IDEX Corporation ($IEX)

Good morning, everyone. Welcome to day 4 of the 21st Annual Oppenheimer Industrial Growth Conference. Next up, we have, outperform rated and top pick IDEX, represented by CFO, Sean Gillen; and VP of IR, Jim Giannakouros. Thanks for joining us today, guys.

Thanks for having us. Appreciate you hosting.

Of course. Sean, I guess to kick things off, you're obviously a newer member of the IDEX team. Perhaps start with what attracted you most to the opportunity and also why you thought or knew you were the right guy for the role?

Yes. I appreciate the question. I'd say a couple of things. I think what first attracted me to the opportunity is you look at IDEX and it's an incredibly strong business. And what I mean by that is you got leading market positions, you got an EBITDA margin that I think is a proof point of that, that you have leading market positions, you have IP, and it's a very well-ran business. And then the other piece of that is the cash flow profile of the business, not only because of the margins, but because of the low capital intensity affords you a lot of flexibility. You have a lot of capital to allocate. So that was kind of the -- this is a good business to join. And then part 2 was, frankly, just where the company was it is on the life cycle of Phase 3, kind of everything that's done over the past few years via acquisition and what the setup was for the future. And the more -- after I kind of did my outside in and started to do some more homework, I just thought this was a really exciting time to join IDEX as well. It's navigated the past few years, a few bumps along the way, but the setup was really strong with kind of this HST advantage market exposure with then an FMT industrial exposure, which has been depressed for a few years, but for a lot of reasons, is inflecting. So that was kind of my -- hey, this seems like an exciting opportunity. I'm interested to join. And then I think the kind of what I can bring is a bit on the capital allocation piece. That's kind of my background. I mean I started my career as a banker, so that's the hatch you wear as an adviser for a number of years. And then as the CFO of a company for 7 years before joining IDEX. And I think one of the things that we did successfully was allocate capital to drive growth, organic growth and then a bit of allocation of capital to drive returns via M&A. So I think my skill set was well suited for what IDEX was looking for as well and thought that I could bring some value that way.

Okay. Makes perfect sense. And IDEX is obviously a portfolio of rather diverse, high-quality assets, a lot of moving parts that are in. By my count, 50 or so businesses, maybe a little bit more. When you introduce the company to someone, how do you encapsulate all of that? How do you describe an IDEX type business?

Yes. So I'd say maybe 2 pieces. I mean the -- one is we move liquid gases or light is what we do, right? So the movement of those 3 things, whether it's a pump, whether it's optics, whether it's a valve, those are the things that we do. And that's kind of almost across everything in the portfolio. So maybe that's at its simplest. And then it gets more complicated from there. But I think the unifying thing of what makes an IDEX business is, one, it's mission-critical and it's technically tough to do, right, to produce. So there's intellectual property to what we do. And the criticality and the mission-critical is a piece of it. And then it's relatively low on the food chain in terms of the bill of material, right? So these are mission-critical applications that are relatively low price points for the overall solution that the customer is using. And therefore, what it allows us to do is have a really nice market position in terms of pricing, getting price for the value add. And then it allows us to be very efficient and highly productive on the product that we sell. So that's kind of at the heart of it, what an IDEX business looks like. When we think about M&A, that's what we're looking for when you think about the acquisitions that have been done over the past few years, even though they may serve very different markets than kind of traditional IDEX, they end up looking pretty similar across those metrics.

Understood. That's a good walk-through. And you alluded to Phase 3 before. Over recent years, there has been at least a selective shift away from what was a decentralized operating model of IDEX to integrated growth platforms. Walk us through the impetus for that transition and what it means now, what it means for the future of IDEX?

Yes. Good question. So kind of the traditional IDEX, highly decentralized and the -- whether it's a GM, a President, a site leader, whatever the term was, that person really had, I mean, autonomy overrunning their business, everything that it included, right? Growth, operations, capital allocation within their business. They were the leader of that. And that's still the case, but the overlay is because we have more businesses now that are connected in terms of the markets that they serve. We need this layer of coordination across them. So I think it's kind of bringing the best of a couple of things, that traditional IDEX, where decision-making is at the point of impact, right? So operational, engineering, most of the customer still at the site level. But because we now have businesses that sell into different parts of semiconductor, space and defense, of course, data centers, having a level of coordination amongst those teams to the customer was something that we needed. And we're seeing some nice traction. You can see it in the growth of that shift in kind of policy and management. So it's not -- and I think of it kind of as a tweak, right? This isn't a wholesale change. You're keeping a lot of the good that drives value around here, but bringing a new layer of coordination to better serve our customers, right? And at the core is what it's about. The customers are asking for it, we need to adapt and move with them. And the nature of the business that enables us to do it in a way that it probably wouldn't have 5-plus years ago.

Okay. Understood. The proof points seem to be accumulating. In terms of the platform strategy, Material Science Solutions or MSS, along with Mott related assets, it received a lot of attention over the last few years, initially not the most positive of attention that seems to be turning now -- maybe speak to the underlying technologies of MSS and Mott and how synergistic they are, what we can expect going forward?

Yes. So I mean, I think from an underlying technology standpoint, in Mott, you have a lot of like -- I mean, there are filters, but they're highly engineered filters, right? It's not a paper filter. It's a kind of centered metal application that can go into different end markets. And then in Material Science Solutions, I mean, you have ceramics in there, you have optical sealing and things like that, that serve different end markets. And I think part of what we've seen in these is the ability to serve a couple of different end markets, right? If it's applicable to semiconductor, it can also be applicable to space and defense. So the ability to kind of tune or move right and left on the product that we have and how it serves its end markets is another thing that's made us -- allowed us to be nimble. And as you point out, I think now you're seeing -- Kenny said, right, not great attention maybe at the outset on MSS, Muon being a big acquisition in that space. You ran a bit of a semiconductor cycle, the wrong way, shortly after acquisition. Now that's moving for a variety of reasons in the right direction. And then same thing for Mott. The initial kind of growth profile didn't come out of the gate as strong as we expected. But now as we stand here 1.5 years into the acquisition and the end markets are all firing, and we're seeing really good traction of our product. And kind of one of the things that makes these businesses attractive and now will be very attractive going forward is, it's hard to break in. So I think what we learned is the ability to break into some of these newer markets with the technologies that we have. The sales cycles a touch longer than we anticipated. But now you're spec-ed in and you have a seat at the table and you're working with a variety of customers on these applications, and that's going to make it really sticky going forward. So some of the things that made it tough early on, I think, are going to play to our advantage from here on out.

Okay. That's a great point. Let's circle back to IDEX's diversification. And if you don't mind, I guess, walk through the trends by key end market or segments, however, you prefer to frame, run rate trends and outlook. Where are you seeing the areas of greatest strength? Obviously, HST are there versus relative weakness where there's still some launch items?

Okay. So yes, good question. So in HST, the good thing is the strength is across more than just kind of one trend or end market. Notable strength in data center, right? So in our performance pneumatics business is where we sell into the data center in 2 ways. The biggest way is in the power applications, so the fuel cells that go behind the meter to help deliver power to data centers. We have product there growing significantly. We also have in our valves business, still within that performance pneumatics business, we sell into the kind of liquid cooling applications that are used in the data center. So we got 2 exposures to data center, both performing exceptionally well, as you would expect. And then we touched on Mott and MSS, a lot of semiconductor exposure, a lot of space and defense exposure performing quite strong. And then pharma in MPT, strong. So kind of you have multiple end markets that are performing well in HST. The one that for now is more kind of flat is Life Sciences. And so that -- obviously, you got kind of the COVID hangover. That was the story for a couple of years. Now it's kind of in that flattish, low single-digit growth. In Q1, it was down slightly year-over-year, mostly a tough comp from the year ago period as well as a little bit of kind of government funding hangover going into the year for some of our customers. So I would expect that to get back to kind of flat to slight growth in the balance of the year. So HST is kind of like everything is firing with Life Sciences being about flat. And of course, I think the dynamics in the Life Sciences world over time, we'll see growth there. But the near term is that flat piece. And then in FMT, you got a few different pockets, right? On the really strong in the water platform, selling to municipalities as well as a little semiconductor exposure, really good strength out of that. In the mining applications for our pumps saw good growth. On the flip side, seeing that ag headwind. We have ag exposure there. There's been some headwind. And then on the chemical side, particularly in Europe, continued headwind, that's where we sell valves into chemical manufacturing. So you got positive on water and mining, a bit negative on ag and chemicals. And then kind of that general industrial piece, which is the biggest slice, has been flat to some like kind of low single-digit growth. And so that's the dynamic in FMT. And then in FSD, Fire and Safety performing nicely, dispensing, known headwinds because it's cyclical, and we're kind of on the down cycle of the project refresh and store refresh, particularly here in North America. and then BAND-IT performing well. So kind of a lot of different moving pieces, HST uniformly strong. FMT kind of got some net impacts that get you kind of flat to some low growth and then same thing in FST. And I think the areas where that will improve is, one, as you move through the year, you'll start to get out of some of the year-over-year comps on chemical headwinds, ag headwinds and dispensing. And then I think we'll continue to see some nice improvement in just general industrial end market, right? I know that the third-party metrics have been watched closely, PMI and what's happening there. I think we did see that in our Q1. What's going on in the Middle East might be putting a little bit of a question mark around it. But I think overall, the setup is pretty good.

Okay. Appreciate all the color there. You just walked through FMC dynamics in general. There's been a bit of a disconnect with the organic sales rate versus orders for the last 3, 4 quarters, more high single-digit kind of range with orders lower, maybe 1% kind of average revenue growth. Can you explain that delta? And is it fair to assume that given the improving short-cycle metrics and the momentum that you have on the order side, that you're leaning at least a bit conservative with the flattish kind of FMT organic sales outlook for the year?

Yes. I mean I think generally, that's probably a fair statement. You probably did see a little bit more, I would say, nontraditional order strength, meaning 2 things. One, in the short-cycle business, right, you're generally consuming the orders as you get them in pretty quick succession. Some of the water orders have been a little bit longer in duration. So that kind of inflates the kind of order versus sales, the book-to-bill. And then in Q1, we saw some orders come into Q1, the very end of March that we probably would have expected into April. That's kind of another little piece, a little bit of timing on the most recent quarter. But overall, as you mentioned, I think the setup is good. The backlog is in a nice position. We generally go into any quarter in FMT, about 50% booked and then the rest you got to book in the quarter. And I think that dynamic has been holding, but visibility has improved a bit in that segment, as you mentioned.

Got it. And in terms of visibility, I would think that for HST, given some of the project orientation of that business that the outlook for 2027 is increasingly robust. Is there anything you push back on there? I realize that you don't have 2027 guidance, so I'm not looking at...

Yes, exactly. But I think you're right. And we mentioned it on the last call. A lot of the trends that are driving the strength in HST today look to persist over a multiyear period, right? I think data center is extremely well understood, right? And then the AI theme, which then hits the semiconductor part of our business, the Space and Defense dynamics in terms of what the customers there are looking to do over a multiyear period portends to growth. And then in Life Sciences, over time, testing and instrumentation and drug development is not going anywhere. So I think as you look over not only '27, but into the future, and obviously, one, it portends to some pretty good growth. And just what I'll say is that's the whole thesis behind a lot of the acquisitions that have been made, right, is to get greater exposure to markets that have more durable growth trends over time. And I think you're seeing that, as you mentioned, not only in a quarter or 2 in this year, but I think it should be durable over a multiyear period.

Excellent. To level set a little bit, how should we think about the size of your revenue exposures currently to AI ecosystem overall. You've called out some of these spaces and verticals. In aggregate, how much are we talking about?

Yes. So I mean, I'll give you -- so in HST, it's about 12% is semiconductor. So the HST segment, about 12% of that is semiconductor. That doesn't include the data center piece. So then the data center piece would be in performance pneumatics. That business last year was about $260 million in revenue, roughly evenly split between the gas business, which does not have a data center exposure and the Airtech business, which has the data center exposure. Airtech is not all data center, right? So within the Airtech half, you probably have on a trailing basis, about half of that business is data center exposure. So that can kind of give you a little dimensionalization of how much is semiconductor and then how much is data center.

Okay. And how about Space and Defense, -- that's also a good...

Yes. About 8% of the HST revenue is Space and Defense.

Got it. Okay. I have to quickly ask about tariffs. Remind us how your team has navigated the tariff environment to date. And given the revised framework, is there any material change, at least on a net basis as we look forward?

Good question. So I think kind of good news on 2 fronts. Good news on the maybe historical front is, I think, the pricing power of the company and the nature of our business model, I think, was nicely displayed with tariffs, meaning our ability to price in accordance with what we see from cost and be ahead of the cost showed up nicely, right? I mean it wasn't a massive needle mover in terms of the profitability, but we were on the plus side of price being greater than the tariffs. So the ability to navigate -- and it's just the nature of our business. We don't have super long-term contracts. We have the ability to price kind of dynamically. So for the whole company, from a year ago to today, net positive on price versus tariffs. And with the IEEPA tariffs being struck down, for us, essentially the tariffs that the administration kind of put in place that at least for now are temporary, but expect they'll find a way to make them permanent, puts us in kind of the same net position. So we don't see a big change in terms of what we need to do on price or what we're seeing on the cost side. So that's kind of the historical and then the IEEPA being struck down in the new normal. So all that's kind of net positive or neutral. I think the historical has been net positive. The kind of forecast is net neutral. And then the question mark is just the refunds on the IEEPA tariffs. As we mentioned on our earnings call, we put ourselves in line for the refunds that we were owed or due like anyone, and we'll see kind of what the timing is and how that plays out. So TBD on the refund side, but kind of on just the business as usual, I think it's net neutral.

Okay. Understood. Something will change on that front anyway.

Exactly, right. Yes, we'll see. Well, I mean -- when I do use the example, I mean, the fact that we were able to nimbly price accordingly with tariffs, which were an exogenous shock to obviously, everyone, I think is the proof point. And it's also kind of the answer to what about -- what's going on in Iran? Is that impacting you? One, no directly because we don't have a lot of exposure there. But then to the extent we see derivative impact on inflation, again, I think the business that -- the businesses that we operate are well suited towards, if not totally getting ahead of them, being able to price accordingly to keep yourself net even.

Okay. Great color. Last topic for me, capital deployment. You mentioned your background, your fit for the role on that front. Over recent past, the team has been focused more so and I think appropriately so on share repurchases. But messaging seems to have shifted at least a little bit that tuck-in bolt-on M&A with the proverbial proof points being there for MSS and Mott, tuck-in bolt-on range M&A could be in play over the near term, correct in that? Two, what kinds of assets would be of greatest interest to the team? And 3, how should we think about the "sweet spot" in terms of deal size?

Good question. So one, yes, that's still the status quo that the near term will be pretty heavy on repo. In the back part of last year, the company stepped up repo to about $75 million a quarter. That's what we've articulated, people should expect for this year, and we did the same -- we did $76 million in Q1 and said you should expect the same balance of repo over the balance of this year with bolt-on M&A at play as well. And I think bolt-on, the way I define that is we did the Micro-LAM acquisition in August of last year. That was about $100 million in size. I think that's the right ZIP code for bolt-on, plus or minus a little bit. And then the nature of what we would be looking at, I think, fits pretty nicely with the platforms we've created via M&A over the past 5 years, right? So -- if it fits kind of the Material Science Solutions world, if it fits Airtech, if it fits Mott, Space and Defense exposure, if it -- we don't want to get too much semiconductor exposure. Eric has been pretty open about that for a company, we don't want to go over 15% just given the cyclical nature of that. And then anything that could augment our water platform in FMT. Those would be kind of the areas that I think are the most logical for us to acquire. I'll probably say I don't see us chasing data center AI growth with some kind of big multiple on a big EBITDA. I don't see us kind of putting money to work there. It could go against you too quickly. We like the exposure we have. But if it comes with something broader, we'd look at it. But generally, in the advantaged markets and platforms we've created is where we would look to spend incremental M&A dollars.

Okay. All makes sense. I guess I kind of liked because you've mentioned water a couple of times, the Intelligent Water Solutions platform. We're quite intrigued by that. I got a closer look at it last year at Wabtec. For those less familiar, maybe discuss the technologies of that platform, the synergistic nature of the build-out of the platform because, again, we think it's quite intriguing in that space in the high single-digit kind of growth rates that you're...

Maybe, Jim, if I could ask you to give a little color on the nature of the water portfolio and the assets we have there, the products we provide.

Yes. I'll. Well, in a nutshell, I mean, what we do, right, is front-end intelligence, right? We have stuff that goes underground and does detection to inform capital decisions and operating budget decisions by municipalities, wastewater management systems, et cetera, right? So for us, that's a good play. There is a technology overlay that obviously is good from a margin perspective and from a secular growth perspective. But also from a funding perspective, we think that the municipal funding environment is strong. It's stable, but we're less susceptible to volatility there because, again, we core to what we offer the decision-makers is that information so that they can appropriate the dollars meaningfully and with less risk.

So we've covered quite a bit here, guys. Anything you'd like to leave the audience with today?

Yes. I mean I would just say we're very pleased, of course, with the strong start to the year for us. And I think it's showing some of the proof points of the strategy over the last few years, right? We're seeing growth in the advantaged markets and the platforms that we created. A lot of it came via M&A, mostly residing within the HST segment. I think the trends there are durable, as we mentioned, over a multiyear period. And then I think the franchise that we have in FMT and FSDP and the margins of those businesses and the flow-through that they will see as we see volume in, call it, just the kind of general industrial part of the portfolio, I think the setup is really good, right, for just kind of continued growth in the advantaged markets and the nice performance in general industrial, both with a strong flow-through and therefore, getting the margins even higher than they already are and the cash flow profile that comes with that. I think the setup is pretty exciting for this year and into the future.

All very encouraging. Again, IDEX is our top pick. So we're on board.

All right. Well, really appreciate the questions and appreciate the time as well.

Thank you very much, Sean. Thanks, Jim.