IDEX Corporation (IEX) Earnings Call Transcript & Summary

Welcome to the IDEX Corporation Annual Meeting of Stockholders. My name is Marsha, and I will be your operator. [Operator Instructions] And I will now turn the call over to Andy Silvernail. You may begin.

Good morning, ladies and gentlemen. It's 9 a.m., and we'll now call our annual meeting of stockholders to order. I'm Andy Silvernail, Chairman of the Board and Chief Executive Officer of IDEX Corporation, and I'll serve as chairman of this meeting. I'd like to take the opportunity to welcome you to the meeting and let you know that I appreciate you joining us this morning. We're having a virtual meeting this year due to public health impact of the novel coronavirus outbreak and to support the health and well-being of our management and stockholders. The agenda for today's meeting is posted on the web portal, and we will follow that order of the agenda. As is our custom, we'll conduct the business portion of our meeting first and then answer questions at the end of the meeting. Before proceeding further, it's my pleasure to introduce you to the company's independent directors who are on today's meeting call: first is Bill Cook, he's our lead Director, he is the retired Chairman, President and Chief Executive Officer of Donaldson Company; Mark Beck, he's the Co-founder and Chief Executive Officer of B-Square Precision, LLC; Mark Buthman, he's retired Executive Vice President and Chief Financial Officer of Kimberly Clark; Carl Christenson, he's the Chief Executive Officer and Chairman of the Board of Altra Industrial Motion; Katrina Helmkamp, she's Chief Executive Officer of Cartus Corporation; Ernie Mrozek, retired Vice Chairman and Chief Financial Officer of The ServiceMaster Company; David Parry, retired Vice Chairman, Illinois Tool Works; Tony Satterthwaite, President and Chief Operating Officer, Cummins, Inc; CJ Warner, President and Chief Executive Officer, Renewable Energy Group. Denise Cade, our Senior Vice President and General Counsel and Corporate Secretary, is with us today and will act as the secretary of this meeting. Other executive officers present at the meeting today are Eric Ashleman, President and Chief Operating Officer; Bill Grogan, Senior Vice President and Chief Financial Officer; Jeff Bucklew, Senior Vice President and Chief Human Resource Officer; Dan Salliotte, Senior Vice President, Corporate Strategy and Acquisitions; Mike Yates, Vice President and Chief Accounting Officer. The company's independent registered public accounting firm, Deloitte & Touche LLP, is represented here today by Erich Grundman, client service partner responsible for our account. Mr. Grundman will be available during the question-and-answer period to respond to appropriate questions. Finally, the company has appointed Broadridge Financial Services to act as inspector of elections for this meeting. Greg Malatia from Broadridge is with us today and has taken the oath of inspector of elections. We will now proceed to the formal business portion of this meeting. Will the secretary please present the certified list of stockholders and proof of proper notice of this meeting and advise whether or not we have a quorum for this meeting?

Good morning, Mr. Chairman. I have with me the certified list of stockholders of the company as of the close of business on March 13, 2020, the record date for voting at this meeting. I also have a certificate as to the mailing of the required notice to such stockholders. These documents will be filed with the records of the meeting. As of today, 69.9 million shares of common stock representing approximately 92% of the total outstanding shares as of the close of business on the record date are represented at this meeting in person or by proxy. There is a quorum, Mr. Chairman.

Thank you. We have 4 items of business today: 3 management proposals and 1 stockholder proposal. Each of these proposals is described in detail in the proxy statement made available to the stockholders in connection with this meeting. Please note that we will give stockholders an opportunity to comment on the proposals themselves after all proposals have been presented. First, you will vote on the election of our 4 Class I directors, each to serve a 3-year term. Four individuals the Board has nominated for election are Katrina Helmkamp, Mark Beck, Carl Christenson and myself. Biographical and other information about the nominees and about the Class II and Class III directors whose terms expire in future years is set forth in the proxy statement made available to stockholders in connection with this meeting. Second, you will vote on a nonbinding resolution to approve the compensation of the company's named executive officers. Third, you will vote to ratify the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020. Fourth, you will vote on a stockholder proposal regarding a report related to employee representation of the company's Board of Directors. The sponsor of the stockholder proposal has prerecorded a brief presentation. Operator, would you please play the recording now? [Technical Difficulty] If we don't have it ready to play, Denise can read the statement.

There was an error in the playback.

Denise, can you read the statement?

Marsha, I just want to confirm that you're not able to play the recording.

Denise, why don't we have you go ahead and read it.

Okay. So this statement is from Mari Schwartzer who is of NorthStar Asset Management. And NorthStar Asset Management is a socially responsible investment firm based in Boston and the beneficial owner of 40,426 shares of IDEX common stock. So I am reading this in her voice. "Today, I am presenting proposal #4 regarding employee representation on the Board of Directors. Never before in our lifetime have our company or employees face such uncertainties or such a grim prospect for the future as posed by the current global pandemic. As our company works to navigate these unpredictable times, employees and their relationship to our company can be the guiding force that allows us to not only emerge safely but also stronger and more competitive. This shareholder proposal encourages the company to explore the ways in which nonmanagement employees could attain membership on the Board of Directors because we believe that all employees are critical to our company's continued success and deserve a voice. We also believe that employees with a seat at the table are more likely to remain engaged and committed to the company. This time of crisis does not diminish the potential value of adding employees to the Board. In fact, crises and transformative eras emphasize the potential value of fresh voices on the Board of Directors. Direct employee communication with the Board could offer significant efficiencies at our company, and the economy seeks innovative solutions to these unprecedented challenges. The existence of employees on U.S. corporate boards is not unheard of. Several other publicly traded U.S. companies have had or currently have workers on the Board of Directors. We believe that employees on the Board of Directors could help our company continue to thrive in several ways, such as more efficient communication of problems faced by employees and the creative solutions that those workers come up with; faster alerts to potential pending crises that could diminish our brand name; increased employee engagement and better retention; expression of employee assessments of management -- of managers, executives and workforce morale directly to the Board; and much more. Our employees are the driving force of our company, but if they trust in management -- but if their trust in management falters due to disenfranchisement or missteps, our company could suffer. To prevent this, we suggest allowing and encouraging representation on the Board by nonmanagement, nonexecutive employees. We believe that employee representation on the Board is a key way to ensure that employees, our most crucial resource, remain fully engaged in the long-term growth of our company and help to ensure operational excellence. We urge stockholders to vote for proposal #4." That concludes her remarks, Andy.

Thank you. The Board of Directors recommends the stockholders vote for the Class I directors, vote for proposals 2 and 3 and vote against proposal 4. We will now open the meeting to comments and questions on the 4 items of business. If you have a question or if you wish to comment on any of the 4 proposals, please submit your comment or question through the web portal. I'll pause now for questions. Ms. Secretary, do we have any comments or questions?

Mr. Chairman, we have no comments or questions with respect to the 4 proposals.

Thank you. We'll now proceed to vote on the proposals. Any stockholder who has not yet voted or wishes to change a vote already cast may do so by clicking on the Voting button on the web portal and following the instructions there. If you have already submitted a proxy and do not wish to change your vote, you do not need to take any further action. I'll pause here for the voting. [Voting]

Now that the stockholders have had the opportunity to vote, I declare the polls closed. Ms. Secretary, do you have the preliminary results of the voting from the judge of elections?

Yes, Mr. Chairman, I do. The preliminary results of the voting indicates that each of the director nominees has been elected and that the proposals to approve the compensation of the company's named executive officers and to ratify the appointment of Deloitte & Touche as the company's independent registered public accounting firm for 2020 have both been approved. The stockholder proposal regarding a report related to employee representation on the company's Board of Directors has not been approved. As Secretary, I will file the results of the voting with the minutes of the meeting. Final voting results will be reported in a current report on Form 8-K to be filed with the U.S. Securities and Exchange Commission within 4 business days after the date of this meeting.

This concludes the formal portion of our Annual Stockholders Meeting. There being no further business to come before the meeting, I declare that the annual meeting is hereby concluded. I'll now give a brief presentation, followed by a question-and-answer session. I'd like to remind you that some of the statements made at this meeting may be considered forward-looking and are subject to certain risks and uncertainties that are described in our filings with the SEC. With that, we'll turn to the presentation. As I walk through the presentation, we're going to touch on a handful of agenda items. First, I'm going to talk about the 2019 financial performance. Second, I'll talk about the IDEX Difference. Third, a discussion of some elements of our great teams, we'll take a look at capital deployment. And then finally, I'll make some comments relative to the current pandemic and how we're managing in that situation. If you can move to the page of the financial performance, please. So in 2019, although we faced some difficult headwinds relative to a slowing industrial economy, we had a solid year. Sales and orders were flat versus 2018 while earnings and free cash flow were up substantially year-over-year. Because of that, you can see on the bottom of the page that we've had outstanding total shareholder return in the 1-, 3-, 5- and 10-year, and certainly, over the longer term, we have substantially outperformed our proxy peer group. So excellent performance overall. What drives that performance is on the following page, and it's what we call the IDEX Difference. And guided by our values, our mission is enabled by what makes IDEX special, and it's these 3 elements of the IDEX Difference: great teams who embrace the concept of 80/20, all about our customers and how we focus on winning for our customers. The IDEX Difference has been a critical component of our overall performance -- financial performance and how we have embraced our employees and the communities that we live in. As we think about our great teams, if you go to the next page on employee engagement, I am very proud to say that IDEX has reached and has sustained the top quartile in the manufacturing sector for employee engagement. And we look at that around 3 elements: employee engagement, manager effectiveness and performance enablement. And we have -- almost 90% of our employees have participated in our survey. And again, we have reached the top 25% of all competitive companies in our landscape. So we're really thrilled with that performance. A major piece of why that happens is on the next page, is inclusion and diversity. We leverage inclusion and diversity to build something truly special here at IDEX, and we win by solving the real issues for our customers, delivering sustainable profitable growth and providing an environment where everyone is invited to do and be their best every day. And in a few moments, as I talk about the impact of COVID-19 on IDEX, I will say that the reason that we are thriving through this is because of the strength of our team, which is a highly inclusive and diverse team of people across the globe, and we are absolutely thrilled with the culture that we are building here at IDEX. A major piece of that culture is on the following page, and that's the IDEX Foundation. We created the IDEX Foundation back in 2014 with the idea of impacting the communities with which we live and work and to do so in a way that is highly driven by our local sites and what's important to their communities. And you could see we've had tremendous growth and impact over the 6 years that we've created the foundation. Last year, almost half of our sites participated in the foundation-funded event, almost 2,700 different volunteers. We donated almost $700,000, and there were 63 different events around the world. It's a part of -- a major part of our culture, and we're very proud to impact the communities in which we live and work. Another important element of our strategy, if you go to the next page, is capital deployment, so how we spend the capital that we create out of this company. And we're fortunate to have a business that has strong free cash flow. And of course, our first priority is always around investing in our businesses in terms of organic growth, in technology, into distribution, into people, but there are 3 other elements of our capital deployment strategy that have been very important to our long-term success. The first is strategic M&A, so it's the companies that we have purchased over time and we bring them into the fold of the company. We bring the IDEX Difference to those businesses, improve them, and they've been an important part of our growth. When it's appropriate, we have repurchased our shares, and it's a consistent data-driven approach that we use, whether we're in open markets or in closed markets. And finally, shareholder dividends. We -- our target is to pay approximately 30% to 35% of our net income, year in and year out, to our shareholders. And you can see on the right-hand side of the page what our capital deployment has helped us do in terms of some important metrics. Our return on invested capital has grown exceptionally from less than 12% in 2012 to almost 17% in 2019. We also had -- our shares have decreased consistently over time, and we have increased our dividend at an expedited basis. With that, let me move to the outlook. I'd like to talk briefly about our response to COVID-19 and how we believe that's going forward. So if you can move to the slide that says COVID-19 Response. Early in this pandemic, we laid out 4 priorities for our business: safety, business continuity, liquidity and to play offense. Our first priority has been to keep our people safe, and I will say we've done an outstanding job. We have had some cases around the world. Thankfully, we have had no loss of life. We have had some of our employees who have lost family members and loved ones, and we certainly grieve for them, but we have worked very hard to make sure that we have a safe environment where our people around the world can be physically, emotionally and financially safe. In terms of business continuity, we have been prepared to manage our business in a volatile environment in how we handle supply chain, internal operations and customer disruptions. I will say that all of our sites are up and running at this time. We have had some shutdowns periodically, but we are up and running around the world. Liquidity is how we manage our cash flow. We have a very strong balance sheet, and our liquidity is excellent. And so I believe we can safely weather this crisis. And then finally, we obviously want to play offense. We're adapting to help with the COVID fight, and we want to make sure that our business is positioned well to help manufacture and distribute products that are critical to the fight around the world. If you move to the next page, we have outlined what we believe are going to be 4 phases of this fight with COVID-19. The first one, I believe we're ending now or near ending, which is the acute phase. We now -- as we move through the beginning phase of this crisis where we had no sense of where the bottom was, we are now moving on to the second part of -- the second phase, which I think is going to last for a quarter or 2, which is really ongoing uncertainty and establishing where the bottom of the economic impact is to the COVID-19 crisis. That will then move us to the third phase, which is learning to live with the virus. And that obviously will go on until there is a substantive answer to the pandemic, which is a vaccine, tracing and treatment. And until those things are in place, we will have to live and work in this world with the virus. And then finally, there will be a new normal. There will be a time when we're on the other side of this, and many things will certainly change around the world as that happens. As you -- as we look forward onto the next page, we are projecting and have communicated to our shareholders that we expect the second quarter sales to be down between 15% and 25%. With that, however, we have excellent liquidity. We have over $1.2 billion of liquidity, and we are balancing our decisions. We're weighing our long- and short-term consequences for our employees, our customers, our shareholders and, obviously, the communities that we are in. But we are in a good position overall. So in summary, if you go to the final page, we are leveraging our strengths to weather this pandemic that's driven this economic downturn. However, our long-term expectation is to get back on track to where we have been for a long time, which is double-digit earnings growth outstanding cash conversion and superior return on invested capital. And we really do that by having very strong strategic positioning in highly engineered mission-critical niches. And we have a great team who really has embraced the IDEX Difference around those 3 elements that I mentioned before, and it is absolutely what makes IDEX special. And finally, we have the balance sheet, we have the cash flow and we have the capital deployment to maximize our total shareholder return over time. And you can see, since 2009, we have more than quadrupled the S&P 500 since that time. So with that, I'm going to pause here, operator, and open up for any questions that people may have.

[Operator Instructions]

Actually, no. The questions are being submitted through the web portal. And Andy, I'm manning that, and I will let you know in a few seconds if I have any questions.

Excellent. Ms. Secretary, do we have any questions or comments?

Just one second, Andy. Andy, we do not have any questions.

Well, thank you. Once again, I'd like to express our appreciation to all of you, our stockholders, our directors, our officers and our employees, for the support you've given during the past year and for your presence here on our virtual meeting. Thank you very much. This ends the call.