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IDEX Corporation (NYSE:IEX)

Q1 2014 Earnings Conference Call

April 23, 2014 10:30 AM ET

Executives

Heath Mitts - SVP and CFO

Andy Silvernail - President and CEO

Analysts

Mike Halloran - Robert W. Baird

Nathan Jones - Stifel

Scott Graham - Jefferies

Allison Poliniak-Cusic - Wells Fargo Securities

Matt McConnell - Citi Research

Matt Summerville - KeyBanc

Paul Knight - Janney Capital Markets

Charley Brady - BMO Capital

Joseph Giordano - Cowen

Walter Liptak - Global Hunter

Bryan Kipp - Janney Capital Markets

Operator

Good morning. My name is Kili, and I will be your conference operator today. At this time I’d like to welcome everyone to the First Quarter 2014 Earnings Conference Call for IDEX Corporation. (Operator Instructions) Thank you, I’d now like to turn the call over to Mr. Heath Mitts, Senior Vice President and Chief Financial Officer. You may begin, sir.

Heath Mitts

Thank you, operator. Good morning everyone. Thank you for joining us for our discussion of the IDEX first quarter financial highlights. Last night, we issued a press release outlining our Company’s financial and operating performance for the three-month period ending March 31, 2014. 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. The format for our call today is as follows: we will begin with Andy providing a summary of the first quarter financial results. He will then walk you through the operating performance within each of our segments. And finally we will wrap up with our outlook for the second quarter and full year 2014. 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 (855) 859-2056 and entering conference ID 30411379 or simply log on to our Company's homepage for the webcast replay. As we begin, a brief reminder: This call may contain certain forward-looking statements that are subject to the Safe Harbor language in today’s press release and in IDEX’s filings with the Securities and Exchange Commission.

With that, I will now turn the call over to Andy Silvernail. Andy?

Andy Silvernail

Thank you, good morning everybody. I appreciate you joining us here for our discussion on the first quarter results. Before I get into the results and the financials in the segments, I want to talk a little bit about how we’re doing against our strategy. As you recall, we outlined three major strategic priorities that we’re going to talk about here this morning. Accelerating organic growth, executing around our core customers and products and then really improving our capital deployment and then also I’m going to take a few minutes and talk about what we’re seeing around the world.

Our first strategic priority -- last quarter, I took some time and mentioned that we seen a build in organic revenue, organic order growth and we’re seeing that really play out here in the first quarter. We saw some buildup in the order rates at the end of 2013 and I’m pleased to say that we delivered 8% organic growth in the quarter. We’ve seen the benefits of focusing in on these segments, our core customers and our products that we’ve been pulling more and more resources over the few years against. It’s also important to note that of the 8% organic sales growth in the first quarter, it was lifted by about 4 points from the conversion of the large dispensing order that we had from the third quarter of last year.

We originally thought that that order was going to happen balanced between the first and the second quarter. In reality the vast majority of it was pulled forward by our customer and that we shifted in the first quarter. So that certainly helped the first quarter organic growth rates. I’m very proud of how the dispensing team did there. They executed flawlessly. We got a customer up and running and the team there was just thrilled with what they’ve accomplished. Because what we’re seeing in our ability to execute, we are raising the low end of our organic growth rate to 4% and we now estimate they will be about 4% to 5% to the full year and we’re increasing our guidance because of this from 338 to 345.

If you look at our second priority, which is executing around our core customers and products, this is a really good story. We’ve seen that improvement and growth is really not so much due to markets but due to our execution. We’ve had an internal mantra, make our own luck and we’ve really done just that and for the few years we’ve been segmenting our markets and our customers more deeply. We put more resources on our best opportunities and we’ve really driven profit improvement in places that historically lag. The aggressive segmentation that we’ve been doing has been supported very strong operational execution where we’ve really focused to deliver value to our customers in terms of quality, reliability, and service. All these efforts really continue to drive very, very strong profitable growth with very strong high incremental flow through rates. And in the first quarter, we saw that come through at about 39% and flow through to the operating profit line.

Our third priority is around capital deployment and really supporting the two priorities is fully funding our organic growth and our organic initiatives. And during 2013 and now continuing in 2014, we’ve made a number of targeted investments to ensure that our platforms can continue to grow. We’ve put money into people, channels, products, and operations and just a few examples that we talked about in the past, but I think are worth reinforcing, we’re opening up a production facility to support our specialty seals business in Houston in the oil and gas markets. We’re doubling the size of our India facility, which has had outstanding demand and this really supports multiple business lines.

We’ve been winning new business and market share in our Scientific Fluidics and our Ag platforms and also we’ve had this really great story in our Fire Suppression business where we have one new business in power production facilities around the trailer business. We’ve been able to fund these organic growth initiatives because we’ve really had very, very good productivity and we expect that to continue in the future. After maximizing these organic growth investments, we said we’re going to layout our strategy of putting money into strategic acquisitions first, share repurchases and dividends. And let me catch on the latter first.

We increased our dividend rate by 22% here recently and we’re very excited about the ability to continue to grow that dividend rate. We also continue our share repurchase program and we anticipate about a net 1% from this effort. And we’re seeing an improvement in our overall M&A funnel. So although we didn’t announce any deals in the first quarter, we are seeing some improvement in our M&A funnel and we feel good about 2014.

Now let me take minute and just talk about what we’re seeing around the world. In North America demand continues to be very positive. And also importantly, our short cycle businesses have demonstrated two consecutive quarters of nice expansion and that gives us some encouragement here as we head into the second quarter.

China, which is on the forefront of everybody’s mind, it’s really -- continue to be choppy. We see growth one month and then slowdown in the next. And so while we’re still very committed to that region, as I said in the past we’re going to have leave with the volatility that’s just inherent in that part of the world.

Europe continues to have a positive trend and I expect that to continue unless something is blunted by what we’re seeing in the activities in Eastern Europe. And then the emerging markets which really offer great opportunity -- it’s very similar to the story in China, which is you have to be one to deliver the opportunity and make your bets over the very, very long term. So excellent long term prospects that I would say is in the last quarter or two. The growth has been slower frankly than in the developed world.

Overall, the outlook is positive with a few pockets of concern. It’s important to remember that in a primarily -- we have a short cycle business and so we don’t have a lot of backlog to look forward into the year, but what we’re seeing right now makes us feel pretty good.

With that let me turn to our results. I’m now on Slide 4. For the first quarter, we have revenue of $544 million is up 10%, 8% organically, which really an exceptional start to the year. Operating margins were 20.9% which is up 170 basis points year-over-year and this improvement is driven by a combination of productivity, volume leverage and also some good pretty mix across our platforms.

The results that we’ve highlighted and really been improved, we’ve seen a great performance by our Fluid & Metering which had a 260 basis point improvement in margin and also had to diversify which had a 360 basis points expansion in margin. I’ll get into that in a more in a second when we talk about the segments. But you know really outstanding results.

We did see backlog decrease by about $7 million in the quarter but this was really due to finishing that dispensing order earlier than we thought and when you back that out, we still feel pretty good about where we stand in terms of backlog going into the second quarter. EPS was $0.91, which is up 23% from last year.

With that let’s turn to the segments. I am now on Slide 5. And we’ll start with the discussion of Fluid & Metering. The first quarter results were very strong and really demonstrated a sustained growth in organic orders and sales which were up about 5%. Operating margins as I mentioned a moment ago, expanded by 260 basis points. We saw a combination of really very good productivity improvements in market growth. And especially this would have been led by energy and fuels platform and that team just continues to do a great job.

If you look at energy and fuels they are two big items that really made the quarter for us. One is the strength of dealing in truck deals in the North America retrofits business. And second there was larger than anticipated fuel consumption as I extended winter played out and that really drove some activity in the end markets in the LPG area, around those OEMs.

If you look at the water service business, that’s another good story. Municipal spending continues to improve. We are seeing some improvement spend generally in those markets. The demand has been, pretty decent in the U.S. in Japan and Europe really around share gains more than anything else. But it’s a good story there too. And that came really -- it continue to do a nice job of capturing share by offering tremendous service and a product part offering. In particular we’ve seen a series of nice new products come out of that business and some excellent commercial execution.

In the Ag world, the Banjo team continues to do a nice job. We are very aware of what’s been happening in that external market. We said last quarter that we thought we had a pretty good view of how the year was going to play out based on making it through the first quarter. And we think we’ll hit our numbers generally but we are aware of the softness that’s out there and that team is certainly preparing contingencies and they really demonstrate the ability to execute with new products, entering new markets. So we feel pretty good about that. And also in our chemical Food & Process in in our diaphragm and dosing businesses, again solid quarter out of all those teams.

Let’s move now to Slide 6, to Health & Science, again solid overall growth. We had sales growth, orders are up about 6%, sales up 5% and we saw margins expand begin up 70 basis points to 19.4%. The benefits of the cost and actions from the fourth quarter, combined with very nice execution in order momentum at the end of 2013, really helped deliver nice quarter for HST.

A few highlights here. Really two things stood out, Scientific Fluidics business and material process technologies. The Scientific Fluidics business has been on a role. They’ve won consistently for five quarters with expanding orders of sales growth. It had improving markets generally, but even more importantly, they are grabbing share in markets that continue to be actually decent markets, but really nice job in new products type this year, new channels and an excellent geographic penetration. If you look at our material process technology business, that as you know is a little bit longer cycle business. Their order rates really picked up, as we have started looking at the end of last year and in this year, and that’s going to convert in the second half of 2014. So that team did a nice job. The other parts of HST are also doing well, but I don’t want to pick of those two highlights.

All right, I am on our final segment, it’s diversified, I’m on Slide 7. Really just a great quarter. We had sales up 22%, driven principally by that large Dispensing order that we talked about. However, if you take that out, the Dispensing business still grew mid-single digits. So we are seeing nice core sales growth. And the operating margins for the whole segment increased by 360 basis points in the quarter. So really, really a nice job across the board.

Again, if we look at Dispensing, even with that order taken out, we have seen that team did a nice job of filling their core business. The U.S. core business is expanding. Europe has picked up off the bottom there. So that’s a good story. And also we’ve seeing real strength in our X-SMART launch. As you recall the new product that we launched here a year or so ago has continued to gain traction. So really nice job across the board with the Dispensing team.

The Fire Suppression group, the story here is really three things. Number one, continuity of benefits of the operational execution and facility consolidations we did here last here. Number two, nice wins in the emerging markets with our portables business. And then number three, as we talked about, really a whole new segment that they’ve developed in the power production facilities with the trailer business.

Finally our rescue business, that’s actually is one business that been a little bit slow. We have seen tightness of money. And if we look in Asia and China in particular, there has been some tightness of money in terms of spend, on some large projects, and we were competing against some pretty tough comps here in the first quarter. But generally I feel very good that that team will see improvement here as we head into the second half.

All right, we’ll now turn to Slide 8, and let’s talk about the second quarter and full year guidance. For the second quarter we think the EPS is going to be $0.85 to $0.87. Organic revenue growth will be about 4% and operating margins will be right around 20%. In Q2 we are expecting tax rate to pick up sequentially to above 30%. For the full year, as I mentioned earlier, we’re increasing our guidance to be in the range of 338 to 345, with organic revenue of approximately 4% to 5% for the full year. And again we expect operating margin to exceed 20%.

As always, a few other modeling items just for you to consider. The full-year tax rate is anticipated to be 29% to 29.5%. Full-year CapEx around $40 million to $45 million and free cash flow will be somewhere between 120% and 125% of net income. As always, this includes any impact of acquisitions, either to the benefits or the costs.

So with that, let me stop now and I will turn it over to the operator for any questions that you have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mike Halloran with Robert W. Baird.

Mike Halloran - Robert W. Baird

On the corporate expense line, could you just go over why the spike in the quarter on the corporate expense line, if there is any diligence-related costs there, and then, what the right run rate looks like going forward?

Heath Mitts

Mike, this is Heath. The spike in that number really comes from a couple of different things. One is some diligence-related activity for potential acquisitions in the future, is one driver. There were some legal costs that we booked, for both for that as well as for some environmental activity going on, and the third driver was compensation-related expense related to equity. So the run rate going forward, I would say run it out of the debt right around $18 million a quarter, it think is a good number.

Mike Halloran - Robert W. Baird

And then, so flattish from where we were this quarter, maybe slightly down?

Heath Mitts

Correct.

Mike Halloran - Robert W. Baird

Okay. And then on the timing of the dispensing order, obviously in the prepared remarks you talked about how the majority of that was pulled in to the first quarter. Could you just help us talk about what the right run rate on the margin line looks there -- looks like there? It feels like you have stripped out a lot of the large orders and something kind of more standard run rate stuff from here, but a little help there would be great.

Andy Silvernail

Let me -- I’ll touch on a couple of things, perhaps you know; I’ll let Heath talk a little bit more about the specifics on the margin. Two things really happened there on that order. Number one, the customer just came and said, can we accelerate this, and can we pull it forward, so we can have it in place for the holidays. Usually any of these large orders that come through, they want to be well in place before Memorial Day, and we had the supply chain and the capability to pull it forward and so we’re able to do that. So that’s kind of the number one.

Number two, when you look at the fill of the base business, a good story there is we are seeing nice fill in the base business. So even though that large order -- our business -- we're going to have to scope the business downward after that large order goes, the fill rate has been pretty good, and that team did a great job of going into that order knowing that we had to have a very flexible model. So we didn’t add any real fix costs to get that order out.

What that means however, though is that -- there was a very high contribution margin, there’s no doubt about it, right. Because we didn’t add a lot of fix cost to that. And the strategy in that business now is to -- is around that highly flexible model that can scale up and down, as we see some of these bigger things. So that’s kind of -- that’s an overview of that order and we expect going forward [indiscernible].

Heath Mitts

For modeling purposes Mike, I would recommend using whatever you want to use for that segment’s organic revenue growth. The flow through on that for the next few quarters will be in a 35% range. So depending on what you want to use for the organic revenue growth. So, yes, we’re not going to run at 28% every quarter obviously with -- in a more normalized state, but we’ll still be in the low to mid 20s -- mix plays in there as well.

Mike Halloran - Robert W. Baird

No. That makes lot of sense. Okay. That’s helpful. And then lastly, just want to understand the mechanics behind the guidance here. If I look at the full year guidance relative to where the first and the second quarter coming out, do your obviously looking on average at quarter run rates that are below what the 2Q median would look like, if I can comment what your second quarter guidance. So maybe you could just talk about some of the puts and takes as we move to the second half of the year, whether there are some demand concerns, it doesn’t sound it, mix pressures or any kind of one off type things that are rolling through?

Andy Silvernail

Our view on the second half really hasn’t changed much, if you just kind of think about the underlying business. What I’d say is -- the guidance in terms of both organic growth rate and where we’re taking it up have to do with pulling that one order forward and then seeing work on modest base improvement and that’s why we took the bottom end of it up. And so, if you look at it how the guidance forms, it’s really based on looking at a 4% organic in the back half of the year, and so it’s not really weaker than the first half here, except that you don’t have the larger, that one larger order in there. So that’s the mechanic, if I thought about it.

Operator

Your next question comes from the line of Nathan Jones with Stifel.

Nathan Jones - Stifel

If I could focus in a little bit on the SMP orders, there has been, over the last couple of quarters very little organic growth there. Can you provide some more color on, kind of, what’s holding that down a little bit?

Andy Silvernail

You know, we’re not really worried about that. Those things can be a little bit more lumpy depending upon where we are. The first quarter of last year was very strong, if you recall the order book of first quarter of last year. And the book to bill is still very, very solid. So we’re not particularly worried about that. The -- as we look at the pipeline that’s coming through the funnel, the order rates, I would say they are definitely going to end the year in that 4% to 5% range.

Nathan Jones - Stifel

In the 4% to 5% organic revenue growth range?

Andy Silvernail

Yeah. Somewhere in that range.

Nathan Jones - Stifel

Okay. So roughly in line with where you were in the first quarter for the year?

Andy Silvernail

Yeah. There’s no reason, if we look at our order book going into the second quarter, like all of our business, we don’t carry a lot of backlog, but the pieces that we have good visibility to have been -- we feel comfortable with. The other thing that makes us a feel little more comfortable is, the really short cycles. So the book and churn business, the day rate business that’s coming out of U.S. distribution, as everyone knows on the call that’s something that can be a little bit lumpy. And we have seen that steady out over the last couple of quarters. So that gives us some confidence too.

Nathan Jones - Stifel

Make sense. On the other hand, you have seen some quite significant improvement in orders in the HST business. Should we expect to that manifest as accelerating growth as we go through the year?

Andy Silvernail

No, I think, what -- if you see there -- if you parse it out, if you look at scientific fluidics, optic and photonics and sealing, those are kind of right in line with what we’ve seen -- what we’ve seen and what we had expected. And the real variance here has been some really strong bookings at a material process technology. And that will ship in a back half of the year and even some into the first quarter of next year.

Nathan Jones - Stifel

So we should maybe see a little bit to better growth in the second half?

Andy Silvernail

Well, yes, it the material process technology but they had a pretty weak fourth quarter last year. That was pretty soft. So they’ll feel that in. And the other pieces I think will hold steady.

Operator

Your next question comes from the line of Scott Graham with Jefferies.

Scott Graham - Jefferies

Hey. So I wanted to may be ask previous question a different way. I think you answered sort of a full year guidance question, relative to organic growth. And I just maybe want to, hoping that you would add on the earnings growth side, because the top end of your EPS guidance, start to put the numbers together, it looks like fairly meaningful slowdown in earnings growth that you’re expecting for the second half of the year. And maybe its conservatism and I think we all certainly get that but, it’s a pretty meaningful step down. So I was hoping you can give us some color on that?

Andy Silvernail

We had incrementals coming out of the dispensing order here in the first quarter right. We would still expect to deliver at the kind of rates that we’ve always communicated, because we’re kind of seeing you know, productivity and what not. I would say that there’s a little bit of conservatism on a margin rate. We do also have -- you remember last year in the fourth quarter we only had 25% tax rate, and that’s going to be more in that 29 to 30 range. So we had some pretty discrete items. I can let Heath talk to it. But that’s going to hit that a little bit. And also we continue to make reinvestments and either the way I look at it is we want to continue to reinvest in our businesses aggressively, and we’re at a position where we have an opportunity to do that. Heath, anything you want to talk about in the margins.

Heath Mitts

No, I would say, we will reserve the right to adjust the 90 days as we see appropriate, but given amount of backlog that we hold formally and where we see things, we want to make sure that we’re cautious in terms of our outlook in second half.

Scott Graham - Jefferies

The second question is simple. You guys in the press release and in your statements here have been a little bit more upbeat on the acquisition pipeline than you have been in quite some time, as I remember. So I was just kind of wondering, Andy, if you can give us a little bit more on why that incremental plus, and are you -- do you think you're getting closer to the finish line on a couple? Is it things in the $50 million to $100 million variety, below that, above that? Anything you can give us would be helpful, thanks.

Andy Silvernail

The improvement is really, I guess the more upbeat tone -- it is not because we have anything big that’s imminent - that’s going to drop tomorrow or anything like that that's substantive. But it's more of -- we started putting more resources into our platforms for business development starting about 18 months ago. And what we’re seeing happen Scott, is just an improvement of funnel from, frankly more feet on the street and an improvement in cultivation. And so if we put together a combined strategy of putting more feet out there, closer to the marketplace, really still looking around this $25 million to $200 million range, that sweet spot. There are a few bigger things out there that we’re looking at, but our sweet spot continues to be in that range. And then the second part, as a number of you know, we started building an acquisition integration team here also about that same time. And we feel like we have the capacity to start to move that ball a little faster. That being said, as everyone knows, right these things, right down to the finish line, they can fall through or they can come through. And so in the last year or so we’ve had a number of things that we got to the finish line on and didn’t happen. And as we look at the balance of 2014, we have a little bit better funnel and hopefully we’ll start to see some more activity.

Operator

Your next question comes from the line of Allison Poliniak-Cusic with Wells Fargo Securities

Allison Poliniak-Cusic - Wells Fargo Securities

Just following on that comment in terms of Scott’s comment on the M&A side, is there any specific area where you guys feel like you’re more weighted in the funnel at this point? Maybe segment oriented?

Andy Silvernail

It’s actually, it’s pretty balanced between FMT and HST. The places that we have set are going to be our priorities around in FMT have been around energy and the chemical area. It’s been an area of focus. And we consistently said that we wanted to build out around agriculture, although that’s been a tough one over the last few years to do. So those were the kind of the three areas in FMT.

When you look at HST, scientific fluidics, optics and photonics, and seals really have been our areas of focus. And so those are the areas that we’re really putting the most energy on. And it really gives us Allison, the ability to arbitrage the market a little bit, as multiples kind of move one way or the other in any one of those segments. We can, even when the market is moving and it has been as strong as it’s been can hopefully put ourselves into a position where we can buy at little bit better multiples than are out there, kind of generally in the marketplace.

Allison Poliniak-Cusic - Wells Fargo Securities

That's great. And then, just in terms of the end markets, it sounded like you were certainly a lot more positive in certain lines. Is there any more that's maybe moving the other way or could be that you are concerned about, or is it just more geographically focused in that respect?

Andy Silvernail

I see two things, one of each. The first one is on the Ag side. I think we have not experienced the slowdown yet that kind of everybody is worried about. We saw some overall commodity prices improved a little bit and therefore net farm income, just modestly recently. At the same time, the drought in California hasn't helped anybody. There is no doubt about that and so, I’m cautious about that one but at the same time I feel very, very good about the team that we have there, and their ability to grow organically in and out of the cycle. So that’s I guess one. The other one is, I still -- and I’ve said this for the last few quarters. I’m tepid on what's going on in China. That’s been pretty volatile, and we have seen that unevenness of business here for quite sometime and so I have some concern around that. We’re still investing in we’re going to continue to invest because they are very important markets to us, but we have to be willing to live with the volatility there.

Operator

Your next question comes from the line of Matt McConnell with Citi Research.

Matt McConnell - Citi Research

Just on the second-quarter guidance, you are assuming a little bit of a margin step down, one. I know the trend would normally be for that to go up just a little bit. Is that exclusive to the Fire Safety and Diversified segment?

Andy Silvernail

Yes, and really exclusive to the incremental margins of the dispensing order, right. And that’s a big number and that came through at nice incremental margins because of the nature of the very flexible model they put in place. And also you’re going to see tax rate creep up a little bit here in the second quarter.

Matt McConnell - Citi Research

Okay. Even like in FMT, the margin was nice, above 25%, but that wouldn’t be part of the sequential compression?

Andy Silvernail

Really, if you look at generally around FMT and HST, the only times you see kind of those big swings quarter-to-quarter are typically due to mix, right. And now that water has improved its overall margin profile. The real mover on there tends to be Ag, because Banjo has some seasonality to it and is pretty high incremental margins, so that’s where you’d see the move quarter-to-quarter.

Over in HST the margin on an incremental basis is pretty consistent through those businesses. So you generally it’s going to more follow volume and then occasionally depending upon your ability, you might win few projects here and there specifically around Material Process technology that might shift mix slightly.

Matt McConnell - Citi Research

Okay, great. And switching gears just a little bit, on some of the growth investments that you highlighted at the start of the call, and we’ve been hearing on the floor, maybe a year or six quarters, what’s the lead time in when those actually drive incremental sales? Like is there a way to quantify what you’re seeing out of those investments? Like where are you in the process of the investments translating to incremental revenue?

Andy Silvernail

So, there are some things that take a really long time to gestate. So as an example, if you just look at the product development lifecycles in HST as an example, you tend to see -- that’s a long gestation period. That can be two to three years frankly. When you look at the channel related things, that can be a year and so some of the channel related activity that we’ve done in diversified and some of the channel related activity that we’ve done in FMT, we’re definitely seeing benefits of. I can give a couple of examples I think in our water business as an example. We restructured that business and we didn’t put incremental resources in there, but we certainly aggressively segmented and move resources.

And some of the growth that we’ve seen in new product and in new areas of business have been attributed to that and then in FMT we’ve been very aggressive about moving resources into the Middle East and also into Asia specifically for our rector business and those are things that have had faster gestation than say that two or three year of period, but I’d say on average it’s kind of 12 to 18 months. And we are seeing a little of now, there is no doubt. We’re seeing a little bit of it now and I would say as we get into the backend of this year more importantly into 2015, I’m hoping that we see more benefits.

Operator

Your next question comes from the line of Matt Summerville with KeyBanc.

Matt Summerville - KeyBanc

First, Andy, with respect to your municipal-oriented business and pertaining to water, are you seeing a step-function improvement in that business? Are you seeing loosening of capital budgets or just mandatory stuff that has been delayed so long it just has to get done?

Andy Silvernail

There is definitely more money out there. I wouldn’t say it’s not. The floodgates haven’t opened up, but I will say I think the money -- the municipal monies have come probably six months quicker than I’ve thought they were going to. As you know on the last couple of calls I’ve said that it was kind of 12 to 18 month cycle from when they see improvements in tax receipts to budget increases. And we’re seeing that little bit faster I think. So there is some loosening of purse strings. And then it kind of relates some of the things that have been on the shelf here really since the financial crisis. There is probably some pent-up demand that’s out there.

I don’t want to overstate it though. It’s not a huge number, but it is improvement definitely. On the European side, that’s really been more about new products and some share shift. And so it really is bifurcated between what I’ll call a true improving in market in the U.S. and in Europe where we’ve just executed better I think and had some nice new products.

Matt Summerville - KeyBanc

Just another follow-up just on the M&A environment as you guys see it. If you look across FMT and HST, what would you say right now in your funnel would be the average type of EBITDA multiples you are looking at?

Andy Silvernail

Average is a tough one, Matt. And the reason I say that is and I’ll give you -- how about I give you a range? I’m going to say 7 to 10 is kind of the range and it really kind of depends on the situation. As you know, getting to that 10 size, you got to really clearly understand how you’re going to drive value pretty quickly. But I’d say generally it’s kind of - if I were to tighten that range it’s kind of 8 to 9.

Operator

Your next question comes from the line of Paul Knight with Janney Capital Markets.

Paul Knight - Janney Capital Markets

The health and science segment, is it chromatography, is it the broader strength in the market, what’s behind the five quarters in a row of the improved order rate?

Andy Silvernail

Three things, number one the market generally has improved. So the analytic range for market driven by I’d say improvements in you see pressure come off from the NIH spending. You’ve seen some improvement in capital spend from a number of our customers in some geographic improvements. So I’d a piece of its market. A second piece of it is around, you are seeing definitely a new product cycle. This is an industry, whether it’s the analytical instrument or the diagnostics industry, you’re seeing some improvement. You will see kind of a two to three year product cycles and we are in the midst of the start of a new product cycle that will last couple of years. So that’s a piece of it. And then the final part is there is real growth around in the biotech side, in the genome sequencing. That’s the piece of the business that’s improving. And then I guess the last entity is I think we are winning share. As I look at what we’re doing on new platforms that are being launched and the dollars per instrument that we’re associated with, we’re seeing that improve.

Paul Knight - Janney Capital Markets

And what are your thoughts about acquisitions in the area where you are more directly interfacing with the end market instead of the OEM world?

Andy Silvernail

We don’t want to compete with our good customers. That’s not something we want to do. We’re really-really comfortable in the component and the subsystem area, and then in the instrument area where, frankly it’s really a component of a larger process. So we’re not going to move, you’re not going to see us move aggressively up market and compete with our customers.

Operator

Our next question comes from the line of Charley Brady with BMO Capital.

Charley Brady - BMO Capital

Just on FMT, and kind of I just want to go back to the organic growth outlook to make sure I understand it here, because you are facing a couple quarters here in terms of the orders, pretty tough comps from second quarter, third quarter last year going into second and third quarter this year, and you did 1% this year. You did minus 1% in Q4. Is the 5% organic growth rate here in the first quarter -- was that longer lead stuff that was driving that, because in my mind I would have thought that some of the more near-term, last quarter, fourth quarter, order numbers would have fed into this quarter a little bit more, maybe the organic growth rate wouldn't have been that high, and I guess I'm trying to square that up with your organic outlook going forward, given that orders are -- unless you are thinking that orders are really going to match the pace of a year ago and I'm missing something, it sounds like that’s going to tick down at least for a couple quarters.

Andy Silvernail

Really if you look at it, part of it is comps. I’m talking of the first half of the year, its comps. We did have some stuff, there was a little bit longer cycle, that came out. At the same time last year we saw some of our leaders and some of the businesses that had historically not been leaders in that area, and our expectation is some of our bigger brands, our Viking, our Warren Rupp brands, that didn’t have really great second halves last year. Because if you look at their order book, are poised to do pretty well and have some of that facing related to the U.S. industrial markets that we’ve seen improve. And so at same time, I think the water business is continuing to sequentially improve, and we don’t see a big downside in Ag yet. So that’s what gives us a level confidence that for the year we’ll end up with sales that are in that kind of 4% to 5% -- 3% to 5% range.

Charley Brady - BMO Capital

Can you remind us how much Ag is of FMT?

Andy Silvernail

It’s around 12% -- 10% to 12%. And it’s the one-piece that moves kind of quarter-to-quarter in a meaningful way.

Operator

Your next question comes from Joseph Giordano with Cowen.

Joseph Giordano - Cowen

I just wanted to ask a question on FMT real quick, on the margin expansion there. How would you categorize that mix versus volume?

Andy Silvernail

You know, a good piece of it was volume, but more importantly I think -- I'm going to call productivity. FMT has done a really, really good job over the last year here of improving overall productivity. And some of our bigger places, our bigger engines, I’ll use to Viking as the example, have done a nice job of driving activity through their entire value chain. So you see that happening. The other part is that the water business, we’re still -- we’re just starting to -- at the back half of the year we’ll finally lap the improvement that we’re seeing there. And that’s been a really meaningful shift, in terms of overall profitability. So it’s not so much, just generally the volume, although the volume helps. We had nice incremental margins there. But specifically, I would hang my hat on productivity, number one. And number two, we’re still seeing the nice comparables for our water business.

Joseph Giordano - Cowen

So I guess that kind of leads into the next question, then. You guys have been successful with productivity for a bit now, so how would you say that success has maybe changed your view on portfolio potential overall, ex-M&A, going forward?

Andy Silvernail

We have said even back a year or so ago, we have said that we thought this was business that could to the low 20s in operating profit, and I would say that our confidence is rising that we can over the next two, three, four, five years, there is more headroom to that than maybe we thought and part of it right is having that sense of what is the full potential of your businesses and even if a business is very profitable how do you continue to drive that and segmentation played a big role in that and you more aggressively segment within a platform with a business, even within a product line, and you really start to feed the winners and frankly starve the losers. You can see a nice overall improvement in your profitability and growth rates.

Joseph Giordano - Cowen

So I mean, is -- not for a near term, but do you guys think if you stay on this path, you can get to something like a 25% without M&A as markets improve and you guys continue to invest the way you are investing?

Andy Silvernail

It’s too early to make that call. If we get consistently into the low 20s, I think we can rethink that then.

Operator

Your next question comes from the line of Walter Liptak with Global Hunter.

Walter Liptak - Global Hunter

I wanted to ask just a follow-on on the dispensing business and maybe you can provide some color on just what inning do you think we are in the cycle for customer refresh, slow refresh? And I guess based on the guidance, we’re not expecting another big order this year, but I wonder if you could tell us what you heard from your customers?

Andy Silvernail

Yes, I’d actually break this into two pieces, Wal. First one is on the refresh what we tend to see is every two-three years, we tend to see that cycle happen. The last couple of years, that’s been compressed because it got held off few years before that. So we’re not expecting to see these mega orders so to speak over the next year to 18 months. Our planning as we look at that and it does not anticipate having any of these north of $20 million orders, we don’t expect that. At the same time, I would say that the base business across the globe has improved. In the U.S. and in Europe it is fundamentally I think a better overall environment for the business. And in Asia, it’s really around the initiative that we have been driving frankly with new product development.

Walter Liptak - Global Hunter

Okay. Is there a growth rate that we can put on this business now? I guess especially on the seals business?

Andy Silvernail

I think it’s much more consistent with kind of the IDEX overall growth rate. it is as we work through the next two-three years, I guess I’d be disappointed if the core business minus backing out these big projects. It should grow in that 4% to 5% rate.

Walter Liptak - Global Hunter

Okay. Good. And then, just switching gears to your energy products and FMT, can you provide some more color on what you are seeing in that market, MRO, versus capital spending plans, for next year?

Andy Silvernail

I think a couple of things. One, very specific to some of the uptick that we’ve experienced has to do with strength in North American market that we’ve had generally and some of that has to do with a truck refresh and some of it has to do frankly with a really cold winter. And so there are couple of discreet items in there, much more importantly what we’re really excited about is and the money that’s moving into the energy sector now today is really about distribution. And the issue you have is where energy is produced and where it’s consumed. There is a big disconnect because of the mix of energy and we sit really nicely in that area of this midstream that we think we can take advantage of and really be a player in there. So we think that there is some legs to this and it’s not as violate as some of the upstream and downstream stuff.

Operator

Your next question comes from the line of Bryan Kipp with Janney Capital Markets.

Bryan Kipp - Janney Capital Markets

Hi, Paul and I just got double-booked, so I appreciate all the color today.

Andy Silvernail

No problem, Bryan. We all set. Good. Thank you all for joining us. We appreciate your interest in IDEX. Obviously, we’re very happy with how the first quarter turned out and we are looking forward to a good year here. I guess the thing I’d end with that I think the success that we’re having is really attributable to the teams that we’re building here at IDEX and I’m very proud of what they’re accomplishing and what they have accomplished and what we have to look forward to. So, I would like to thank the IDEX team for really an outstanding quarter and positive future here. So, thank you very much for joining us. We look forward to talking to you in the next quarter. Take care.

Operator

This concludes today’s conference. You may now disconnect.

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