Idex Corporation (IEX) — Q2 2024 Earnings Call Transcript

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 second quarter 2024 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months ending June 30th, 2024. The press release, along with the presentation to be used during today's webcast, can be accessed at our investor website at investor.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. Turning to Slide 2. Please note that during today's call, we will present certain non-GAAP financial measures. We will also make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to risks and uncertainties. Actual results might differ materially from any forward-looking statements that we make today, and we do not assume any obligation to update that. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available on our website and our SEC filings. With that, I'll now turn this call over to CEO and President, Eric Ashleman.

Thanks, Wendy, and good morning, everyone. I'm on Slide 3. IDEX delivered against expectations in Q2 despite increasing macro uncertainty, with both adjusted EBITDA margin and adjusted EPS coming in slightly above our previous guidance. I'd like to thank the IDEX teams around the world for their strong execution on behalf of our customers and shareholders. As mentioned on our first quarter call, we saw a noticeable uptick in industrial day rates in our closest to consumption FMT businesses in December. This continued through the end of February but pulled back a bit in March as a surprisingly firm inflation report reduced the likelihood of near-term interest rate relief. These daily order rates are largely stable now and in line with our original 2024 assumptions. However, as the U.S. election cycle has come into full daily view, creating even more uncertainty given the perceived disparity of outcomes, we've seen a pullback in project commitments. There's no talk of project cancellation, just a quarter or two push to the right. We'll continue to watch these businesses as open economic and political questions are resolved for any early signs of inflection. Within the HST segment, we don't yet have enough growth catalysts to overcome the pressures facing our life science and analytical instrumentation markets. Our HST industrial markets are performing as described earlier for FMT, with stable day rates and deferred project activity. Despite some encouraging discussions from our semiconductor customers asking us to get ready to launch, to support the next cycle of growth, we just haven't seen yet turn into accelerating releases or increased order positions. We think we're close here as most major players are pointing to likely strong growth in 2025. Life sciences and analytical instrumentation performed in line with expectations, with a strong focus on innovations to support the next cycle of growth and excellent productivity to support margins as we await market recovery. As we said at the beginning of the year, we believe we are unlikely to see positive inflection for these markets until 2025. FSDP had a strong quarter. Our dispensing teams are performing exceptionally well within emerging markets. Their share gains within India are nicely offsetting much of the pressure from their North American markets as large retailers step back following a strong two-year replenishment cycle. Our Fire business continues to grow as industry throughput improves. They're also growing share through higher adoption of mobile platform automation. Finally, BAND-IT was affected by softness in auto and industrial demand but continues to deliver very strong above-average profitability. Finally, we were thrilled last week to announce the acquisition of Mott. We'll talk a bit more about the company in a moment as we update our work within capital deployment. Turning to Slide 4. Although market headwinds persist, we are leveraging our strong technical and innovation capabilities as well as our close customer partnerships to position our business for growth across technology-enabled markets and applications. Our materials processing technology, MP350 Microlyser Processor, won the Biotech Innovation Award at Interfax, the leading global pharmaceutical and biotechnology conference. The MP350 is designed for production scale cell disruption, which is used in the manufacturing of many biotech products, such as antigens for vaccines and viral vectors supporting gene therapy. In the life sciences area, our new Melles Griot XPLAN CCG Lens Series imaging system, released in February, is providing customer access to superior quality optics with off-the-shelf lead time. This aligns with our strategy to deliver leading innovation and operational scale to support our customers from prototype to production, positioning us well for growth. During the second quarter, our intelligent water inspection team at EPAC launched Verisighht Ultra. This inspection technology tackles challenging infrastructures with remote access and an intuitive digital interface, capturing and converting data into powerful insights in the inspection of wastewater management systems. This is one of the many examples of how we're helping municipalities deliver clean water to their communities. We also received customer approval at our Trebor business for the next generation of sustainable Ultra Pure Water Heater and pump applications used to support the semiconductor wafer fabrication process. The Quantum NXT heaters have saved semiconductor manufacturers over 0.5 billion liters of ultra-pure water this year alone. We anticipate this will provide long-term growth as the semiconductor market reaccelerates. And in our Fire & Safety group, our teams unveiled the WildCAT solution for brush trucks used to fight wildland fires. Through a touchscreen application in the cab, firefighters can take control of essential water path functions while stationary or on the move in a much safer environment. With wildfire season clearly upon us in North America, this is a critical solution that can really make a difference. Now, turning to our disciplined capital deployment initiative on Slide 5, we continue to leverage our strong balance sheet to tune our portfolio for profitable growth through strategic acquisitions. Last week, we announced the acquisition of Mott Corporation, a leader in the design and manufacturing of centered porous material structures and flow control solutions with deep material science knowledge and process control capabilities. Mott develops highly engineered configurable mission-critical solutions for scalable high-quality applications. Their business is complementary to our broader Applied Materials Science Technology businesses within HST, including Nuon, STC, and Optical Technologies. And perhaps most impressively, they deliver for customers with an outstanding culture that fits really well with ours. We believe the addition of Mott will deliver value for IDEX via strong organic growth, EBITDA margin expansion to above HST average and near-term EPS accretion. In addition to Mott, we acquired a small company, Subterra, on July 25. Subterra's technologies help digitize underground infrastructure. It will become part of the intelligent water platform within our FMT segment, adding an important piece to our analytics solution across wastewater collection systems. Finally, as we optimize our portfolio, we continually reconsider the long-term growth prospects for all of our businesses. Occasionally and typically with smaller companies that lack a path to scale, we decide to sell to an owner that can better maximize potential. During the second quarter, we divested Alfa Valvole for $45.5 million in cash. They operated within our FMT segment. With that, I'll turn it over to Abhi to discuss our financial results.

Thanks, Eric. Turning to the consolidated financial results on Slide 6. Please note that all comparisons are against the prior year period unless otherwise stated. Orders of $773 million were up 1% on a reported basis and up 2% organically. We saw mid-single-digit organic growth in FSDP and HST, which were partially offset by a mid-single-digit decline in FMT, driven by projects being pushed to the right. Second quarter sales of $807 million were down 5% reported and 4% organically. We experienced an 11% decline in HST, while FMT and FSDP were essentially flat compared to the prior year period. Second quarter gross margin and adjusted gross margin were 45.4%, an expansion of 70 basis points, driven by strong price cost and favorable operational productivity, partially offset by unfavorable mix, higher employee-related costs, and lower volume leverage. Second quarter adjusted EBITDA margin was 27.8%, down 60 basis points. However, as compared to Q1, adjusted EBITDA was up 180 basis points. The strong sequential expansion highlights our team's continued focus on deploying 80, 20 and to drive profitability as we manage through challenging market dynamics. I will discuss the drivers of second quarter adjusted EBITDA on the next slide in a moment. On a GAAP basis, our Q2 effective tax rate was 21.2% versus 22.4% in the prior period. The decrease was primarily due to a discrete benefit from research and development incentive resolution related to prior years from an international taxing authority. Second quarter net income was $141 million, generating an EPS of $1.86. Adjusted net income was $156 million with adjusted EPS of $2.06, down $0.12. Free cash flow for the quarter was $118 million, a decrease of 2%. We achieved a conversion rate of 75% of adjusted net income, a 310 basis-point improvement on a year-over-year basis. We have a strong balance sheet, and this quarter, we repaid $25 million of the $50 million previously outstanding debt under our term facility, and we paid $52.2 million in cash dividends. The dividend was our 119th consecutive quarterly dividend payout. Moving on to Slide 7, which details the adjusted EBITDA drivers. For the second quarter, adjusted EBITDA decreased by $17 million. The 4% organic sales reduction unfavorably impacted adjusted EBITDA by $23 million, flowing through at our prior year adjusted gross margin rate. The negative volume flow-through was partially offset by a strong price cost spread of 100 basis points in the quarter and operational productivity, resulting in a $13 million benefit over the prior year. In the quarter, we saw unfavorable mix driven by dispensing and lower overall industrial activity. These factors resulted in a negative 48.7% organic flow-through. The impact of FX lowered adjusted EBITDA by $1 million, while acquisitions net of divestitures was flat on a quarter-over-quarter basis, as the benefits from our acquisitions were offset by adjusted EBITDA from divested companies. This resulted in a negative 42.4% flow-through for the second quarter. I will now review segment level performance. Turning to slide 8 and FMT segment. In Q2, orders decreased 4% organically, driven primarily by the cyclical decline in the ag market and push-out industrial project activity, as Eric discussed in his opening remarks. Organic sales were flat as lower volumes, particularly in our industrial safety and pump businesses, were offset by continued strong price capture. More specifically, we are seeing stable day rates across industrials. We're seeing project spending pushouts in the current macroeconomic climate. Our water businesses continue to benefit from strong municipal activity. While the ag markets are experiencing a cyclical downturn, our teams continue to make their own luck, and we are pleased with our team's performance against the current backdrop. Adjusted EBITDA margin decreased 140 basis points due to higher discretionary spending, lower volume leverage, and higher employee-related costs, partially offset by strong price cost spread and favorable operational productivity. Moving on to slide 9 and our HST segment. Despite slower than expected recovery in the semiconductor industry and delayed industrial projects due to demand softness, organic orders were up 5% year-over-year. Organic sales were down 11%, primarily driven by our Life Sciences and Analytical instrumentation markets. While the market is experiencing a transitional period, we continue to work closely with our customers on innovation as we position ourselves for growth while we wait for the markets to recover. While we are seeing early signs of encouragement in our semicon end markets, we have not yet seen the inflection in our orders. In line with our FMT industrial businesses, our HST industrial businesses are also experiencing project pushouts. Q2 adjusted EBITDA margin for HST improved 10 basis points year-over-year, primarily due to the net accretive impact of acquisitions and divestitures. On an organic basis, adjusted EBITDA margin decreased 20 basis points, driven by lower volume leverage, unfavorable mix, and higher employee-related costs, partially offset by operational productivity, strong price cost, and lower discretionary spending. Sequentially, margins improved 150 basis points despite a sequential sales decline, which is a reflection of our strong focus on driving operational efficiency. Now turning to slide 10. Organic orders in our Fire & Safety/Diversified Products segment were up 6%. Organic net sales were up 1% compared to the prior year, driven by price capture across all markets and continued dispensing project wins in emerging markets. We are seeing positive trends within the Fire & Safety business as the OEMs continue to work their backlogs down. BAND-IT saw weakness tied to auto and weaker industrial project activity. Q2 adjusted EBITDA margin declined 40 basis points year-over-year, primarily due to higher employee-related costs and lower volume leverage, partially offset by strong price cost and operational productivity. With that, I would like to provide an update on our outlook for the third quarter and full year on slide 11. Note that our guidance does not contemplate the impact from future acquisitions. For the third quarter, we project organic sales to increase 0% to 1% compared to prior year. We anticipate an adjusted EBITDA margin of approximately 27%, with GAAP EPS in the range of $1.61 to $1.66, and adjusted EPS in the range of $1.85 to $1.90. On a year-over-year basis, we expect low single-digit organic sales decline in HST and FSDP and low single-digit growth in FMT. Given our current view on the timing of end market recoveries, we are revising our full-year outlook. We now expect revenue to decline 1% to 2% compared to our prior outlook of growth of 0% to 2%. Given the revised organic assumptions, we expect full-year adjusted EBITDA margin of approximately 27% versus a prior outlook of approximately 28%. We project GAAP diluted EPS to range from $6.85 to $6.95 compared to our previous guidance of $7.13 to $7.43, and adjusted EPS to range from $7.80 to $7.90 versus our previous outlook of $8.15 to $8.45. To update to a full-year revenue guidance implies mid-single-digit organic sales decline in SSD with low single-digit growth in FMT and FSDP. We will continue to closely monitor the end markets while maintaining our focused effort on driving profitable growth. With that, I will turn it over to Eric for closing remarks.

Thanks, Abhi. I'm on slide 12. Today, along the way, we touched on each of our key value drivers: organic growth, inorganic growth, and margin expansion. We continue to apply our IDEX operating model, an 80/20 philosophy across all aspects of our business. It frames our culture and drives our growth and profitability. We are innovating and winning today with our best 80s customers in very attractive markets. We believe broader economic support will really amplify these efforts over time. We have stepped up inorganic efforts with a series of thematic proprietary acquisitions intended to drive above-average growth in advantaged markets. And we continue to strip complexity out of our businesses to support maximum financial leverage and impact. Thanks again to our IDEX employees and partners around the world for all that you do to drive trusted solutions that improve lives. With that, I'll turn it over to the operator for your questions.

Good morning, everyone.

Hi, Mike.

So 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, I don't know, maybe a touch of optimism to it, but there's been more project pushouts and timing-related things. So the core of the question is, 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 I just kind of want to bridge the gap between the two, if you would.

Yes. I think you accurately captured the first part. I reviewed the period from December to now and noticed that the core rate has stabilized since the initial decline from the excitement in the first quarter around March, and this has continued through the quarter in both FMT and the industrial sectors of HST. The main differences from our previous guidance are that we expected some semiconductor launches in HST based on signals indicating capacity increases, but those orders didn’t come through as we anticipated. Additionally, there were some deferments late in the second quarter that have shifted to the second half, which we need to monitor. We typically don’t consider project business a significant part of IDEX, but starting in mid-May, particularly in June and into July, we noticed changes linked to two uncertainties: inflation and interest rate relief, which have been prevalent since March, and increasing political uncertainty. In our discussions with distributors and OEMs, these concerns have been consistently raised. This has led to longer approval processes rather than cancellations or reductions in resources. We experienced this in FMT and across various HST markets, and it has also affected some growth initiatives we had hoped would support us in the latter half of the year. However, I am optimistic that these issues will eventually be resolved. As they do, we have maintained engagement and discussions about the future, which boosts our confidence. The core foundation built on these day rates indicates that the system is functioning effectively, with maintenance ongoing. Together, these elements provide a long-term perspective that suggests a resolution is on the horizon.

So the follow then up on that then is, how do you think this recovery curve plays out? And if you listen to your comments on a lot of the price 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? I'm not saying this year, not even asking for a timing component to it, or are you thinking something a little bit more iterative and modest as we think about moving into 2025? Because at the end of the day, it seems like you're saying, there's a lot of things underneath the surface to be really positive about. And it's just a question of when they hit. And so just trying to understand the recovery timing from your perspective.

Certainly. I will address this in two areas, and I'm sure we'll discuss the pressure on core sectors in HST as well. Starting from my previous point, the uncertainty related to interest rates and geopolitical factors could see some resolution as we approach the end of the year. In past situations where such issues have been resolved, we've experienced significant momentum. It remains to be seen if high rates will delay the restart of investments. The fourth quarter and the book-to-bill ratio will be critical for understanding our trajectory into 2025, especially in light of the upcoming election and key decisions. The embedded needs within our projects are overdue and require action. I am optimistic that these solutions will ultimately be deployed in a way that benefits us moving forward. On another note, we will keep an eye on the life science and analytical instrumentation sector, which has been stagnant for some time following a recalibration last year. There are encouraging signs in our discussions that we may be nearing the end of this cycle. As we approach the two-year mark of this experience for our customers, we're looking at technology life cycles and the potential for updates. We're noticing faster drug discovery and trials, with numerous innovation announcements from our clients aligning well with our offerings. Regarding China, our expectations have been stable for some time, and we are hopeful for effective stimulus measures. Finally, in the semiconductor sector, many are predicting a strong cycle in 2025, so we will be monitoring the transition period leading up to that point.

Thank you.

Thanks, Mike.

Hey, good morning, guys.

Good morning, Vlad.

So, maybe just a quick question on free cash flow. I know I think you did about 75% conversion in the quarter. You talked about 100% plus for the year. So can you just talk about what needs to happen to hit that higher conversion rate for the year and sort of your level of visibility or confidence in that?

Yes, Vlad, this is Abhi. I can take that. First of all, we believe that the 75% for Q2 is consistent with what we usually see in this quarter, given how the cash flows are timed. Regarding your question about our confidence in achieving a cash flow above 100%, we are very confident in that forecast for the year. We are focused on reducing inventory in line with our revenue trends. As we look towards the second half of the year and our revenue, our teams are committed to managing inventory at appropriate levels to optimize working capital, and we feel quite assured about reaching our free cash flow target.

Great, that's helpful. Appreciate it. And then I wanted to dig in a little on FSDP. The plus 6% organic orders in the quarter and it's pretty encouraging. I guess was there any bigger one-time orders in there to think about? Or sort of, again, your level of visibility to orders remaining positive in the back half if the macro holds as it is?

I can provide some insight on that. Regarding the order profile for Q2, the growth largely came from FSDP. If we look at the segment, the primary driver was demand from Fire or North America OEM. This is where we observed the growth in Q2 from an order perspective in FSDP. It's also important to note that FSDP includes dispensing, which can result in variable order patterns since we have discussed the emerging market growth in dispensing and those orders can arrive in larger quantities. Therefore, while you might see some orders in Q1, they may be shipped throughout the year. In summary, the growth in Q2 is specifically linked to the North America OEM demand we experienced during the quarter.

All right. Thanks, Abhi. I’ll get back in queue.

Good morning, everyone.

Good morning, Nathan.

Good morning.

I think it's been a while since we've talked about fire OEM demand being positive. So that's good to hear. I wanted to follow up on the HST numbers. The guidance does imply that you're going to see a little bit of revenue improvement in the back half relative to the first half. Is that just the absence of inventory destocking that you saw through the second half of 2023 and into 2024? And just how you think that's going to progress as we get into the back half?

Yes. Well, some of the cases where we talked about, the larger chunks that have been deferred and deferred here more recently. I mean those are lining up closer to the back half of the year. We, again, know what those programs are. We know what the platforms are. And ultimately, they do support the bridge to some of the growth that OEMs are talking about, specifically in the semiconductor area. We have a couple of other HST programs that we've been monitoring for a while. I mean they're very, very milestone-based, and I'm pretty confident that those are going to hit as well. So I think it's largely attributable to those two things.

I guess, continuing to follow up on the project pushed out kind of question here. Historically, when industrial companies have started to talk about projects being pushed out, but not canceled, that can be a precursor to projects getting pushed out for an extended period of time. It doesn't sound like you're that concerned that we're in that kind of environment today where you can just say things that got pushed from the second quarter into the second half, get pushed into 2025, et cetera, et cetera. Just comment on your confidence that we're not in that kind of environment where by the time we get to the fourth quarter, we're going to be talking about industrial orders that you thought were going to hit in the second half of 2024 and now being pushed to 2025?

I understand the essence of your question. I want to emphasize the significance of the reference points involved. One advantage we have in the early indicator businesses we often discuss in FMT is that they provide an excellent measure of sensitivity to varying narratives. In the last call, I mentioned the pullback in core rates in March and how it aligned with the recent inflation data and the uncertainty surrounding rate relief. This, in my view, highlighted our sensitivity to that specific dynamic and has remained consistent since. Additionally, there's the election cycle in the U.S. Almost everything we're discussing is centered on North America, including the numbers and their implications. Considering these two factors, which frequently come up in discussions about delays or extensions, we are aware that both will eventually reach resolution points, with a high degree of certainty regarding the first one. As for the second, we anticipate developments in November. I've observed these cycles a few times before, and it's not uncommon for matters to become somewhat stagnant during these periods. The post-inflation situation is new, but I believe we are nearing a resolution and that the sensitivity we are observing suggests that as these issues evolve, we can expect to see some relief soon.

Great. Thanks for taking my question.

Thanks, Nathan.

Thank you. Good morning, everyone. I don't know if you all were listening to one of your industrial peer conference call. I'm just kidding, but Dave were saying the exact same things about extended approval loops and some nervousness about election and some project push-outs. So the commentary is familiar and so you guys are not an outlier. So I just wanted to share that. The question first is it's kind of like what we're not hearing about analytical instruments, life science destocking, you said it's in line with expectations. Is the destocking over? I know you've got to be really careful about declaring that, but just what's your sense today.

I view many of these issues through the lens of listening for cues in conversations. That's why I highlighted positive aspects earlier, such as innovation, the acceleration of drug trials, and the duration of the cycle and the need for refreshes. At the customer level, we're hearing about these factors. While there are still pockets of finished goods inventory globally, it's difficult for us to assess that fully. However, the narrative isn't dominated by this concern as it was earlier in the cycle. I still find uncertainty in our own numbers and guidance, and we haven't declared victory on this situation, maintaining our stance for the rest of the year. That said, I'm noticing a trend toward more positive commentary. To be honest, I believe we're nearing the end of the run-up in this market. There are several factors converging, and I’m particularly excited about the level of innovation we’ve been part of and have discussed. It’s starting to significantly impact the market for our end customers, which reflects confidence not just in the short term, but also in the medium and long term.

And Deane, this is Abhi. Just to build on what I just said, if I look at the performance this year and just look at the first half, quarter-over-quarter, 1 to 2, the performance has been relatively flat. So to Eric's point, we weren't expecting a recovery in life sciences this year. But if I look at the performance, it has been flat.

Yeah, that's exactly the way it appears to us, but just want to see if there was anything else below the radar screen. And then second question is given the kind of uncertain backdrop, how about you all making any changes in your discretionary spending? Any pullback in growth investments? You reaffirm your CapEx for the year, but any changes there that you would highlight or not changes that you would highlight?

Yeah. I would say steady as she goes there. I mean, as we said before, growth investments, typically for us are people based. They're domain experts. They're the people that are really, really good at engineering things and figuring things out with close proximity to customers. The innovation cycle takes longer than a lot of people will recognize in mission-critical spaces like this. So making sure that people are engaged and doing the right work. That's always part of what we do. And maybe even more important now than in a relatively choppy period, you're staying on that case because you ultimately could feel that gap later on in our own growth numbers. I will say, I referenced maybe more specifically, the work we're going to do with 80/20 as we talk about Mott coming on board. And one of the things that that's going to help them do, and it helps us across IDEX is that's actually a source of resource deployment and reallocation of resources that we have here from areas that are not as impactful to areas that are more impactful. So as we play that out business to business and play it out in acquisitions, it's a way to kind of augment the power of resources in areas where we want to apply them without actually upping the spend profile overall. And we indicated that when we referenced it in the transaction as an area of margin lift for the company as they grow, but it's just representative of how we deploy it more generally and more broadly at IDEX.

Deane, you will notice in the commentary of the press release and the 10-Q that discretionary spending is down for FSDP and HST. However, there is an increase in FMT, which is linked to our digitization efforts. This is a key focus area for growth. Overall, I would say there is a discretionary reduction across both businesses, except for FMT.

Really helpful. Thank you.

Thanks. Just a couple of quick ones. First, can you quantify the level of price capture you saw in Q2? And remind us, is that consistent with what you saw in Q1? And then similarly, if you can also compare your organic book-to-bill in Q2 versus Q1? And then I have a follow-up.

Yeah, Matt, absolutely. So if I think about the price capture, it's in line with the guidance that we laid out for the year. So price capture for the quarter was closer to 2%. But the bigger thing that we talked about that we were focused on is the price/cost spread. And our price cost spread for the quarter was 100 bps. And if you recall, what we have said, going into the year, we were targeting between 80 to 100 bps. So we're on the high end of the price/cost capture for the quarter. From a book-to-bill standpoint for the quarter, we landed at 0.96 versus 1Q of 1.02. Now that said, part of this is the timing of when the blankets booked in the quarter. In Q1, we had a few blankets that got booked that we shipped throughout the year. Q2 had lesser of those. So the best way to think about our book-to-bill is as we go towards the tail end of the year, like Eric alluded to, one of the things that we are focused on is our book-to-bill ratio because that's where we see a lot of blankets come through that feed the revenue for 2025.

Got it. And then just a follow-up on the analytical instrumentation life sciences. I want to be clear. At this point, do you believe the inventory drawdown is completely behind us? Additionally, are you observing that OEMs are generally maintaining lower inventory levels than they did prior to COVID, or is the overall stocking level returning to something more aligned with pre-COVID levels? Thank you.

Yes, there are two different types of inventory. We have greater visibility into one compared to the other. The inventory between us and our customers consists of components we supply them. Their current planning levels are typical based on past replenishment rates, lead times, and delivery expectations. This has been consistent for some time now. However, for the finished goods inventory, which impacts our customers globally, the situation is less clear. Although we haven't observed any further decline in demand and have maintained a relatively stable position, we do not believe it will be a significant factor moving forward. We remain optimistic and are looking for a turnaround, which we anticipate might happen around 2025.

Thank you, Eric.

Thanks, Matt.

Hey. Good morning, guys.

Hi.

Hey, Joe.

So just inherent in the revenue guide for the second half of the year, what are you thinking for orders for FMT and HST like in dollars versus the 2Q level? Do they get better or worse from here?

If I look at our guide and you kind of think about the back half that we have guided, yes, the orders do get better in terms of dollars sequentially from first half to second half.

It's challenging to evaluate companies in the post-COVID landscape due to the chaotic supply chain. However, when examining each of your segments over the past few years, specifically since COVID, the volume of excess orders compared to revenue remains substantial. This suggests that there may be more backlog coverage than your guidance indicates, as there are significantly more orders than revenue over the trailing three years. Are you observing that customers are not taking delivery of backlog orders as anticipated, or are there cancellations occurring?

I want to make sure we're seeing it the same way. I mean, typically, backlog, we're a smaller backlog company. Our normal course of business for us is kind of half a quarter is assured, and we go find the rest. That's a general statement for IDEX that absolutely in the pandemic year has changed. Like, it did for everybody else. I mean, I think we doubled it kind of at the height here and had a quarter's worth of insurance, maybe a little bit more as people over-ordered and did everything they could for supply chain assurance. Maybe sooner than many companies, we actually reverted back to a very typical backlog profile, and we've been there for a while now. So kind of half a quarter in front of us got to go hunt for the rest. So the dynamics in backlog for us are not that different. The lead times and replenishment that we're being asked to provide in all three segments is pretty typical. I think the only thing that's atypical here for us has been the level of project commitments and those discussions around when the next thing might be coming. And I'll just point back to the indicators that we talked about as to what's driving it.

Thanks, guys.

Hey. Good morning, guys.

Hi.

Hi.

I wanted to focus on margins. You mentioned previously that as we approach the end of the year, there might be a slight increase. It appears that guidance could suggest that as well. Regarding reaching the 30% margin level, how much of that is reliant on volume returning compared to the product mix? I'm trying to understand the dynamics of these higher growth areas as we move forward.

Andrew, I think you cut off for a second or two there, so I might have missed the piece. But let me try to answer that question. If I don't completely get to your answer, then just ask me, and I'll do it. But if you just take a step back and kind of think about where we are, your general comment about depending on volume, volume is a big part of it because, of course, when we see top line growth, we lever really nicely on our businesses. So that is a big component of how margin expansion happens. But that said, though, given where we are you will notice, sequentially, our margin profile got better by 180 basis points, right, despite very minimal help from volume. And that's really tied to the work that we do around 80-20 complexity reduction and cost out in the light of where we've been. So as you think about the balance of the year and how we're thinking about the year, exiting Q4, so I want to be very careful. I'm talking about rates exiting Q4, not full year rates. We're thinking about HST closer to that 28% kind of profile on EBITDA, FMT closer to 34%, and then FSDP in the 28% to 29% range from an EBITDA standpoint.

Very helpful. And yes, I wanted to focus on in Fluid & Metering. The reasonable water strength has been a nice story for a while for you and others. Where are you guys to be thinking that inning? Or what inning do you think you guys are in? And how much of your business is influenced by government spending or government funding?

The cycle will continue for some time due to the way funding is intentionally distributed across the industry. It takes a long time to allocate this funding since these projects involve complex engineering and multiple stakeholders, not just us. A significant portion of the announced funding has not yet been spent or developed. I see this as a multi-year support system. We play a crucial role in facilitating the expenditure of this money, which contributes to the strength of our business. We conduct analytical work that assists in drafting the capital requests. Many of our clients are civilian engineers who utilize this data to propose projects eligible for the funding you mentioned. Some of this funding is intentional and stems from announced government programs. Many municipalities, which are government-funded, rely on taxation. Additionally, we are involved in the industrial water sector, which is connected to private markets. Overall, I believe we have a promising period ahead, as the process of making these plans a reality takes time.

Yes. Okay. All right. Thank you.

Thank you. Good morning. I apologize if I lost audio for a while. If I missed something or if you have already covered a point, please feel free to redirect me. Regarding the project delays, are they connected to specific government policies that could influence the situation, or are they more related to a general sense of unease or uncertainty affecting spending behavior?

We briefly discussed this earlier, but it's worth revisiting. There are two main themes to consider: first, the increased cost of money, which has been persistent, and the uncertainty surrounding improvements in that area, all tied to inflation and interest rates that everyone is monitoring. The second theme is political uncertainty and the unpredictable outcomes stemming from polarization in North America regarding various issues. Our discussions haven't really focused on the specifics because our business is quite diverse, operating in various locations and not heavily reliant on any single program. This is similar to my earlier point about the water sector. The intent to invest over multiple years is positive for us, as it allows us to engage with municipalities and industries worldwide. Our perspective remains quite general at this stage.

Perfect. Thank you. And then could you remind us the rate-sensitive businesses within FMT that you're kind of using as guidelines? What's the nature of the activity there in the business? Could you just give us a little bit more background around that, and I will stop there. Thanks.

Yes. It's a series of businesses in the FMT, primarily involving pumps, bulbs, and fluids used for various purposes. They are typically marketed through industrial distribution. Our rapid fulfillment process allows us to take an order on a Monday, ship it by Wednesday, and have it in service by Friday. This capacity provides valuable insights into overall consumptive activities, contributing to more than 50% of the order flow in these businesses. We use this information as a diagnostic tool to assess the health of the sector. There are two key aspects we observe: core day-to-day rates, representing short-term fulfillment, which has been steady and aligns with our expectations from last fall, only briefly interrupted by a favorable three-month period of anticipated rate relief. This has since returned to a steady state. The second aspect is project work, which we view as smaller-scale expansions rather than large projects; for example, a simple back-end expansion at a food plant can shift us from one or two pumps to about 40 or 50, depending on approvals and decisions that are crucial for progress. Currently, there's some delay in this area related to the broader themes I mentioned. Overall, we are pleased that the day rates indicate strong and stable industrial activity, and we look forward to resolving uncertainties in project-driven work, which will enhance overall performance.

Perfect. Thanks so much.

You bet.

Well, thank you. Listen, I recognized we struggle a bit here to find our organic guidance footing over the last six quarters. I realized a lot of that chop is coming out of the HST segment. And I'm fully aware that we're disproportionately investing in HST organically and inorganically is a key element of our strategy. What I want to make sure you understand is this is the right call for our business. Even in a period of uncertain transition for some of these foundational markets, we've talked about a lot here today. A third of this segment lies across two verticals within life science and analytical instrumentation and advanced semiconductor manufacturing. They're pressured today, but no doubt they're going to have wins at their backs for years to come. We just built another third of the segment that allows us to lever the supplied material science technology to a really narrow band of high-quality application areas, and the Mott acquisition completes this phase of the build. And then the remaining third, it's composed of high-quality businesses, where it's all number one in their respective niches and very, very IDEX-like in the way they function. So together, we're innovating to set really critical specification points that are going to position us for leadership in the years to come, markets that are going to shape our futures. And we'll see the financial benefit of that play out, just as we've seen it play out in the legacy businesses of FMT and FSDP. It's really important that we kind of get IDEX into the mix as these markets form up and launch. So I look forward to walking you through our progress on that in the quarters and the years to come. And I wish you all a good day. Thanks so much.