Earnings Call Transcript - IEX Q4 2023

Operator, Operator

Greetings. Welcome to the Fourth Quarter 2023 IDEX Corporation Earnings Conference Call. At this time, all participants will be in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I'll now turn the conference over to Allison Lausas, Vice President and Chief Accounting Officer. Ms. Lausas, you may now begin.

Allison Lausas, Vice President and Chief Accounting Officer

Good morning, everyone. This is Allison Lausas, Vice President and Chief Accounting Officer for IDEX Corporation. Thank you for joining us for our discussion of the IDEX fourth-quarter and full-year 2023 financial highlights. Last night, we issued a press release outlining our company's financial and operating performance for the three months and full-year ending December 31, 2023. The press release along with the presentation slides to be used during today's webcast can be accessed on our company website at idexcorp.com. Joining me today are Eric Ashleman, our Chief Executive Officer and President; and Abhi Khandelwal, our new Senior Vice President and Chief Financial Officer. Today, we will begin with Eric, providing an overview of the state of IDEX's business. Abhi will then discuss our fourth-quarter and full-year 2023 financial results and provide an update on the various markets we serve. He will also discuss our outlook for the first quarter and full-year 2024. Lastly, Eric will close the call with his final remarks. We will then open the call for your questions. If you should need to exit the call for any reason, you may access a complete replay beginning approximately two hours after the call concludes by dialing the toll-free number (877) 660-6853 and entering conference ID 13742102, or simply log on to our company homepage for the webcast replay. Before we begin a brief reminder. This call may contain certain forward-looking statements that are subject to the Safe Harbor language in last night's press release and in IDEX's filings with the Securities and Exchange Commission. With that, I will now turn this call over to our CEO and President, Eric Ashleman.

Eric Ashleman, Chief Executive Officer and President

Thanks, Allison, and good morning everyone. First, I'd like to introduce and welcome our new CFO, Abhi Khandelwal, back to IDEX. Abhi previously worked at IDEX for 10 years and served as my finance partner for the majority of that tenure. I'm thrilled to welcome him back. In many ways, it feels like you never left. Turning to Slide 6. We navigated the challenging backdrop in 2023 with strong execution. As backlogs normalized, we took inventory out of the system, reduced lead times for customers, increased cash flow to record levels, and delivered productivity through strong price capture and operational excellence. As always, I want to reach out to our IDEX employees around the globe with a sincere and appreciative thank you. I want to provide a bit of high-level perspective as I cover last year's dynamic demand patterns. Coming into 2023, we expected this would be a year of recalibration across our broad array of markets and our thesis certainly held. Our fragmented industrial markets within FMT and parts of FSDP and HST played out as expected. Supply chains improved, reducing overall lead times and bringing artificially high backlog and inventory levels into focus. Customers addressed these positions over time through order reductions to our businesses, ultimately reaching levels of stability for us in the fall. Our less fragmented markets within Life Sciences and Analytical Instrumentation and Semiconductor recalibrated in a dramatically different way. Through much of the post-pandemic recovery, these markets had been running very hot with demand that was constrained primarily by supply chain availability. Demand pressures from high interest rates, lower capital availability, and a lackluster post-COVID recovery in China, combined with outside inventory balances and backlogs drove sharp order reductions throughout these normally fast-growing sectors. This played out dramatically in the first half for IDEX. Given our short-cycle character, we saw the decline quicker than many and reached equilibrium in the fall sooner than some. As we delivered against expectations within a stable Q4, we took a breath and developed a plan of attack for the year ahead. Lead times and backlogs are back to pre-pandemic levels. The majority of our industrial and municipal businesses are stable and seeing improvement with early and encouraging signs of modest growth ahead. The open questions are the specific catalysts and timing to support further acceleration. Our teams continue to aggressively engage with our top growth bets to drive market outperformance. These initiatives are spread across all segments in a variety of niche verticals. We're particularly excited about our growth work with customers in our water, semiconductor, space communications, and energy transition markets. The markets not yet showing signs of near-term recovery remain Life Sciences and Analytical Instrumentation. We haven't forecasted a positive inflection yet for 2024. That said, our teams continue to work a robust pipeline of innovative projects in conjunction with our customers, positioning us to win on tomorrow's next-generation platforms. We believe in the long-term growth potential of these end markets and are well-positioned to support growth at the first signs of improved demand. We continue to focus on aggressive capital deployment towards M&A as we tune the portfolio towards faster-growing high-quality markets. We acquired Iridian and STC Material Solutions last year, adding important pieces of material science technology to our HST segment. Our funnel is expanding, filled with targets that enhance our growth potential. Our balance sheet is strong, fully supporting our ambitions. Finally, we divested two businesses, Micropump and Novotema, as we practice AD20 at the enterprise level. With that, I'll turn it over to Abhi to discuss our financial results.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Thanks, Eric, and thanks to everyone for welcoming me back to IDEX. It's great to be here and be re-joining a great organization. Moving onto the consolidated financial results on Slide 8. All comparisons are against the prior year period unless stated otherwise. Orders of $754 million in the fourth quarter were down 6% overall, and down 10% organically. We experienced an organic decrease in each of our three segments. FMT and FSDP declined mid-single digits while HST contracted by about 17% as the market stabilized at a new level post-recalibration. For the year, orders were down 7% overall, and down 11% organically. Our HST segment contracted upwards of 20% as customers experienced a sharp inventory recalibration during the year and leveled to new near-term demand targets that include stunted growth expectations for China coming out of the pandemic. Our FMT and FSDP segments were down low-single digits as they also experienced recalibration although at a much smaller scale. Fourth-quarter sales of $789 million were down 3% overall, and down 6% organically. We experienced a 19% organic decrease in HST while both FMT and FSDP grew by 3% organically. Full-year sales of $3.3 billion were up 3% overall and down 1% organically. HST contracted by 10% on an organic basis driven by declining life sciences analytical instrumentation and semiconductor markets, partially offset by price. FMT and FSDP grew mid-single digits, driven largely by strong price capture on slightly higher volumes. Fourth-quarter gross margin was essentially flat at 42.7% while adjusted gross margin, which was also 42.7%, contracted 90 basis points due to lower volume leverage, unfavorable mix and the dilutive impact of acquisitions and divestitures, partially offset by strong price-cost and operational productivity. Both full-year gross margin and adjusted gross margin of 44.2% contracted 60 basis points for the same reasons I just described. Fourth-quarter adjusted EBITDA margin was 25.8%, down 120 basis points. I will discuss the drivers of fourth-quarter adjusted EBITDA on the next slide. On a full-year basis adjusted EBITDA margin contracted 40 basis points to 27.5%. A bridge of the full-year adjusted EBITDA can be found in the appendix of this presentation. Despite a year of significant volume pressure, our teams delivered on price-cost and operational productivity, significantly muting the impact of these unprecedented volume declines. On a GAAP basis, our Q4 effective tax rate of 22.7% versus last year's fourth-quarter effective tax rate of 20.5% increased primarily due to the absence of one-time foreign currency benefits realized in 2022 in connection with the funding of the acquisition of Muon as well as the impact of the loss recorded on the sale of Novotema during 2023, for which no related tax benefit was realized due to the type of consolidated group in which it participated. Our full-year GAAP effective tax rate of 21.7% was flat with the prior year. However, both 2023 and 2022 included favorable discrete events. Fourth-quarter net income was $109 million generating EPS of $1.43. Adjusted net income was $139 million with adjusted EPS of $1.83, down $0.18 from the prior year fourth quarter. Full-year net income was $596 million, resulting in EPS of $7.85. Adjusted net income was $624 million, generating adjusted EPS of $8.22, up $0.10 or 1% from last year. Finally, free cash flow for the quarter was $179 million, up 22% over the prior year period. We achieved a conversion rate of 129% of adjusted net income, mainly driven by improved working capital performance despite lower adjusted net income. On an organic basis, we drove more than $40 million of inventory reduction in the quarter through our targeted reduction efforts and we saw inventory turns improve. For the year we delivered record free cash flow of $627 million, up 28% versus last year and coming in at 101% of adjusted net income. This was mainly driven by lower net working capital as we reduced organic inventory levels by almost $65 million and achieved higher adjusted net income. We achieved this despite higher year-over-year capital expenditure as we maintain focus on investing for the future. We will continue to drive inventory levels down and optimize working capital levels further in 2024. Moving on to Slide 9 which details the drivers of our fourth-quarter adjusted EBITDA. Adjusted EBITDA decreased by $15 million compared to the fourth quarter of 2022. Our 6% organic sales reduction unfavorably impacted adjusted EBITDA by $36 million, flowing through at our prior year adjusted gross margin rate. Price-cost was accretive to margins and we drove operational productivity that offset employee-related inflation. Mix was unfavorable by $3 million. Reductions in variable compensation contributed $3 million of benefit in the quarter. These results yielded a negative 39% organic flow-through. Overall, our team's focus on cost containment and resource reallocation has effectively managed our revenue declines. IDEX is well-positioned to recover and grow back stronger than before when market dynamics turn favorable. The impact of FX and acquisitions, net of divestitures, contributed $5 million of adjusted EBITDA in the quarter. However, the divestiture of Micropump lowered flow-through as those margins were higher than those of our newly acquired assets which were experiencing volume deleveraging given the end markets' rebalancing. With that, I will provide a deeper look at our segment performance. I'm on Slide 10. Let me walk you through our outlook as it relates to our end markets. First, as I consider the markets served by our Fluid & Metering Technology segment. Industrial derates began to see some sequential improvement in the fourth quarter and we expect continued stability in the near-term as our short-cycle businesses meet underlying customer demand. We continue to see normalized book-and-bill order patterns given shorter lead times and normalized supply chain dynamics. As we move into 2024, we're cautiously optimistic as we continue to see tailwinds due to domestic infrastructure initiatives and within mining. We anticipate these patterns will hold. We will continue to mind our derates to evaluate longer-term expectations as this is the most short-cycle market exposure. Our water businesses continue to be favorably positioned as we enter 2024. Municipal project activity remains strong with no signs of funding delays and the project funnel is healthy with new opportunities winning share to deliver solutions for critical water challenges. Our energy business has been steady, even as new oil production is down and fuel markets are flat, driven by declining fuel prices and mild heating seasons in North America and Europe. As consolidation occurs within this industry and funding for new projects remains delayed, we see operators doing more with less using the same infrastructure to drive production. These market dynamics favorably impact our demand profile as our energy businesses meet customers' need for replacements as they keep existing infrastructure running. In the chemical market, we continue to see positive results across the U.S. and Europe with pharma and battery applications providing opportunities for growth. China softness is being mitigated by the rest of Asia. The one area experiencing pronounced headwinds in FMT is our agricultural business. The size of this market is about 10% of the FMT segment, which equates to mid-single-digits for overall IDEX. We continue to see headwinds as OEMs have stepped down their projections due to continued destocking and declining net farm income and crop prices. Our KZValve acquisition continues to be a differentiator with its automated actuation valve technology and we are focused on targeted share gain to offset the pressure of current market challenges. Moving onto the Health & Science Technologies segment. We continue to see positive results stemming from our space broadband laser communication initiatives which are bolstered by Iridian's technological capabilities. We expect this space to grow in 2024. The industrial markets served by businesses in the HST segment are experiencing signals in line with FMT expectations. Our material processing technology business is gaining share in battery production with the step up in new orders as we enter the year. We continue to see signs of improvement within biopharma related to new vaccine development, where our technologies are uniquely positioned. We see particular strength in emerging markets. For semiconductor, we began to see initial signs of improvement as we exited 2023. We expect this market will continue to recover somewhat in 2024 driven by an improved outlook for memory chips due to demand for devices. Further out, we look forward to continued growth in semiconductor driven by artificial intelligence, automotive and long-term secular tailwinds driven by electrification. While these markets point towards growth within HST, what is not yet showing signs of recovery is our Life Sciences and Analytical Instrumentation markets, which represent nearly 35% of HST and about 15% of overall IDEX. However, the long-term growth drivers have not changed. While orders appear to be stabilizing, we have not forecasted a positive inflection yet for 2024. While this industry navigates immediate-term challenges, we continue to have our eye on the future. We are closely partnering with our customers across our Life Sciences businesses and we're actively innovating to provide tomorrow's solutions. With our focus on innovation and operational scale to support customers from prototyping to production we are uniquely positioned for growth as these markets recover. Turning to our Fire & Safety Diversified Products segment. We expect FSDP will be flattish to down slightly in 2024 driven by headwinds in dispensing as key customers recently completed the multi-year refreshment cycle. We expect Fire & Safety end markets to remain stable and growth to be driven by strategic share gain initiatives our teams are focused on. We continue to win through value-added integrated systems and technology and standardized offerings that enable higher OEM throughput. Overall demand for Band-It continues to remain strong and we expect growth on a year-over-year basis. With that, I'd like to provide an update on our outlook for the first quarter and full-year 2024. I'm on Slide 11. We expect full-year organic growth of 0% to 2% with the majority of our end markets stable to growing as I highlighted in my market outlook commentary. This reflects low-single-digit growth from FMT and includes acknowledgment of the uncertainty in timing and scale of recovery given the short-cycle nature of our business. For HST we expect low-single-digit growth as broader expectations for year-over-year growth across its markets are moderated by the lack of visibility in the Life Sciences and Analytical Instrumentation space. And we expect FSDP to be down slightly as the dispensing refreshment cycle has completed and volume in that space will step down. The dynamic is expected to lower overall IDEX organic growth by 1% and offset the growth expected by Fire & Safety and Band-It. This organic rate guide equals earnings per share contraction of $0.03 to growth of $0.26 depending on top-line results and includes price-cost, which we anticipate will be positive for the year and mixed pressure stemming from dispensing volumes. Additionally, we expect our operational productivity will more than offset pressure from wage-related inflation and provide $0.10 to $0.15 of EPS growth. As always, we're committed to investing in the future growth prospects and expect to make incremental resource investments of $0.05 to $0.09 during the year as we invest in the people needed to champion our growth efforts and drive the next chapter for outperformance. The reset of variable compensation levels after a challenging 2023 provides a $0.16 headwind while the impact of recent acquisitions and divestitures contributes $0.12 of adjusted EPS growth. Finally, considering a few non-operational items, lower levels of debt due to pay-downs in the second half of 2023 are expected to yield $0.07 of EPS growth and we expect FX to also provide $0.07 of benefit. These are more than offset by an increase in the effective tax rate on a year-over-year basis, creating $0.19 of headwinds to adjusted EPS. The 2023 effective tax rate includes certain discrete events, which produced $0.09 of benefit to adjusted EPS in 2023, as compared to 2022. Those benefits do not repeat in 2024 and conversely, the projected 2024 rate of 23% includes a heavier mix of improved performance in geographical regions with higher tax rates, as well as certain legislative changes increasing global tax. So in summary, we're projecting organic revenue growth of 0% to 2% for the year. The variable compensation and tax-rate pressure essentially erodes 4% of EPS growth year-over-year leading adjusted EPS expectation in the range of $8.15 to $8.45 or down 1% to up 3% over 2023. Moving to Slide 12. I'll provide additional details regarding our 2024 guidance for both our first quarter and full-year. In Q1, we are projecting GAAP EPS to range from $1.45 to $1.50 and adjusted EPS to range from $1.70 to $1.75. Organic revenue is expected to decline 6% to 7% year-over-year due to tough comps and adjusted EBITDA margins are estimated to be about 25%. While it is not a factor impacting year-over-year comparability, I would like to remind you that on a sequential basis when walking from fourth-quarter results to first-quarter we have a headwind of $0.10 related primarily to the accelerated recognition of share-based compensation in the first quarter of each year. Turning to the full-year 2024, in summary, we estimate full-year organic revenue of flat to up 2%, to yield GAAP EPS of $7.15 to $7.45 and adjusted EPS of $8.15 to $8.45. Adjusted EBITDA margin is expected to be approximately 28%. Capital expenditures are anticipated to be about $75 million normalized upon the completion of certain factory automation investments and emerging market footprint expansion in 2023. And free cash flow is expected to be over 100% of adjusted net income. Corporate costs are also expected to be approximately $95 million, up from 2023 by approximately $10 million as variable compensation resets to current market expectations. With that, I'll turn it over to Eric for closing remarks.

Eric Ashleman, Chief Executive Officer and President

Thanks, Abhi. I'm on Slide 13. In summary, the majority of our businesses are stable and starting to see the early days of market recovery. We're working together as a team to drive outperformance above that baseline and we are well-positioned to capitalize on growth to come as we invest our cash back into the business to support organic and inorganic expansion. Our core FMT businesses are back in world-class lead times with expanded margins, they're ready to expand them again as volume leverage broadly returns. Fire & Safety and Band-It within FSDP have differentiated technologies to accelerate growth and continue as the leading players in their global markets. Much of HST is seeing recovery or the early signs of growth. We temper these expectations a bit overall given our lack of insights supporting demand recovery within Life Sciences and Analytical Instrumentation markets, and we also face the cyclical headwinds from global dispensing in our agriculture businesses. Finally, it's really the early days of a new normal following three years of unprecedented change; better to be appropriately cautious and careful as we line up our resources and strategic plans to support the full cycle ahead. One I feel will be especially strong for companies like ours. We are prepared to help customers solve their toughest problems we see as their greatest opportunities, our businesses and technologies are outstanding. Our teams and talent are world-class and our culture is really unique. We appreciate your support and interest in IDEX. And with that, I'll turn it over to the operator for your questions.

Operator, Operator

Thank you. And our first question will be coming from the line of Nathan Jones with Stifel. Please proceed with your questions.

Nathan Jones, Analyst (Stifel)

Good morning, everyone. Welcome back, Abhi.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Thank you, Nathan.

Nathan Jones, Analyst (Stifel)

I just wanted to start off with a question on inventory destocking versus demand. I guess it's most appropriate to the Life Sciences and Analytical Instrumentation businesses. Obviously, sharp declines you saw in 2023, is there any way for you to parse out or give more color around what you think was actually calendar declines in your customers' demand versus them taking down their levels of inventory of your products?

Eric Ashleman, Chief Executive Officer and President

The inventory destocking was much larger than the underlying demand decline, probably by a factor of two. We saw double-digit declines at times, nearing 20%, which I don't think is representative of the underlying markets. We haven't seen that severity in public commentary from customers either. This was an incredible run-up and then an artificial plunge as inventory was normalized. The state of those markets today is down low-single digits to maybe slightly double-digit on the low side, or at the early start of double-digit recovery in some pockets. One main point is that while year-over-year comparisons remain materially different because of the prior periods, we have been in a sequential level of stability since late summer through much of Q4. We are projecting that stability across 2024. So there's a period where comparisons will look challenging, but the platform itself is relatively stable. We lack a little visibility on the timing for a catalyst that would accelerate growth.

Nathan Jones, Analyst (Stifel)

I was looking at the order rates in HST and they've certainly stabilized over the last couple of quarters with sequential improvement from Q3 to Q4. Can you parse out the different pieces in HST sequentially on the order rates, where you're seeing things improve versus Life Sciences and Analytical Instrumentation, or where it's moving on a sequential basis?

Eric Ashleman, Chief Executive Officer and President

We do see some end-of-year blanket activity in the more classical Lifecycle Analytical Instrumentation market which added some orders. About half of HST is more industrial in nature and mirrors what we saw in FMT, so that supported part of the improvement. We are also seeing a bit of activity on the semiconductor side, although it's early and modest. Overall, there were no major declines in Q4; a few things moved up, and much of the improvement reflects broad-based support with some year-end blanket activity in the Life Sciences sector.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Nathan, to add: the sequential order lift in HST was about $30 million. The majority of that was demand-driven; about $10 million of that was typical year-end blanket activity that happens. We saw orders improve starting around Thanksgiving through December.

Nathan Jones, Analyst (Stifel)

Across the portfolio, your customers' level of inventory now— you talked about taking your inventory down in the first half of 2024. Do you think your customers are still destocking in the first half and when do you think customer inventories will match demand levels?

Eric Ashleman, Chief Executive Officer and President

I would parse that by channel. A lot of inventory closest to us in FMT is in distributor channels; that's largely corrected now. We don't sell many products that are stocked long-term, so we probably hit quicker correction there. On the OEM side, it's customer-by-customer, but between us and our end customers we are largely clean, driven by returning to strong lead-time performance. Over time that normalizes orders and supply. The only piece we cannot fully see is extended channel inventory far from the factory; there are pockets, but given IDEX's fragmentation and diversification, no single pocket is likely to upset the balance materially.

Nathan Jones, Analyst (Stifel)

Excellent. Thanks very much for taking my questions.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Thanks, Nathan.

Operator, Operator

Our next question is from the line of Allison Poliniak with Wells Fargo. Please proceed with your questions.

Allison Poliniak, Analyst (Wells Fargo)

Hi. Good morning. On the Life Sciences side, new product development was described as ongoing. Could you talk relative to historicals— is the pace stronger or about the same, and has any competitive dynamic changed as a result of the reset in that business?

Eric Ashleman, Chief Executive Officer and President

Great questions. Early in the year it's a good time to engage as conferences and trade shows occur. The level of innovation between our teams and major customers is strong. It makes intuitive sense: after a period focused on replenishment, the dynamics are returning to normal competition, and innovation will lead the way. We are particularly good at scaling with customers, so we hear requests to get prototypes done sooner so production can follow. That dynamic is healthy. In many cases customers are normalizing costs and resources, which plays to our strengths because we have integrated capabilities. Competitive dynamics haven't changed materially; there are not many players in this space, and we have a good understanding of our position and feel we've maintained or enhanced share with major customers. We continue to monitor their performance as they compete.

Allison Poliniak, Analyst (Wells Fargo)

Got it. And on working capital— you mentioned wanting to bring inventory down. Is there a target for 2024?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Allison, in 2023 we reduced inventory by about $65 million, which is roughly a 0.4 percentage point improvement. For 2024 we're targeting another 0.5 point improvement in inventory.

Allison Poliniak, Analyst (Wells Fargo)

Got it. Thanks for the color.

Operator, Operator

The next question comes from the line of Mike Halloran with Baird. Please proceed with your questions.

Mike Halloran, Analyst (Baird)

Good morning, everyone.

Eric Ashleman, Chief Executive Officer and President

Good morning, Mike.

Mike Halloran, Analyst (Baird)

As you set guidance for the year, are you looking for sequential stability across the platform from current levels— understanding ag and dispensing have cyclical pressures— and are the positive catalyst markets modeled to offset those pressures? How do you expect the cadence to play out?

Eric Ashleman, Chief Executive Officer and President

From a revenue and demand perspective, we ended Q4 in a normalized position after a back half that was stable. IDEX's short-cycle nature gives us about half a quarter of visibility on January 1, so we're back to equilibrium. We saw broader support emerging in late Q4 and continued through January—January was a nice start for us in all three segments. There's a typical seasonal uptick from Q1 to Q2 that we expect to materialize as lead times and customer expectations dial in. We also have a series of growth bets that progress through the year. We expect modest semiconductor recovery more in the back half of the year. So, expect normal IDEX seasonality with cautious Q1 guidance and potential accretion through the year as growth initiatives and seasonality combine.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Mike, to add more color: we ended Q4 with adjusted EPS of $1.83. Sequentially, we expect operational improvements of $0.12 to $0.15, which would take that figure nearer to $1.98. Year-over-year impacts include a $0.10 stock-comp timing headwind and about $0.04 from variable compensation reset, which results in the Q1 guide range we provided. Operationally, we are seeing the improvement Eric mentioned— backlog build in January is largely shippable in Q2. There is a seasonal uptick from Q1 to Q2.

Mike Halloran, Analyst (Baird)

Great. And then an update on M&A activity— is the landscape more actionable and any update on revenue synergies or pipeline?

Eric Ashleman, Chief Executive Officer and President

M&A remains a major focus. Our funnel and engagement level with targets is the highest we've ever had. If the broader market improves, that could increase availability of targets and incentivize some owners to transact. The environment is favorable and we feel positive about our ability to deploy capital.

Mike Halloran, Analyst (Baird)

Great. Appreciate it.

Operator, Operator

Our next question is from the line of Deane Dray with RBC Capital Markets. Please proceed with your questions.

Deane Dray, Analyst (RBC Capital Markets)

Thank you. Good morning, everyone. I want to circle back on Life Sciences and Analytical. You're not forecasting an inflection in 2024. Many of your customers are saying inventory normalization might run through midyear and then recovery in the back half. Is that a timing difference, and what's the lead timing difference for that recovery to read across into your results?

Eric Ashleman, Chief Executive Officer and President

Inventory reductions vary by customer and factory. We model at that level; we're in lockstep with customers in many cases. There may be pockets of end-customer inventory delaying recovery in some channels, but in other places the mix and positions support flat projections for 2024. We would welcome a back-half inflection, and we would be ready operationally to support it. Internally we're conservative in planning to ensure costs and materials are controlled and to be dynamic in execution when demand recovers.

Deane Dray, Analyst (RBC Capital Markets)

That helps. On inventory obsolescence— is that an issue given the destock and potential obsolescence?

Eric Ashleman, Chief Executive Officer and President

I haven't seen inventory obsolescence as an internal concern. Many of the products in Analytical Instrumentation are in mature spaces, and short-term obsolescence hasn't been raised as an issue.

Deane Dray, Analyst (RBC Capital Markets)

Separately, on your bellwether businesses collectively, such as Band-It or Warren Rupp, what cadence of demand are you seeing relative to expectations?

Eric Ashleman, Chief Executive Officer and President

Those are very short-cycle, widely dispersed businesses and we use them as a proxy. They moved together down during recalibration and in Q4 and January they are moving together towards the positive. These are modest improvements, but consistent green indicators across those bellwethers are meaningful and support our confidence.

Deane Dray, Analyst (RBC Capital Markets)

Good. Thank you.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Thank you, Deane.

Operator, Operator

The next question is from the line of Vlad Bystricky with Citigroup. Please proceed with your questions.

Vlad Bystricky, Analyst (Citigroup)

Hey. Good morning, guys. Did you say what price was in the quarter and what you're assuming for price in 2024 as well as the overall price assumptions in the 0% to 2% organic growth outlook?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Vlad, in the fourth quarter we saw pricing around 4%. It did come down as the year progressed compared to prior quarters. For 2024, we're modeling 2% price in the guide. We're more focused on the price-cost spread, which we expect to be about 80 to 100 basis points. That's higher than IDEX historical averages, and reflects our view of price capture versus cost pressures.

Vlad Bystricky, Analyst (Citigroup)

Perfect. Thanks. And can you talk more about energy transition-related demand— particular project types or geographies where you're seeing pickup?

Eric Ashleman, Chief Executive Officer and President

We see energy transition demand in technologies supporting the shift to alternative energy and sustainability. Examples include battery manufacturing support— material handling for caustic materials— where we've seen strong velocity. Some FMT businesses with mining exposure remain strong, tied to mineral extraction for battery production. Our Airtech-related acquisition has seen demand in thermal management for alternative energy solutions. These opportunities are global—Europe, Asia, and the U.S.—and we tend to be involved in niche verticals and applications that support the transition.

Vlad Bystricky, Analyst (Citigroup)

Great. Thanks.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Thanks, Vlad.

Operator, Operator

Our next question is from the line of Rob Wertheimer with Melius Research. Please proceed with your question.

Rob Wertheimer, Analyst (Melius Research)

Thanks. A question on HST, specifically Life Sciences, and how you manage costs. Is the cost structure set such that if demand comes back, you'll return toward historical margin levels? And looking back, if you had known how deep the downturn would be, would you have managed costs differently?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Over the last couple of years we've focused on cost structure adjustments and have taken restructuring actions where appropriate. For Life Sciences, we feel comfortable with the current cost structure given current volume levels. As volumes recover, leverage should expand margins. We do not have specific plans today to take additional cost out beyond our current posture.

Eric Ashleman, Chief Executive Officer and President

On philosophy, we are very careful about protecting domain expertise, technical know-how, and customer relationships. Programs in these sectors come around infrequently and are often risk-averse, so we are cautious about removing critical capabilities. Innovation remains active even when demand is down, and customers often want prototypes and scalable production support. We've retained a technical core while reducing variable resources that can be brought back quickly as demand returns. Our flat organizational structure and close proximity to operations help us flex resources efficiently. All of this results in strong margin expansion as volumes recover.

Rob Wertheimer, Analyst (Melius Research)

Perfect. Thank you.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

Same here. Thank you.

Operator, Operator

Our next question is from the line of Brett Linzey with Mizuho. Please proceed with your question.

Brett Linzey, Analyst (Mizuho)

Good morning, all. On distribution, MRO, and stabilization— good to see. On CapEx and customer planning, has the tone changed in terms of capital outlays and what are you expecting for those businesses this year?

Eric Ashleman, Chief Executive Officer and President

Large project work is most visible in our water business and in some energy and pharma projects. We're seeing early, modest positive signs—projects being discussed and progressed that previously were delayed. We're not yet at a mega-project sanctioning level broadly, but the indications for more intentional capital deployment are better than in 2023.

Brett Linzey, Analyst (Mizuho)

Got it. And on margin outlook— 28% company adjusted EBITDA margin guide— can you provide color at the segment level for how to think about that?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

For 2024 company guidance of about 28% adjusted EBITDA margin: HST margins should expand toward 30% as volumes flex back up in the back half. FMT should see a slight margin expansion versus 2023. FSDP should see slight margin erosion due to completion of the big-box retailer dispensing refresh cycle, which results in mix pressure. Overall, HST expansion, modest FMT expansion, and modest FSDP contraction net to the company guide.

Brett Linzey, Analyst (Mizuho)

Very helpful. Thank you.

Operator, Operator

Our next question is from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your questions.

Jeff Sprague, Analyst (Vertical Research Partners)

Good morning. A longer-term perspective: pre-COVID organic growth was around 3% to 4% historically. Do you have confidence that normalized organic growth will be higher going forward given portfolio changes and price capture?

Eric Ashleman, Chief Executive Officer and President

Yes. We're targeting higher normalized organic growth. Two levers: the portfolio changes we have made by acquiring businesses in faster-growing markets and tuning the portfolio upward; and performance outperformance from our initiatives. We've long targeted 200 to 300 basis points of outperformance. With reasonable market support, absent massive swings, we aim for mid-single-digit organic growth as a target on a normalized basis. Intentional capital deployment on top of that could increase the overall rate further. That's a core focus.

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

On price, the world is not back to pre-pandemic inflation levels, but we don't expect prices to revert fully to historical low levels. It will likely be somewhere in between. For 2024 we feel good about our price-cost positioning.

Eric Ashleman, Chief Executive Officer and President

Price capture is a point of competitive advantage for us. We have the positioning and innovation to secure price in sticky markets. As the world normalizes a bit, we expect to land a little north of historical levels and maintain a favorable spread.

Jeff Sprague, Analyst (Vertical Research Partners)

Thanks, and one other quick one: what percent of your Life Sciences and Analytical Instrumentation revenue is in China?

Eric Ashleman, Chief Executive Officer and President

We don't have a large direct business in China; it's more indirect following customers. A better proxy is what percentage of our customers' business is in China, which is a fraction—less than 20% depending on the sector. We don't have a lot of direct feet on the ground there.

Jeff Sprague, Analyst (Vertical Research Partners)

Got it. Thank you very much.

Operator, Operator

Our next question is from the line of Andrew Buscaglia with BNP. Please proceed with your question.

Andrew Buscaglia, Analyst (BNP)

Good morning. On Slide 10 you gave a helpful breakdown of end markets. HST margins struggled late in the year. If Life Sciences and Analytical Instrumentation were to come back, how would that affect mix and margins?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

To be clear, the mix pressure comment earlier referred to dispensing in FSDP. If Life Sciences volumes recover, given our cost positioning, you should see margins expand in the HST segment throughout the year.

Andrew Buscaglia, Analyst (BNP)

In FMT, the growth this quarter was surprising. How much is attributed to government stimulus and is that part of your 2024 confidence?

Eric Ashleman, Chief Executive Officer and President

Some of it is related to water and municipal capital, which can be government supported, but it's a small part of the segment. More generally, there's a healthier view among customers feeling confident to lean into their markets, stop pulling inventory and get to work. That includes infrastructure and maintenance projects, which benefit pumps and related equipment. Taken together, these indicators support our confidence for 2024.

Andrew Buscaglia, Analyst (BNP)

Thanks for the color.

Operator, Operator

Our next question is from the line of Joe Giordano with TD Cowen. Please proceed with your questions.

Joe Giordano, Analyst (TD Cowen)

Hey, thanks for squeezing me in. On HST revenue guide— if orders hold around Q4 levels or slightly above and you run off the excess orders from the post-COVID high book-to-bill, that implies a decline next year. Are you contemplating a recovery of more magnitude in HST in 2024?

Abhi Khandelwal, Senior Vice President and Chief Financial Officer

If you look at the order uptick Q3 to Q4, we were up about $30 million. About $10 million was blanket year-end activity that will ship throughout 2024 and $20 million was incremental demand. For 2024 we do expect to build orders throughout the year. We are cautious given early signs, but we expect continued order book build and shipments across the year.

Joe Giordano, Analyst (TD Cowen)

Thanks, guys.

Operator, Operator

We have reached the end of our question-and-answer session and I will turn the call over to Eric Ashleman for closing remarks.

Eric Ashleman, Chief Executive Officer and President

Thanks everyone on the call for your questions and interest in IDEX. Abhi, thank you for joining on your first earnings call with me. A few final points: IDEX is a complex and diversified company and the market swings over the last few years made visibility challenging. We believe things are clearer now. Our key message is we achieved uniform market stability last fall, enjoyed a stable Q4, and are lining up for the start of a favorable cycle. The majority of our end markets are starting to return to growth and our shorter-cycle businesses moving together is a reliable proxy for the company. We've intentionally tuned IDEX toward faster-growing businesses closer to strong OEMs, and we continue executing on those initiatives. We are confident in accelerating through the year. Life Sciences and Analytical Instrumentation are uncertain for 2024, but we remain committed to the space and confident in the long-term fundamentals and our positioning, which is evidenced by active innovation requests from customers. Finally, we've put capital to work with intentionality during choppy periods and if the market calms we can push further. We're prepared to support customers and continue to transform the company. Thank you again for joining. Have a great day.

Operator, Operator

This will conclude today's conference. Thank you for your participation and you may now disconnect your lines at this time.