IDEX Corporation (IEX) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Q3 2017, IDEX Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Yates, Vice President and Chief Accounting Officer. Thank you. Mr. Yates, you may begin.

Great. Thank you, Doug. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for a discussion of the IDEX third quarter financial highlights. Last night we issued a press release outlining our company's financial and operating performance for the three-month period ending September 30, 2017 and next week we’ll file our 10-Q for the same period. The press release and 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 CFO. The format for our call is as follows: We will begin with Andy providing an overview of the third quarter financial results and an update on our markets and geographies. He'll then walk you through the operating performance at each of our segments. And finally we will wrap up with an outlook for the fourth quarter and the full-year 2017. Following our prepared remarks, we'll then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering the conference ID 13652255 or you may simply log on to the company's homepage for the webcast replay. As a brief reminder before we begin, this call may contain certain forward-looking statements that are subject to the Safe Harbor language in today's press release and IDEX's filings with the Securities and Exchange Commission. With that, I’ll turn the call over to our Chairman and CEO, Andy Silvernail.

Hey, thanks Mike. Good morning, everybody. Thank you for joining us here to discuss our third quarter results. Overall I’m very pleased with the results and how our year is shaping up. We’ve now experienced three straight quarters of strong order, sales and earnings and we’re expecting this trend to continue in the fourth quarter, which will lead to a record for the year for the company. Organic growth in both orders and sales are a direct result of our ability to capitalize on the strengthening economy and our ability to execute on our growth initiatives. Our effort segment in our portfolio continued to pay dividends and drive exceptional results for IDEX. We’re experiencing broad based strength within a majority of our end markets including Life Science, Semicon, Water, Ag and Industrial. Over the last few quarters we’re had pockets of concerns in the portfolio, specifically around mid-stream energy and dispensing and I’ll tell you that both are showing nice signs of improvement and I’ll talk about that a little bit later on. As always I’ll walk through some of the specific details in regards to the markets and the segments shortly, but overall I am very pleased with how the company is performing. Our operating results to-date have been outstanding and above expectations and I expect this to continue for the rest of the year. Orders remain strong across all three segments, delivering third quarter overall growth of 8%, up 7% organically. FSD was up 10% and FMT and HST were each up 6%. Revenue grew 8% overall, 7% organically as well, driven by strength in all three segments. HST was up 10%, FMT was up 7%, FST was up 4%. We saw a nice ratable increase in both orders and sales throughout the quarter. It looked very much like we have in the last two quarters. The team once again delivered very solid results. Gross margins were 44.9% that was up 140 basis points. Adjusting for the inventory step up from last year gross margin was up 50 basis points. We’re pleased with the expansion, at the same time we are still having some inefficiencies that we mentioned last quarter and we expect those to be completed by the end of the year. We had Op margin of 22%, that was up 130 basis points compared to prior year and I want to take a minute and talk about this in a little bit of detail. I know there are some questions here on flow-through, probably one of the bigger questions of the day, and let me start by saying our operating flow-through was very strong. If you look at the 130 basis points improvement and then the 10 basis points compared to prior year, we had almost $6 million of variable comp expense that hit us in the quarter. We had our CFO depart last year, which was a positive to last year but created a headwind for this year and we had our strong performances turned into strong variable comps. So again, on an apples-to-apples basis, our flow-through was just over 36% and our margin expansion is at 110 basis points on the operating line. EPS of a $1.08 was up $0.16 or 17% compared to last year; it was a record for the quarter. Free cash flow was $115 million at 138% conversion which obviously is a very strong quarter. Now let me take a minute and talk about what we’re seeing in our core markets and geographies. In agriculture we continue to see improvement in this market and we’re going to finish strong with 2017 and it’s going to bode well for 2018. We’re seeing strength in both OEM and distribution. Municipal end markets in both water and fire continue to see positive momentum. Our mid-stream oil and gas business is starting to see signs of recovery. As you know we talked about that and we believe we start to see that at the end of the year and we are, and upstream continues to do well. In our Scientific Fluidics and Optics business, the markets remain one of our best performers and we’re seeing strength in IVD Bio, analytical instrumentation and DNA sequencing; all of these continue to outperform. Semicon demand remains strong and we expect it to continue through the balance of the year and into next year, really driven by new products and new market entry of our teams, and in industrial we continue to see tailwinds from the industrial rebound across our businesses. If you look at the regions, North America is leading the rebound in the global recovery and we expect that to continue going forward. Europe also has had some real strength. We do have some tailwinds from FX, but across the board in Europe we’re seeing improvement in auto and in housing and these really bode well for our continued expansion in Europe. In Asia, we’re getting volume increases. We had some large project orders that have come through here in the year, but we’re also seeing strong distribution performance in China, which is a nice sign. If we turn now to capital deployment, we’re committed to the strategy that we’ve laid out for some years now and the results have really proved out the strategy, and I want to take a few minutes to walk through each element of that strategy. In terms of organic growth, I’m obviously very pleased with our performance, 6% organic growth and 5% organic sales growth for the year is outstanding, so year-to-date really great results. 7% organic growth in the quarter is our strongest since the third quarter of 2014 and we’ve been very consistent that organic investments are going to be our number one priority. We believe that our business segmentation coupled with funding those best organic initiatives is leading to a very strong performance. The 7% organic orders growth achieved in the quarter is about – or sales growth rather is about half market and about half our initiatives and we are very pleased with those results. We’re trying to build a culture of growth here at the company and we are very excited about the journey that we’re on. In terms of dividends the practice that we’ve laid out for the last few years remains consistent. On September 14 our Directors approved our 92th consecutive dividend, which is $0.37 a share. In the quarter we bought back about $14 million worth of shares, 116,000 shares of our stock. Year-to-date we bought back about 200,000 at a cost of about $24 million and although we’re not purchasing as many shares as we had in the past few years, we remain very committed to the strategy and we’ll continue to deploy capital as it makes sense and we drive shareholder value with our share repurchases. In terms of M&A, it’s our number one priority inorganically and we’ll continue to drive the strategy. Our funnel is solid. We’re working on various opportunities. But with that said, you know look, we all know, valuations are high and we’re going to be incredibly disciplined with how we deploy capital to drive value for shareholders. Our balance sheet is in great shape and we have great free cash flow. At the end of the month we had net leverage is about one times and we had growth leverage at about 1.5 times, so we have a great abundance of capital to deploy for our strategies. Let me transition now. I’m on slide five and I’m going to talk about the third quarter results. Q3 revenue of $574 million was a third quarter record. It was up 8% overall, 7% organically. It was driven by growth within all three segments; HST up 10%, FMT up 7% and FST up 4%. I’d like to point out that we didn’t burn any backlog in the quarter as orders were also $574 million. Operating margin as I said was 22% up 130 basis points and again on an apples-to-apples basis up 110 basis points. I’d like to provide some details relative to our Q3 effective tax rate also. In 2017 in the quarter we had a 26.4% tax rate compared to 29.6% in 2016. This is 320 basis points less than last year and was really associated with our reparation of cash from China that was used for our SFC acquisition. This drop in the rate was expected and the reason we guided a 26.5% ETR three months ago. Q3 had income of $84 million, resulted in an EPS of $1.08. This is a record for the third quarter. It was up $0.16 or 17% from the adjusted prior period. Free cash flow for the quarter was strong at $115 million, again converted to 138%. Alright, let’s turn to slide six. We’ll now walk into the segment discussions. I’m going to start with Fluid & Metering. For the third quarter in a row, FMC was solid. We had organic order and sales growth of 6% and 7% respectively. Op margin was up 130 basis points primarily due to higher volume, cost savings from prior year and our restructuring activities. In water we’re experiencing strong demand in the US distribution for our new products and the municipal markets continue to grow. We’ve also had terrific new product development, this is come out in this area and we’re getting some project wins in Asia. In industrial fluids, our pump business had another great quarter. We had double digit increases in orders and sales. US distributors are optimistic about the rest of 2017 and we continue to have some wind at our back caused by the oil and gas businesses across the US and Europe and really globally. Valve business continues to be strong. We’ve had a nice increase in sales and orders and we’re seeing stability in the large chemical customers around the world. Our midstream energy business as I mentioned has been improving. We’ve been keeping an eye on that here really for the balance of the year. We’ve seen that improving. Specifically we’re seeing truck build for LPG increase, which bodes well for 2018. The LPG mobile market in Europe has also improved and we’re seeing share gains by some of our larger customers. Overall there still remain challenges in this piece of our business, but we are seeing a recovery and again this positions us well looking at next year. Ag has been a great story this year. We’ve got consecutive quarters of double digit order and sales increase and optimism continues as we look at 2018, really as we see the pre-build season upon us and we’re seeing strength in both OEMs and distributors. Alright, let’s turn to slide seven and we’ll talk about Health & Science. Similar to FMT, HST has experienced three strong quarters in a row with organic orders up 6% and organic sales up 10% over the last year. Operating margin increased 190 basis points for the third quarter, mainly due to higher volume and inclusion of the fair value inventory step up from last year. Although I’m happy with 190 basis point increase for the quarter, we have had some inefficiencies that were seen mostly within HST that we feel very confident will be done by the end of the year. In Scientific Fluidics and Optics, AI, Bio IVD and DNA sequencing are all seeing strong demand and we expect that to continue. Our optics businesses are now fully integrated with our life science and our fluidics business and we’re seeing our thesis come to life here, specifically the combination of optic solutions and fluid solutions driving significant competitive advantage for us. We also announced in the third quarter our decision to build an optical center of excellence in Rochester New York. By the end of 2018 we’ll consolidate three of our optics businesses into one state of the art facility that will be a huge win for our customers and for our people. We continue to make long term investments in this market and will bear fruit down the road. In sealing solutions it was really a phenomenal quarter, double digit organic order and revenue growth primarily driven by strength in the semicon market and we’re seeing SFC nicely integrate into our sealing platform and delivering on the promises of that acquisition. HST industrial results are strong, particularly in the US, UK and some new business wins in China. MPT, we had some large orders in the quarter and our pipeline for future orders looks good. We did – we haven’t finalized our site consolidation and we think as we get into 2018 the benefits of that site consolidation to be fully in play. Okay, I’m on our last segment, slide eight for diversified. Organic orders were up 10% in the quarter and organic sales increased 4%. Operating margin was up 130 basis points in the third quarter, primarily due to volume and the inclusion of fair value inventory step up from last year. Dispensing, you know we’ve talked a little bit about plateauing here in the last few quarters, but in the third quarter we secured three nice sized dispensing orders. We have order strength across the globe and nice order for X-SMART in emerging markets and two relatively large DIY orders in North America, including the order that we’ve been talking about here that’s been pushed a couple of quarters. So this has really been the big factor driving the 10% order growth in FST. Additionally we are launching some new products in dispensing in Europe that I think are going to position us well for 2018. In Fire & Safety the North American markets remain solid with both fire and rescue. The muni markets are outperforming expectations and the rescue business in particular in North America has been exceptionally strong. Our eDRAULIC tools continue to capture share. We are gaining the synergy that we expected from the integration of Akron and AWG. I’m excited by the potential that these give us going forward. They are absolutely meeting our expectations. And then finally BAND-IT had a strong quarter; high single digit revenue growth in the quarter. We’re seeing nice share wins in auto, a rebound in energy as well as an uptick in industrial. Okay, I’m on our last slide, slide nine. Let’s talk about the fourth quarter and full year 2017 guidance. For the fourth quarter we estimate EPS in $1.06 to $1.08. Organic revenue growth at about 6%, operating margins at about 22%, the tax rate should be about 28%, FX will provide about a 3% tailwind and corporate costs should be about $17 million. For the year, as we look at our outlook, we look at the solid results we’ve had to-date, obviously a very strong third quarter. We're going to raise our EPS guidance. We’re now going to be $4.25 to $4.27, which will be a record for IDEX. We continue to expect full year organic revenue growth to be a little over 5%, the full year operating margin at about 22%, FX will be a headwind of a little less than 1% for the full year. Our corporate costs should be around $70 million and our free cash flow should be 120% of net income. As always, none of these forward-looking statements include the impact of acquisitions or potential restructuring. And with that, let me pause here and Doug, I’ll turn it over to you for questions from those on the phones.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question.

Good morning, everyone.

Good morning, Mike.

So, you know Andy if I think over the last few quarters here, you know particularly starting last year, numerous headwinds from a growth perspective and each quarter it seems like you’re picking a few of those off and negative markets are starting to turn more positive or at least flattening and now you’re listening to the dialogue here and not sure I heard any markets where you were sounding overly concerned, right. Even some of the midstream markets which have lagged from a recovery perspective are starting to turn a little bit. So maybe comment broadly on if there are any markets out there that you’re looking at that you’re concerned about and if anything changes you would look to the quarter on that side.

Mike, you’ve definitely hit it on the head here. You know the two of it that have been lingering are really mid-stream energy and dispensing. I would say from a mid-stream energy, we are definitely starting to see that alleviate, the entire market alleviate, which is obviously positive as we head into the fourth quarter and into next year, so I think that’s good news. Dispensing, I would say the market trends haven’t changed from what we’ve talked about. The wins in the quarter and what I think will be wins next year are really driven by our actions. You know the wins at the two [DIY] [ph] that I talked about, those are things that we’ve been working on for an awful long time. You know we work on it constantly really and you know the large X-SMART order that we got are things that we’ve been you know working in our sales funnel for a long time. But I don’t think the markets have changed. I think those will still be relatively flat as we think about you know the fourth quarter and going into next year. But broadly Mike, you’re right; things have continued to firm as I think through how this year has progressed and what I think is going to – 2015 is going to turn into unless we have some you know exogenous event. I think we’ll continue to see a firming of markets and some improvements, some momentum.

So then let’s translate that into early thoughts on next year and more focused on momentum and then timing of the capital side.

Yeah.

So obviously a lot of shot cycle momentum that we’ve seen here. On the capital side it’s more a dispensing side and things that have been healthy for a while, just maybe plateauing at a nice level. Maybe talk about the short cycle progression as you work into next year and then more importantly has your thought process on timing of larger CapEx from an industry perspective changed at all? Is that getting pulled forward or is it still pretty similar?

I don’t think it’s changed very much. I think that as we move through this quarter, some larger capital spend, if you see good numbers I think you’ll start to see some improvement in large capital spend. But I think what’s going to play out here now are two things; number one, you know we’re seeing what I’ll call – you know they are definitely projects, but they are small projects. We’ve definitely seen improvement of that throughout this year. I do think you’re going to start to see some larger stuff come into play as we get into ’15, as people are planning now for ’15, I think you’ll start to see – sorry, for ’18, ’15, God! I’m losing it. In ‘18 I think you’ll start to see some of those come into play. To be clear, we haven’t seen those in our work yet and so this is a belief of mine, but I think you will start to see that into ‘18 and importantly, distribution improving. The momentum in distribution is a good sign and we are seeing that across our portfolio. So you pick the business, distribution is getting better, which typically is a good overall indicator.

One follow-up on that last point. Where – no, the second last point there. Where would you most see in your portfolio, the larger CapEx items start coming through?

Well, you see them in a couple of places right. So FMT would be the biggest place you would see it. But then you also see it a little bit in Fire & Rescue, right. So the governments will release funds and you will start to see it in Rescue a little bit, but FMT mostly is where you would see that pop-up and also in MPT a little bit, right. You see some of the larger pharma projects in MPT.

It makes sense. Thanks Andy. I appreciate it.

You bet Mike. Thanks.

Our next question comes from the line of Allison Poliniak with Wells Fargo. Please proceed with your question.

Hi guys, good morning.

Good morning Allison.

I just want to touch on the organic investment. Obviously you have seen a lot of success out of that. How are you thinking about organic investments not with you know obviously more comfort in the growth. Are we accelerating it here where it could hold back incrementals, you know not a bad thing. But you know how should we think about I guess that investment at this point in the cycle sale?

So let me answer your direct question, and then answer – I’m going to be a politician and answer the question I want to answer, how about that?

Sounds good.

So one is no. We are investing fully. I don’t think it’s going to drag down our incrementals. You know we have talked a lot about that 35% range that we believe we can achieve that even investing at the right kind of rate. If we wanted to pull back, obviously we can get some more. But we are going to fully fund it, the kind of rates that we are at and so I feel good about that. So I have a lot of confidence that we’ll continue to invest at the rates that we want to and need to and still provide attractive incrementals. You know I think one of the important questions on this call is really around that margin profile and the fall through and I wanted to provide some clarity in my comments, but it’s a really important one, right, which is when you dig into that you say hey, what’s really happening at the operating level of the fall-through at IDEX. It’s a really good story. It’s between 35% and 40% for the quarter and you have some noise in there. You got the step-up, we sold a business last year, you got variable comp, there is a lot of pieces in there. But when you wash that through and you say what’s happening operating-to-operating, it’s a really good story. We are delivering exactly where we said we would at the levels of increased revenue.

No, that’s great, that’s helpful. And then the inefficiencies in HST, remind me, that’s the site consolidation and is it just dragging a little further than what you would have thought I guess?

Well remember we said last question, we said it was about $3 million and we said we’d get through about half of it, so we’d be at a run-rate of about $1.5 million and then we’d get rid of the rest of it as we get into the fourth quarter, and we actually experienced about $2 million versus $1.5 million, so it’s about $0.5 million less than we through. Part of it is site consolidation at MPT and then part of it is frankly the rate of growth within Life Sciences, right. So that’s just been really strong and we’ve got a couple of sites that have – that struggle to meet demand. We’ve got our eyes on it. We know how to solve it. It just takes a little bit of time and we’d rather eat a little bit here than disappoint our customers. And so even with that we are able to deliver on the kind of flow-through that we are talking about. So you now obviously we get some of the stuff cleaned up and the underlying earnings power is pretty good.

No, that’s great and just one last one on the corporate cost line. It seemed to be a little higher this quarter and then obviously you raised the outlook for this year. I mean what’s going on there? What should I think about that?

Yes Allison, that goes right back to the variable comp statement.

Got it.

So you got two things going on. One, you know last year our CFO moved on and we had some, you get some benefit from that, right. And then this year our variable comp, our bonus payments are going to be substantially higher because of the very strong performance that we’ve had this year. So you put those two things together and it’s not a small number right; literally it’s $6 million in the quarter, those two things together. So that’s why if you look at apples-to-apples and you say okay, lets wash this stuff out. If you take out that variable comp impact margins end up being up 110 basis points, op margins 110, and flow-through at north of 36%.

Great, thank you.

You bet, Allison, thanks.

Out next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Hey, this is Adam Farley on for Nathan.

Hey Adam, how are you?

Doing well, doing well. I thought you called out continued momentum and strength in agriculture, but the – oh yeah and the distribution. Could you just provide a little more color there, like what’s driving that?

Well, you know we actually, we just finished our strat cycle and one of the things that we were really digging into is kind of the difference between you know kind of pharma earnings, pharma income right and cash income and those are two very different things right. And what you have seen happen here is you’ve actually seen cash income accelerate ahead of pharma income and we are seeing people reinvest, so that’s the principal driver. And then you had two years that they were pretty tough, right. So you had this great run-up, you had two very tough years. So I think you are seeing a rebound generally from some latent activity that probably needed to happen, and you have an increase in cash income, and that’s showing up at the OEMs and at the distributors.

All right, that’s helpful. And then just turning to the muni markets, you said there was positive momentum there as well. What’s driving that? Is that more government funds or a little more details?

Yeah, you are seeing more headcounts. You got – I’m not sure if this is a good thing or not, the government is growing. So you are seeing continued spend and continued employment and so generally these aren’t huge numbers, but they continue to be positive.

All right great, thank you.

Thanks Adam.

Our next question comes from the line of Matt Summerville with Alembic Global Advisors. Please proceed with your question. Q – Matt Summerville: Thanks, good morning. A couple of questions; first, just on the consolidation activities, I thought you mentioned something – well, two actually pertaining to HST; one in Optics, three facilities getting combined into a new facility in Rochester and then the things that are ongoing I believe with respect to MPT. If you kind of net those two together what should we be looking at from a restructuring or a cost saving stand point in 2018 and then I have a follow-up?

Yes. So the MPT stuff is done, right. So we did that this year, you’ve already seen the restructuring cost, those have already flowed through, so that’s there in the first quarter. So now it’s just kind of getting that fully up to speed. The optics center of excellence just to level set everybody, our two big life science Optics businesses are actually sitting in Rochester today. So they are in Rochester today and what we are going to do is we are going to build a new state-of-the-art facility that’s going to give us the ability to expand and very importantly modernize a few things in a part of the business. So we will be able to really invest in there, and that’s the bulk of it, and then we have some smaller things moving over from other facility, from a smaller facility. And so the total restructuring cost and bill for next year – for us this year, what do you think that will be?

That’s a couple of million bucks.

It’s not big, it’s not big Matt. it’s a couple of million and the benefits of this are you will get a little bit cost savings, it’s not a ton, but the benefits of this are really our ability to drive growth and productivity and modernize those facilities. These are the business where we are seeing Fluidics and Optics you know really come together, that strategy, that thesis we talked about for a long time. It allows us to expedite that and service the large OEMs that are out there that we have great partnerships with them. Q – Matt Summerville: And then just in terms of the M&A pipeline, can you speak to the actionability. You guys I think it’s a been a little over a year since you have done a deal and maybe speak to whether or not you think multiples at this point are just completely prohibitive or whether you are perhaps a bit more optimistic looking forward? Thank you.

So let me answer that in two ways. One I’ll just kind of talk about the funnel generally, which is again I’m sounded like a broken record, but it looks a lot like it’s going to historically look. There is nothing surprising in our funnel, either positively or negatively. In terms of the stuff we are seeing right now, we are looking at some things right now that are absolutely actionable, there is no doubt and we are constantly in these discussions and we are in several discussion as we speak. The question becomes, can you get over the finish line and the biggest issue today of getting over the finish line is around valuation and so we have certainly seen valuations creep up, we’ve certainly seen some very aggressive bidders in the market place and we are, we are disciplined. We know where it makes sense for us and our shareholders and if we have to choose between building cash and doing bad expensive deal, we’ll chose to build cash and eventually it will break our way. I think patience really pays off here with owning the kind of companies that are IDEX like companies, that you guys enjoy, that have real defensible models, our ability to drive incremental growth, our ability to expand margins and drive high returns on capital, and we are going to be patient. Q – Matt Summerville: Thanks Andy.

Thank you very much.

Our next question comes from the line of Steven Winoker with UBS. Please proceed with your question.

Thanks. Good morning Andy, Bill.

Good morning. Good to hear your voice.

It’s good to be here. I wanted to just follow up on the last question that you talked about or maybe just make it a little broader. Andy, how has your thinking continued to evolve given you are now seeing 7% organic growth rate that you mentioned? How has your thinking evolved from the scope of the business that IDEX, you know this has been an ongoing thought process for a lot of years. Where are you in that thought process?

You mean in terms of our ability to drive organic growth Steve.

Yes, I think relative to that scope and the question of simplification and across – and optimization across the portfolio.

You know I still think we have a long way to go Steve. You know we have come a long way, but it’s almost like you kind of peal back that layer and you find something else that’s interesting. And I think you know the early phases were eliminating a lot of waste, right, that was the first phase of eliminating a lot of waste, a lot of non-value added activity and getting people just focused, you know just on a handful on things. The second phase was moving that more deeply into the customer, meaning that we were more present at the customer, more people, more spending and that’s kind of the phase that we are in now and that’s why you are hearing us talk so much more about new product development and it’s not that we were bad at new product development in the past. We’ve just – we’ve reached a new level where I think we are closer to our customers and we are choosing where we want to play in a much more focused and intense way frankly, right. We are putting more people in resources on a smaller handful or areas. The next phase that we are going to move into here is really around how do we accelerate the different points of connections across IDEX and we are seeing that – if you see the different areas that work for us; so if you look at our integrated growth, so IDEX Health & Science building the center of excellence, right. We are now getting a scale in a handful of areas in Optics that are going to allow us to merge our Optics and Fluidics in this really unique value proposition as an example, that’s going to allow us to continue to growth that business faster. What we did at MPT and bringing those businesses together, again we’ve gone and we found scale in places that we didn’t have scale before. So we now have more engineering resources to focus on really two markets, pharma and food, where we were all over the place before and we are able to double down on some of those things. So I think we are entering that phase now Steve, where we are finding more and frankly bigger opportunities because we are simply closer to the customer, the noise is lower and we are making some bigger bets.

Okay, that’s helpful. And then just as a follow-up as you think about that model evolving, the sustainability of these incremental margins, particularly around pricing power and the wage inflation challenges that you are -- not the temporary one, but sort of the broader one. How can – what’s your thinking in terms of convincing investors of the sustainability of that?

You know I think our pricing power, our pricing equation is excellent and I think it will be excellent over time. You know historically we’ve done a really good job of getting half a point to a point of price, and then ultimately the delta, the difference between pricing and inflation, that’s been a really, that’s been a pretty constant number for us; that spread has been pretty constant. You know one of the things that we have been experiencing in the last year is lower pricing and we are starting to see that inflation come up a bit and so we needed to make sure we stay ahead of that and we’ve done a good job with that. That has come down a little bit. That delta, that spread has come down a little bit, but I actually think that we’ll maintain our historical spread. If anything, one of the things that this amount of segmentation does, and the amount of focus that we are talking about, it pushes you into businesses where you are likely to increase that spread, not decrease that spread. And so if I think long term, if I think three to five years from now, do I think we’ll still get the spread? Yes, I do. Do I think the probability of it being higher versus lower is better? I do Steve, and a lot of it comes down to playing in markets where we have a definitive advantage; where the mode is wider, the mode is deeper and we frankly have more ability to command price, because we bring tremendous value to those customers.

Okay, and then…

And even in the businesses we’ve seen inflation spike a little bit this year, we’ve been able to go out in the third quarter proactively with incremental pricing to get ahead of it. So I think the businesses are well positioned to keep that spread as we move forward here over the next 12 to 24 months.

Okay, great. And just one last one, are you seeing any signs of any of your OEs or others in the market attempting to back with vertical integrator experiment with places that you are historically strong?

You know that tends to happen when you get off the technology curve. The places, the only places where you really see that as a risk right, and we obviously think a lot about it and when you look at the Life Science world, that’s a pretty consolidated world, and we are very mindful of that, and if you lose your technology development, then there would be a risk of that or if you start to play and say build the print sort of stuff, then you are in a difficult spot. But if you are working with them, you are building, you are consistently building your next level of technology you are in pretty good shape.

Okay, great. Thanks.

Thanks Steve.

Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Hi, this is Jeffrey on for Deane Dray. I was wondering if the mid stream oil recovery has been all price related or if there’s been competitive dynamic changes?

No real competitive dynamic changes and I wouldn’t say that you are starting to see – if I understand your question right, we are not getting a bunch of price there. What you are seeing is you are seeing the market come back in terms of capital spend around mobile kind of truck builds in the LPG mobile markets, that’s been the biggest so far.

All right, and then switching gears a little bit on your water market, can you talk to how municipal budgets are looking.

Yeah, I think that they are healthy, right. So if you look at the expected spend; if you look at head count that we track, all those point in the right direction.

Yeah, the surveys we’ve down with our metro markets show low single improvement over the next 12 months.

Yeah.

All right, thank you.

Thank you.

Our next question comes from the line of Charley Brady from SunTrust Robinson Humphrey. Please proceed with your question.

Thanks. Good morning guys.

Hey Charley.

Hey, could you just talk about raw material cost pressure that you are seeing. I didn’t hear any – maybe I missed it, but I didn’t hear any mention of that on the call. Obviously what you are seeing is it’s not hurting the margins, but I’m just kind of – maybe drill down on that a little bit, where you are seeing it, to what degree?

No, I mean we’ve seen some pockets in the more commodity based raw materials, but nothing material overall to the portfolio. I think I mentioned it a little bit earlier, I think in the areas of some of the industrial businesses where we have seen a little bit increase in the commodity prices we’ve been able to go out proactively with incremental price increases. So again, keeping ahead of that price cost curve.

We expect to see it Charley, right. So we expect to see material and labor inflation as we get into ’18. It’s fully our view that that’s coming, and if anything I think that the expectations of it are low. I think we are in a very tight scenario, tighter than most people fully appreciate around the supply chain and around labor and that I think the light switch is going to happen. It’s going to be faster and it’s going to be brighter and that’s what we are playing for. So all of our work around productivity and all of our work around our outbound pricing is with that as a backdrop.

And that assumption is backed into your incremental outlook of 35% incremental margin expectation, right?

It is.

Just one more follow-up. On the dispensing orders you got, particularly the large one, what’s the timing on when that ought to ship out?

Well, we got, most of it in the fourth quarter.

There is some that goes into ’18 but most of it goes into the fourth quarter. And if you think about it, what that means Charley is that our fourth quarter is plus or minus ratable of the third quarter, right, if you just kind of back into the numbers we gave you. It means that the third and the fourth quarter sequentially look flat.

Yes.

Got it. Great, thanks.

You bet Charley.

Our next question comes from the line of Brett Linzey of Vertical Research Partners. Please proceed with your question.

Hi, good morning all.

Good morning Brett.

Hey, back to FMC, a really nice quarter on the margin there, all time highs. I guess structurally as you look at the business, the mix, you know new products and some of the restructuring you’ve done. What’s really the margin entitlement of that business? And then I guess as we look into ’18, are there costs that need to come back as you look to meet some of these order increases?

Yeah, you know so I think we are targeting kind of 27 area plus or minus here in FMT. In terms of cost coming back materially there will be some, right. You know we’ve had a pretty strong rebound; we’ve got some double digit growers, and there are some places where in terms of more people capacity, it’s not plant and equipment but people capacity, we will do some of that, but it won’t get in the way of healthy incremental and so we will do that. We are going through our budgeting cycle now and there is nothing that’s shocking in any of that stuff so far, but there will be some ads that we got to do to make sure that we can keep up with the improvement. And then we should be able to deliver the kind of the incrementals you’d expect.

And maybe just back to the strat cycle. I mean obviously the lens here is turning to 2018 and you know I know you don’t want to provide too much color. But based on product momentum, the channel development, a lot of the things you touch on. Do you think the H2 run rate is a decent place order for 2018 and maybe half that market, half that self help, but any early framework that teams are providing as part of that planning cycle?

You know I actually, I haven’t looked at it like that, right, so kind of saying second half becomes first half. I think that’s probably a little too high. I have to look at how that actually layers out. But generally I think the way I would expect it is in terms of seasonality, I expect it to look like it historically looked like. I don’t think there is going to be any major bumps on the road you know. US industrial production, the latest estimates right now are coming in at you know 2% to 2.5% plus or minus, right, and that’s going to be 50%, 60% of our businesses, and so as I think about what our underlying markets are likely to look like, that feels about right, if you look at it in the US and then on a global basis. And then obviously our goal is to beat that in a meaningful way. We’ve talked about our long term objective is how do you get 200 basis points better. And so as we go into the year, you should not expect out story to change.

Okay, great. Thanks guys.

Thank you.

Our next question comes from the line of Joe Giordano from Cowen & Co. Please proceed with your question.

Hey guys, thanks for taking my question. When I look at FMT, and we’ve seen a lot of people talk about aftermarket people servicing each other’s products and other cheaper low cost countries being able to produce things better now than they used to. I know your margin structure seems to less of an issue, but can you talk about how you look at your portfolio overall in that context like on a, like a continuous basis.

Yeah, I think Joe what your really referencing tend to be the bigger iron commoditized products where people need incredible reach to get to their customers and they have service cycles that have a lot of intensity to them. And by the way, not very many skews and lots of volume. We don’t fit that model at all, right. We tend to be very nitchy. There is a lot of specification and customization that goes into working with the customer and so that mix and that customization tends to really become a barrier to entry for your classic sort of low cost, more commoditized pieces of business and how those competitors compete. So we don’t see that a lot. I don’t expect to see that a lot. You see it around the edges, but you are going to see it much more with the folks that we compete with. We are not – and that’s right, we are in market where we don’t compete with, that are much more commoditized. That’s where I think that risk really stems from.

That’s fair rough. And then just I wanted to clarify on some of the incremental discussion we’ve had. Is the variable cost that we are talking about, is that all coming through the corporate line? And when you are talking about your certified guide, is that on the – are we talking just like on a segment basis?

So there is some incorporated and it’s on that segmented out to each of the individual segments.

Yeah sorry, I misspoke, but in total for the quarter, again it’s almost $6 million.

Right, we are talking like of the 35% guide that you are like on a normalize basis. Do you mean that like a segment level or like a total…

Total company, total company.

Okay.

Yeah, sorry.

Cool, I just wanted to clarify that. And then just last from me, your comments on muni I think we’re pretty clear. I guess we had some conflicting data points from our a few companies this morning. So the strength that you are seeing there, you are not seeing that as just an IDEX specific aspect or maybe you are outperforming a little bit and you think the underlying markets kind of that you are playing globally look pretty strong, are pretty consistent right now.

I think the underling markets are good as Bill referenced. You know we are talking kind of low since digits, but they are certainly not rolling over so they continue to robust and we are winning. We got some really good new product development that’s going into those markets and we are seeing strength.

Great, thanks guys.

Thank you.

Our next question comes from the line of Katja Jancic from BMO Capital Markets. Please proceed with your question.

Hi. Thank you for talking my questions.

Good morning.

Incrementals in HSTs were lower than in first half. Is that completely because of inefficiencies or is there something else?

It’s all the inefficiencies right. So the bulk of what we saw in the quarter happened for the whole company but they were in HST, it’s all tied to that.

Okay. Can you rank sales growth by end market and FMT and also in FSD?

That would be tough to do. Its – obviously -- I’ll do my best, I’ll do my best and Bill. So the industrial stuff, the cyclical stuff that’s picked up is going to be the highest right. So if you look at what’s happening in the industrial FMT that’s going to be the highest. Banjo and Ag is going to be strong, there is no doubt about that. They are going to be close and then you got water within FMT. You go over to HST, obviously what we are seeing within Life Sciences is going to be strong. Sealing actually might even be a little bit better that than, but they are close, they are both in that double digit range, so those are doing well. You know the Sealing story is a great story. That’s a place where we made multiple acquisitions, we built a platform, we made a greenfield investment in the US to penetrate the US market and we are really seeing some nice wins there. If you move over to you know to Diversified and BAND-IT has been really strong, right. BAND-IT has been strong and obviously found the dispensing business we had, nice order growth there in the quarter. But it’s hard to, if you were to look at every business, if you guys had access to that the signals across the portfolio are pretty good.

Now I’m not sure if you mentioned this, but what were water sales – what was water sales growth?

We don’t call that out specifically.

Okay. Now I know you made a couple of divestitures in ’16. Are those impact on sales complete or should we still look at that?

In the fourth quarter we’ll have…

We sold IETG in the fourth quarter and the Korean...

How much is that going to be, total for the fourth quarter?

That’s a couple of million bucks.

It’s not a big number, but yeah there will be a little bit.

Okay, and I know historically you talked about your fixed businesses. Can you talk a little bit about the margin progression there? Are there any businesses that you still expect to graduate from that group?

Oh yeah! We’ll definitely graduate some this year. As you know we’ve talked about the idea that you kind of get two years in that bucket and so I expect that we are going to graduate some folks out of that bucket this year. You know if we do any acquisitions, you know those obviously go into that automatically, but we continue to see nice margin expansion and frankly growth out of those businesses. You know it’s been unexpectedly strong. So the focus that we are doing there is both improving top line and improving the bottom line.

Perfect. Thank you very much.

Thank you.

Our next question comes from the line of Brett Kearney from Gabelli & Company. Please proceed with your question.

Hi guys, thanks for taking my question.

You bet Brett.

I just had a question of your pumps businesses. The double digit growth you are seeing in those businesses, would you say that also breaks down about half end market growth and half discreet wins and can you comment at all…

Yeah, it’s not materially different.

Okay. Can you comment at all on who you might be getting share from or kind of the specific maybe product lines where you are seeing the wins there?

Yeah, one of the big wins for us has been in the lease custody transfer market which is called LACT, where our Viking business has – they are a new product development and really market development. They just had a great year and they won some really large chunks of businesses. In terms of talking about competitors specifically, I won’t get into that, but that’s been a big win for them. And then again if you look at what’s happened, you know kind of across our portfolio with the cyclical upturn of those businesses have done well. But specifically within the pumps businesses, LACT has been a big driver for us.

Okay, great. Thank you.

You bet.

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

Well, as always we appreciate your interest in IDEX. I am obviously very pleased with how our teams are performing, whether talking about our focus on organic growth, our discipline in utilizing our capital, our ability to drive margin expansion and cash flow, the team is just doing an outstanding job. So I look forward to talking to you here, to talk about the fourth quarter results in 90 days or so. I expect that we’ll finish the fourth quarter strong and look forward to position ourselves well for 2018. So again, thanks for your time and your support and we’ll talk to you in 90 days. Take care.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.