Idex Corporation (IEX) — Q2 2020 Earnings Call Transcript

Great. Thank you, Melissa. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for a discussion of the IDEX second quarter 2020 financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the three months ending June 30, 2020. The press release, along with the presentation slides to be used during today’s webcast, can be accessed on our company’s website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We’ll begin with Andy providing an overview of IDEX's second quarter performance and addressing the impact of the COVID-19 pandemic on our operations, as well as the company’s response to date. He will then provide an overview of our primary end markets. Bill will then discuss our second quarter 2020 financial results and walk you through a review of the company’s cost actions, liquidity and financial durability. And finally, Andy will conclude with our current framework for the third quarter and closing remarks. Following these prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering conference ID number 13694805, or you may simply log on to our company’s 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’s filings with the Securities and Exchange Commission. With that, I’ll now turn this call over to our Chairman and Chief Executive Officer, Andy Silvernail. Andy?

Thanks Mike. I want to start by thanking all the people across IDEX. They've really stepped up with the challenges that COVID-19 has presented and have embraced the evolving protocols along the way. As COVID-19 has impacted families globally, we've not been spared loss here at IDEX, and I want to make sure that all of our teams know how proud we are of their contributions. In a crisis, especially one as devastating as this, your true values are exposed and the culture that we've built at IDEX is stronger than ever. We continue to supply our customers with critically enabling products across the globe, meeting their challenging demands, and partnering with them to rapidly support and develop innovative new products to battle COVID-19. I'm going to share one of those examples here in a few minutes. Our businesses continue to deliver during this pandemic. With our internal safety protocols and resilient supply chain, we've been able to deliver products with limited interruptions. When issues have arisen, the teams have been able to react quickly and mitigate the impact on our business and customers. While we have experienced significant sales increases, our balanced end market exposure and mission-critical product offerings have limited these declines. The diversification into various life sciences, pharma, and municipal applications has lessened the more cyclical declines in energy and general industrial end markets. Also, our operating and finance teams across the globe did an excellent job of deleveraging the balance sheet and helping to drive record second quarter free cash flow. We converted at 193% of adjusted net income. Finally, we have continued to be proactive in mitigating the bottom line impact from the historical economic dislocation created by the virus. We've ramped down all non-essential expenses to mitigate our organic decrementals at less than 40%. We're leveraging and restructuring actions that we took in 2019, along with new actions that were required in several of our businesses that will see more prolonged volume impacts. As these organizations right-size for the new normal, we've increased investments in several other businesses to capitalize on short-term COVID-19 opportunities, as well as invest in projects that will support our longer-term growth. We've made swift and smart decisions to keep our people safe, keep our business moving, and ensure our financial performance making sure that we do everything we can to help win the COVID-19 fight. Turning to slide seven. We outlined four key strategies to operate in the COVID-19 world in early March. Focusing on this framework has been a key part of our ability to perform across our businesses. From a safety perspective, protecting our teams as we remain open has been our priority. The standards we've implemented globally have been effective in keeping operations consistently running with minimal work stoppages across our facilities. We've evolved our protocols and have implemented mandatory face coverings in all of our facilities to protect our employees and limit the spread of COVID-19. As I mentioned earlier, our operations and supply chain team have done an excellent job ensuring business continuity. We continue to improve our operational preparedness and bolster our supply chain with plans to help avoid business disruptions. We anticipate continued volatility in the months ahead, and the dynamic planning support structure we've built should serve our businesses well. Our actions in the second quarter have minimized any concerns we have with liquidity. We issued $500 million of new bonds to pay off our 2020 notes and bolster our cash position. We had record second quarter cash flow, and we have $746 million of cash on our balance sheet and full capacity on our revolver. The efforts of our teams have put us in a great financial position, and we have more than enough capital to fund all of our operational needs due to the pandemic as well as position us to take advantage of other capital deployment opportunities. Lastly, our leaders are spending more time playing offense. Our teams continue to innovate and bring new products to market that capture short-term opportunities, but also leverage our portfolio to capitalize on longer-term secular trends that are evolving as a result of the pandemic, particularly around testing for viruses and antibodies as well as the creation of a vaccine. I will go into more detail on those opportunities here in a minute. We also see the M&A markets opening up with more deals starting to come through. While it's still going to be a challenging year from an M&A perspective, we're more optimistic in our ability to get a deal done than we were 90 days ago. With that update on the status of the COVID-19 playbook, I'd like to spend a few minutes walking you through one of the products that's a critical technology in the mass production of vaccines. I'm on slide eight. In the HST segment, products from our microfluidics product line within our Materials Processing Technologies business are key to help bring a vaccine for COVID-19 to market. Our Microfluidizer processors are key technology used to manufacture the vaccine adjuvants required for several of the vaccine trials. Vaccine adjuvants are immune stimulators added to many vaccines commonly used today. By using an adjuvant in a vaccine, the body can produce a better immune response to the antigen with the germ, while also allowing vaccine manufacturers to produce more doses of vaccine with less antigen. In addition to vaccine adjuvants, Microfluidizer processors can be used to manufacture lipid nanoparticles that are key ingredients with new mRNA style vaccines currently in the pipeline. The team at MPT has done a fantastic job responding to the increasing demands in the market for COVID-19 vaccine testing and preproduction, and has quickly aligned priorities to meet this market need and participate in the fight against the pandemic. This highlights just one of the ways IDEX businesses have answered the call and wholeheartedly embraced our mission of trusted solutions improving lives. We're moving now to slide nine. We've outlined here how we're seeing the current environment impact our primary end markets. In our Fluid & Metering Technology segment, we've seen a broader industrial softness that we called out at the end of 2019, become exacerbated by the pandemic as well as volatility in the oil and gas markets. Our industrial businesses have seen a decline in volume due to the lack of capital investment from our customers. While we've seen the like-for-like replacement sales in these businesses hold up well because of the critical nature of its components, the impact of the soft market and the pandemic delaying capital projects has led to broader declines. Our water business, while down year-over-year, has held up well as municipal projects have largely been continuing with some delays as municipalities have responded to the critical needs of the communities that they serve. Similarly, agriculture has held up reasonably well, given a stronger spring season in the U.S. and relatively optimistic demand from growers. In the Health & Science Technology segment, we've seen two bright spots coming from both the opportunities I discussed previously, as well as a strong rebound in the semiconductor market in 2020, which has largely been driven by demand for 5G products. We've seen semiconductors come out of the downward cycle that they had experienced over the past 18 months. On the other hand, analytical instrumentation, industrial, and automotive markets have been impacted significantly. In AI, as the medical industry focused on COVID-19, other investments in lab equipment were delayed and we're just now seeing those investments start to pick up. Automotive experienced a wide-ranging production shutdown significantly impacting our sealing business. We expect some modest sequential improvement as we move into Q3 but expect these markets to remain challenged in the short and medium term. Moving to Fire & Safety/Diversified, we also saw the automotive and aerospace industry shutdown in the U.S., significantly impact our BAND-IT business. Additionally, we've seen lower capital spending globally impact our dispensing business as many customers are delaying replacement and upgrades, as they assess the pandemic's impact on their business. Our fire and rescue businesses, while countercyclical similar to other municipal businesses, saw non-committed capital projects pushed out due to municipalities prioritizing COVID-19 responses and only engaging in mandatory equipment purchases. Previously funded projects continue to proceed, and demand for our new products and offerings in fire and rescue are partially offsetting these project delays. As I mentioned previously, we firmly believe in the strength of the IDEX business model. While there will be continued softness in some of our harder-hit businesses, our diversified end market offerings will mitigate the impact of some of the cyclical declines that we've experienced. Our investments in life sciences, pharma, and municipal markets have helped provide countercyclical opportunities that we believe will continue to somewhat offset the weakness in these markets. With that, let me stop here, and Bill, I'll turn it over to you for the financial results for the quarter.

Thanks, Andy. I'll start with our consolidated financial results on slide 11. Q2 orders of $522 million were down 17% overall and 18% organically. As Andy just mentioned, the slowdown in our industrial end markets, volatility in oil and gas, and the compounding impact of the pandemic saw year-over-year declines in most of our geographies and end markets. Pacing for the quarter seemed to bottom out in May, with April orders down 18%, May down 23%, and June down 13%. Second quarter sales of $561 million were down 13% overall and 17% organically. While we were able to maintain operations effectively and avoided extended facility shutdowns, the interruption of automotive and transportation markets decreased CapEx spending in energy and general industrial and weakness in dispensing led to the organic sales declines. As mentioned before, which are relative strengths from a bounce back in semiconductors and new applications we've developed in response to the pandemic. Q2 adjusted gross margins declined 290 basis points to 42.6%, primarily driven by lower volume, the diluted impact of acquisitions and business mix, partially offset by strong price capture and cost actions, which I will detail out on the next slide. Second quarter adjusted operating margin was 21.1%, down 340 basis points from prior year, mainly driven by lower volume leverage and the impact of acquisitions, partially offset by restructuring actions and discretionary cost controls. Our Q2 effective tax rate was 22.7%, which was higher than the 21.7% in the prior year, primarily due to a decrease in the excess tax benefits related to share-based compensation. Second quarter adjusted net income was $84 million, resulting in EPS of $1.10 down $0.40 or 27% compared to the prior year EPS. Finally, free cash flow was a record of $161 million for the quarter, up 36% compared to the prior year period and was 193% of net income. The strong performance was the result of significant focus and discipline on working capital management, aided by federal tax payments pushed to the third quarter. The teams delevered the balance sheet with the lower sales volume, primarily through collecting cash from our customers; past due accounts receivable was the lowest it's been in several years. The reduction of receivables will stabilize with the sales volumes. So, we did not view this level of free cash flow performance sustainable going forward, but we are confident in our ability to drive cash flow conversion in excess of 100% of net income. Moving on to slide 12. As we discussed our Q1 earnings release, we dimensioned our cost structure and identified both discretionary structural cost actions we could take to help mitigate the impact of reduced volume. While our overall adjusted operating income declined $38 million in the quarter, we would have expected the $110 million organic sales decline to have a negative impact on operating income of $66 million and our robust 60% contribution margin rate. This $66 million was offset by $25 million in executed operational actions, $5 million from the impact of restructuring taken in the fourth quarter of 2019 combined with $15 million of discretionary cost controls taken in the quarter, along with $5 million of price and net productivity that was partially offset by negative product and business mix. To reconcile the $15 million of discretionary cost actions for you, we identified $120 million of actions we could take at revenue declines of 35% in our last call. The quarterly impact would have been $30 million with sales down 17%, roughly half of what our scenario depicted, our discretionary savings of $15 million is also about half of the target. While the teams did an excellent job in the second quarter mitigating a revenue decline, we saw the need to take additional restructuring actions in several businesses to rightsize their organizations for their new normal. The additional structural actions that were taken were focused in those businesses that we believe will experience a longer-term impact from the pandemic and underlying market softness. These businesses had to make some difficult decisions, but prudently responded to the existing economic circumstances while also supporting their long-term growth initiatives. These actions will provide another $10 million of annualized savings for us starting in the third quarter. Turning to slide 13 on liquidity. Free cash flow for the trailing 12 months ending June 30 was $516 million or 138% of net income. As mentioned before, we continue to be well-positioned to weather the current environment. We expect to generate free cash flow in excess of net income as we focus on cost containment and working capital management. Cash and cash equivalents totaled $746 million at the end of the quarter. We also have full availability of our $800 million revolving credit facility. With cash on hand, available financing, and conservative leverage, we are confident in our ability to continue to meet our obligations, fund operations, and make critical investments in the business. We addressed our prior $300 million 2020 notes during the quarter by issuing $500 million of 3% senior notes due in 2030, ensuring that we have adequate liquidity and capital as we pivot to the offense. The proactive steps that we executed in the first half to enhance our focus on liquidity and working capital have resulted in record free cash flow for the quarter. And although we are confident in our current position, we continue to actively monitor conditions with our customers and suppliers to ensure that we're able to react to any market condition.

With that, I would like to turn it back over to Andy to summarize our Q3 expectations and provide some final thoughts. Thanks, Bill. I'm on slide 14 folks. As I mentioned last quarter, we believe we will continue to operate in a challenging environment. We do not anticipate the economic recovery from this unprecedented situation will be a straight line, and we expect that we will continue to see certain markets remain challenged, while others bounce back more quickly. The strength is in our business model and our people, and we will continue to make prudent decisions to navigate the environment effectively. We feel strongly that the actions we've taken to position the company to weather the existing environment, but as importantly, to rebound strongly as we come out of the other side. We remain well-structured from an operational, talent, and financial perspective, but we acknowledge the challenges that we will face across all of our business units, and we expect that the revenue in the third quarter will be down 12% to 17% organically. While we expect modest sequential growth from some markets that have started to recover, we know that some other markets will continue to be challenged. We're focused on balancing the need to take responsible cost control actions, while investing in areas that will allow us to recover quickly. We look forward to additional ways to play offense and deploy solutions that help in the fight and provide opportunities for us to generate long-term growth. To conclude, I'm extremely proud of how our employees have responded to this crisis. The teamwork that has been displayed as we rolled out evolving safety protocols, responded quickly to volatile market conditions, and ultimately delivered critical solutions for our customers is a testament to the mission and the values of our company and the great people who are central to the IDEX difference. While we have started to learn how to live and operate in this new world, there will be further challenges that we face in the coming months. From what I've seen from our team, I have no doubt that we'll continue to meet and overcome these challenges as they come. With that, let me pause here, Melissa, and turn it over to questions.

Hey, good morning, everyone. Hope everyone's doing well.

Hey, Mike.

So, let's start kind of where you left off there, Andy. Not a linear recovery from here, maybe some thoughts on how July has shaped up? What kind of assumptions are embedded as you think about the rest of the year and the type of curve or how you think things play out, and then maybe a little bit more timeframe the next year, year and a half? What's the organization planning for as it sits here? Obviously, you guys are going to be positioned to be very fluid and be able to attack the problems or opportunities as they come, but what's the base case for improvement as you guys look at and how you're planning for things?

Thanks, Mike. I'll divide the response into two parts. First, let's address the short-term situation. July has shown continued improvement, which is a positive sign. After conducting our operational reviews over the past week, we see consistent sequential improvement across our businesses, reinforcing our belief that we reached the bottom in May. As Bill mentioned, July resembles June, perhaps even a bit better. Unless we experience another global shutdown or significant issues from the ongoing surge, we expect this improvement to continue for the rest of the year. In about 90 days, I hope we will be discussing guidance in the single-digit to low-double-digit range for revenue. However, I must emphasize the uncertainty due to the ongoing surge in the U.S. and the challenging situations in many parts of the emerging world. Regarding the longer-term recovery, my views remain consistent since we spoke in March. We are likely to face challenges until a vaccine is available. We're closely monitoring developments in our HST segment, and there is encouraging news regarding the vaccine efforts. However, we are learning that these vaccines may not be effective, could take longer than expected, and the virus might mutate. Our current outlook is that we expect to see ongoing improvement through the third and fourth quarters. Assuming a vaccine is deployed early next year, we anticipate a significant acceleration in recovery.

No. No, that's helpful. And then, second piece on the M&A side, the prepared remarks, tough environment, but a little bit more optimistic.

Yeah.

A couple fold here. One, what is the approach you guys are taking in this environment at a high level? And two, what's driving the optimism behind the thought process?

At a high level, it's really important to focus on what you know well. In this environment, making deals in unfamiliar areas is quite challenging because due diligence is much tougher. We're currently involved in due diligence for a couple of different deals, one based in Europe and another in the U.S. It's not like it was six months ago; you can't physically get out there and do what you need to do as you did in the past. Therefore, you must have a thorough understanding of your markets and the essential structure of the business you're looking at, as well as what you can do with that business. Over the past 60 days, we've noticed an increase in deal flow and more conversations with people we've been building relationships with for years. Regarding confidence, as I mentioned in our last call, it's tied to feeling secure about cash flow, and I feel very good about our cash flow trajectory. We had an exceptional cash flow quarter, and we expect further benefits from deleveraging in the third and fourth quarters with inventory. Overall, I'm very optimistic about our underlying cash flows and our ability to predict the performance of similar businesses based on these cash flows.

So, could you put that also in context of how you're balancing M&A and then buybacks as we sit here today, pull back on buybacks because of the environment, not because of liquidity and/or maybe feel better about the M&A side, so a better place to put capital. Any thoughts there?

Let me address that in two ways. First, we had to pause our buybacks at the beginning of the quarter after initially being active as the stock price dropped. With the significant uncertainty, we decided to stop. We did have a 10b5-1 plan in place during the second quarter, so we are still open to repurchasing shares. We have sufficient capital and authorization from our Board to do so. However, our primary focus remains on acquisitions, as they strategically enhance our business, compound capital, and create opportunities for our team. That will always be our top priority after ensuring our business is fully funded. We're committed to pursuing acquisitions. Price levels have remained steady, and the trade-off between interest rates and reduced cash flows due to the pandemic has balanced each other in terms of valuation. Overall, from a value standpoint, we are in a similar position to where we were six months ago.

Yeah. No, that makes a lot of sense. I appreciate the time.

Yeah. Thanks, Mike.

Thank you. Good morning, everyone.

Good morning, Deane.

Andy, if you think back like a year and a half ago, we had investor meetings with you and we talked about what the playbook was in a normal recession.

Yeah.

Clearly, this is anything but normal. However, there is still a playbook that you're following, and it would be helpful if you could refresh us on it. When I look at slide 12, it provides important insights, but could you elaborate on a couple of key points? We see the aspect you cannot control, which is the near-term organic volume, and we've noticed the decline there. Then to the right, we see the total flow-through after all your cost-cutting measures, which involves a lot of strategy regarding what and how you're cutting. My first question is regarding the total flow-through on the far right: is that an outcome or a target? As you respond, please address that. Additionally, where do we stand regarding how deeply you will cut? What growth opportunities are you preserving for the future? Let's start with those points.

Absolutely. To approach this from a strategic standpoint, we entered this year with a clear plan for potential downturns. Our assessments indicated that 2020 had a reasonable chance of experiencing a mild recession, which we had anticipated in the fourth quarter of the previous year. We implemented actions worth $15 million to $20 million, which you can see reflected in our FY 2019 cost measures, amounting to $5 million for the quarter. As we responded to the significant downturn at the end of last quarter, we outlined a scenario where business could decline by as much as 35%, which represented $120 million in discretionary or variable costs that we could target. Unfortunately, this plan was misunderstood regarding our intentions to act on it, prompting us to provide clarification. Additionally, we identified another $40 million in urgent measures we could take. As we progressed, we executed about half of the discretionary actions, corresponding to the $15 million noted for the quarter. We balanced this with a variety of pricing strategies and acquisitions. We also recognized that several businesses would face structural challenges going forward, leading to some restructuring efforts this quarter. Currently, we have a bit more left to address in the third quarter, but overall, we're in a strong position. While we don't have immediate plans for further cuts, we have the remaining half of the discretionary actions available and are implementing some of the urgent measures across select businesses, though this is not a widespread approach within IDEX.

That's real helpful. And if I can switch gears and go back to the side on the microfluidics. For a second there, I thought I was in a Danaher conference call. So just a couple of questions.

A lot of the same markets.

Yes, sir. A couple of questions here on the application. And then, broadly, are you seeing investments yet on this whole wave of the reassuring of the U.S. pharmaceutical production capacity? So, two questions. One, for this application on page eight, are you both in vaccine discovery and also vaccine production, and then all the pharma reassuring? Are you seeing any of that?

Yeah. So the answer to your first question is yes and yes. Or A question and question B, it's yes and yes.

So production and discovery …

And production.

… of the vaccine, and then eventually production, it gets used in both.

In terms of discovery, we are primarily focused on our life science business, particularly in analytical instrumentation and biotech through sequencing. For instance, the Microfluidizer is not a new technology, but it is now being scaled in a way we haven't seen before. We are in a unique position to scale a leading market technology during what is expected to be an incredible boom in this sector. We anticipate a significant production of vaccines, many of which may never be utilized due to the substantial funding circulating in that system. We have been a market leader in this area and will continue to maintain that position moving forward. Deane, could you please repeat the second question?

Pharmaceutical reassuring?

Yes, that is definitely happening to some extent. However, I believe it will progress more slowly than many anticipate. It’s not simple to transition everything all at once. Nonetheless, we will absolutely engage as this trend develops. There is no question that this is occurring, particularly in some of the more sensitive areas. We will benefit from this, especially in AI and our materials processing business, which will be significantly impacted. Additionally, we will see some effects in our analytical instrumentation and life sciences business.

That's real helpful. Thank you.

Thanks, Deane.

Thanks. This is just more of a geographic question. Can you give a little bit of color in the quarter around the 17% organic, what you experienced in North America versus Europe versus China? And then similarly, maybe at least, some qualification around directionally how things progressed in the geographies as things shut down and opened up during the quarter. Just maybe more color around order rates there in as well, if you could.

Certainly. In terms of geographic performance, the U.S. showed some weaknesses, Europe performed about as expected, and Asia did better overall. Notably, China showed positive growth for the quarter, which is encouraging. However, India faced significant challenges, with sales dropping considerably due to extensive shutdowns. These regions are critical for us. Regarding the figures that Bill shared about monthly trends, they were largely consistent globally, with Asia, particularly China, improving more rapidly. This trend deviated somewhat from the other data available, but overall, the improvements closely aligned with the reopening phases. As the situation improved with reopening, we observed a corresponding uptick in business activity, whereas shutdowns led to negative impacts, reinforcing the relationship between operational stability and business performance.

You mentioned the opportunities in microfluidics, but it seems like you're also increasing growth investments in other areas. Could you elaborate on some of those? Additionally, is there a way to assess the scale of the potential opportunities based on what you're observing?

We have several initiatives that aren't particularly risky and we have a clear understanding of how to execute them. For instance, in spraying technologies and compressors, as well as in the ongoing global ventilator production, our gas business is actively involved. These opportunities are currently in progress, and we can see a future path for them. While there may be some fluctuations, we know how to navigate these areas, and they collectively represent over $10 million. These are significant programs that are gaining traction and are quite appealing. On the other hand, we also have opportunities that are much more volatile. We're working on innovative testing protocols with exciting technology, and there's substantial investment flowing into these areas. These could either grow into very substantial ventures, potentially reaching tens of millions, or the technologies may not succeed and yield no viable results. There is considerable uncertainty with new technologies, particularly concerning how the end market evolves and how swiftly global testing capabilities can expand. Notably, we aren't just discussing COVID testing; I believe we will see a significant overhaul of global testing capacity to avoid past pitfalls. Consequently, I anticipate a prolonged increase in testing capacity over the coming years. These two categories are quite distinct, but they both represent opportunities worth tens of millions, depending on their success in commercial markets.

Great. Thanks, Andy.

Thanks, Matt.

Hi, guys. Good morning.

Good morning.

Just want to build on Deane's question around that the playbook that you talked about. Obviously, the portfolio was quite stressed in the quarter, but as we moved to that playbook, did anything come to light in terms of a process, a business, or even a regional exposure that you're kind of questioning now that you might kind of go back and have to revisit once things stabilize here?

Are you asking if it was a business that became vulnerable or something similar? Is that what you mean, Allison?

Vulnerable or sort of the way you're doing business today that maybe you have to kind of rethink some of that process? Anything that came to light that was pretty unique as you kind of moved through the stress that we had this quarter. It might be an early question here because we're still going through it.

I think there are a couple of points to address, Allison. First, I want to make a general observation that applies to our overall operations. We've demonstrated our capability to work remotely. However, I don't agree with the notion that everyone should work from home indefinitely; I find that idea quite concerning. Nevertheless, our ability to effectively collaborate with customers and suppliers from a distance, achieving equal or even better results, is likely to lead to significant changes. Additionally, our improved understanding of our customers, coupled with the growing comfort with technology, is a significant development. It's crucial for a business like ours, which is so focused on applications, to understand problems, provide solutions, and address issues effectively. This is very important for us. Additionally, the high contribution margins associated with our IDEX can be both a blessing and a curse. We appreciate these margins and have no intention of giving them up, but it's essential for us to find ways to make certain aspects of our costs more variable. In some areas of our business, while fixed costs may initially seem beneficial, they can become burdensome if circumstances change. Thus, we're considering how we can increase variability in our operations. Lastly, we've realized that what we think of as fixed costs and variable costs can actually be much more adaptable than we had previously understood. And if you just told me a year ago that we could do what we've done with our cost structure, I'm not sure I would have believed it, Allison, to be candid with you. And I think we've demonstrated to ourselves our ability to do that. And I think going forward, how do you keep those lessons learned, and make sure that we have as dynamic a P&L and balance sheet as we can both on the upside and the downside.

Thank you for the insights. I'd like to ask about the municipal markets. You mentioned experiencing some pressure in the rescue and fire sectors, while water was performing better. In your discussions with customers, are there concerns heading into 2021 about potential additional pressure in these areas? We're continually seeing news about various cities and municipalities facing financial difficulties. How do you view these markets, and do you expect any level of government funding to be introduced eventually?

I believe that if we reflect on the financial crisis from 12 years ago, the municipal sector managed to remain stable initially, but about 18 months later, challenges arose. I don't expect it to take that long this time, as people have learned to respond more swiftly. I anticipate that municipal budgets will face some difficulties globally. It’s likely there will be interventions in the form of federal or government funding because some projects are being delayed as resources are redirected to address COVID-related issues. This delay will create a demand gap that needs to be addressed next year. Therefore, I think we will see challenges in the next 12 to 24 months, and I expect some federal support to emerge. However, regardless of this support, there will still be a negative comparison when we look ahead to the next year or two.

Great. Thanks. That's helpful. Thank you.

Thanks, Allison.

Good morning, everyone.

Hi, Nathan.

I'd like to go back to slide 12 as well. And I'm going to ask you a few questions about what that might look like when we change it to Q3. Your FY 2019 cost actions should still have five on that bar.

Yeah.

You said you have about half of the discretionary costs out. So, if you got this discretionary cost bar be 30 in Q3, or should it be some number between 15 and 30?

No, I'm sorry, Nathan, if there's any confusion on that. The 30 would have been the scenario if our business had declined by 35%. In the quarter, our business was down approximately 17% organically, so we targeted about half of that discretionary. Just to clarify for everyone on the call, if you refer back to our presentation after the first quarter, the $120 million we discussed was a cost we could potentially eliminate based on a 35% volume decrease, but we've only experienced about half of that. Looking at the third quarter, I would anticipate something around 15, but this is dependent on volume. If we end up closer to 12, that figure might be a bit lower, but I believe 15 is a reasonable estimate. Bill, do you agree with that?

Yeah. I agree. It will be pretty close to 15 next quarter, plus or minus.

Got it. And then, the price productivity and make should be roughly the same. Maybe it's a little lower. I mean, I know you've talked about maybe less than a point of price this year, so maybe that's four or five, something like that. And then we have other 2.5 from the structural cost actions that you've taken in 2Q.

Correct.

Okay. So, your organic flow-through numbers probably going to be something like maybe a 35 or something like that by the time we get to the end of Q3?

That was in that ballpark.

Okay. The next question I wanted to ask is regarding the overall 12 to 17 organic guidance. Clearly, you had the lowest order numbers in May, and you turn your inventory roughly every six weeks, so you should have worked through that by now. If not, in the early part of July, you're looking at a 3.8 year-over-year comp. We've mentioned that things are expected to improve sequentially. Could you discuss what conditions would lead you to be at the low end of that 17? It seems like you would need to see some kind of disruption in supply chains or shutdowns to hit minus 17. Also, what factors would you need to consider to improve beyond minus 12? It appears to me that you should be trending toward the better end of that range instead of the worst end.

The answer to this question is straightforward. To be at the bottom end of the 17, it would have to resemble the situation from the past quarter. To exceed the 12, which I currently don’t see any evidence for, we need to show more sequential improvement. That's why the 12 to 17 range seems appropriate. However, there is a scenario where things could improve slightly, while a worse case scenario could occur if we experience a significant shutdown. Additionally, it's important to note the surge in COVID-19 cases in the U.S., whereas Europe has managed the situation better. This creates uncertainty, and with the presidential election beginning, there's potential for increased volatility that I find concerning. Those are two factors that could worsen the situation, but at this moment, I do not anticipate it dropping below 17.

I know you guys plan for the worst and hope for the best. One last one. Would you expect to burn backlog during the third quarter, or relatively stable?

Bill, what do you think there?

Yeah, relatively stable.

Okay. Thanks very much for your time.

Thanks, Nathan.

Can you hear me?

Sure, can, Scott. Good morning.

Hey, good morning. I have several questions around the guidance as well. First of all, maybe go back to the second quarter guidance, which was minus 15 to 25. And you did a minus 17, so you sort of came on the better end of that. What surprised you versus the midpoint in the quarter?

When we provided that guidance, the situation was just beginning to unfold, and it was difficult to gauge the extent of the downside. We felt confident about reaching the 15 mark, but the low end of the expectations was much less clear. Our ability to predict revenues was significantly worse 90 days ago compared to now. There remains some volatility in our operations, but if you examine our key industrial sectors, you'll notice a stabilization in order rates, which is a positive indicator. We closely monitor our short-cycle businesses as they provide valuable insights. The volatility we experienced three months ago has substantially decreased, especially in day rates. Therefore, we are more confident in our projections. We initially had a 10-point range at the end of the last quarter, which we've narrowed down to a five-point range. Typically, our range tends to be between one to two points. If this trend continues and we avoid any major disruptions, we anticipate being able to further tighten that range in the next 90 days.

I would add that while there is commercial variability, we also gained confidence regarding operational uptime and supply chain uptime. This improvement allowed us to narrow the range. The potential risks identified by Andy within the quarter contributed to the range we currently have.

No. I understand that. Based on Andy's response, it seems like you feel more confident about the third quarter guidance, and that it has a more data-driven basis than the second quarter guidance. With that in mind, I wonder why, if you're anticipating improvements sequentially, there is still a minus 17 in the guidance. Most of us considered the last quarter to be the worst ever, and things seemed to have bottomed out in May. I'm still uncertain about how there can even be a 17 organic in that guidance. What is your concern regarding that figure?

We have a limited amount of data, specifically for June and part of July, showing some improvements. If the current trends hold, the negative 12 figure seems accurate, indicating sequential improvement. However, if we encounter significant issues due to the surge in the United States, we need to remember that the actual numbers are currently worse than they were during the period of panic. The situation is particularly concerning in the U.S., and we're just beginning to see its effects in the emerging markets. The negative 17 figure suggests a substantial backslide, resembling conditions from the second quarter. Reflecting on our position 90 days ago, we had no clear understanding of the real downside. I believe we've gained better insight, which gives me more confidence in the range of 12 to 17 compared to the earlier 15 to 25 range. My confidence has significantly increased in the 12 to 17 range.

Yes, it seems that way. I have two quick follow-up questions. First, let’s consider the minus 12 or the midpoint of the third quarter guidance. Which of the end markets on that interesting page, I believe it's page nine, really stands out? Can you explain which markets or factors could lead to better outcomes?

You're talking about the checkerboard slide, Scott?

Yeah.

Currently, the highest volatility is found in FMT and diversified markets. The negative volatility has primarily been linked to general industrial sectors and those connected to transportation, with oil and gas being a distinct case made worse by the current situation. The general industrial sector seems to be bottoming out and showing signs of improvement, which could lead to better outcomes. However, it is also the most susceptible to a downturn. The most significant volatility will likely be seen in industrial and chemical sectors; these are particularly noteworthy. In the Fire & Safety category, dispensing and automotive are important, with dispensing showing unique potential due to a strong consumer market, especially among big box retailers selling paint. However, purchases are currently halted as they are increasing capital spending. On the industrial side, performance is closely linked to market trends. A noticeable increase in dispensing could arise if consumer confidence grows. Additionally, there are encouraging signs in transportation, particularly with the automotive sector showing recovery. Aerospace presents different challenges, especially in our BAND-IT business, which has experienced some downturns related to transportation, particularly in aerospace.

That's hugely helpful. Would you mind if I just snuck one more question here for Bill? So, I guess, I was a little bit curious about the break the glass, $40 million potential. I'm assuming that that's a structural cost reduction number for potential. And I'm wondering why it's not a larger number than that.

Well, I mean, it's compounding on $20 million of actions we took in Q4. So, if you look at that total bucket, that'd be $60 million.

I thought you mentioned that $40 million is a potential figure. I'm trying to clarify if that amount is based on structural factors. If it's indeed structural, could you explain what that number signifies in breaking the glass?

You're removing the basic fixed costs of the business, which include facilities and personnel. That figure is significant. To provide some context, when we projected $15 million to $20 million last year, it was a substantial and important amount, but it was based on the assumption of a mild recession. To give you an idea, in 2008 and 2009, we eliminated a total of $40 million.

A little bit less, but around there.

And that was total, Scott, including discretionary, right? And right now, we are at a total run rate. Bill, is at $90 million. Is that the number?

Yeah. If you add in the discretionary, correct.

Well, frame that way. I understand it better. Thanks a lot, guys.

Yeah. Thanks.

Thank you very much. I appreciate everyone's time and patience as we navigate the current challenges together. I want to highlight two key takeaways. First, the mission and values of our company have faced significant tests, and I am immensely proud of how everyone at IDEX has responded. They have shown compassion, taken action, and exhibited discipline and prudence. It is heartening to see these values not only endure but also strengthen during such times. Second, over the past few years, I have discussed how our company performs in challenging situations. I take great pride in our ability to sustain cash earnings even during difficult periods. I believe the results from the second quarter reflect this capability, as we achieved impressive cash flow performance. If you consider it from a cash and EPS perspective, it's truly impressive. As we progress through the remainder of the year, we obviously won't have the same opportunities with accounts receivable that we experienced last quarter, but we will with inventory. When we reflect on this year, we'll all remember the challenges we faced, but I believe it will once again demonstrate the resilience of a company like IDEX and its business model. I'm genuinely pleased to have the opportunity to lead this business. Thank you all for joining, and I look forward to connecting with you in the next 90 days. Take care.