IDEX Corporation (NYSE:IEX) Q1 2024 Earnings Call Transcript April 24, 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, and welcome to the IDEX Corporation First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Wendy Palacios, Vice President, FP&A and Investor Relations. Thank you. You may begin.
Wendy Palacios: Good morning, everyone. This is Wendy Palacios, Vice President of FP&A and Investor Relations for IDEX Corporation. Thank you for joining us for our discussion of the IDEX first quarter 2024 financial highlights. Last night, we issued a press release outlining our company’s financial and operating performance for the three months ending March 31, 2024. The press release, along with the presentation slides to be used during today’s webcast can be accessed on our company website at www.idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Abhi Khandelwal, our Senior Vice President and Chief Financial Officer. Following our prepared remarks, we will open the call up for your questions.
If you should need to exit the call for any reason, you may access a complete replay beginning approximately 2 hours after the call concludes by dialing the toll free number (877) 660-6853 and entering conference ID number 13742103, 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 filings with the Securities and Exchange Commission. With that, I’ll turn this call over to our CEO and President, Eric Ashleman.
Eric Ashleman: 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. Our lead times and overall responsiveness are at outstanding levels as we stripped out excess inventory and improved overall productivity. Our closest to consumption businesses within FMT pulled back a bit in March after a strong January and February launch but things stabilized again in early April, suggesting our initial take on overall modest support for 2024 remains the correct call.
The Health & Science Technologies segment performed at expectations, but there are puts and takes there as we consider individual recovery rates within our markets and application sets. Our tactical priorities favor those growth initiatives that best leverage our most differentiated technologies in line with markets showing higher probabilities of near-term inflection. Largely through inorganic efforts, we’ve expanded our technical capabilities within HST to support the highest quality semiconductor technologies to power the AI revolution. We have increased content within the transformative world of low orbit space broadband, we are increasingly called upon to help companies develop and deploy advanced technologies for national defense and we have ambitions to continue to add to these capabilities as we further leverage our balance sheet through M&A.
We continue to watch for signs of recovery in life sciences and analytical instrumentation and are ready to capitalize on growth at the first signs of improving customer demand. Our businesses serving these spaces are exceptionally well positioned with highly credible expertise. We have confidence in our ability to outperform again once this market correction runs its course. Overall, it’s clear that economic and geopolitical uncertainty persist as a backdrop for all companies. We’ve leaned into that with a conviction that the three core tenets of the IDEX difference, an expression of our most basic differentiated mindset help us play offense. Our great teams and talent work together in superior businesses with a special culture. We practice 80/20 to align around the few things that really matter and we leverage natural proximity to the customer to solve their toughest problems quickly to support our outstanding economics.
We ultimately create compounding value for shareholders by driving organic growth outperformance through our top growth bets. We amplify these bets through acquisition of complementary faster-growing companies and we expand margins and generate strong free cash along the way as our leaders apply the five core tools of the IDEX operating model. I’d like to thank our IDEX teams around the globe for their dedication to these principles and for delivering strong performance in Q1. With that, I’ll turn it over to Abhi to discuss our financial results.
Abhi Khandelwal: Thanks, Eric. Before jumping into the consolidated results on Slide 4, I want to highlight our team’s consistent ability to execute, as is seen in the results, delivering strong profitability and free cash flow in the first quarter despite challenging year-over-year comparables. Moving on to the consolidated financial results. All comparisons are against the prior year period unless stated otherwise. Quarters of $820 million in the first quarter were down both 1% overall and organically. We experienced an organic decrease in FMT and HST, while FSDP grew low double-digits, driven by strength in dispensing and emerging markets. First quarter sales of $801 million were down 5% overall and down 6% organically.
We experienced a 13% organic decrease in HST and a 3% organic decrease in FMT, while FSDP grew by 2% organically. First quarter gross margin was 44.6%, declining 60 basis points, while adjusted gross margin was 45%, contracting 20 basis points due to lower volume leverage, partially offset by price/cost and operational productivity. First quarter adjusted EBITDA margin was 26%, down 120 basis points. This is a sequential improvement versus fourth quarter of 20 basis points as we remain focused on margin expansion. I will discuss the drivers of first quarter adjusted EBITDA on the next slide. On a GAAP basis, our Q1 effective tax rate of 21.5% versus last year’s first quarter effective tax of 22.2% decreased primarily due to a favorable discrete item.
First quarter net income was $121 million, generating EPS of $1.60. Adjusted net income was $143 million with adjusted EPS of $1.88, down $0.21 from the prior year first quarter. Finally, free cash flow for the quarter was $137 million, up 13% over the prior year period. We achieved a conversion rate of 95% of adjusted net income, mainly driven by lower variable compensation payments and capital expenditures despite lower adjusted net income. On an organic basis, we drove more than $78 million of inventory reduction over the last 12 months, and we saw inventory turns improve 0.4 turns year-over-year. Slide 5, moving on to Slide 5, which details the driver of our first quarter adjusted EBITDA. For the first quarter, adjusted EBITDA decreased by $22 million compared to the first quarter of 2023.
Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $29 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. These results yielded in a negative 50% organic flow through. The impact of FX and acquisitions, net of divestitures contributed $3 million of adjusted EBITDA in the quarter, resulting in a negative 48% flow through. With that, I’ll provide a deeper look at our segment performance. I’m on Slide 6, within our FMT segment. In our water businesses, municipal project activity remains strong. Note that water sales performance in first quarter of the prior year was favorably impacted by both Hurricane-related backlog execution and the catch-up of a one-month lag treatment of the Nexsight acquisition effectively recording four months of Nexsight sales in the first quarter of 2023.
Our energy business has remained stable with favorable infrastructure tailwinds, offset by a mild winter. Our agricultural businesses continue to be cyclically down, in line with expectations. Finally, Q1 adjusted EBITDA margins expanded 60 basis points, driven by price/cost and operational productivity despite slightly lower volumes. Moving on to Page 7. Despite challenging year-over-year comparables, the Health & Science Technologies segment performed to expectations, and nearly all of our HST business saw sequential orders improvement as compared to the fourth quarter. Our teams continue focusing on our most strategic customers’ next-gen solutions in life sciences and analytical instrumentation, while we watch for signs of recovery. Our space, broadband and laser communication initiatives continue on track despite current quarter customer delays.
Our material processing technology business saw strength in food and sports nutrition that offset conservative customer capital investments within biopharma and pharma. For semiconductor, we saw orders improvement of both year-over-year and compared to the fourth quarter. And we expect these trends to continue in line with an improved outlook for memory chips. In line with our FMT industrial businesses, the HST industrials are steady. Lastly, adjusted EBITDA margins improved 40 basis points over the fourth quarter of last year. A year-over-year decline of 250 basis points was driven by volume leverage, partially offset by price/cost and operational productivity. Now turning to Slide 8. Our Fire & Safety/Diversified Products segment performance was driven by dispensing project wins in emerging markets, which helped offset the impact of key U.S. customers’ multiyear refreshment cycle.
We continue to see stability in Fire & Safety. In the quarter, our focus on strategic share gain initiatives helped partially offset unfavorable budget reallocations in the industry. BAND-IT automotive demand is strong with growth expected in the year. Additionally, industrial performance was similar to FMT and HST with sequential improvement versus Q4. Finally, adjusted EBITDA margins expanded 40 basis points, driven by price/cost. With that, I’d like to provide an update on our outlook for the second quarter. I’m on Slide 9. In Q2, we’re projecting GAAP EPS to range from $1.75 to $1.80 and adjusted EPS to range from $2 to $2.05, with organic revenue decline of approximately 2% to 3% and adjusted EBITDA margin of approximately 27.5%.
Turning to the full year 2024. We are maintaining our previously issued full year outlook of organic revenue growth of zero to 2% and adjusted EBITDA margin of approximately 28% and adjusted EPS of $8.15 to $8.45 with majority of markets performing in line with our initial guidance and our focused efforts on driving growth bets. With that, I’ll turn it over to Eric for his closing remarks.
Eric Ashleman: 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 bets across the company at any one time to achieve these results. I highlighted earlier some examples of growth initiatives through Applied Technologies within HST. Within FMT, we’re also working on integrating the recently acquired assets within our Intelligent Water group alongside our legacy technologies to support critical analytical work within municipal and industrial wastewater containment and processing. Also within FMT, we’re deploying digital tools across multiple brands that go to market through distribution to enhance our customer experience and promote share gain.
I’ll go deeper in the quarters ahead with additional specific examples to help bring this work to life. We amplify these bets with complementary inorganic work via M&A to add another 200 to 300 basis points of growth. We see an outstanding opportunity to support faster-growing transformational markets through the disciplined build of relative and absolute scale within very high-quality niches. Over the last three years, we’ve been working this play in the Intelligent Water space within thin-film optics and within the niche of small form factor materials-intensive processing. Finally, we expand margins and seek to drive double-digit earnings growth along the way as our teams deploy the five basic IDEX operating model tools with 80-20 as our heartbeat.
Our decentralized environment and collaborative culture supports speed and agility and our inclination to resist top-heavy infrastructure supports financial leverage as we grow. In closing, the world is transforming and evolving in exciting but unpredictable ways. We’re building a company to thrive and win in that environment where power meets speed and agility at the intersection of technology and culture. I look forward to communicating our progress with you along the way. With that, I’ll turn it over to the operator for your questions.
See also 14 Cheap Penny Stocks to Buy According to Analysts and 10 Best Password Managers in 2024.
To continue reading the Q&A session, please click here.