Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- IDEX Corp (IEX, Financial) delivered adjusted EBITDA margin and adjusted EPS slightly above previous guidance.
- Strong execution by IDEX teams globally despite macroeconomic uncertainties.
- FSDP segment had a strong quarter with significant gains in emerging markets, particularly in India.
- Fire business continues to grow with higher adoption of mobile platform automation.
- Recent acquisition of Mott Corporation expected to deliver strong organic growth, EBITDA margin expansion, and near-term EPS accretion.
Negative Points
- Noticeable pullback in project commitments due to macroeconomic and political uncertainties.
- HST segment facing pressures in life science and analytical instrumentation markets with no immediate growth catalysts.
- Semiconductor market recovery slower than expected, impacting HST segment.
- Adjusted EBITDA margin decreased by 60 basis points year-over-year.
- Revised full-year outlook projects revenue decline of 1% to 2%, down from previous growth expectations of 0% to 2%.
Q & A Highlights
Q: Let's start by understanding the change in the guide here. If I hear the comments right, Eric, the underlying daily rates were relatively stable in the quarter. And demand commentary has maybe a touch of optimism to it, but there's been more project push outs and timing-related things. So what's really changed from an end market dynamic as we move through the second quarter into the back half? The magnitude of the drop of the organic trends in the back half versus where it was previously seems more severe than the comments you're making. So just kind of want to bridge the gap between the two, if you would.
A: Yeah. So look, I think you hit the first part of it dead on here. We've seen kind of this level of core rate stabilization since that initial pullback from the exuberance of Q1 right on that March time and it held through the quarter. The two components that are most different from us relative to the last guidance are the anticipated semicon launch in HST, which didn't materialize into orders, and project commitments being delayed due to inflation and political uncertainty. These factors have led to longer approval loops, but there's no cancellation or pullback in resourcing.
Q: How do you think this recovery curves and plays out? If you listen to your comments on a lot of the project activity still there, more push out, more timing-oriented and some stability on the daily rates. Is this a scenario when these things start hitting, we could see a pretty rapid recovery pace? Or are you thinking something a little bit more iterative and modest as we think about moving into '25?
A: I'll go through that in two dimensions. The uncertainty attributable to inflation and political situations should resolve as we close out the year. We've seen in other occasions when things like that have been resolved, things have started pretty aggressively. The second dimension is the life science and analytical instrumentation sector, where we are closer to the end of the cycle. We're seeing indications of accelerating drug discovery and trials, and there's optimism in the semicon part for strong growth in 2025.
Q: Can you talk about what needs to happen to hit the higher free cash flow conversion rate for the year and your level of visibility or confidence in that?
A: We feel highly confident in our forecast for the year. Our teams are focused on driving inventory reduction in line with where the top line is. As you think about the back half of the year and where our top line is, our teams are focused on driving inventory to the right levels that will drive working capital. We feel pretty comfortable with us hitting our free cash flow target.
Q: Wanted to dig in a little on FSDP, the plus 6% organic orders in the quarter, it's pretty encouraging. Was there any bigger one-time orders in there to think about or your level of visibility to quarters remaining positive in the back half if the macro holds as it is?
A: The growth in Q2 was primarily driven by fire or North America OEM demand. In FSDP, we also have dispensing, and orders can get choppy because of bigger chunks of orders. But the growth in Q2 is tied to North America OEM demand that we saw in the quarter.
Q: Is the destocking over in analytical instruments and life sciences? Are you seeing OEMs generally carry less inventory than they were pre-COVID?
A: The planning levels between us and customers are pretty typical for what they've been in the past. The inventory of finished goods, which extends globally, is less clear for us, but we haven't seen further erosion in demand. We are leaning on points of optimism looking for the firm, which we hope to be somewhere into 2025.
Q: Given the uncertain backdrop, are you making any changes in your discretionary spending or pullback in growth investments?
A: Steady as she goes. Growth investments are typically people-based, and the innovation cycle takes longer. We are focused on deploying resources effectively without upping the spend profile overall. We are also leveraging our 80%, 20% philosophy to reallocate resources to more impactful areas.
Q: Can you quantify the level of price capture you saw in Q2? Is that consistent with what you saw in Q1? And compare your organic book-to-bill in Q2 versus Q1?
A: Price capture for the quarter was closer to 2%, with a price cost spread of 100 bps. Our book-to-bill ratio for Q2 was 0.96 times versus 1.02 times in Q1. The timing of blanket orders affects this, and we expect more blankets towards the tail end of the year.
Q: What are you thinking for orders for FMT and HST in the second half of the year? Do they get better or worse from here?
A: The orders do get better in terms of dollars sequentially from the first half to the second half.
Q: Where are you in the cycle for reasonable water strength, and how much of your business is influenced by government spending or funding?
A: The cycle plays out for a while because the intentionality of funding takes a long time to spend. We participate in analytical work that helps write capital requests, and a portion of it is government-funded. There's a nice run here overall, as it takes a while to bring all this to fruition.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
