Idex Corp /De/ Q1 FY2020 Earnings Call

Greetings, and welcome to IDEX Corporation First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Mike Yates, Vice President and Chief Accounting Officer. Thank you. You may begin.

Thank you, Diago. Good morning, everyone. This is Mike Yates, Vice President and Chief Accounting Officer for IDEX Corporation. Let me start by saying thank you for joining us for a discussion of the IDEX first quarter 2020 financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the three months ending March 31, 2020. The press release, along with the presentation slides to be used during today’s webcast, can be accessed on our company’s website at www.idexcorp.com. Joining me today is Andy Silvernail, our Chairman and CEO; and Bill Grogan, our Chief Financial Officer. The format for our call today is as follows. We’ll begin with Andy providing an overview of IDEX performance drivers and addressing the impact of the COVID-19 pandemic on our operations, as well as the company’s response to date. Bill will then discuss our first quarter 2020 financial results and walk you through an assessment of the company’s liquidity and financial durability through several scenarios. And finally, Andy will conclude with our current framework for second quarter and closing remarks. Following our prepared remarks, we will open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number 877-660-6853 and entering conference ID number 13694804, or you may simply log on to our company’s homepage for the webcast replay. Before we begin a brief reminder, this call may contain certain forward-looking statements that are subject to the Safe Harbor language in last night’s press release and in IDEX’s filings with the Securities and Exchange Commission. With that, I’ll turn the call over to our Chairman and Chief Executive Officer, Andy Silvernail.

Thank you, Mike. I appreciate everyone joining the IDEX Q1 earnings call today. I’m starting off on Slide 6. The world is spinning with great uncertainty. But as you leave this call today, I want you to feel certain about one thing: IDEX is well-positioned to survive and thrive through this COVID-19 crisis. We have the quality of businesses, we have the people, and we have the financial wherewithal. We’ve invested our company aggressively over the years to build a very special organization. Most important, we’ve built the culture. We’ve built a culture with incredibly talented teams who run great businesses that matter to the world. Our culture has helped us react very early to this crisis. We’ve made swift and smart decisions to keep our people safe, to keep our businesses moving and ensure liquidity, making sure that we do everything we can to help win this COVID-19 fight. IDEX has an important mission that we capture in four words: "trusted solutions, improving lives." Our mission has never been more important. In a world consumed with the physical, emotional, and the financial impact of COVID-19, IDEX plays a critical role in keeping people safe and healthy, while helping directly with the fight to defeat it. I’m going to move now to Slide 7. There are so many ways that IDEX is in this fight. In our Fluid & Metering segment, we enable food, energy, and industrial supply chains. In Fire & Safety/Diversified, we’ve acted swiftly to quadruple the production of our mobile medical tents used by hospitals as they struggle to handle the surge in COVID-19 cases. And in Health & Science Technologies, we’re making compressors used in ventilators, mobile carts that produce hospital grade air where it’s not available, and compressors for mobile disinfecting sprayers. And, of course, we’re also a critical supplier enabling the genetic sequencing that decoded the RNA of the coronavirus, enabling the development of tests for COVID-19 and its antibodies, as well as finding therapies and hopefully, an eventual vaccine. There are dozens more examples across the company where we bring essential products to a market in need. I’m turning now to Slide 8. I want to pause here for a moment and thank all of our people across IDEX, especially those in manufacturing, shipping, and other roles that require a presence in our facilities. We have robust safety protocols at our sites worldwide to protect our people performing essential jobs. The safety of our people will always be the most important consideration as we continue in this new environment. In a crisis, especially one as devastating as this, your true values are exposed. I’ve never been prouder of the people of IDEX. From the first sign of the COVID-19 crisis in China, our teams have been collaborating, problem-solving, and acting. While great strategy is a product of this crisis, we’re also seeing the best in who we are. I’m now moving on to Slide 9. On March 20, I held a conference call with investors, where I laid out our operating context and our priorities to steer IDEX successfully through this crisis. Much has changed in five weeks, but our point of view and our priorities remain the same. We’ve built our strategy and our operating plans based on four phases of this evolving crisis. I believe we’re now moving out of Phase 1, the acute phase; and into Phase 2, which will be a period of ongoing uncertainty and significant challenge for the next three to six months. There’ll be limited visibility as quarantines are lifted, and we all work to gradually restart the economy safely. During this phase, we expect to see a significant drop in demand and production capability as customers, suppliers, and our own teams are regularly impacted by shutdowns and shortages. The third phase will be learning to live and work with COVID-19. This will require significant changes to much of what we do, and this period will extend until there is a solution that gives people confidence to engage socially and professionally without fear. While this phase will not be easy, we’ve seen from our businesses in China, which have rebounded quickly, that we can successfully pivot our approach. The final phase will be the post-virus world. I know we all look forward to this day when normal returns. I’m convinced, however, that normal will be redefined just as it has been after other severe crises. Like the Great Depression, the Second World War, 9/11, and the Financial Crisis, there will be significant and permanent societal and economic changes. The coronavirus will shape our lives and our economy in countless ways, some easily predictable and others yet unknown. Over the next 12 to 18 months, as we move through these phases, it is our job as leaders to successfully traverse phases one through three and enter Phase 4 with a company that’s financially strong and an organization that is positioned to thrive. I’m now turning to Slide 10. We’ve outlined four strategies that guide our way to a better future. Our top priority is safety, protecting our teams as we try to remain open to serve customers that are essential to our society. While we are normally highly decentralized, this is a time when we have carefully weighed safety protocols and mandated certain standards worldwide. These have included temperature checks at the beginning of all shifts, guidelines for face coverings, cleaning and sanitizing practices, and processes for addressing a variety of scenarios from COVID-19 cases to possible exposures. Our COVID-19 issues and response team has led the way and regularly provides guidance to our local sites as issues arise. And because of the strong procedures we have in place and the handful of incidences where employees have contracted the virus, few if any coworkers have been quarantined. Not only is this good for business, but it’s great for the health, well-being, and morale of our employees. I’m glad to report that every IDEX employee who has contracted COVID-19 has so far recovered. To ensure business continuity, which is our second priority, we have developed plans for each site to use in the event of a ramp down of operations. We want to ensure these are handled smoothly and in a way that prepares the business to return quickly to operations. We are also regularly addressing supply chain concerns. While our supply chains are generally shorter than many of our other global manufacturers, we have quickly addressed issues from lockdowns and travel restrictions. So far, our business continuity planning, like our security plans, have helped us avoid more significant business disruptions. In the months ahead, we expect we’ll be choppier. This extensive planning and support structure we’ve built should serve our businesses well. Our third area of focus is liquidity. IDEX entered this time with a strong cash position and we have remained cash flow positive since the beginning of the crisis. Our goal is to remain so throughout, protecting our liquidity and our balance sheet. We’re working with our businesses and finance leaders to help them manage through a period unlike anything they’ve seen in their careers. Bill Grogan, our CFO, has instituted daily cash management practices that he is working with all of our leaders across the globe. Finally, we’re playing offense. That means different things in different areas of our business. In some instances, it means pivoting to focus on the needs of customers who are now booming as they’re selling essential products. In other instances, it’s meant helping businesses in need, like we did in Novotema just outside Bergamo in Italy that was closed. Our sister company, PPE in England, stepped in and produced seals for a medical ventilator manufacturer as Novotema was struggling. Playing offense also means being prepared to accelerate acquisitions when the market unfreezes and a thoughtful approach to share repurchases. With that, I’m going to pause here. I’m going to turn things over to Bill, and he is going to walk you through an overview of our financials and liquidity.

Thanks, Andy. I’ll start with our consolidated financial results on Slide 12. Q1 orders of $645 million were down 2% overall and organically. The slowdown in our industrial end markets that we discussed during our previous call was compounded by the impact of the pandemic in most of our geographies and end markets. However, there was positive momentum in our life sciences and pharma businesses. The backlog we’ve built will help fill the decrease in orders we expect in Q2. First quarter sales of $594 million were down 4% overall and 5% organically. Results early in the quarter were better-than-expected in most areas of the business outside of China. But as the impact of COVID-19 ramped, most of our businesses, with the exception of life sciences and pharma, took a negative turn and drove us to the low-end of our guide. Q1 gross margins expanded 10 basis points to 45.7% and were up in all three segments, primarily driven by strong price capture, continued productivity initiatives and discretionary cost control. These actions more than offset the negative margin impact of lower volume leverage. Operating margin was 23.5%, down 30 basis points from the prior year, mainly driven by the dilutive impact of the Velcora acquisition, which had operating margin of 8%, but EBITDA margin of 25% and lower volume leverage. This was offset by our gross margin expansion and SG&A cost actions we took in the fourth quarter of last year. Our Q1 effective tax rate was 20%, which was higher than the 19.5% in the prior year due to a reduction in excess tax benefits related to share-based compensation. First quarter net income was $102 million, resulting in an EPS of $1.33, down $0.11, or 8% compared to the prior year EPS. Finally, free cash flow was $72 million, down 5% compared to the prior year, but was 71% of net income, compared to 69% last year. Turning to Slide 13, our liquidity. Free cash flow for the trailing 12 months ending March 31 was $473 million, or 113% of net income. We continue to be well-positioned to weather the current environment. IDEX has consistently generated positive free cash flow in excess of net income through margin expansion, ongoing working capital initiatives and an effective capital allocation philosophy. LTM adjusted leverage was 1.5 times, providing sufficient capacity to fund all of our business needs and allowing us to quickly pivot to offense as the economic environment improves. Leverage increased slightly in the quarter as we drew $150 million on our revolver in late March in response to temporary challenges in the short-term funding markets. Cash and cash equivalents totaled $569 million at the end of the quarter. We also have $642 million of availability under our $800 million revolving credit facility. With cash on hand, available financing and conservative leverage, we are confident in our ability to continue to meet our obligations, fund operations and make critical investments in the business. In relation to $300 million of notes due at the end of the year, we are currently exploring potential options, including availing ourselves to the capital markets. As Andy mentioned, we have put in place additional processes to enhance our focus on liquidity, and we are actively monitoring conditions with our customers and suppliers to ensure that we’re able to maintain positive cash flow and mitigate the impact of a challenging environment on cash and working capital. We’re taking all necessary actions to make sure we’re appropriately positioned to operate effectively during this period. Moving on to Slide 14. While we believe that we are well suited to operate in this environment, we’re continually monitoring the impact of COVID-19 on our operations and are modeling a number of possible scenarios. These examples are meant to give our investors a picture of our durability, not a reflection of what we expect for full-year sales. Under our current cost structure, which reflects the structural actions we took in the fourth quarter of 2019, we believe that our annualized break-even revenue, the point at which we continue to generate positive cash flow, is approximately $1.8 billion, or 30% decrease to our 2019 sales results. To be proactive in this uncertain environment, we have developed a playbook with actions to reduce that break-even point. We’ve identified approximately $120 million worth of additional cost reductions, which will drive our break-even revenue closer to down 35%. This would include bonus actions, eliminating travel, marketing and supplies and many other discretionary cost items. If the conditions warrant it, we’re prepared to take structural cost actions and generate an additional $40 million of reductions, resulting in a break-even revenue point of down 40%. Lastly, although we intend to fund our dividend, if we were to suspend it, our break-even point would be as low as 50% down on an annualized basis. We’re taking all prudent actions to manage discretionary spending, as we continue to gauge the impact of this volatile environment. At this point, we do not believe that further structural actions are necessary, but we’re staying closely tuned into our end markets and supply chains and are prepared to take additional steps if necessary. With that, I’ll turn it back over to Andy to review our current view on the second quarter.

Thanks, Bill. Hey, everybody, I’m on slide 15. As I mentioned in my opening remarks, we believe the next three to six months are going to be extremely challenging. Everyone will face the same uncertainty as we reopen the economy safely and execute in an environment where COVID-19 exists and impacts operations potentially in waves. While we believe strongly in the IDEX business model and we’re very well-positioned, we acknowledge the challenges that we face across our business units. We expect revenue in the second quarter could be down as much as 15% to 25%. We know that some of our end markets will be significantly challenged, but those headwinds will be somewhat offset as we continue to deliver mission-critical components to essential customers worldwide. We’ve taken prudent actions to significantly reduce our discretionary cost across our businesses and the steps we took in the fourth quarter of 2019 have positioned us to react to a market that is significantly more challenging than we expected when we started the year. We are closely monitoring our markets and our businesses and we will react quickly to changes. To conclude, I’m extremely proud of how our employees have responded to this crisis. And even though the next 12 to 18 months will be challenging for all of us, I know that we will meet this challenge and come out stronger on the other side. With that, let me pause here and turn it over to questions from the audience. Thank you.

Thank you. At this time, we’ll be conducting our question-and-answer session. The first question comes from Deane Dray with RBC. Please state your question.

Thank you. Good morning, everyone.

Good morning, Deane. Hey, it’s great to hear from you and I’m wishing everyone the best. I appreciate the all the details in terms of the potential scenarios this morning. And the first question really picks up where Bill left off on Page 14 on those scenarios…

…because Andy, I want to say for the past year, you’ve been asked about the IDEX playbook for a normal recession.

Yes.

And it really feels like – I don’t even know what that is anymore, because we’re far beyond that.

Even do we, Deane.

So it’s just – the idea here, as you said, if things progress or get worse, it just feels like we’re already there.

Yes.

So talk about it, and I know this is a tough conversation, but the deep – deeper cuts that you’re likely going to have to take, like is that $120 million of cost out, is that enough? What’s – what are the milestones that you’re looking for here and then maybe some comments on decrementals?

Yes, you bet. So, first of all, that first look at the $120 million, that stuff that we are very actively putting our arms around and taking the cost out of. And obviously, you can see that it even impacted in a positive way to some degree in the first quarter, because we started those actions really as we are coming into February and early part of March, and so there’s some benefits there. So, we’re grabbing that lever already, and we’re grabbing it very aggressively, Deane. So that’s the first thing. One of the main priorities that I have going through this crisis is to maintain as much of the structure and the talent that we can in IDEX appropriately. And so, I’m willing for a short period of time to absorb some of the incremental cost to maintain that talent base and to position the company well. That being said, as you know, we’re a very diversified and decentralized business. And so, you have companies that – some companies are absolutely growing in this environment and some are really taking it on the chin. And so, we’ll have to get the appropriate footprint in the appropriate places depending upon how much deeper and how much longer this goes. But our first priority is to certainly keep the integrity of IDEX intact as much as possible. So, I look at that secondary group of actions, that the incremental $40 million as steps that we will take if we have to, but would prefer not to, Deane. In terms of decrementals, if you look at it on a sequential basis versus year-over-year, I think, that’s probably a good way to look at it. Obviously, we’re a very high contribution margin company. So, we have contribution margins in the low-60s. And so, if we can offset a good chunk of that and end up in the 40s or 50s without having to make massive structural changes to the company, we would do so within the short term. But obviously, in the longer-term, you’ve got to have the appropriate cost structure.

That’s really helpful. And then I just – I appreciate the four phases that you’ve laid out. And I don’t want to minimize how much heavy lifting, and frankly some pain to get through all four of these phases. But looking beyond into that new normal and maybe the idea of when you will start to shift to offense…

Yes.

…and you’ve got balance sheet now. You didn’t chase expensive deals the last couple of years. When does M&A make sense? We know markets have to normalize a bit, but when do you start to flip the switch and play offense here?

Well, some of that is in our control and some is not. In terms of overall playing offense, we’re doing some of it right now, Deane. We are – if you look across our businesses, those places where essential products are booming, so disinfection, many of our Health & Science markets, pharma reshoring, which we think is going to be a major trend. We’re playing offense now. We have redirected our people and investment and are making sure that we can first and foremost help with this fight but also make sure that we’re doing the right things for our shareholders, our owners. And so, some of that’s happening now. As it regards to M&A, there are really two challenges with M&A. First is having enough confidence in your own situation to deploy that liquidity in that balance sheet, and the second is that you have willing sellers. We are doing an awful lot of work right now on both sides of that equation. So let me talk about the liquidity side. There’s liquidity that is to survive that a lot of people are having to utilize. And at the end of this, they will have a stretched balance sheet in the very difficult circumstances. That is not our situation, and I don’t want it to be our situation. Our drive and why we have so much focus on this breakeven level of cash flow is because I want a balance sheet that is deployable—aggressively deployable as the world starts to settle itself. And so, if we can maintain this north of $1 billion of liquidity, as cash flows become more certain and the market stabilizes, we will get aggressive, no doubt about that. Now the other side of that equation is who are the sellers. And so, as you can imagine right now, and you guys are talking to a lot of folks, that’s frozen—it's just a frozen marketplace. I think it will take through a quarter or so for that to start to unfreeze when Boards of Directors and families are going to look at this situation and recognize that it’s going to take a while and that an attractive price in this marketplace might make sense. But I think it will take a little bit of time, Deane.

Thank you, and best of luck to everyone.

Thanks, Deane.

Thanks. Our next question comes from Mike Halloran with Baird. Please state your question.

Hey, good morning, everyone.

Good morning, Mike.

Good morning, Mike.

So a couple of things. First, when you look at that down 15% to 25%, what’s that predicated on? Is that based on what you’re seeing now? Are there signs of stability after that initial shock downward? Any kind of context on what kind of logic you’re using to get to the 15% to 25% down?

Yes. So I’d first say that the 15% is our experience as March unfolded and what we’re seeing here in early April. And being a short cycle business, we certainly saw the reaction pretty quickly, both on the ups and the downs, by the way, in terms of the things that are struggling. The industrial businesses are certainly taking it on the chin, more so than other businesses. So if you look at FMT, that’s just going to be more painful there. You’ve got the combination of the coronavirus impact and then, of course, what’s happening in the energy world that’s unfolding. So that 15% is what we’ve been experiencing here for, call it, six, seven weeks, Mike. My view is it’s likely to get worse than the 15%, and we see kind of slippage happening in a number of places that especially have more impact if you’re in energy, you’re in transportation—those places, in particular, are really getting pounded and others are holding up. So I feel pretty comfortable with that range, Mike.

And then you alluded to it earlier, but maybe just talk about how you guys are thinking about what the structural changes could look like here? What are some of the things that you’re thinking you might rotate to, obviously, some of the pharma medical stuff you’ve already mentioned? Anything else you’re thinking about? And then how do you prepare for it in the short-term here and balance that with all the other things you have up in the air?

Yes. I think one of the things that really works in our favor in this environment is our structure. It could be an impediment. We put that rapid response team in place very early on, because we knew that our decentralization could lead to many different answers across sites. There were certain things that you just couldn’t have 45 different answers on, and we’ve been able to move very quickly. In this case, in terms of playing offense, our structure helps us a ton, because the places that are really struggling with massive demand falloffs, you can isolate them specifically and you can start redirecting resources to things that are exciting. I’ll give you an example. In the world of Health & Science, we have a significant demand for engineering right now because of all the new things that are developing, whether it’s from testing, which you’re seeing PCR tests take off that we’re helping with, we needed engineering and we actually redirected engineering from our business in rescue to help our business in Health & Science. And so we’re doing a bunch of things like that. So we’re definitely moving to those opportunities and moving people and resources. In terms of the big structural changes, I think they’re going to happen around a lot of things touching our Health & Science world. I think if I think about the food supply chain, that’s going to be an area that will be impacted. There’s a lot of talk of reshoring in terms of moving things out of more difficult or riskier environments. I think that will happen; it was already happening, but it’s not like a big boom—it’s a relatively slow phase. But overall, I feel like we’re positioned well and our structure really helps us move to the areas where opportunity and demand are likely to be and move away from places that are likely to be hit harder.

Thanks for that. And then one, just clarification on Slide 14, the break-even cash flow. Is that a free cash flow before CapEx or after CapEx?

After. Correct, Bill?

All right, great. Thank you. I appreciate it.

Yes. Thanks.

Our next question comes from Scott Graham with Rosenblatt Securities. Please state your question.

Hey, good morning. And as usual, Andy, thank you for your frankness and clarity.

Yes. Thanks, Scott.

Oh, sure. So I just want to make sure that, we’re—that I’m at least thinking about what you’re saying about decrementals correctly. So if we’re at 15% to 20% thinking for decline in this quarter’s sales, if I choose the midpoint and say minus 20%, just for example sake…

Yes.

…taking that number, multiplying it by 50% and that’s your decline in operating income this quarter, it is as simple as that, right?

Yes, plus or minus. Yes.

Okay.

Yes, that’s close enough. Yes.

And within that, how much of the $120 million discretionary are we talking about? In other words, what I’m trying to get to here is that…

Oh, I gotcha. Yes.

…if it’s $50 million this quarter, next quarter, it could be $40 million and so on, that would be helpful?

Okay. I think I understand your question, Scott. But if I don’t get it right, just reiterate or help me out here. So the $120 million is an annual number, right? And because we’re not that seasonal and our fixed cost structure isn’t that variable, you could basically take the $30 million a quarter. And that’s going to come out of there. And that’s pretty much coming out now. It might be a little bit more as time goes on, but that’s coming up pretty rapidly. And that’s what enables you to go from instead of having to be a 62% or 63% negative flow through, that’s what helps you kind of ratchet that down over time. So, Bill, is there anything you’d add there?

No, I think some of the items may be a little bit less in the second that would ramp up, but it’s close.

Okay, okay. That’s…

Does that answer your question, Scott?

Yes. For all intents and purposes, the $30 million quarterly is kind of the exit rate right now?

Yes. We’ve clamped down so hard here that we’re not spending money on things that don’t have a direct impact. That $120 million is really clamping that down.

Okay, gotcha. Two other questions. What would be the trigger for the $40 million? What level of sales? Is it this 35% to 40% decline in sales, that’s the trigger for the structural?

There is, to some degree, Scott, it is an amount. But more than anything else, it’s what we think the duration is going to look like. So if we’re going to reset the business, let’s just say, down 20%—just as an example—and you’re no longer a $2.5 billion company, you’re now a $2 billion company. You have to have a different cost structure if you think that’s going to be sustained for a period of time. And so that’s what we’re really trying to evaluate: what we think the duration and the depth is likely to be and it’s a combination of those two that would trigger us to look at the $40 million. We didn’t feel like we had to do that today. We felt like we should buy ourselves some time, and we have with the $120 million. And so we’ll continue to evaluate that. As you know, we took out a big chunk here. In the fall, we took out $15 million and we had another $5 million, which obviously we’ve gone and got. So we were—although we hadn’t predicted this, we did predict a tough year. And so we went and proactively got that $20 million out. And so we’ll decide on depth and duration here as we go through this quarter to figure out whether or not we want to take out the other $40 million.

Gotcha. That’s very clear. And then I think you actually in that answer just answered my third question, which was sort of the way that Slide 14 was structured to do 30%, 35% and 40% and higher revenue declines, that is both depth and duration in these numbers, right?

It is, yes.

Right, because your organic—you’re thinking for the second quarter if it’s minus 15% to 25%, even if it ends up at 25%, what you’re talking about here is, on an annualized basis, there would be a duration here that would get us to these numbers?

That’s right, Scott. And I want to be very clear Bill said that in his remarks, but just so everyone hears this correctly. We are not—do not use these as guidance for where we think the world is going. This is really, for example only, and we’re trying to get a couple of messages across here and I think probably they’ve landed, but just in case. Message one was, there’s a lot that can happen in this world before we become—before we have a cash flow issue. And therefore, we don’t have a liquidity issue. We have tons of liquidity, but we’re not going to—we’re not going to have to utilize that liquidity to stay afloat. I want to utilize that liquidity to play really aggressive offense. And so, hopefully, that came across: number one, we’re in a great position from a cash flow standpoint; and number two, our liquidity is really being pointed towards playing offense aggressively.

Yep. Page 14 is much clearer to me now. Thank you, guys.

Great. Thanks, Scott.

Our next question comes from Nathan Jones with Stifel. Please state your question.

Good morning, everyone.

Hey, Nathan.

I guess, I’ll go a little further on the cash flow side. Slide 14, here, we’re looking at revenue changes and expense changes. Maybe we could look at the working capital side of this. I guess, you should clearly have some source of cash out of inventory. Maybe you can talk about, what you’re expecting there? If you’re seeing any slowdown in DSOs, or changes in receivable collections or any changes in customer behaviors, maybe they’re getting stressed out? Any more color you can give us on that side of the equation?

Yes. I’ll comment on this and then Bill, I’ll let you comment on it also. From—in terms of how we’re managing this, I think this is a couple of ways. The first one is inventory. We got to make sure it comes out naturally as volume gets affected, right? And that is—that has been a winning move in any slowdown for us. And historically, we have taken out inventory, and that’s obviously had a very positive cash effect in any kind of slowdown. So you should expect us to continue to do that and take cash off the balance sheet, or cash out inventory rather on the balance sheet. In terms of payables and receivables, my philosophy here is don’t be the bank, meaning, we can’t get caught between customers and suppliers. At the same time, I want to be very careful about not damaging customers and suppliers in here. So if we can end up neutral in that regard and really play that strategically, I think that’s important. Obviously, we’ve got suppliers that we want to make sure they are healthy, they’re our partners—this is not a time to beat on them when they’re struggling. At the same time, we can’t finance them. And so, as our customers are coming to us and asking for relief, we’re really weighing that against what we can do across the working capital spectrum. And so, we’re being pretty firm. We’ve got excellent service levels, we’ve got great lead times competitively. We’re not going to become the bank.

Okay. So the target, payables and receivables, net cash neutral and inventories at source?

Yep.

Okay. My second question is on pricing. You guys have reported positive net pricing every year for as long as I can remember, including 2009. This is clearly a little different thing, maybe a little steeper in the short-term here. Do you guys think you can still be net price positive or at least net price neutral in this kind of environment?

I’m pretty hopeful that we can stay positive. The price that we put out in the beginning of the year was already out and going. And so I don’t see why that won’t stick. I think there will be some challenges next year as we think about pricing and whether or not we can be as aggressive. Bill, on those two topics, do you want to give your view?

Yes. I would say, our price capture in the first quarter was in line with what we experienced for most of last year. And I guess, my only comment on the working capital piece is, there are some selective businesses that took some actions to target to build some buffer stock relative to supply chains in certain countries that were shutting down. So first quarter inventory performance was good, impacted slightly based upon some of those builds. And to Andy’s point, we fully anticipate to bleed that off here in the second quarter. But price capture is still strong across the portfolio.

Bill, what’s your view of price here as we think about this year unfolds?

I mean, obviously, it’ll be more challenging as we go through the balance of the year, as customers are more impacted. But I think our core pricing initiatives that we have across the portfolio will remain positive. Does it come down slightly potentially? But overall, price costs still positive for us.

Yes. Okay, thanks a lot. I’ll pass it on.

Thanks, Nathan.

Our next question comes from Allison Poliniak with Wells Fargo. Please state your question.

Hi, guys, good morning.

Hey, good morning, Allison.

So, Andy, I just want to talk maybe higher level. IDEX, you build a really solid foundation here, you’ve talked about that. And then you mentioned through these phases, but particularly as we go to that new normal, is there anything that’s really coming to light here in terms of portfolio growth? It sounds like you’re starting to pivot some of that near-term organic investment to some of these new applications. I’m just trying to get a sense if that’s temporary or if it’s sort of potentially a new direction here for IDEX?

Yes. So I think we’ve had a lot of things come to light in terms of opportunities where people have come to us on trying to help with very specific things relative to the COVID-19 crisis. As we have evaluated those, we’ve been careful. What I mean by that is, we don’t want to take a bunch of people and resources and shift them to something where the lead time is so long that when you bring your solution to bear, it doesn’t matter anymore. There are going to be a bunch of boom-and-bust cycles of different things coming to market, both because they’re very effective and then they’re no longer needed, or they weren’t particularly effective and they wash away. We’re trying to avoid those kinds of things. We’re trying to move the portfolio to things that are really about helping the fight, where we have capabilities and we can ramp really quickly. I use the mobile medical tents out of our Vetter unit in Germany. We sold more in the month of March than we sold all of last year, and we’ve ramped that up. They’ve literally quadrupled their overall capacity as we go through the rest of this year. That makes a ton of sense. It doesn’t take any major investment or capability that we don’t have. So we’re moving to those sorts of things very aggressively. As we think longer-term, I think there are some trends here that are natural for us. Around global testing, that was already a trend that was growing and we had positioned ourselves behind it in IDEX Health & Science, and that is going to accelerate. What I mean by testing is testing for anything and everything that analytical equipment and biodiagnostic testing is used for. That stuff is just going to continue to grow aggressively and we’re going to continue to position ourselves against that. Then things like pharma reshoring are the real deal. Our material process business will absolutely play in that. It’s going to take a long time, but I believe that will develop. And you have other trends that will be accelerated because people have had to change their lives so much, that it’s easier to move into those trends—things like digitization, mobile communications, and how that impacts even products like a Viking pump, where customers will become more comfortable expecting digital results and information-based outputs. I think that will move some of those things forward faster.

Great. That’s helpful. And then you mentioned China, it sounds like it’s coming out of—it's coming through this and going into the recovery phase. As this rolls through globally, any lessons learned or has your approach evolved differently as you hit each region based on what’s been going on in China? Any color there?

Yes, that’s a great question, Allison. Moving from East to West in terms of how this crisis has unfolded, we’ve been learning along the way and we’ve done a few things. Our Chinese businesses led the way in creating protocols for safe working. We have every single one of our plants up right now. Not everything’s at full capacity, but even our places in Northern Italy are up and working. I’ll give a lot of credit to that because we learned very early on how to ramp down, how to ramp back up and how to work in an environment where the virus is with you. We’ve created a protocol and a playbook out of that. We then changed and augmented that for different parts of the world. Very soon, we actually shared that with the Manufacturers Alliance for Productivity & Innovation, and our team did a great job putting that together. We’re continuing to learn. Last week, we did a global general managers and site managers call and had four of our general managers from Italy on that call, taking people through their experience—the physical and emotional experience of what they’ve gone through, how to keep people safe. We did a virtual lunch-and-learn for everybody around those learnings. One of the things we’re trying to leverage is the network effect of having so many sites around the world, where we can learn and share and get best practices into people’s hands. We’ve been trying to do that really intently.

It sounds great. Stay safe, everybody. Thanks.

Thank you, Allison.

Thank you. Our next question comes from Joe Giordano with Cowen. Please state your question.

Hey, guys, good morning.

Good morning, Joe.

So you guys just closed an energy deal. I know it’s a kind of a specific niche technology. Can you just talk about your overall exposure there? What you’re seeing in the way you guys play in the energy markets?

So, Joe, I think as you know, we are principally a midstream player. We’re not really anywhere near the wellhead for the most part; we have some things here and there, but not a ton. Across the energy business, which today is sub-10% of our total portfolio, we have an expectation that that’s really going to get hammered here. So far we haven’t had it as severe as we expected to be, but we are certainly seeing all of those indicators now on the order front. And so we’ll have to get our cost structure right and our overall footprint right to make sure that we can sustain there. I think everybody learned the lesson in 2015 and 2016 about the overall impact of capital spending and how the energy economy impacts the global economy; that’s going to exacerbate this whole situation. We’re going to have to make sure that our businesses are positioned correctly as we go forward. But thankfully, we’re not upstream at the wellhead seeing some of the more extreme declines. We will see declines, but it won’t be like what upstream businesses are seeing.

When you think about, I mean, it’s hard now to think about like new investments you have to make when you’re trying to rip out costs at the same time. But as you think about your global footprint, does something like this make you have to step back and rethink the way you even have your facility set up? Does the workflow have to look different in the future? Does headcount have to be totally different and more automated? Like how do you think about how your global plants look coming out of this?

Joe, I think that question as we move now through Phase 3 is going to be one of the most important questions we’re wrestling with, because when you think about a manufacturing facility, especially one that is principally assembly and test, the natural output of lean manufacturing is cellular manufacturing, which does not work with social distancing the way it’s constructed today—people are not six feet apart. We’re already in the process of working on how to maintain the elements of lean manufacturing, which is the elimination of waste and bringing down lead times, while having principles of social distancing in place. That’s something we’re working on. A lot of people are. We’re not going to move to batch manufacturing or destroy three decades of great work, but it will change how people work. It will change the office environment and how we interact with customers. Many things will change until people have comfort to be closer together again.

Thanks for the color.

Thank you, Joe.

Our next question comes from Andrew Buscaglia with Berenberg. Please state your question.

Hey, guys.

Hey, Andrew.

If you could talk—I’m getting the sense directionally for the year, FMT gets hit probably the worst and then Fire & Safety maybe second worst and then Health & Science maybe third worst, because there are some partial offsetting factors. Would you agree with that?

I would. Yes.

Okay. In those other segments, are there—when you talk about partially offsetting factors, maybe in Health & Science—are there any in the other two segments? Is there anything else you’re seeing that could go the other way as a positive?

Yes. So I think, as you look at FMT first, obviously, the agricultural space has been beaten up. But I do believe that the food supply chains are going to continue to be critical. That’s an overall good trend for Ag where we play, both for the material handling business and for Banjo. Our ABS business is seeing some benefits from analytics in sewer systems—there’s modeling and analytics that can be done and that has relevance now. So we think ABS will hold up pretty well. The more industrial-facing general industrial parts will have negative impacts, offset by pockets of positives. For example, chemicals related to disinfectants are booming. Fire side: interestingly, some applications can be used for disinfectant, so you’ll see some of that. You have a long backlog for fire trucks in the U.S.; over a year of backlog. What we don’t know is whether we’ll see cancellations. We have not seen that yet, but we’ll monitor it. In China, the rescue business picked back up aggressively; tenders slowed and picked up. BAND-IT and dispensing both will take it on the chin short-term because of retail exposure for dispensing and BAND-IT exposure to transportation and oil and gas, but other parts will do well.

Okay, that’s good color.

Thanks.

If you could—maybe just one last question on same question but related to margins. I would think FMT would get hit hardest because it seems like in Fire & Safety you’ve made some structural changes that fare better than FMT. Is that safe to say in terms of the decline we’ll see?

Yes, I think FMT will fare the most challenged and then Diversified and then Health & Science.

Okay, got it. Thank you.

Yes. Thanks, Andrew.

Our next question comes from Brett Linzey with Vertical Research Partners. Please state your question.

Hey, good morning, everyone.

Good morning, Brett.

I wanted to come back to your comment on the past six to seven weeks, you mentioned you’re running down mid-teens. What does the range look like there? And then just thinking about the complexion across the geographies, as we do reopen commerce, how are you thinking about the pace of return between the U.S. and Europe?

Just to make sure I understand, Brett, are you asking the range of outcomes business-by-business, like how bad to how good?

Well, I mean—you’re saying on average things around mid-teens. There’s probably some growth in there, which implies some businesses down 30%–40%. Is that the right way?

Yes. We have a couple of businesses we think will be down in that 40% range. Very few are that severe, but there are a couple. It’s primarily energy and transportation exposure. We expect in the next quarter or two to have that kind of impact. We don’t think that will stay long. In China we saw a very aggressive snapback but it’s bifurcated: some businesses are COVID-facing and growing like crazy, and others are struggling but came back quickly. That probably won’t be the model for the rest of the world due to different circumstances in democracies that change how quickly you can manage people and business. I think it’s going to look more like what we see in Europe where it takes longer. Our expectation is fits and starts. I’m not expecting everything to be fine by fall. I don’t want to bank on a quick vaccine or miracle. We’ll plan for the reality in front of us.

Okay, great. No, I appreciate that. And then just one last one. I was hoping you could spend just a moment on the evolution of the portfolio, not so much from a product standpoint—you gave good examples earlier—but in terms of service or the recurring elements of the portfolio. What’s that mix look like today? Service will be impacted near-term, but in a new normal, what is the recurring element that looks like?

We’ve never been a company with classic high recurring revenue in the sense of big parts and service. We tend to sell like-for-like in a very high percentage of our applications. Bill, how would you characterize total recurring?

It’s greater than 50%.

I agree. When we had the financial crisis, our total business was down 14% the following year, Health & Science was down 5% and industrial businesses down about 20%. We have a better portfolio positioning now with less cyclical exposure and more Health & Science in the mix, so I feel good about that. There will be some places hit hard, though.

Okay, great. I really appreciate all the detail. I hope everybody stays safe.

Yes. Thank you.

Our next question comes from Walter Liptak with Seaport Global. Please state your question.

All right. Thanks. Good morning, guys.

Good morning, Wal.

I wanted to ask a question about the municipal businesses. Your comments so far that Fire okay, China picked up pretty quick. I wonder how the municipal businesses you think will do this time? Is there anything different or more challenging financially or otherwise? I think you mentioned the sewer business could have some benefits. I wonder if we could just talk about muni?

I think historically, municipal businesses have had an 18-month to two-year lag compared to other businesses, driven by receipts and operating capital budgets. I expect a quicker reaction this time than in the financial crisis. In the financial crisis, municipalities held up well initially and then struggled later in 2010–2011. I expect they’ll react faster this time because it’s such a shock to the global system and municipalities will likely clamp down quicker on spending. I expect it will still lag the overall industrial economy, but probably with a faster response.

Okay, great. Thanks. And then last one for me just about the share buyback. I wonder if you can just remind us how much is left on the share repurchase authorization and how you’re thinking about it in the second quarter and in the second half?

We did buy just over $100 million of shares. We had a 10b5-1 in place going into this, and we did buy just over $100 million. We shut that 10b5-1 down as we looked at the value of liquidity and the uncertainty we were in. We valued that certainty more than incremental repurchases at the moment. I know buybacks have become politically charged in some cases. We’re not a company that takes government cash and we’re not in that category. We’re going to utilize liquidity the best way we can to help stakeholders. If that means buybacks, we will do so appropriately. In terms of authorization, we have the $500 million that we got authorization for a few weeks ago, plus the repurchases; Bill, what’s the total remaining?

It’s a little over $700 million.

Okay, great. Okay. Thanks, guys.

Thank you.

Our next question comes from Matt Summerville with D.A. Davidson. Please state your question.

Thanks. Just a quick one. Most of mine have been answered. But just with respect to life sciences and pharma, the strength you’re seeing there—is that COVID-19-related, or is that something else? And could you put that in the context of the $50 million improvement, I believe, you saw in overall backlog? How that component plays out looking forward?

You’ve got two stories in there, Matt. First, yes, there’s absolutely a pickup from COVID-related activities. But we also have a number of important customers with programs that are ramping, and we have won substantial business and had some nice orders in the quarter. So it’s both ongoing programs and COVID impact. Bill, what was HST portion of the $50 million backlog increase?

It was a little over $30 million from HST.

Yes. So that will give you a sense, Matt.

Thank you.

Thank you. Ladies and gentlemen, there are no further questions at this time. I’ll turn it back to management for closing remarks.

Great. Thank you very much, and thank you all for being on the call. I know that we’re sitting in a time that has shaken us in many ways. I’d like to close with a couple of comments. First, as I said in my prepared remarks, I could not be more proud of how the team here at IDEX has handled this. I have seen a level of collaboration and teamwork and positivity that really warms the heart. It’s just incredible. And when you see that, sometimes the news cycles have a tendency to get you down. But when you see how people are coming together in the real world and tackling this, it is awesome, and it’s why I’m in business. I believe that the purpose of business is to make life better, and I could not be more proud of the team at IDEX for what they’ve done. It’s just remarkable. Second, I’d like to say thank you to everybody who is on this call and your interest in IDEX. While the IDEX brand is not well-known in the consumer world, we play a very important role in a lot of places that really do matter. That mission that I talked about—trusted solutions and improving lives—we live that here at IDEX. We’re seeing in this crisis how important that is. I want to thank the people who are investors in the company and prospective investors for your support and partnership as we move through this. We will move through this and we will get to the other side with a very strong company that’s positioned extremely well. So thank you, everybody. I appreciate it and look forward to discussions as we go forward. Take care.

Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.