IDEX Corporation (IEX) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the IDEX Corporation Second Quarter 2019 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. I would now like to turn the conference over to your host, Mr. Michael Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone. This is Mike Yates, I'm Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for a discussion of the IDEX second quarter financial highlights. Last night, we issued a press release outlining our Company's financial and operating performance for the three months ending June 30, 2019 and later today we will file our 10-Q. The press release, along with the presentation slides to be used during today's webcast can be accessed on our Company's website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Bill Grogan, our Chief Financial Officer. The format for our call today as follows: We will begin with Andy providing an overview and an update on market conditions, geographies, and our capital deployment. Bill then will discuss our second quarter financial results and walk you through our operating performance within each of our segments. And finally, Andy will wrap up with an outlook for the third quarter and the full-year 2019. Following these prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering conference ID 136-841-63 or you may simply log on to our Company's homepage for the webcast replay. Before we begin, a brief reminder, today’s call may contain certain forward-looking statements that are subject to the Safe Harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I'll now turn our call over to our Chairman and CEO, Andy Silvernail.

Thank you, Mike, and good morning, everyone. I appreciate you joining us to discuss our 2019 second quarter operating results. Let me start with a few summary points on the results. Q2 was solid and I'm very pleased with these performance in a choppy economic environment. Bill is going to walk you through some financial details in a bit, but overall we delivered 3% organic growth in the quarter, our 10th consecutive quarter of organic growth. The 3% was slightly below our expectations, but considering the lingering trade tensions and the uncertainty in the macro environment, I was happy with the result. Our price and productivity initiatives continue to drive outstanding margin and capital return regardless of commercial environment. We delivered another record EPS in the quarter. As we look at the balance of the year, we're confident in our ability to execute in times of volatility. As such, for raising the low end of our full-year guidance by $0.08, our guide is now $5.78 to $5.85 per share. Finally, before I go into details, I want to take a moment to welcome Velcora Holdings and its two product lines Roplan and Steridose to the IDEX family. We're very excited about the possibilities this acquisition brings to our Sealing Solutions platform and I'm confident the acquisition will prove to be a great addition to our portfolio. With that, let me start the call with the look at the regions we do business in. The overall global economic output remains uncertain. Companies are employing a wait-and-see approach and slowing down larger project activities as they wait for some resolution to the various geopolitical situations across the world. We believe that the underlying fundamentals in North America remains strong due to high levels of employment and expanding wages. Markets continue to grow, but at a slower rate versus the first quarter. In Asia, there are some pockets of strong performance, but the overall Asian economic performance decelerated due to uncertainty driven by the ongoing trade conflicts in China and the election cycle in India. Finally, the Eurozone was flat year-over-year. We see pressure in Germany as auto, tooling, and general industrial markets softened, given the apprehension in the UK as the future of Brexit is still unknown. All right, let me turn to the markets we serve. The industrial markets are generally performing well, driven by OEM and project wins. However, we're seeing softness in daily distribution orders and project closure timing is becoming harder to predict, despite the strong funnel. Demand continues to be robust across key life science markets. Strong performance continued to in IVD/BIO as our partnership with our customers continue to drive innovation and bring new products to market. The energy market is relatively flat with strong North American truck demand and good performance of commercial aviation offset by lower LPG project volume. U.S. ag, continues to be solid. Our overall farmer sentiment is low with continued tariff impacts and the challenging 2019 planting seasons. OEMs are reacting to the slowdown with an extended mid-year shutdowns. Municipal markets in North America remain stable. We see some slowness in Europe were political uncertainty is leading to project delays and the China markets are softening, but India remains strong. The semiconductor market continues to be driven down at high inventory levels and memory chips as well as lower consumer sales of smartphones. We do not expect this market to pick up in the back half of the year. Finally, the slowdown in global light vehicle sales drove softness in our automotive exposure, especially in China. Okay, let me switch to capital deployment. As I mentioned earlier, I'm very excited to welcome Velcora Holdings and the Roplan and Steridose product lines to the IDEX family. These businesses will mess nicely with our Sealing Solutions of portfolio, and we're confident at our current product offering. We deployed $137 million in capital on the deal to paid about 13x 2019 EBITDA. We expect the deal to achieve double-digit cash on cash returns in the near future. We're still working through the purchase accounting associated with the transaction, but we don't expect to deal to the material to a 2019 adjusted EPS. As usual or closely with their teams integrate the business in IDEX family, and we look forward to the long-term returns I'll provide. M&A continued to be a priority for us and the funnel remains strong. Our teams continue to evaluate several deals as we continue to look for high quality assets to that portfolio. In addition in the quarter, we were purchased $3 million of stock at an average purchase price of $155 and we returned $38 million to shareholders via dividends. With that, we pause here for a moment. I'll turn it over to Bill, who's now talk about the financial results and the segment discussion.

Thanks, Andy. I'll start with our second quarter financial results on Slide 4. Q2 orders were $628 million were down 2% overall, the flat organically, each of the segments were flat year-over-year. I'll get into more detail and covering the segments, but I would say there are three main drivers for order performance. First, the softness we are seeing in ag, semi and auto impacted orders by about 150 basis points. Secondly, you unresolved trade conflict and continued geopolitical uncertainties are creating caution in the markets and we're seeing customers pause on large projects investment across the segments. And finally, we're comping back to back years of over 8% organic growth for the second quarter. Q2 revenue of $642 million was up 1% overall and 3% organically, driven by 3% organic growth across all segments. We expanded second quarter gross margins by 20 basis points to 45.5%, primarily due to price, volume leverage and production efficiencies, partially offset by continued investments in engineering related to new product development. Q2 adjusted operating margin was 24.5% and all-time quarterly high for IDEX and up 90 basis points compared with the adjusted prior year period, mainly driven by our gross margin expansion in lower SG&A costs. Q2 adjusted net income was $150 million resulting in record, high adjusted EPS of $1.50, up $0.10 or 7% over prior year adjusted EPS. Our second quarter effective tax rate was 21.7% same as prior year, but 80 basis points lower than our previously guided amount, primarily due to higher access tax benefit from greater than expected stock option exercises in the quarter. Free cash flow was solid at $118 million of 8% over the last year and 103% of adjusted net income. This was our highest Q2 free cash flow of all time. Finally, in regards to the balance sheet, gross and net debt leverage remain very healthy. The combination of our strong balance sheet, capacity on our revolver and free cash flow provides us the ability to deploy $2 billion in the next 12 months for the right M&A opportunities, while still maintaining our investment grading. I'll now turn to the segment discussion. I'm on Slide 5, starting with Fluid & Metering. Q2 orders were down 2% overall and flat organically, mainly driven by the market cautious sediment we mentioned earlier, market contraction in the ag market and lower projects and energy. Q2 sales were up 1% overall and up 3% organically. All businesses other than Banjo grew organically in the quarter. Despite some market choppiness in North American distribution, FMT continues to perform well overall driven by a successful targeted growth initiatives in the industrial space along with solid OEM demand as well as our ability to capitalize in the favorable chemical market conditions. Both our Viking and Richter businesses posted record sales for the second quarter in a row, driving strong growth in our pumps and valves businesses. The municipal water business remains steady and the oil and gas market conditions have stabilized a bit. As I mentioned before, the only business in this segment that contracted year-over-year was Banjo, which is impacted by the overall Ag market dynamics. We're keeping a close eye on preseason order patterns that generally occur in Q3 as an indicator to see if there is a chance for a rebound in 2020. Finally, excluding restructuring expense, operating margin was 30.5%, up 100 basis points over the adjusted prior year quarter, mainly due to price, volume, leverage and productivity initiatives, partially offset by higher engineering investments. Let's move on to Health Science turning to Slide 6. Q2 orders were down 1% overall, but flat organically, mainly driven by the market pressure in Semicon and automotive. From a sales perspective, Q2 sales were up 2% overall and 3% organically, driven by our strong performance across all segments of our life science business. As we continue to grow through targeted MPT efforts in collaboration with our key customers and leveraging strong secular growth trends. At gas, we continue to see project wins with our MPT launch in the food and beverage space, driving double-digit revenue expansion. In MPT, they have built a strong backlog driven by growth in the Pharma market and we look for them to have strong back half of the year. Finally, the unfavorable market conditions in Semicon and Auto negatively affected our sealing platform and created headwinds the overall sales and orders for the segment as sealing was down 18% in orders and 6% in sales organically for the quarter. From a margin perspective, excluding restructuring expenses, operating margin increased 100 basis points to 24.6%. This was primarily due to higher volume and lower amortization, partially offset by higher growth investments. I'm now moving on to our final segment diversified. I'm on Slide 7. Q2 orders were down 3% overall and flat organically, driven by a tough comp in dispensing due to a larger project order in the prior year. They were down 22% in orders for the quarter. Q2 revenues were flat overall, but up 3% organically and I'll provide more color on that in a minute. Operating margin of 27.1% decreased 100 basis points in the quarter. This was driven by dispensing as they delevered on their lower project volume. Sequentially, this segment was up 130 basis points versus Q1. Our FSD segments performance was mainly driven by solid results in our fire and safety businesses. On the fire side, we continue to capture OEM demand and our cast products are performing well and the launch of our SAM product is getting a lot of attention in the market. Within rescue, we are capitalizing on strong tool demand and seeing positive momentum around our MPT programs. Our hydraulic watertight tool that we launched at the beginning of the quarter is seeing high demand. At BAND-IT, its performance remained strong despite general softness in the auto market and lower industrial sales. However, we continue to win in the aerospace and several other niche verticals. Dispensing story remains challenging. As I mentioned earlier, the business was down double-digits compared to prior year due to a tough comp against some large project wins last year. We expect the business to be marginally better in the second half, but still down. There will continue to be a drag in the segment for the balance of the year. I'll now pass it back to Andy to provide an update on our 2019 guidance.

Thanks Bill. So to wrap things up, let me summarize some additional details regarding our 2019 guidance for both the third quarter and the full-year. I'm on the last slide, Slide 8. In Q3, we're projecting EPS to be in the range of $1.45 to $1.47, organic revenue growth of approximately 3%, and op margin at about 24%. We are estimating a 1% topline headwind from FX, assuming the June 30 rates, which translates into $0.01 impact of EPS. Q2 effective tax rate should be about 22.5% and we expect to spend about $20 million in corporate costs. If you look at the full-year for 2019 again, we're raising the low end of our full-year EPS guidance $0.08, our new guidance is $5.78 to $5.85. Full-year organic revenue is projected to be 3% to 4% and op margin again about 24%. And the same with the next quarter, we expect the total FX impact as June 30 rates to be 1%. The full-year effective tax rates should be about 21.5%. We're expecting to spend about $60 million in CapEx, free cash flow should be about 105% of net income, and corporate costs should be in the $78 million to $80 million range. As always, our earnings guidance excludes any associated costs with future acquisitions or restructuring. With that, operator let's turn it over to questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.

Thank you. Good morning, everyone.

Hi, Deane.

Maybe we should start with the macro since that seems to be where most of the uncertainty is. And Andy, we were with you last at EPG and you were clearly signaling at that time, you were seeing choppy daily orders and that seems to have come through in the results today. Couple of questions to start with. What was the cadence of the quarter? You've heard a lot of different commentary from the company's about the months in the quarter. So how did that progresses you? And then some color on the distribution side, sell-in and sell-through?

Yes. So the overall cadence was different Deane than we've been experiencing here for the last year. I think in several conversations that I've had with people, I've noted that in the past year, maybe year and a half, we've seen this cycle in the quarter where you've had – have a weak month, and maybe a slightly better month and then a relatively strong month. That's been the pattern here for quite some time. And the pattern was different. For the first time, we didn't see that ramp up in the last month of the quarter. I will say that the early part of July is stable, right. So you're not seeing a decline in any time, which I think is positive. But you didn't see that uptick in the last month of the quarter like we have seen in the past. And so, I think that really notes well to a decelerating environment, which is what we're experiencing certainly from last year, first quarter to this year. So frankly, no surprise, it's kind of what we've been expecting here for some time. I think we've tried to do a good job of communicating that and I think we're in the environment that we expected to be here coming into the year.

And the view from the distributor sell-in and sell-through?

Unlike a lot of folks, we don't have a lot of off-the-shelf distribution. We do have some, it's been fine. We don't see any major areas of stocking or destocking. I think that the biggest thing relative to folks is, they're very cautious, whether it's in the distribution network or the OEMs, people are pretty cautious about anything with the big ticket. And so I think we're going to see that until you get some certainty back into the marketplace. The interesting thing about it is it doesn't feel like it's driven by what I'll call fundamental demand of under capacity or overcapacity, which is typically what happens. This really feels a manmade. And so the encouraging part of that is did you get some resolution on some of these things, I think demand snaps back pretty quickly. I think the discouraging part of it is, it doesn't really look like that's going to happen anytime in the near future.

Yes. That’s really helpful. And just kind of extend the manmade observation, it's manmade and not execution. And that's pretty clear to us. And just last question for me, and if there's ever a time to be asking this, it's now your barometer business. You always BAND-IT, Warren Rupp and gas, and BAND-IT looks like it's holding up versus even with auto being weak and gas had a good quarter. So take us through the barometers.

It's a mixed bag. What I would say is on the daily rate business, you definitely see softness. BAND-IT and gas in particular have actually won nice chunks of business, but there are larger chunks of business that had been part of our targeted growth list. Warren Rupp is actually holding in. And so if I look across the board, it's a mixed bag, all in all equally in deceleration.

Terrific. Really good color. Thank you.

Thanks Deane.

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

Hi, guys. Good morning.

Good morning.

Can we go back to Health & Science orders, I think Bill you said, the semi and auto part was putting pressure about, I think it was down 18% in orders. Can you talk to maybe the life science and MPT and some of what the order trends you're seeing on that side?

Yes. So life science is really solid and no concerns there. The MPT has a very good funnel of work, they've been working on, Allison, as well as anyone that's pretty lumpy, but generally, it's a good funnel of work they have there. The concerns are all around semiconductor and auto, the Sealing business you said 18 down, that was a Sealing business in particular. And that they have our largest chunk of semiconductor exposure. So they're facing some headwinds, they’re semi and auto. And so they're facing some headwinds there, but really good execution and most of the Sealing platform, which is nice to see. So I think those are just part of those cyclical markets generally, otherwise very happy with the profit expansion that we saw in HST that's a record for us. And I know this time last year we had some questions about whether or not we were going to expand margins at the same time of click that we had in other parts of the company. And I think we've demonstrated that we can do that. And I think the life science stuff is in really good shape.

Great. And then can we just touch on Velcora's, a little bit more color on there. Just in terms of growth rate margin? Is it leveraged to any significant customers that we need to be mindful of?

Yes. So first of all, and this is a terrific business. We've known about this business for a long time. But we cultivated the business ourselves. It's a wonderful thing principally road plan, which is that the 85% of business is a mechanical Sealing business. A lot of exposure into faster growing parts of the market into life sciences and just generally good positioning across the board, the businesses is profitable, it's an eidetic like business and we think quite a bit offside frankly. It's a well-run company that really terrific team of people, but we think not unlike when we bought PPE back here quite some time ago and nine years ago now, that business, the margins have I think more than double that PPE in a period of time. Probably won't do that, but there's a lot of upside in terms of profit and growth rates.

And not heavily concentrated across a small group of customers.

Yes. So it's life science, food and beverage and then general industrial.

Great. Thank you.

You bet Allison.

Thank you. Our next question comes from the line of Michael Halloran with Robert W. Baird. Please proceed with your question.

Hey, good morning, everyone.

Good morning, Mike.

So just a quick tack on to that, what's the accretion embedded in the guidance associated with the acquisition?

Nothing as of now, we're still working through final purchase accounting. We'll give guidance once we complete that come out of the third quarter, but nothing material, maybe a penny or two or most.

Okay. So then – on the acquisition M&A commentary very strong robust pipeline. Maybe you could talk a little bit about actionability. I know that's been a hurdle in the past. It's on a little bit more constructive.

Yes, so it's, look we've talked about here for quite some time. We've been working on a ton of stuff and walked away from a lot of things. So it's the pipeline looks good. We've got a bunch of things that we're working on. Actionability is very hard to estimate. In this environment we found time and again that you've had people who have been willing to pay, kind of an exorbitant price at the end of a discussion. The quarter was terrific because we were the only ones in there at a very constructive long-term conversation going on and was in an auction, the rest of the environment frankly, is unchanged from when we talked about it 90 days ago Mike.

All right, makes sense. And then just from a guidance perspective, understanding how you get to that 3% to 4% range, obviously orders, 3%-ish plus or minus starting the year here. When you look to the back half of the year, is this about comps easing where the time you hit the fourth quarter that that helps get to that range? Is it about the cadence that you're expecting from an end market perspective? Maybe just give some puts and takes and how you get to that 3% based on the environment today and then whether or not there's continued deceleration in the environment embedded in that assumption?

We don't have anything competitive in terms of further deceleration. We have not estimated that basically at the levels that we're at today. We kind of take it in straight line and that's what it is. It's the fourth quarter that we have a much easier cost. The second, third quarter is a tougher comps, a fourth quarters, a significantly easier comp. There's no significant change. There's no one major inflection that has to happen for us to get to these numbers.

That makes sense. I appreciate it.

Q2 is the larger order. We decelerate a little bit just for the seasonality in Q3. So to your point, flat orders at a larger number yielding into Q3 is not straight math.

I appreciate that Bill. Thank you, guys.

Thank you. Our next question comes from the line of Nathan Jones with Stifel. Please proceed with your question.

Good morning, everyone. Just maybe following onto Mike's question and your answer to that, I mean it sounds like you're – the back half off of the year guidance embed normal seasonality, not getting better, not getting worse, largely across the portfolio. Maybe you could talk about the things that could make it get worse, could make it gets better, relative to what your current expectation is?

Yes. I wish I had a brilliant answer for you, Nathan. I think it's all the macro, frankly. We're going to work our body of product and customer opportunities and continue to push for our consistent 200 bps above market. I think is all going to depend upon the global economy. I'm not sure that we're going to swing at one way or the other, meaningfully off our current trajectory different than that.

Fair enough. Maybe on margins particularly FMT in case anybody missed it, I think you crossed 30% margins there for the first time, so congrats on that. Is that the kind of level that you guys think you can maintain there? What businesses in that segment have the opportunity to improve margins a bit more? If we're starting to slowing growth there, should we expect to see incrementals dropping to that kind of 30 to 35 range? I think you expect when you're seeing lower growth here. And does that mean we should see margins flatten out year?

Yes. So I think at the current volume levels that we're at, I'm not – I think we're about at the right level of profitability. On an increase in volume, you've still got headroom here, because of the very high incrementals. At the end of the good part here is, we have – we don't have a huge mix of margin. We have some margin mix here, but we've got a lot of businesses that are now kind of pushing up against this higher 20s number. So assuming that the world that fall apart on us, that margin will feels pretty good. At the same time, we've all got to be candid. This is a very high contribution margin business and if the business turns down, it's going to have a steep dropdown. That's just the way it is. We have continued to plans that we've talked about before on these calls. And it's why we have been cautious in some degree about our market outlook. And so my point of view is we're a very healthy margin level now. We have further incrementals and FMT and in other parts of the business, based on the high contribution margins and our ability to get priced. And we are preparing as we always do, if we have softening to make sure we're appropriately, resetting the business and taking out some costs in line with volume.

You guys have always made it pretty clear that you have those kinds of contingency plans for economic downturns. Are there businesses now where you actually need to enact some of those plans? Are they places where you need to take costs out currently with where the economy is?

Yes, definitely. If you look across the 40 businesses, if you look at the folks who are more focused on auto, semi, ag, you absolutely have got to do that. And they've been doing that here since basically this time last year, in one way or the other. Just from a process standpoint and we're looking at this – number one, we're looking at this all the time. We'd go into any year, having a contingency plan that's very, very specific and I know I've said this in many venues before, but just the high level math of this whole thing. Our broader contingency plan is one that says, okay with the what I call, vanilla recession. We think the topline is down five points plus or minus, right? And that five points is equal do about $125 million unmitigated, that's going to be about $75 million in pretax profits. And we think that we can take out and not damage the business somewhere in that $20 million range pretty quickly. A bunch of it's volume related, a bunch of it services related, right size in certain places that have a larger overall impact. The end up with downside of call it somewhere between $50 million and $60 million. So $0.50 to $0.60 a share and so what that's kind of 8%, downside on a 5% in a topline downside. And that's the mentality that we've had and obviously as you move into the businesses, the contingency plans look different than that and not everybody is the same. But that's our mindset. And so as we things decelerated here, I mean, I don't – I'm not going to call it a recession, but we're prepared if that happens and we'll pull the trigger on things and some things make into your point. We are pulling the trigger on now, the small things that are being hit specifically with the volume declines. Bill, anything you wanted to add there?

Yes. I was going to highlight, we did take a couple of restructure actions in the quarter on those businesses that are seeing fundamental softness. So we continue to evaluate and as businesses underperform take action.

That's helpful color. Thanks a lot guys.

Thank you. Our next question comes from the line of Matt Summerville with D.A. Davidson. Please proceed with your question.

Thanks. Two questions. First, just on the quarter, where were you in terms of price realization year-over-year and how did that compare to the inflationary pressure you're seeing in your businesses.

We continue to trend is that little over a point of price capture and at the high end of our historical price costs spread, about 30 to 40 basis points historically a little on the higher end here in the second quarter.

The team has done a super job with price and managing the spread and to build a point, we're on a little above our higher end that 30 to 40, which is good.

And then with respect to the HST overall, may be to an earlier comment, Andy. At this point, do you feel like that business is breaking into a new sort of higher level of margin potential? And can you maybe talk about, what areas you still can see sort of material improvement from here with the platforms that are currently in the HST portfolio?

Yes. So I'm actually really, really proud of that team. We're at our record op margin there with Sealing down 18% with a pretty high incremental margins in that business. So when you set Sealing aside and you look at what the performance is of the rest of the business, it's pretty extraordinary and actually I’ll get the Sealing team a lot of credit managing that downside. They actually manage the cost structure really well too. So that's a good note. So I think we're in a good position. I’m line in it a little bit. If you went back to 2015, 2016. One of the things you guys couldn't see because the industrial businesses were getting kind of kicked around is we were in the process of restructuring a number of businesses within FMT. And that breakout and profitability that we've had here in the last 2 years, 2.5 years was about that, right? We have reset the margin structure of the business and when volume came back, you've now see what has happened to profitably at FMT. I don't think HST has that much upside. I'm not going to say that, but I think what you're seeing with us having a record with a key piece of the business being down and the fact that they're holding margin. When you see that pick back up, I think that bodes well for improvement in the overall HST margin structure in the future.

Yes, we did two plant consolidations with an HST in two, one with an MPT and one within the life science space. So there were some structural actions, I think to help us get it.

Yes.

And to this point to add Andy's comment probably not hugely increases going forward, more relations – yes it's that.

One thing to note, Matt and everyone should pay attention to this. Velcora is going to land into HST. They're bringing some amortization there. It's a little bit – the margins are a little bit lower than the HST average anyway. And so you will see some dilution on that as we go forward a little bit.

Thanks you, guys.

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

Hey, good morning, guys.

Good morning, Brett.

Hey, just wanting to come back to incremental margins and really thinking about the Q3 framework and the implicit in Q4. If you just look at incrementals, at the midpoint, it does imply incrementals that are just naturally above what those businesses typically do? Are you throttling back some investment spending, or is it just some of that price cost benefit you're going to see here in the second half? Any color there?

We are not throttling back investment spending at all. You're going to see – we're going to hit that $60 million number for CapEx. As I've mentioned to you before, they're kind of 25 major programs or projects that myself, Bill and Eric Ashleman and then the rest of the team really focusing on and we are funding those. There are some places that are in cyclical downturns that we're pulling back. But in our places that we're betting – we're continuing to – into that. And one of the things that I'm really intent on and we're having – one of the reasons I'm so straightforward with you guys about what we're going to do if there's a downturn and it's exactly the conversation we're having with our Board because if you get the scenario that I outlined before, what I don't want to do is go and take another $10 million or $20 million out because with that you will cut throttled down investment. And if you have a recession that's six or 12 months, the last thing we want to do is might go a bunch of really critical people that you wont be able to hire back in this tight environment in the future. So I want to invest that $10 million or $20 million, so we can continue that to have better than market growth rates. So we're keeping going and we're going to trim back on places that are weaker. But we're going to keep investing.

And I think our price capture helps enable that.

Yes, absolutely.

Okay, good. And then I guess just a follow-up to that. Specific to just restructuring, you did a little less than $4 million in the first half, I think $12 million in 2018. Do you expect this step that up in the second half for the year here?

Yes, I think you'll see a few more things happen here that that we've been seeing up. But unless things materially weaken, I think it will be maybe a little bit higher, but it's not going to be a breakout number.

Okay, good. And then just the last question, regarding the channel. Maybe you could just compare and contrast what you're seeing in distribution versus direct in OE specific to orders. How did that look in the quarter and then really into July here? Thanks.

I'll have Bill comment on this, it sounds too. He's done a lot of work in this area, but there are two things that were different in the second quarter on the orders front then in the first quarter. The first thing is that larger projects and we've seen this pattern for the last eight years, since I've been CEO. We see this pattern happen with when the softening kicks in, the larger scale stuff gets pushed out and you started to see that happen. That was one thing we have seen kind of larger projects get delayed. And then secondarily, what we saw happen in the throughout the quarter was the day rate business in some of these very short cycle businesses came down. And so that's what kind of played out. The good news is again, July has held up that if you're not seeing a sequential decline anymore, which is a good thing. But you are seeing a little bit lower level than if you compare it to the first quarter or the fourth quarter of last year in terms of the order book.

Okay, good. I appreciate the color?

Thank you. Our next question comes from the line of Andrew Buscaglia with Joh. Berenberg. Please proceed with your question.

Hey guys. Can you talk a little bit about, so you mentioned you made the comment that some of this is – sluggishness is man-made? But have mind suggest with semiconductors and auto and even ag, I would say that could be a prolonged decline. So trying to triangulate what you're seeing maybe are too niche to be impacted by that. But what is your comment on that.

Well, maybe one comment. The corollary we saw in May when there was a tweet around potential tariffs with Mexico, our industrial business saw immediate response in reduction in day rates. So that corollary around this being not fundamental economics versus caution in the broader economy is somewhat of what we're basing at early on.

Yes. And also – and you recognized that auto, semi, ag and total is 12% of the business, 10% of the business.

Yes, we are less.

Yes. So you've got to recognize it that I'm referring to basically 90% of the business that is not bad stuff. And so as you look, if you break down life sciences, you break down municipal, you break down general, industrial, that's more of what I'm referencing. And look, if we couldn't see that – Bill described, if you couldn't see that corollary between those things and how fast that happens, it's really remarkable. And back to the question that I got earlier about our canary businesses, we saw those in particular, I mean, if you snap your finger and as you get good news, bad news out of some of these trade and economic issues, we see it show up in our order book really quickly.

Okay. And then maybe just a more specific one within Health & Science technologies, one of your larger customers, Illumina had a weak quarter, did you guys look into that as anything concerning there given that they're kind of a barometer for what you do in biotech?

Yes. So we're super careful about commenting on any customers. I think what I would say, and this is a broader statement – sometimes people forget what we sell into these marketplaces and we're selling components that are going into instruments. And a lot of these businesses you see some of their outsized impact, positive or negative is really their reagents. And so the key to look at for us is our growth versus instrument sales. And what I can say very broadly throughout the marketplace is we track well and I would say take incremental share. And that's a broader statement than any one customer.

Okay. All right. Thanks very much.

Thank you.

Thank you. Our next question comes from line of Joe Giordano with Cowen and Company. Please proceed with your question.

Hi, good morning. This is Robert in for Joe. I just wanted to go back to [indiscernible] trajectory that we saw in Q2, is that slowing down. Would now be the time to start to think about the possibility of orders start to turn negative going forward. Could you provide any color on that?

I don't think so. Robert, the information that we have thus far wouldn't suggest that. But with that being said, let's just, I mean I think all of us are looking at this environment the same way. It is materially slowed sequentially. I think that the risk of recession has absolutely gone up, there's no doubt about that. But we have not seen any evidence of that as yet.

Okay. Thank you.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Silvernail for any final comments.

Thanks, Melissa. I appreciate that. Thank you to all of you for joining us on the call today. Once again, very proud of the work that the team has done in this pretty choppy environment. The levels of execution, the levels of focus on the areas that matter most to us and really building the culture of this company to continue to perform regardless of environment is what we have worked very hard to do. And so I appreciate your time and I look forward to talking to you again here throughout the quarter and then in the next 90 days. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.