EXHIBIT 99.1
IDEX CORPORATION
MODERATOR: HEATH MITTS
OCTOBER 18, 2007
1:30 PM CT
Operator: Good afternoon, my name is (Robin) and I'll be your
conference operator today. At this time I would like to
welcome everyone to the IDEX Corporation 3rd Quarter
Earnings Release Conference Call.
All lines have been place 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
would now like to turn the call over to Vice President
and Treasurer of IDEX Corporation, Mr. Heath Mitts, you
may begin your conference.
Heath Mitts: Thank you (Robin). Good afternoon and thank you for
joining us for our discussion of the IDEX 3rd 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 month and nine
month periods ending September 3o, 2007.
The press release along with the presentation Slide to be
used during today's web cast can be accessed on our
company website at www.IDEXcorp.com.
Joining me today from IDEX management are Larry Kingsley,
Chairman and CEO and Dom Romeo, Vice President and Chief
Financial Officer. The format for our call today is as
follows. First, Larry will provide a view of the current
IDEX portfolio and then update you on our progress across
the four business segments.
Dom will then take you through our financial results for
the quarter and outlook for the fourth quarter. Following
our prepared remarks we'll then open the call for your
questions.
If you should need to exit the call for any reason, you
may access a complete replay beginning approximately two
hours after the call concludes by dialing the toll free
number 800-642-1687 and entering the conference ID
5708545 or simply log on to our company Home Page for the
web cast replay.
As we begin, a brief reminder. This call may contain
certain forward-looking statements that are subject to
the safe harbor language in today's press release and in
IDEX's filings with the Security and Exchange Commission.
With that, I'll turn the call over to Larry Kingsley,
Larry?
Larry Kingsley: Thanks Heath. So, we'll begin with a quick summary of our
operating performance for the quarter. Orders were up
15%. Sales were up 16%. Operating margin of 18.9% was up
10 basis points and EPS is up 15% to 47 cents.
Despite some isolated areas of softness, we were pleased
with our overall performance for the quarter and we'll
get into a lot more detail here in the next few Slides.
Last quarter we provided general guidance to clarify our
expectations for the third quarter. Given that our third
quarter results were slightly below expectations, we
provided a summary view on Slide 6 of the presentation to
represent the state of our markets and our assessment of
each segment.
We'll build on the notion to provide a dashboard in a
similar fashion on a quarterly update going forward. If
you don't have the Chart in front of you, it's a metrics
of our business segments (paraded) against our relative
strategic position, market growth, our global presence
and our M&A focus.
The cells of the metrics indicate the resultant
attractiveness in Red, Yellow and Green. The (triple)
summary is that I like our ability to win as much as I
like the attractiveness of where we play.
And again, similar to my comments last quarter, most of
the markets that we're in are performing well and
indicate continued very good prospects for growth.
Our innovation and share gain capabilities will continue
to create growth that's even better then the market. All
of our businesses apply commercial and operational
excellence to drive competitive positions and customer
service performance.
We continue to challenge our business leadership as to
how we can expand both our product served markets and
grow in the emerging industrial countries. In particular,
a Fluid Metering served end markets of process in
infrastructure are strong, both domestically and
globally. CAPEX continues to float a project in support
of oil and gas exploration and distribution, water
infrastructure repair, chemical process plan programs, as
well as (pharma), food mining and power generation.
The Fluid Metering strategy of building out the broadest
array of technology to move, measure and dispense
critical fluids and difficult applications is delivering
great results.
Business is continually winning new customers, generating
consistent organic growth and our acquisition build out
is enabling us to further penetrate targeted growth
areas.
(Banjo), (Toptech), (Faure Herman), (Quadro) and those
acquisitions to come are all focused towards expanding
our product basket, while leveraging our channel strength
in a very logical fashion.
We're building a strong position in Asia and establishing
the beginning of a presence in Eastern Europe. So, in
summary, Fluid Metering as indicated on the Charts is all
Green.
Our Health and Science business is growing due to both
solid and market performance and also technology is
enabling faster, more accurate analysis of critical
fluids that we pump, filter, de-gas, transport and
measure.
As you know, within the Health and Science we've talked
about non-core, less profitable OEM relationships. That
we decided to exit during '07. if you reference the
pneumatics row in Slide 6, that is (unintelligible)
segment within Health and Science that we view as less
attractive currently within the Health and Science
portfolio.
It's within this portion of the segment that you'd find
those referenced exited OEM relationships. Again, our
(unintelligible) strategies and focus is application
intensive requirements in global niche markets.
We will continue to carve out the best opportunities
within Health and Science pneumatics accordingly. And
we'll selectively invest to grow. Our core strategy
within Health and Science though is to continue to build
out the critical fluid system components and sub-systems
that are the foundational elements to Health and Science
analysis and diagnosis equipment.
The core Health and Science outlook is good. Based on
organic growth opportunities coupled with strategic
acquisitions to further enable our capability.
In dispensing, we're the global providing automated
dispensing and mixing equipment used primarily today in
the paints and coatings market. Dispensing is a project
formatted business. Quarter to quarter comparisons always
illustrate the lumpy nature of the global demand
particularly the US channel commitments for new
equipment.
However, despite quarter over quarter reporting
lumpiness, it's a long term growth prospects continued to
be attractive. The dispensing strategy is to continue to
develop a global product platform to address Europe and
the Americas while leveraging global designs to enter
emerging markets.
Our new modular product design will improve our
operational footprint flexibility to ensure that we serve
our customers effectively and maximize operating
performance. So, in our assessment dispensing great.
We continue to have a mixed outlook for Fire and Safety.
Fire and rescue tools in the US is a slower growth
business for us in '07. The US fire truck builders who
are the OEM purchasers of our onboard systems, has slowed
through the course of this year.
Most of the approved Federal spend through '07 ahs been
allocated to specific programs, but remains unspent as US
municipalities sort through local budget issues.
Additionally the diesel engine emission changes as
mandated last year have resulted in less truck sales and
associated equipment purchases from us following Q1 of
this year.
Outside of US growth prospects are comparably quite good.
As you know our strategic focus has been to establish the
best channels and support organization including local
manufacturing throughout Europe and Asia.
And we continue to expand our channels in areas like
Southeast Asia, Africa, Eastern Europe and the Middle
East. Innovation to enable ease of use is our strategic
focus. Our Rescue Tools business is introducing new
products that address the needs of a changing emergency
rescue and response profile.
And as faster tool deployment by way of quick connect
hydraulics, universal systems for fast tool change out
and lighter tools for the changing global demographics
and for smaller first responders.
We report our BAND-IT business within Fire and Safety.
BAND-IT continues to expand both domestically and
globally based on new products, expanded presence and
outstanding operational excellence.
BAND-IT is a recognized leader for providing (stand)
clamping solutions for harsh environments where a
mechanical clamping force and joint integrity is mission
critical.
To follow up, Fire and Safety is a profitable great cash
generating segment that will continue to grow
internationally at IDEX targeted organic rates. In the
US, we will mange our cost closely to maximize capital
redeployment. So, for the Chart it's a mix of Red, Yellow
and Green for Fire and Safety.
I like the opportunities for sustained operational
performance afforded to us by the end markets that we're
in and further enhanced by our position and execution
capability.
We will continue to invest for organic growth in our home
and adjacent segments, our business development focus and
acquisition pipeline is directed toward the Fluid
Metering and Health and Science segments. Over our
planning horizon we anticipate closing a combination of
meaningful, both on acquisitions and larger strategic
investments in these areas that will further enable
organic growth capability.
Another good example of our strategy at work is today's
acquisition announcement. (Isotech) is a nice product
line expansion in the Health and Science segment.
The diversity of revenue base serves us well in the
existing investments in developing markets is a good
foundation to grow from while select domestic markets are
soft.
So, we'll update you quarterly as to ongoing assessment
of the environments, our position and strategy. By way of
the same high level dashboard. What I'll do now is
quickly run through an update by segment and talk about
what's new and focus on quarterly operating performance.
And we're now on Slide 7. I'm very pleased with our FMT
third quarter performance. Sales grew 35% including 9%
organic growth, which generated further margin expansion.
The integration of our more recent acquisitions is on
track. Faure Herman and (TopTech) are performing well and
providing nice incremental opportunities for our liquid
controls energy platform.
Quadro, acquired in June is a great fit in our sanitary
group of products within the FMT segment. And we're
pleased with the initial integration process.
Within FMT during the quarter we introduced innovative
new products that include (Vikings) new (helico) gear,
external gear pump, which improves reliability and
provides for longer life of diesel engines used for power
generation on board ship, on locomotives and on large
portable power generators.
Also, within FMT, our new (Atex) certified explosion
proof product family has been expanded for use in a
variety of environments where spark free operation is
critical. And addition to strong end market drivers the
emerging international market applications for Fluid
Metering represents the best organic growth
opportunities.
Based on recent enhancements we now have the industries
broadest line of mechanical (cylanoid) pumps targeted to
water and power generation applications in Asia.
As a point of reference FMT's international revenue is
42% of sales and growing. Trading out of Health and
Science, so we're on Slide 8. As mentioned earlier,
Health and Science market continues to be attractive
while our total Q3 sales performance within (HST) was 3%.
The core analytical instrumentation, IVD and
biotechnology market performed very well.
As you know this the area that we continue to acquire in,
as I mentioned earlier and dedicate most of our strategic
investment within the segment too.
Those markets where up 10% organically for us. As we
noted during last quarter's call, decline of specific OEM
contracts reduced revenue by more then 130 basis point to
growth in Q3.
We expect the same level of adverse impact the growth
through the first quarter of '08. Our strategy of
building fluidic assemblies for the most demanding
instrumentation applications is yielding good new growth
opportunities.
Our experience with de-gassing fluids to enable elemental
analysis is now being applied to de-bubbling and
de-gassing techniques and in vitro diagnostics
equipments.
The strategy here as well within other HST new products
is to combine the various proprietary design components
to manufacture fully tested sub-systems. In this
particular example, its deliver prepared fluid samples to
the point of analysis.
In the third quarter the HST operating margin benefited
from the improved mix within the segment. And that
generated 230 basis points of margin expansion.
As you know the OEM nature of HST can result in lumpy
quarterly results. We continue to be bullish about the
long term opportunities and we continue to invest for
grow accordingly.
In dispensing, and we're now on Slide 9. As we mentioned
last quarter for the third quarter we anticipated weak
domestic demand for dispensing based on anticipated
slower growth from a portion of the customer base and
that's the smaller size retail stores.
And to be clear, this includes the regional paint
dealers, the independent hardware stores and the co-ops.
There investment in new equipment decreased beginning in
Q2 of this year. And while we still see slower hardware
and paint store demand for the fourth quarter and headed
into '08. The large retailer base (unintelligible) should
be strong.
Our visibility into specific program activity and current
project commitment lends confidence to a solid order book
as we quote the year and head into '08.
The European demand in dispensing has stabilized and
should continue to be reasonable as we head into next
year. In addition to dispensing, dispensing's lack of
growth in the third quarter. The segments operating
margin was down 750 basis points.
And Dom is going to bridge the segment results, but it
was a combination of volume impact and specific
operational issues which contributed to the decline.
In dispensing our field service costs were very high in
the quarter due to one of our major customers who
experienced raw based machine performance problems. Which
were due to colorant that was use in the machine that was
outside of the colorant producer's specification. This
colorant caused a component of our machine to
malfunction.
Hence the result was a load on our service organization
that far exceeded our internal capacity, and required out
sourced support services and a lot of over time to
support our customers.
So, it's kind of the equivalent of Coca-Cola in your gas
tank and our required response was the equivalent of a
utility company responding to an ice storm.
Moving now to Fire and Safety. As mention earlier we saw
significant US fire truck OEM demand decline in the third
quarter. Within the segment the fire suppression
business, which is about a third of the segment or 8% of
IDEX revenues was down 7% organically. And orders were
down 11% organically.
Within rescue tools despite funding challenges on a
domestic front we continue to drive outstanding
international market expansion. We received global rescue
tools orders for lifting bags for air ports in Mexico and
Germany and Hungary as well as rescue tool orders in
Italy and Turkey and Russia, Poland and from the US Air
Force.
This segment also includes our engineered band clamping
business, BAND-IT as you know, and mention earlier. They
continue to execute just an outstanding year fueled by
strong end markets and innovative new products.
So, Dom will walk you through our third quarter financial
performance including further detail by segment and for
that I'll turn it over to Dom.
Dom Romeo: Thanks Larry and good afternoon everyone. We're now on
Page 11, Orders and Sales. Orders of $328 million
increased 15% for the third quarter. As we mentioned in
our earnings release, orders were up 3% on organic basis
and were impacted by the timing of OEM demand.
Let me walk you through by segment the Q3 organic order
growth rate. First FMT. The increase was 3%, however OEM
timing impacted orders by about 200 basis points. This
impact plus our view of planned Q4 book and ship volume,
equates to a more indicative growth rate of 6% to 8%.
HST orders were down slightly versus our view of a growth
rate of 3% to 5%. Within HST we anticipate improved Q4
book and ship volume versus last year in primarily our
core markets.
Dispensing orders were up 18% versus a more indicative Q4
growth rate 4% to 6% and again as Larry mentioned this is
largely due to the lumpy nature and project nature of the
business.
FSD was up 2% with growth at BAND-IT being offset by
lower demand in the US fire suppression market. Sales in
total of $335 million gross 16% and 5% on organic basis.
Turning next to operating and EBITDA margin. Operating
margin of 18.9% increased 10 basis points from last year.
EBITDA margin at 21.9% increased 70 basis points. The
delta represents increased amortization of intangibles
relating to acquisitions.
In terms of flow through on organic basis both HSP and
FMT achieved nice improvements. Dispensing was adversely
impacted by volume and I'll bridge the other operational
impacts in a few Slides.
FSD was impacted by a lower volume within fore
suppression and mix as well. Turning next to income, Page
13. Income from continuing operations of $38.8 million
was 16% an EPS of 47 cents was a 15% increase.
For the third quarter the effective tax rate was 33.1%,
year to date we're just under 34%. For the quarter and
versus prior estimate EPS improved by about a penny due
to ETR.
In our Q4 estimates we're assuming a 35% ETR and as I
mentioned in the past our rate can vary due to geographic
mix of income and discreet tax events in a given quarter.
Page 14, Balance Sheet Highlights. Sequentially,
inventory was up slightly and receivables were down due
to volume. Debt to capitalization was 21% and our balance
sheet capability obviously continues to be very strong.
Year to date free cash flow is just under $123 million,
that's up 25% versus last year. And for the quarter, free
cash flow $52.2 million was a 50% increase from last, so
continued very strong cash flow performance and
generation.
Turning to Page 15, Fluid and Metering Technologies. FMT
continues to post record results. Ad Larry mentioned the
end markets we serve are very strong. Additionally our
recent acquisitions are performing well and we continue
to have a strong pipeline. Sales increased 35%. Organic
growth was 9% and acquisitions contributed 25%.
Operating income of $31.6 million was an all time high.
And margin of 21.9% increased both on a year over year a
sequential basis. And when you adjust for currency in the
impact of acquisitions, FMT also achieved 35% plus flow
through on the organic growth.
So, again solid results for FMT reflecting both the
strength of our portfolio and operating model. Page 16,
Health and Science Technology. Sales of just over $83
million was up 3% and in line with our expectation.
As non core OEM contracts offset solid growth in our core
HSP markets. Operating income of $16.7 million was up 15%
and margin increased as Larry mention 230 basis points.
Both operating leverage and mix contributed to this
increase. Here we see the leverage of our prior
investment and the favorable mix as core volume replaces
non core OEM contracts.
For Q4 we see continuation of favorable mix, which will
be partially offset by severance actions within non core
product lines. So, largely as we look at Q3 as expected
results for HST with expanding margins.
Page 17, Dispensing Equipment. Sales were down 5%
organically and as we mention in our earnings release,
due to lower then expected demand within our North
America's small retail channel.
Operating margin of 14.7% was obviously disappointing and
a significant decrease from last year. To the right of
the Slide we've included a summary. First of all currency
increased revenue by $1.8 million and has a very minor
impact on income.
Volume was down $1.7 million and impact income by over $1
million, specifically versus last year, the lower volume
relates to high margin products.
Then cost impacts driven both by in quarter sales
(linearity) and the field service costs that Larry
mentioned severance and product mix unfavorably impacted
income by additional $1.6 million.
While we expect the operational productivity and mix to
improve, for Q4 we anticipate additional severance action
and some what lower field service costs. So, for Q3
within dispensing, lower then anticipated volumes and
some discreet cost impacts.
Turning to Page 18, Fire and Safety Diversified Products.
Sales increased 5% organically and as we mention BAND-IT
growth was offset by OEM demand related to fire
suppression equipment.
Operating income increased 4% to $16.5 million. Margin
was down 90 basis due to the volume decline of fire
suppression and also due to unfavorable mix.
So, for SFD at our expectations for band clamping and
rescue tools, but offset by lower demand on the OEM side
in the North America fire suppression market.
As we move into Q4 we expect this trend to continue. In
addition we anticipated additional severance action.
These actions in addition to those discussed in
dispensing and HSP are included in the 1 to 2 cent impact
included in our earnings release.
Turning to our fourth quarter outlook on Page 19. Based
upon current trends and the market conditions discussed,
we estimate sales in the $338 to $346 million range and
that would be an increase of 12% to 15% from last year.
Within that organic estimates by units are as follows, 5%
to 6% for the total company. By unit its FMT 6% to 8%,
HST 3% to 5%, Dispensing 4% to ##5 and FSD 4% to %5.
Currency, mainly the impact of the Euro is estimated to
add 2% to 3% and the acquisitions of Faure Herman,
Toptech, and Quadro are estimated to contribute 5% to 6%.
Based upon these volume ranges, EPS is estimated at 46 to
49 cents and as I mentioned this estimate assumes 1 to
cents primarily for the estimated severance costs and to
a lesser extent field service costs within dispensing.
The Q4 effective tax rate is estimated at 35%. With that
we'll turn the call back to Larry.
Larry Kingsley: Thanks, Dom. We're going to go ahead and open the line
for Q&A now and then I'll summarize after we go through
the Q&A.
Operator: At this 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.
Your first question comes from the line of (Robert
Lagapa) form CIBC World Markets.
(Robert LaGaipa): You know if we add back the $1.6 million, you know and
there's additional costs in the quarter, I mean the
margin was still very, very weak. What gives you the
confidence that if that actually improves on a go forward
basis? Because when I look at your anticipated core gross
for the fourth quarter, I mean how much of that is still
due to the comp? Because you know, if we look at the
majority of segment is Europe, I mean how far off is the
North American markets relative to what you were seeing
previously?
Larry Kingsley: Well, (Bob) let me start with the North America market
comment and then we'll have Dom go back to the same
bridge and maybe provide a little more color.
As we said, the smaller retailer, the independent
retailers, had come down quite a bit at the end of Q1 and
Q2 and kind of bottom out and we don't see them
continuing to decline. The larger retailers continue to
invest and as I said in my prepared remarks the program
activities actually pretty good.
So, now it lends confidence to the situation in North
America that small retail represents about 25% of total
dispensing, that's 25% of global dispensing.
(Robert LaGaipa): Uh-huh.
Larry Kingsley: And we've got pretty line of sight into the large
projects within the larger retailers. So, unless any of
the larger retailers do an about face on us, which we
don't anticipate, we feel pretty good about understanding
the growth opportunity. Let me have Dom go back to the
bridge again.
Dom Romero: Sure (Bob), I think the way to kind of look back on
dispensing if you think about margin rate and flow
through. You see this on the uptake. And most of our
decline in revenue for the quarter obviously was in the
Americas.
But if you go back to the Chart I provided volume
organically being down $1.7 million that flows through
the income at a fairly substantially high rate. And I
think if you were to go back and look at quarters were
we've seen 5% to 10% organic growth within dispensing
you'll see that same trend with expending margins.
But I feel very confident that's the uptake side of the
equation. What's unique about the quarter is indeed the
$1.6 million of the cost impacts that were operational,
product qualities, severance and product mix.
So, we expect part of those products to contribute or
continue primarily in severance and we'll see this field
service cost smaller the fourth quarter. So we feel very
good about the flow through capability and obviously the
long term capabilities within dispensing.
(Robert Lagaipa): And I guess the follow to that is just regards to the
field service costs, what happen with the colorant at
your customer. What's your confidence level that that was
unique, what should give us confidence that that might
not happen at another customer?
And I guess associated with that, do you reevaluate your
service organization to handle these one off or are you
comfortable just taking the hit and out sourcing it?
Larry Kingsley: No, (Bob) we've been dealing with obviously customer
service and support for a long time in the business and
issues do come along from time to time. So, it's not
unusual to have equipment service issues that spike a bit
in given quarter.
This one was much larger and the aggregate impact of what
we saw in the quarter for field service associated issues
was an order of magnitude more then anything we've
typically have seen. And it had to do again with a paint
company's chemistry, which was produce, which was way out
of spec and basically the equipment could in no way deal
with it, the corrosive nature of it.
So, the equipment malfunctioned. Obviously our first
issues are how to respond and make sure that the customer
is properly supported, which we done. And we can't go
into a lot more detail as to who's responsible for
various aspects of essentially the cost associated with
this.
But the derivative impact of this too (Bob) is that it's
really not just the service costs, it throws the
organization into a state of reaction that becomes a lot
less productive for everything in general.
(Robert Lagaipa): Last question, if I can (afford) to pass the baton, when
you see some of the weakness in some of these select end
markets that you have, what action have you taken to
right slash some of these businesses? And are you
comfortable with the size of some of these businesses or
do you take further action to right size them?
Larry Kingsley: No, we're always looking at what action is appropriate to
be taking so that we are appropriately cost position in
the businesses that serve those respective markets. And
an example just to stay within dispensing, as I mentioned
in the remarks here and I think I talked last quarter
about it.
For the last year and a half we've been designing a new
family of dispensing equipment products, which is built
on a global platform. Its modular so different pieces,
different elements of the product line can be constructed
out of the base design and it can be produced in either
the North American plants, the European plants or even
our (Segue) plant in China.
So, we have a lot more flexibility now in where we
produce stuff and that obviously enables our ability to
think through footprint optimization.
(Robert Lagaipa): Right, okay, thanks very much.
Larry Kingsley: You bet.
Operator: Your next question comes from the line of (Michael
Snyder) from (Robert W Bears).
Larry Kingsley: Hi, (Mike).
(Michael Schneider): If you could address just the pneumatics portion of the
HST. You mentioned that the head wind of the two OEM
contracts was 130 basis points and if we add that back to
the gross rate of the segment your still at just 4.3%
growth for the quarter.
You mentioned the markets weakened for those products
but, at least my sense, and following your competitors
and even being over in Europe talking to your
distributors, that those markets are not that weak.
Can you be frank and explore with us just exactly what's
going on in that division and what might explain not only
the market weakness your talking about but what seems to
be coincidental now, you have two OEM contracts who come
to an end and the markets weakening.
Larry Kingsley: (Mike) its not so much an issue of coincidence between
markets weakening and OEM contracts ending. If you look
at the HST segments and as you know the core that we're
focused on there is the analytical instrumentation and
over the last five quarters or so, moving into IVD,
essentially all the diagnosis equipment. That's we're
we've got the best product line, that's were we've been
focusing our acquisition investment and that's were we're
been focusing a lot of the organic initiatives.
We have developed, I think a very strong front end to the
HST organization in North America and Europe and
developing a very strong front end in Asia. And our
growth in the targeted core of HST, as I said was double
digits for the quarter.
That's organically, double digits. Sand I think that
that's in a good set of markets as you say, but also that
we're performing pretty well. There is a piece of HSC
which is long term less attractive and it was even
shorter term less attractive this quarter and that some
of the stuff that we titled pneumatic.
And that's some of the air handling equipment that is in
products like home medical and its in product where your
essentially either compressing air or providing a vacuum
capability in one of the applications where either as a
function of price, meaning OEM pricing that we would have
and or market growth.
And actually in this quarter's case it was the
complimentary or the compounding impact of the two of
them. You know, continues to yield dilutive growth
contributions to the core of HST. As we continue to build
out HST, we still expect for it to be a first, an
important counter (cyclical) element to IDEX.
So, we think it doesn't cycle with anything close to the
industrial products and we think its going to be a great
growth opportunity that's going to be better then mid
single digit. So as the HST product line continues to
grow in the areas that we're focused on, I think we'll
see good growth in general.
(Michael Schneider): Well the, I guess, just phrasing the question
differently, the oxygen concentrated market isn't down
double digits, the packages isn't down double digits, the
machinery markets, and certainly the printing press
market, I mean none of the key customers of this
pneumatics division are down double digits.
Is it that you're starting to prune unprofitable
customers because pricing has become that much tougher?
Is there a technology generation that you missed and now
are since losing contracts, there's got to be something
to explain why this market is down? If you run the
weighted averages that pneumatics division has to be down
double digits?
Larry Kingsley: Yes, its not double digits (Mike), but I think the core
of your question is, is it because what we're doing to
prune out some of those lesser attractive opportunities
and how much of it is market contributed?
More of it what we're pruning out. And there is slower
growth in some of the pneumatic segments. It's not down
double digit, but it is down for sure. And will it always
be down this much in a given quarter?
Absolutely not, but we need to in this segment continue
to focus on where we're not going to see a commoditized
OEM response. And we think there's plenty of opportunity
to provide slow growth out of that segment that can be
complimented with much, much higher growth in the core
analytical instrumentation portion of the business.
(Michael Schneider): Is it also a by product though? You talked the past
quarters about building the front end sales organization
for HSC, is it just that you're focused on these other
diagnostic areas and that shift in focus is just
resulting in lower growth in the other half of the
business at least temporarily?
Larry Kingsley: Yes, I mean certainly part of it (Mike). Our reinvestment
is disproportionate in the direction of the core HST
segment. Yes, no question.
(Michael Schneider): Okay, and then just in terms of the dispensing business,
if you look at Q# versus Q4 forecast, got minus 5% in Q3
and then basically an equal amount of growth of 5% in Q4.
Can you talk through the 18% order growth, was there
something that just presumably the order and the
shipments slipped from Q3 to Q4.
And is it one program? Is it multiple programs? And I
guess, the question we've got, I guess most today is
this, is the small retailer just indicative of what
ultimately Home Depot, Lowe's and Wal-Mart do and maybe
this quarter is evidence of that?
Larry Kingsley: Well, I don't think that, certainly not short of mid term
that the small retailers indicative of what the larger
retailers are doing because we have, I would say very
close conversations with the larger retailer management
teams and we know were their strategic investment
thinking is.
And their, you know obviously very enamored with paint,
fill the product line it's a very profitable product
line. They're going to reinvest in the right equipment.
And new equipment and refurbishment are the biggest piece
of the story versus new store build out.
You know, you can speculate all day long about the small
retail reasoning or some of the kind of the root causes
to their performance over the last couple of quarters,
but its probably a combination of their relative
liquidity and their overall ability or desire to reinvest
right now.
We don't think that that segment goes away, but it's not
going to be as strong as a contribution to the domestic
paint business as it has been the last year or so.
And then back to your question around the lumpiness on
the book to ship math. I wouldn't get hung up in 18%
organic order growth in the third quarter is not going to
yield 18% organic sales growth in the fourth quarter.
We, I think Dom mentioned in his comments that the
indicative number is in the mid single digit.
(Michael Schneider): Okay, thank you again.
Operator: Your next question comes from the line of (Scott Graham)
from Bernstein.
Larry Kingsley: Operator, I think we're not hearing (Scott).
Operator: Mr. (Graham) your line is open.
Larry Kingsley: Still nothing. Operator?
Operator: Mr. (Graham)'s line is open.
(Scott Graham): No its not.
Dom Romeo: Yes it is (Scott) we have you now.
(Scott Graham): Okay, she said a couple...
Larry Kingsley: We've got you (Scott).
(Scott Graham): Yes, I'm using a megaphone over here and it ain't
happening. Just a couple of things. First Dom from a
housekeeping standpoint, could you tell us again what the
core orders were by segment?
Dom Romeo: The organic orders?
(Scott Graham): Yes, please.
Dom Romero: And again, my comments were to help you bridge
(unintelligible) provided fourth quarter guidance, to
help you bridge kind of the organic order growth rates to
our view of the fourth quarter sales growth rates.
By segment, FMT was 3%, but again to remember we had OEM
timing that impacted that by about 200 basis points. And
those orders are booked and planned to ship in Q4 they
just happened in October. So again, on more indicative
growth rate for sales is the 6% to 8% range.
HST was basically flat, but as we see the fourth quarter
we've got volume increases relative to this book and ship
in the quarter from our core end markets on the
analytical and IVB side.
Dispensing, as Larry just mentioned, was up 18%, but as
we look at the programs and what we see in the fourth
quarter at a more indicative growth rate for sales is 4%
to 6%.
And then FSC was up 2% with BAND-IT offsetting of US fire
suppression side. And again, our projected growth rate
there is in the 4% to 5% range for sales.
Larry Kingsley: Scott? Operator, we lost (Scott).
Operator: Your next question comes from the line of (AJ Kernwall)
from Goldman Sachs.
Larry Kingsley: Operator, I think you want to go back to (Scott).
Operator: Mr. (Scott) disconnected.
Larry Kingsley: Okay, let's proceed.
Operator: Your next question comes from the line of (AJ. Kernwall)
from Goldman Sachs.
Larry Kingsley: Operator, we don't hear (AJ).
(AJ Kejriwal): Hello?
Larry Kingsley: Hi (AJ).
(AJ Kejriwal): Hi, how are you?
Larry Kingsley: Okay, are you there? Apparent folks, we're experiencing
some technical problems. Operator, you want to try and
assist and engage (AJ)? Operator?
Operator: Mr. (AJ Kernwall) your line is open.
(AJ Kejriwal): Hello? Can you hear me?
Larry Kingsley: We can hear you.
(AJ Kejriwal): Hi, just following up on HST Larry, as you work through
these issues and the pneumatics business, how should we
think about growth over the next couple of years?
Is it a new come back to the 6% to 9% or should we think
as 3% to 6% as what you have been the last couple of
quarter as indicative of the next couple of years?
Larry Kingsley: Just to make sure that we're clear. You referred to HST
not FST, right?
(AJ Kejriwal): HST, correct.
Larry Kingsley: HST, yes (AJ). No, we certainly have targeted mid to high
single digit growth for HST. And obviously we hoped that
the focus on the right segments improves margin as a
function of mix.
(AJ Kejriwal): Okay, so on, within the pneumatics what actions, if you
could elaborate on the actions that you plan to take over
the next several months that would bring growth back to
your targeted mid to high single digit rates?
Larry Kingsley: Well, the focus within HST's big picture is to go after
the analytical instrumentation, the IVD, some of the
biotechnology and pharma applications, which represent
the best consistent organic growth opportunities for us.
And most of those are served by the HST businesses other
then the pneumatics business, although the pneumatics
business does have some small portion of its revenue
there.
So, its not so much action within the pneumatics business
as it is investment for growth that we've made and we
will continue to reinvest in the other HST businesses to
go after those what we think are most attractive
opportunities.
Now, back to within pneumatics, there are some attractive
elements of that platform. You know, you remember that we
acquired Jun-Air within that platform early last year.
And Jun-Air has been a great acquisition for us. The
whole concept of clean quite air, highly precise air
compressors for both vacuum and compressed air
applications is panning out basically very much for our
strategic thinking.
Some of the lower generator kinds of opportunities that
you would have that aren't nearly as technically
sophisticated and don't go after some of the high growth
opportunities within the market are not going to be our
focus.
So, it's more a matter of sales focus. And were we
reinvest on the front end of the business and how we
carefully mange the cost so that we don't end up with an
efficient operation in total for HST.
(AJ Kejriwal): On Fluid Metering, good organic growth 9% in the quarter,
but margin improved by only about 30 (bibs) so how should
we think about incremental margins going forward? I know
Dom mentioned 35% flow through, but just sounded like the
margin improvement in the quarter was?
Dom Romeo: (AJ) not really, actually if you think about the numbers,
you look at the growth rate of 35% on revenue, 25% of
that came from acquisitions and those flow through at
just over 20%. So, if you think about the composite of
acquired companies at 20%.
If you take out currency that has no real
(unintelligible) of impact in terms of margin rate, you
get that 35% flow through on the 9% sales growth. So, the
right way and actually you'll start to see some of that
smooth out as we move into '08 in terms of current
acquisitions anyway.
And we think all of our companies have the capabilities
to grow organically at 35% in terms of flow through. But,
acquisitions are the big reason you see less of a number.
Now, if you look at my opening comments to on EBITDA
margins, there's about a 70 basis points (delta) in the
quarter between last year and that's also prevalent in
the operating margin line that you see in Fluid Metering.
So, again, hitting on all cylinders in terms of operation
models. So, I wouldn't be concern what so ever if that
plenty of capability to continue to do so.
(AJ Kejriwal): Great, thank you.
Dom Romeo: Thanks (AJ).
Operator: Your next question comes from the line of (Scott Graham)
from Bernstein.
(Scott Graham): Hi, can you hear this time?
Larry Kingsley: We can hear you (Scott).
Scott Graham): All right. And operator for the record, I did not cut off
the line, you cut me off. Any way, I wanted to understand
a little bit about SMT and I know that you guys are
forecasting a good fourth quarter of 6% to 8% organic.
However, as you guys well know this business has been
sort of running in the 8% to 10% zone for a while. Is
there something that we should know about that business?
Is there anything, any recent end market that's weakened?
Is it a comparison issues? Give us a better read on that
if you would Larry.
Larry Kingsley: Sure (Scott). If you think about FMT its 42% of total
sales, we've been talking about how 2/3 of that business
is focused on the, what we've been calling the
infrastructure markets. We think those are going to
continue to be very, very strong growth opportunities for
us.
The other 1/3 is in a variety of process control end
applications where we play as a component to the system
and then some on board kind of OEM products.
Now, with a growth may not be as spectacular is in some
of those on board OEM products, but again it's a pretty
small piece of FMT. So, the outlook right now, certainly
internationally, but also domestically for FMT continues
to look pretty good.
And we're just getting into our annual operating plan
season. The next few weeks will focused around '08, but
early indications for the business are pretty good.
(Scott Graham): Okay, on the dispensing business, when we talk about some
severance in the fourth quarter. I think you said that
related to dispensing. Is this issue essentially now
cleared up, is it behind us?
Or is there other then this, I mean, beyond the
dispensing? In other words are your folks, kind of back
to normal operations now or is there additional residual?
Dom Romeo: Sure (Scott) if you look back at my comments. On the
operating and mix side and to some extent we'll see a
lingering impact from the field service costs.
But my comments relative to severance, if you consider
the 1 to 2 cent impact we've added on for the fourth
quarter, that is largely going to be due to additional
severance and that will be within dispensing pockets HST
as well as Fire and Suppressions.
So, that's why we provided that level of guidance for
those impacts for the fourth quarter
(Scott Graham): Understood. I guess the last question is maybe a broader
question about the whole idea of giving guidance, which
you guys have not done before until now on an EPS basis.
I know you had a minor shift in core sales last quarter,
but is this going to be a sort of quarter as you go? Or
in the fourth quarter are you going to do a year thing?
How is that going to lay out for us?
Larry Kingsley: The short answer (Scott) is we'll let you know in January
when we get into the Q4 report. But, no we at this point
though it was appropriate for this quarter given the
sequential choppiness within dispensing in particular.
We also wanted to, you know we're very transparent, we
wanted to call out Fire and Safety, the US fire
suppression piece and talk through that. We wanted to
make sure people had a good understanding of where we
thought the fourth quarter was going to come in. Now the
options obviously going forward would be to do some
general annual guidance of some sort, which we may think
about the very other end of the range in terms of how
specific we would get on a forward-looking basis with the
quarterly guidance down to the EPS line. But, we'll let
you know, get back to you with the fourth quarter call.
(Scott Graham): Okay, I actually do have one last question, if you don't
mind. In the HST business, you're expecting 3% to 5%
growth next year in the fourth quarter. I know that you
still look at that as a certainly a 5% plus organic
grower.
Is this going to be the case that given the roll off of
these contracts Larry that we could actually start to see
in the second half of '08 HST being kind of what we had
all envisioned, you know 5 to 8 maybe even a little bit,
maybe toward the 8% growth in that business. Is that you
think in the cards?
Larry Kingsley: You know (Scott) I would fall back into the same answer
as the question that you just asked. I think we'll give
you a little more specific view as we get closer to '08.
But, we expect great performance out of HST as we focus
on the core markets.
(Scott Graham): Good enough thanks for your time.
Larry Kingsley: Thank you (Scott). Sorry for cutting you off.
Operation: Your next question comes from the line of (Walt Litech)
from (Berington).
(Walt Liptak): Good afternoon. Can you hear me?
Larry Kingsley: Yes (Walt).
(WaltLiptak): Great, just one last follow up on the dispensing, just so
it's clear to me anyways. The one time cost sounds like
they'll be done in the fourth and we can expect margins
to return to some kind of normal level in 2008?
Larry Kingsley: That's correct (Walt).
(Walt Liptak): Okay. And in the Fire and Safety side of the business,
I'm not aware of any, you know its not a great market in
my view right now, but its at least stable and the
deterioration that you saw in the quarter, is it related
to across the board or is one particularly OEM that's
having operational issues? Can you talk a little bit more
about what you're seeing in that market?
Larry Kingsley: Lets, I would say it's neither. It's not across the
board, but its certainly broader based then one OEM. If
you look at the last two or three years the strongest
growers in the fire truck OEM space have really been the
small builders.
And they certainly have not performed as well over the
last couple of quarters as they had been. And out of the
larger builders, who are our customers obviously, we want
to talk for them.
You know, I think you covered the space (Walt) so we let
you ask the question of them. But, yes, some of them are
performing better then others. And I think they'll
probably talk to that in their calls.
(Walt Liptak): Okay, yes I guess I'm it's still not clear to me
directionally where you think that this market is going
longer term. And if this is just a short term small OEM
issue or something that is going to be reoccurring.
Because clearly some of the property tax related issues
is putting budget constraints in place. But, it doesn't
seem like it's that bad to me.
Larry Kingsley: No, let me come back and frame it up from an IDEX
prospective and I think again you may want to ask
questions of others. But, from IDEX prospective the US
fire suppression piece, well total fire suppression is
about 8% of IDEX. The US piece would be 75% of that. So,
6.5 points of IDEX's revenue associated with US fire
suppression.
And in our estimation of that market attractiveness short
term, there's better opportunities for us to focus. Both
in terms of international fire suppression, rescue tools
globally, but also some of the other things that we've
got that are comparably pretty attractive.
It's a nice business, it's a profitable business and you
know, obviously we've got a great brand. So, we continue
to look at it opportunistically. In terms of the root
cause to what's driving some of the short term, the
(unintelligible) here from quarter to quarter, I think
your thesis is probably right.
It's probably a matter of municipalities not having as
much of a budget to spend or trying to put certain
specific projects on hold while they get a good
understanding of how much they want to spend. And we've
seen some anecdotal evidence of that State by State.
(WaltLiptak): Okay, all right great. All right thanks guys.
Larry Kingsley: Yes.
Operator: Your next question comes from the line of (Ned Armstrong)
from FBR Capital Markets.
(Ned Armstrong): Thank you, good afternoon.
Larry Kingsley: Hi, (Ned).
(Ned Armstrong): My question also involves the rescue and fire suppression
business. You had mentioned Dom, I think that there was
some severance expenses recognized this quarter and
possible next. Is that due more to downsizing or is it
more indicative of correcting operational issues?
Dom Romeo: On the fire side?
(Ned Armstrong): Yes.
Dom Romeo: No real operational issues to speak of. In fire its more
our right sizing the organization in terms of cost as we
move forward.
(Ned Armstrong): Okay, and then second with respect to acquisitions, just
how you're seeing the market versus last quarter. Is
there any difference in prices that sellers are willing
to accept, willingness of financier to finance and that
type of thing?
Larry Kingsley: I would say our view is the acquisition pipeline is very
good. We think there's plenty of opportunities both in
terms of (bulk on) as well as some larger ones. Pricing
has somewhat plateau and there's certainly not as much
private equity playing.
We'll see as the capital markets free up a little bit
whether that changes again. But, we have some pretty good
opportunities that we're working right now.
(Ned Armstrong): And then with regard to acquisitions strategically. Are
there any product adjacencies or product technology
adjacencies that you're investigating now?
Larry Kingsley: Yes, most definitely (Ned) but we really aren't at
liberty to talk about them, as you can imagine.
(Ned Armstrong): What I mean is it away from your traditional pumping
technologies or different types of technology within
pumping? Just want to understand like the breadth of it,
I guess.
Larry Kingsley: Yes, we're looking a, if you think about the FMT space
that the infrastructure side of FMT, and include pharma,
there's some elements of that we also report up through
HST. There are some very nice opportunities to
strategically build out our existing FMT and HST served
product lines by way of other things that we can do in
those spaces.
Both services as well as products. And that is really the
first priority of our business development team here at
corporate right now is to focus on what we can do to
build a much stronger product basket in those markets.
Which we think will sustain 6% to 7% organic growth and
then our opportunities to grow better then that.
(Ned Armstrong): Okay, thank you.
Larry Kingsley: Sorry (Ned) I just cant too specific for the kinds of
reason you can imagine.
(Ned Armstrong): No, I understand, thanks.
Operator: Your next question comes from the line of (Nat Nagerry)
from (Sentinel Asset Management).
Larry Kingsley: Hello? Operator?
Operator: Your next question comes from the line of (Nat Nagerry)
from (Sentinel Asset Management). (Nat) your line is
open.
Larry Kingsley: Operator, we're having a problem here with the call.
Operator: Your next question comes from the line of (Charlie Brady)
from (BNO) Capital Markets.
(Charlie Brady): Hi, thanks, good afternoon.
Larry Kingsley: Hi (Charlie).
(Charlie Brady): Can you just touch a little bit on the semi-conductor end
market. I guess with (Tre border) was sort of one end
market I haven't heard you speak about and what your
seeing in that market?
Larry Kingsley: The end market is pretty good. It's actually expected to
accelerate a bit going into next year. (Trevor) has done
a nice job over the last two years and this year they
continue to drive new product development that is both
new pumps as well as new other products such as some of
heaters that are used and the semi-conductor fab
processes.
And there are some things that we, I think I talked in
the last call about that we've now taken some of the
acquired EPI manifold capability and built assemblies
that in conjunction with some of the (Trevor) expertise
are offering to the semi market.
So, it's a very nice piece of our business. In terms of
the end market growth, now it's been found and it appears
to continue to look just as good if not a little better
next year.
(Charlie Brady): Okay, and then on dispensing to get back to the field
service costs, is there an opportunity at some point do
you think to recoup some of that expense? Even though it
wasn't really designed for a machine percent.
Larry Kingsley: We can't comment obviously (Charlie) you can imagine in
terms of how you sort out who's responsible for element
of the cost. It wouldn't be appropriate to comment right
now.
(Charlie Brady): Oh, I know. Okay, thanks guys.
Larry Kingsley: Thank you (Charlie). Let me wrap up folks. I apologize to
those that we cut off didn't even know we cut off. I
apologize to (Scott) again. I think we provided a lot of
detail with respect to our business and the segments.
We're very please with the progress.
And while a couple of the domestic markets are soft, our
strategy is absolutely firmly in place and we think we're
in great shape to continue to build out, particularly the
Fluid and Metering. Instead of end markets and the
products that we offer there but also continue to focus
on Health and Science and reinvest accordingly.
Despite the dispensing disappointing Q3 results, we're
very optimistic about the growth opportunities in
dispensing mid term here. And while we've got some slight
challenges in Fire and Safety all up internationally,
particularly with the opportunity to take rescue tools to
some of the developing country markets, just a super
opportunity there too.
So, our capital structure is excellent, we're very good
shape. As I stated earlier I like our ability to win as
much as I like the businesses that we're in and markets
serve. So, we'll end the call with that and we thank you
for joining us.
Operator: This concludes the IDEX Corporation 3rd Quarter Earnings
Release Conference Call. You may now disconnect.
END