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

Q2 2019 IDEX Corp Earnings Call

LAKE FOREST Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of IDEX Corp earnings conference call or presentation Friday, July 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

* Andrew Edouard Buscaglia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - 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

* Robert G. Jamieson

Cowen and Company, LLC, Research Division - Research Associate

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Presentation

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Operator [1]

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Greetings and welcome to the IDEX Corporation Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you. You may begin.

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

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Thank you, Melissa. Good morning, everyone. This is Mike Yates, 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 second quarter financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ending June 30, 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 capital deployment. Bill then will discuss our second quarter financial results and walk you through our operating performance within each of our segments. And finally, Andy will wrap up with an outlook for the third 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 13684163, or you may simply log onto our company's homepage for the webcast replay.

Before we begin, a brief reminder. Today's 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 the call over to our Chairman and Chief Executive Officer, Andy Silvernail.

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

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Thank you, Mike, and good morning, everyone. I appreciate you joining us to discuss our 2019 second quarter operating result. Let me start with a few summary points on the results. Due to a solid -- and I'm very pleased with these performance in a choppy economic environment. Bill going to walk you through some financial details in a bit, but overall, we delivered 3% organic growth in the quarter, our 10th consecutive quarter of organic growth. The 3% was slightly below expectations, but considering the lingering trade tensions and the uncertainty in the macro environment, I was happy with the result. Our price and productivity initiatives continue to drive outstanding margin and capital return, regardless of commercial environment.

We delivered another record EPS in the quarter. As we look at the balance of the year, we are confident in our ability to execute in times of volatility. As such, we are raising the low end of our full year guidance by $0.08, our guide is now $5.78 to $5.85 per share. Finally, before I go into details, I want to take a moment to welcome Velcora Holdings and its 2 product lines, Roplan and Steridose to the IDEX family. We are very excited about the possibilities these acquisitions brings to our Sealing Solutions platform, and I'm confident the acquisition will prove to be a great addition to our portfolio.

With that, let me start the call with a look at the regions we do business in. The overall global economic output remains uncertain. Companies are employing a wait-and-see approach and slowing down larger project activities as they wait for some resolutions to the various geopolitical situations across the world.

We believe that the underlying fundamentals in North America remain strong due to high levels of employment and expanding wages. Markets continue to grow, but at a slower rate versus the first quarter. In Asia, there are some pockets of strong performance, but the overall Asian economic performance decelerated due to uncertainty driven by the ongoing trade conflicts in China and the election cycle in India. Finally, the Eurozone was flat year-over-year. We see pressure in Germany as auto, tooling and general industrial markets softened, given the apprehension in the U.K. as the future of Brexit is a still unknown.

All right, let me turn to the markets we serve. The industrial markets are generally performing well, driven by OEM and project wins. However, we are seeing softness in daily distribution orders and project closure timing is becoming harder to predict, despite a strong funnel. Demand continues to be robust across key life science markets. Strong performance continued to in IVD/BIO as our partnership with our customers continue to drive innovation and bring new products to market. The energy market is relatively flat with strong North American truck demand and good performance of commercial aviation offset by lower LPG project volume.

U.S. Ag, it continues to be soft. Our overall farmer sentiment is low with continued tariff impacts and the challenging 2019 planting season. OEMs are reacting to the slowdown with an extended midyear shutdowns.

Municipal markets in North America remain stable. We see some slowness in Europe, where political uncertainty is leading to project delays and the China markets are softening, but India remain strong. The semiconductor market continues to be driven down by high inventory levels of memory chips as well as lower consumer sales of smartphones. We do not expect this market to pick up in the back half of the year. Finally, the slowdown in global light vehicle sales drove softness in our automotive exposure, especially in China.

Okay. Let me switch to capital deployment. As I mentioned earlier, I'm very excited to welcome Velcora Holdings and their Roplan and Steridose product lines to the IDEX family. These businesses will mesh nicely with our Sealing Solutions portfolio, and will complement our current product offering. We deployed $137 million in capital on the deal and paid about 13x 2019 EBITDA.

We expect this deal to achieve double-digit cash-on-cash returns in the near future. We're still working through the purchase accounting associated with the transaction, but we don't expect the deal to be material to our 2019 adjusted EPS. As usual, we work closely with our teams to integrate the business into the IDEX family, and we look forward to the long-term returns they will provide.

M&A continues to be a priority for us and the funnel remains strong. Our teams continued to evaluate several deals, as we continue to look for high quality assets to add to the portfolio. In addition in the quarter, we have repurchased $3 million of stock at an average of purchase price of $155, and we returned $38 million to shareholders via dividends.

With that, let me pause here for a moment, I'll turn it over to Bill who is going to talk about the financial results and the 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 second quarter financial results. I'm on Slide 4. Q2 orders of $628 million were down 2% overall and flat organically. Each of the segments were flat year-over-year. I'll get into more detail in covering those segments, but I would say, there are 3 main drivers for order performance. First, the softness we were seeing in Ag, Semi and Auto, impacted orders by about 150 basis points. Secondly, the unresolved trade conflict and continued geopolitical uncertainties are creating cautions in the markets, and we're seeing customers pause on large product investment across this segment. And finally, we're comping back-to-back years of over 8% organic growth for the second quarter.

Q2 revenue of $642 million was up 1% overall and 3% organically, driven by 3% organic growth across all segments. We expanded second quarter gross margins by 20 basis points to 45.5%, primarily due to price, volume leverage and production efficiencies. Partially offset by continued investments in engineering related to new product development.

Q2 adjusted operating margin was 24.5% an all-time quarterly high for IDEX and up 90 basis points compared with the adjusted prior-year period, mainly driven by our gross margin expansion and lower SG&A costs. Q2 adjusted net income was $115 million resulting in record high adjusted EPS of $1.50, up $0.10 or 7% over prior year adjusted EPS.

Our second quarter effective tax rate was 21.7% same as prior year but 80 basis points lower than our previously guided amount, primarily due to higher excess tax benefit from greater-than-expected stock option exercises in the quarter.

Free cash flow was solid at $118 million, up 8% over last year and 103% of adjusted net income. This was our highest Q2 free cash flow of all time.

Finally, in regards to the balance sheet, gross and net debt leverage remain very healthy. The combination of our strong balance sheet, capacity on our revolver and free cash flow provides us the ability to deploy $2 billion in the next 12 months for the right M&A opportunities, while still maintaining our investment grade ratings.

I'll now turn to the segment discussion, I'm on Slide 5, starting with Fluid & Metering. Q2 orders were down 2% overall and flat organically, mainly driven by the market caution sentiment, we mentioned earlier, market contraction in the Ag market and lower projects in energy. Q2 sales were up 1% overall and up 3% organically. All businesses other than Banjo grew organically in the quarter.

Despite some market choppiness in North American distribution, FMT continues to perform well overall driven by successful targeted growth initiatives in the industrial space along with solid OEM demand as well as our ability to capitalize on the favorable chemical market conditions.

Both our Viking and Richter businesses posted record sales for the second quarter in a row, driving strong growth in our pumps and valves businesses. The municipal water business remained steady and the oil and gas market conditions have stabilized a bit.

As I mentioned before, the only business in this segment that contracted year-over-year was Banjo, which is impacted by the overall Ag market dynamics. We're keeping a close eye on preseason order patterns that generally occur in Q3 as an indicator to see if there is a chance for a rebound in 2020.

Finally, excluding restructuring expense, operating margin was 30.5%, up 100 basis points over the adjusted prior year quarter, mainly due to price, volume, leverage and productivity initiatives, partially offset by higher engineering investments.

Let's move on to Health Science, turning to Slide 6. Q2 orders were down 1% overall, but flat organically, mainly driven by the market pressure in Semicon and automotive. From a sales perspective, Q2 sales were up 2% overall and 3% organically, driven by our strong performance across all segments of our Life Science business. As we continue to grow through targeted NPD efforts in collaboration with our key customers and leveraging strong secular growth trends. At Gast, we continues to see project wins with our MPT launch in the food and beverage space driving double-digit revenue expansion.

At MPT, they have built a strong backlog driven by growth in the Pharma market, and we look for them to have a strong back half of the year. Finally, the unfavorable market conditions in Semicon and Auto negatively affected our Sealing platform and created headwinds to the overall sales and orders for this segment, as Sealing was down 18% in orders and 6% in sales organically for the quarter. From a margin perspective, excluding restructuring expenses, operating margin increased 100 basis points to 24.6%. This is primarily due to higher volume and lower amortization partially offset by higher growth investments.

I'm now moving to our final segment Diversified. I'm on Slide 7. Q2 orders were down 3% overall and flat organically, driven by a tough comp in dispensing due to a large project order in the prior year. They were down 22% in orders for the quarter. Q2 revenues were flat overall but up 3% organically, and I'll provide more color on that in a minute.

Operating margin of 27.1% decreased 100 basis points in the quarter. This was driven by dispensing as they delevered on their lower project volume, sequentially this segment was up 130 basis points versus Q1. Our FSD segments performance was mainly driven by solid results in our fire and safety businesses. On the fire side, we continue to capture OEM demand, and our cash products are performing well and the launch of our SAM product is getting a lot of attention in the market.

Within rescue, we are capitalizing on strong tool demand and seeing positive momentum around our MPT programs. Our hydraulic watertight tool that we launch at the beginning of the quarters is seeing high demand. At Band-IT, its performance remain strong, despite general softness in the auto market and lower industrial sales. However, we continue to win in the aerospace and several other niche verticals.

Dispensing story remains challenging. As I mentioned earlier, the business was down double digits compared to prior year due to a tough comp against some large project wins last year. We expect the business to be marginally better in the second half but still down. They will continue to be a drag in this segment for the balance of the year.

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 to wrap things up, let me summarize some additional details regarding our 2019 guidance for both our third quarter and the full year. I'm on the last slide, Slide 8. In Q3, we're projecting EPS to be in the range of $1.45 to $1.47, with organic revenue growth of approximately 3%, and op margin at about 24%.

We're estimating a 1% top line headwind from FX assuming the June 30 rates, which translates into $0.01 impact of EPS.

[The future] effective tax rate should be about 22.5%, and we expect to spend about $20 million in corporate cost.

If you look at the full year for 2019, again we're raising the low end of our full year EPS guidance $0.08, our new guidance is $5.78 to $5.85.

Full year organic revenue is projected to be 3% to 4% and op margin again about 24% and the same with the next quarter, we expect the total FX impact at June 30 rates to be at 1%.

The full year effective tax rate should be about 21.5%, and we're expecting to spend about $60 million in CapEx. Free cash flow should be about 105% of net income and corporate cost should be in the $78 million to $80 million range. As always, our earnings guidance excludes any associated cost of future acquisitions or restructuring.

With that, operator, let's turn it over to 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 Deane Dray with RBC Capital Markets.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [2]

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Maybe we should start with the macro since that seems to us where most of the uncertainty is. And Andy, we were with you last at EPG and you were clearly signaling at that time, you were seeing choppy daily orders and that seems to have come through in the results today.

Couple of questions to start with. What was the cadence of the quarter? We've heard a lot of different commentary from the companies about the months and the quarter. So how did that progress with you? And then some color on the distribution side, sell-in and sell through?

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

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Yes, so the overall cadence was different, Deane than we've been experiencing here for the last year. I think in several conversations that have had with people. I've noted that in the past year or maybe 1.5 years, we've seen this cycle within quarter where you've had a weak month and maybe a slightly better month and then a relatively strong month. That's been the pattern here for quite some time.

And the pattern was different. For the first time, we didn't see that ramp-up in the last month of the quarter. I will say that the early part of July is stable, right? You're not seeing a decline of any kind, which I think is positive, but you didn't see that uptick in the last month of the quarter like we have seen in the past. And so I think that really notes well to a decelerating environment, which is what we're experiencing from -- and certainly from last year first quarter to this year.

So frankly, no surprise. It's kind of what we've been expecting here for some time, I think we've tried to do a good job of communicating that, and I think we're in the environment that we expected to here coming into the year.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [4]

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And the view from the distributor sell-in, sell through?

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

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Unlike a lot of folks, we don't have a lot of off-the-shelf distribution. We do have some. It's been fine, but we don't see any major areas of stocking or destocking. I think that the biggest thing relative to folks is they are very cautious, whether it's in the distribution network or the OEMs, people are pretty cautious about anything that's a big ticket. And so I think we're going to see that until you get some certainty back into the marketplace. The interesting thing about it is, it doesn't feel like it's driven by what I'll call, fundamental demand of under capacity or overcapacity, which is typically what happens. This really feels man-made. And so the encouraging part of that is, if you get some resolution on some of these things, I think demand snaps back pretty quickly. I think the discouraging part of it is it doesn't really look like that's going to happen any time in the near future.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [6]

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Yes. That's really helpful. And just got to extend the man-made observation. It's man-made and not execution.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [7]

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Yes.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [8]

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And that's pretty clear to us. And just last question for me, and if there's ever a time to be asking this, it's now, your barometer businesses. You always BAND-IT, Warren Rupp and Gast, and BAND-IT looks like it's holding up versus even with auto being weak and Gast had a good quarter. So take us through the barometers.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [9]

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It's a mixed bag. The -- what I would say is on the daily rate business, yes, you definitely see softness. BAND-IT and Gast in particular have actually won nice chunks of business, but there are larger chunks of business that have been part of our targeted growth list. Warren Rupp has actually [hold in] and so, if I look across-the-board, it's a mixed bag. All in all, equal in deceleration.

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Operator [10]

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Our next 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 [11]

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Can we go back to Health & Science orders, I think, Bill, you said the semi and auto part was putting pressure about, I think it was down 18% in orders. Can you talk to me a bit the Life Science and MPT and some of what the order trends you're seeing on that side?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [12]

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Yes, so life science is really solid and no concerns there. The MPT has a very good funnel of work. They have work on -- you know Allison as well as anyone that that's pretty lumpy, but generally, it's a good funnel of work they have there. The concerns are all around semiconductor and auto, the sealing business, you said 18% down that was the sealing business in particular. And that they have our largest chunk of semiconductor exposure. So they're facing some headwinds there, well semi and auto. And so they're facing some headwinds there. But really good execution in most of the Sealing platform, which is nice to see.

So I think those are just part of those cyclical markets, generally, otherwise, very happy with the profit expansion that we saw in HST, that's a record for us and I know, this time last year, we had some questions about whether or not we're going to expand margins at the same kind of clip that we had in other parts of the company, and I think we've demonstrated that we can do that.

And I think the life science stuff is in really good shape.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [13]

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Great. And then can we just touch on Velcora's, a little bit more color on there. Just in terms of growth rate, margin, is it leveraged to any significant customers that we need to be mindful of?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [14]

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Yes. So first of all, this is a terrific business. We've known about this business for a long time. We cultivated the business ourselves. It's a wonderful [business], principally Roplan, which is that the 85% of the business is a mechanical sealing business. A lot of exposure into faster growing parts of the market into life sciences and just generally, good positioning across-the-board. The business is profitable, it's an IDEX-like business, and we think with quite a bit of upside frankly. It's a well-run company, a really terrific team of people, but we think not unlike when we bought PPE back here quite some time ago, yes, 9 years ago now. That business, the margins have, I think, more than doubled at PPE in that period of time. Probably won't do that, but there's a lot of upside in terms of profit and growth rates.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [15]

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And not heavily concentrated across a small group of customers.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [16]

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Yes, now-- so it's life science, food and beverage and then general industrial.

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Operator [17]

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

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [18]

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So just a quick [tack on the bad]. What's the accretion embedded in the guidance associated with the acquisition?

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

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None as of now. And we're still working through final purchase accounting. We'll give guidance once we complete that coming out of third quarter, but nothing material, maybe $0.01 or $0.02 at most.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [20]

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Okay. So then on the acquisition M&A commentary, very strong robust pipeline. Maybe you could talk a little bit about actionability? I know that's been a hurdle in the past. It sounded a little bit more constructive, so?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [21]

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Yes, so it's, look we've talked about here for quite some time we've been working on a ton of stuff and have walked away from a lot of things. So it's -- the pipeline looks good, we've got a bunch of things that we're working on, actionability very hard to estimate. It's -- in this environment, we found time and again that you've had people who have been willing to pay companies or been a price at the end of a discussion. This is -- Velcora was terrific because we were the only ones in there, had a very constructive long-term conversation going on and [wasn't an option], the rest of the environment frankly is unchanged from when we talked about it 90 days ago, Mike.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [22]

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All right. Makes sense. And then just from a guidance perspective, understanding how you get to that 3% to 4% range, obviously the orders 3-ish percent plus or minus starting the year here? When you look to the back half of the year, is this about comps easing by the time you hit the fourth quarter that helps get to that range? Is it about the cadence that you're expecting from an end market perspective? Maybe just give some puts and takes on how you get to that 3% based on the environment today? And then whether or not, there's continued deceleration in the environment embedded in that assumption?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [23]

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We're not -- we don't have anything embedded in terms of further deceleration. We have not estimated that. It's basically at the levels that we're at today. If you kind to take it and straight line it, that's what it is. It's the fourth quarter that we have a much easier comp. The second and third quarters have tougher comps, fourth quarter is a significantly easier comp. There is no significant change, there's no major inflection that has to happen for us to get to this -- these numbers.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [24]

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Seasonally, Mike, Q2 is a larger order, and we decelerate a little bit just -- there's a seasonality in Q3. So to your point, flat orders on a larger number, yielding into Q3 is not straight math.

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Operator [25]

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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 [26]

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Just maybe following on to Mike's question there and your answer to that. I mean, it sounds like you're the back half of the year guidance embeds normal seasonality, not getting better, not getting worse, largely across the portfolio. Maybe you could talk about the things that could make it get worse, could make it gets better, relative to what your current expectation is?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [27]

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Yes. I wish I had a brilliant answer for you, Nathan. I think it's all macro, frankly. We -- we're going to work our body of product and customer opportunities and continue to push for our consistent 200 bps above market. I think it's all going to depend upon the global economy. I'm not sure that we're going to swing it one way or the other, meaningfully off our current trajectory, different than that.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [28]

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Fair enough. Maybe on margins, particularly FMT in case anybody missed it, I think you crossed 30% margins there for the first time. So congrats on that.

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

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We did.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [30]

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Is that the kind of level that you guys think you can maintain there? What businesses in that segment have the opportunity to improve margins a bit more? If we are starting to see slowing growth there, should we expect to see incrementals dropping to that kind of 30 to 35 range? I think you expect when you're seeing lower growth here. And does that mean, we should see margins flatten out here?

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

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Yes, so I think -- at the current volume levels that we're at, I'm not -- I think we're about at the right level of profitability.

On an increase in volume, you've still got headroom here because of the very high incrementals, the good part here is we have a -- we don't have a huge mix of margin. We have some margin mix here, but we've got a lot of businesses that are now kind of pushing up against this higher 20s number. So assuming that the world doesn't fall apart on us, the -- that margin level feels pretty good.

At the same time, we've all got to be candid. This is a very high contribution margin business and if the business turns down, it's going to have a steep drop down, [especially] the way it is. We have contingency plans that we've talked about before on these calls. But -- and it's why we have been cautious in some degrees about our market outlook.

And so my point of view is, we're at a very healthy margin level now. We have further incrementals in FMT and in other parts of the business, based on the high contribution margins, and our ability to get price, and we are preparing as we always do. If we have softening to make sure we're appropriately resetting the business and taking out some cost in line with volume.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [32]

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You guys have always made it pretty clear that you have this kind of contingency plans for economic downturns. Are there businesses now where you actually need to enact some of those plans? Are there places where you need to take cost out currently with where the economy is?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [33]

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Oh yes, definitely, definitely. If you look across the 40 businesses, if you look at the folks who are more focused on auto, semi, Ag, you absolutely have got to do that and they've been doing that here since -- basically this time last year in one way or the other.

Just from a process standpoint, we're looking at this -- number one, we're looking at this all the time. We go into any year having a contingency plan that's very, very specific, and I know I've said this in many venues before, but just at the high-level math of this whole thing. Our broader contingency plan is one that says, okay with what I call, a vanilla recession, we think the top line is down 5 points plus or minus, right? And that 5 points is equal to about $125 million unmitigated, that's going to be about $75 million of pretax profits. And we think that we can take out and not damage the business somewhere in that $20 million range pretty quickly.

A bunch of it is volume related, a bunch of it is services related, rightsizing certain places that have a larger overall impact. So you end up with a downside of, call it, somewhere between $50 million and $60 million. So $0.50 to $0.60 a share and so what that's kind of 8% downside on a 5% top line downside. And that's the mentality that we've had and obviously, as you move into the businesses, the contingency plans look different than that, they are -- and not everybody is the same. But that's our mindset. And so as we -- as things decelerate here, I mean, I'm not going to call a recession, but we're prepared if that happens, and we'll pull the trigger on things and some things, Nathan, to your point, we are pulling the trigger on now. There are small things are going to hit specifically with volume declines. Bill, anything you'd want to add there?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [34]

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Yes, no I was going to highlight, yes, we did take a couple of restructuring actions in the quarter on those businesses that are seeing fundamental softness. So we continue to evaluate and as businesses underperform, take actions.

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Operator [35]

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

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [36]

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Two questions. First, just on the quarter, where were you in terms of price realization year-over-year? And how did that compare to the inflationary pressure you're seeing in your businesses?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [37]

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We continue to trend at that little over a point of price capture and at the high-end of our historical price cost spread of about -- about 30 to 40 basis points historically, a little on the higher end here in the second quarter.

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

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The team has done a super job with price and managing the spread and to Bill's point, we are on that a little above our higher end at 30 to 40, which is good.

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Matt J. Summerville, D.A. Davidson & Co., Research Division - MD & Senior Analyst [39]

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And then with respect to the HST, overall, maybe to an earlier comment, Andy. At this point, do you feel like that business is breaking into a new sort of higher level of margin potential? And can you maybe talk about what areas you still can see, sort of, material improvement from here with the platforms that are currently in the HST portfolio?

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

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Yes. So I'm actually really, really proud of that team. We're at a record up margin there with sealing down 18% with pretty high incremental margins in that business. So when you set sealing aside and you look at what the performances of the rest of the business, it's pretty extraordinary and actually, I'll give the sealing team a lot of credit, managing that downside, they actually managed the cost structure really well too. So that's a good note.

So I think we're in a good position, I'm liking it a little bit -- if you went back to 2015, 2016, one of the things you guys couldn't see because the industrial businesses were getting kind of kicked around is we were in the process of restructuring a number of businesses within FMT, and that breakout in profitability that we've had here in the last 2, 2.5 years was about that, right? We have reset the margin structure of the business and when volume came back, you've now seen what has happened to profitability at FMT. I don't think HST has that much upside. I'm not going to say that, but I think what you're seeing with us having a record with a key piece of the business being down and the fact that they are holding margin. When you see that pick back up, I think that bodes well for improvement in the overall HST margin structure in the future.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [41]

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And we did 2 plant consolidations within HST too, one within MPT and one within the life science space. So there were some structural actions, I think, to help us get it. Because at this point, to Andy's comment, probably not huge increases going forward more in relation to...

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [42]

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(inaudible)

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William K. Grogan, IDEX Corporation - CFO & Senior VP [43]

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Yes, exactly.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [44]

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One thing to note though, Matt and everyone should pay attention to this. Velcora is going to land into HST. You'll bring some amortization into there, it's a little bit -- the margins are a little bit lower than the HST average anyway. And so you will see some dilution in that as we go forward a little bit.

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Operator [45]

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Our next question comes from the line of Brett Linzey with Vertical Research Partners.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [46]

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Just wanted to come back to incremental margins and really thinking about the Q3 framework and the implicit in Q4. If you just look at incrementals, at the midpoint, it does imply -- incrementals they're just naturally above what those businesses typically do. Are you throttling back some investment spending, or is it just some of that price cost benefit you're going to see here in the second half? Any color there?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [47]

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We are not throttling back investment spending at all. You're going to see, we're going hit that $60 million number for CapEx. I mentioned to you before, there are kind of 25 major programs or projects that myself, Bill, and Eric Ashleman and the rest of the team really focus in on, and we are funding those.

There are some places that are in cyclical downturns that we are pulling back. But in our places that we are betting, we're continuing to bet. And one of the things that I'm really intent on and we're having -- one of the reasons I'm so straightforward with you guys about what we're going to do, if there is a downturn, it's the exact same conversation we're having with our Board because if you get the scenario that I outlined before, what I don't want to do is go and take another $10 million or $20 million out because with that, you will throttle down investment.

And if you have a recession at 6 or 12 months, the last thing we want to do is let go a bunch of really critical people that you won't be able to hire back in this tight environment in the future. So I'm going to invest that $10 million or $20 million ,so we can continue to have better than market growth rates.

So we're keeping going, and we're going to trim back on places that are weaker, but we're going to keep investing.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [48]

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And I think our price capture helps enable that.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [49]

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It does, yes, absolutely.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [50]

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Okay. Good. And then I guess just a follow-up to that. Specific to just restructuring, you did a little less than $4 million in the first half, I think, $12 million in 2018. Do you expect to step that up in the second half of the year here?

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

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Yes, I think you'll see a few more things happen here that we've been teeing up. But unless things materially weaken, I think it'll be maybe a little bit higher, but it's not going to be a breakout number.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [52]

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Okay. Good. And then just a last question. Regarding the channel, maybe you could just compare and contrast, what you're seeing in distribution versus direct in OE specific to orders. How did that look in the quarter and then really into July here?

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

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I'll have Bill comment on this, some too he's done a lot of work in this area. But there are 2 things that were different in the second quarter on the orders front than in the first quarter. The first thing is, it is larger projects, and we've seen this pattern for the last 8 years since I've been CEO, you see this pattern happen. When the softening kicks in, the larger scale stuff gets pushed out and you start to see that happen. And that was one thing we've seen kind of larger projects get delayed. And then secondarily, what we saw happen in throughout the quarter was the day rate business in some of these very short cycle businesses came down and that's what kind of played out. The good news is, again, July has held up that you're not seeing a sequential decline anymore, which is a good thing, but you are seeing a little bit lower level and if you compare to the first quarter over the fourth quarter of last year in terms of the order book.

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Operator [54]

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Our next question comes from the line of Andrew Buscaglia with Berenberg.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [55]

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Can you talk a little bit about -- so you made the comment that some of this is -- the sluggishness is man-made. But headlines suggest with semiconductors in auto and even Ag, (inaudible) would say that could be a prolonged decline. So I guess I'm trying to triangulate, what you're seeing, maybe you're too niched to be impacted by that, but I want to hear your comment on that?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [56]

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Well maybe one comment, the corollary we saw is in May, when there was a tweet around potential tariffs with Mexico, our industrial businesses saw immediate response in a reduction in day rates. So then that corollary around just being not fundamental economics versus caution in the broader economy is somewhat what we are basing that theory on.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [57]

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And also, Andrew, recognize that, auto, semi, Ag in total is 12% of the business, 10% of the business.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [58]

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Less.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [59]

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You just got to recognize that, that I'm referring to basically 90% of the business that's not that stuff. And so as you look, if you break down life sciences, you break down municipal, you break down general industrial, that's more of what I'm referencing.

And look, if we couldn't see that, as Bill described, if you couldn't see that corollary between those things and how fast that happens, it's really remarkable and back to the question I got earlier about our canary businesses.

We saw those in particular, I mean, if you snap your finger and as you get good news, bad news out of some of these trade and economic issues, we see it show up in our order book really quickly.

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Andrew Edouard Buscaglia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [60]

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Okay, and then maybe to some more specific one within Health & Science technologies. I know one of your larger customers, Illumina, had a weak quarter, did you guys look into that? Is there anything concerning there, given that they're kind of barometer for what you do in biotech?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [61]

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Yes. So we're super careful about commenting on any customers. I think what I would say and this is a broader statement is our -- sometimes people forget what we sell into these marketplaces, and we're selling components that are going into instruments and a lot of these businesses you see some of their outsize impact, positive or negative is really their reagents. And so the key to look at for us is our growth versus instrument sales and what I can say, very broadly throughout the marketplace is we track well, and I would say take incremental share, and that's a broader statement than any one customer.

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Operator [62]

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Our next question comes from the line of Joe Giordano with Cowen and Company.

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Robert G. Jamieson, Cowen and Company, LLC, Research Division - Research Associate [63]

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This is Robert in for Joe. I just wanted to go back to (inaudible) and trajectory that we saw in Q2 as that's slowing down.

Would now be the time to start to think about a possible -- the possibility of orders starting to turn negative going forward. Could you provide any color on that?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [64]

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I don't think so, Robert. The information that we have thus far wouldn't suggest that, but that being said, let's just -- I think all of us are looking at this environment the same way. It is materially slowed sequentially. I think that the risk of recession has absolutely gone up, there's no doubt about that, but we have not seen any evidence of that as yet.

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Operator [65]

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Ladies and gentleman, that concludes our question-and-answer session. I'll turn the floor back to Mr. Silvernail for any final comments.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [66]

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Thanks, Melissa, I appreciate that. Thank you to all of you joining us on the call today. Once again, I'm very proud of the work that the team has done in this pretty choppy environment. The levels of execution, the levels of focus on the areas that matter most to us and really building the culture of this company to continue to perform regardless of environment is what we have worked very hard to do. And so I appreciate your time, and I look forward to talking to you again here throughout the quarter and then in the next 90 days. Take care.

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Operator [67]

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Thank you. This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation.