
software and complete systems used in production plants
and terminals around the world. From new airports in China
and the Middle East to automated fuel terminals in Western
Europe to agricultural production in North America that in
turn supports production, such as ethanol production. The
underlying fundamentals and the market drivers vote well
for sustained growth within fluid metering.
Dom's going to review the segment in a minute, but just in
summary, fluid metering grew 31% in Q2. Operating leverage
was outstanding with a reported Q2 operating margin of
21.4%. That's an increase of 130 basis points.
Continue to find and execute attractive acquisitions in
the segment, which can in turn deliver great organic
growth opportunities, particularly when coupled with our
other offerings and with our global reach.
Quadro Engineering is the most recent example of the fluid
metering strategy at work. You look at Slide 8; Quadro is
a technology leader in particle control solution for the
pharmaceutical and the bio-pharmaceutical markets. Quadro
is based in Waterloo, Ontario. Quadro's core capabilities
include fine milling, and multiplication and special
handling of liquids and solids particularly used today in
laboratory pilot phase and production skilled processing
for pharma and the bio-pharmaceutical application.
Their core technologies are a strategic expansion of our
sanitary platform in both liquids and solids and they
provide a strong basis for us to serve selective
high-growth sanitary applications in developing markets
worldwide. Quadro currently has sales of approximately $22
million and we tend to quickly expand Quadro's global
rates, as well as our serve market and the sanitary
applications and that's both in the pharma as well as
outside of the pharma segments.
I'm going to turn now to health and science. We're on
Slide 9. For those of you who are less familiar with the
segment, we serve a large addressable market here as well.
The focus is precision, engineer fluidics that are used in
analytical implementation, clinical diagnostics and
medical technology products. The markets are
pharmaceutical, drug discovery, new applications and life
sciences, diagnostic testing, dental equipments and
patient care.
In this segment we also serve home medical applications,
semi-conductor processing and a couple of niche segments,
and although the health and science market continues to be
very attractive, our Q2 sales performance was well below
our targeted range for the business. As we mentioned
previously in the Q1 call, we are exiting a couple of less
attractive OEM relationships within the health and science
segment. The decline in specific OEM contracts reduced
revenue by more than two points of organic growth in the
quarter.
This will continue to moderate impact growth rates in
short term as we re-focus our resources to the more
attractive health and science opportunities. We will
further penetrate four targeted health and science
segments that we believe grow well above GDP rates through
and beyond our three-year planning horizon.
We've made just about all of the organization's investment
acquired to achieve that. We're already realizing the
benefits of the pull through sales in those segments with
the recent acquisitions that we've made.
In summary, we continue to see excellent growth
opportunities and are investing accordingly. In the short
terms, we'll continue to prune some of the less attractive
customer relationships.
In dispensing, on Slide 10, we're the global leader in
automated dispensing and mixing equipment used to
primarily today in the paints and coatings markets. In Q2,
we achieved organic growth of 7% dispensing; an impressive
230 basis point improvement in operating margins and that
takes us to 28.6%. So great execution by our dispensing
team.
Our focus in dispensing continues to be in developing
applied solutions for our customer, encompassing complex
color formulation and highly accurate, repeatable
precision dispensing technologies. There's also a steadily
growing service and support component to this business,
particularly as an increasing number of the retailer
expand into architectural paints.
Our leading product position enables us to support the
continued North American and European retail pain
expansions, as well as respond to the changing
regulations. Through the first half of '07, we continue to
see strong demands at the project-based North American
large retailers who are partially offset by the softness
in the small lower-volume retail channel. Western Europe
remains stable while Eastern Europe is growing nicely, as
that market continues to adopt point of sale tinting.
As we enter the third quarter of '07, we're projecting
flat year-over-year sales growth for the quarter due to
the continued softness in the smaller US retailers and due
to the project nature of this.
So moving now to fire and safety. As you know, we provide
highly engineered pump valves, control devices and other
products used in fire trucks, emergency vehicles, as well
as the rescue tools used by the first responders. This
segment also includes our engineered (unintelligible)
business, (unintelligible). Within rescue tools, we
continue to drive international market expansion.
Global rescue orders were filled during the quarter for
airlifting bags in China, lifting bags, pipe-sealing bags,
decontamination equipment in Poland, rescue tools for the
Jordanian Civil Defense and a complement of cutters,
spreaders, power units and other similar rescue products
for departments, both in the US and globally.
In addition, our strategy to modify rescue tools for
industrial markets continues to go well. We're now selling
products to stabilize and support mining applications.
Within fire suppression the investments in our Asian
business development strategy are tracking to plant with
recent fire winds in Beijing, Shanghai and in Malaysia.
Within North America, we view the rescue vehicle market to
have stabilized at a moderate growth rate with some truck
builders experiencing continued growth while other truck
builders are anticipating short-term slightly lower order
rates.
Our ability to continue to grow faster than the market,
due to our ability to innovate, to introduce new products,
provide more product value to our customers, and as you
know, that's something that we've been doing successful
for quite some time.
BAND-IT continues to experience very strong global orders
for its engineered band clamping systems used in a variety
of applications in oil and gas exploration, including rig
and ship platform construction and repair and underwater
pipeline installation, demand also remains strong from the
aerospace, the commercial and military markets.
In addition, increasingly sophisticated systems in rail
and light rails, hybrid vehicles and medical systems are
also requiring the aerospace caliber cable harnesses which
are shielded from EMI and (unintelligible) interference
and many demanding applications.
The band that just continues to expand at doing just a
terrific job with IDEX like innovation, applied solutions
and many different markets. All of fire and safety
performed very well for the quarter, with organic growth
at 10% and operating income of just under 25%. Dom's going
to now review the financial results for the quarter and
year-to-date including more detail with regard to our
segment operating performance.
With that, I'll turn it over to Dom.
Dom Romeo: Thanks, Larry. Good afternoon, everyone. I'm now on
Page 12, orders and sales. Orders of $339 million
increased 17% from last year and 7% organically. Mostly
orders were $108 million in April, $115 million in May and
$116 million in June, so once again, very consistent
throughout the quarter.
By segment the Q2 organic orders growth rate was as
follows. First Fluid ad Metering Technology, that after a
first quarter adjust under 11%, FMP posted an 8% increase
in the 2nd Quarter, and as Larry mentioned, the growth in
the various markets served continued to be strong and
that's evidenced by our order trends and also the pipeline
we have with projects.
Health and Science was up 6%, and we do see some
improvement in core, analytical and IVD markets.
Dispensing due to growth in Eastern Europe and improved
conditions in Western Europe was up 6%, and lastly First
and Safety and diversified Products was up 7% in Q2, and
again we look at both backlog in our pipeline, we see
growth for the second half consistent with the first half.
Sales of $345 million was an all-time high and again that
was an increase of 16% in total and 8% on an organic
basis. Turning next to Operating Margin on Page 13,
operating margin at 20% increased 110 basis points from
last year, and on a consolidated basis we achieved 40%
plus flow-through on organic growth for the quarter. Let
me just take you through the math on that.
Sales increased 48 million versus last year. Within that
acquisitions provided 25 million of revenue at about 20%
operating margins. Currency added 6 million to revenue
with an estimated flow-through in the low-to-mid teens.
Thus the organic revenue growth was about $17 million and
the associated operating income on that was $7 million or
a flow-through of over 40%. So again, as Larry mentioned,
from an operating margin perspective, very strong
execution and strong leverage.
Turning next to Income, Page 14, income from continuing
operations was up 21% and EPS of 51 cents is a 19%
increase from last year. The effective tax rate was 34%
for Q2 and for the year, we estimated the ETR in the
34-35% range. And as I mentioned in the past, the biggest
driver in terms of impact on ETR will be our geographic
mix of income.
As a point of second half modeling internally, we're using
35% for the second half, versus the 34% we've discussed on
the last call. So all in all from an earnings perspective,
again very strong performance.
I'm on Page 15 now, Balance Sheet highlights. Debt to
capitalization was 24% and our balance sheet continues to
be strong. Second quarter free cash flow of $58 million
was up 40% from last year and from a working capital
perspective, we made some nice progress in the quarter.
Sequentially, revenue increased about 4% or $11 million.
Exclusive of the impact of the Quadro acquisition,
inventory was down slightly. Additionally we improved our
monthly linearity within the quarter and receivables were
essentially flat. So all in a very strong performance in a
cash flow perspective.
Page 16, fluid and Metering Technologies, and again FMT
continues to post solid financial results. Orders were up
31% in the quarter, 8% on an organic basis. Sales
increased 31%, 23% from recent acquisitions and 7% on an
organic basis. Again, acquisitions contributed to about
23% to the 2nd Quarter sales results for the segment, the
combination of (Banjo), (Top Tech), (unintelligible) and
Quadro contributed operating margins consistent with
segment performance, and operating income is just over $30
million was a 39% increase from last year and up 130 basis
points from last year.
Health and Science Technologies for the quarter, orders
were up 7% on a reported basis and 6% on an organic basis.
Operating income increased 4%. Operating margin of 18.4%
reflected an improvement of 50 basis points versus the
prior year, and as we mentioned we have two OEM contracts,
one on the science side, the other in the medical products
line. They're for Q2 in the next two quarters will
adversely impact segment growth to about 200 basis points.
Turning next to Dispensing, Page 18, orders in the quarter
were up 11%, about 6% on an organic basis, sales increased
12% and organic growth was 7%, and again very strong
operating margin at 28.6%. That was an increase of 30
basis points from last year.
Turning to Page 19, Fire Safety and Diversified Products.
For the quarter, orders were up 10%, 7% on an organic
basis. Sales increased 13% and organic growth was 10%. And
as Larry mentioned, growth in this segment is driven by
global marketing expansion combined with new product
introductions. Operating income grew 11% versus last year
and margin at 25% was essentially flat with last year.
With that, I'll turn that back to Larry.
Larry Kingsley: Thanks, Dom. Given our ability to take share in attractive
markets, we continue to invest for growth while being
mindful of what is necessary to react to managed costs and
those businesses that are growing at the less than IDEX
targeted mid to high single digit organic rates.
For the back half of the year, we see continued strength
in just about all of the in-markets we serve. Operational
excellence enables us to continue to be more productive
and further leverage our fixed cost structure. Our
strategy and operational execution will continue to
deliver strong performance. Commercial excellence is
enabling us to continue to expand the available market for
fluid metering and health and science, all enabling us to
take share in all of our four segments.
Our international exposure continues to serve us well, and
our ability to acquire great businesses like Quadro
further augments our ability to grow beyond organic
capability. As you know, we don't provide guidance and we
don't intend to.
We've made more specific forward-looking statements in
this quarter's release and in our prepared comments than
we typically do for two reasons. One, some of the larger
diversified industrial companies are experiencing slower
markets than we are, and two, we wanted to speak
specifically about our views of what we expect and the
dispensing (unintelligible) markets for the third quarter.
And what we see is the opportunity for improved
performance in health and science. So in summary, we
believe mid- to high single-digit organic growth coupled
with similar acquisition contributions will continue to
deliver annual EPS growth and the range that you've seen
from IDEX over the past few years.
For the back half of '07 we're focused on delivering
within that same range and setting the stage for a great
'08. With that said, we'll open the line for 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 the line
of Michael Schneider with Robert W. Baird and Company.
Michael Schneider: Maybe first, can you hear me okay?
Larry Kingsley: I can hear you, (Mike).
Michael Schneider: Maybe first we could just address the contract hit, the
HST in the quarter it was two points. Can you give us a
sense, though, if I heard Dom correctly that continues in
the second map, would that also continue in the early 2008
or by the year end do we anniversary that hit?
Larry Kingsley: Yeah, (Mike) we're not going to delve into the specifics
of the OEMs. We did see about 200 basis points of adverse
impact, organic growth in the quarter. That will continue
and favor down through essentially the end of the year
into the first quarter.
We don't see any impact associated with that OEM exiting
beyond that timeframe and for that matter, we see fairly
strong outlook from our core health and science segments
otherwise, and that it analytical instrumentation
segments, the IBD and Biotech segments, the various
medical equipment segments, such as dental and some of the
other medical capital equipment. So to frame it up, 200
basis points will taper down slowly through the end of the
first quarter of '08.
Michael Schneider: Okay, and then as far as the order rights, you did know if
that order is up 6% organically. Would you attribute that
to the sales force investments you made last quarter in
reorganization? Would you attribute it to some change in
the actual (unintelligible) markets or both? Just some
color there, and then could you give us an update on where
you are in that sales force initiative?
Larry Kingsley: Absolutely, (Mike) I would start with the segments that we
serve. The markets that we serve for health and science,
are very attractive markets that are growing at a nice
pace. And their OEM structured markets, so there is a
little bit of lumpiness or order release to sales rates
that varies from time to time, but if you look at those
core segments of analytical instrumentation to serve the
life science and pharma markets, the various diagnostic
equipment segments that serve all forms of patient care
for tests and for in-hospital patient care.
Those segments are growing nicely. We continue to see them
grow to 6% organic orders growth in the quarter is
reflective of the markets and their attractiveness. I
think we'll still see improved performance in health and
science based on the investments that we've made over the
last couple of years in the front end of the business, and
frankly, I won't be pleased until we're performing at the
high end of the single end of the organic range that we've
talked so much about.
In terms of organization structure within health and
science, in the prepared remarks, as I commented, we have
made most of the investments from re-investments on the
SG&A line of as needed. I think we've got the right
structure in place. We've got the people in the positions.
We've got the sales leadership in place, GM talent in
place to go after the targeted segments, and I think it's
a matter of continuing to execute well and just take that
organic orders right from six on up.
Michael Schneider: Okay, then just one last question. (Banjo); could you give
us an update on the growth rate of that business now that
you've owned it for a couple of quarters and also
presumably, it does have a beneficial impact to organic
growth as we anniversary that acquisition as we enter into
'08.
Larry Kingsley: Sure, (Mike). We typically don't delve into the business
unit organic growth rates, but obviously the AG space is
doing quite well. And (Banjo) is doing quite well, as a
result. But also the synergies that we talked about a year
ago in terms of taking the (Banjo) product into the
industrial applications. It's working out very nicely. We
just had a review week before last and we're actually
tracking a little bit ahead of our plan and vice versa.
Some of the products that were taken into the (Banjo)
channel seems to be generating some nice little
incremental sales for us.
So we're very pleased with the acquisition of (Banjo).
It's doing well in the home space. Now, we're thinking
about how to take it to some of the international markets
where essentially it's untapped and that's upside for us.
In terms of the organic rates for the quarter for (Banjo)
year over year, (Mike) it's in the double digit range, and
as you know, the anniversary date will be the beginning of
the fourth quarter so right now those numbers are included
in our acquisition growth rates for FMT.
Michael Schneider: With that all should be accretive to FMTs, organic growth
rate, presuming the growth rate stays where it is.
Larry Kingsley: Beginning in Q4, that's right and for '08, obviously.
Michael Schneider: Yeah, Okay, thank you again.
Larry Kingsley: (Mike), thank you.
Operator: Your next question comes from the line of Terry Darling
with Goldman Sachs.
Terry Darling: Just wanted to follow up on health and science. I may have
missed it somewhere in the commentary or the release, but
what was the acquisition impact on revenue growth in
health and science in the quarter?
Larry Kingsley: Terry, it's basically nil. The 1% is essentially organic.
As you know, the acquisitions were apples to apples for
the quarter. So we're all organic.
Terry Darling: Okay, and some of the comments you sort of referred to a
core part of the business of health and science and a
non-core piece. And I want to just make sure we're clear
on what the non-core piece is. Are there elements of that
beyond the customer contracts that we're referring to, but
you are looking to rationalize one way or the other. Have
we got that understanding correct?
Larry Kingsley: No, Terry. Basically, the focus of the health and science
team is in the segments of those analytical
instrumentation segments which serve the variety of end
markets that are pharma, life science and other drug
discovery applications. The (unintelligible), medical
equipment and dental equipment, the laboratory and the
automation of the laboratory and then there are some
select environment segments that we like a lot.
Beyond that in the segment, we also do serve some niche
segments, things like home medicals, as an example, which
is all reality isn't going to get the same degree of
attention from us going forward.
We're selective in terms of those OEM relationships that
we like, that we think are sustainable, differentiated
product positions that will generate great margins from
and we'll stay in those, where we don't see the same
sustainable margin opportunity, we'll be opportunistic
about if and when we exit. It's not going to have a big
dilutive impact to the organic rate for health and
science, though, for anything beyond the mid term.
Terry Darling: Okay, let me ask you a different way. If we add the two
points from the impact of the contract second growth 1%
goes to 3% which is still below I think where you think
that business can be longer term. I'm just trying to
understand where the additional drag on growth is coming
from.
Larry Kingsley: Sure. And it depends on if you're trying to bridge organic
orders at 6% or the sales result at one. But bottom line
is a couple things relative to just Q2 beyond those OEM
contracts that we exited, and that is there is a degree of
lumpiness to the OEM release rate. And one of the larger
customers in general was going through a bit of an
inventory correction from Q1 through Q2. We anticipate
that their sales will ramp up here in mid-term. And there
is - I think there's also some sales upside that'll come
by way of all of that investments that I answered in the
last question.
So, you know, if you look at the mix of market-impacted
issues and things that we need to do about it largely it's
on our dime for how we in the back half of the year
improve our performance within the health and science
phase.
Terry Darling: Okay, and then I think you in early discussions had
mentioned that acquisition prices in this particular space
- so on health and science - you know, had moved up to
levels that were not attractive to you and you were
focusing on other areas. Is that still the case?
Larry Kingsley: I would say that comment isn't universal. There are some
properties that we're looking at now in the health and
science phase that bridge actually between fluid metering
and health and science that we see as potentially
interesting. And evaluations would not preclude us based
on what we know about those as proprietary deals of
getting them done.
And really, Quadro in many senses is kind of the same
situation. Quadro, you know, is going to be reported in
the fluid metering segment but Quadro serves the
pharmaceutical and bio-pharmaceutical segments, as well as
some other segments. Such as food - specialty segments
within food. And in reality some of the end market drivers
there are similar to the health and science drivers. And,
you know, Quadro was a proprietary transaction. We like
the Quadro fit very well in terms of serving those end
segments. So depending how you classify that is either a
fluid metering or health and science acquisition. Things
like Quadro are certainly very doable for us going
forward.
Terry Darling: Okay. And lastly on margins - second quarter margins
actually pretty good relative to our expectations and sort
of wide-range between Q1 and Q2. As we look to the back
half of the year do we think more like Q2 or do we think
more like Q1?
Larry Kingsley: I think you can assume that our margin generation
capability is always going to be strong. We have the
ability to float through very nicely on any incremental
growth that's north of mid-single digit organic. And as
you know from our total growth model we buy business that
we can add margin to fairly quickly. And the combination
of our acquisitive and our organic growth is going to
continue to yield nice margin extensions.
Terry Darling: Okay, thanks much.
Dom Romeo: And Terry, the other thing to consider. I think when you
look at margin it's better served by segment. As you'll
recall the second quarter for dispensing is typically our
highest revenue quarter. And obviously with the second
half or third quarter at lower revenue you'll see a five
segment mix impact in terms of our ability to float
through at the thirty to 35% that's still the case.
Terry Darling: Yeah, Dom maybe my question wasn't clear. I was still
exclusively focused on health and science. 18.4 in Q2,
17.2 in Q1. Pretty wide-range there and pretty good
performance in spite of weak revenues. You know, in terms
of your comment of flowing through at the higher end of
the range with, you know, mid-single digits organic, but
we're going to be below that range at the back half of the
year. I'm just trying to calibrate there.
Larry Kingsley: No Terry, sorry I didn't realize that was the question.
No we are definitely not looking at Q1 as indicative of
the margin opportunity for health and science.
Terry Darling: Okay, super. Thank you.
Operator: The next question comes from the line of Matt Summerville
with KeyBanc.
Matt Summerville: Just a couple questions. First, can you provide a little
detail year-to-date what the additional spend has been in
the health and science business? And then what that looks
like in the second half of the year?
Larry Kingsley: Matt, it's really not a matter of additional spend within
- from a reinvestment stand point within the health and
science segment. We've been investing in the health and
science marketing sales organization. The R & D
capability, both internally as well as what we've acquired
for three and a half or four years. So there's really not
a year-over-year issue that particularly pertains.
We do have the ability to meter that, obviously, going
forward. If, you know, we see better opportunities in one
of those market segments, in one of those businesses
verses the other.
Matt Summerville: Looking at the dispensing business - to switch gears over
there. If you look at sequentially the second quarter over
the first. You grew revenue over $2 million and operating
margins were up something like four or 500 basis points.
Can you help me understand, I guess what's - obviously the
leverage there's great - but what was going on from a
(mig) stand-point?
Larry Kingsley: Sure, Matt, as you recall in the first quarter we had
severance expenses. So if you take that out it's basically
volume and obviously operations initiatives driving the
cop. The better cop here is year-over-year. And at this
revenue level dispensing has a significant cost leverage.
So that's what you see in the numbers for the quarter. But
don't forget the first quarter we had the severance
expense to the numbers.
Matt Summerville: Okay great. Thanks a lot.
Operator: Your next question comes from the line of Ned Armstrong
with FBR and Company.
Ned Armstrong: Good afternoon.
Larry Kingsley: Hi Ned.
Ned Armstrong: Yeah, my question involved acquisitions. I mean, you know,
there's been a lot of talk about how the financing markets
have been roiled and that the private acquize (sic) have
been pulling their horns a little bit. Have you seen that
out there in what you're looking and what are your
thoughts about that in general as far as presenting
opportunities for better pricing?
Larry Kingsley: Well Ned, as you know, we focus on proprietary
transactions. Again, not to reemphasis the Quadro as a
prototypical IDEX acquisition but in terms of Bolton it
is. When we're looking at a large number of proprietary
acquisitions - Particularly in the fluid metering space -
typically we can find them that fit well within our
historical seven and a half and nine and a half times
EBITDA range. Still. And if we've got enough of them under
way we can afford to be selective.
In terms of the private equity exits of the middle market,
you know, industrial technology space, I would say I've
not seen that yet. I think it's likely to happen. But we
haven't seen it yet. But in the mean-time our
(unintelligible) teams is working hard to make
acquisitions happen.
We, as you know, we deployed just under $400 million in
'06 and again a little bit at the beginning of '07 in
terms of capital toward great acquisitions. They're doing
fantastically. We think we choose them well and integrate
them very well. And we've got quite a few number - or
quite a few on the list right now for what we would like
to get done yet this year and into '08. I would personally
be disappointed if we didn't deploy over $500 million in
capital over the next 18 months and kind of double that
over the planning period.
Ned Armstrong: And maintaining the type of multiples that you've been
paying in recent acquisitions?
Larry Kingsley: Yes.
Ned Armstrong: Okay, thank you.
Operator: Your next question comes from the line of Scott Graham of
Bear Stearns.
Scott Graham: Hey, good afternoon. I have a question on fluid (FMT) and
wanted to follow up on (unintelligible). When we look at
(FMT) the organic growth rate of the business, we saw it
at about 7% this quarter on a comparison of 8% in the year
of '04. This is verses the last two quarters where organic
was up 12 on a comp of 12 and ten on a comp of ten. So
something did happen there even if it's, you know, not
something that could set - that's continuing. Could you
give us an idea of what exactly pushed the growth rate
down by, you know, five points this quarter versus last
quarter?
Larry Kingsley: I think it's got - some of that you basically laid the
trend out very accurately in turns of the Q1 '06, Q1 '07
and the same for Q2 '06 and '07. It's not unusual for us
and our businesses to have year-over-year delta of
something of the sort and as you know with an (FMT) we
typically would see at least mid if not high single-digit
organic growth. Particularly with a comp of what we've
added over the last few years. And a quart of the quarter
organic rate difference of between, kind of, mid to high
single-digit and double-digit is something that's likely
to continue to be the case.
So basically to kind of restate what you asked, we saw
organic orders growth year-over-year trend almost exactly
with organic sales. And I wouldn't read too much more into
it than that.
Scott Graham: Well, what were the underlying markets that felt - I know
that this is not an easy thing for you to get to because
of how many applications you're in (FMT) - but were there
any markets that feel weaker in the second quarter verses
the first quarter? I would think that there had to have
been.
Larry Kingsley: Not really, Scott. What we've seen in the last couple of
years it's the very beginning of the year in particular is
a fair amount of forward investments. Particularly in the
energy markets where they're typically working through
some of their spring infrastructure projects. And we've
seen that now actually, I think, going on three years in a
row.
In the chemical segment it's a little more constant
through the course of the year. Water and wastewater is
more project driven. So that can kind of come up and down.
And tends to trend a little more up. And, now I don't want
to get any more specific regarding the back-half of the
year with an (FMT) but to tell you that Dom and I, and
Heath too, just spent a better part of a week with the
team. And we feel very good about what they've got in
their backlog in their project topper and what they're
working to make for a very successful '07.
Scott Graham: Now it's fair to say that comment within that paragraph
of, you know, subjective guidance that (FMT) should see
second half growth equivalent to, you know, combined first
quarter second quarter growth. That would mean,
essentially, Larry, that organic sales growth in FMT in
this third and fourth quarter should accelerate verses the
second quarter on a year-over-year basis, yes?
Larry Kingsley: That's the right math, Scott. We've kind of looked at the
year-to-date first half, which is obviously higher than
the 7%. And our comment in the release is a comment.
Scott Graham: That's helpful, thank you. As far as the dispensing
business, kind of the same thing. Because in the first
quarter we were up ten on a minus four comp. And this
quarter we were up seven on a minus four comp. Now next
quarter you have a difficult comparison of 12%
acknowledged and that's probably why you're cautioning
towards a flat sales number. But it would suggest that in
the fourth quarter here again, we should see a nice rant
in organic growth in this business as well, yes?
Larry Kingsley: Scott, I can tell you this. Yes, you're correct from the
stand point that third quarter for dispensing is a more
difficult comp. Too, in the prepared remarks we talked
about the fact that some of the smaller retailers in the
US over the last couple of months have been a little
slower than they were in the first quarter of '07. The big
boxes, the DIY channel is still continuing with their
program commitment, by and large. And most of that looks
quite robust. And if you want to look at order rates as a
mirror, first half second half for dispensing, that
wouldn't be outlandish. But we're mainly trying to caution
folks relative to the third quarter performance.
Scott Graham: That's fine. Last question is on margin. Which the
contribution margin this quarter, as you've laid out, was
outstanding. And it was third quarter with, you know,
little bit of European vacationing, what have you, I can
understand why you're thinking maybe a little bit lower
than that in the third quarter. But then we should kind of
be right back in the saddle in the fourth quarter. I
assume that all the productivity programs that we've
talked about ad nauseam, you and I, Larry and Dom, that
everything is on track there.
Larry Kingsley: Yeah. I don't like the term ad nauseam, we'd love to talk
about it. I would tell you Scott that our productivity
metrics are tracking right where we want them to be for
the year. We're tracking ahead of last year in terms of
what we call hard-savings. Both material and labor.
Productivity is right on track. Our product moves to our
Chinese facilities are basically tracking where we want
them to be. And I think in terms of process-base and
cost-base focus we're right where we need to be. So I feel
very comfortable that we'll achieve our targets. And...
Scott Graham: I have one last question if I might. Sorry, but the health
and science, obviously a hot issue today. When we went
into the breaking out of this segment to be a stand alone
business I'm thinking, if memory serves - and I think I do
have a good memory on this - that we were thinking that
this is a business that where IDEX is concerned that mid
to high-single digit organic growth is what you guys focus
on getting. But that this would be more towards the higher
end of that range. At least that was the thinking I think
going in. Now that you're like re-tasking this business,
you know, give us an idea of, you know, A, is it still,
you know, that type of thinking that this should be maybe
a high-single digit organic growth business? And B, what
gives you the confidence now that you've had to re-task
the business a little bit here once that you can in fact
still get there.
Larry Kingsley: Sure. Good question. Look. We broke out health and science
for a couple reasons. At the time, if you all remember, we
basically had a big pump group and we wanted the - to call
folks attention to a couple of things. First, that even if
you look at what we have now within the fluid metering
space, we've moved well beyond pumps. We've talked
about, you know, ultra-sonic technology from (Farberman)
and new control and instrumentation products from Top
Tech. And all of what we've done to enhance our metering
capability, otherwise within fluid metering.
But also, there was a fairly large component, about 24% of
sales, that really went to a little bit different set of
end markets than does the classic fluid metering
industrial set of applications. That the health and
science sees. And at that, you know, basis for sales we
said, one, we need to demonstrate to folks that this
business is going to be counter-cyclical with fluid
metering. That it's not going to cycle with
(unintelligible) with segments, and that we've got a great
opportunity for growth.
Our internal expectations for growth for this business are
large. We have expectations that this business will grow
at the fastest pace within the company. We're not pleased
at all with where we are right now. We think we've got
great markets to serve and we're confident that we will
continue to improve our approach to those markets.
So, bottom-line, we think we've got a great business.
We're pleased with the segment. And again, the primary
issue at the time when we broke it out was to call out how
health and science is a nice compliment to what we have in
the fluid metering segment.
Scott Graham: That was very helpful, thank you.
Operator: Once again, I would like to remind everyone in order to
ask a question please press star 1 on your telephone
keypad. Your next question comes from Robert Lagaipa with
CIBC World Markets.
Robert LaGaipa: Thank you. Good afternoon. I hate to (blabber) health and
science, but I just wanted to find out, you know, the
inventory correction that they had mentioned is being a
little bit of a drag in the second quarter. Expecting it
to dissipate and become more favorable in moving forward.
I mean, what end market was that in? Was it something that
was fairly large or really proved to be a drag? Or was it
something else?
Larry Kingsley: The end market, Bob, is the life sciences segment. And
some of it's also Big Pharma I'm not going to go into
details of which of the instrumentation OEM partners that
is, but the end markets are very robust. Obviously they're
growing very nicely. And as a matter-of-fact their
forecast is to accelerate a bit.
Robert LaGaipa: And you've already seen that in terms of you order growth
there?
Larry Kingsley: What we're expecting is improved order rates, yes.
Robert LaGaipa: Okay. And what's been the trends within gas.
Because gas, you know, obviously, you know, it's a large
part of that segment. You know, at least historically it's
been a little more industrial. And I know you've been, you
know, making great strives to try to become more, you
know, health science oriented within that segment. Or
within that business, rather. What have the trends been
within that business the last few quarters?
Larry Kingsley: Sure. Gas, as you said, is a pretty broadly served set of
markets. (Unintelligible) OEM (unintelligible) player
they've designed and manufactured air-handling equipment
that goes into a number of the health and science segments
as well as other niche industrial segments.
The trends there have been for the most part impacted by
what we've just been talking about. Which is one of the
customer relationships that we've decided to exit. Which
is in the home medical segment. Other than that, gas is
performing pretty well. Same comments that apply to health
and science as well would apply to gas so. And the team's
working very hard to grow their business (unintelligible).
Robert LaGaipa: Terrific. Two other questions. One, in dispensing the
retail orders that, you know, the timing of which,
obviously impacting the third quarter. Do you have any
visibility to when they're expected to be delivered? I
mean, do you know that they're going to be delivered in
the fourth quarter? Is it something that we're still going
to have to watch out for moving forward?
Larry Kingsley: Yeah, we feel pretty good about dispensing and the retail
channel commitment to the various big programmatic
activity. We've got fairly decent visibility into those
projects and which ones are likely to take place both in
the third and fourth quarter.
Robert LaGaipa: Okay. So you're expecting improvement in the fourth
quarter there.
Larry Kingsley: Yeah. We feel good with what we have right now in terms of
the projects set for the fourth quarter for a decent
organic growth quarter.
Robert LaGaipa: Terrific. Last question if I could. You know, something
that really hasn't been talked about a lot so far. It's
been in the fire safety side. You know, obviously the
organic growth has been very good these last few quarters.
I'd imagine why that's driven by the international
businesses. But what about does the Fire and Safety Act -
I know you've talked about in previous quarters that the
fact that the release of funds really haven't come through
yet. But, you know, for at least the remainder of the
fiscal year, which is, you know, coming to a close soon, I
would think that the release of those funds might be on
the near term horizon. Where does that stand?
Larry Kingsley: Where it stands is the $550 million that was originally
approved has been flowing and has been released. And
there's been some debate around whether it may sum up to
$490 verses $550 at the end of the fiscal year. But I
think by and large we're seeing it play out within the
Federal Fiscal Year as planned.
And so the bigger question, the ones that, you know, we're
working internally all the time are to track the release
of funds - the specific equipment, and the specific
projects, and specific municipalities. But by and large
that's, you know, that's been to plan. And according to
what the Federal Government has done similarly in the last
three years.
Robert LaGaipa: Should we see any bump here in the third quarter and then
it start to fall off as we, you know - the fiscal year I
think is the end of September, if I'm not mistaken. I mean
should we see a bump here in the third quarter and then
see some of that given back in the fourth quarter? How
should we model that in...
Larry Kingsley: No. No, I wouldn't assume that at all. As a matter of
fact, as we said before, Bob, the Fire Act, you know, in
the theme of funding, basically aren't a real big impact
we think to our sales. And so frankly there's been bigger
impact over the lasting months - eighteen months. Like the
Emission Standards changes and things of the sort between
'06 and '07. So if I were you I wouldn't take it in either
way in terms of my modeling.
Robert LaGaipa: Terrific. Thanks a lot.
Larry Kingsley: Okay Bob.
Operator: Your next question comes from the line of Charley Brady
with BMO Capital Markets.
Charley your line is open.
Larry Kingsley: Charley?
Charley Brady: Yeah, hi. Just one more healthcare question, if I could.
You alluded to the fact, or you mentioned briefly, as
you're going to go forward as you continue with customer
rationalization. Is it fair to assume that those would not
be to the same magnitude as the current OEM business
you're exuding now?
Larry Kingsley: Yes, that's fair to say, Charley.
Charley Brady: Okay, and then on the fire side of the business how much
of that business is currently outside US or outside North
America? And how much of the growth from that business do
you see coming outside of North America going forward?
Larry Kingsley: That business it could take fire and safety and total is
about half outside of the US. And in terms of growth we'll
see probably disproportion of contribution over the next
couple of years from outside the US. As more people have
adopted some of the rescue tools and more of the
developing nations are using more fire suppression
equipment. So probably, you know, 2/3 of the organic
growth will come from outside the US over the next couple
years.
Charley Brady: Okay, then the final question you talked about mining
applications. Could you just go into little more detail
about what you're doing there and some - and more
specifically what type of applications would be in the
mining section?
Larry Kingsley: Mainly around shoring. We're using all three mechanical,
pneumatic and hydraulic tools. Basically they're
derivative products that were originally designed for
rescue applications to be used in mining. Both for the
actual mining specialty applications themselves and
getting at the desired material. But also for safety
precautions sake.
Charley Brady: Thank you.
Larry Kingsley: Sure, Charley.
Operator: Your next question comes from the line of Walt Liptak with
Barrington.
Walt Liptak: Thanks. Good afternoon. Got an H and S question too. Was
there any expense related to the exit of the two OEM
contracts?
Larry Kingsley: No.
Walt Liptak: Okay. And the 50 basis points improving in margin, was
that the -was that primarily the result of the exit of
those contracts?
Larry Kingsley: There's some impact there. And there's also some if you
remember our comments in the first quarter with respect to
the acquisition associated to impact to margins. But
basically Walt, you know, we continue to see margin
enhancement opportunities for the health and science
(unintelligible).
Walt Liptak: Okay. And I wonder if you would comment on the Quadro
acquisition and what the revenue growth rate might look
like?
Larry Kingsley: Well, in all the acquisitions that we're looking at, we're
looking for organic capability that's within the IDEX
range. Hopefully greater than that. I think Quadro is -
they're certainly capable of that. I was with the Quadro
team a couple weeks ago we went through in detail what
their current focus is and how we need to dove-tail what
they're doing into the rest of the fluid metering
strategic plan. The opportunity for taking what we do well
fundamentally in sanitary fluid applications now
augmenting that with some of what they do well. I.E the
salads and particulate handling and some of those -
particularly the emulsification applications where you're
trying to create a suspended fluid essentially or
substance of some sort.
It's something that a good chunk of the Pharma, the
Biopharma, number of immunization segments that we serve
are looking for someone like us to bring that product
capability. So, you know, I would be shocked and I would
not be pleased if we didn't grow it at IDEX-like or better
than IDEX-like organic rates over our three year planning
horizon
Walt Liptak: Okay. It sounds like because of those synergies that you
just mentioned that it could be closer to double-digits.
Larry Kingsley: It very well could be, Walt.
Walt Liptak: Okay, and then one last one. You mentioned in your
commentary about the rescue vehicles in the US and that
you made it sound like there were some market share gains
that you were getting outside of some of the traditional
OEMs. I wonder if I had that right or if you could
elaborate a little bit more on that.
Larry Kingsley: I don't think in our prepared remarks we said anything
about market share gains relative to the vehicles. We see
good growth opportunities both in the vehicle side and on
the rescue (unintelligible) side. And for that matter also
with the Bandit group.
We see that of the vehicle builders that some of them are
growing nicely. Particularly some of the small and
middle-sized truck builders right now posting nice
year-over-year gains. That is their own (unintelligible)
but also our relationship with them. And the larger ones
it's, you know, a mixed bag - some doing well, some not
doing as well.
Walt Liptak: Okay. Okay, thanks very much.
Larry Kingsley: Sure, Walt.
Operator: At this time there are no further questions. Gentleman,
are there any closing remarks?
Larry Kingsley: Well let me just say in very brief form, thank
you for joining. Obviously we're very pleased with our Q2
record performance. The back half of the year for almost
all of our business looks great. We're very focused as
always in terms of operational execution. And we'll talk
to you in a quarter. Until then thanks very much.
Operator: Thank you. That does conclude the IDEX Corporation Second
Quarter Earnings Release Conference Call. You may now
disconnect.
END