Idex Corporation (IEX) — Q4 2022 Earnings Call Transcript

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 2022 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, 2022. 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 Bill Grogan, our Chief Financial Officer. We will begin with Eric providing an overview of the state of IDEX' business, including a recap of our recent performance. Bill will then provide a segment outlook for 2023 and discuss our fourth quarter and full year 2022 financial results as well as our guidance for the first quarter and full year 2023. Eric will then close the call with our key priorities for 2023. Following our prepared remarks, we will 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 2 hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13734461 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'll now turn this call over to our CEO and President, Eric Ashleman.

Thank you, Allison, and good morning, everyone. I'm on Slide 6. 2022 was a record year for IDEX. We experienced double-digit organic growth every quarter, driving all three of our segments to record sales levels and achieved strong record profitability, driven by solid execution. This year was not without its challenges. We experienced unprecedented inflation as well as a difficult supply chain environment. Despite these obstacles, we achieved some of the strongest financial results we've ever posted. I'd like to thank our IDEX employees around the globe for their efforts and hard work. We also deployed more capital than ever before, investing in our businesses, acquiring new ones and returning capital to our shareholders. We deployed a record $950 million for the acquisitions of Nexsight, KZValve and most recently, the Muon Group. We reinvested back into our core business to increase capacity to support growth and drive productivity and made investments in the commercial engineering and M&A resources that enable us to execute on our best opportunities. We also repurchased 795,000 shares of IDEX stock for $148 million as we followed our opportunistic disciplined approach to buybacks. As we turn to 2023, we are prepared to build upon a very solid foundation. We have strong backlog positions overall, and we continue to leverage innovative technologies to drive targeted growth opportunities. We have healthy price carryover in addition to new price actions to capture the value our products bring to our customers. Finally, we have an opportunity to drive strong productivity as we bring process-driven normalcy back to our operations through the application of the IDEX operating model. However, we're a short-cycle business and with that comes limited visibility. The broad-based supply chain constraints experienced last year have created some new dynamics around order patterns and customer delivery timing. And we predict that 2023 will be an uncertain period of transition as we dynamically calibrate with our customers. Additionally, there are likely to be pockets of demand softness due to a variety of intersecting economic and geopolitical factors. Regardless of these challenges, we will execute and deliver growth above-market entitlements. The short cycle and decentralized nature of our business supports quick adaptation and alignment to shifting conditions. And we will course-correct quickly and effectively when needed. Our balance sheet has ample capacity to support our M&A strategy as well as organic reinvestment. Our extended M&A and strategy team continues to build conviction around our best opportunities, and our funnel is strong and of high quality. We've also identified areas where we will deploy capital organically to expand capacity, capture market share and drive operational productivity. IDEX had a strong finish to an outstanding year in 2022. Our agility, resiliency, and our fundamental ability to execute has IDEX exceptionally well positioned to outperform as we move forward. With that, I'll turn it over to Bill to discuss the outlook for our segments on Page 7.

Thanks, Eric. In our Fluid & Metering Technology segment, industrial day rates were steady in the fourth quarter, and we expect they remain at this level in the near term with strong price support. We've seen initial signs that customers are returning to a book-and-bill order pattern, consistent with pre-pandemic behavior. We continue to monitor day rates to evaluate longer-term expectations as this is our most short-cycle market exposure. We expect another strong year in agricultural business with strong farmer sentiment and high crop prices. We continue to see positive signals from both our OEMs and distributors and a trend towards investing in precision technologies as a means of mitigating higher input costs. We are on our next phase of process automation at Banjo and see continued improvement in delivery and efficiencies putting us in a good position to capture share. Our outlook for our municipal water business continues to be favorable. The healthy quoting activity we experienced over the past few quarters is expected to translate into 2023 growth. And we continue to identify opportunities to leverage our technology to capture new programs. The EPA just received record funding, and the Infrastructure Bill could provide a tailwind in the back half of the year. The chemical markets overall are soft. We see opportunities for growth in U.S. green energies and strong project activity in the Middle East, but this is offset by softer European demand due to higher energy costs and cuts to production capacity. In our energy business, we see favorable demand for energy exports and natural gas production as well as continued oil price support. However, customers continue to delay larger investments as they focus on cost, inventory, and supply chain issues. The strong price capture and productivity achieved in 2022, as well as new pricing actions in '23 will continue to drive improvements in FMT margins with some risk of offset from lost volume leverage, depending on the second half volumes. Moving on to the Health & Science Technology segment. We expect HST to remain our highest growth segment. Our life sciences and analytical instrumentation businesses will continue to grow in '23 due to strong next-gen sequencing applications and continued expansion of cell-based therapies in various chromatography and mass spec applications. In the short term, however, several of our OEM customers are holding excess inventory, driving volume out of the first quarter and into the balance of the year. We believe this is a short-term issue, and the overall market outlook remains extremely positive for this sector. Our targeted growth initiatives tied to a wide variety of applications from satellites and space to energy-efficient fuel cells continue to perform well, and our industrial businesses are seeing market trends similar to FMTs. We are seeing some slowing in the semiconductor market, driven by higher memory device inventory levels and declining customer chip spending. Fabrication spending and new fab construction are both expected to be down for the year. That said, we provide critical consumable components for a large installed base, which tends to be more stable despite end market and CapEx cycles. Where we play in the market and our recent share gains are expected to drive continued outperformance versus the broader market. We are seeing overall signs of slowing demand in pharma and biopharma, particularly around larger projects. Customers are hesitant to make larger investments given inflation and higher interest rates. India continues to accelerate, and the easing of China restrictions could drive growth and recovery in the region to offset some. Lastly, our auto business is expected to perform well. Global auto production is stable, and our presence in premium vehicle segments in EV and hybrids is driving a faster recovery as compared to the overall market. HST margins will expand in '23 due to pricing, productivity, and volume, partially offset by continued reinvestment in our highest growth businesses and some mix headwinds in the short term due to expected life science AI demand patterns. Finally, we expect our Fire Safety and Diversified Products segment will experience growth towards the lower end of our guided range. In fire safety, U.S. and European fire OEM volumes remain constrained by supply chain and throughput issues, but backlogs are strong, and volumes are steady. We expect continued share gain with smaller builders that are coming online to capture surplus demand. Our rescue business remains positive with strong NPD, and we continue to leverage our integrated model to drive distribution growth. We expect our Banjo business to continue to outperform across industrial, automotive, and energy markets as it leverages its inventory and differentiation to capture share. Finally, our dispensing business has achieved strong results for the last 2 years, but will be down in 2023, driven by lower North American project volume as customer equipment refresh cycles approach their final innings. We continue to see growth in India, offset by some moderating demand in Europe and Southeast Asia. For the segment, we expect price cost and operational productivity will drive margin expansion with some offset for mix as we see lower dispensing project volume in the segment. With that, I'll discuss our financial results. Moving on to our consolidated financial results on Slide 9. Q4 orders of $803 million were up 1% overall and up 1% organically. We experienced continued orders growth in FMT, driven by strong water and energy results and an FSD due to strong fire and rescue orders as well as the receipt of a large project order for dispensing in the quarter. HST orders were down 8%, mainly due to the life science and AI OEM orders and softer semi demand I highlighted earlier. For the year, orders were up 8% overall and up 5% organically. We experienced positive orders growth across all three of our segments. Fourth quarter sales of $811 million were up 13% overall and up 12% organically. We experienced nearly 20% organic growth in HST and strong growth across both FMT and FSD. Full year sales of $3.2 billion were up 15% overall and up 13% organically. We saw strong double-digit growth across FMT and HST and 9% growth in FSD. Q4 margin contracted by 140 basis points compared to the fourth quarter of 2021, and adjusted gross margin of 43.6% contracted by 40 basis points. This was driven by unfavorable mix within HST and FSD, the dilutive impact of acquisitions, employee-related inflation, and unfavorable productivity in HST, partially offset by volume leverage and strong price cost. For the full year, gross margins expanded by 50 basis points, and adjusted gross margins expanded by 10 basis points to 44.8%, primarily driven by strong volume leverage, positive price/cost, and productivity, more than offsetting employee-related inflation and engineering resource investments. Fourth quarter adjusted EBITDA margin was 27%, up 10 basis points versus 2021. A bridge of Q4 adjusted EBITDA as well as Q4 adjusted operating income can be found in the appendix of this presentation. Full year adjusted EBITDA margin of 27.9% is up 20 basis points versus 2021's adjusted EBITDA of 27.7%. This represents record profitability for IDEX. I will discuss the drivers of full year adjusted EBITDA on the next slide. Our Q4 effective tax rate of 20.5% decreased versus last year's effective tax rate of 22.5%, primarily due to tax benefits realized as we recognize certain foreign currency impacts for tax purposes with the funding of the Muon Group acquisition. Our full year effective tax rate of 21.7% also included tax benefits from the sale of our Knight business and was down from the 2021 effective tax rate of 22.5%. Fourth quarter net income was $130 million, which resulted in an EPS of $1.71. Adjusted net income was $153 million, with an adjusted EPS of $2.01, which was up $0.30 or 18% over prior year. Full year net income was $587 million, which resulted in an EPS of $7.71. Adjusted net income was $618 million, resulting in an EPS of $8.12, up $1.25 or 18% over prior year adjusted EPS. Finally, free cash flow for the quarter was $147 million, 96% of adjusted net income, mainly driven by improved working capital performance. For the year, free cash flow was $489 million, down 1% versus last year and coming in at 79% of adjusted net income, mainly driven by higher net working capital, partly offset by higher income. As we exit the year, we made progress in reducing core business inventories and have momentum behind us to continue to drive further reduction into next year. Moving on to Slide 10, which details the drivers of our total year adjusted EBITDA. Full year adjusted EBITDA increased $119 million compared to 2021, and our 13% organic growth contributed approximately $91 million flowing through at our prior year gross margin rate. We levered well on the volume increase and had record price capture to offset record inflation. Price/cost was accretive to margins and has returned to historic levels. As we exited the year, all three of our segments posted positive price/cost results. We drove operational productivity to offset supply chain-driven inefficiencies and realized the benefits of our energy and Italian site consolidations. Mix was a small positive for the year. We saw unfavorable mix pressure in the fourth quarter of about $3 million that were reversed a majority of the year-to-date favorability. We invested $20 million taking in the form of engineering and commercial resources in the business and M&A and diversity equity inclusion resources in corporate, tracking to the lower end of the $0.20 to $0.25 of full year spend we highlighted at the beginning of the year. Discretionary spending increased by $25 million versus last year, closer to the high end of the $0.20 to $0.25 range on significantly higher sales than our original guide. We exited the year with a solid 30% organic flow-through. ABEL, Nexsight, KZValve and Muon acquisitions, net of the Knight divestiture and FX contributed an additional $14 million of adjusted EBITDA. Inclusive of acquisitions, divestitures, and FX, we also delivered 30% flow-through. With that, I would like to provide an update on our outlook for the first quarter and full year 2023. I'm on Slide 11. We expect full year organic revenue growth to be in the range of 1% to 5%. This range reflects the uncertainty in the second half of the year given the short-cycle nature of our business. This organic growth rate equates to $0.12 to $0.60 depending on the top line results. This range includes price cost, which we anticipate will be positive for the year and some mix pressure stemming from HST and dispensing volume in FSD. We expect that our operational productivity will more than offset pressure from employee-related wage and benefits inflation. We operated in a challenging supply chain environment in 2022, and we expect the easing of these conditions as well as driving our own internal productivity funnel will deliver $0.06 to $0.08 of net productivity for the year. In 2022, we returned to a more sustainable level of discretionary spending post-pandemic and invested in the people needed to drive our strategy. Travel and external services did not fully rebound until the second quarter of 2022. And we hired at an increasing rate as we move through the year. Although our spend is only moderately increased versus our Q4 exit rate, we'll see pressure of approximately $0.09 on a year-over-year basis. This impact is entirely felt in the first quarter of 2023. Although not to the same level as in 2022, we will continue to invest for the future: people, new products as well as applications for existing products, and these investments will provide up to $0.20 of pressure in 2023, depending on top line results. The range indicates how we will focus on resource allocation in an uncertain period and dial in our investments appropriately. Net of the divestiture of our Knight business last year, we expect acquisitions to contribute $168 million of revenue and $0.43 of EPS. Now let's look at a couple of non-operational items. Interest expense associated with the Muon acquisition represents a headwind of $0.12, and we expect FX to be a small impact, providing $0.02 of EPS pressure. So in summary, we are projecting organic revenue growth of 1% to 5% for the year, adjusted EPS expectations are in the range of $8.50 to $8.80, a 5% to 8% growth over 2022. The midpoint of our guidance implies a solid 30% adjusted EBITDA flow-through.

Thanks, Bill. I'm on the final slide, Slide 13. Before we open the call for questions, I'd like to wrap up with a summary of our 2023 focus areas. First, we are refocusing our efforts on a foundational set of practices and tools that link us together the IDEX operating model as we exit two intense years of double-digit organic growth within an environment of temporal barriers and obstacles. This is a year to double down on the core execution elements that make us an excellent company. The use of daily management, monthly business reviews, goal deployment and other tools have long been a source of efficiency, innovation, and growth for IDEX as market conditions, particularly within supply chains, begin to return to historic norms; we must seize the opportunity to optimize our process-driven fundamental business practices to best support future growth and outperformance. Second, we are committed to growing our talent at an even faster rate to fuel future IDEX growth. Our excellent execution is led by incredible leaders around the world who are committed to our core values of developing top-performing talent and creating an inspiring company culture that attracts and retains the best people. Diversity, equity, and inclusion continues to be an area of focus, creating environments where people feel they belong and are comfortable bringing their true selves to work each and every day. One talent note I want to address is the recent departure of Melissa Aquino. If you recall from our last session together, I introduced her as the new leader of the FMT and FSD segments. Melissa made a difficult decision to go back to a previous employer to take an opportunity she felt she could not pass up. We wish her well in her new endeavors and continue the search for her replacement. In the meantime, the gap has allowed me to step in, get closer to our businesses and spend time with an outstanding group of business leaders. Lastly, we've deployed $1.5 billion over the last 2 years on high-quality growth businesses, and we look forward to deploying additional capital in 2023. Our M&A teams have made tremendous progress identifying compelling portfolio extensions. Our funnel is in the best shape it's been over my tenure at IDEX, and our strong operating cash flow and balance sheet put us in a great position to continue to capitalize on those opportunities. Although the short-term economic picture might be uncertain, I could not be more excited as I consider the next few years of our story. I believe we're headed into an extended period of growth and above-market performance fueled by a combination of technology-driven tailwinds and our own high-quality business potential. Our businesses are first-rate, our teams are outstanding, and our culture is special. With that, let me pause and turn it over to the operator for your questions.

I just want to go back to your comment on optimizing processes and how we should think about that inventory is certainly one that's been a target just because you've had to build it up to deal with some of the supply chain issues. But maybe a little bit more color about how you're thinking about that.

Yes, that's probably the best example. We're coming from a situation where even the most well-intentioned processes turned into a scramble for parts and waiting for shipments. As that situation improves, we want to ensure we focus on re-establishing process-based fundamentals, involving the right people in the right discussions. This approach is how we successfully managed inventory in the fourth quarter. We still have a lot of work to do, but we are very optimistic about the potential moving forward. It's important to recognize that if we don't intentionally shift back to higher standards, we risk falling behind. We're seizing this opportunity.

Got it. And then just turning to free cash flow, still a little bit below historical performance for IDEX in terms of that conversion. Is it really just that inventory holding it back? I would say, what would be the lever to drive it higher at this point and sort of back to normal for you guys?

Yes. So in the fourth quarter, we talked to the third quarter inventory stabilized. It wasn't a detriment to cash flow. Here in the fourth quarter, it added about $20 million of free cash flow, the movement we made on our position, and we continue to see that momentum. I think we've got line of sight to a half a turn to a full turn of inventory improvements as we progress through the year. It will be a significant driver of our cash flow performance as we go from, obviously, less than historical averages on our free cash flow conversion to last year being 100-plus percent, which will yield somewhere between 30% and 40% increase in free cash flow year-over-year. So I think that's a huge win as we progress through the year.

So a couple of questions here. First on the guidance. Obviously, the commentary on the first quarter and some pushouts, plus a lot of the commentary about basically expected volatility through the year. How have you cadence that guidance? Is it relative to normal seasonality? I mean, how do you think about the first half, back half versus a normal year? Not that we've had a lot of normal years lately, but any kind of context you give to how you're thinking about what that cadencing looks like and how much kind of caution maybe you've put in there given what that backdrop looks like?

Yes. I think we're generally first half, second half is fairly close, 49, 50, 51, 49, something like that. So this year, I think the implied guide is a stronger first half with volume starting to decline in the back half. We've got pretty strong price carryover and price capture that will put in place here in the first quarter that will carry at least the price side. And then just the implied volumes in the back half are down somewhere between 2% to 4%.

That's helpful and makes sense. You mentioned that the order volatility is related to the compression of the booking to shipment time. Are you indicating that we might experience quite volatile order patterns this year, but perhaps more consistent demand as we progress throughout the year, especially considering your previous comments about the first and second halves? Is this essentially a caution about the anticipated order rates, suggesting we should avoid over-projecting based on the actual demand?

Yes, I think that’s accurately put. This year is about recalibration, similar to how we experienced dynamic adjustments during the recovery from the pandemic and supply chain challenges. Now, I believe we are moving back to more typical patterns. However, due to the nature of IDEX, this will likely happen at different rates. We anticipate seeing this more prominently in certain OEM-centric markets within HST, where we are much closer to the customer and the activity is already high. There is a slight pause as they take a moment to assess and reduce inventory, but these markets are generally healthy after this adjustment. In contrast, some of our industrial businesses, which are farther from the end consumer and have considerable distribution in between, are more fragmented. The same dynamics will emerge there too, but probably at a later stage. Overall, we expect things to return to normal rates where order and sales rates are closely linked, unless we are at the start or end of a cycle. However, what’s unusual is how this will unfold due to the varied segments within IDEX, and we are ready for that. Our strategy is to closely monitor the situation, adjust as needed, and remain cautious about interpreting short-term fluctuations as indicators of long-term trends. We want to ensure our resources are focused on areas with the highest growth potential.

I'm going to follow up on Mike's last question regarding the recalibration of orders. IDEX typically maintains low inventory and has various channels, but there may be some areas with inventory in new channels. How do you view the potential for your customers to reduce their inventory, and could that lead to a temporary decrease in demand for you? Is that reflected in your projection of a 2% to 4% volume decline in the second half?

Yes. I mean, there's definitely some of that in there. I think, as you know, we're kind of low on the food chain. We do a lot of component work for people who then turn it into subsystems in terms of the final system. So at any point along that food chain, there's the potential for accumulation and then frankly, the normalization of it along the way. I think what we're thinking about, though, is when you think of how order patterns are generated, many of them are actually done in an automated way. There actually isn't a lot of human intervention. And the two factors that drive it the most are, of course, lead times and whether or not they're pulling in, and we're seeing that. We're seeing that kind of across the supply base. We're experiencing as well. A factor a lot of people don't consider as much, though, is volatility or variability. And so even when lead times are pulling in, if you still have an inability to count on it, it will tend to keep driving higher demand requirements throughout the system. So we're kind of monitoring both of those. And as any one of them comes to something more normal, almost always, you're going to see an impact on that on the other side for a short cycle business like ourselves. I don't think it's a massive number because, as you say, most of the things we make are customized and they don't stock well anyways. But we're coming off a pretty robust time here. I do think this calibration matters. It will play out over time through much of IDEX. Again, I think the focus for us is to understand it make sure that our own inventory positions and resources are calibrated right, but then be very, very focused on end-market demand, what's driving that, what's the actual consumption rate on the other side because that ultimately is what you want to dial in to.

I think maybe the question on supply chain. I think over the last couple of years, generally, all of these lead times have stretched out. But for IDEX's businesses, the delays have really been up your supply chain because you buy these highly value-added components. So there's a number of steps for them to go through. And as they compress, that's compressing the order to ship time. So can you talk about where your supply chain is relative to where it was in 2019 chain? How much better it's got, how much there is still to go? And what your general assumption is now for getting back to something like normal? Does it happen in '23? Does it happen in '24?

Yes, I would say that in general, our supply chain has improved significantly and is nearly back to where it was in 2019, with some exceptions related to certain commodities. Electronics are still a primary concern, but since we are not heavily reliant on electronics, the impact is limited across the company. I want to emphasize that we have strong local supply relationships, working with partners we have known for a long time and who are located nearby. Throughout the toughest times, we supported them by sending teams to troubleshoot and enhance their processes. These strong relationships have enabled quicker adjustments. While we have not completely returned to 2019 levels at IDEX, we are certainly past the halfway point. Depending on how the year unfolds, it is possible for us to reach a normal state by year-end or as we enter the next year, unless unexpected factors arise.

I was hoping we could discuss the margins in HST. I know you provided some details in the prepared remarks. You mentioned the top line, but we didn’t get insight into the margin read-through. It seems price/cost was positive. You shared other data points as well. Was mix a factor? How much of this was temporary, and how do you expect it to unfold for the rest of the year?

Yes. I think there's three things there, Deane. One, we continue to face some of the inefficiencies. We talked about here as we progress through the back half of the year. Some of those businesses have grown 20% and still calibrating on some of the manufacturability of some of this cutting-edge technology that they have. Two was some mix within the portfolio. We talked about some of the short-term OEM pushouts. A lot of that has been kind of our book-and-ship components that are higher margin. And then the last one, just the addition of Muon, they were only in the portfolio for a month. They were shut down to do a full physical inventory that diluted margins a little bit. The Muon on will go away in the first quarter. I think we're making progress on the productivity piece, but the mix, I think, is still a component that we'll experience in the first quarter. Yes, so we've got the volume impact and then that mix carrying through at least through the next three months.

Got it. That's helpful. And just expectations on price cost into '23. Is there more pricing initiatives you need to put through? Or is this all carryover benefit?

No. We've got carryover and the incremental pricing actions that we took to kick off the year. Obviously, that's part of our normal process and cadence to continue to capture the value for our products. So I think we're in a really good position from a price cost. We said in the fourth quarter, we are back to historic levels, and we think that will continue here as we progress through the year. If something were to change, obviously, we go back to the customers with an incremental increase, but we're well-positioned here as we kick off the year.

Great. Just last question, I'm not sure how specific you can get, and I really appreciate the prepared remarks and some of the earlier questions about fleshing out the transition period year. Just right from the supply chain normalizing changes, order behavior, we get that. But we just saw the ISM taking another step down, orders another step down. With all your short-cycle businesses, this is a great canary in a coal mine company to like gauge lead time changes, and you've given fabulous color here. If we total up the collection of soft pockets of business, is this a demand deterioration you're seeing broadly? Could it be the early signs of it? Or do you feel like these are more temporary? Just kind of step back and say, okay, from seeing these trends, how does it look to you for the businesses that you touch play out for the course of the next couple of quarters?

Yes. I'd say, Deane, it's still pretty early. I mean everything we're kind of talking about here near term that there was some exposure in Q4 and some carry into Q1. That's very much a temporal condition and otherwise very active and strong markets where you can see, hey, people are taking a pause for all the reasons that you just suggested. Those bellwethers that we have on the industrial side, most of which their order side is coming through the small order flow side, honestly, those are holding up. We're simply, in some cases, projecting that if you combine a couple of things, we kind of know where those inventory levels are, we know how they think about planning, we know where we are from a lead time perspective. We're saying at some point, we expect we'll have some of that moderation there, but it really isn't in front of us as we sit here today. And then back half of the year is more of a macro call than anything else as we think about kind of floor and top end of the range for all of IDEX. So I think your question is helpful because it helps us kind of parse that we'll at least put out there, hey, we're seeing some of these things from an early indication standpoint, but most of them are in a temporal spot. We can imagine some things that would be bigger pieces of IDEX, more industrial in nature that would kind of follow the same calibration. And then ultimately, like everyone else, we're kind of thinking about where does the future go back half of the year, it's more of a macro question.

Your order commentary has been very clear and helpful. And I appreciate it. I'm sorry to sneak in one more on it. But just in general, HST, a vertical that had more excess inventory given some of the disruptions across the whole vertical. And then do you have a sense that supply chain has actually gotten a lot better or orders like coming in as people anticipated getting better? I'm just wondering if that's already happened, where people can feel more confidence in lead times, I guess, across the businesses, or whether it's an anticipation of that? And then I had an M&A question, if I could.

I don’t believe that businesses in the HST sector have more inventory; rather, they have more advanced planning. Generally, during any cycle, these larger organizations tend to be more formal and quicker to respond to changes. Given that it’s a concentrated industry, these reactions can be more pronounced. Therefore, I don’t see any indication that they are holding more inventory than others, and this situation is not particularly unusual compared to previous patterns during transitions. Now, regarding your second question, could you remind me of the specifics about supply chain confidence?

Exactly. Yes. So whether supply chain has already gotten better and that lets people have more confidence in lead times and thus destock a bit or whether that's not happened yet?

I think of it as two main factors. One is lead time compression, which is clear, and people are noticing this when they inquire about it. The second important factor is performance relative to those quotations. Neither aspect has fully returned to the desired levels yet; both have improved and are interconnected. The assurance and reliability in delivery against commitments have a significant psychological effect. This is arguably the more influential of the two. If customers realize that while the wait may still be longer, they can expect to receive what they requested on time, they are more likely to proceed with their decisions. However, unexpected delays can lead them to hold back on certain things. Both factors are progressing, and as we move through the year, we will discuss both aspects further.

That was very helpful. Just in general, we've had, I think, a reasonably solid level of deal activity you guys have done great over the last year. Your characterization of buyers market just among potential targets for acquisition and whether PE matters for you guys and whether there's less intense competition there. And I will stop.

Yes. Overall, our situation is positive. We've seen impressive performance over the past few years and have acquired some strong businesses. I've mentioned before our efforts to build strategic conviction in a formal manner, which enhances our overall business intelligence across IDEX. The aspects we can control are in excellent shape. When we consider our external engagements, we've always aimed to clarify that we operate within a high-quality market, which tends to be stable in terms of valuations and timing of transactions necessary for our work. Regarding private equity, they often compete with us for similar opportunities, as they are also drawn to these types of companies. However, there's currently somewhat less competitive activity from those who have managed to secure funding. We have always aimed to stay ahead in this effort through our proprietary outreach, particularly at trade shows, which allows us to avoid traditional competitions with many other bidders. Although it's an efficient market and deals don't always occur when we expect, the dynamics surrounding private equity activity are indeed as described. Overall valuations remain high as we continue to seek high-quality companies similar to the last three we have integrated into our business.

And Eric, thank you for the transparency, that was great. So the question is, maybe I missed it because I was writing, as you mentioned so many things. Did you share what the pricing was in the quarter?

No, no one asked it. It was over 5%.

And the gap was it that still about like 50-ish?

On price cost?

Yes.

Yes. We said it was back to our historical level, so right around there.

Okay. And then the carryover for next year, can you tell us what that would be?

Yes. I mean, overall price next year is somewhere around 3% to 4%, about half of it is carryover.

Got it. So I was just wondering about the step-down in the first quarter organic, is that mostly FMT and maybe secondarily, FSD in the organic?

No, it's mostly HST. We highlighted just some of the temporal moves from some of the OEMs as they recalibrate order patterns and inventory levels; that's the major driver.

Okay. Well, thank you all for joining and listening to our story. And I know there were a lot of moving pieces there in an environment that's got some pluses and minuses and things that are playing out. So I'll keep this really, really simple. I want to, again, thank all the folks from IDEX. 2022 was a great year. I mean really, really outstanding year, incredible growth, focused on the right things, getting capital to work, and we grew our people; we grew our culture. I think 2023 is going to be an equally great year, and it really sets us up for the future to come. We talked a little bit in my last framing comments there about the power of execution. We're really excited about that. We think we've got a chance here to go establish even a little bit more competitive advantage as we jump on this and recalibrate to the world to come. So we're all over it. We're doing that actively. And then just as passionately, we've got a number of teams that are thinking about the future, what comes in 5 years, what comes in 10 years, and we're going to make the choices that we have to capitalize on those too. So thanks for your support and interest, and have a great day.