Idex Corporation (IEX) — Q2 2022 Earnings Call Transcript

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX second quarter 2022 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the 3 months ended June 30, 2022. The press release, along with the presentation slides to be used during today's webcast, can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We will begin with Eric providing an overview of the state of IDEX's business. Then Bill will discuss IDEX second quarter financial results and updates on segment performance in the markets they serve and our outlook for the third quarter and full year 2022. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing toll-free number, 877-660-6853 and entering conference ID 13724804, or simply log on to our company homepage for the webcast replay. Before we begin, a brief reminder. This call may contain certain forward-looking statements that are subject to safe harbor language in last night's press release and in IDEX filings with the Securities and Exchange Commission. With that, I'll now turn this call over to our CEO and President, Eric Ashleman.

Thank you, Allison, and good morning, everyone. I'm on Slide 6. IDEX delivered outstanding results in the second quarter. We achieved record sales levels, 12% organic growth supported by double-digit contributions from each of our operating segments. Our backlog grew by 43 million, and we now sit at record levels to continue momentum into Q3. Core profitability continues to be strong even as we return to more normal discretionary spend levels, allowing us to fully invest in our best growth investments. We delivered record adjusted EPS of $2.02, an increase of 15% over the prior year's second quarter. Last quarter, I described how our IDEX teams leveraged 8020 to accelerate throughput within a challenging supply chain environment. That positive momentum continued in the second quarter as our teams improved their ability to execute and deliver for our customers. Our decentralized operating model, which aligns decision-making at the point of impact close to the customer, drives the speed and agility required for us to outperform. Our lead times were a competitive advantage and enabled share gain in pockets across the company. Inflationary pressures remain, but the rate of increase decelerated, while we continue to capture price equivalent with our differentiation. Gross price capture increased and we expanded our price/cost spread trending back towards historic levels. We remain committed to our capital deployment strategy and M&A remains a top priority for us. This quarter, we closed on the acquisition of KZValve, a complement to our agriculture business within FMT. Our pipeline is strong, and we continue to evaluate opportunities in higher-growth markets that support our style of competition. We have a healthy balance sheet and are confident that we can continue to put our capital to work. We're also deploying capital organically across our portfolio to drive operational efficiencies and increase capacity to support our growth. We continue to make investments in commercial, engineering and M&A resources that enable us to execute on our strategy. During the quarter, we increased our share repurchases and deployed $88 million to buy back 475,000 shares of IDEX stock. We remain disciplined with our methodology to create long-term value for shareholders when we see a disconnect between our intrinsic assessment of IDEX enterprise value and our public valuation. Lastly, in the second quarter, our Board approved an 11% increase in our dividend. Rising interest rates, continued inflation and geopolitical dynamics all present some uncertainty for us as we consider and head into the second half of the year, but we're not yet seeing any major signals of near-term slowing within our commercial environments. We have good line of sight to the next 90 days, and we continue to see strength in almost all our end markets. As we look across the industries we serve and our portfolio of differentiated technologies, we're confident that IDEX is well positioned to outperform during any short-term market volatility. It's been a really strong first half of the year, and our teams have a lot to be proud of, but it's not easy to overdeliver in this environment. I'd like to thank our IDEX employees around the globe for their hard work, diligence, and agility as they execute for all our stakeholders. With that, let me turn it over to Bill to discuss our financial results.

Thanks, Eric. I'll start with our consolidated financial results on Slide 8. Q2 orders of 839 million were up 12% overall and up 7% organically. We experienced strong orders growth in HST and FMT, but saw contraction in FSD driven by dispensing North America's strong replenishment orders received last year. Second-quarter sales of $796 million were up 16% overall and up 12% organically. We experienced record sales with double-digit increases across all 3 of our segments. Second-quarter operating margin was 23.4%, up 30 basis points compared to the prior year. Adjusted operating margin was 23.8%, down 60 basis points. Incremental amortization related to Airtech, Nexsight and KZValve acquisitions unfavorably impacted adjusted operating margin by 80 basis points. Second-quarter net income was $138 million, which resulted in EPS of $1.81. Adjusted net income was $154 million, resulting in an adjusted EPS of $2.02, up $0.27 or 15% over the prior year. Finally, free cash flow for the quarter was $97 million or 63% of adjusted net income. This reflects higher accounts receivables driven by the significant increase in sales versus last year as well as elevated inventory levels. Inventory has increased to buffer supply chain challenges and leveraged material availability as a competitive tool to take share in the market. We have spent a lot of time with our teams reviewing their inventory reduction plans and are targeting to bleed down our inventory positions in the second half of the year. Moving on to Slide 9, which details the drivers of our adjusted operating income. Second-quarter adjusted operating income increased $23 million compared to last year. Our 12% organic growth contributed approximately $22 million flowing through at our prior year gross margin rate. We leveraged well on the volume increase. Our teams drove operational productivity, and we had strong price capture to offset inflation headwinds. Price cost was accretive to margins and is trending towards our historic levels. We experienced positive mix of $2 million across the portfolio. We reinvested $4 million, mainly in the form of engineering and commercial resources, to drive long-term growth and additional resources to support our accelerated M&A activity. Lastly, discretionary spending increased by $9 million versus last year and up $7 million versus the first quarter of 2022. Our teams across the globe are back to in-person partnering with our customers, actively marketing our products and investing to support innovation. As we look ahead to the second half of the year, we do not expect this level of sequential increase to continue. We've now ramped to our pre-pandemic spending rate, but on significantly higher sales. Our organic flow-through was 23%, in line with the flow-through expectations we set at the beginning of the year, but most likely the lowest rate we will experience this year. Flow-through is then negatively impacted by the dilutive impact of acquisitions and FX getting us to a reported flow-through of 21%. With that, I'd like to provide a deeper look at our segment performance. I'm on Page 10. In our Fluid & Metering Technologies segment, we experienced a strong second quarter for both orders and sales with organic growth of 8% and 13%, respectively. FMT adjusted operating margin expanded by 170 basis points versus last year. The increase included 60 basis points of headwind due to incremental amortization related to the Nexsight and KZValve acquisitions. Volume leverage, strong operational productivity and favorable price costs were the main drivers of the increased adjusted operating margin. Our industrial markets are exhibiting stable demand with consistent quote activity over the last few quarters. We are seeing small to midsized projects coming through in the oil and gas and petrochemical markets as well as in applications tied to mining, asphalt and lithium-ion battery production. Agriculture continues to perform well. Farmers are experiencing record inflation and look to our technology and precision ag to drive productivity. The KZValve integration is going extremely well, and our automation project at Banjo is on track. Market conditions remain favorable in our municipal water business. We continue to see a strong commercial funnel and long-term optimism, driven by government funding and ESG initiatives. On the energy side, upstream markets are experiencing healthy demand with oil prices providing strong support. Midstream investments have yet to see a bump in activity due to customer supply chain constraints and caution our long-term price sustainability. Moving on to Health & Science/Technology. Stellar commercial performance continues with organic orders up 13% and organic sales up 12%. HST adjusted operating margin contracted by 130 basis points versus the second quarter of 2021. Incremental amortization related to the Airtech acquisition unfavorably impacted adjusted operating margin by 130 basis points. Additionally, adjusted operating margin was driven by strong volume leverage and positive price costs, partially offset by increased employee-related costs, discretionary spending and resource investments. HST continues to benefit from strong secular growth trends within life science, analytical instrumentation, semiconductor and food and pharma markets. The life sciences market is experiencing strong demand for next-gen sequencing instruments and consistent core diagnostic market performance. Analytical instrumentation and material processing results remain strong on continued pharma and biopharma demand. On the semiconductor side, we continue to see growth, but at a slower pace. We've been able to offer shorter lead times than our competitors, enabling share gain across a variety of applications. We continue to see strong growth in our optics businesses tied to broadband satellite technology and strength in our industrial businesses similar to the FMT results. Finally, turning to our Fire & Safety/Diversified product segment. Orders contracted by 5%, but sales were strong with an organic increase of 11%. FSD adjusted operating margin contracted by 280 basis points versus the second quarter of last year. This was driven by higher volume being more than offset by higher employee-related costs and discretionary spending as well as pressure on price cost due to aged OEM backlogs on the fire side and automotive exposure with more metal content within BAND-IT. As we noted in prior calls, we have taken action to address this gap and expect the price/cost will improve in the second half of 2022 as those increases pull through our backlog. Our dispensing business performed well, driven by delivery of North American project volume and an overall positive global paint market. BAND-IT had strong results across the industrial, automotive and oil and gas markets. On the automotive side, we continue to outperform the market and capture share on new platforms. In Energy, we see strong downhole market demand and capture share due to material availability with shorter lead times for our customers. Within Fire & Safety, we are seeing strong demand with our E3 rescue tools. On the fire side, core North American and European markets remain choppy due to OEM supply chain constraints, but we are starting to see some modest improvement. With that, I'd like to provide an outlook for the third quarter and our full year 2022 results. I'm on Slide 11, which lays out our updated guidance. For the third quarter of 2022, we are projecting organic revenue growth of 9% to 10% and operating margin of approximately 24%. Q3 forecasted operating margin is up slightly versus the second quarter due to improved price cost, partially offset by lower seasonal volume leverage. We expect GAAP EPS to range from $1.80 to $1.85 and adjusted EPS to range from $1.98 to $2.03. Turning to the full year. Given our strong performance in the first half of the year, we are raising our full-year guidance. We now expect full-year organic revenue growth of approximately 10%. This reflects our confidence in line of sight for the third quarter, but some caution in the fourth quarter due to the short-cycle nature of our business. We expect GAAP EPS to range between $7.19 to $7.29 and adjusted EPS to range from $7.88 to $7.98. Our operating margin for the full year is expected to be approximately 24%. We are expecting free cash flow as a percent of adjusted net income to range from 75% to 80%, down from our previous guidance. With our higher revenue expectations for the back half of the year, elevating our year-end receivables balance and a slower-than-expected inventory bleed, this is our best estimate as we head into the second half of the year. Our long-term goal remains to be above 100% and consider the current guidance a reflection of the volatile external environment versus a structural shift in our cash generation capabilities. With that, let me pause and turn it over to the operator for your questions.

So let's start with the comment, Eric, that you said you're really not seeing anything yet in terms of deterioration. Things are going well, and you can certainly hear that from all the end-market commentary you guys gave. And then balance that with the guidance outlook that says you're taking a little bit more of a cautious outlook into the fourth quarter given short-cycle business, and you don't know what you don't know. So maybe just talk about those two competing things and what things you're looking for in your portfolio to say that things are going to keep this pace, maybe decelerate, could be the BAND-IT business, could be something else, but would love to kind of compare and contrast all that stuff?

Yes, thank you. We continuously monitor what we consider our early warning signal businesses, which are the shorter cycle, more industrial sectors closely tied to actual consumption in the industrial landscape. These areas have performed remarkably well. I believe that the overall narrative of the post-pandemic recovery revolves around an industrial system that has been working tirelessly to catch up. Therefore, we prioritize observing these indicators for any signs of weakness, as they typically provide early warnings that could lead to broader impacts. As I mentioned earlier, these indicators are currently stable. We'll discuss this further during the call, especially regarding our exposure across various markets in project work. This serves as an essential gauge for our overall confidence, reflecting how stakeholders are adjusting to uncertainty. We've noticed a slow down in a few areas, which is noteworthy as many businesses in this sector have struggled to gain momentum during this recovery phase. Aside from a few indicators and specific challenges ahead, we’re keeping a close eye on everything while also considering our backlog support, which provides us with some reassurance in the short term. Naturally, we will continue to make adjustments and recalibrate our approach, which is one of the advantages of operating in a short-cycle business, allowing us to respond quickly.

Yes. And just to frame that, I mean our implied guidance, like, is kind of a 1 percentage sequential deceleration in Q4. So it's small, just a little bit of noise that could potentially be out there. But right now, what we have line of sight to and the confidence in our order patterns, we still think the back half is going to be really strong.

No, that makes sense. I believe you mentioned that the backlog increased by $39 million during the quarter. Are you seeing lead times extend? Is that more indicative of the underlying order strength throughout the quarter? Could you elaborate a bit more on the backlog?

I mean, it's really broad-based. We're looking at the other day to see if it was kind of in pockets and chunks, and it's not. I mean, it's kind of layered across a lot of things. Our lead times in aggregate are holding or decelerating. I mean, we made a comment there that we are seeing some pockets where frankly, our advantaged lead times that are reducing are giving us some opportunity to go grab some share in things. So I'd say on balance, we're not doing anything to drive that in the wrong direction. It's going in the right direction. And the backlog build is very, very broad-based.

Last question for me. You made a comment there that you invested to support accelerated M&A processes. Is that a reflection of a pretty healthy pipeline? I know the environment has gotten a little more challenging on the M&A side. So I would like to understand what you're seeing and what you hope those investments could get you.

Yes. I believe the environment for high-quality assets has remained stable as we've navigated this situation. However, much of this is a result of our deliberate efforts to gain deeper insights into the areas surrounding our best applications. We are intentionally increasing our efforts in this regard, including allocating more resources and utilizing third-party analytics to enhance our understanding, all while the environment continues to support high-quality assets.

Maybe we could start with the free cash flow guidance cut there. And look, we're seeing this across the sector. This is getting to be pretty familiar, but the idea of carrying more buffer inventory and then the expectation with all this demand likely resulting in higher receivables towards year-end. So we get the way the math works. But Bill, can you expand on the time frame for bleeding the inventory down? I guess it really does depend on how the supply chain begins to normalize. But just take us through the math on that.

Yes, I think that's exactly right. Currently, lead times are improving, and we're starting to see that across our entire supply chain. Our increased purchases to manage longer lead times and continue fulfilling customer orders are decreasing. Now, it's about aligning that with our production and streamlining our processes. As we look at the third quarter, we expect some improvement, but more significant reductions in the fourth quarter leading into early next year. We've spent considerable time with our teams to understand and adjust for persistent robust demand, assessing our vendors' capabilities regarding lead times, reducing our open purchase orders, and increasing throughput from the second quarter into the first. We aim to maintain this trajectory as we progress through the latter half of the year.

Are there any issues with product shortages related to semiconductors, where you have nearly finished goods but are waiting on a specific product that is impacting your inventory?

Yes, that is a component as we've had customers who other suppliers for them haven't then is capable to produce have held up some of their receipts. So we have finished goods at a higher level than we have had historically because of issues our customers are facing with other suppliers.

And maybe, Dean, to the extent you were asking about unfinished items in our factories or things waiting on a part, similar to what you see in the automotive sector, I wouldn't say it's completely absent in our environment, but it doesn't occur frequently. We have a rapid production process that doesn’t accommodate incomplete items well; there’s really no space for them. Our production process is fast enough that it's more efficient not to start them since that's how most of our businesses operate.

That's helpful color there. Because you do hear like for the autos, where they've got all these cars lined up that still need semiconductors and...

We wouldn't put a pump or something into the build schedule because we'll make 40 of them in a couple of hours, those kinds of things.

Good. For my last question, Eric, you raised a point earlier about the macro situation when Mike was asking about it, specifically mentioning some areas where projects are slowing down. This certainly reflects the overall CEO confidence. Are they going to proceed? You referred to the midstream sector, and we've seen a lot of discussion around that. However, the anticipated spending hasn't fully materialized due to oil prices. Can you elaborate on where you see these projects slowing down or not getting the momentum you expected?

Yes. I would say it's more about the second category, where projects are not being released or not moving forward, something we've been contemplating for a while now, and some of these delays just extend out. Regarding the midstream side, we see some slowdowns in our chemical markets, particularly in Europe. There's also a bit of a slowdown in the paint dispensing sector as we come off a significant replenishment cycle. Additionally, we have some specific issues in industrial markets, such as food expansion, which are somewhat isolated and not a major part of our business but still good indicators to monitor. Throughout this cycle, it's notable that this category never really gained momentum. Initially, it was heavily influenced by uncertainty surrounding the recovery, which later shifted to questions about bandwidth—whether anyone could find the materials or time to focus on these projects. Now, as we reach the later stages of this process, we see a combination of these factors returning. There is some renewed uncertainty, the bandwidth issue persists, and now inflation and rising project costs are prompting some businesses to reassess their plans and calculations.

Keeping in line with that project comment. I know you talked verticals, but is it any like weighted towards a specific geography? Or does it seem very broad-based by vertical at this point just in terms of what you're seeing?

Well, I mean, I'd say broad-based in terms of the way I just described it. I mean, we are seeing a bit more geographic strength in North America than Europe for all the reasons I think we would suspect in terms of things people are watching there on the geopolitical side, the energy side, those things. But both are positive for us. But if I had to call it, I would say, a little bit more positive on the North American side than Europe.

Great. And then just kind of going back to the free cash flow and just CapEx in general, tepid start to sort of the approach to that $90 million. You talked about Banjo and then investment in emerging markets. I mean, are those still on track? Or do you kind of risk that some of that gets pushed to next year just because of the uncertainty right now?

No, that's what's going to drive the increased spending in the latter half of the year. We expect both the India and China facilities to open later this year. Banjo is anticipated to come online in late third quarter or early fourth quarter. Those projects are on track. This is part of the $60 million ramp and the $30 million ramp, which will result in $60 million in spending in the second half. In relation to supply chain delays, we have noticed some smaller items pushed from the first half to the second half. There is some variability in those numbers, but we are confident that the larger projects will meet their timelines in the coming months.

Can you provide insights on the current sentiment among potential sellers in terms of M&A? Specifically, do you think pricing is being adjusted as the market stabilizes and interest rates rise? Is there a possibility of a standoff while parties recalibrate their expectations? Additionally, could you comment on the size of your funnel and pipeline compared to previous periods?

Yes. As I mentioned earlier, our current efforts are increasingly intentional and focused. We're conducting extensive analysis and having many discussions. Our activity level has increased significantly, primarily due to our initiatives. In these discussions, similar to those you have, there's an emphasis on near-term prospects, forecasts, and sales tracking, which ties back to valuation and is more intense than it has been for various reasons. As Bill and I have always mentioned, when evaluating high-quality assets, we're generally looking at a history that is strong and well-positioned, along with a reasonable projection path, particularly if we take ownership. However, not all parties may share the same perspective, which is a possibility. Our view remains long-term regarding the assets we pursue. In summary, we are experiencing more activity, leading to a strong pipeline, with increased engagement in near-term discussions about implications and future directions. Yet, we also need to remain patient and confident about the quality of these opportunities, ideally fostering mutual understanding and engagement.

Perfect. And if I can, I guess, follow up on that on the uncertainty and so forth. You touched on backlog earlier. I don't know if you're willing to give any more color on where your backlog stands versus prior cycles or versus prior record levels, etc. It seems there's a bit of a standoff and that everybody is uncertain about the future, but the future doesn't look bad currently. I don't know if the backlog will help us triangulate that a bit?

No, definitely. I mean, our backlog is kind of 2x of what it has been historically. And normally, we'd go into a quarter with 50% of the quarter sales in backlog. We've got close to 2/3 now. So we have a lot more visibility to temper any dramatic short-term falloff. So again, relative to the next couple of months, we're fairly confident in our numbers. So I don't think there's a huge pause that would come because our backlog could support any short-term decrease in orders.

Just a couple of quick questions. With respect to price, can you comment on where you were price realization second quarter year-over-year? And how much incrementally on top of that you expect to realize in the back half? And then I have a follow-up.

We're a little over 4% here in the second quarter, which ramped from a little over 3% in the first quarter. We don't guide the balance of the year price, but we're really confident in what the teams have gone out with to combat inflation, which seems to have leveled off. So I mentioned we have an expectation that our price cost is going to continue to improve through the back half of the year to support some of our higher-margin profile expectations.

In certain areas of the commodity markets, certainly in metals, steel, aluminum, copper, things have come off their highs pretty materially, still elevated from historical standards, but certainly off-peak. When does some of that start to actually add some incremental benefit to your P&L?

I would like to highlight a couple of points. Firstly, we have only a few businesses that are directly affected by commodity prices. In terms of materiality, we are purchasing components that are a few steps removed from that value stream. Therefore, we did not experience the same level of inflation impact that many other companies faced. Additionally, a 4% price increase is still positive in terms of price versus cost, and we are continuing to grow. Over time, this will have a significant impact, but we will retain all the additional pricing adjustments we've implemented. We have approached pricing holistically with increases rather than surcharges, and we are confident in our position moving forward.

Eric, can we come back to what you said really on deal cultivation, right, in the activity being more of a function of your internal efforts? Maybe you could elaborate on that. Have you significantly up-resourced the deal teams? Does this heavy level of activity indicate any interest in kind of pursuing new adjacencies? Just maybe a little bit of kind of strategic and tactical color on what's going on there.

Yes. I mean, we're not a massive center-led kind of organization. Never have been. So this might sound more dramatic than it probably is from a headcount perspective. I mean, it's a few well-positioned ads from the outside work that we're doing on the third-party side. And then frankly, the biggest component is just a higher level of engagement overall business to business. I mean, this is something we've been driving now for a couple of years. And we really focus to combine growth outperformance on top of our just sort of institutional great well-deserved execution shops. And so a lot of it is that way. In terms of where we're looking and what it looks like, I mean, we've always favored. I always come back to this analogy of concentric circles around these applications that we kind of currently sit in. We know these environments really well. We know what's to the right or left of us, and the best work for me is really starting to understand where is this market heading, should we make a move slightly left or right and how would we do that. The recent acquisitions that we've layered into the company are perfect examples of that. As we said before, we're also thinking about the broader world in general and where problems are presenting themselves and where IDEX-like styles of competition could come in play, and maybe that would open up a flank for us in some applications that are new to the company. So that's in the mix as well. But if you really had to overgeneralize it and think of it, think of it as just radiating circles from the best parts of the company with more intensity, a lot of it from the ground up. That's the way we like to do it.

Yes. I think those actions, the depth and quality of the funnel is probably at an all-time high. Like that work that the team has done across a variety of different end market applications, those concentric circles that Eric highlighted, and one of the main reasons why we are so confident in our ability to deploy capital much more consistently as we progress.

Great. And unrelated, just returning to this topic, everyone is closely monitoring the economy for potential issues. Do you have any sense that the improving lead times might actually indicate underlying problems? Are there any changes in supply dynamics or order shipment patterns that could signal an impending slowdown?

That's a good question. I mean, it's hard to say, though, because in many ways, we've been running us, others at such a hot level. It's pretty abnormal. Pulling back from that in any way, even if it's just simply the deceleration of the tremendous acceleration we've been feeling is going to have a material noticeable impact inside just how it feels in the business. But I don't know that, that's the same thing as a broader call on economic conditions, maybe more than it's just, okay, it's not at peak levels. We can catch a breath. We can actually be a little bit more planful, mindful. And that's for us, and that's for others as well. So think of it more in those terms but then let's say, since there's nothing else to do, we can get product quicker. I don't see it as an indicator of that.

So I just wanted to ask, kind of following up on these macro-related questions. In your businesses that go through distribution, can you give us some color on what you're seeing and hearing in terms of distributor inventories and whether there are any areas where you're more concerned about a potential for destocking in the event of a slowdown?

Yes. Well, I always kind of preface this question with a reminder that we have a lot of configured customized products with quick replenishment, which means not a ton of our inventory on shelves. So it's a small number. I will say we've got some good visibility to at line of sight minimum. You can see it visually when you go visit them. So you can see some slight increases there for our product. I would assume that's applicable to more stockable components as well. In our world, we think of that as if ultimately that bleeds off over time, in some ways, it's pretty similar to the way that it works in our own business. It takes a while because of the wide variety of SKUs that are out there. None of it's really clumped around a standard solution that if you made a deterministic call on it would just flow out in a big pocket or chunk. So we think about it a lot for IDEX, mainly just as more of an indicator of health overall. But from a meaningful impact to the numbers up or down, it extends over a large time horizon. It's not a giant piece of the business, and it usually is kind of lost in the math, to be honest.

Okay. That's helpful. And then maybe just stepping back. So you talked about obviously, the intent to bleed down some inventory here over the back half and into '23. But your availability has been, I think, a competitive advantage for you. So can you talk about what you're seeing in terms of your own supply chain availability and logistics that gives you the confidence to begin to bring down inventory without giving up any of the competitive advantage that you've gained through the recovery?

Yes. Some of this is based on facts. We monitor our suppliers' performance, lead times, and their on-time delivery to us. We can see factual improvements. The logistics processes have significantly improved compared to the beginning of the year. Our teams are also becoming adept at handling any issues that arise. The key for us and for anyone looking to tackle this is to take advantage of the opportunity to pause and regroup. With our improved throughput and stronger execution, we have gained some time and resources to recalibrate the systems, which is essential for addressing inventory. This involves adjusting demand signals on a detailed level. As Bill mentioned regarding our team engagement, we are ensuring this work is being done. Our team is prioritizing tasks based on factual patterns and using their available time and energy effectively to achieve this.

And then some of the areas we have been able to take shares, it's because we have an 80-position with that vendor. And we're getting a higher allocation than some of our smaller competitors. So if they don't have the material availability, we're able to go in and take their volume.

Let's start with a question on Health & Science and the organic order growth that you're seeing there. Everybody is focused on the economy going up and down at the moment but that's a business that's less cyclical for you and still showing extremely strong orders. Maybe you can just talk in a bit more detail about what's driving those? Are these product cycles that have a specific duration? What the outlook is for continued growth there? Just any more color you can give us on the strength around that business.

Yes, it's exactly as you described. It's closely linked to strong trends that we anticipate will continue for a significant period. Like other areas in IDEX, we analyze it into various components and drivers along with specific application sets. The AI segment is performing well, particularly in analytical instrumentation. Additionally, the genomics sector has been very active. Initially, this was focused on COVID and COVID surveillance, but as the pandemic has progressed into its third year, we are now seeing more targeted applications of that technology in areas such as targeted medicine and related research. We also have certain areas where we provide support for vaccines, which have remained robust as work continues on different targeted vaccines for both COVID and other diseases. Overall, we are seeing a pickup in many of the macro dynamics and trends we have long recognized, which is why we invest considerable time discussing and investing in these areas.

Maybe one on gross margins. I mean, you obviously have very strong gross margins for an industrial company to begin with. They've been pretty consistent over the last few years in this 45%, plus or minus kind of range. Is there a negative impact that you've seen to gross margins with all of the disruptions around supply chain in COVID that maybe are less related to price cost but modest in efficiencies within your manufacturing that maybe go away that could lead to higher gross margins or anywhere else that you see opportunities to expand gross margins?

Yes. No, I think the biggest pressure has been price/cost. With 45% gross margins, you have to have a price cost spread well in excess of that to expand. So that has put constant pressure. And then we continue to invest in engineering resources, which to remind everyone, that is included in our gross margin number. So we've been able to maintain through robust productivity across the portfolio to offset some of those headwinds. So I do think price cost getting back to historic levels and then our continued volume leverage that we get on the high contribution margins we have in our business. Once we stabilize a little bit from an operations perspective, we'll be able to pull through some increases. With, again, just the very difficult operating environment we've been in, the ability to have discrete productivity projects across the portfolio that we've historically been able to execute on has been muted a little bit too here is another point. So I think as things normalize, we'll get another kicker off of that.

Congratulations on what was a really good quarter from you guys. I have one quick one for Bill. Kind of can you give us an idea of where sort of your sales are running OpEx versus CapEx?

We don't really disclose that externally, to be honest. We don't look at it internally. It goes a little bit to the project comment that Eric talked about a little bit earlier. It's not a huge part of our business. So I would say, holistically, most of our projects are OpEx, replacing like-for-like current IDEX volume and then some incremental market share gains that we have. The CapEx, we have some specific things that we would be able to realize with plant expansions, new plant creation. But overall, relative to our portfolio, it's not an overly material number. So the short answer would be, holistically, it's more OpEx-related on our sales.

Got it. I want to understand dispensing a bit more. There's a comment in the presentation about non-repeat orders, and in previous quarters, you mentioned that dispensing should decline significantly in the second half of this year. I'm trying to get a clearer picture of what that means for the second half. How does dispensing look now? Is it improving or not?

No, I think it's in line with our expectations that we had at the beginning of the year. I mean orders pressure in the second quarter will have more pressure in the third, but they'll continue to have sales growth in the third quarter with sales finally falling off a little bit kind of post those replenishment projects in the fourth quarter. So still a great business. Very global. Still having wins in emerging markets. They're launching new technologies on the software side. So although they're going to lose the replenishment, their core business continues to grow. So it's been cyclical over its life span, but a little bit of pressure here in the short term as those projects roll off. But holistically, lots of additional opportunity through software and emerging markets growth.

Got it. And if I could just squeeze this last one on the fire business, where the OEMs, your customers are still saying that they're pretty supply chain restrained. Has anything changed in the last couple of quarters there as it's a pretty good business for you guys, particularly now with your having a nice little beachhead in Europe? Could you give us an idea of where that business goes in the next couple of quarters?

Yes, I'd say the headlines there, the supply chain constraints and some of the larger folks that are in that space are still there, still challenging, still fighting that. I will say that there's kind of smaller to medium specialty players have done a decent job jumping in. So that's helped us a bit, just not the biggest part of the market. We remain really, really focused in that business on technology. So there's only so much we can do to help out on the supply chain side. Eventually, that will come to a better place. As it does, we want to be ready with all of the automation that we've been talking about, not only the pieces that we have in the water path of the mobile platform, but we've got a nozzle now that's got connectivity in it and diagnostics. We're doing the same thing on the rescue tools piece. So we've got some really, really good things there just presented in a giant global show here in the second quarter. So that for us is kind of the longer-term headline on an industry that we think will ultimately start to dial in and improve.

Just wanted to come back to the orders. So the underlying run rates in the quarter very strong, even more encouraging on a two-year stack basis. What is your expectation for year-over-year order growth in the second half as customers are no longer advanced ordering or some of this backlog in mind? I mean, do you think you can grow orders and anything that July would inform you here?

Obviously, back half, we've got much tougher comps. In the third quarter, at least relative to we have visibility. We think we'll still be positive from an organic perspective, highlighted a little bit of the dispensing pressure that will continue. But overall, IDEX still positive. And from a July perspective, no material changes versus the trends that we've experienced here across the portfolio.

Okay. Great. And then I just was hoping you could spend a moment on the KZValve acquisition, how that performed on a stand-alone basis heading into the close relative to expectations? And then what are you calibrating for accretion within the guidance framework for this year?

Sure. I'll provide an overview of the general state of the business, and then let Bill address the financial question. The acquisition has been very successful, and the integration process is going well. It closely complements our Banjo franchise in the agricultural sector within FMT, and it's conveniently located nearby. The teams have tackled the integration effectively, and it has performed strongly, similar to our agricultural businesses in North America and Europe. This has been one of the easier integrations due to the strong commercial connection within the business, and everyone is aligned on technology and the broader market dynamics. We are very optimistic about the long-term prospects here, and I'll hand it over to Bill for more specifics.

Yes. EPS in the back half, $0.02 to $0.03.

Congrats on the strong quarter. You mentioned the strength you're seeing more broadly, but obviously, the macro is deteriorating. What types of initiatives are you doing internally to prepare for those macro data points, ultimately, if they start impacting the business?

Yes, thank you for that. We have experienced several cycles in the past and have a standard approach to handling them. For us, the first step would be to assess discretionary spending. We have noted this previously since we started from a point of having very little discretionary spending. Now, we are actively engaging with customers and participating in trade shows, leading to an increase in this area. However, we have learned over the last couple of years that it is possible to manage with significantly lower discretionary spending. That will be our initial focus. Additionally, we see an opportunity to closely examine productivity within our factories. If there is a slowdown, we might gain some capacity to reassess how processes are running and how different product lines are positioned compared to a few years ago. Moving on, the one area that stands out is our headcount. We are still actively seeking new hires, as the competition for talent is quite significant. In some communities where we operate, it has been challenging to find available labor. While this situation has improved recently, there is still pressure in this regard. This aspect, considering our long-term growth focus, is where we will be particularly cautious about our choices and investments. Overall, the process remains familiar for us, and the short-cycle nature of our operations enables us to respond quickly. Is there anything you would like to add, Bill?

No, I think you said it well. Our expectation for decrementals will be a little bit higher than they have been historically due to our current profit levels and the war on talent highlighted by Eric. Historically, we would have been in the low 30s, but we are probably closer to 40% now if there is a slight pickup as we progress over the next couple of quarters.

That's really helpful. Just one more, if I may. I know we had mentioned orders before, but declining sequentially over the past quarter. What are you seeing from a cadence perspective going forward?

Yes, I think there's always our first quarter, we generally get our annual blankets from a lot of our customers. So it's generally inflated relative to sequential profile of the balance of the year. So that's the real driver from the Q1 to Q2. For us now, it's kind of leveling off with keeping an eye on just our daily order rates, which have sustained here in the month of July.

Thank you all for being here today. We are extremely proud of our performance in the first half of the year. As I conclude, I want to emphasize that our story is one of 'and' rather than 'or' at IDEX. We have consistently built our reputation for effective execution, whether in good or challenging times, and that is reflected in today's performance. We are intentionally working to enhance growth outcomes as an additional aspect of value creation. We achieve this by identifying key opportunities that align well with long-term positive macro trends and mobilizing our resources around them. Additionally, as I have mentioned before, we are strategically complementing these efforts with both organic and inorganic investments, which we will continue to pursue going forward. You can see this in the acquisitions we've made in precision agriculture, alternative energy, the pneumatic sector, and water solutions. These initiatives are coming together, and I want to emphasize the value of these two aspects. We will keep discussing this as we progress. Thank you for your interest in joining today.