IDEX Corporation (IEX) Earnings Call Transcript & Summary

Hi, good morning, everybody, once again. Next up speaking is IDEX. We're once again very excited to have them joining us at the Wells Fargo Industrial Conference. My name is Allison Poliniak. I'm a senior analyst here, covering industrial technology and transportation. Once again, for folks, if this is your first time joining us today. If you have any questions for the IDEX team, certainly, email me at [email protected]. [Technical Difficulty] we're just going to go right into it here as we can maximize our time with IDEX today.

Bill and Mike, a question or a theme that's been kind of prevalent in [Audio Gap] is really this concept of an industrial recovery, what you guys are seeing? It sounds like it's starting to accelerate. It does see some risk in the back half. And I would say, generally, folks are a little perplexed as sort of why the cautious conservatism in the second half. Maybe if you can provide any color what you guys are seeing specifically.

Sure. Yes. I think we've been pretty positive relative to the rebound we've seen here over the last couple of quarters. We've talked -- since we hit the deepest part of the pandemic back last year in the second quarter, we've continued to see strong sequential recovery as we progress through the year. And that was in all segments in all businesses. Obviously, still the line different in the different entities, but all positive. Obviously, expectations coming in to the beginning of the year, we've -- we're outpacing that as we've gone through the first quarter with a more significant rebound than we had expected. We've built $60 million of backlog here in the first quarter, which really gives us a lot of confidence here as we go into the second quarter. So I think a broad based recovery, both through our end markets and our geographies is generally what gives us the bullishness here, at least in the short term. Relative to your conversation on, hey, what gives cause for the back half. Obviously, relative to the significant rent in demand, and the global supply chain's ability to digest that and react and pivot off of record lows last year in several industries is probably the thing that we've seen pockets where it's bend. It hasn't broke yet across at least in our channels. But it's something we're keeping a close eye on. So maybe from a broad-based commercial perspective, we do have some businesses that are outperforming and have over the last couple of quarters, whether it's exposure to semicon, food and pharma business. Agriculture has been extremely strong. We're at record levels for our Banjo business. Dispensing has shown significant recoveries relative to the lack of investment in some of the big-box retailers here in the States and some of the manufacturers over in Europe and Asia. Core industrials continue to improve, but that's probably the last piece of our business that has gone positive, right? We came up with our framework that we shared last week in our earnings. We had a lot of our businesses recover, which we define that as back to pre-pandemic levels and those that are recovering in and a lot of that is our industrial [ exposed ] business.

That's great. Mike and I had been talking just a few minutes earlier, any regional difference in sort of how that growth is starting to percolate? I know India has certainly been a key concern of late.

No, I was just going to -- yes. No. Definitely, Asia has been leading the recovery, right, outside of India, right? It's kind of in reverse order of where the pandemic hit, right? It started over in Asia, it went to Europe, then it came to the U.S. and the recovery is just kind of go in the same way, with China being very strong. And then North America is actually outpacing the European recovery as we vaccinated and the U.S. economy has really come back a little faster as a result of our position on the pandemic compared to Europe. But North America is coming on pretty strong. And then, obviously, I think as Europe catches up with the vaccine over the next few months, we expect that to kind of accelerate here in the back half of the year. Obviously, we were talking, Allison, as you mentioned, about India. Obviously, they've been hit pretty hard. That's a relatively small piece. It's a couple of percentage of the overall IDEX. It's a nice business, nice opportunity that we were growing and investing in, but they are definitely struggling currently. And we're doing -- we're trying to help our folks as best as we can over there in India as we focus more back on safety and continuity. It's almost like we're dealing with the pandemic from 9 months ago or 12 months ago, really in our situation over in India is currently.

Understood. And one thing I want to touch on is growth investments. Certainly important to IDEX. And rather than doing an all-out pause, IDEX pushed through, right, and to put for some of that investment. How do you view that investment today? Is it weighted to any verticals? Are you accelerating it here based on some of the success that you've seen over time? Just any thoughts there?

Yes. I would say, remember, our investment framework, at least for organic investments is really focused around our organization's ability to reallocate resources. So when you look at individual business, regardless of what's going on, they want to focus their internal time and attention and people around the activities that they think are going to drive the biggest returns to their business. If they have incremental needs, they're going to go to those segment and those segment teams look at the businesses within their portfolios to say, okay, whom am I going to pull, time, resources and capital from to support some of the bigger initiatives and the businesses that they have. When the segments can't do it themselves, they come to the IDEX level and then we look across our different segments for opportunities to reallocate resources to support those larger things. And then last of all, we'll come to our shareholders and say, hey, EPS is going to be light several cents because we're going to -- we need to outpace our current investment trajectory. So I want to start at least with that on how we allocate resources and our approach to some of the targeted growth initiatives that we have currently doing that. I would say, it's fairly spread across all 3 segments right now, relative to the things that we're working on. We generally have 25 to 30 initiatives that we're banking on to drive our organic growth outperformance happening at any one specific point in time. And that's either through longer-term cycle development of new products or attacking new opportunities and adapting our current technology to apply to those different problems that we followed in our customer base. So we've got a lot of things going on, specifically around M&A. Eric highlighted on our last call we're reallocating internal resources to bolster our current business development team. We're adding external resources to bolster our segment M&A work. We have some temporary resources in to help us work on some M&A strategy mapping in some different markets we're looking to do some work in. So I think the next thing maybe I'd highlight that's more broad-based, is our continued work on the digitization of our product and then how we go to market. Obviously, there are things we're doing around the smart technology side. We've been able to be market leaders in several of our businesses, whether it's our SAM product within Fire & Rescue as we've automated the fire fighting process within North America or ADS, which is really an IoT platform for municipalities to monitor their sewer flows. And then the rest of the portfolio is looking at opportunities to make sure that we're capitalizing on our product technology, using it through the data side.

Great. And kind of combining that altogether, is there a way -- has the long-term growth algorithm changed for IDEX over time? Is it sort of 200 basis points outpacing GDP? Is it starting to go higher than that? Just any color there.

No. I would say that, that algorithm maintains for now. Obviously, as we continue to deploy capital in the M&A space, looking for businesses that have higher secular growth trends that, over time, will help us outpace total production in excess of that 200 basis points. But as of now, with what we have within the portfolio, our targeted growth, coupled with our ability to capture price on a year in, year out basis, we think that helps us ultimately drive that double-digit EPS growth that we look for on a year in and year out basis.

Great. And you touched on supply chain and sort of that it's bend but not broken. Are there ways that you're looking to manage that differently? We had another earlier presentation talk about nearshoring is actually really happening because of some of these challenges. How is IDEX [Technical Difficulty] at this point? Or could become bigger issues potentially?

Yes. I would think -- our general hypothesis is that situation is probably going to get worse before it gets better just because demand continues to ramp. And obviously, it's difficult for some aspects of the supply chain to be as flexible as let's say, IDEX is. But I would say our teams, overtime, have built up skills to address this. Eric said, hey, our supply chain folks have been scavenging in terms of their ability to make sure that we had continuous supply. Whether that's through the work we did as tariffs ramp with China, Brexit and concerns around how a product was going to flow between U.K. and Central Europe to last year with COVID to make sure we had multiple sources to provide the critical components we need to be able to deliver for our customers. So I think our teams have done a really good job of finding different ways to make sure we have continuous supply. Caveating that with, hey, it's probably going to get worse, and we will do our best to buffer in the short-term with inventory where we see we need to do that. And then we'll look for alternative sources. But as you said, and we talked a little bit earlier, that probably is one of the larger concerns as we pivot into the back half as, are things going to stabilize enough where people are able to handle this surge in volume or does it go in a different direction.

Great. And that sort of leads us on the cost side, a lot in the past two days about commodity inflation. Not that you guys aren't impacted by it, but you seem to manage it better than others. Can you maybe walk us through that to some extend?

Yes. So obviously, we are impacted by I think -- one of the benefits we have is since we're not overly vertically integrated, we purchased a reasonable amount of our building materials that we're not buying things straight off the ground. It's processed probably a couple times before it ultimately gets to us. So we have better line of sight to when that inflation is going to hit us. Obviously, as with that supply chain, it goes through a couple of cycles. They see it -- we get a couple of quarters. In the current environment, maybe a couple of months of insight and we're actively going out. Our commercial teams work really well with our supply chain teams to come up with estimates of what we need to proactively go out for incremental pricing to make sure we stay ahead of that price cost spread.

Great. And the other concern we've been hearing quite a bit about has been labor challenges. Just the inability to find labor at this point. Is that something you guys are seeing any concerns around that availability of that pool?

Not materially across our businesses. We are fortunate that -- I don't know, Mike, what is it? 7%, 8% of our cost is actually direct labor itself.

That's right.

A lot of ours, again, is the purchase parts is being the biggest input. So obviously, labor is scarce. We've been able to ramp up and meet the need. So we haven't seen it be a material impact for us.

Great. And I certainly want to touch on capital allocation, particularly the M&A markets for IDEX. You guys have been an increasingly active. It sounds like you're adding resources to it, so it could ramp. Is there anything in terms of how we should think of those properties that IDEX is looking at for investors to think about so like when the next one comes, we're not necessarily surprised. It sort of fits what you're looking for, for IDEX. Can you kind of walk through those key attributes for us?

Sure. Mike, do you want to start and then I'll add on?

Oh, sure. So I mean when we -- we have a funnel that we put every candidate, M&A candidate through, right? It's basically, hey is it IDEX-like business, right? Is it an engineered solution that's differentiated, that's mission-critical, that has a strong brand, that has an installed base, that has proprietary technology, has high material margins, right? Those kind of types of characteristics, every IDEX business has those characteristics. We did sell a few businesses back 4, 5 years ago. And the #1 criteria that those businesses didn't have, they weren't the #1 or #2 leader in the niche market that they played in. That's the other criteria that we look for in an M&A candidate, are they -- their position in their niche market, right? #1 or #2. So when you put all those things together, that is an IDEX-like business. If it puts through the filter, we identify those things. And then obviously, that's -- when you have that type of criteria and they check all those boxes, you're going to have these high-margin, high EBITDA businesses that we love and that fit naturally into the portfolio.

Yes. So I mean, Mike explained the core filters that we use to evaluate businesses. We got a lot of questions after our call in January. We had a bullet on capital deployment of technology bets. And feel like, hey, is IDEX going to software. And no, it's not a -- it wouldn't create a software segment and go deep in that space. It's more of how are we going to look at acquisitions that might have a software component that ultimately help pull-through our hardware or be able to enhance our IoT journey or digitization strategy. So it's more of a complementary technology where it makes sense for IDEX to be the software leader within a different space. I highlighted some of those a little bit earlier. So I think it's holistically IDEX-like companies. We're spending more time and effort in some specific targeted areas across the three segments, with some of those additional internal and external resources that we look for. And really, we spent time increasing the number of people that we have working on this primarily through our segment leadership teams and some of our general managers, where historically, maybe they spent 20% of their time on M&A, we're ramping that up to a number that's closer to 50%. And really that freed up capacity is some of the work we've done over the last couple of years on margin improvement and figuring out how we're going to attract organic growth and then the significant progress we've made on increasing talent across the portfolio. So these business unit leadership teams have a great infrastructure of folks that can spend a lot of time on day-to-day and they can elevate and look for more opportunities on the M&A side within the markets that they operate in.

And when I think of IDEX, I always thought in terms of multiples being paid and what IDEX is willing to pay for businesses. You always had a sort of a strict return metrics around that. Has anything changed? Are you changing their view? How are multiples in the field today as we go forward? Just any thoughts around that.

Yes. So obviously, our return hurdle threshold has evolved over time. We're -- for the businesses that we like, we're not paying 8 or 9x for. So I think 10 years ago, we had a 12% year 3, 15% year 5, kind of cash return. That's evolved over time. Obviously, we're still focused that ultimately, we need to do M&A that's in excess of our cost of capital with a focus on trying to get a double cash-on-cash return by year 5. A lot of that is the change in the market dynamics, some of that is the change in our cost of capital as we've progressed over time. So we're still a returns-focused company when it comes to deals, but it's evolved as the market pass. Yes. Obviously, the multiple we paid on Airtech was on the higher side. But again, we have no problem paying 15 or 16x for an asset that's going to return double digits for us, and will lever extremely well as it continues through our ownership.

Great. And I remember, we touched on this on the earnings call, but maybe remind folks, just the amount of capacity you guys have for M&A. What's your comfort around leverage at this point just given M&A seems to be ramping pretty quickly?

Yes. Obviously, our balance sheet has got significant amount of capacity. I think post Airtech, with a target leverage of around 2.5x, we still have well over $2 billion to deploy. Obviously, we've had a really successful first half of 2020, '21 and we continue to look for other assets to add to the portfolio here, hopefully, in the back half and continuing on to 2022. Obviously, we want to -- ideally, we're less episodic with our M&A progress and more consistent over time. We'd love to deploy $300 million to $500 million of capital every year on IDEX-like quality businesses. So hopefully, some of the work we're doing on our process side, some of the work we've done relative to our ability to due diligence in a much faster time period will help us continue to be successful as we progress forward.

Great. And you mentioned Airtech, and we did have a question come in from someone. Could you provide a little bit more color in terms of the size of the market, key end market, does it have overlap with Gast, any major competitors, growth rates, any color around all that. There's a lot going into that.

Sure. I'll start and Mike, maybe you add on. Obviously, Airtech is a business that we've known for many years. Obviously, their business has evolved significantly over time, too. It is a very complementary business to Gast, the business we have in United States within IDEX. Gast is much more on the compressor side and will remain relative to moving air. Airtech is on the blower side. So different unique ways to leverage air to facilitate movement within different technologies. So we would say it's complementary technologies that gives us access to different opportunities from an application perspective. Both businesses are very fragmented with the end markets. I always tell this story on Gast. They would do air rifle simulations, shrimp farming and pond aeration, right. So just these very diversified, dental work, health science, oil and gas, general industrial. And Airtech is very similar. They've had a little bit of concentration within the fuel cell end market, which has been a really growing opportunity for them. And then outside of that, it's really fragmented end market opportunities for them as it is for Gast. So I think when you combine the 2 businesses, there are some commercial synergies and ability for those engineering teams to lever one another, channel management and then also just capturing some new market opportunities along with some 80/20 work that we'll do in the leveraging of our sourcing teams to improve some of the efficiencies. Obviously, a mid-30s EBITDA business for both companies. They're highly profitable. This is going to be a growth story for us. Airtech actually outperformed Gast. Over time, they've been a double-digit grower here for the last 5 years. So I'm excited about their technology, what it's going to bring to IDEX and then the synergies it's going to have with our Gast franchise to be kind of the world leading premier pneumatics businesses.

You covered just about everything. The only thing I'll add to that is there's probably -- we might have used the word overlap in the conference call a few weeks ago with Gast. And they really are complementary. They sit right next to each other. There's not a lot of overlap of an Airtech product in a Gast product. So we've clarified that. And there's probably some opportunity even on the supply chain sourcing as well. So -- because their products actually look very similar, but they do different things. And as Bill has alluded today, all Gast and Airtech products, all go into a variety of end markets.

Great. And we got another question in on HST margins, a nice structural step up. Is that sustainable for IDEX? Any color there?

Yes. I mean, I think -- obviously, we pointed out a couple of pieces on the call. Obviously, HST has had some significant growth. They fared a little bit better than the other segments last year. So they are levering the restructuring actions we took last year and this levering their overall cost base. Obviously, there's a little bit of business mix in there, but the business mix, we think, will be consistent here going forward relative to the growth we see within those entities. There's a little bit of pickup on the amortization side. But we're confident relative to the progress that, that segment has made that hopefully, we have competing -- each three segments competing, who's going to have the highest margins in IDEX.

That's good to hear. And a question targeted towards FMT, more specifically Viking. The oil and gas markets, has that recovered for them? How are you viewing that market for them this year?

It's starting to recover. Obviously, we had a tremendous business opportunity with the LACT business that, obviously, between the pandemic and burgeoning in the energy space, really took a hit, they're down to almost 0 revenue in the last 3 quarters of last year. So it's starting to come back, quotes and bids because actually, it's a differentiated technology that benefits that space. So as people start to improve investment, that's top on the list. I think it's going to take a while before it gets back to the pre-pandemic run rates, but some progress being made. We talked about even that business, the margin profile is really strong, too. So we had some mix pressure associated with that last year. But outlook, it's nowhere near where it was, but...

Understood. And a question on the auto market. You had mentioned, I think, on the call that it certainly recovered. It was in your presentation. Folks are trying to reconcile a lot of the concerns on the semi shortages and impact to autos and kind of reconcile your recovered versus those thoughts?

Yes. So that is definitely happening. I think the -- what gives us -- we put it in a recovered bucket was just the amount of new platforms we won, right? So we increased kind of our share of wallet within our customers. So although there's some choppiness relative to shortages, so the number of vehicles might fluctuate and some pressure there, but our content per vehicle went up. So that's really live, we're probably more bullish than what the general automotive outlook is.

But the short-term impact of semi on auto is real, right? And not to underestimate that here in the very short term.

Understood. And then not to leave Fire and Diversified out, your paint mixing machines. Is there an opportunity? We're hearing so much about home remodel. Is that sort of passed already? Is there some evolution going on there that should be helpful? And then somebody asking about mix in terms of margin if that business sort of starts to ramp for you?

Yes. So the Dispensing had a couple of rough years between '19 and '20 where there wasn't a significant amount of refreshes here in North America. We saw significant growth prior to that within Asia. What we're seeing this year is the recovery of that market. No major changes. So really, the fundamental driver of volume in that market is the paint formulations changing. When there's a paint formulation change, it requires a new piece of equipment for the most part. So it's not more around the volume of paint. I think with the big box retailers, most of them have 2 or 3 machines in every one of their stores. So we're going through right now just a refresh of the investments that they made several years ago. So I think 2021 is going to be extremely strong year for the dispensing market globally. We've seen that coming out of the gates, probably some of that will carry over into 2022. But it is our lumpiest business. I think we do have differentiated technology. We're the market leader. Part of the wins we had this year in our ability to retain business with some of those key customers, we've launched all new high-end automatic equipment that provides a number of new features relative to data and then operational features that continues to deepen our moat in that space. Dispensing leveraged extremely well. As it ramps, so there will be a tailwind to margins, although last year what FSD did on our margin profile was significant. So I think that the core business between BAND-IT and Fire & Rescue, margins, on average, are up pretty close. So there's not this huge deviation where we're going to get a onetime pickup from dispensing, then we'll have to complicate it next year, it will be a small enough, but not overly material.

Perfect. And a question on FMT impairments. I know they're relatively small. Any color you can provide on the nature of those impairments?

Those are very small in the quarter, $140,000. Actually, related to our business out of Viking, we consolidated some of our foundry equipment and consolidated two foundries into one and then we go ahead to write-off some fixed assets. It's very small, immaterial.

Understood. And I know we're about to get the boot here soon. So any closing remarks that you want to leave with investors about IDEX?

Yes, I think you were off to a great start for the year, both from an organic and inorganic perspective. Obviously, be confident in our ability to handle the challenges that I think we'll see within the -- in the industrial spaces, right? Our broad-based portfolio of businesses I think will bode well as we progress. And we ultimately think, regardless of whatever challenges happen in the second half, we are extremely bullish about the next couple of years in the industrial space that we'll be to in for some robust growth here as we rebound from the pandemic.

Perfect. Well, thanks so much for your time today, gentlemen. It's been great.

Thanks, Allison. Take care.

Thank you, Allison. Bye-bye.