Idex Corporation (IEX) — Q4 2018 Earnings Call Transcript

Thank you, Matt. Good morning, everyone. This is Bill Grogan, Chief Financial Officer for IDEX Corporation. I am stepping in for Mike Yates this morning and will cover the introduction. Mike unfortunately lost power overnight due to the polar vortex hitting Chicago and he is anxiously awaiting the restoration of power at his house. We are hoping for that restoration soon, Mike. Okay. Let me start by saying thank you for joining us for the discussion of the fourth quarter and full year 2018 financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the three months and year ending December 31, 2018. The press release, along with the presentation slides to be used during today’s webcast can be accessed on our company’s website at idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO. The format for our call today is as follows. We will begin with Andy providing an overview and update on market conditions, geographies, and our capital deployment strategies. I will then discuss our fourth quarter and full year 2018 financial results and walk you through the operating performance within each of our segments. Andy will then wrap up with our outlook for the first quarter and full year 2019. Following our prepared remarks, we will open the call for 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 conference ID 13684161 or simply log onto 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 last night’s press release and in IDEX filings with the Securities and Exchange Commission. With that, I will now turn over the call to our Chairman and CEO, Andy Silvernail.

Thanks, Bill, and good morning, everybody. I appreciate you joining us here to discuss the fourth quarter of last year and also the full year operating results from 2018. I am going to start with some highlights from 2018 and then move to the outlook for 2019. 2018 was another record year for IDEX. We hit all-time highs for all of our key metrics and we continue to outperform the market. The overall macro economy was strong and our teams capitalized. When we leveraged our target of organic growth initiatives to deliver results above and beyond the underlying market support, we continued to invest back in our businesses with record levels of CapEx and engineering investment in 2018. Those investments helped drive our terrific top-line performance as well as margin performance. We saw over 100 basis points improvement in operating margin in all three segments. Our balance sheet is in great shape and we have plenty of capacity to deploy capital across our framework and drive long-term value for shareholders. Looking ahead to 2019, we are monitoring the geopolitical and global economic environment and its volatility. However, we are confident in our long-term strategic objective to grow faster than the underlying market. We are able to do so due to our leading positions and diversified product portfolio, and we look forward to another solid year in 2019. Now, let me take a moment to talk about what we are seeing in the markets that we serve and the regions we operate in. In the industrial market, the conditions remain favorable, and we see this in both FMT and in HST. Day rates for our book-and-ship businesses continue at high levels, project activity is decent, and our growth funnel is very solid. In Scientific Fluidics and Optics, our life science markets continue to expand. We are seeing strong growth across IVD/BIO and DNA sequencing driven by new products, project traction, and market share gains. In energy, we did see some softness in Q4, and with the fluctuation of energy prices, we expect to see that persist throughout the year. However, the situation could improve as we move into 2019. The teams continue to drive growth through new project activity and by serving our customers. In agriculture, the OEMs are holding up, but depressed commodity prices and lower net farm income are concerning. We are watching that closely as we head into 2019. In the municipal markets, the North American market is stable and expected to modestly expand. Our focus remains on new product development in water and investment in emerging markets within fire and rescue. The semiconductor market is small for us relative to our portfolio, but it has been growing rapidly in the last couple of years. It was a difficult market in Q4, and we see more softness into next year. Now, let me move on to the geographic outlook. Sales across all geographies performed well in the quarter, with North America leading the way. We are starting to see lower market support in Europe and in Asia, but our targeted growth initiatives have driven positive results across the globe. Looking ahead, the fundamentals are still decent as evidenced by stable day rates and strong project funnels. However, we do have pockets of concern in some markets and general caution with the overall 2019 global economic condition. Let me switch gears for a second here and talk about what we are seeing with tariffs and inflation. In the current tariff environment, if we expect that to continue, our best estimate is an incremental $5 million to $7 million of impact in 2019. We will continue to employ internal countermeasures to offset these additional costs, and we do not see them as significant headwinds for us as we go into this year. Inflation has slowed down on the materials side, but we are experiencing wage inflation. However, we have and will continue to mitigate inflation through productivity and price realization. Again, regardless of the external environment, which we expect to be more challenging and volatile in 2019, we are committed to outperforming our markets. Let’s turn now and talk a little bit about M&A. The current valuation environment remains the biggest hurdle for us when it comes to acquisitions. Our team is hard at work evaluating several deals, but we are going to be disciplined with our return framework, and we will only move forward when our target has great strategic and financial impact that fits our style of competition. Shareholder returns are our number one focus, and we will continue to evaluate deals with our commitment to providing long-term shareholder value. Our balance sheet is in a very strong position, and when the right deal comes along, we will capitalize on it. Our gross leverage is 1.3x, and our net leverage is only 0.6x. Consistent with our balanced capital allocation framework, we repurchased $174 million of stock in 2018, with $122 million of that coming in the fourth quarter with opportunistic purchases. We also returned $127 million to shareholders in 2018 via dividends. I am going to pause now and turn it back over to Bill Grogan, who will talk about financial results and our segment discussion.

Thanks, Andy. I will start with our consolidated financial results. I am on Slide 4. Order rates slowed down in Q4. We were up 1% overall and 2% organically. For the year, orders were up 7% overall and 6% organically, a solid year from an order intake perspective. Regarding the Q4 slowdown, I will get into more detail as we go through the segment discussions, but I would like to emphasize that our core industrial franchises did extremely well in the quarter. Secondly, we did see some timing-related issues due to some early receipts in Q3 and some delays in Q4. We also saw some true softness in a few markets but we believe the quarter is closer to a 5% organic growth number if we normalize for some of these factors, closer to where we think our new run-rate will be for 2019. From a sales perspective, Q4 revenue was up 5% overall and organically as well. While fiscal year revenue was up 9% overall and 8% organically, this was our highest organic sales growth since 2011. We expanded gross margins by 10 basis points for both Q4 and the year primarily due to production efficiencies and volume leverage. This was partially offset by investments we made in engineering related to new product development. Q4 adjusted operating margin was 23.3%, up 120 basis points, and fiscal year adjusted operating margin was 23.4%, a 150 basis point increase. The teams did an excellent job of leveraging the great organic performance throughout the year into the bottom line results. Q4 net income was $98 million, resulting in EPS of $1.27. Excluding restructuring expenses, adjusted EPS was $1.31, up $0.19 or 17%. Full year net income was $411 million with EPS of $5.29. Again, excluding restructuring expenses, adjusted EPS was $5.41, up $1.10 or 26% higher than last year. Our Q4 effective tax rate was 23.8%, resulting in an effective tax rate of 22.4% for the year. Both rates were lower than our previous guidance resulting in $0.04 of EPS favorability in the quarter. The difference was primarily due to additional interpretations the IRS provided in tax reform, along with the reduction in the statutory rate in the Netherlands. Free cash flow for Q4 was strong at $137 million, up 14% and 136% of adjusted net income, which resulted in full year free cash flow of $423 million, which was up 9% and 101% of adjusted net income. Free cash flow was only up 9% for the year, primarily due to working capital and capital expenditures investments we made to support our long-term growth. Regarding the balance sheet, it remains very healthy. Gross debt leverage is 1.3x, while our net debt leverage is at 0.6x. The combination of our strong balance sheet, capacity on the revolver, and free cash flow gives us the ability to deploy well over $1.5 billion over the next 12 months. I will now turn to our segment discussion. I am on Slide 5, starting with Fluid & Metering. FMT continues to deliver strong numbers from both an order and revenue perspective. Q4 orders were flat overall, up 2% organically, while full year orders were up 6% overall and 7% organically. The lower order rate was primarily driven by the timing of precision orders for Banjo, wherein Q3 orders were up 36%, and Q4 orders were down 5%, as well as we saw some project push out in the quarter in the chemical and energy markets. Q4 sales were up 7% overall and 8% organically, while full year sales were up 8% overall and 9% organically. Adjusted for restructuring expenses, Q4 operating margin was 29.1%, up 70 basis points over the prior year quarter. Full year operating margin was 29.2%, up 150 basis points. FMT’s performance was primarily driven by market growth across the industrial and chemical sectors, coupled with continued stability in the municipal market. Those served as the core drivers of growth for the year, as evidenced by strong global demand in core distribution and project wins across the group. Oil price fluctuations in Q4 postponed some investments, but we are seeing market conditions improve as prices have increased and stabilized. Agricultural order rates did slow in Q4 primarily due to the timing of pre-season orders I mentioned earlier, but the fundamental economics in agriculture do give us some concern heading into 2019. Project funnels in various end-markets remain strong and active but have been less predictable in timing as we close out the year with a backdrop of caution in the global market. However, overall, the targeted growth efforts across our businesses in this segment continue to gain wins and market share, regardless of the slower market support. Let’s move on to Health & Science, turning to Slide 6. We are very pleased with the Health & Science results both for Q4 as well as the fiscal year. Q4 orders were up 10% overall and 9% organically, while full year orders were up 10% overall and 7% organically. In the quarter, the 9% organic growth was aided by some timing shifts related to receipts of annual purchase orders by some of our large OEM customers. Q4 sales were up 8% overall and 7% organically, while fiscal year sales were up 9% and 6% organically. Excluding restructuring expenses, Q4 adjusted operating margin was 23.4%, and full year adjusted operating margin was 23.6%, both margins up over 110 basis points over the prior year. HST’s performance was primarily driven by continued success in our IVD/BIO and our Life Science Optics businesses, where they continue to outpace the market due to targeted marketing, product, and technology efforts in collaboration with key customers. HST industrial remains strong with double-digit growth due to some large wins within our gas business and also continued strength in their day rate distribution business. Strong execution in marketing, product, and technology drove customer lead times and helped enable growth. We also had some solid project wins in the pharmaceutical and food space that drove double-digit orders increases. Finally, despite the downturn in the semiconductor market, our Sealing Solutions continue to perform well in oil and gas and the industrial end markets. I am moving on to our final segment, Diversified. I am on Slide 7. Q4 orders were down 10% overall and 8% organically, primarily due to the lumpiness of our dispensing business, coupled with the timing of a large annual blanket order at BAND-IT, while full year orders were up 5% overall and 4% organically. Q4 sales were down 2% overall and 1% organically, while full year sales were up 9% overall and 7% organically. I will give more details on that in a moment. Excluding restructuring expenses, Q4 adjusted operating margin of 26.5% was flat with the prior year, while adjusted fiscal year-end operating margin was 26.8%, up 170 basis points from the prior year. FSD sales performance was primarily driven by our fire business reporting high single-digit growth due to strength across most of their product categories and geographies. Rescue sales were up due to strong project volume in emerging markets and several wins in key markets in the U.S. BAND-IT saw growth across most of its verticals, with transportation sales increasing significantly due to volume increases in their airbag applications through new platform wins. They also had some nice project wins in the Middle East. The sales growth in Fire & Rescue and BAND-IT was muted by the lumpiness of the dispensing business, which was down 25% for the quarter, but it was up 7% for the year. Dispensing does have market-leading positions across all of their geographies but it is our most project-oriented business and creates tough comparisons from time to time. The dispensing sales decrease was the primary reason for the operating margin being flat for the quarter as well for FSD. I will now pass it back to Andy to talk about our expectations for 2019.

Thanks, Bill. Everybody I am on Slide 8 and we can walk through 2019 guidance. On an operational basis, we expect full year organic revenue growth to be in the 4% to 5% range, which will provide $0.30 to $0.50 of benefit to EPS. We expect our productivity initiatives to offset inflation and then leverage these actions to drive about $0.03 of benefit over 2018. As I mentioned earlier, our focus has always been to invest in our best organic opportunities, people, new products as well as new applications for existing products. We will continue to make these investments across all three segments, and these growth investments will create about $0.05 of pressure in 2019. Although our two acquisitions in 2018, Finger Lakes and Phantom will provide a very modest boost to the top line in 2019, we are not expecting a significant benefit to the bottom line because of deal amortization. Let’s take a quick look at a couple of non-operational items. First, foreign exchange will be a headwind in 2019 based on the December 31 rates, which will provide about $30 million of top line pressure. The bottom line pressure from foreign exchange has two pieces that together add up to about $0.15. $0.11 is from foreign exchange translation due to the higher rates plus an additional $0.04 on foreign currency transaction gain that were recorded in Q1 of 2018 as we unwound intercompany loans relative to 2017 tax reform that we talked about last year. Second, share buyback activities that we mentioned before have taken our share count down and it boosts our EPS in 2019 by about $0.06. So in summary, we are projecting organic revenue growth in the 4% to 5% range and have EPS expectations of $5.60 to $5.80. We are going to wrap things up here. I will summarize things regarding 2019, the fourth quarter, and the full year. I am on our last slide, that’s Slide 9. In Q1, we are estimating EPS of $1.35 to $1.38 with organic revenue growth again in the 4% to 5% range and operating margin at about 23%. We are projecting a 1% top line headwind from foreign exchange again based on the December 31 rates, which translates to about $0.02 of EPS. However, as I mentioned earlier, we are also facing an additional $0.04 of foreign exchange headwind from the transactional gain that we incurred in Q1 of 2018. The Q1 effective tax rate is expected to be 22.5% and corporate costs should be about $20 million to $22 million. If we turn to the full year 2019, again, EPS is expected to be $5.60 to $5.80. Full year organic revenue growth should be in the 4% to 5% range and operating margin ought to be about 23.5% to 24%. Top line foreign exchange will be impacted by 1% again based on the December 31 rates. Full year effective tax rate should be about 22.5%. CapEx is anticipated to be about $60 million, and free cash flow should be about 105% to 110% of net income. Corporate costs are expected to be in the range of about $80 million to $84 million for the year. As always, our earnings and guidance exclude any potential associated costs, future acquisitions, or restructuring. With that, Matt, we are going to pause here, and I will turn it back to you for questions from folks on the phone.

Hi, good morning.

Hi, Allison.

I want to go back to, I think I heard it correctly on the order rates in Q4. I am trying to normalize some of the puts and takes. Were you saying the order rate was around 5% organically, or did I hear that wrong?

Yes. We will talk to it and let me give a little bit of high level and Bill if you want to jump in, go ahead. So, it was a pretty unusual quarter from an order perspective, Allison. And what I mean by that is if you look at our normalized book and turn business and our normalized funnel, that was kind of right in that 4% to 5% range. So, it was really solid, but we had a bunch of things that moved around. In dispensing, we had some pretty big overall project things that moved around and actually in BAND-IT too. And so in both those places, we had some pretty good sized chunks that got pushed over into 2019, and so I can certainly understand the concern about the headline organic 2%, but I do think that the underlying day rate support is more in that mid-single digit range. Bill, anything you want to add?

Yes. As Andy said, there are a lot of puts and takes, but if you normalize our core as we reconcile the business, we feel really comfortable with a close to 5% organic number in Q4 hence our guidance for the balance of 2019.

What I would add to it too, Allison, that I did mention, on the positive side, in the fourth quarter, we had a real nice blanket order that happened in HST, and so we will see a hole relative to that, that usually happens historically in the first quarter, and it happened in the fourth quarter. So as we when we are talking again here in 90 days, you will see some headwind from that on an order rate basis in HST, so I just want you to understand the puts and takes.

Great, that’s helpful. Thank you. And then you talked about project push. I think you mentioned chemical specifically. Is this just typical project push-out that happens, or is there something underlying going on there at this point?

The fourth quarter was a pretty lumpy quarter. I mean historically what we’d see is we’d see strength ramp through the quarter in the fourth quarter, it happened right up until the holidays. But the quarter looked like this: a weaker October, actually a really good November, and then a weaker December. What we’ve been talking with our customers to ensure it’s not something systemic, and what we just heard time and again is with all the craziness in the world, there was a big pause in December. By the way, what we’ve seen in January supports that, so I walk out of January not feeling really concerned about what we saw in December, and I think it’s normalizing now. Bill, anything you want to add?

Yes, I’ll just say so that point is, the things that we saw pushed in December, we realized several of those here in January.

Great. Thanks so much.

You bet, Allison. Thank you.

Hey good morning, everyone.

Good morning, Mike.

So, just following up on that, when you think about the non-lumpy pieces of the business, how have you seen trends track? Trying to strip out comparisons, have they been relatively stable in context to that, or have they seen some of that same December stall and then reaccelerate?

No, there’s been, well, it may be a little bit of that, but not as much as I call it the project-related stuff, Mike. Generally, the day rate businesses and if you look at if you got to think of day rate businesses, it’s basically everything except for a couple of things in life sciences that happen once or twice a year, dispensing, MPT, and then the BAND-IT thing; they’ve got a couple of large customers that they typically put in blankets that move around but that’s it; it’s not really project-related, Mike, it’s more just when does the blanket hit. Everything else in the portfolio, you’re talking 75% of the business looking at day rate type stuff or maybe two-thirds of the business and that’s real stable; nothing surprising there.

And you always offer a good broader perspective so maybe you can try to balance what is, well, certainly confident commentary on your side and growth expectations for ‘19 that are healthy, with a lot of the headline news we’re seeing and some of the regional risk and geopolitical risk out there, and how you’re blending that all together?

Yes. So maybe Mike, the way to take a step back and think of it is, we believe we’ll deliver 200 basis points to 300 basis points better than the underlying market. And as we have triangulated on global industrial production forecasts, those look to be in the kind of 2% to 3% range, and that’s what gives us confidence around that 4% to 5% as we think about this year. That being said, we were very purposeful in our written commentary here in our prepared remarks about the volatility that we continue to see in the world. I think that the fourth quarter, that variability that you saw, October, November, December, is really a good example of what I think the world is going to look like. We had eight quarters of sequentially ramping growth rates, and I think, we mentioned a quarter or two ago, certainly last quarter, that we thought that was going to change and become more lumpy, more volatile, and that is where we are. If we buy into a 2% to 3% industrial production, we will land at that 4% to 5%. We feel very confident, but that underlying volatility is real, and it’s something we’re paying a lot of attention to.

So, just one follow-up on that then when you, because there is volatility month-to-month, quarter-to-quarter here, what are you guys tracking or looking at internally to get a sense for what is just volatility or cause for something more concern?

Yes, so there honestly are kind of two or three things that really matter. If you think about what accelerates our business or decelerates our business, Mike, one is, is what’s happening to day rates. Day rates actually matter more to us than anything else because so much of our business is quick turn. We’re monitoring those and in those, we’ve always talked about the BAND-IT core industrial business, the Gast business, the Warren Rupp business; those are three really good beacons and right now they tell us that things are okay. That’s what they’d say, so that day rate piece is something we spend time on. As you look at projects, as you know, Mike, we don’t typically do big projects. There is one here, one there, that’s really meaningful. What matters is the size of them and what’s happening to where they sit in the scheduling. When you start to see projects shrink in size and then they get multiple kicks down the road, that’s when you start to worry. When you get something pushed from December to January, you kind of get it, especially when it shows up in January, you understand it. But if you start to get into January and it’s now April, nope, it’s not. When you start to get that and things that were $1 million have now gone to $2.5 million, that’s when you start to get concerned. The last thing I’d say is, just really close relationships that we have with our OEMs and our value-added distributors. Those are conversations that are just happening every day now. Sometimes they don’t know their business as well as we do sometimes, and so understanding what’s happening to their turnaround, we don’t see a lot of things stocked for the most part, but we do have electronic compounds at major OEMs, so we monitor those and we do have a handful of distributors who are a little bit more classic in their inventory setups, and so we watch those too.

Good context is always appreciated.

You bet.

Thank you. Good morning, everyone.

Hi, Deane.

And a special shout out to Mike, to get his power back and get back to normal.

No kidding, it’s below, Deane, when I drove in, that didn’t include the wind.

Just let me echo Mike’s comments just then and how helpful it is that you were able to parse out your business and the indicators, that’s real helpful to us. And just to clarify, I heard Bill chime in at the end on Allison’s question about those two orders that were pushed: the dispensing and BAND-IT. Are they in that January category? Maybe just provide color on those, just it’s so fresh.

So, the BAND-IT order, they split their annual purchase order into two six-month purchase orders, so we expect to get the BAND-IT piece later in the first half. In dispensing, a couple of projects we have landed and expect to land here within the next couple of weeks.

Good. You said BAND-IT, it’s typically a blanket type order and so that’s not the price.

Deane, that is very specific to a large Aerospace customer that we have; most of the balance of their business isn’t that type.

Yes.

And we’ve seen some softening in the whole dispensing supply chain; is that also what you’re seeing there?

So, the issue you have with dispensing is, we monitor market share gain pretty carefully, right, because of our leadership position and to make sure that we’re not losing anything significant so that’s kind of number one. Number two, when you get into some of these larger programs, they hit periodically and it just makes for, frankly, a really difficult comp when you go for one or two years without having that, and we’ll see what happens here in ‘19, right? We track every single age of machine and replacement cycle, etc., but it’s really driven by some of these larger paint retailers and whether they’re going to refresh or not; and we just don’t know that really until a few months until they’re ready to move.

Got it. And then just to swing over on the 2018 free cash flow, came out on the right side of that 100% threshold that everyone watches.

Yes.

And you parsed out the two factors, which makes sense, a higher working capital and the CapEx. So maybe some color there: how much of the working capital reverses? And then on the CapEx, can you call out any of the projects and what kind of internal rates of return you’re seeing or that you expect on those investments?

Want to tackle that one?

Yes, sure. I would say specifically on the CapEx, I think this year we looked at a bunch of investments relative to new products and getting the capabilities to enhance our ability to get to market faster. We looked at several businesses that we had the opportunity to upgrade equipment to improve productivity and throughput to support the increased growth that we had. These are 12 to 24 month returns, higher than our overall IDEX return on invested capital number, so no-brainer from an investment perspective. The team has really taken a hard look as we’ve seen CapEx ramp significantly below most of our peer groups relative to the capital we need to operate the business, but high-return projects. Relative to the working capital, there is some opportunity here as we level out on the growth side to unwind some things, and you see our guide is higher than the 101% that we saw in 2018.

Great. And just last quick question on Fire and Safety: have the orders started to show up yet in India? I know that’s a big growth opportunity for you guys; where does that stand?

Yes, I was actually over there between Thanksgiving and Christmas, and we did a specific review on that, and that’s actually starting to play out nicely. We are starting to get some of the wins. The spend, as you know, is a little bit of a national and then it turns into kind of regional or state, how the funds are distributed, and we are seeing some of that break and we’re seeing some pretty nice growth there.

Terrific, thank you.

Thanks, Deane.

Good morning, everyone.

Hi, Nathan.

I’m going to go to the margin side of this. The guidance for 2019 has only 30 basis points to 40 basis points of margin expansion.

Thank you, Nathan.

Well, it is significantly less than what you guys have been doing for the last few years. So I’m wondering if we could talk a little bit about the puts and takes there. I’d imagine that there is probably not that much left in your fixed bucket at the moment that says margins could crop up a bit. Obviously, there is some impact from higher investments here, probably a little bit lower incremental margins because you’ve got a little bit lower organic growth, but just if you can walk through kind of the puts and takes of that margin increase in 2019?

I think let me talk about it first, and if Bill wants to kick in too, we’ll do that. But I think the increase that we’re looking at is what a normalized expansion should look like based on the kind of growth that we’re factoring. To me, that feels right. Frankly, in 2018, our margin expansion was a little high, right? So it obviously outgrew our expectations, and you just got much stronger incrementals throughout the year. I’ve said a few times that if you’re below 30% incrementals, you’re probably investing too much. And if you’re above 40% for a long time without kind of structural actions, then you’re probably not investing enough. This feels about right, and I think we can sustain that at those growth rates. If you saw the world get tougher, our job would be to boost that and not lose a lot of ground here. And if, for some reason, we saw some improvement in growth rates, we’d probably invest a little bit more, probably not as aggressively as we have the last two years, but we would probably invest a little bit more than we have. Part of if you go back to the bridge, you looked at, Bill, I may get this wrong, so correct me, but I think last year we laid out $0.16 of incremental investment for the year in our bridge.

A little bit less than that; it was double digit.

And currency impacts margins at all or is it primarily just translation that just affects the actual dollar number but not the margin?

Correct.

Translation. That’s right.

Got it. But maybe just, I know everybody is fairly concerned about the environment in China. I don’t think you guys do less than 10% of revenue over there, but you do have a few businesses that participate over there. So just any color you can give on what you’re seeing in China at the moment?

Yes, absolutely. And part of that trip where I was in India, I was in China in that same period too, so that was a big question we were talking about here just a month ago. Look, it is definitely slowing; there is no doubt about that. The concern on the ground in China is pretty substantial when you get when you start talking to people who are living it day to day. They are concerned about the growth rates. We have had some really strong growth in China in the last year or two because we’ve frankly fixed a problem that we’ve had for a while, and so we’ve had some good growth, and we expect to see continued good growth because of that. But I do think overall that market support is coming down now. The key to it then, I think, Nathan, is where are you picking? This isn’t a ubiquitous statement that everything is slowing, but more things than not are, and so I think we got to be in China, for China, to sell into the region. You got to be in there for the long term, but I do think in 2019 it’s going to be more challenging.

Just last one on capital allocation. You guys got a bit more aggressive in the fourth quarter on share buyback. Is that just a function of the market melting down, and you saw an opportunity to take your stock at a good price? Should we not read more into that?

I think that’s exactly right. We are following the framework that we’ve always talked about relative to intrinsic value and being more aggressive when we see disconnects, and we saw a disconnect.

Okay, thanks very much for the time.

Thanks, Nathan.

Good morning, Andy. Good morning, Bill.

Good morning, Scott.

I was hoping you could tell us what pricing was in the quarter and then what materials inflation was relative to that. I know that’s not how you look for productivity, but I am just for the purposes of the old price cost question; if you could help us out, thanks?

Yes, price capture was a little bit over a point, and the inflation we maintain that 30-point spread that we’ve been able to do throughout the last two years.

Yes.

And that’s just materials inflation or was that overall inflation?

That’s material and wage at a gross margin level.

How about the wage? It slowed a lot, yes.

Right. So there is – materials leveled off; material inflation leveled off in the back half, and a little bit of kicker as we saw some of the tariff increases come through in the third and fourth quarter.

Got it. Bill, you went through the capital allocation thinking for 2019 you mentioned the $1 billion number. Forgive me, but I wasn’t able to write that fast, so could you kind of say kind of where you guys are at in capital allocation heading into the year?

Yes, Scott; we are at 1.3x gross leverage and 0.6x net. We have we said in our commentary it was over $1.5 billion; it’s closer to $2 billion that we have availability at any time here in the next 12 months.

So, would it suggest that in the absence of M&A that your $0.06 of share reduction benefit for ‘19 might prove conservative?

Fully depends, right? So we’re going to stick with the framework, and as we’ve said several times, but just to remind folks. In our framework, we take a look at, and we just did it in the fall with our Board, we take a look at what we think the long-term intrinsic value is, we build in a buffer relative to opportunity cost of capital, and then as we see our stock behave relative to that, we decide how aggressive we’re going to get. And we build that framework into a 10b5-1 in closed periods, and we use the same framework in open periods. What we try to do, Scott, is really bring discipline to it so it’s not people reacting emotionally to good or bad news.

Got it. Last question, can you tell us after essentially what is now the first month; you indicated that your sort of run rate, your day rate orders were kind of 5-ish in the fourth quarter. What does that number look like in January?

It’s not much different, right? We’re basically kind of on our plan so far through the year. So, we feel pretty good about it. I mean, we started the year. I wouldn’t get overly excited about it and it’s not bad news; it is basically what we expect.

Understood. Thanks a lot.

Thank you.

Thanks. Just two questions. First, can you give a little bit more geographic granularity around how you performed in North America, Europe, and Asia for Q4 around that 5% and then what the expectation is sort of around the 4% to 5% that you’re guiding organically for ‘19?

Yes. So we – North America as we said in our comments continues to lead the way and has so for quite some time. All indicators, Matt, suggested that’s going to be the case in 2019 unless we see a material global softening. That’s the biggest concern I have. The biggest concern is the volatility that we have, the geopolitical instability and length of duration of the expansion overall; not the industrial, but the overall. That’s what I think the risk is, but North America has continued to be strong. Asia and Europe both started to soften two quarters ago, and I think we mentioned that in the last call and that’s continued. Now Asia is – it really depends upon where you are, right? So, China has softened. India is still pretty good, and other parts of Asia-Pacific have been okay. Europe, I think the biggest concern in Europe is Germany. We’ve got a pretty good footprint in Germany. We export a lot to other parts of the world from Germany. The softness that I think everybody experienced was above expectations; it was softer than people had thought. So that’s a place we’re keeping a pretty close eye on.

And then as my follow-up, can you just give a little more detail on what you’re seeing in your energy-facing businesses in FMT and with respect to BAND-IT, maybe tying in sort of up, mid, downstream commentary there?

Yes. As you know, Matt, we got to be somewhat careful in this commentary because we’re not the best barometers for what’s going on in the energy field just by the nature of the nicheness where we play, number one, and the fact that most of what we do is kind of midstream. So, I would just caution people that we’re not the best barometer. But that being said, when oil prices – energy prices kind of tank, we did see a slowing and it was reasonable; I mean, it was a material slowing for that piece of business, which has since – we’ve seen a pickup back up here. Some of what we’re experiencing in terms of positives, we know are driven by our own activities. So, we’ve got some very specific wins that we’ve got in BAND-IT that we can put our finger on; they were kind of non-market related. The same thing I’d say over LC and Corken. The general market conditions have been softer with recently a little bit of improvement, but I still think that’s – I’m going to put that in the cautionary category, and our job is to keep getting wins and frankly keep taking down lead times. One of the things that we’ve certainly learned around energy is that the folks who are deep in the upstream, the pricing sensitivity is brutal when things go south, and we just don’t have that. So, that’s not a place we want to put big bets into the future. But also, lead times really matter, right? Your speed of service and quality of service is a major advantage in those markets. So, we’re spending more time there trying to build that advantage.

Thanks, Andy.

Thanks, Matt.

Hey, guys. Good morning.

Hey, Joe.

So, Andy, I got to say you sound more optimistic than I expected on this quarter.

Well, I think, Joe, it’s – I obviously everyone gets a little bit of reputation. Yes, I think my optimism is more on our ability to execute than it is on the markets, to be clear. We’ve built some really excellent capability around executing. We’re calling – we are kind of living with what the global experts are saying around global industrial production, and that’s a really good starting point for us. Where I feel good is our ability to consistently outperform. A lot of this depends on your view of the markets. At this stage, we’re not bucking the trend. We do tend to be an earlier cycle. I will tell you there are parts of the fourth quarter I got a little nervous during the fourth quarter because of the clunkiness that we were seeing. That coming back has given me a better feeling about certainly earlier in the year.

So, you’re talking about the 200 bps that you expect to do over market, and I think you’ve proven the ability that that’s a reasonable expectation. But when you think about that market component, that other 200 bps, we – I have a couple auto guys that we talk to; it’s a different market clearly, but they’re guiding like way underneath what current third-party estimates are for growth. So, do you feel like you’re gaming the market at all, or are you just like this is the number with it will probably go down, but we’re using what they say for now like that makes sense?

It’s hard to tell, right. So, my point of view of this is we kind of start with what do we think the world – what do the world thinks is going to happen or what the experts are saying is going to happen, and we tend to be a little more bearish on that than average. If the world is saying 2% to 3%, we will tend to go more towards 2% than we will towards 3%, right? And then from there, it’s really starting to dissect where we have exposure and where we don’t, right? The nice part of our portfolio is we have really broad exposure, and so there is no lot on the margin that happens relative to our exposure versus global exposure, except maybe in a quarter or half year. It’s really driven by our ability to get some things done. As I sit here, my confidence level on our ability to execute is high. My confidence level on the responsibility and the capability of the folks who are in the geopolitical discussion is exceptionally low. I have no confidence that they’re going to get it right. My concern then, right, is an event that gets driven by the intersection of the aging cycle and the irresponsibility of global leaders.

I think that’s definitely fair. Last thing from me. So, you guys spent a lot on growth investments this year; you’re calling out another $0.05 next year. Obviously less of an incremental, but still a big number off a big year like in growth dollar terms. Do you feel like you’re teeing up more and more things to start restructuring and taper down like maybe not executing on them yet that things have gone – day rates still look good, but are you like teeing up more of this stuff now than you were like maybe a year ago?

I think if I actually take a look at cap spending, let’s go back 2 or 3 years, right, that’s when it started to pick up a little bit; we went from kind of 1.6%, 1.7%, we’re now kind of 2.1%, 2.2%. So that, call it four-tenths to five-tenths of a point of increase in cap spending. What that’s been associated with is really is the function of all of the segmentation work we’ve been doing for half a decade and getting better and better at picking the organic growth opportunities and the productivity projects that have much bigger banks of the block. If I go back to my comment just a few moments ago, my confidence level about our ability to execute over and above whatever the market does is really based on that, and so that investment is mirroring that condition. So, I think where we are is I feel pretty comfortable that we’re in a range of where we like it to be for a while.

Fair enough. Thanks guys.

Thank you, Joe.

Hi, thanks, guys. I think I’ve got one question left for you. We covered a lot. I want to go back to the margin questions, and you’re netting inflation with productivity. I wonder if we could drill down into the productivity part of it. How do you feel about productivity in 2019, and how much more is there to go on – bringing up margins in 2019, 2020? Is there still a lot of work to be done?

Hey, Walter, it’s Bill. I would say a couple of things. First, I would refer to Andy’s earlier comment on margin expansion in that 30 basis points to 50 basis points relative to the 4% to 5% growth that we’ve seen. Relative to our ability to drive incremental productivity, there are still opportunities out there. The teams had a rolling 12-month funnel that we leverage; actively looking at ways to improve material costs through alternative sourcing, re-engineering parts to take costs out, labor efficiencies, overhead streamlining through. We did a site consolidation this year and other capital investments to improve our overall throughput with enhanced technologies. As we look at the funnel, our projects that we have signed up for this year are on par with what we delivered in 2018.

Okay. And just thinking about that longer term, you guys have done a great job with productivity over the last few years. Are margins sort of peaking out here, or is this a process where you can keep on going for a number of years and continue to be at that 30 to 50 basis points margin improvement?

I think we can still go get more. I’ve got kind of two pieces of thinking around that. The first one is we spend a lot of time looking at the difference between our contribution margin and our operating margin. When you do that walk, you’ve got about a 40-point walk that we call conversion cost. You can still reinvest aggressively back into the business and still very, very actively improve conversion cost to get the kind of lift we’re talking about without starving the business. If you assume you’re going to get positive growth in the business, once you get past 2%, at about 2% you’re paying the bills; you’re covering your normal inflation. Once you get past that, you have the ability to get some level of expansion. If you’re in the mid-single digits, you’re going to get that 30 to 50 basis points; chances are. I think that, that reality of the IDEX economic engine is really, really important. We spend a ton of time when we say productivity, we’re not trying to grind out kind of marginal productivity. We go into every cycle. When I say cycle, Bill said we got a 12-month rolling funnel. Every time we have a business review, we’re looking a year forward, and we have a base expectation that the people are going to cover or do better than inflation. When you partner that with a business to get positive results, you see better margins. There’s really no reason why you can’t continue to see margin expansion.

Okay. That sounds great. Thank you.

Thank you, Walt.

So first of all, let me just say thank you to everybody for your time and effort that you put into following IDEX. We appreciate the analyst community and we appreciate our investment community. I think it’s important to note that we are very cautious about the underlying environment, right, that’s out there in terms of where we are in the cycle, in terms of the likelihood of a recession. We very much believe that somewhere in the next 24 to 36 months, there’s going to be a recession, and we believe that to be true. At the same time, we think that long-term relative to the industrial cycle, we actually think is really attractive. We want to put ourselves in a position to really win over the long-term. I like what we’re doing in terms of focused investment, putting our money in our highest priorities, continue to segment our business, building our team, and the team has done a great job and I want to congratulate them. They’ve really been outstanding. As a final word before we go, being a native New Englander, I’ve got to say Go Pats. So, with that, we will cover things; thank you, Matt, and thank you, everybody again. Take care.