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Edited Transcript of IEX earnings conference call or presentation 26-Apr-19 2:30pm GMT

Q1 2019 IDEX Corp Earnings Call

LAKE FOREST May 1, 2019 (Thomson StreetEvents) -- Edited Transcript of IDEX Corp earnings conference call or presentation Friday, April 26, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew K. Silvernail

IDEX Corporation - Chairman, CEO & President

* Michael John Yates

IDEX Corporation - VP & CAO

* William K. Grogan

IDEX Corporation - CFO & Senior VP

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Conference Call Participants

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* Allison Ann Marie Poliniak-Cusic

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Bryan Francis Blair

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Joseph Craig Giordano

Cowen and Company, LLC, Research Division - MD and Senior Analyst

* Matt J. Summerville

D.A. Davidson & Co., Research Division - MD & Senior Analyst

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

* Nathan Hardie Jones

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the IDEX Corporation First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Michael Yates, Vice President and Chief Accounting Officer. Thank you, Mr. Yates. You may begin.

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Michael John Yates, IDEX Corporation - VP & CAO [2]

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Thank you, Doug. Good morning, everyone. This is Mike Yates. I'm Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for a discussion of the IDEX first quarter financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ending March 31, 2019. And later today, we will file our 10-Q. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company's website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Bill Grogan, our Chief Financial Officer.

The format for our call today is as follows. We will begin with Andy providing an overview and an update on market conditions, geographies and our capital deployment strategies. Bill will then discuss our first quarter financial results and walk through the operating performance within each of our segments. And finally, Andy will wrap up the call with an outlook for the quarter and the full year 2019. Following these prepared remarks, we will 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 2 hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID number 13684162, or you may simply log onto our company's homepage for the webcast replay.

Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the safe harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn our call over to our Chairman and CEO, Andy Silvernail.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [3]

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Thanks, Mike. Good morning, everybody, and thank you for joining us for our first quarter call. I'd like to start with some key themes. Q1 results were strong and somewhat better than our expectations from 90 days ago. Bill will walk you through the details, but overall, I'm pleased with our organic growth in both orders and sales, the team's execution of outstanding, driving operating margin expansion and cash flow, and this helped us deliver another quarterly EPS record, driven by both operational outperformance and favorable tax rate. Momentum continued in our industrial, municipal and life science markets, both partially offset by softness in ag and semicon as well as some lumpiness in our project-oriented businesses, specifically, dispensing and MPT.

There were some concerns of slowing global economic -- the global economy and those do remain, but we're confident in our ability to grow faster than the underlying markets, as a result of our market-leading positions, our ability to capture price and deliver on our targeted growth initiatives.

Pulling it all together, we're raising our full year EPS guidance while maintaining our organic revenue growth expectations.

Now I'd like to take a moment and talk about what we're seeing across the markets we serve and the regions we do business in. In the industrial market, the overall conditions remain favorable, with continued strength in OEM and our targeted growth initiatives. We are however seeing some day rate volatility in pockets of our business due to customer caution about the macro outlook. In Scientific Fluidics and Optics, our life science markets continue to expand. Our IVD/BIO business is leveraging new product launches and platform wins to our growth and the AI market demand remains solid.

In Energy, we're seeing some rebound driven by higher oil prices. Mobile truck builder demand is increasing, and we're seeing positive signs in the aviation fueling space.

In municipal, the North American market continues to modestly expand. Our focus remains on new product development, notably the recent launch of our new hydraulic tool and our SAM system in Fire & Rescue as well as continued expansion in emerging markets.

In ag, we're expressing some contraction due to macro uncertainty around the soybean tariffs and the OEM slowdowns. We are seeing some growth in Latin America and Europe, but North America is a challenge.

In semicon, we continue to see broad-based pressure by lower investments in Asia and the downturn in memory chip demand after substantial growth in 2017 and 2018.

In auto, as you all know, there's been a slowdown in global light vehicle sales and that's driven some softness in this market but as you know, that's a relatively small piece for us.

Now let's move on to the geographic outlook. Sales across the majority of geographies performed well in the quarter, with North America leading the way. Asia was positive, specifically, India and China, was primarily driven by our initiatives versus the macro trends. The European economy lost some traction in Q1, and we saw some supply chain disruptions ahead of Brexit. And finally, we are seeing some softness in the German economy. Nevertheless, our targeted growth initiatives and new products continued to drive positive results around the globe.

All right. Let me turn now to capital deployment. M&A continues to be a priority for us. With that said, there remains a challenge in the current environment due to valuation. Our teams have evaluated several deals, but our approach has not changed and we will remain very disciplined with our return framework. We will only close on a deal if it fits the IDEX [sale of] competition and delivers long-term value for our shareholders. This remains our #1 priority.

As I said, our balance sheet it is very healthy, our gross leverage is 1.3x and our net leverage is 0.6x. When the right deal comes along for IDEX, we will capitalize on it. In terms of the other capital deployment, we did repurchase $52 million of stock in the quarter at an average price of about $140 a share. We also returned $33 million to our shareholders via dividends.

Let me know turn it over to Bill who is going to go over our financial results and our segment discussion.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [4]

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Thanks, Andy. I'll start with our first quarter financial results on Slide 4. Q1 orders of $655 million was an all-time record and was up 4% overall and 6% organically. All 3 segments were up with FMT leading the way. Q1 revenue was $622 million, up 2% overall and 4% organically.

We expanded gross margins by 40 basis points to 45.6%, primarily due to price, production efficiencies and volume leverage, partially offset by investments in engineering related to new product development. Our Q1 operating margin was 23.8%, up 120 basis points compared with the adjusted prior year period, mainly driven by our gross margin expansion, lower intangible amortization and lower variable compensation costs.

Q1 net income was $110 million, resulting in record-high EPS of $1.44, up $0.15 or 12% over prior period -- prior year adjusted EPS. Our Q1 effective tax rate was 19.5%, which was lower than the 24% in the prior year period, mainly due to an increase in foreign tax credits, discrete tax expense in the prior year period and the mix of global pretax income.

The first quarter ETR of 19.5% was also 300 basis points lower than our previously guided amount, mainly due to a higher excess tax benefit from greater-than-expected stock option exercises in the quarter.

This lower tax rate accounted for 5 out of the 7 EPS favorability compared to the midpoint of our previous guidance. The remaining $0.02 of EPS favorability was operationally driven. Free cash flow was solid at $76 million, up 12% over the last year and 69% of net income. This was our highest Q1 free cash flow of all time.

In regards to the balance sheet, no change here. Gross and net leverage remain very healthy. The combination of our strong balance sheet, capacity on our revolver and free cash flow provides us visibility ability to deploy $2 billion in the next 12 months for the right opportunities.

I'll now turn to the segment discussion. I'm on Slide 5, starting with Fluid & Metering. FMT continues to deliver strong numbers, from both an order and revenue perspective. Q1 orders were up 8% overall and 10% organically. Q1 sales were up 4% overall and 6% organically. Op margin was strong at 29.6%, up 110 basis points over the adjusted prior year quarter, mainly due to price, volume leverage and productivity initiatives. As Andy mentioned earlier, we are seeing some day rate fluctuation in pockets of the business, but overall the fundamental strength within the industrial sector continues to drive solid results.

Our Viking and Richter businesses posted record order and sales in Q1, with continued project wins in the processing and chemical markets across the globe. The municipal water business remains steady and the oil and gas market conditions have improved due to oil price increases and stabilization. The only business in this segment that contracted year-over-year was Banjo. The concerns we highlighted with the ag market in Q4 materialized in Q1, and we continue to be cautious on the balance of the outlook for Banjo. Overall, the targeted growth efforts across our businesses in this segment continue to gain wins and market share.

Let's move on to Health & Science, turning to Slide 6. Q1 orders were flat overall, but up 1% organically. We highlighted on our last call, we expected a tougher comp for HST orders due to an OEM blanket we received early in Q4 of last year, along with the last time buy we offered customers in Q1 of 2018, as we eliminated a product line as part of the Rochester COE project. Normalizing for the items, orders would have been up 5% organically for the segment. From a sales perspective, Q1 sales were up 2% overall and 3% organically, I'll give you a bit more color on this in a minute.

Operating margin increased 10 basis points to 24%. This was primarily due to lower amortization. Core margin performance was negatively impacted by lower project volume in FX and MPT. Overall, HST's performance was primarily driven by continued success in Scientific Fluidics and Optics.

Underlying AI and IVD/BIO markets remain positive, and we continue to grow through targeted NPD efforts in collaboration with our key customers.

Gast saw strong underlying industrial OEM demand and solid execution on our growth initiatives in the food and beverage market.

On the negative side, organic growth was impacted by contraction in our sealing business, which was affected by both a downturn in semicon and lower auto sales.

Finally, MPT backlog remains strong and has grown sequentially versus last quarter, but timing of project shipments is skewed towards later quarters in the year due to longer lead times.

I'm now moving on to our final segment, Diversified, I'm on Slide 7. Q1 orders were up 5% overall and 9% organically. Revenues were down 2% overall, but up 1% organically. Operating margin of 25.8% increased 90 basis points in the quarter. This was mainly attributable to price productivity initiatives, more than offsetting our volume decreases. FST's performance was driven by our Fire & Rescue business continuing to see growth across most of the product categories and geographies, with several project wins resulting from new product launches.

Band-IT saw growth in several of its verticals, with aerospace leading the way. They also had some nice project wins in cable management.

Our dispensing business was down around 15% organically for the quarter as they had a tough comp against some larger projects last year. We expect them to recover some as we progress through the year, but will be down, overall, for the full year based upon timing of customer replenishment cycles. I'll now pass it back to Andy to provide an update on our 2019 guidance.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [5]

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Thanks, Bill. So let's wrap things up, and I'm going to summarize here with some additional details on 2019 for both the second quarter and the full year, I'm on our last slide and that's Slide 8.

In Q2, we're estimating EPS $1.47 to $1.50, with organic revenue growth in the range of 4% to 5% and operating margin about 24%. We're projecting 2% top line headwind from FX based on the March 31 rates, which translates to $0.02 headwind in EPS. Q2 effective tax rate is expected to be about 22.5%, and corporate cost will be around $20 million. Looking at the full year, we're raising our full year EPS guidance. We now expect earnings to be in the range of $5.70 to $5.85. Full year organic revenue growth remains the same at 4% to 5%, with operating margin of about 24%. Top line FX impact will be about 1% based on the March 31 rates.

For the full year, we expect our tax rate to be about 22%, CapEx to be about $60 million and free cash flow in the range of 105% to 110%. And finally, corporate cost in the range of $80 million to $82 million. As always, our earnings guidance excludes any costs associated with future acquisitions or restructuring. With that, Doug, let me pause here, and we're going to turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Allison Poliniak with Wells Fargo.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [2]

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Can we go back to commentary around MPT? I just want to just make sure I understand it. I think, Bill, you were saying sales were weak in the quarter, but you have a strong backlog, so it's really timing of when those projects are getting delivered. Is that correct?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [3]

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Yes. MPT is going to be down for the first half but they will back up in the first half and overall positive for the full year.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [4]

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Yes. So, Allison, we actually did build backlog and we actually have a great backlog position in MPT, but it's, along with dispensing, those 2 tend to be -- is the most lumpy of our businesses. And so we're going to see that backlog flush itself through in the back half.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [5]

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Got it. And then what are those onetime events that you referred to on the slide? Is that just the order commentary you are talking about?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [6]

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Correct.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [7]

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Okay, perfect. And then on acquisitions. Obviously, a lot of dislocation in the markets here. Are you sensing -- I know it's been a long haul, but any sense of multiples kind of starting to pull in? Any sort of change there that you can comment?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [8]

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Not really. It's been pretty consistent and I think for us, Allison, it really continues to be working it very hard and being patient and disciplined. Eventually something will break here, but the last thing we want to do is do a really expensive deal that doesn't fit our framework. So we're going to keep our discipline.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [9]

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Fair enough. And then last, that corporate expense, it looked that it was adjusted down a little bit. Is that just your cost control or is there something else in there?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [10]

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No. It's just a flow-through of the favorable variable compensation that we incurred in the first quarter.

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Operator [11]

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Our next question come from the line of Michael Halloran from Robert W. Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [12]

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So I'm hoping to triangulate a couple of things here, Andy. If I think back, you were essentially projecting, from an end-market perspective, kind of a low single digit environment with choppiness quarter-to-quarter. Is that still the case? Any change there? And then secondarily, could you triangulate that that with some of your leading indicator-type companies? I know -- you didn't -- I don't think you mentioned Warren Rupp, could've missed it, but Gast and BAND-IT both were really strong in the quarter, so I'm hoping you can put those pieces together for me.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [13]

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It was actually mixed, Mike. So if you go back and you look at how the quarter developed, it was pretty soft in the first half of the quarter, and then strength picked up pretty broadly as we got into the second half of the quarter. So that was a good sign, and obviously building backlog in the quarter and the 6% order rate is a good sign as we walk into Q2. That being said, those businesses that we look at as being very short cycle, that was mix too, right. So we had some -- if you strip out some really specific wins that we know we got and you look at the day rate business, pretty choppy in some places and then relatively strong as you lean more industrially, pretty strong. So I actually don't think that the point of view has changed much from when we talked 90 days ago.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [14]

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Any different on the regional side?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [15]

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Yes, a little bit. I think, Asia is probably a little bit better than we had expected. North America is just about what we had expected and Europe's a little weaker.

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Operator [16]

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Our next question comes from the line of Deane Dray with RBC Capital.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [17]

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Maybe we can start with a review of some of these sector puts and takes that a number of the multi-industries have been commenting on, either there were or were not affected. So let's start with, there were some issues about pull-forward of demand out of the first quarter into the fourth quarter. There was a company last night reported after close, where it ended up being much bigger than they thought. Did you see any of that dynamic? Was that at all related to the softer start of the year for you guys?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [18]

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Not really. We had that 1 order in HST that we talked about that went into the fourth quarter, but not a big deal.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [19]

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And that wasn't tariff related, I just want to get ahead of something. That was pure timing.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [20]

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That was pure timing with the customer. So generally, Deane, we're so short-cycled that we don't tend to -- we're so short-cycle and we're not generally an off-the-shelf product that we don't play a lot in some of these, for lack of better term, games that you see out there. Last year, we did see -- as the tariff stuff was kicking in, we did see some crazy activity there between the second and third quarter, but in terms of looking at 2019, 2018, I don't think it's material for us.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [21]

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Good. And then I didn't hear weather come up at all, but when I hear about ag softness, there was a company, Pantera, had issues there with weather. Anything on your side?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [22]

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Yes. The only weather here was Mike's house being shut down by the weather, but...

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [23]

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That was last quarter.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [24]

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Exactly right. There was a little bit here and there but not enough to have mattered. Specific to ag, look, that market is just soft and we saw it coming late last year. We had that bolus of activity that we cautioned everybody on that we didn't think was going to hold and that has been reality. And they're just going to have to work through their cycle. In terms of whether or not that's bottomed yet. You got some people saying that, I'm not sure. And so we're going to kind of hold off making that call at this stage. And -- but it's an important business for us, but we think we have it triangulated in terms of the rest of the year.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [25]

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Good. And then just last one from me. Can you comment on price costs in the quarter? And any changes in the outlook for the year?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [26]

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Yes. So we're still above 1% in pricing. Inflation did settle in a little bit, so we had -- we definitely had a little bit of incremental benefit relative to the expectation of that 30 to 40 bps, so a little bit better than expected. So we think we're in a good spot for the rest of the year.

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Operator [27]

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Our next question come from the line of Matt Summerville from D.A. Davidson.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [28]

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Two questions. First, in the prepared remarks, you referenced supply chain disruptions you saw in Europe. Can you get into a little bit more granular detail on that and whether that's still with you here as we're into the second quarter at this point?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [29]

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Yes. So, Matt, the bigger thing there was really specific to the U.K. and we have a number of businesses, fire and sealing in particular that are in the U.K. And what you saw was you saw some hoarding of product as people were ramping up to that expected Brexit date. And so we'll see how that plays itself out now that we've got that kick down -- that can kick down the road again. But you definitely saw some behavior around relationships between the U.K. and the continent in terms of supply chain. It's not that big a deal to us, but to that -- those businesses it is. And so we'll keep an eye on it, but I expect as this continues to unfold, we'll continue to see some of that wackiness.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [30]

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And then, are you seeing any evidence? You mentioned sort of the short-cycle day rate business, but beyond that, are you kind of thinking in some of your longer-cycle businesses, are you seeing any evidence that customers are delaying capital decisions, awaiting some sort of outcome with all of this trade stuff?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [31]

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Absolutely. I actually think that if you go back to last summer, what changed was people pulling in capital, being much more hesitant about releasing larger chunks of capital, while this tariff stuff is working itself out, and obviously, with the government shutdown in the U.S. Those combined events, I think, made people skittish. And if you look across -- I was in China last week and if you look across kind of behaviors, what's happening in Asia, it's a big time wait and see. And then any U.S. businesses that do have a lot of China exposure is a big-time wait-and-see attitude on how things are going to play out. So I do think that there is some constrained relationships between kind of natural supply and demand with this situation.

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Operator [32]

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Our next question comes from the line of Nathan Jones with Stifel.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [33]

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Andy, question here just on FMT and the impact that Banjo had in the quarter. I mean, you got pretty phenomenal order growth, 110 basis points of margin expansion, and I think, Banjo is one of the higher-margin businesses in there, so it probably was a bit of a drag on margin expansion. Can you maybe talk about what the drag from Banjo was? You're getting pretty close to 30% operating margins now. Can we see that number breach this year?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [34]

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Yes. So it was -- it's less than you might have thought. There is definitely some impact, but it's lessening, we think, for a couple of different reasons. Most importantly, the margin profile of the rest of FMT has closed some of the gap on the rest of -- relative to Banjo. So the mix impact isn't quite as big as you would think. And when it's all said and done, you're talking about this a company that is sub-5% of IDEX sales. And so even if you look at it relative to FMT, you're still talking about, what 12%, 14% of FMT business, is that about right? So plus or minus. So it's not immaterial, but it's not that big a deal -- not as big as it would have been, say, 5 years ago.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [35]

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Okay. Then maybe you did talk about pockets of weakness in FMT and you've danced a little bit around what those are. Maybe you could give us some more details on which of the businesses or which end-markets that you're seeing that weakness in?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [36]

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Yes. More generally the pockets of real weakness across the company are around ag, are around semicon and in auto. Now the good part is, is we don't -- all those things together are sub-10% of revenue for IDEX. So when all said and done, yes, there's pockets of weakness there. The bigger thing that I was referencing in my prepared remarks was around the volatility of day rates. And so we've seen this in a couple of different periods, kind of going into '15, '16, coming out of '15, '16, and then last summer. You start -- as you look at it at one kind of inflection positive or negative, you kind of tend to see some of this volatility, and I think that goes back to the earlier question that was asked about capital being held up. I think if capital gets held up, the book-and-turn business tends to have more volatility in it and also projects get kicked out. So I think it's a combination of those things. The good news story here is, if you get some relief on that, I think that volatility goes away and you inflect upwards.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [37]

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Okay. So going to '15, '16 and coming out of '15, '16 that volatility clearly resulted in a big downturn and a big upswing. I guess the volatility last summer didn't really move the needle in a big way one way or the other. I...

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [38]

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I'd say, Nathan -- I would argue that we're in a 6-month period. If I were to go back kind of the third quarter through the first quarter, I'd say it's been 6 months of that, right. We've had months that have been weak and months that have been very strong. And so I think we're still in that question mark zone.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [39]

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Okay. So you're still in a period of volatile day rates, waiting to see whether that's going to sort itself out or jump off a cliff or inflect up or something like that. Any sense from you of what you think is going to happen around that?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [40]

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The issue, I think is this isn't tied to normal economic activities. It's very big macro and political issues and so I don't have any idea.

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Operator [41]

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Our next question come from the line of Joe Giordano with Cowen.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [42]

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So some of like the higher-profile OEMs in some of the HST areas like on Mastech and chromatography, et cetera, talked about having -- it sounded like there was some buildup there in the channel perhaps. I'm just curious as to what you're seeing. I know it's longer side -- sales cycle for you guys there. So what are you seeing relative to that? How temporary does that feel like for you guys?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [43]

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Yes. So we didn't see -- if you actually look at the life sciences piece itself, that was actually pretty darn healthy. And so we have not seen that play through. With the major customers, we have electronic Kanbans that are in place with all of them and so we have a pretty good visibility. How that might play through their supply chain, their forward supply chain to the customers back to us, we have less visibility on, but I don't think you're looking at something that's going to be a really big deal.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [44]

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Right. FSD, I mean, I guess the pop-in orders probably was a bit surprising for most people. How sustainable do you think that it is? Is that a business as a segment that might be down organically this year, full year? Or how you kind of -- how are you calling that right now?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [45]

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No. I think, this is Bill. Overall, it's going to be up for the year. I think there will be again, quarter-to-quarter volatility for dispensing, right. Sales were down 15%, but orders were up 10%. We called on the fourth quarter, we had something that pushed it in the first quarter. We landed that order, but Fire & Rescue, really strong mid-single digit and kind of same expectations for BAND-IT.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [46]

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Yes.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [47]

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And then just last from me. I mean, we've talked about day rate volatility a bit a bunch here. Andy, I know that's something that really gets you kind of laser-focused. So how are you kind of -- when you're not sure which way it's going to break, how do you kind of act? Do you kind of think -- do kind of get ready for one side or the other or get actions in place that if it goes one way, we're ready -- I know you hate getting behind that either, but just how you...

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [48]

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We are, as I said many, many times in the past we react much better to the upside than we do to the downside. And so we can move pretty quickly as demand inflects upwards, and I'm happy to have to chase that a little bit. That's all right with me. The contribution margins are going to be high, and you're really chasing it with supply chain and labor. And so I can deal with that. Getting way out in front and having the markets turned over on you is very painful, right. Because now you're firing people, and you've got a really difficult contribution margin on the backside where the decrementals become painful. So I'd rather be conservative going into that, have to chase the upside a little than I would getting out in front and having to dramatically react to the downside.

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Operator [49]

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Our next question comes from the line of Bryan Blair with Oppenheimer.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [50]

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I was hoping you could offer a little color on the SAM launch in Fire & Safety. I know you literally just introduced to the market but seems like that's going to be a game-changing technology. Curious about initial reception and whether it already contributing to FSD order rate.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [51]

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I appreciate the question, Bryan. So we have the North American Fire Show in Indianapolis here a few weeks ago and we introduced both the SAM system and the new eDRAULIC tool. And I think it's fair to say that the SAM system had incredible reaction. The number of people at that booth, the reaction from customers has been terrific. We have already secured our first major customer around that. I don't want to talk about who at this time. And it's a big deal, right. We made that small acquisition -- technology acquisition last year. That was all about bringing the user interface and our ability to link all of our components into a singular system. And it's really -- in terms of -- everyone was talking about IoT and digital, and this is a great example of we're really on the forefront of that. And what's going to happen is over the course of years, we're going to change the productivity and the safety profile of a fire truck, and that's a really big deal. Now that being said, this is stuff that happens really slowly and it happens slowly for 2 reasons. One, there's already a year of backlog in the fire truck OEMs, right. So things have all been ordered. So unless somebody wants to fundamentally change the nature of their order, it's going to take some time for that to go through the system. And then second, there's going to be conversion, right. You've got a huge installed base over time. But I think what happens is, you're going to see this over the course of 3 to 5 years, I believe, we're going to start taking significant chunks of market share. We've got great intellectual property around this. And I do think it's a game changer for us. As you think about over a decade our positioning in the fire market relative to this capability and how it pulls through componentry, it's a big deal.

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Bryan Francis Blair, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [52]

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And if we could follow up a little on M&A. Obviously, you have a lot of dry powder right now and good scale and diversification across platforms. With the resources you have in place, is larger scale or more transformational M&A a prospective going forward?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [53]

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You know, Bryan, we're pretty cautious about that. If you look at the universe of businesses that would be transformational. So let's, say our size to half our size, right. If you look at businesses of that scope and scale, there are very few that fit naturally with IDEX. There are a handful and those are the things that we keep up on and we work on all the time. And there are a few that we could do that would be wonderful combinations with IDEX, but it's not very many. It has to be at the right price, and you've got you be able to drive real synergies. That being said, as you look from, say, that size down to $300 million, $500 million or so -- call it $300 million to $1 billion in revenue, there's quite a bit of stuff out there. And it's really a matter of timing and being able to do a deal at the right kind of economics that fits our style of competition. And if that happens, we will move really quickly. We looked at a bunch year, we put a ton of effort into them and we just need to keep to our style of competition and the discipline around our return frameworks and not get seduced into doing mid-single digit ROIC deals that are "accretive" but are really disastrous to the capital structure and the return structure of the business over the long term. And we're just not going to do that.

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Operator [54]

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There are not further questions in the queue. I'd like to hand the call back to management for closing comments.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [55]

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Thanks very much, and thank you, everyone for joining us here on the first quarter call. More than anything else, I want to thank the teams here at IDEX who do just a tremendous job being laser-sharp focused on our customers, understanding that in a market like this we really do need to execute and execute well and they've done that. And then discipline around how we spend this free cash flow and so the teams, I'm very proud of the teams that we have and the culture that we've built. And I look forward to catching up with everybody in the next 90 days. Take care.

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Operator [56]

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Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.