IDEX Corporation — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Greetings, and welcome to the IDEX Corporation First Quarter 2024 Earnings Conference Call.
Good morning, everyone. This is Wendy Palacios, Vice President of FP&A and Investor Relations for IDEX Corporation.
Thanks, Wendy, and good morning, everyone. I'm on Slide 3. In Q1, our core execution capabilities delivered strong results, particularly within our Fluid & Metering Technologies and Fire & Safety/Diversified Products businesses. We experienced an encouraging lift in sequential orders from our core industrial and municipal markets after a period of elongated destocking, and we were able to quickly capitalize on this bounce and deliver for our customers.
Thanks, Eric. Before jumping into the consolidated results on Slide 4, I want to highlight our team's consistent ability to execute, as you've seen in the results, delivering strong profitability and free cash flow in the first quarter despite challenging year-over-year comparables.
Thanks, Abhi. I'm on Slide 10. I'd like to close by coming back to the simple value equation I talked about in my opening remarks. It all starts with organic growth outperformance, typically targeting 300 basis points above market entitlements. We drive about 20 to 25 bps across the company at any one time to achieve these results. I highlighted earlier some examples of growth initiatives through Applied Technologies within HST.
[Operator Instructions]
So just a simple question, Eric. Maybe just talk about, in your mind, if anything has really changed in the market since you gave the last guidance or from an expectation perspective, obviously, dispensing a little better in the first quarter, doesn't seem like your expectations for the remainder of the year are all that different.
Yes. No, thanks for the question. I mean not a lot that's different. I mean, I provided some color around the cadence of those kind of smaller flow FMT order of businesses that we have that are such good diagnostics. I think just to show that at the end of the day, the call remains the same, but it was interesting to watch the sensitivity and kind of ebb and flow in a way.
Yes. No, makes sense. And then an HST margin question. Obviously, you're running well below peak right now. When you get mix normalized and those end markets come back, whether it's '25 or later, back part of this year, as you just mentioned, how do you think about margin normalization?
Yes, Mike, this is Abhi. So I think if you go back 90 days and think about the discussion near the end of Q4, I think, look, what we've said is that the volumes come back in HST, more specifically in life sciences and the semicon that Eric just talked about. This business levers really well. And what we have said is we expect margins to be closer to 30% in HST once our volumes are back.
So 30% EBITDA margins when everything comes back, okay? Because the 25% to 27% just for clarity, was me just previous margin ranges. So okay, that makes sense. That makes sense. We appreciate everyone.
Our next question comes from the line of Deane Dray with RBC Capital Markets.
Eric, I think you've given some of the color here, but just regarding your read on how the year is beginning to play out, can you also touch on day rates and it sounded like BAND-IT started off well, so that's always a good sign. And anything else about the bellwethers, Warren Rupp and some of the others?
Yes. And that cadence that I articulated in the opening in Mike's question was really right there. It was on those bellwether businesses that we aggregate, take a look at weekly and then kind of use as an ultimate barometer of industrial health for IDEX. And I think, again, we saw those launching really strong in January, continued into February. It was interesting, a little bit of a pullback in March, and we had Easter earlier than ever before. So probably some of it.
And just to build on it, I think the other thing it points to that we've had a lot of conversations around is normalization of the supply chain. So it's a lot faster when it turns on, a lot faster when it turns on because people know that the lead times are back to normal levels that they can adjust their demand as they see the markets move up and down.
That's real helpful. And I'm glad you mentioned about that normalization of supply chain because that's been a focus. And just a separate question on the life sciences, analytical instruments market. We've been watching this and just kind of waiting where and how that -- the destocking might run its course and it just really hasn't turned the corner yet. I did see one of the life science guys report a strong quarter, but that was more on the bio processing side, less on the instrument side.
Yes. So I think there's a couple of points to hit there. I'll start with the first where you ended. I mean the lag is -- I mean it's not extended for us because most of our replenished cycles and lead time fulfillment abilities and capabilities of components going to companies like that is really fast. I mean it's one of the reasons that when this sort of destocking cycle started, we were one of the first to come and recognize it back in Q4 of '22. And so I think any sign of life, we're going to see that first and it's -- and we're going to see it probably pretty close to the time that they're talking about selling the instruments just because of the natural way that forecast would roll in and come back into our factories.
Our next question comes from the line of Vlad Bystricky with Citigroup.
I guess can you just talk about, and sorry if I missed it, what price versus cost overall actually was in the quarter and your expectations for price versus cost for the year and what you're seeing in terms of inflationary pressures versus your expectations coming into the year?
Yes, Vlad. This is Abhi and I'm more than happy to answer that for you. So if you recall, when we talked about our Q4 earnings, what we talked about was price for 2024, we'd laid it out at about 2%. But more importantly, what we were focused on was this price/cost spread of 80 to 100 basis points. So as you think about where we exited Q1, we were closer to that 100% from a price/cost standpoint, in line with expectations, in fact, on the high end of expectations.
Great. That's helpful color. I appreciate it. And then just to go back to HST. In terms of the organic sales decline that we've seen in the quarter, are you able to give us more color on the underlying growth rates in industrial and semicon versus what you're seeing in life sciences and analytical instrumentation?
Well, a couple of things there. I mean, the comparisons in a lot of HST are at pretty exaggerated levels given the rapid destocking that we saw last year. And so let's -- we've been talking about life science and analytical instrumentation as being in a general condition of kind of flat waiting for signs of recovery. And that, just from a segment percentage, is just over 1/3 of the entire segment.
Yes. No, the only thing I'd add is I think just -- look, we've talked about this, I think comparing it year-over-year is kind of tricky given what we saw last year. So I think it's important to kind of point out, if I look at the sequential order trends, look at the sequential order patterns from Q4 to Q1, we saw about $59 million of order uptick, $14 million of that was tied to FSDP, half of that, I'd say is blanket with our large customers that give us blanket that we ship throughout 2024. The other half is normal book-to-bill.
Our next question comes from the line of Nathan Jones with Stifel.
Getting back on to the HST order patterns and the sequential improvement that you're seeing there. It's obviously up quite a lot off the bottom from third quarter of '23. Customers did a lot of inventory destocking out of some of those businesses. Is it your view that customer inventories have been rightsized and we're kind of moving back to an area where your orders are pretty close to what your end customers are selling? Or is that still continued destocking going on from your customers? And do you have visibility into that?
Well, so I'll kind of break down HST because I think the answer varies a bit depending on the portion-ality of the pieces. So half of it is broadly industrial, again, more like FMT and the rest of IDEX. And I think they're -- like in those other areas, I'd say the destocking trends are largely past us. And so part of that lift you're seeing in that industrial core. And it's because, frankly, we're at about the levels of consumption and as those become more positive, we rise with them. So you see the same dynamic in about half of HST that you see elsewhere.
That's helpful. Maybe back on to the margin question and where it gets back to in a more normalized volume environment, I think you said 30%. Is that -- first, is that an EBITDA margin target? Because historically, we've been talking about operating margins...
EBITDA margins item.
Yes. And I would think that during this downturn, that, that business carries a lot of very highly-skilled labor that you would be really hesitant to rationalize during your downturn, particularly one that's likely to be short and cyclical. And so that's led to some of these pretty high decrementals that you're seeing in that segment. But should all that result in very good operating leverage and very high incrementals as we come out of the other side. Is there any commentary you can give us on kind of what you'd expect to see out of incremental margins in HST as we see that volume adjust?
Well, Nathan, I think the point you made is the answer, but I will say it, which is, to your point, we've been very, very thoughtful in terms of how we rightsize the business. Again, as Eric talks about the long-term vision, we believe in the long vision of this business and expect this business to grow as we come out of the cycle.
Our next question comes from the line of Joe Giordano with TD Cowen.
Just curious like on the tools and the life science piece of HST, is there like -- medium term, is there any sort of like adjustments at the top end of like what this potential is? I mean I know we're going to get to the end of the destock and all that over the next bit here, and long term there's a clear call. But like do we need to like adjust what we think like the potential is over like a multiyear period here given what's happening internationally and things like that?
Well, I think there's probably a couple of things out there to consider at the highest level when you're projecting. I think you hit one of them. So the ultimate position of China in this market, I think is something everybody has to think about. It's a big part of the issue currently because it was such a high catalyst of growth here more recently for most of the customers that we supply. .
Would you say like globally, it's longer term fungible? Like there's a baseline global demand that is going up and whether it's China or elsewhere, where this needs to be put in, it needs to be put in and like it's just friction over like a shorter-term basis? Is that how you kind of think about it?
I think that's exactly how we would think about it. I mean, it's -- the China piece, in particular, is pronounced from just the relative nature of what it had been and what it is now. And that's not trivial. That's couple of positive years on the one side and a few of adjustment on the other. But long term, this is ultimately about applying life-saving technology, transformational technology, of course, a global population.
Our next question comes from the line of Matt Summerville with D.A. Davidson.
I wanted maybe just a little bit of commentary and maybe a little bit more granularity on what you're seeing in the M&A pipeline at present, which businesses, which end markets are you focused on have you seen as far as purchase price multiples? Just a little more detailed color there.
Yes. Well, I think you saw in the remarks that I had. I mean, I made a special point to talk about the fact that we're looking for complementary pieces. So things that attach well to other areas of IDEX and I mentioned, at high level, how we had done that over the last 3 years in the optics space, the water space. And then I call it kind of material-intensive processing on small form factor, that's where Muon fits and frankly, STC.
Got it. And then just as a follow-up, could you maybe spend a minute talking about kind of the ultimate duration and strength of the muni water and wastewater cycles as you kind of see it playing out for IDEX?
Yes. I think, as I've said a couple of times before, I don't think it launches with a lightning bolt or a bang, but actually, the duration of it is going to be very durable. You've had a lot of intentional funding announcements put out there. Those always take a while to find their way home and funded projects that have been engineered and are now being deployed.
Our next question comes from the line of Rob Wertheimer with Melius Research.
Eric, you touched on an interesting topic in your opening comments just on semiconductors and the AI shift, which is obviously driving huge -- in demand, pricing power, all sorts of things, across pockets of industrials. I wonder, do you have any expanded remarks on what your exposure is there, how your technological capabilities are changing, whether you're entering kind of a new segment of semiconductors? Anything you can flesh out there if you're willing.
Yes. No, I appreciate it. I mean it's still a modest portion of IDEX, overall, but it's growing, and it's growing and has found its way into the portfolios of some of the things we've recently acquired in HST. So we're certainly more interested and focused on it. And as we've brought those technologies in, I mean, we thought about this revolution and the jobs to do within it, particularly the hardest ones is our #1 area of interest.
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Well, thank you very much. Thanks for everybody joining today. We appreciate your interest in IDEX. And look, I think, no doubt, there's some uncertainties out there in the near term whether it's inflation, interest rates, geopolitical tensions, it's obviously an election year. We hear a lot of chatter about that out in the background. As I said, I think there's some sensitivity to it. But more broadly, I still think the arrows are very positive for businesses like ours and others over time.
Thank you.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.