Idex Corporation (IEX) — Q2 2016 Earnings Call Transcript

Thank you, Rob. Good morning everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. 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 three months period ending June 30, 2016. 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 our markets, what we are seeing in the world and discuss our capital deployment. He will then walk you through the operating performance within each of our segments. And finally, we will wrap up with an outlook for the third quarter and the full year 2016. Following our prepared remarks, we will 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 2 hours after the call concludes by dialing the toll free number 877-660-6853 and entering conference ID 13620006, or you may simply log on to the company’s homepage for the webcast replay. As we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today’s press release and in IDEX’s filings with the Securities and Exchange Commission. With that, I will turn the call over to our Chairman and CEO, Andy Silvernail.

Thanks Mike. I appreciate everyone joining us here for our second quarter 2016 discussion. As Mike said, I am going to start off here with just a little bit of an overview before getting to some more detailed commentary. Just as a highlight, as an overview here, we had strong execution, especially from the bottom line perspective here in the second quarter. The second quarter economic picture is still pretty mixed, if you look at the North American industrial markets, especially on a year-over-year basis, that continues to be pretty soft. However, we have started to see some sequential improvement in those markets, specifically within FMT and with HST, which gives us some positive reaction. If you look at our consumer-facing businesses or those things that touch the consumer in one way or another, life sciences, automotive dispensing and if you look at the municipal facing businesses of water, fire and rescue, those all remain pretty solid. The question marks that really exist out there on top of the overall North American industrial environment in the direction that’s going to take is really around China, which continues to be soft, and obviously, the questions around Brexit and how that’s going to impact the overall European economic condition. And as we look at the industrial markets and we think about the impact and the derivative impacts of the oil and gas business how that’s going to play out here for the balance of the year. The bottom line, however, is given continued questionable market conditions I think our team has done a very good job in the second quarter in terms of execution. As I mentioned, we did see some sequential improvement. We saw, throughout the quarter, a ratable increase in business. We had $168 million in April, $177 million in May, and $184 million in June in terms of orders. And in June, we delivered about $200 million in sales, which drove most of the operational improvement that we have talked about. So, we are still very cognizant of the challenges that are out there in the marketplace. We have done a great job controlling cost and driving margin. And overall, this has produced pretty strong results that we saw in the quarter. Orders and sales were up 5% and 7% respectively. Organically, they were down 2% and 1% respectively. Our GAAP EPS was $0.99, which is up $0.10, 11% higher than a year ago. And we had operating margin of 20.6%, which was down 70 basis points and I will get into that here a little bit, but that was really impacted by the fair value step up for Akron Brass and the remaining continued consideration for CIDRA, but again, I will talk about that in more detail in a minute. In terms of our commitment to strategic acquisitions, we have continued to drive that strategic priority. On July 1, we completed the acquisition of AWG. They are a leader in the European Fire and Safety markets and they are a terrific fit with Akron Brass and our existing fire and rescue platform. And so really, it’s just wonderful to invite AWG into our family. Additionally, in the second quarter, we completed the private placement of $200 million of senior notes. Our quarterly dividend of $0.34 was up 6% year-over-year. And we continued, albeit at a slower pace, our repurchase plan and our M&A pipeline remains robust. Like I think everybody out there in the marketplace, we are still not certain exactly what Brexit is going to mean for us in the longer term. In the shorter term, it did have an impact on us in the quarter. And as we look at the second half, if we assume that the rates remain the same between the dollar, the pound and the euro, we will have some translation pressure in the second half of the year. Let me turn now and talk a little bit about core markets and geographies and what we are seeing out there. In terms of energy, the lack of demand is still a headwind for us, specifically in our energy platform, at BAND-IT and at Sealing Solutions. And as we have stated before, the lower energy prices, they do impact our industrial businesses from a derivative effect and that’s still a condition in the marketplace. As we think about the industrial businesses. Industrial distribution remains challenged, especially when compared to a year ago. But as I said a second ago, we have seen signs of stabilization in the marketplace. Ag continues to be a challenge also. Commodity prices have remained depressed in the second quarter. We don’t expect that to rebound as we have said for some time, but we have seen some stabilization there too. Scientific Fluidics continues to be strong across our markets in bio, analytical instrumentation and IVD and we expect that to remain the same through the balance of the year. And as I said a moment ago, municipal has been a good story for us. In terms of regions, in North America, the story really all is about industrial distribution and how that’s playing out. Some signs of stability are a good note. But the picture remains pretty much the same as we have been talking about here for a couple of quarters. In Europe, we actually have over-delivered in Europe around our dispensing and our water businesses in a tough environment. But certainly, the Brexit decision leaves some question marks that we will have to play out here over the coming quarters. And finally, in Asia, it’s really a story of two major economies. One is China that continues to be – continues to struggle, that’s not a surprise at all. We are managing that well. But the good news story for us has been India and we have seen strong demand with fire, rescue, energy and dispensing as we have executed throughout that region. Let me turn to capital deployment for a moment here. Our capital deployment strategies for investing in long-term growth disciplined M&A, consistent dividends and opportunistic share repurchases remains unchanged. And as we look at our ability to deploy capital here in the future, we are in a really good position. We completed the $200 million private placement. The proceeds of which we paid down our revolver. Today, we have about $500 million of availability on our revolver. That availability, plus cash on hand, gives us a lot of capability. In fact, we paid for the AWG transaction completely out of cash from our balance sheet. So, when you put together our balance sheet availability, cash on hand and what will be more than $500 million of free cash flow after paying dividends and after investing fully in the company, we are going to have north of $1 billion to deploy here over the next 3 years. In terms of organic growth, the story remains the same. We continue to make investments to drive profitable growth for years to come. This year, in particular, we have made specific bets in Scientific Fluidics, Sealing and our fire businesses and they are all positioned well for long-term growth. In terms of dividend, as I mentioned, we announced a $0.34 dividend here in the quarter, which is 6% above last year. In terms of share repurchases, we bought back 726,000 shares this year for $56 million, and that’s at about $77 a share on average. In terms of M&A, we have had an active year as you know. We purchased AWG on July 1 for €46 million, which has about $36 million of sales and that complements well with Akron, which fits into our fire and rescue platform. And together, along with our existing businesses, really makes a market leading platform in that space. In terms of M&A, the pipeline continues to be strong. Really no change from what we discussed earlier in the year. All the work that we have done and continuing to cultivate our M&A pipeline has certainly paid off for us and we expect it to do so again in the future. Okay. With that, let’s switch now to talk about results for the quarter. I am on Slide 4. In Q2, we had $550 million of revenue, which is up 7%, down 1% organically. Orders are $529 million, which are up 5%, down 2% organically. On an organic basis, both orders and sales have been challenged. However, as we look at the second half of the year, we are facing easier comps and so we do expect flat overall organic growth for the year. Operating margin, as I mentioned earlier, was 20.6%, down 70 basis points year-over-year. Similar to last quarter, our 2Q results include a few moving parts and I will get to here on the next slide. Overall, again, I am very, very impressed with our team’s ability to execute in the challenging environment. Free cash flow was $80 million. This is 106% of net income. It was down $6 million from last year, but that’s entirely due to the timing of some tax payments here in the U.S. And so we will get the benefit on a comparable basis here in the back half of the year. And finally, net income came in at $75 million with GAAP EPS at $0.99, up $0.10 or 11% from last year. So, let me just take a minute now and I want to bridge for you the $0.99 of EPS on Slide 5 here compared to the midpoint of the bridge – or the midpoint of the guidance that we gave you last quarter. So turn to Slide 5 for me and you will see the bridge. The midpoint of the guidance from a quarter ago was $0.92 and we delivered $0.99. And just let me walk you through the elements of the bridge. First was very solid execution that gave us about 2 points of beat in the quarter. Lower inventory step up gave us another $0.02 from Akron Brass is lower than expected. We had the reversal of a contingent consideration of $1 million from CIDRA and that gave us $0.01 of benefit. We had lower tax rate from an excess tax benefit for the new accounting for share-based compensation that gave us $0.01. And we also got $0.01 from the rapid change in the exchange rate between the dollar and the British pounds here with the Brexit announcement and that gave us $0.01 too. So all told, when you add that up, that is the $0.07 beat versus the midpoint of our expectations. Let me transition now to the segment discussion. I am on Slide 6 and we will start with Fluid & Metering. In the second quarter, organic orders decreased 1 point, while organic sales increased 1%. And I know it’s a small number, but this is the first increase in organic sales we have had at FMT since the first quarter of 2015. Margins were up 20 basis points, driven by an increase in volume and energy. Specifically within energy, we saw a stronger aviation market that was offset with the mobile market that was softer. And we did ship a few large international projects in the second quarter that have been delayed for several quarters. And we had mentioned that in the past, but those kind of all came here in the second quarter. And these – the delivery of this business really was the bulk of the over-performance here in terms of operational over-performance. Water had another good quarter. Sequentially, they continued to improve and they have over the last few quarters. The municipal markets remain favorable. And we have had great profit execution as the team at water. Industrial, as I mentioned before, continues to be soft on a year-over-year basis, but we are seeing some signs of stability, which is encouraging. And we have done really a great job around cost control and profit execution in our industrial businesses in FMT. And then finally, ag continues to be soft. We expect it to be so for the balance of the year, but it’s certainly not deteriorating any further. With that, let’s turn to Slide 7 and we will talk about Health & Science. Overall, the life sciences and the scientific markets remain strong and steady, with softness in those businesses that are facing the industrial marketplace. Organic orders were flat in the quarter and organic sales were down 2% and operating margins were down 30 basis points, really from the lower volume in the industrial portion of the segment. Scientific Fluidics continues to be a good news story. Orders and sales continue to be up in all markets over 2015. We have seen strength in analytical instrumentation, bio and IVD. All of those marketplaces continue to deliver and again we expect that to do so for the balance of the year. In terms of Sealing Solutions, we had an uptick in Q2, really coming out of strength in our semiconductor business, although it was offset in many parts by weakness in oil and gas and heavy equipment. HST Industrial, which I mentioned earlier, that has had dynamics that are very, very similar to what we have seen within FMT and so we are still seeing negatives on a year-over-year basis, but again, some signs of stability on a sequential basis. And then finally, at MPT, we had some strength in Asia with some shipments of some projects. So, we had a decent quarter at MPT. Okay. I am on our final segment, Diversified, on Slide 8. Organic orders were down 9 points in the quarter, with organic sales down 1 point and operating margins were down 400 basis points versus the prior year. That being said, the real impact here came from the remaining inventory step up at Akron Brass, which was $3.6 million. If you exclude that, operating margins came in at 26.6%, which is down 150 basis points versus last year. But remember, this is our first full quarter of having Akron into the business. And I would also ask you to remember that in the second quarter, we are going to see $2 million more of fair value inventory step up for AWG. Dispensing continues to outperform. X-Smart has been a true success story for us, especially in developing markets. We have shipped our 25,000th unit in the quarter. And remember, we launched this just three years ago. This is a great example of our team’s ability to drive organic growth. And fire and rescue, again, we have welcomed AWG and Akron into the family. It gives us a terrific market leading position. Rescue continues to struggle in the international markets and has for several quarters now. But we have had a great launch of our StrongArm technology, which we think is going to be a real success for us. Finally, BAND-IT, the transportation business within BAND-IT has been strong. But in general, industrial and oil and gas continue to be challenged overall. We did see, interestingly enough, some improvement in businesses as oil prices reached over $50. And while I certainly wouldn’t call that a recovery, it’s certainly an interesting data point to see how that tracks so closely as we saw oil break a $50 a barrel in the quarter until it settles back down. Okay, I am on the final slide, Slide 9. Let me give you some guidance here for the third quarter and also for the balance of 2016. In Q3, we expect EPS to be $0.90 to $0.92, but just please remember that, that includes $0.02 of inventory charge associated with AWG, and we are going to get a $0.01 of pressure from the additional interest expense from the private placement that we did in June. Operating margins will come in at about 20.5%. We expect organic revenue to be flat. And in Q3, the tax rates should be about 27%. If you look at the full year, we are maintaining our guidance at $3.70 to $3.75. Also remember, we have $0.02 of interest expense from the private placement and as well as $0.01 of incremental impact from AWG for the fair value step up charges and we will also have some impact from purchase accounting amortization. For the full year, we are still expecting revenue to be approximately flat. Operating margins should come in at 20.5% to 21%. CapEx should be $40 million to $45 million. Free cash flow, we are expecting to be at about 120% of net income. And for the full year, we are expecting a share reduction of about 1% for the year. As always, remember to exclude any impact from our guidance from acquisitions, either costs or the benefits in the future. With that, Rob, let me stop here and let’s turn it over for questions.

Good morning, Andy, Heath, Mike.

Nathan, good morning.

Good morning.

Andy, could you just start by telling us how much those international energy projects contributed to the quarter?

Yes, it was about $6 million in total that we shipped pretty much in the last week of the month. So, it was substantial and it flowed through at some pretty decent levels. And so that’s a big piece of the operational execution. And just remember, Nathan, this is stuff that’s been sitting in backlog for an awful long time. It’s pretty unpredictable when it ships and both – or actually two or three of them just kind of broke at the exact same time.

Is there more that’s still delayed sitting in backlog? Are there any other orders sitting in backlog or is this truly something we should be thinking about as discrete?

Yes, not of substance, Nathan. We have got some smaller things here and there. As you know, we don’t have a lot of large things that tend to sit in backlog. These are things that are being shipped to North Africa, the Middle East and they require letters of credit and an incredibly painful process to get them shipped. And frankly, they are incredibly unpredictable and we had not had them in our forecast. We actually had them in the forecast for later in the year and they happened to break in the second quarter.

Okay. And then just on the guidance for the rest of the year, you had about 2% organic decline in the first half, to get to flat you need plus 2 in the second half. I don’t think the comps are that much easier in the second half than they are in the first half. Organic orders is still running negative. Where does that incremental demand come from that can get you to flat organically for the year?

Nathan, this is Heath. Largely, it’s the things that we have visibility to in the fourth quarter. As you know, there is a little bit of seasonality in some of our businesses, specifically around oil and gas and a few things in the rescue tools side. So, it’s our current outlook in terms of where we see the third and fourth quarter coming in. But most of that growth is going to come from the fourth quarter – the fourth quarter numbers. And obviously, we will get smart over the next 90 days and sharpen our pencils if that changes.

Okay. And I don’t know that you are going to be able to answer this question. You talked about industrial distribution stabilizing or maybe getting a little bit better sequentially. Do you have any visibility into what kind of end markets are helping there or do you lose visibility once it gets into the distribution channel?

You certainly lose visibility into the distribution channel, although I will say that the businesses that we saw then tend to be pretty good predictors for us, so with the exception of one. So, we saw strength at Viking. When I say strength, it means stability, so not improvement necessarily, Nathan. But certainly, the decrease stopped at Viking, at Rupp and at the industrial businesses within or the industrial distribution business within BAND-IT. The one counter to that is we still saw some softness at Gast. And typically, Gast kind of goes along with those other three. So, that was the one contra-indicator, but those other three were good signs.

And then I wonder if you could just give me a little bit more color on the comment that you made that you saw some improvement in oil and gas markets when the price got to $50 a barrel. Can you talk about where the demand improvement stabilization, whatever we want to call it here, came from being upstream, midstream, downstream, MRO?

That was – so, the comment was really specific to BAND-IT, which has very, very short cycle delivery and it was more around the MRO marketplace. And so I think, again, I want to be really clear. We are not calling for any kind of recovery. Just it really struck us how tightly correlated the improvement in the BAND-IT MRO business was when that ticked above $50. And so I just – what that tells me, Nathan, is just how tight the overall supply chain is. And the fact that when you do see recovery, I think it’s going to be – it’s going to come at a pace that’s going to move pretty quickly, especially around parts and service.

That’s very helpful. I will jump back in the line.

Thanks and good morning, all.

Good morning, Steve.

Just want to push on one of your answers to that last question, I think that second half, not only is a couple percent, but the fourth quarter is – means 4% implied. And in fact, quarter-to-quarter, there really is no comp difference in total from getting easier. So, can you push a little harder there to give us some comfort level that all of a sudden we jumped to 4?

Yes, I think, first of all, Steve, you got to keep it in perspective. That’s a, to get there, that’s a $550 million quarter, which is what we just did. Now, we did burn some backlog in the second quarter. We would expect that to reverse itself to some degree. So, it’s not – while the flat versus 4 or down 1 versus 4 seems like a giant number, recognize it’s that when you look at it from a comp perspective and you look at on a sequential perspective, it’s not that big a number, it’s the same number we delivered this quarter.

Okay, that’s fair. And then just getting a little bit into that FSDP order decline to 9%, I think I understood what happened on the sales front. Is it – are you seeing the same dynamics though in the order – would you attribute it to the same areas then?

That’s just a more – remember, that’s the most lumpy of our business, right, when it comes right down to it. And so you will see that disconnect between order and sales that you don’t see in the other businesses. There is nothing there that jumps out to you that says that, that is – has a significant disconnect from history or that’s a big red flag in the future. I don’t see that happening.

Yes. Steve, that’s – obviously, that’s the smallest segment. And it’s a little bit of the tyranny of small numbers a little bit in terms of just a couple of million can swing it either way. So, I wouldn’t read anything into that.

Okay. And one more question and I have been debating with investors is in your last financial reporting, one of the things you guys had talked about was how revenue from new products introduced in the last 3 years has dropped to 8%. Where is that – and I think it used to be 20% in prior years, where is that trending these days and what’s been driving that number down?

Steve, I think you may have us confused as somebody else. We haven’t reported any new product sales numbers in years.

I will have to look at it. I am not sure what you are referencing. I apologize. I am happy to follow up with you on that, but let me take that offline.

No problem. But it is there on Page 8. It says new products from – revenues from new products introduced in the last 3 years. So, it’s an NPVI referenced and I looked at it this morning, so I would love to understand that.

I will have to get back to you, sorry.

Okay, okay. That’s fine, we’ll follow-up offline. I will pass it on. Thanks.

No problem. Thanks, Steve.

Thank you. Good morning.

Hey, Matt.

You talked about the order ramps through the quarter and certainly each month got better. How does that compare to the normal seasonality within – so, was that ramp up in orders through the quarter the same as what you typically see or was it – were the underlying trends better?

It is a little bit stronger, Matt, than what we had seen. Now typically, you will see some difference between early on in the month – early on in the quarter to later on in the quarter, but it did improve especially on the sales basis. But even on the orders, it was a little bit better than what we have seen in the past.

Okay, great. And then on the balance sheet, how much of your cash is accessible right now, because you did the private placement ahead of pretty strong cash generation period over the next couple of quarters, I would expect. So, of that $360 million, how much is kind of available if you were to have U.S. needs?

Well, Matt, this is Heath. Most of that, as you can imagine, is offshore. And most of it resides in Europe with some in China as well. So, it would be fair to say we could probably pretty easily get our hands on about $200 million of it without having to do too much on the tax side in terms of dividending things back and forth. But it’s somewhere between $150 million, $200 million will be easily accessible and then all of a sudden, it gets a little more challenging.

Okay, great. Thanks very much.

Thanks, Matt.

Hey, good morning everyone.

Good morning.

Just quick follow-up on Matt’s first question. When you look at orders as they track through the quarter, did orders turn positive as you got to that June month with that ramp through the quarter or are you still tracking modestly negative by the end of the quarter on a month-to-month basis?

You mean June versus June comparison?

Yes, year-over-year, sorry.

Yes, let me go back and look at that. I am going to say yes, but I don’t have the number right in front of me. Just by the nature of where it was coming out in April versus where we ended for the quarter, the answer to that is going to be yes, but let me caution you on that, right. Any one month of orders and/or sales is not a good barometer for direction.

No, no, absolutely, but orders turning positive for the first time in a while. Just curious if that was the case. And then on the CapEx side, you guys lowered that from 50 to, I think, you said in the call 40 to 45, the deck says 45. Anything behind that, Andy, or is that just kind of normal machinations?

No, it’s just normal stuff. You end up typically as you come into the year with a pretty large wish list, right. And as the year gets down, as you look at the ability of the units to actually absorb the capital, it just tightens over time. That’s a pretty natural pattern for us.

Alright. So, it’s tightening and not incremental concern from your perspective on the environment and investability?

No, no.

Great. Appreciate it.

You bet, Mike. Take care.

Hi, guys. Good morning.

Hi, Allison.

Andy, can we just go back? I think it was Nathan that asked the question on stabilization. I think last quarter when we talked, you noticed some stabilization, but you still thought there was a lot of risk versus opportunities out there right now. I mean, has that changed at all for you and your thoughts?

Yes, I think the bottom has come up a little bit, Allison. So, I certainly – I am not going to take away all the concern that I had. If I look back toward last quarter, the big concerns that I have really had were around softness on the industrial side potentially moving into a recession and then the really big questions on China and then finally, just kind of the constant concerns in Europe. And so if I were to kind of step forward and say what’s changed instead in China, it stays exactly the same. I think Europe, we have actually performed better. We have had pretty strong performance, specifically in dispensing and in water. But the Brexit stuff, it just puts a level of uncertainty that frankly it’s hard to get your hands around what exactly that could mean. So, I would say, in total, I would say that’s modestly worse than where we were a quarter ago. And in the U.S., with another quarter of stabilization in industrial distribution, I think that’s modestly better.

No, that’s great. Thanks. And then just on acquisitions, you broadened obviously your pipeline. Is there any area that maybe looking particularly more attractive in this environment or a product category that you guys are a little bit more focused on in that pipeline?

Not necessarily. As you know, we kind of think of our pipeline around kind of four major areas, right. So, industrial fluids, HST components, engineered fastening and then around fire and safety. So, if you look at our pipeline, it’s pretty decent throughout. I will say that within the HST world, things are still at really frothy levels and so you have just not seen as many opportunities nor is the cultivation kind of moving along as rapidly as you would love. That being said, in the other three areas, it’s pretty good. So, we are continuing to work that. We work it every single month. So, it’s just an ongoing strategic process for us. And right now, it looks pretty decent.

That’s great. Thank you, guys.

Thank you.

Hey, thanks. Good morning, guys.

Good morning, Charlie.

I just want to comment on the commentary around the Brexit commentary. I mean, are you hearing anything specific subsequent to that vote from our customers or have you seen any movement in terms of projects being slowed or pushed out or is it just kind of, you don’t know what’s going to happen yet, but nothing definitive from a customer base standpoint?

Yes, it’s nothing definitive. And just to give you some kind of some sense of what it all looks like, right. So, if you look at our total revenue, it’s about 5% or so of the business that’s moving through the UK. Our cost base is actually on a comparative basis is a little bit higher. So, we actually have a decent hedge there all in all. So, I don’t think we are going to get pounded from transactional or a translational perspective. It’s pretty well hedged. And so far, we haven’t seen that play it sell-through, except for how currencies have moved and what that’s done on a translational basis. I think the bigger concern for me, Charlie, is if that starts contagion, right. That’s I think the UK in and of itself is, not a huge concern. The bigger concern is that if it starts to kind of snowball such role here throughout Europe.

Right, thanks. That’s helpful. And just one more on HST, can you give us a little more granularity on the industrial piece of that business, how much was that off? And did you see, in terms of stabilization of that business, improvements through the quarter as well or was it just kind of soft throughout?

Well, except for Gast, right. So, Gast is a pretty good size business for us and it’s a good profit generator. And unlike what we saw in FMT, where we saw Viking and Rupp, we saw some really nice stabilization there. We did see continued softness into gas. And remember, Gast has a good chunk of its business that’s going into the scientific world and then it’s got the majority of its business, frankly, that’s general industrial. And that’s the general industrial piece that continued to be soft. And so we are keeping an eye on it. But if you look at the four of the – four things that we kind of look at as early indicators: Viking, Rupp, Gast, and BAND-IT. Three of the four certainly saw some positive signs from stabilization, Gast was the outlier.

Great, thanks.

Yes.

Hey, good morning.

Good morning, Scott.

So, you indicated that during the quarter that you felt better about orders. And I know you talked about that more in a sequential basis and I think others then are asking and I was going to ask the same thing about the year-over-year. And you cited, in particular, feeling better about distribution, yet the distributors are kind of saying it went the other way in the middle of the quarter. So, I am hoping you could help us with that a little bit, particularly the year-over-years would be helpful in the month?

You got to remember, Scott, when you – the stuff that came out this morning for some of the distributors are the commodity distributors, right. And we played very minimally there. We are playing more in the value-added side of distribution that bring engineering content to work. So, I fully recognize that what you saw specifically out of Grainger here this morning flies in the face of some of the stuff that what we saw in the quarter, but remember, we just don’t play a lot in their world of distribution.

Okay. I just would add that MSC Industrial and Fastenal, which are maybe a little bit more engineered than that?

They are really not, Scott. Those guys all play in that same world of pretty much commoditized piece parts. So, I think we touch them very modestly. Now that being said, I fully – we pay attention to them too and what’s going on with in the marketplace. And so I think that’s you are making an important point here. What we are seeing are signs of stability. To be very, very clear, we are not seeing signs of continued erosion. And I think what we are seeing in the marketplace and everybody had been seeing in the marketplace, certainly around anything that was commodities related and then the derivative impact had been continued negatives. And what we are seeing is some stability. I know that’s not exactly the most encouraging statement in the world, but stability to me is encouraging given what we had been experiencing.

Look, stability is the new up, Andy. The other question I had was around pricing, are you guys still pricing positive?

We are. Yes, we are.

And there is still a gap between that and inflation?

Yes, for sure, Scott, this is Heath. We are – the numbers in Q2 were very consistent with what we have seen in the past both on the absolute gross pricing as well as the spread that we would see in this environment.

That’s great. And maybe more specific to Allison’s questions earlier, is there something that you think in the second half that you guys could close? Anything you are maybe in the further down the funnel that you would say maybe we can get another nice size deal closed in the second half?

Yes, listen, Scott. We are – I will give you an unfulfilling answer and that is that we are always in different levels of diligence for a variety of different things and some things break our way and some things don’t and we will see, but you would expect the process that we have followed historically would be consistent with what we would do for the remainder of this year and going forward.

Yes, unfulfilling. Okay, thanks.

Thank you, Scott.

Hey, good morning Andy and Pete.

Good morning.

A question on the fourth quarter here, you guys mentioned as we looked – we are looking at like core sales decline in the first half and core sales is expected to improve in the second half now, that is more like fourth quarter driven here. Could you give us some more clarity from segment perspective, what is going to drive, which segment do you – we should think about?

Yes. So, again, the answer – let me touch two things and then I will get into the question. The first one is I think it’s recognized that the $550 million is the identical number to what we just delivered. So, it’s not like we are looking at a big giant step up here. So, I think it’s important to note that we are not calling for some massive breakout and sequential economic performance here in the fourth quarter. That being said, we do have some visibility with some of the large chunks of business that Heath mentioned earlier that we see kind of moving us sequentially to that number. We do have some natural seasonality. And so when you put those two things together, it’s just not a huge reach to get to that $550 million. And so is it $445 million, is it $555 million, plus or minus, but around that number it feels pretty good.

Right. Yes, because the second quarter, you just mentioned about like oil and gas few projects which came in the last week of the quarter here, right. So I am just thinking about like are there any big buckets which you are looking at, whether it will be in FMT or HST or we have seen HST and FSD kind of organically weak here for the first two quarters and should we think about like some improvement in those markets or should we bank more on the FMT side of the business to kind of drive?

Our visibility in the fourth quarter is not dependent upon a lot of project activity. There are some natural things that would be more seasonal in nature and for instance the energy business, but not necessarily project activity in that regard. But if you go back over time, I think you would see that Q2 and Q4 largely would have similar profiles.

Yes, Andrew, the pattern that we are talking about is not abnormal at all.

Okay, okay. And another question on the capital spending here, somebody did mention that you lowered the CapEx here. Any particular segment or was it kind of broad-based here dependent on the dollar?

We are fully funding the things that we outlined for the year. We are moving forward with the investment in the facility in China that we have talked about. And we are actively investing in and pursuing investments. So, this is more, Andrew, just the tightening of expectations kind of given what we see, how people are going to absorb capital here through the balance of the year.

Okay. And lastly just some questions on the incremental interest expense and the AWG step up inventory charge for the third quarter. I think you did give some numbers. I just wanted to clarify if you can give those again?

Hello, this is Mike Yates. In the third quarter, we will have a $2 million – approximately $2 million charge within cost of sales for the AWG step up fair value inventory charge. And for the back half of the year, interest expense will increase about $0.02, about $1 million each quarter as a result of the $200 million private placement that we completed in June. That’s just the difference between the blended rate on the private placement of about 3.3% compared to the revolving credit facility rate, because we use the proceeds to repay down the revolvers. The revolver is about 1.5%, 1.55%. So, that delta drives about $0.02 of incremental interest over the back half.

Okay, thanks a lot, Mike. Thank you, guys.

Thank you.

Hi, good morning.

Good morning, Brett.

Just wanted to come back to fire and safety, I was a little bit surprised, down revenues against the down 11% comp certainly have some pressures in the rescue side of the business. Could you just sort of unbundle the different businesses and talk about those trends? And do you see any firming in some of the more challenged pieces as we look into the back half year?

Yes. So first of all, Brett, again, as I mentioned before the disconnect between the 9% down organic in orders, right and the 1% in sales, that’s a very typical – that gap between those two things is not substantial. As you look across the businesses, again the places that have been – have sort of strength, dispensing showed strength. BAND-IT has continued to be weaker, right, whether because of the industrial exposure as compared to last year. Rescue has been weaker, really with the international rescue tools, marketplace continuing to be soft. And the fire business has been okay, generally, so when you kind of put that together, that’s the bulk of the split.

Okay. And then I guess as you look at the BAND-IT piece and the Rescue International, as we are looking at the back half here, do the comps start to ease or do you think that’s sort of rolled into 2017?

Yes, they do to some degree. From a BAND-IT perspective, it gets easier really around the oil and gas side of the marketplace. Rescue is a little bit of a wildcard just because – it’s been soft now. We are into 1.5 year here, frankly, of the rescue business, the international rescue business being soft. Mind you, the U.S. business has been terrific. And eDRAULIC 2.0 and now StrongArm have continued to be good pieces of business for us. It’s really around countries that are buying through central purchasing that you have seen the weakness. Obviously, in the Middle East and in Indonesia, with a lot of the crisis that’s going on around the world there. That’s been the weak part. So, while theoretically there are easy comps, we are expecting that business to be pretty soft here through the back half of the year.

I think on the organic fronts, the comps, specifically for fire and safety and diversified segment, again much, much easier in the fourth quarter.

In total?

In total, for the segment. So, I think in the third quarter, we can still see some pressure just based on where the prior year came in. But in the fourth quarter, without much sequential improvement, we do see quite a step up on the organic side.

Okay, great. And I just want to come back to AWG and Akron, you have owned the businesses for a couple of months now, you are kind of working through the integration process. I guess, what’s the margin opportunity you see today? And then separately, as you look at some of the selling channels, top line opportunities as you pull through those different products, how you are thinking about the business and sort of the go forward here?

So I think, with both of them, we are targeting about a 500 basis point profit improvement over a 3-year period. And obviously, we would work to bring that forward as much as possible. So, the basic economics of both businesses look very, very similar to our original fire business. And our fire business has meaningfully better overall economics that we think we can get close to with both Akron and the AWG over time. So, we are going to see a nice improvement in profitability and therefore driving returns on capital both those businesses from that. On the commercial side, the benefits on the commercial side are certainly in the U.S., as you look at the Akron business and our existing fire business, there is a lot of channel overlap, but I think there is a lot of opportunity to bring a better overall product portfolio to market. And to be able to do that in a way where we are bringing kind of all of the high value content from a flow perspective to the OEMs and to the marketplace. So, I think there is definitely some benefit there. In terms of AWG, AWG and Akron were both the leading players in their respective markets. And so you got the number one player in the U.S., the number one player in Europe. There are some materials in technology differences that will take some time to play through. You are not going to just willy-nilly integrate things that don’t make sense. You want to be really sensible about that. And the channel overlap is a little bit less there. Although there are some nice benefits of having it within the Lucas umbrella, AWG within our Lucas umbrella, which is our principal rescue tool business.

Okay, great. And if I could just sneak one more in here, so have restructured the business to some degree, you have done a real good job on productivity. If we do see some modest inflection within this industrial complex, I guess how should we think about incremental margins relative to the 30 to 35 that you guys have talked about in that sort of modest improvement environment?

There is absolutely no reason that we wouldn’t achieve those targets. If you assume that you move from what has been a flattish world to a 2% to 3% world, there is no reason that we wouldn’t be able to deliver at those rates. If you saw something that was better than that, say 3% to 4%, I believe for some period of time, you would see even higher incrementals.

It makes sense. That’s all I had. I appreciate it.

Thanks, Brett.

Yes, good morning and thank you for taking my questions.

Good morning.

So, you call it – it looks like you can call like $6 million in the quarter from those delayed energy projects. And I am assuming those were not included in guidance for the second quarter. And you still – even with those, did you still come in at a decline of 1% organically versus flat guidance? Does that mean the quarter was actually coming in worse leading up to those orders at the very end of the quarter? And how does that reconcile with the commentary where you are seeing kind of stability in some level of improvement?

Yes. So Matthew, I think you are mixing and matching a few things. So, let me separate them out. The first one is around those projects specifically. About half of that $6 million we had baked into our expectations and about half wasn’t. And obviously, you guys wouldn’t have any insight to that going into the quarter and so you are talking $3ish million or so of revenue that was a little bit better than expected plus or minus. In terms of that relative to the commentary of stability, you are really talking about two very different markets, right. One is the projects we are talking about were principally around energy and things that had set in backlog for quite some time. And the comments around stability were really around the North American industrial markets. So, two different pieces that I think it’s important to distinguish.

Okay, got it. And then what are you hearing from your life science customers around the timing of spending from kind of increased NIH budgets and what they are spending on?

Yes, nothing that’s material. That’s been a good news story for that part of the business here for a couple of years now as spending has started to increase. As you know, the aggregate spending itself is not that big a deal, right. So, how much is being spent by NIH is not that big a deal. It tends to be a catalyst for the industry, right. So, the $35 billion or so dollars that gets spent by NIH and it gets distributed incredibly broadly across the scientific complex in and of itself does not drive a lot of business. It is really what it does to catalyze the industry around research and around production. So in my view, it continues to be a net positive, but I don’t think it is something that’s an inflection.

Alright, got it. And last question for me is I think you brought down your net share repurchase to 1% to 2% for the full year, is that a function of where the stock is or is that a function of the acquisition pipeline?

The pipeline has been pretty good already with AWG and with Akron, in total. We have put a decent amount of money to work. And we have laid out a very clear capital deployment strategy for people and how we have thought about share repurchase and the combination of those two things are part of our discipline.

Alright, thank you very much.

Thanks, Matt.

Well, thank you all very much. I appreciate the questions here today and I appreciate your interest in IDEX and the support of the business. When it’s all said and done, the conditions that remain today are very similar to what we have seen in the past year or so, with some benefits of some industrial stability here in the United States that we saw in the quarter. But mostly, it’s really around the team’s ability to execute and that’s what I am most proud of is our ability to continue to drive performance in an environment that is still murky. And so I really appreciate my team and I thank them for all their performance. And I look forward to talking to you all again here in 90 days. Thank you.