The IDEX Corporation Earnings Conference Call for the second quarter of 2023 has begun with Allison Lausas, Vice-President and Chief Accounting Officer, introducing the call. Eric Ashleman, the Chief Executive Officer and President, and Bill Grogan, the Chief Financial Officer, will provide an overview of the state of IDEX's business, discuss the second-quarter financial results, and provide an outlook for the third-quarter and full-year 2023. Following the prepared remarks, there will be a question-and-answer session. The call will be recorded and available for replay on the company's homepage.

IDEX posted record sales and adjusted earnings per share in the second quarter, along with strong free-cash flow. Their Fluid and Metering and Fire and Safety diversified products businesses both posted strong organic growth and profitability. However, their Health and Science Technologies segment is facing challenges due to inventory destocking from their OEM partners. They are mitigating the volume declines by executing targeted cost reductions, driving strong cash-flow, and innovating for customers. IDEX is not expecting recovery in HST volumes in the second-half of the year.

In the second quarter of 2023, Eric noted that there was a 27% year-over-year organic drop in HST orders due to moderating demand, leading to a revised full-year 2023 adjusted EPS guidance of $7.90 to $8 per share. Additionally, the company closed on the Iridian Spectral Technologies deal to add another market leader in custom optical filter solutions. Eric emphasized the company's commitment to managing through the short-term while continuing to invest in their people, capital deployment, and technologies to enable long-term growth. William Grogan then discussed the financial results for the quarter.

Orders of $766 million were down 9% overall and 13% organically, mainly due to a decrease in HST. Record sales of $846 million were up 6% overall and 3% organically. Gross margin decreased by 10 basis points due to lower volume leverage in HST and acquisitions. Adjusted EBITDA increased by $22 million, with 3% organic growth and 4% price, but lower volume unfavorably impacted adjusted EBITDA by $9 million. Cash from operations was up 26% due to lower investments in working capital, and inventory was reduced by $20 million.

In the Fluid Metering Technology segment, organic sales grew by 10% and Adjusted EBITDA margin expanded by 340 basis points. However, orders contracted by 4% due to the slowing industrial landscape. Price cost was accretive to margins, and cost controls and variable compensation expense provided $5 million of benefit. Muon and KZValve acquisitions, net of the Knight divestiture and FX, contributed an additional $9 million of Adjusted EBITDA. North American water markets remain positive due to extreme weather, necessary technology and infrastructure upgrades and improved funding, while energy markets remain mixed.

The chassis availability is driving strength in mobile applications, and the chemical market is seeing positive results in the US, Europe, and Asia. However, agricultural demand remains mixed, and the Health & Science Technologies segment has seen a decline in organic orders and adjusted EBITDA margins due to inventory destocking, timing of orders, and soft semiconductor demand. The semiconductor market is expected to stabilize in the third quarter and recover in the fourth quarter.

The company's Material Processing Technology business is experiencing softness due to economic concerns, but there is some strength in aftermarket and battery market opportunities. The Fire & Safety Diversified Products segment saw organic orders grow by 2%, organic sales growth of 8%, and a 300 basis points expansion of adjusted EBITDA margins. The paint market is mixed, the fire business is gaining share, and the rescue market is stable. For the third quarter, the company is projecting GAAP EPS to range from $1.60 to $1.65 and adjusted EPS to range from $1.84 to $1.89, with an organic revenue decline of 7% to 8% and an estimated adjusted EBITDA margin of 27%.

Bill has outlined the projected revenue and earnings guidance for the full year, which includes organic revenue decline of 1-2%, GAAP EPS of $6.80-$6.90, adjusted EPS of $7.90-$8, adjusted EBITDA margin of 27%, capital expenditures of $70 million, and free cash flow of 100+% of adjusted net income. Eric has reiterated the company's commitment to strong execution for customers, building great global teams, and deploying capital with discipline. Over the past decade, the company has used 80/20 to optimize business performance and focus on faster-growing applications.

IDEX is making capital investments in businesses and platforms to power and increase potential, such as Muon, Sealing Solutions, Optical Technologies, Iridian Spectral Technologies, KZValve, Banjo, Nexsight, Airtech, and ABEL Pumps. These investments allow IDEX to stay competitive and pivot resources to the fastest-growing mega trends. The company is managing the near term urgently and appropriately while also looking to the potential of great things ahead.

In the second quarter, Eric Ashleman noted that the oversupply of inventory had to be addressed, and that customers had to re-assess their end-markets and the level of demand they could expect. This calibration resulted in a shift in expectations from high single-digit growth to more mid-single-digit growth.

The speaker predicts that orders have bottomed out and inventory is in balance. The speaker believes that the traditional growth rates will return in 2024. They are optimistic about the future of the semicon industry, predicting that it will improve beginning in Q4 and continue into the new year.

Eric Ashleman explains that the industrial side of the business is close to pre-pandemic levels and that they have been able to examine the markets and look more into the future than the past. He states that they are able to identify any potential catalysts, such as the water space, that may have funding sources. He also mentions that they are now able to cover half of the quarter and will be able to cover the other half soon.

Eric Ashleman believes that the world is beginning to catch up to where IDEX is positioned, and is confident that the next cycle will be a good one. He claims that IDEX is well-positioned for growth, and that with strong capital deployment they can achieve 300% outperformance. He believes that this growth algorithm will be sustainable and organic.

IDEX is a supplier to Original Equipment (OE) manufacturers, and while they do not participate in the other revenue streams such as service and consumables, they are in contact with purchasing and engineering teams. Lead times have changed due to destocking, and Eric Ashleman notes that IDEX is one step removed from the public companies that are discussing destocking and the bottoming of the market.

This paragraph explains how the company has progressed from the factory floor to commercial conversations, largely due to the criticality of their products. It also discusses how inventory positions and lead times are now better than ever, leading to a rapid decrease in order rates and the company's backlog position returning to typical levels.

Eric Ashleman states that the normalization of the cycle is the predominant driver for the slowing industrial orders and landscape. This is due to the need to not permanently alter the capability of the system. The company posted double-digit organic growth in the last quarter, which is indicative of the environment. There is still some reluctance to make big capital purchase bets, but overall, there is nothing overly negative in the environment.

Bill Grogan states that the EBITDA margin will experience a slight decline in Q3 due to the decrease in volume, but the cost actions taken have helped to mitigate this. The volume will bottom out in Q3 and the EBITDA margin will start to build back up in Q4, aiming to reach a 29-30% EBITDA-type margin as the recovery progresses.

Eric Ashleman does not believe that chassis availability with traditional OEMs and relationships with mid-tier OEMs and retrofit offerings are major drivers of the strength Fire & Rescue is seeing. He does note that there is still $20-30 million of inventory reduction to go in the second half of the year.

Eric Ashleman discusses the positive effects of chassis availability and composition of suppliers on business. He also mentions that the strength in North American paint dispenser business was due to large project orders that were delivered in the second and third quarter. Europe was slower in terms of orders this year but there may be a recovery going into next year. Eric notes that there is a lack of catalysts in many markets.

Eric Ashleman is discussing the confidence and optimism around the chip stack and infrastructure bill and manufacturing, and how they are all connected. He states that they are at a unique point where they can see exactly the mindset of people in the next quarter, and that many of the big trends will have nice runs in the future. He also mentions that some of these trends have already been seen in the walk, such as in water and chemicals, and that they have solid visibility going forward. Joe Giordano agrees with this statement.

Eric Ashleman and Joe Giordano discuss the weakening of industrial distribution and how their company is in sync with it. They are looking for new opportunities while others are still talking about it. Ashleman believes that their company will be talking about other catalysts in the future, and Giordano agrees. When asked to quantify the headwind to growth due to inventory correction, Ashleman explains that it is a reasonable amount of the current volume declines, as customers have calibrated on their months of supply.

Eric Ashleman explains that their on-time delivery metrics are in very good shape, with the majority of orders meeting or exceeding customer expectations. This is due to the company's improved lead times and their communication of these lead times to customers.

William Grogan is discussing the importance of meeting customer requirements and on-time delivery (OTD). He states that businesses need to be aware of the changing customer requirements and lead times and must prove that they are meeting those requirements through the OTD number. He then explains that they are taking cost actions, but are focusing on the discretionary side and not cutting too deep in case the markets recover next year.

In this paragraph, the speaker is discussing how the company is leveraging an 80/20 resource allocation model to preserve the majority of their growth resources in order to drive results in the future. They mention that 80/20 is used to guide the process of maximizing the power of existing employees so that incremental head count is not necessary. The speaker then explains how the channel and HST differ from the other two segments and how the same analytics process is applied broadly throughout the business.

Eric Ashleman explains that the HST market is characterized by direct relationships with a few customers, while the FMT and industrial side of HST have more numerous markets and positions, creating a buffer against drastic swings. He also notes that analytics have always been a staple in the distribution model, and that they are now getting even closer to the OEM relationships in order to have a direct line of sight. Robert Wertheimer commends the educational explanation.

Eric Ashleman states that the company's recalibration is nearly complete and that the backlog is almost back to normal. He believes that the pandemic-induced order trends will soon be done with, and that the future is going to be very good with the company accelerating faster than others. He also believes that the company's strength and resiliency built over the last couple of years will help them perform very well when the next cycle plays out positively.

IDEX employees have been praised for their hard work in deploying capital and executing strategies to outgrow their core markets, especially those in HST who had to quickly adjust their operations. They have risen to the challenge and are thanked for their efforts.

This summary was generated with AI and may contain some inaccuracies.