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Edited Transcript of IEX earnings conference call or presentation 25-Jul-18 2:30pm GMT

Q2 2018 IDEX Corp Earnings Call

LAKE FOREST Jul 31, 2018 (Thomson StreetEvents) -- Edited Transcript of IDEX Corp earnings conference call or presentation Wednesday, July 25, 2018 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

* 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

* Brett Logan Linzey

Vertical Research Partners, LLC - VP

* Deane Michael Dray

RBC Capital Markets, LLC, Research Division - Analyst

* Joseph Craig Giordano

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

* Nathan Hardie Jones

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

* Robert Scott Graham

BMO Capital Markets Equity Research - Analyst

* Steven Eric Winoker

UBS Investment Bank, Research Division - MD & Industrials Analyst

* Walter Scott Liptak

Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to IDEX Corporation's Second Quarter 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I'd now like to turn the conference over to Bill Grogan. Thank you, please go ahead.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [2]

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Thank you, Brenda. Good morning, everyone. This is Bill Grogan, Chief Financial Officer for IDEX Corporation. I'm stepping in for Mike Yates this quarter. I'll cover the introduction.

Let me start by saying thank you for joining us for our discussion on 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, 2018. And later today, we will file our 10-Q for the same period. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com.

Joining me today is Andy Silvernail, our Chairman and CEO. The format of our call today is as follows. We will begin with Andy providing an overview and update on the market conditions, geographies and our capital deployment strategies. He will then discuss our second quarter financial results and walk you through the operating performance within each of our segments. And finally, we will wrap up with our outlook for the third quarter and full year 2018. Following our 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 13675420 or simply log on to our company 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 today's press release and in IDEX's filings with the Securities and Exchange Commission.

With that, I'll now turn over the call to our Chairman and CEO, Andy Silvernail.

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

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Thank you, Bill. Good morning, everybody. I appreciate you joining us to discuss our second quarter results. Let me start with a brief overview. Look, we had another outstanding quarter. As a matter of fact, I would say in my 7 years as CEO, it's the strongest overall quarter we've had and resulted in a very strong first half of the year. Just about every market that we have has shown solid growth and the economy remains strong despite what we're seeing with global trade. I'll provide more details on market conditions and geographies in a minute.

Strong execution and continued healthy market conditions drove another record quarter for IDEX. After achieving all-time highs in orders, sales, operating income and EPS in the first quarter, we topped that this quarter and once again hit all-time highs in each of these categories. I'm very pleased with our record second quarter and our first half operating results. I'll go into more detail shortly, but let me give just a quick overview with some highlights here.

Orders were up 9% overall, 8% organically. Sales were up 11%, up 9% organically. Adjusted operating margin was up 180 basis points to 23.6%. Adjusted EPS was $1.40, up $0.32 or 30%. And free cash flow was $110 million, up 40%. Of all the positive numbers in the quarterly results, I'm most proud of the team's sustained outperformance on organic growth. The high single digit growth rates for both orders and sales driven by solid growth across all 3 segments is truly outstanding. Overall, we delivered terrific operating performance.

Before I go through more specific details on financial results, let me add that I'm excited that we just announced the acquisition of Finger Lakes Instrumentation, which will fill a strategic gap and a nice complement in our IDEX Health & Science portfolio. I'm also thrilled with the asset purchase of Phantom Controls that we made in June. These acquisitions will be a nice add to our portfolio.

Finally, we continue to live the IDEX difference daily. Great teams embracing 80-20 are driven by customer obsession. It's nice to watch the culture of the company embrace our initiatives and then show up in our financial results.

Now let me take a minute to talk about the markets that we play in and the regions we serve. In industrial, industrial production, the momentum continues. Day rates for our book-and-build business remain at high levels, and we see increased project activity converting to orders.

In Scientific Fluidics & Optics, demand within life sciences remains positive, and we continue to have a really, really nice performance overall.

Energy, we've had a rebound in this market. Midstream oil and gas has picked up and upstream remains strong.

In semicon, the global markets have remained strong really all year, and we look forward to that strength continuing.

In agriculture, the markets continued to perform and the OEMs have affirmed the outlook for the balance of the year. We do have some concerns here relative to trade, but we'll have to monitor that going forward.

In the municipal markets, the market remains strong. New product development in water has been a really nice benefit for us and emerging markets have done well.

Now let's look at the geographies. Overall, things are going well for us in North America. Europe continues to be solid. And in Asia, in both China and India, we see things going very well. In summary, what we saw and began to experience in 2017 has accelerated in 2018. Thank you.

One thing I'd like to talk about for a minute is what we're seeing with tariffs. Based on the enacted tariffs, our best estimate is that we're going to see $4 million to $6 million of impact in 2018. We continue to look at all of our options, including pricing and alternative sourcing strategies. And we've done a really nice job of overall balancing the overall margin impact to the business.

Let me take a second and talk about inflation. We are starting to see the higher impact from inflation. And we've been very successful in mitigating the uptick through productivity and price realization. With that said, inflation remains a concern and the team is doing very, very well and a very, very good job of monitoring this and the impact of it on a go-forward basis.

Let's turn to capital deployment. I'd like to take a minute to recap our capital deployment strategy. As always, organic growth remains our #1 focus and the team is dedicated to overall targeted organic growth and new product development initiatives. This is evidenced by our outstanding organic order and revenue performance. With M&A, it remains a priority for us, and we continue to evaluate a lot of opportunities. We're going to remain disciplined and focused on delivering the best possible returns to our shareholders. Our balance sheet is strong. And when the right deals come along, we'll capitalize on it.

Speaking of the right deals, I'm excited to welcome both Phantom Controls and Finger Lakes to the family. The assets of Phantom Controls will mesh nicely with our current fire suppression business and help accelerate our water-flow strategy. And on Monday, we expanded our Health & Science portfolio by adding Finger Lakes Instrumentation. This will be a nice add to our overall fluidics and optical business. We'll work to quickly integrate both of these acquisitions and bring them into the family in short order.

In terms of share repurchases, during the quarter, we deployed approximately $20 million to repurchase 147,000 shares of stock. We remain committed to our strategy, repurchasing shares when it will create long-term shareholder value.

In the second quarter, the board approved a $0.06 increase in our quarterly dividend, which equated to a 16% increase. This resulted in a $33 million dividend payout to our shareholders in the quarter.

All right. Let me turn now to our results here in the second quarter. I'm on Slide 4. Q2 orders of $639 million were up 9% overall and 8% organically. Again, strong order growth from all 3 segments. The strength in the first half orders provides us with confidence for the second half. Q2 revenue of $634 million was up 11% overall and 9% organically driven by positive results in all 3 segments. FMT was up 10%. HST was up 8%. And FSD was also up 8%. We built $5 million of backlog in the quarter on top of the $20 million that we built in the first quarter.

We expanded Q2 gross margins by 50 basis points to 45.3%, primarily due to production efficiencies and volume leverage, partially offset by investments in engineering.

Q2 operating income was $149.8 million, adjusted for approximately $2 million of restructuring expenses. That was up 20% compared to the prior period. Q2 operating margin, adjusted for the $2 million of restructuring, was 23.6%, up 180 basis points year-over-year. Similar to the first quarter, the majority of the restructuring expenses were within HST and are associated with our investment in the new Optics Center of Excellence in Rochester, New York. Consolidated operating margin was also impacted by higher corporate cost, which is mainly due to $2.2 million stamp duty in Switzerland associated with the restructuring of an intercompany loan.

Q2 net income was $107 million, resulting in EPS of $1.38. Excluding the restructuring expenses, EPS was $1.40, an increase of $0.32 or 30% over last year.

Our Q2 effective tax rate was 21.7%, which is lower than the 26.1% in the prior period. This is mainly due to the enactment of the 2017 tax reform at the end of last year. The 21.7% second quarter ETR was 80 basis points favorable to our previously guided amount. This is driven by a continuous effort to modify our tax strategies into the tax reform. The positive EPS impact of our lower ETR versus our guide was basically offset by the stamp tax I mentioned earlier. Overall, we had a $0.09 operational beat versus the midpoint of our guide.

Free cash flow was $110 million, 101% of adjusted net income and up over 40% from last year. And finally, flow through is another great story, over 40% to sales.

With regards to our balance sheet, it's very healthy. We have gross debt of 1.4x, net debt of 0.6x and well over $1 billion in capital to deploy.

Let me now turn to the segment discussion. I'm on Slide 5 starting with Fluid & Metering. FMT continues to put up strong numbers, both from an order and revenue perspective. Q2 orders were up 6% overall, 7% organically. Q2 sales were up 10% overall and organically. Op margin, adjusted for restructuring, was 29.5%, up 240 basis points over the prior year, mainly due to volume leverage and productivity. The ag business, as I mentioned, continues to be strong, and we are watching out for the impact of tariffs.

In industrial fluids, the pump business is very impressive. It had record orders and sales. The U.S. distribution market is solid and day rates for book and ship continue to improve. Increased oil prices are driving continued strength in oil and gas as well as the business for our LACT.

Valves, our targeted growth initiatives in Europe and China have performed well in the quarter. And in water, we're well positioned driven by new products. In energy, new product development is progressing and expected to provide future opportunities and the project funnel is solid for the back half of the year.

Let's move on to Health & Science. I'm on Slide 6. I'm very pleased with Health & Science results in the quarter. Q2 revenues were up 11% overall, up 8% organically. Orders were up 5% overall, but only 2% organically. HST had a tough comp due to some very large project wins last year in MPT. Just to remember, HST orders last year were up 11%. Excluding restructuring expenses, adjusted operating margin was 23.6%, an increase of 100 basis points in the quarter, mainly due to higher volume and productivity. As I stated on our last call, 23% to 24% operating margin is much closer to what I expect the segment to be performing, and I'd like to commend the team once again for the improved performance.

In life science and optics, the IVD, BIO end markets continue to overperform. The recent acquisition of Finger Lakes Instrumentation will continue our expansion within this market. We're encouraged to add these technologies that Finger Lakes will bring and excited to bring them into our fluidics, microfluidics and optical illumination and detection business.

In Sealing Solutions, the semicon market remains very robust on a global basis. Transportation and oil and gas are also doing well. In MPT, the funnel activity remains positive, but if you recall, we do have a pretty tough comp here in the third quarter in MPT. In HST industrial, demand remains overall very strong.

I'm now moving on to our final segment, Diversified. I'm on Slide 7. Q2 orders were up 21% overall, 18% organically. As mentioned, we did have an easy comp as we had a large project last year pushed to the second half. But even if we exclude that, orders would have been up double digits for the quarter. Revenues were up 11% overall, 8% organically. Excluding restructuring expense, adjusted operating margin of 28.1% increased 300 basis points. This is mainly attributable to significant volume upside along with productivity.

In dispensing, North American and European markets remain strong and steady with increased orders and project activity. Emerging markets remain strong from robust market growth and new product development penetration.

In Fire & Safety, rescue is positive across the globe, and we've seen project activity pick up in India, China and the Middle East. In our fire OEM, the muni business is steady.

As I mentioned earlier, we're very excited to incorporate the recently purchased assets of Phantom Controls. And finally, margins continue to improve at both Akron Brass and AWG. They're ahead of expectations.

At Band-It, last but not least, we've experienced double-digit organic order and revenue growth driven by share gains and overall strong demand across the globe.

Let me now conclude with some additional details to our 2018 guidance for the quarter and for the year. I'm on Slide 8.

In Q3, we're estimating EPS in the range of $1.29 to $1.32, with organic revenue growth in the range of 6% to 7% and operating margin of 23%. The Q3 effective tax rate is expected to be approximately 22.5%, with an estimated less than 1% top line headwind from FX based on the June 30 rates. Corporate costs are expected to be approximately $20 million.

And turning to the full year, we've increased our full year EPS guidance to the range of $5.27 to $5.35. Full year organic revenue growth is expected to be approximately 7%, so a nice increase in organic revenue guidance as well. If you remember, we guided before at 5% to 6%.

Full year operating margin is expected to be in the range of 22.5% to 23%. For FX, it's going to be a 1% tailwind for the year based on the June 30 rates, but we will have headwind in the back half. It's worth about $0.06 to us. The full year effective tax rate is going to be about 23%, but we'll see what happens here with tax reform.

Capital expenditures are anticipated to be around $45 million. Free cash flow will remain strong at 110% of net income. And corporate costs should be in the range of $76 million to $80 million. That's up a little more than $2 million from the stamp tax that I mentioned before. Finally, our earnings guidance excludes any associated cost of future acquisitions or restructuring.

With that, Brenda, let me turn it over to any questions people have.

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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 Steven Winoker with UBS.

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Steven Eric Winoker, UBS Investment Bank, Research Division - MD & Industrials Analyst [2]

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Great to see this level of growth. And I agree, it's impressive. I would love to get a sense on that FSDP organic 18% increase on the order side. To what extent are these kind of onetime, lumpy orders, pull forward, anything else? Should we be expecting this to fall back to company mean rest of the year? I mean, I think you're up against high single comps. It wasn't easy there so.

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

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Yes. So overall, even if you take out some of the larger orders that we saw, you're looking at a double-digit order increase. We did have some project orders that will ship in the back half of the year and even into the first part of next year, but the activity was very, very strong. I would not expect it to remain in the double-digit territory. That's too ambitious. But overall, strength is pretty good. And it's in every one of the businesses. It's not in a singular business.

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Steven Eric Winoker, UBS Investment Bank, Research Division - MD & Industrials Analyst [4]

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All right. And your forward guidance implies, I think, fourth quarter at least some deceleration. Again, you got, I think, 9% comp last year. Is that all it is? Is there something more to it? Is tariffs playing into your thinking here?

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

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No, no. The tariffs, as we mentioned, is going to have some impact and certainly into the cost structure of the business, we think about $4 million to $6 million. We haven't factored in a slowdown for overall global growth. We just have much tougher comps as we go forward. As I mentioned, last quarter, we really started to see the acceleration at the back half of last year. And I don't think we're going to decelerate sequentially, but at the same time, those comps just get tougher.

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Steven Eric Winoker, UBS Investment Bank, Research Division - MD & Industrials Analyst [6]

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Okay. And then just one more, if I could. These acquisitions you mentioned, the most recent ones sound pretty interesting. Are the return on invested capital plan going forward changing significantly? I mean, how should we think about the financial side of them? And any kind of call out in the strategic front would be helpful.

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

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The size is relatively immaterial today. Both of them are really technology plays when you get right down to it. Phantom really helps us overall with the integration of being able to bring together all of the most valuable components on a fire truck. It optimizes productivity for firefighters and safety. And the real benefit for us in Phantom is going to be pull-through revenue from our other parts of the business over time. It's a really neat set of technologies. It's very, very well protected with intellectual property. So we're very positive on that. Finger Lakes, that we just announced, it's fundamentally a camera technology. It allows us to integrate that into our optical systems. Right now, we're having to buy off-the-shelf componentry, which as things get smaller and more efficient gets more difficult to do. You really need to be able to integrate that yourself. And so it's a technology purchase that is right down the road from our current business in Rochester and will go nicely into our center of excellence.

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Operator [8]

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

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [9]

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Maybe we can start on price/cost in the quarter and then kind of separate both. So for pricing, how much did pricing contribute? What's the plan on price increases? And then the other side, lots of material cost inflation, labor, how are you seeing that? And then the offsetting of tariffs?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [10]

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Yes. So first on the pricing side, we got a little more than 1% in the quarter, which is a nice uptick from where we've been. And that's really just our sustained strategies around being out in front of what we saw, even last year at this time is a pickup in inflation. So we've been more aggressive there generally. And obviously, the environment makes it easier to have those conversations with integrity with customers. The inflation side has also picked up. We've kept our spread. We said we've historically shot to have somewhere between a 20 to 30-point spread on price versus inflation and we've kept that. And so we are seeing inflation pick up. And it's really everywhere. It's materials. It's labor. It's universal. And we expect that to continue. And obviously, tariffs don't help that situation.

We're having those conversations with our customers. We're trying to again be ahead of everything. What you don't want to be is the 20th person in line having that conversation about how tariffs have impacted the business. I think that the threat, and I've been talking about my concerns about inflation for a while, the threat is that in the short term, the tariffs cause -- are really kind of gasoline on the inflation fire. In the long term, it's the flip side, it actually causes a deceleration in growth. But in the short term, we could see that impact. And we're balancing that with a combination of actual price increases and then in some cases, what I would call, surcharges, where that will roll back off if tariffs roll back off. And those are broken down about 50-50.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [11]

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Good. That's real helpful. And then maybe just on the pricing side. We've heard some descriptions from CEOs about pricing effectiveness. And what is that dialogue? Because you are at the higher end of the component technology and you've got more pricing power. So when you put pricing through, are you getting pushback? Are you getting all the price? Just some color there would be helpful.

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

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You never get all of it. I think realization is probably somewhere in the 50% range over time of what you go to the market with and what effectively sticks. And it's easier to have those discussions in distribution than it is with -- obviously, if you have long-term OEM contracts, that's a much more difficult conversation to have. And so we'll typically get more price if we were looking at FMT and Diversified, and we'll get less price overall in HST.

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Deane Michael Dray, RBC Capital Markets, LLC, Research Division - Analyst [13]

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Got it. And just last question on the outlook and kind of a follow-on to Steve's question is, when you look at your kind of key barometers, and we've talked about this before, whether it's gas and Band-It and Warren Rupp, just maybe just take those kind of leading indicator businesses and what do they tell you about the pace of short cycle industrial demand and how long this demand growth is sustained?

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

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They're very positive. If you look at our industrial businesses, our industrial fluid businesses, they are the strongest of our businesses overall. So they're signaling very positive things. We don't have any signs that, that necessarily is going to slow. I am obviously very hesitant with what the overall trade discussion means to the global economy. And look, if things start to slip, they'll show up fast in those businesses. Gas, Warren Rupp, in particular, Band-It, industrial, you'll see that relatively quickly if the global economy starts to slow.

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Operator [15]

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And 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 [16]

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Can you just talk to, I guess, capacity, both from the supplier side and your side. With growth at this level, any concerns that your suppliers won't be able to keep up, that you're going to have to adjust for, that you've been adjusting for?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [17]

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Yes. It's real, Allison. So let me talk about it from our perspective first. From our perspective, we really don't have a lot of physical constraints. If you look at buildings, machinery, you don't have a ton. We are definitely increasing our overall automation or semi-automation. We're doing that mostly through machining centers. And so we're not really constrained in that way. The biggest constraint for us and for everybody is people, highly skilled people. And that's going to continue and that's going to get more difficult as time goes on. And I do think that, that's what's going to drive across the globe more investment in automation and semi-automation.

In terms of our supply chain, we absolutely are seeing issues and we have been for some time. But if you look at lead times, they have extended. As we talked about last quarter, we built some inventory last quarter because we had seen lead times extend and we were trying to protect our customers. I think we've generally done a pretty good job with that, but there's really no way to avoid it in this environment. And that's why I think we're starting to see the capital cycle play out the way it is because you are seeing some constraints in global supply chain.

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Allison Ann Marie Poliniak-Cusic, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [18]

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That's great. And then I just want to touch on the full year margin outlook. You're still keeping to that low end of the range. Is there something mix-related that we should be thinking about in the back half that could bring that number down a little bit from what you did in Q2?

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

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No. I mean, when you look at our first quarter margin rate and second quarter, the average there is a little bit over 22.5%. So no major mix concerns. I think we will probably be closer to the top of that range, but want to give ourselves a little bit of spread depending where things go in the back half.

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Operator [20]

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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 [21]

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I guess, Andy, you guys have always been a prepare for the worst and hope for the best kind of company in the way you run the businesses over there. With growth coming in pretty significantly higher than you planned at the start of the year, are you seeing any need to add kind of back office support functions, G&A kind of functions, corporate expense kind of functions, back into the business to support this higher level of growth? And then maybe how you're thinking about that with your opinion that maybe tariffs slow down global growth, maybe the growth doesn't stay as high as it has been that long?

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

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So we have very cautiously added, what I would call, overhead to the business. If you look at our overall headcount across the globe, it's only modestly changed in the last couple of years. And so, we've gotten a lot of productivity there. Where we're going to add people and where we have added people are at the businesses. There's really no need to add a bunch of people at corporate. As you know, it's a pretty small group. Anyway, it's pretty much IT, finance and HR. Otherwise, everything is at the businesses. And so that's where we're going to focus our investment. I don't really see a big need for that to change.

The one thing that I talk to a lot with people about is, unlike 5 years ago or 10 years ago where there was a lot of fat to trim in the downturn, that doesn't exist today. And so in the next downturn, which will come, I think us and everybody else are going to have to be very, very smart about how we deal with that and in terms of people in particular, right? So the people shortage that exists across the globe of really of skilled folks is going to get exacerbated here. It's not going to get better. And so when you think about a downturn, you're going to approach it differently than you've approached it in the past. And you're going to do everything you can to actually be ahead of the curve and make sure that you don't hurt your great people.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [23]

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Fair enough. And then I know you guys have largely or pretty much exclusively funded all of the internal growth opportunities that warrant funding. You've got higher growth here. You've got more income here. Are there other projects that you can go a little further down the list for that potentially don't have as good returns, but still good returns that you would look at funding? Do you have enough bandwidth, enough people power to continue to do that?

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

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I've said this many times, I feel confident that we're funding the things that are in front of us that makes sense. If there's any limitation, again, it's people, right? I don't think that's a big limitation for us, but that's the biggest thing across any of our businesses is great people make a huge difference. And that's why we spend so much time on it as a corporation.

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Nathan Hardie Jones, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [25]

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Maybe just one more following up on Allison on the supply chain. You're talking about seeing lead times stretch out higher in the supply chain. Are you starting to see suppliers look to cash in on that and raise prices contributing to inflation? Is that something that you're expecting to see, expecting it to get worse, any color you've got there?

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

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We've absolutely seen it. We work it constantly, both in mitigating with our supply base and diversifying across suppliers and passing on price where we need to. It's there, right? So if you went back 2 years ago, pricing into our supply chain was effectively 0, right? It was nothing and we were getting positive productivity. Today, we're in the 0.8 point range that we're starting to see. And so that's a meaningful uptick across our businesses. And at this stage where we're seeing demand continue to be strong, there's no reason that's going to change unless our leadership shoots us all in the foot here.

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Operator [27]

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And our next question comes from the line of Brett Linzey with Vertical Research.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [28]

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Just want to come back to FMT margins. I mean, really continue to impress here with further expansion in Q2. I guess with H1 and H2 sales relatively balanced, I mean, is there anything in the back half in terms of mix or stepped up investment that would suggest or point to profit margins stepping down sequentially, H1 versus H2? And then I guess, what's the expectation for that segment for the full year?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [29]

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Well, I would say that within FMT, there's some seasonality where sequentially, the revenue will go down a little bit here in the back half. An example, Banjo seasonality, they're more first half-related. And they're one of our highest-margin businesses. So it's not a huge impact, but you probably see the margins not be as robust as they were in the second quarter, but still within that mid- to upper 28% range.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [30]

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Yes. I mean, just across the board, one of the major drivers of profitability for us has been the strength of a handful of industrial businesses that have superior contribution margins to the rest of the company and have pricing power. And so we're very mindful about that. And so as you look at sequential changes, that flow through is big, positive or negative. And so you certainly have to watch that quarter-to-quarter.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [31]

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Okay. And then in the release, I mean, you talked about the M&A pipeline being active. I guess how would you delineate between what's actionable at current valuations and returns versus relationships that are just being cultivated? Do you see anything breaking free here in the near term?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [32]

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We've been awfully close on some things. Just recently, we walked away from almost $0.5 billion deal. And we walked away on price. We kind of got down to the last couple of players and we walked away just with the discipline that we brought to bear. So it certainly isn't a lack of opportunity. It isn't a lack of effort. It really is the pricing environment. And so we've been very disciplined. We'll continue to be disciplined. The stuff we're cultivating, that really doesn't change quarter-to-quarter, year-to-year. That kind of magnitude looks the same. It really is what's driven by what's coming to market. And we've seen a lot of activity this year come to market. And we expect that to continue with these elevated valuations.

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Brett Logan Linzey, Vertical Research Partners, LLC - VP [33]

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Okay. And just maybe one more on new product vitality. You guys have taken share here for a couple of years out of orders and sales. What percent of sales are from new products over the last 3 years today? And I guess what's the right number as you guys climb the technology curve in many of these businesses, where does that target need to be?

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

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Brett, we stopped measuring new product vitality some time ago. And the reason for that is, what I found is it tends not to be a real number. It's not something that's easily auditable. And it also creates a lot of bad incentives for people to rename things, to increase complexity and stuff like that. So we tend not to do that. The other thing is and really the beauty of IDEX is, we tend to have very, very long product life cycles, things that last decades and have incredible durability. And so we don't want to kind of shoot ourselves by accelerating change that doesn't need to be changed. That being said, we are really aggressive around new product development. And if you look at the growth that we're having, the 9% organic growth, about half of that is the market and about half of it, we're driving. And I would argue that most of that is coming from new product development.

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Operator [35]

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

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [36]

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So most of my stuff has been asked already, but Andy, I just wanted -- you're a pretty conservative guy. And you generally, like the last -- God knows how long now, you guys come in above the high end of what you're guiding pretty consistently. But this quarter, the magnitude of that was even more than it has been. And what were the couple of things that -- you obviously are not trying to get like top ticket with your guidance, but what were the couple of things that like, wow, this is a lot better than what we kind of thought?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [37]

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So you come into the quarter with about 50% of the quarter booked. And I don't know, Bill, was that changed by a couple of points here and there?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [38]

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Yes, most, yes.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [39]

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It doesn't change by a lot. So what happens in the quarter is you get more book-and-turn business. And that really happened. And it happened across the business. It wasn't 1 or 2 businesses that drove it. It really was across the portfolio. And so the overall economy, my expectation was that you are not going to see a sequential acceleration in the second quarter. I thought that, that would start to modulate. And we did see it. And so that did surprise us a little bit. So a stronger book-and-turn business, strength sequentially that we hadn't really expected. And I do think that, that does slow down, right? We've now had, what, 6 or 7 quarters of sequential acceleration?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [40]

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Yes, 6.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [41]

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Yes. So that's going to slow down. There's no doubt about it. And I think we were probably a quarter too early in making that call.

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William K. Grogan, IDEX Corporation - CFO & Senior VP [42]

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Yes. I mean, the stat we look at internally, 60% of our businesses were up double digits. So that's pretty broad-based across the 3 external segments to have that magnitude of growth across the portfolio.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [43]

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So would you say like -- it's fair to say that you're not extrapolating that kind of acceleration into your updated guidance then?

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

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The third quarter's going to be stronger than we thought before, but we don't see it accelerating from the second quarter like we saw the second quarter accelerate from the first. Seasonally, that tends to be a weaker quarter for us anyway. And I just don't think that the growth is going to accelerate. I don't suspect it's going to get weaker unless, again, it's driven by some of the overall trade issues and whatnot. But I still think it's going to be pretty robust.

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

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So relative to our last guide, we're more confident in the back half and what the growth numbers are going to be.

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Joseph Craig Giordano, Cowen and Company, LLC, Research Division - MD and Senior Analyst [46]

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Okay. The last for me, just on the Diversified segment on the margin. I mean, that segment is still hard to model just given the size of orders. Like what should we be thinking about for the second half there?

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William K. Grogan, IDEX Corporation - CFO & Senior VP [47]

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I think 26% to 27%. I mean, it's -- at the current growth rate, it's been able to lever extremely well. And with the 2 acquisitions that Andy mentioned earlier, the progress we've made on the integration front, they've well surpassed our expectations. So they're going to get much more close to where they were pre-deal.

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Operator [48]

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And our next question comes from the line of Scott Graham with BMO.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [49]

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You're getting some interesting questions here, kind of like I'm going to ask a similar one on kind of how you guys are doing it. The organic continues to shine through and somehow even got better. So I guess my simple question is from my simple mind is, are you willing to maybe share a little of that secret sauce here, Andy? Can you tell us where the sales opportunities are most prevalent and which ones you're funding maybe by segment? Can you maybe get a little bit more specific on how you're doing this market share, this land grab so consistently, maybe you can give us a little bit more detail, if possible.

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [50]

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I'll give you a relatively boring answer. If you actually look back, this is kind of 3 years in the making, if I go back. We got really aggressive. Go back to 2014, 2015, we got very, very aggressive about segmenting our businesses. And so as you think about what we've done with using the 80-20 principles around segmenting our businesses, segmenting our markets and really deeply understanding where the profit pools were, where we had advantage, where we didn't have advantage and really aggressively moving resources around the company.

I have mentioned earlier that we haven't seen a big change in headcount here in quite some time. And the reason for that is because we, over 3 or 4 years, we have really aggressively moved people and investment to the areas within businesses. And I'm talking about segmenting to the product level where you're moving people and resources to where we have distinctive advantage. And so I'll give a great example of that. If you look at our dispensing business, if you went back 6, 7 years ago, we had real question marks about that business, about the viability of that business and whether or not it should be in the portfolio.

And if you look what Eric Ashleman and the team have done. Eric is our Chief Operating Officer. We have fundamentally refreshed that entire product line. We exited a handful of product lines really aggressively. We entered a previously nonexistent market segment with the X-Smart. And again, as I said, have refreshed the entire product category. And dispensing has turned into just an outstanding business for us.

That same example can be used across IDEX. You can go business by business. We opted to sell 6 businesses. As you know, we had been reticent to sell anything in the past. And we got out of businesses that we didn't think we had an advantage with. We exited 4, Bill, I want to say, 3, 4 years in a row about 1 point of organic growth each year. That didn't really show up in the numbers per se because we didn't talk about it a ton. But you're talking about over a period of time more than $100 million. Actually, probably more like $150 million if you include what we got out of optics that we exited. And we exited businesses where we didn't have an advantage, a distinct advantage. And so it's a relatively boring answer. It's a lot of very scrappy, in-the-dirt work. And in our business, things move relatively slowly. And I think what you're seeing now is you're seeing that hard work pay itself off.

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Robert Scott Graham, BMO Capital Markets Equity Research - Analyst [51]

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Okay. That was comprehensive. Would it be possible for me to ask you sort of if you gave us a dispensing example, can you give us an example maybe in pumps?

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Andrew K. Silvernail, IDEX Corporation - Chairman, CEO & President [52]

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Oh, sure. Viking is a great example. The Viking business has always been a flagship business for us. And what I would say is, we had a distinctive culture where we said yes to everything. So you had unbelievable modifications that we were doing in that plant. We had lead times that were ridiculous. We really relied on the Viking brand. Our volumes were modestly growing at best for 5, 6, 7 years. And that exact playbook that I walked you through a moment ago in the last 3 years at Viking, we've done the exact same thing.

And even if you take away the incredible strength in the markets that they're in, Viking is doubling their market growth rates right now. The LACT business has been outstanding. We've entered multiple segments of that market with technologies that have a really distinctive advantage versus the competition. Our overall lead times, we've cut them in half in 3 years. And so our ability to be incredibly aggressive in the marketplace on service is unique. And when you're in an environment like this, lead times really matter. And so we've been able to do those sorts of things at Viking.

So you could go across the business. We can give you examples of that in HST. I gave you examples of that in gas. You can do it business by business. And that's the key, right? There's no IDEX magic here, right? Except to say, we have done this across our portfolio of 40 businesses. And we've made really tough capital and people allocation decisions around where we have distinctive advantage.

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Operator [53]

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And our next question comes from the line of Walter Liptak with Seaport Global.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [54]

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I wanted to ask just a clarification on a data point when we were talking about market share versus market growth. I thought I heard you say that you attribute half the growth to market share, the other half to the market. Is that right?

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

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Yes. I would use -- market share is not exactly the right term because in some places we're literally entering businesses that we haven't been in. So you could call it share. But it's half market growth and it's half new business that we are winning distinctively.

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [56]

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Okay. All right. Got it. And realizing that a lot of your business is quick turn and there's low visibility. There is some project work. I wonder if you'd talk a little bit about what you're seeing from projects. Is there a funnel that's building, maybe pricing? And then specifically, I think you called out the LPG truck build. Where are we in that cycle? Is this something that -- why and how long does that go?

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

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Yes. Walt, let me make sure I got those. You had a question on project work generally, pricing and then LPG, so want to make sure I get all 3 of those. On project work, yes, it's picked up. As you know, we don't tend to have a lot of really large projects. They tend to be in the couple hundred thousand to $5 million range generally. And if you went back 18, 24 months, what you would have heard us say is that, we were really kind of living on book-and-turn business. And we started to see project work come back 18 months, 24 month ago, and that has continued to improve. So that has absolutely been the big change here. If you look over the last couple of years where project work has come back, we've certainly seen that. In terms of pricing, Walt, I'm not exactly sure what your angle was on pricing. Can you clarify that for me? What was the question?

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Walter Scott Liptak, Seaport Global Securities LLC, Research Division - MD & Senior Industrials Analyst [58]

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Just sometimes the longer project work goes out to bid and there's multiple rounds of bidding to try and get the price down.

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

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Okay. That certainly is the case. We tend to be a really small part of these projects. And so we don't tend to see a lot of price pressure in there. That's not something that would be particularly mentionable here. So I would say, no, it's not been a particularly big deal. And the overall pricing environment for anything right now is much more favorable than it's been in a long time.

And then finally on LPG, yes, the truck builds have improved. Where are we in the cycle? I think we're actually still early to mid-stage in that. That really just picked up this year, if you look at it. Now truck builds overall, as you know, are astronomical. I think the U.S. is at 430,000 Class 8 trucks, if I remember right. It's a big number. And obviously, we're not as tied to that. But overall, that industry is seeing major expansion. But I would say, we're still early to mid in the LPG truck build.

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Operator [60]

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Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any closing comments.

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

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Well, first, just thank you for following IDEX and the work that you do here with us. Most importantly, I really want to thank our teams. The operating teams in the business led by Eric Ashleman have just been outstanding. The results that we get is due to them. And I'm very, very appreciative of what they bring to the table each and every day. So again, appreciate your time and look forward to talking to you here in 90 days. Take care.

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Operator [62]

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This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.