IDEX Corporation (NYSE:IEX) Q4 2023 Earnings Call Transcript
IDEX Corporation (NYSE:IEX) Q4 2023 Earnings Call Transcript February 7, 2024
IDEX Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Fourth Quarter 2023 IDEX Corporation Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to Allison Lausas, Vice President and Chief Accounting Officer. Ms. Lausas, you may now begin.
Allison Lausas: Good morning, everyone. This is Allison Lausas, Vice-President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX fourth-quarter and full-year 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months and full-year ending December 31, 2023. The press release along with the presentation slides to be used during today's webcast can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Abhi Khandelwal, our new Senior Vice-President and Chief Financial Officer. Today, we will begin with Eric, providing an overview of the state of IDEX's business.
Abhi will then discuss our fourth-quarter and full-year 2023 financial results and provide an update on the various markets we serve. He will also discuss our outlook for the first quarter and full-year 2024. Lastly, Eric will close the call with his final remarks. We will 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 (877) 660-6853 and entering conference ID 13742102, or simply log on to our company 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 will now turn this call over to our CEO and President, Eric Ashleman.
Eric Ashleman: Thanks, Allison, and good morning everyone. First, I'd like to introduce and welcome our new CFO, Abhi Khandelwal back to IDEX. Abhi previously worked at IDEX for 10 years and served as my finance partner for the majority of that tenure. I'm thrilled to welcome them back. And in many ways, it feels like you never left. Turning to Slide 6. We navigated the challenging backdrop in 2023 with really strong execution. As backlogs normalized, we took inventory out of the system, reduced lead times for customers, increased cash-flow to record levels, and delivered productivity through strong price capture and operational excellence. As always, I want to reach out to our IDEX employees around the globe with a sincere and appreciative thank you.
I want to apply a bit of high level perspective as I covered last year's dynamic demand patterns. Coming into 2023, we expect this would be a year of re-calibration across our broad array of markets and our thesis certainly held. Our fragmented industrial markets within FMT and parts of FSDP and HST played out as expected. Supply chains improved, dropping overall lead times bringing artificially high backlog and inventory levels into focus. Customers attack these positions moderately over time through order reductions to our businesses, ultimately reaching levels of stability for us in the fall. Our less fragmented markets within Life Sciences and Analytical Instrumentation and Semicon recalibrated in a dramatically different way. Through much of the post pandemic recovery, these markets had run red-hot with demand that was really only constrained by supply chain availability.
Demand pressures from high interest rates, lower capital availability and a lackluster post-COVID recovery in China, combined with outside inventory balances and backlogs drove sharp order reductions throughout these normally fast-growing sectors. This played out dramatically in the first half for IDEX. Given our short-cycle character, we saw the decline quicker than many and reached equilibrium in the fall sooner than some. As we delivered against expectations within a stable Q4, we took a breath and developed a plan of attack for the year ahead. Lead times and backlogs are back to pre-pandemic levels. The majority of our industrial and municipal businesses are stable and seeing improvement with early and encouraging signs of modest growth ahead.
The open questions are the specific catalysts and timing to support further acceleration. Our teams continue to aggressively engage with our top growth bets to drive market out performance. These initiatives are spread across all segments in a variety of niche verticals. We're particularly excited about our growth work with customers in our water, Semicon, space communications, and energy transition markets. The markets not yet showing signs of near-term recovery remains Life Sciences and Analytical Instrumentation. We haven't forecasted a positive inflection yet for 2024. That said, our teams continue to work a robust pipeline of innovative projects in conjunction with our customers, positioning us to win on tomorrow's Next-Gen platforms. We believe in the long-term growth potential of these end markets and are well-positioned to support growth at the first signs of improved demand.
We continue to focus on aggressive capital deployment towards M&A as we tune the portfolio towards faster-growing high-quality markets. We acquired Iridian and STC Material Solutions last year, adding important pieces of material science technology to our HST segment. Our funnel is expanding, filled with targets that enhance our growth potential. Our balance sheet is strong, fully supporting our ambitions. Finally, we divested two businesses Micropump and Novotema as we practice AD20 at the enterprise level. With that, I'll turn it over to Abhi to discuss our financial results.
Abhi Khandelwal: Thanks, Eric, and thanks to everyone for welcoming me back to IDEX. It's great to be here and be re-joining a great organization. Moving onto the consolidated financial results on Slide 8. All comparisons are against the prior year period unless stated otherwise. Orders of $754 million in the fourth quarter were down 6% overall, and down 10% organically. We experienced an organic decrease in each of our three segments. FMT and FSDP declined mid-single-digits while HST contracted by about 17% as market stabilized at a new level post-recalibration. For the year orders were down 7% overall, and down 11% organically. Our HST segment contracted upwards of 20% as customer experienced a sharp inventory recalibration during the year and level-set to new near-term demand targets that include stunted growth expectations for China coming out of the pandemic.
Our FMT and FSDP segments were down low-single digits as they also experienced recalibration although at a much smaller scale. Fourth quarter sales of $789 million were down 3% overall, and down 6% organically. We experienced a 19% organic decrease in HST while both FMT and FSDP grew by 3% organically. Full-year sales of $3.3 billion were up 3% overall and down 1% organically. HST contracted by 10% on an organic basis driven by declining life sciences analytical instrumentation and semiconductor markets, partially offset by price. FMT and FSDP grew mid-single-digits, driven largely by strong price capture on slightly higher volumes. Fourth-quarter gross margin was essentially flat at 42.7% while adjusted gross margin, which was also 42.7% contracted 90 basis points due to lower volume leverage, unfavorable mix and the dilutive impact of acquisitions and divestitures, partially offset by strong price-cost and operational productivity.
Both full-year gross margin and adjusted gross margin of 44.2% contracted 60 basis points for the same reasons I just described. Fourth-quarter adjusted EBITDA margin was 25.8%, down 120 basis points. I will discuss the drivers of fourth-quarter adjusted EBITDA on the next slide. On a full-year basis adjusted EBITDA margin contracted 40 basis points to 27.5%. A bridge of the full-year adjusted EBITDA can be found in the appendix of this presentation. Despite a year of significant volume pressure, our teams delivered on price-cost and operational productivity, significantly muting the impact of these unprecedented volume declines. On a GAAP basis, our Q4 effective tax rate of 22.7% versus last year's fourth-quarter effective tax rate of 20.5% increased primarily due to the absence of one-time foreign currency benefits realized in 2022 in connection with the funding of the acquisition of Muon as well as the impact of the loss recorded on the sale of Novotema during 2023.
For which no related tax benefit was realized due to the type of consolidated group in which it participated. Our full-year GAAP effective tax rate of 21.7% was flat with the prior year. However, both 2023 and 2022 included favorable discrete events. Fourth-quarter net income was $109 million generating EPS of $1.43. Adjusted net income was $139 million with adjusted EPS of $1.83, down $0.18 from the prior year fourth quarter. Full-year net income was $596 million, resulting in EPS of $7.85. Adjusted net income was $624 million. Generating adjusted EPS of $8.22, up $0.10 or 1% from last year. Finally, free cash flow for the quarter was $179 million, up 22% over the prior year period. We achieved a conversion rate of 129% of adjusted net income, mainly driven by improved working capital performance despite lower adjusted net income.
On an organic basis, we drove more than $40 million of inventory reduction in the quarter through our targeted reduction efforts and we saw inventory turns improve. For the year we delivered record free cash flow of $627 million, up 28% versus last year and coming in at 101% of adjusted net income. Mainly driven by lower net working capital as we reduced organic inventory levels by almost $65 million and achieved higher adjusted net income. We achieved this despite higher year-over-year capital expenditure as we maintain focus on investing for the future. We will continue to drive inventory levels down and optimize working capital levels further in 2024. Moving on to Slide 9 which details the drivers of our fourth-quarter adjusted EBITDA. Adjusted EBITDA decreased by $15 million compared to the fourth quarter of 2022.
Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $36 million, flowing through at our prior year adjusted gross margin rate. Price cost was accretive to margins and we drove operational productivity that offset employee-related inflation. Mix was unfavorable by $3 million. Reductions in variable compensation contributed $3 million of benefit in the quarter. These results yielded a negative 39% organic flow-through. Overall, our team's focus on cost containment and resource reallocation has effectively managed our revenue declines. IDEX is well-positioned to recover and grow back stronger than before when market dynamics turn favorable. The impact of FX and acquisitions, net of divestitures contributed $5 million of adjusted EBITDA in the quarter.
However, the divestiture of Micropump load flow-through as the margins were higher than those of our newly acquired assets who were experiencing volume deleveraging, given the end markets deplane. With that, I will provide a deeper look at our segment performance. I'm on Slide 10. Let me walk you through our outlook as it relates to our end markets. First, as I consider the markets served by our Fluid & Metering technology segment. Industrial derates began to see some sequential improvement in the fourth quarter and we expect continued stability in the near-term as our short-cycle businesses meet underlying customer demand. We continue to see normalized book-and-bill order patterns given shorter lead times and normalized supply chain dynamics.
As we move into 2024, we're cautiously optimistic as we continue to see tailwinds due to domestic infrastructure initiatives and within mining. We anticipate these patterns will hold. Dolby will continue to mind our derates to evaluate longer-term expectations as this is the most short-cycle market exposure. Our water businesses continue to be favorably positioned as we enter 2024. Municipal project activity remains strong with no signs of funding delays and the project funnel is healthy with new opportunities winning share to deliver solutions for critical water challenges. Our energy business has been steady, even as new oil production is down and fuel markets are flat, driven by declining fuel prices and mild heating seasons in North America and Europe.
As consolidation occurs within this industry and funding for new projects remain delayed, we see operators doing more with less using the same infrastructure to drive production. These market dynamics favorably impact our demand profile. As our energy businesses meet customers' need for replacements as they keep existing infrastructure running. In the chemical market, we continue to see positive results across US and Europe with pharma and battery applications providing opportunities for growth. China softness is being mitigated by the rest of Asia. The one area experiencing pronounced headwinds in FMT is our agricultural business. The size of this market is about 10% of the FMT segment, which equates to mid-single-digits for overall IDEX. We continue to see headwinds as OEMs have stepped down their projections due to continued destocking and declining net farm income and crop prices.
Our KZValve acquisition continues to be a differentiator with its automated actuation valve technology and we are focused on targeted share gain to offset the pressure of current market challenges. Moving onto the Health & Science Technologies segment. We continue to see positive results stemming from our space broadband laser communication initiatives which are bolstered by Iridian's technological capabilities. We expect this space to grow in 2024. The industrial markets served by businesses in the HST segment are experiencing signals in line with FMT has expectations. Our material processing technology business is gaining share in battery production with the step up in new orders as we enter the year. And we continue to see signs of improvement within biopharma related to new vaccine development, where our technologies are uniquely positioned.
We see particular strength in emerging markets. For semiconductor, we began to see initial signs of improvement as we exited 2023. We expect this market will continue to recover somewhat in '24 driven by an improved outlook for memory chips due to demand for devices. Further out, we look forward to continued growth in Semicon driven by artificial intelligence, automotive and long-term secular tailwinds driven by electrification. While these markets point towards growth area within the HST, that is not yet showing signs of recovery is in our Life Sciences and Analytical Instrumentation markets, which represents nearly 35% of HST and about 15% of overall IDEX. However, the long-term growth drivers have not changed. While orders appear to be stabilizing, we have not forecasted a positive inflection yet for 2024.
While this industry navigates immediate-term challenges, we continue to have our eye on the future. We are closely partner with our customers across our Life Sciences businesses and we're actively innovating to provide tomorrow solution. With our focus on innovation and operational scale to support customers from prototyping to production we are uniquely positioned for growth as these markets recover. Turning to our Fire & Safety Diversified Products. We expect FSDP will be flattish to down slightly in 2024 driven by headwinds in dispensing as key customers recently completed the multi-year refreshment cycle. We expect Fire & Safety end markets to remain stable and growth to be driven by strategic share gain initiatives our teams are focused on.
We continue to win through value-added integrated systems and technology and standardized offerings that enable higher OEM throughput. Overall demand Band-it continues to remain strong and we expect growth on a year-over-year basis. With that, I'd like to provide an update on our outlook for the first quarter and full-year 2024. I'm on Slide 11. We expect full-year organic growth of 0% to 2% with the majority of our end markets stable to growing as I highlighted in my market outlook commentary. This wage reflects low-single-digit growth from FMT and includes acknowledgment of the uncertainty in timing and scale of recovery given the short-cycle nature of our business. For HST we expect low-single-digit growth as broader expectations for year-over-year growth across its markets are moderated by the lack of visibility in the Life Sciences and Analytical Instrumentation space.
And we expect FSDP to be down slightly as the dispensing refreshment cycle has completed and volume in that space will step down. The dynamic is expected to lower overall IDEX organic growth by 1% and offset the growth expected by Fire & Safety and Band-it. This organic rate guide equals earnings per share contraction of $0.03 to growth of $0.26 depending on top-line results and includes price-cost, which we anticipate will be positive for the year and mixed pressure stemming from dispensing volumes. Additionally, we expect our operational productivity will more than offset pressure from wage-related inflation and provide $0.10 to $0.15 of EPS growth. As always, we're committed to investing in the future growth prospects and expect to make incremental resource investments of $0.05 to $0.09 during the year as we invest in the people needed to champion our growth efforts and drive the next chapter for outperformance.
The reset of variable compensation levels after a challenging 2023 provides a $0.16 headwind while the impact of recent acquisitions and divestitures contributes $0.12 of adjusted EPS growth. Finally, considering a few non-operational items lower levels of debt due to pay-downs in the second half of 2023 are expected to yield $0.07 of EPS growth and we expect FX to also provide $0.07 of benefit. These are more than offset by an increase in the effective tax rate on a year-over-year basis, creating $0.19 of headwinds to adjusted EPS. The 2023 effective tax rate includes certain discrete events, which produced $0.09 of benefit to adjusted EPS in '23, as compared to 2022. Those benefits do not repeat in 2024 and conversely, the projected 2024 rate of 23%, includes a heavier mix of improved performance in geographical regions with higher tax rates, as well as certain legislative changes increasing global tax.
So in summary, we're projecting organic revenue growth of 0% to 2% for the year. The variable compensation and tax-rate pressure essentially erodes 4% of EPS growth year-over-year lending adjusted EPS expectation in the range of $8.15 to $8.45 or down 1% to up 3% over 2023. Moving to Slide 12. I'll provide additional details regarding our 2024 guidance for both our first quarter and full-year. In Q1, we are projecting GAAP EPS to range from $1.45 to $1.50 and adjusted EPS to range from $1.70 to $1.75. Organic revenue is expected to decline 6% to 7% year-over-year due to tough comps and adjusted EBITDA margins are estimated to be about 25%. While it is not a factor impacting year-over-year comparability, I would like to remind you that on a sequential basis when walking from fourth-quarter results to first-quarter we have a headwind of $0.10 related primarily to the accelerated recognition of share-based compensation in the first-quarter of each year.
Turning to the full-year 2024, in summary, we estimate full-year organic revenue of flat to up 2%, to yield GAAP EPS of $7.15 to $7.45 and adjusted EPS of $8.15 to $8.45. Adjusted EBITDA margin is expected to be approximately 28%. Capital expenditures are anticipated to be about $75 million normalized upon the completion of certain factory automation investments and emerging market footprint expansion in 2023. And free cash flow is expected to be over 100% of adjusted net income. Corporate costs are also expected to be approximately $95 million, up from 2023 by approximately $10 million as variable compensation resets to current market expectations, With that, I'll turn it over to Eric for closing remarks.
Eric Ashleman: Thanks, Abhi. I'm on Slide 13. In summary, the majority of our businesses are stable and starting to see the early days of market recovery. We're working together as a team to drive out performance above that baseline and we are well-positioned to capitalize on growth to come as we invest our cash-back into the business to support organic and inorganic expansion. Our core FMT businesses are back in world-class lead times with expanded margins, they're ready to expand them again as volume leverage broadly returns. Fire & Safety and Band-It within FSDP have differentiated technologies to accelerate growth and continue as the leading players in their global markets. Much of HST is seeing recovery or the early signs of growth.
We temper these expectations a bit, overall, given our lack of insights supporting demand recovery within Life Sciences and Analytical Instrumentation markets, and we also face the cyclical headwinds from global dispensing in our agriculture businesses. Finally, it's really the early days of a new normal following three years of unprecedented change, better to be appropriately cautious and careful as we line up our resources and strategic plans to support the full cycle ahead. One I feel will be especially strong for companies like ours. We are prepared to help customers solve their toughest problems we see as their greatest opportunities, our businesses and technologies are outstanding. Our teams and talent are world-class and our culture is really unique.
We appreciate your support and interest in IDEX. And with that, I'll turn it over to the operator for your questions.
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