Idex Corporation (IEX) — Q2 2015 Earnings Call Transcript

Great. Thank you, Shaye. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our 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 three-month period ending June 30, 2015. 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 Heath Mitts, our Chief Financial Officer. The format for our call today is as follows: we will begin with Andy providing an overview of the second quarter financial results, and then he will provide an update on what we're seeing in the world and discuss our capital deployment. He will then walk you through our operating performance within each of our segments. And finally, we will wrap up with an outlook for the third quarter and the full year 2015. Following our prepared remarks, we'll then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering the conference ID number 13598713, or you may simply log on to our company's homepage for the webcast replay. Before we begin, just 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 turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks, Mike. Good morning, everybody, and I appreciate you being here for our second quarter call. As we sit and look at the global economy and really, the end markets, that's the story for 2015. It has been the story, and it will be the story for the balance of the year. When we closed the first quarter, we talked a lot about what was going on with the strength of the dollar, the decline in oil and gas, and some challenging overall conditions. And in the second quarter, that certainly continued. Agriculture has weighed on our overall results along with oil and gas. And in the early part of the second quarter, we saw some slowing in the North American industrial side, specifically in distribution. But on the other hand, we had pretty strong results coming out of Scientific Fluidics and our Sealing businesses within Health & Science. So, the markets and the regions are what I would call a mixed bag right now, but our teams are executing very well. We had really nice performance in operating margins, EPS, and cash flow. Additionally, we closed three acquisitions in the last 60 days and retired some European debt that had matured in June. So for the second quarter, we had EPS of $0.89. It was $0.01 over last year. Cash flow was strong at $86 million or 124% of net income. Operating margin was an impressive 21.3%, up 80 basis points from last year. Organic sales and operating margins in HST were up 4% and 280 basis points, respectively. Very nice job by the teams. We also had a 170-basis point increase in Fire & Safety/Diversified in the operating margin, and we closed acquisitions of Novotema, Alfa Valvole, and CiDRA for just about $200 million. Finally, as I mentioned, we did retire €81 million of European private placement debt that had matured in June. The way I'd sum it up is a tough overall market with outstanding execution by our teams in controlling our own destiny. As we look at the rest of this year and into the second half of 2015, I think we will see more of the same. We've made the decision to continue to simplify our operating structure, and we are going to do some restructuring here in the back half of the year. We'll spend around $8 million or so, and that payback will generally be less than a year. So we should have a nice benefit from that as we exit this year and enter into 2016. I would say we have had a little bit of momentum here, positive momentum in the back part of June and in the early part of July. The industrial businesses that had slowed down saw a tick-up in the back half of June and the first couple of weeks of July. So overall, I am confident that we can deliver in the back half for our customers and certainly for you, our shareholders. We are going to hold our EPS guidance at $3.50 to $3.60 for the year. In a few minutes, I'll talk about the results and our expectations for the year, but I want to take a moment and just talk about the appointment of Eric Ashleman to Chief Operating Officer, which we announced last week. This is an important inflection point for IDEX. For the past four years, we have invested heavily in the foundational elements of the company: the vision, strategy, capital deployment philosophy, culture, teams, and importantly, the IDEX operating model. This is the right thing to do and the right time to do it. We have driven outstanding performance for our shareholders, built our internal capabilities, and established a sturdy foundation for accelerated growth. Eric and I have worked together closely since I joined the business in January 2009. He has been an outstanding executive, delivered great performance, built strong teams, and has led virtually all of our organic initiatives, including our efforts around diversity and inclusion. He will do a great job continuing to strengthen the foundation of IDEX and drive overall performance. Importantly, Eric's promotion allows me to invest more time in the key areas of growth for the company, whether it's globalization, larger organic investments, or acquisitions. Historically, these elements have been a very important component of the IDEX success story. We have had compound top-line growth of over 11% per year for 27 years as a public company. If we are going to achieve that performance, I need to focus more on the faster pieces of growth for the business, and this organizational change will give me the capacity to do that. I'm excited to work with Eric as a partner on the operating side of the business, and prepare ourselves for the next phase of growth. Congratulations to Eric once again for his appointment. With that, let me pivot and talk about what we're seeing around the world. In North America, energy and agriculture continue to be challenging, and I don't expect any change in 2015. The distribution businesses slowed in the first part of the quarter. The book-and-term business had been relatively soft. As I mentioned, we saw an uptick in the back half of June into July in North America. In Europe, it’s been a good story for us, particularly in Water, Rescue, and Dispensing. We have seen some upside in larger project business on the energy side in Western Europe and a bit in the Middle East, offset by weakness in Eastern Europe and in Russia. China continues to be soft specifically, while the broader Asia-Pacific area has been decent for us. We have seen a slight pick-up in municipal business in China, but we remain cautious due to the general conditions in that region. Now, let's discuss capital deployment, which is a vital piece of our story. We have strategies for capital deployment that include fully funding organic growth, paying a consistent dividend, smart share repurchases, and strategic mergers and acquisitions (M&A). On the organic growth side, even though global markets are a challenge, we plan to invest $45 million in capital spending, which remains at record levels for us. In the second quarter, we distributed a $0.32 per share dividend and repurchased 661,000 shares for about $51 million, leading to a net reduction in our share base for the year by about 2%. On the M&A side, we've put $200 million to work in three acquisitions, which integrate well into different sectors of IDEX, making integration simpler. Novotema is a part of our Sealing Group, Alfa Valvole will nicely fit into FMT, and CiDRA Precision Services is a crucial component of our Scientific Fluidics business and will be a wonderful addition. Our funnel remains solid for M&A as we look into 2016. Now, moving on, orders for the quarter were $505 million, down 8% total and down 4% organically. Revenues were $515 million, down 6%, down 2% organically. Operating margin stands at 21.3%, up 80 basis points. Free cash flow was $86 million, converting at 124% of net income, and EPS was $0.89, up $0.01 from last year. Now let's finish with segment discussions. I'm on Slide four. So, Fluid & Metering closed the quarter with a 3% decrease in organic orders and a 2% decrease in organic sales. End-market conditions remained largely unchanged from last quarter. We saw some slippage in the industrial side, but there has been some pickup in the latter part of June into July around distribution. The Water services segment performed well, benefiting from solid demand in the U.S. and the UK with municipal spending on the rise. Energy, as I've mentioned, continues to see a slowdown, particularly in our mobile area around trucks. However, we did experience strength in Western Europe and the Middle East in this sector, but we foresee challenges moving forward. Ag has its own trials due to down farm incomes. Although this remains a strong business for us long term, we know we will encounter difficulties well into 2016. Now, moving to Health & Science. Organic orders were down 4%, while organic sales were up 4%. Our margin performance was excellent, up 280 basis points with average product mix results and productivity gains. Scientific Fluidics is performing exceptionally well with strong demand across Analytical Instrumentation and in vitro diagnostics. The Sealing business was robust in the U.S. and Europe due to semiconductor market performance, though slightly offset by oil and gas and heavy equipment challenges. The Optics & Photonics market has remained stable with strength in life sciences, driving impressive profitability. HST in the industrial segment mirrored trends in Fluid & Metering, facing initial weakness contrasted by improved performance towards the latter part of the quarter. Lastly, Material Process Technologies experienced a good quarter with solid organic sales performance, but we foresee potential challenges ahead in the pipeline of orders. On to our last segment, Diversified. Organic orders were down 7%, while organic sales saw an 11% decrease. The second quarter faced tough comparisons against large projects from last year. However, margins improved by 170 basis points due to remarkable productivity gains and favorable product mix. While we've seen growth in Dispensing globally, challenges have arisen in Eastern Europe due to regional instability. On the flip side, the North American and UK pump business remains strong, and our eDRAULIC products especially performed well in the U.S. On the guidance front for Q3, we expect EPS to range from $0.88 to $0.90, with a tax rate of about 29% to 29.5%. We anticipate around a 5% headwind in foreign exchange. Our full-year guidance remains at $3.50 to $3.60, with expectations of flat organic revenue growth. Finally, our earnings and guidance will not include the future costs associated with acquisitions or restructuring. Thank you for your time.

Good morning, everyone. I’d like to start by getting a better handle on those margins in FSD. I remember last year, as the Dispensing order was going through, we discussed your expectations for margins, noting they can reach 25%. Your comment on mix leads me to believe that might not be the case, yet we’re seeing 28% margins in that segment. How do we explain this effectively?

This was an extraordinary quarter in terms of profitability. The mix certainly helped us. The trailer business from last year was a lower margin business, and with that not being a significant part of this quarter's results, it aided profitability. Fire is a solid contributor and has seen margins improve from low teens to mid-20s this year. In terms of specific products, lower margin products in BAND-IT were softer while higher margin products performed well. So, while I do believe we’ve had a reset to higher margins for FSD, I'd caution against adopting this quarter’s performance as a new standard.

Hi. Good morning, guys. On the slowdown in industrial North America, outside of distribution, have you seen any indications of broader weakness beyond energy? Is it more isolated or impact on CapEx spending seen across the board?

Generally, we noted CapEx coming down against our expectations. The first quarter revealed a slowdown in larger projects. However, the book-and-term business held up well until April and May, which also saw slowdowns. Now, we deem industrial America is somewhat weaker than it was six to twelve months back, due to the impact of oil and gas. However, we think the current levels are what we can expect through the year.

Hey Joe, this is Heath. We did not provide organic growth guidance, but we’re expecting flattish organic growth.

To address your second question about our willingness to consider larger acquisitions now that Eric's in the COO role, we will continue our disciplined approach to M&A. There's no change in our philosophy; we remain open to opportunities but will exercise caution. Eric's promotion does provide me more capacity to focus on strategic growth areas and M&A activities.

Yes. Hi. Good morning. In FMT, how have you managed to stay resilient in energy exposure? Is it attributable to new products, market share growth, or other factors?

It’s three key factors contributing. Firstly, Water has been on a strong upward trend, thanks to solid municipal demand. Secondly, we have launched new and innovative products that have resonated well with the market. Finally, the strategic investment system we adopted over the past several years has also contributed to limited adverse impact amidst market turbulence.

Hi, good morning, everyone. Just following up on the commentary you've made regarding energy—any specific larger projects you expect to continue?

We were positively surprised by some larger skid projects we've seen in the Middle East. While they haven't been massive in scale, they've surfaced amidst a scarcity of projects in that region for the past 18 months. Meanwhile, we expect any potential decline in mobile truck builds will likely occur this upcoming year.

Hi, guys. Good morning. Can you offer insight whether you've begun to see visibility regarding a potential bottom in energy volumes?

We believe we are close to hitting a bottom. Based on our current quarterly reviews, the team is confident that as we enter Q3 and Q4, we may be nearing stabilization in energy volumes.

We’ve recently observed a general uptick in June and July, contrasting with the reports we are seeing elsewhere. Is there anything unique that you feel sets IDEX apart from this trend?

To clarify, our uptick was largely a rebound from a particularly poor May. June was better than April and significantly improved from May, while July matched our expectations. It is essential to understand that May was exceptionally disappointing on our industrial side.

Good morning, guys. Your guidance reflects a flat core growth expectation for the second half. Given first-half performance saw an average decline of around 3%, can you elaborate on where the growth is expected to come from?

The comparisons do get easier in Q4, but we don't anticipate a significant acceleration. Third-quarter growth is expected to be around zero to up 1%, while we expect better performance in Q4, primarily due to easier comparisons. With respect to restructuring actions, they're fairly spread across most businesses, targeting volume-based adjustments due to lower demand. We don't expect the benefits to be realized until 2016. I want to thank you all for joining us today. We appreciate your support as shareholders. In a challenging environment, our teams are executing well, and we are committed to finishing strong this year. Thank you, and we will connect again in three months.