The operator welcomes participants to the Fourth Quarter 2023 IDEX Corporation Earnings Conference Call and introduces the speakers, Allison Lausas, Eric Ashleman, and Abhi Khandelwal. They will discuss the company's financial and operating performance for the fourth quarter and full year of 2023. The presentation slides and press release can be accessed on the company's website. The call will include an overview of the business, financial results, market update, and outlook for 2024. A replay of the call will be available and a reminder is given before the speakers begin.

The speaker, CEO and President Eric Ashleman, welcomes the new CFO Abhi Khandelwal and thanks the employees for their strong execution in navigating the challenges of 2023. The company's thesis of a year of re-calibration across markets held true, with fragmented industrial markets stabilizing and less fragmented markets experiencing high demand constrained only by supply chain availability.

IDEX faced challenges in the first half of the year due to high interest rates, lower capital availability, and a slow post-COVID recovery in China. However, they saw stability and improvement in their industrial and municipal businesses in the fall and are now focused on accelerating growth in specific markets. The markets that have yet to recover are Life Sciences and Analytical Instrumentation, but IDEX is working on innovative projects to position themselves for future growth. They also plan to continue investing in M&A to expand their portfolio in faster-growing markets. Last year, they acquired Iridian and STC Material Solutions, adding important technology to their HST segment.

The company's funnel is expanding and their balance sheet is strong, allowing for potential growth. They have divested two businesses and are practicing AD20 at the enterprise level. Abhi discusses the financial results, with a 6% decrease in orders and a 3% decrease in sales in the fourth quarter. However, for the full year, sales were up 3% overall and down 1% organically. The HST segment experienced a 19% decrease in sales, while FMT and FSDP saw a 3% increase.

In the fourth quarter, the company's gross margin and adjusted gross margin remained relatively flat, with a contraction of 90 basis points due to lower volume, unfavorable mix, and the impact of acquisitions and divestitures. Adjusted EBITDA margin also decreased by 120 basis points in the fourth quarter and by 40 basis points for the full year. Despite significant volume pressure, the company's teams were able to deliver on price-cost and operational productivity. The GAAP effective tax rate increased in the fourth quarter due to the absence of one-time foreign currency benefits and the impact of a loss on the sale of a subsidiary. Net income for the quarter was $109 million, resulting in EPS of $1.43. Adjusted net income was $139 million with EPS of $1.83. For the full year, net income was $596 million, with adjusted net income of $624 million and EPS of $8.22. Free cash flow for the quarter increased by 22% compared to the prior year period.

Despite lower adjusted net income, the company achieved a conversion rate of 129% and saw improved working capital performance. They drove inventory reduction and achieved record free cash flow. Adjusted EBITDA decreased by $15 million due to a 6% organic sales reduction, but price cost and operational productivity helped offset this. The team's focus on cost containment and resource reallocation has managed revenue declines and positioned the company for future growth. FX and acquisitions contributed $5 million to adjusted EBITDA, but the divestiture of Micropump had a negative impact due to higher margins and volume deleveraging in their newly acquired assets.

The speaker discusses the performance of their Fluid & Metering technology segment and the outlook for their end markets. They mention seeing some improvement in the industrial derates market and anticipate continued stability in the near-term. They are cautiously optimistic about 2024, citing tailwinds from domestic infrastructure initiatives and mining. They also discuss the strength of their water business and steady demand in the energy market due to consolidation and operators using existing infrastructure. The chemical market is also performing well, except for a decline in the agricultural business.

The market size for the HST segment is about 10% of the FMT segment, and IDEX is facing challenges due to OEMs reducing projections and declining farm income and crop prices. The KZValve acquisition is helping to offset these challenges. In the HST segment, there is expected growth in space broadband laser communication and material processing technology, but there are also signs of improvement in biopharma and semiconductor markets. However, the Life Sciences and Analytical Instrumentation markets are not yet showing signs of recovery.

The company is facing immediate challenges, but is focused on future growth by partnering with customers and innovating in the Life Sciences industry. They expect flat to slightly lower growth in their Fire & Safety Diversified Products, but anticipate stable demand for their Band-it products. Overall, they expect 0-2% organic growth for the full year of 2024, with potential for growth in FMT and HST offset by a decline in FSDP.

The organic rate guide for the year predicts a range of earnings per share contraction of $0.03 to growth of $0.26, with positive price-cost and mixed pressure from dispensing volumes. Operational productivity is expected to offset wage-related inflation and provide $0.10 to $0.15 of EPS growth. Incremental resource investments of $0.05 to $0.09 are planned for future growth, while the reset of variable compensation levels and recent acquisitions and divestitures contribute to adjusted EPS growth. Lower levels of debt and favorable foreign exchange rates are expected to provide $0.07 of EPS growth, but this is offset by an increase in the effective tax rate, resulting in a projected adjusted EPS range of $8.15 to $8.45 for the year. Overall, organic revenue growth is expected to be 0% to 2%, with variable compensation and tax-rate pressure impacting EPS growth. The first quarter and full-year guidance for 2024 will be discussed in more detail on Slide 12.

In the first quarter, the company is 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 due to tough comps, but the company is expecting growth in the full-year of 2024. The company is well-positioned to capitalize on future growth opportunities and is investing in its businesses to support expansion. The core FMT businesses have improved lead times and margins, and the Fire & Safety and Band-It businesses have unique technologies that will drive growth.

The company is seeing signs of recovery in most of its business segments, but remains cautious due to lack of demand in Life Sciences and Analytical Instrumentation markets and cyclical headwinds in agriculture. They believe the future is strong for their company and are prepared to help customers with their challenges. The decrease in demand in 2023 was largely due to customers destocking inventory rather than a decline in actual demand.

The speaker discusses the current state of the company's markets, which have stabilized after an initial surge and then a sharp decline. They explain that while the year-over-year comparisons will still be affected by the previous year's market conditions, the company is currently operating on a stable platform. The speaker also mentions a sequential improvement in order rates in one of the company's divisions, and notes that this is partially due to increased activity at the end of the year. About half of the division is focused on industrial markets, similar to another division within the company.

In the paragraph, the speaker discusses the company's performance during the Thanksgiving holiday and the early indicators of growth. They mention an increase in orders and activity in the Semicon industry. They also mention a slight increase in Life science blanket activity. The speaker then talks about the company's inventory levels and how they are working to reduce it. They mention that the inventory levels of their customers are also improving and that they are in good shape.

The company has seen strong performance in customer and lead-time performance, which has been driven by automation. They are unable to track end-customer solutions inventory, but the diversification of their business puts them in a good position. The company is investing in new product development in the Life Sciences side, and there has been a high level of innovation in collaboration with their major customers. This makes sense given the current tough environment, where people are focused on replenishment and improvement.

The speaker discusses the current state of competition in the sector and the importance of innovation. They also mention their ability to scale with customers and how this is a positive indicator for long-term success. The company is confident in their position with major players and has a good relationship with them. They also mention their goal to decrease working capital by 0.5 points in 2024.

Mike Halloran, from Baird, asks about the company's overall thought process for the year and how they are setting their guidance. Eric Ashleman responds by stating that they are expecting sequential stability across the platform, with some cyclical pressures in the ag and dispensing segments. He also mentions positive catalyst markets that could potentially offset these pressures. Abhi will provide more information on how this will financially track. Ashleman notes that they ended the previous year with a normalized position and saw support emerging in the end of Q4 and continuing through January. He also mentions a seasonal uptick from Q1 to Q2.

The company has not been able to see growth in the past few years due to weather and other factors, but they have a natural uptick in Q2. They have several growth bets in place across all verticals, including a slight recovery in the semiconductor market. The first quarter is expected to be conservative, but they expect operational improvement of $0.12 to $0.15, bringing the total closer to $2.

The company's year-over-year performance has been impacted by $0.10 in stock-comp timing and $0.04 in variable comp reset, bringing their guide down to $1.75 to $1.77. However, operationally, there has been improvement and backlog has been built in January, with a seasonal uptick expected in Q2. The company is focused on M&A opportunities and has seen an increase in potential targets, with the potential for a better market environment in the future.

Deane welcomes Abhi back and thanks him for the detailed information and clear assumptions. Deane asks about the lack of forecasted inflection in 2024 for the Life Sciences Analytical story, noting that customers are still reporting inventory normalization through the first half of the year. Eric explains that the recovery will depend on individual customer demand and inventory levels.

The speaker is confident that the company's flat projections will hold steady due to their conservative approach to planning and controlling costs. They have also prepared for potential changes in the second half of the year. The issue of inventory obsolescence has not been a major concern for the company.

The company saw a positive trend in demand for its bellwether businesses, which are short-cycle and have diverse customer sets. This is consistent with other indicators such as ISM new orders. The price cost for the fourth quarter was around 4%, and for 2024, the company is modeling a 2% price increase.

The company is focused on the price-cost spread, which is currently higher than historical averages. They have modeled in a 2% price capture, similar to pre-pandemic levels. In terms of energy transition-related demand, they see growth in technologies involved in the transition to alternative and sustainable energy sources, such as battery manufacturing and mining. This is expected to continue into 2024.

The speaker discusses the recent acquisition of Airtech and its success in the alternative energy solutions market. They mention their global presence and niche focus. A question is asked about managing costs in the HST Life Sciences division and the speaker responds by saying they are prepared for a potential return to normal margins and discusses their philosophy on cost management during downturns.

The company has been operating well and has been focusing on reducing costs. They feel comfortable with their current cost structure and expect margins to expand as volumes increase. The company is careful with areas of expertise, technical knowledge, and customer relationships. They are staffed and ready to go for when the market recovers and innovation is still active despite the current downturn.

The speaker discusses the company's strong core and its ability to flex its labor resources during market fluctuations. They also mention their flat organizational structure and the readiness of their leaders to take on more responsibilities. This allows them to avoid costs and make smart deployment plans. They believe that these factors will contribute to margin expansion as demand increases.

The speaker discusses the distribution of MRO and the stabilization they are seeing. They mention that there has been a positive change in tone among customers regarding capital outlays and they are expecting more intentional capital deployment. The speaker also mentions that the company's EBITDA margins for 2024 are expected to be around 28%, with HST's margins potentially reaching 30% in the second half of the year.

Eric Ashleman, CEO of IDEX, discussed the company's long-term growth potential and expressed confidence that the company will see a higher level of organic growth in the future. He mentioned two key factors contributing to this growth, including the company's focus on more aggressive capital deployment and the nature of its portfolio, which is primarily in faster-growing markets. While there has not been much pruning of the portfolio, the company is seeing a shift towards faster-growing markets, particularly in the FMT segment.

The company is working towards increasing its portfolio average and targeting 200-300 basis points of outperformance. They are aiming for mid-single-digit growth on an organic basis and are excited about potentially eliminating forces that have made it hard to see progress. The speaker believes that inflation levels will not return to pre-pandemic levels but will also not go back to historical levels, instead falling somewhere in the middle.

The company feels confident about its position and pricing for 2024. They have a competitive advantage in price capture and are differentiated in sticky markets with risk-averse customers. The percentage of their Life Sciences and Analytical business in China is less than 20%. Margins for HST have struggled towards the end of the year.

The mix of the dispensing business has caused pressure in 2024, but the Life Sciences business is expected to see volume growth which will lead to margin expansion in the HST segment. The growth seen in the FMT segment is attributed to a healthier view from customers who are confident and ready to invest in their markets. The government stimulus may also have a small indirect impact, particularly in the water space. Overall, there is a positive outlook for the company as customers are starting to invest and work on projects, such as building roads and fixing them, which will require products from the company.

The company has seen an increase in orders for HST, with $10 million coming from blanket orders and $20 million from demand. They expect to continue building the order book throughout 2024, but are being cautious due to early signs of recovery in different parts of HST.

Eric Ashleman, CEO of IDEX, thanks investors for their interest and acknowledges that the company can be complex and diversified. He explains that market stability has been reached and most end markets are seeing growth. He also mentions that the company has made bets and initiatives that have driven larger unit measures.

The company is working on executing their plans and is confident in accelerating their growth throughout the year. They are committed to the Life Sciences and Analytical Instrumentation industry and have a strong positioning in the market. The company has invested a lot of capital in the past few years and is confident that they will continue to succeed and transform the company. The conference call has now ended.

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