AMETEK Q1 2024 Earnings Call Transcript

Good morning, Deane.

Sure, sure. Glad to do that all. Deane. I'll start with the walk around the company, start with our process business. Overall sales for our process businesses were roughly flat versus last year and in line with our expectations. Growth remains solid across our energy and semiconductor businesses and we're really well positioned there to benefit from the sizable project and investment activity within these markets. For the full year, we continue to expect sales for our process businesses to be up low single digits.

Next I'll switch to aerospace and defense and our A&D businesses had a strong start to the year, approximately 10% organic growth in the quarter. Growth was very solid across both our commercial aerospace and defense segments for all -- and for all of 2024, we continue to expect organic sales for our A&D businesses to be up high single digits on a percentage basis with similar growth across both our commercial, aerospace and defense businesses.

Next, I'll move to Power. Our Power businesses were up low double digits in the first quarter with contributions from the acquisitions of UEI and Amplifier Research, being offset by a low single digit decrease in organic sales. These recent acquisitions, along with the acquisition of RTDS in 2022, expanded our presence within a number of highly attractive market segments which are expected to benefit from a strong investment cycle, including the expansion of renewable energy and the power grid infrastructure. And for the power segment, we continue to expect low to mid-single digit organic sales growth for 2024.

And finally, I'll go into the automation and engineered solutions market segment. Overall sales for A&ES were up 20% on a percentage basis in the quarter, or up mid-20s in the quarter with contributions from the acquisitions of Paragon Medical and Bison Engineering being offset by a high single digit decrease in organic sales. As we expected, the impact from normalization of inventory levels across our OEM customer base continued in the first quarter, and we expect to see a return to growth in the second half of the year, consistent with what we had indicated last quarter. And finally, as a result, we continue to expect organic sales for our automation businesses to be up low single digits with stronger growth in the back half of the year. So that's the walk around the company. And I think you also asked for a -- what's going on in the various geographies. So I'll get to that too, Deane.

The US was down 1% against a pretty difficult comparison, and our strongest growth was in our aerospace and defense businesses. Moving to Europe, we were down 2% -- minus 2% organic with notable growth in parts of our process and parts of our power businesses offset by weakness in automation. And in Asia, we were up low single digits with strength across our process businesses. So we had a very good performance in Asia. And digging down into that a little further, China was flat in the quarter with solid growth in parts of our process businesses. So up low single digits in Asia, and China was flat. And then finally --

Yeah, you asked about the destock, Deane. And I think that it's playing out as we had talked about last quarter. I think the destock will continue into the second quarter, but in the second half of the year, we expect that to turn around. So we're watching that closely, and it's really kind of playing out as we thought. I mean, the destock was probably a bit more than we thought it was going to be in Q1, but that may be positive for later in the year because we think second half of the year is just positive.

Yeah, it's salespeople. The largest chunk of it is in the engineering, research, development and engineering. And we have a full slate of projects. We have excellent opportunities longer term, and we're getting after them. So I'm very positive on what's happening in our new product development programs.

Thank you, Deane.

Good morning, Jeff.

Yeah, that's a great question, Jeff, and it's kind of what you said. I mean, we typically resorbed the smaller acquisitions as we proceed through the years and quarters. And the last time we did something like this was when we bought, I believe, ZYGO, it's a bigger acquisition, and because of the size of the acquisition and because of the opportunities that we see, we wanted to take that integration charge because there are tremendous, tremendous opportunities to improve the business. So it's a one-time nature. It's for larger deals. As you know, Paragon was the largest acquisition that we have done. We spent about $1.9 billion. So as we dug into it, as we worked with their management team, we got really comfortable with this plan.

Quite honestly, there's more opportunities than we thought. We have a good team of both AMETEK and Paragon leaders that are really getting after it now. So I feel really good about the business. The integration is being integrated into AMETEK well. It's very positive around the future, and I think this restructuring is largely going to happen over the next couple of years. And what we really see is a less than two year payback on it. So excellent payback and we started on that, and we're really positive what we're doing, and I feel positive about the deal.

Yeah. If you look at -- our overall sales were up 9%. That's both groups and the organic group -- the organic growth was just down modestly, about half a point. EIG overall sales were plus 4%. The organic growth in EIG was plus 1%. EMG overall sales were plus 21%, and organic sales at EMG were minus 4%. So you had -- that defines the group dynamics for revenue.

Yeah, yeah. The first point is, when you look at AMETEK's first half, second half, we typically have 48% of our revenue and profits in the first half of the year and 52% of our revenue and profits in the second half of the year. And that's exactly what we have this year. So our second half of the year is not back-end loaded. So we feel good about that. Another point that you may not see, it really appears our orders have stabilized. Specifically when I look at Q4 '23 to Q3 '23, and then I look at the next quarter, Q1 '24 to the last quarter, to compare to Q2 '23, so the last two quarters sequentially with all the acquired backlog removed, so really looking at a true run rate sequentially, we've seen low single digit growth in orders in both Q4 '23 and Q1 '24. So it feels like we bottomed and we're starting to see some modest improvements.

At the same time, in Q1 '23, we had an extremely good quarter. So we have a difficult comp that we're battling, and finally and perhaps most importantly, we've had customer commentary that continues to communicate to us in the second half of the year, the destocking phase will come to an end, and we should return to a positive book-to-bill. So in terms of the economic environment, we're not -- we're watching it closely, but for the balance of the year, we're just assuming modest economic growth, not any kind of economic acceleration, and at the same time, not a recessionary environment. And we expect that we'll grow sales modestly each quarter and the comparables get easier in the second half of the year, and as I said, this 48%, 52% split H1 to H2 is very much aligned with our historical averages.

No, that's a good question, Jeff. Pricing was -- continued to more than offset inflation. Pricing was approximately 4% in the quarter and inflation was about 3%. The results speak to the highly differentiated nature of the AMETEK product portfolio and our leadership position in these niche markets around the globe. And for the full year, we do expect that pricing to come in a bit and inflation to come in a bit, but we expect to maintain a positive spread between them.

Thank you, Jeff.

Yeah. It's a great question. I mean, we look at tariffs, and that became a bigger issue back in the 2017 timeframe. And in the quarter, we had a minimal impact from tariffs, and they were completely offset for price. To give you an idea, across the whole company, tariffs are only going to cost us about a $0.01, that was like $3 million or $4 million. And what happened there is we've aggressively rebalanced our supply chain. It's largely done. So we're not overexposed to any region of the globe, and we have a strategy where from the US, we're largely sourcing from Mexico and other regions of the Americas, and in Europe, we do a lot of sourcing from the Czech Republic and Serbia. And in Asia, we do a lot of sourcing from Malaysia. So we've got a nice balance around the world.

So I think the hard work that we did over the past few years of really rebalancing our supply chain, we're essentially finished with it. Just very, very small bit of work that continues, and we're very well positioned to be able to deal with an increasing tariff regime, specifically with China, in particular, we don't have a real risk there. We do excellent business in China. It's a China for China strategy. It's about 9% of our sales, and then largely, we source what we sell in China. So we're in pretty good position in terms of tariffs.

Yeah. I mean, it was a pretty typical quarter. March was the strongest -- excuse me, March was the strongest quarter. Wait a minute. Okay. Yeah, pretty typical quarter, with March being the strongest on both orders and sales. So it's -- sales were the highest of the quarter in March, and then in April, we were right on plan. So we feel good about the guidance and it's pretty -- they said it's bouncing around there, but we're not seeing any incremental weakness at this point.

Thank you.

It's very, very difficult to predict the very near term, but Scott, the pipeline remains very strong, and we're actively looking at a number of high quality deals across a broad set of markets. So we have $1.8 billion of existing cash and credit facilities post-Paragon. We have a balance sheet that would support, if the deals meet our criteria, we could do over $4 billion of deals this year, and that would only take our leverage up to about 2.5 times. So we're really in an excellent position.

And it's not a balance sheet issue. It's not a cash flow issue. We're performing extremely well. It comes down to finding the right businesses, and we have a good pipeline right now. Very good pipeline. And we really have the opportunity, as you said, we typically have this opportunity to differentiate our performance with the M&A element of our growth strategy with this strong balance sheet and with these strong cash flow positions. So in this market that's a bit choppy, our combination of opex and M&A and this proven acquisition strategy, I'm really looking to differentiate our performance with our M&A and our opex during the next couple of quarters.

Yeah. This is sequential, Scott.

Q1 will be a bit higher than Q2, Q3 will be a bit higher than Q2, and Q4 will be a bit higher than Q3.

Yeah. The orders were minus 8, and organic orders were minus 10. And again, we had a tough comp and I went through the process of -- they sequentially grew low single digits the last couple of quarters when you take out the comp. I think in Q1 of '23, we had exceptional orders from some project business and EIG in particular. So when you take that out and you look at what's going on sequentially, we get more comfortable.

Yeah. Thank you, Scott.

Good morning, Andrew.

Yeah, well, in '24, we had told you in prior meeting that Paragon was going to contribute $0.08 to $0.10 to AMETEK's EPS, and that still holds. When I look at that $22 million charge, we said the payback is going to be less than two years and at run rates, so it will take us a couple of years to get there, but the run rate, we have $70 million of benefits. So we spent approximately $29 million. We're going to get approximately $70 million of benefits. The payback is less than two years. So that really tells you what a great return it has, and it's just -- there wasn't a lot of focus and then we can run things really efficiently. And I'm just excited that the management team sees it that way too, and we're really going to make Paragon an exceptional business from an operating perspective.

Regarding 2025, I think we've come out and said that we should see a substantial increase in operating earnings related to Paragon in 2025, but I'm not willing to quantify what's going to happen in 2025. We're much too far away to do that. But again, the metrics I'd point you to are, we spent $29 million, we'll see $70 million in benefit at max run rate, and the payback for the project is a little less than two years. So we feel really good about it, good pay back for our shareholders.

I just think that it's a larger deal and we saw a lot of opportunities over. It will take us a few years to do it. So we pulled it forward.

Yeah. I don't know what you have in your numbers, Andrew. I don't really look at them, but I can tell you that we're expecting to get $0.08 to $0.10 of benefit from Paragon and this restructuring doesn't change that.

Yes.

Thank you, Andrew.

Good morning.

Yeah, I think the -- when I think about the long term secular growth drivers and we talked about a little -- a few of them in my talk, a lot of project activity around the semiconductor market, and that's finally, we're moving closer and closer to the point where that's going to start turning into business for us in the west. There's a lot of project work on semiconductors. The power market, as you said, and there are really two drivers there, the driver for renewables energy, but also the driver for investments in the power grid. So our RTDS business, our power instrumentation business are really levered to those. So that's starting to happen as we work its way through.

When I think about the aerospace and defense business, again, we had a great quarter again, and that's continuing. And I think both Airbus and Boeing have a nine year backlog. So the commercial market looks good. Our defense, we're in the right position in defense. We had another good quarter in defense. So when I think about those kind of markets and those trends, I feel good about the future and a lot of fiscal stimulus in the US, which has not been there in the past and -- but it takes time to work through the system. So we think longer term, I think we're in the right places to do well.

Thank you, Chris.

I can't point to anything we changed. I mean, if you go back and you follow us, we kind of called exactly what happened. We talked about the first half of the year of sales outpacing orders. So that means you'd have a slightly below 1 book-to-bill. Now we talked about the destock in the first half and we thought it would turn positive in the second half. We did that before this quarter. I think we have a pretty robust communication system with our field, but there's always opportunities to get better and we work on those and continuously improve our businesses, but I feel like the information that we got from the field is pretty accurate and we're on top of it, so -- but there's always rooms to improvement and we're always looking at ways to improve.

Thank you.

Yeah. We had 9% acquisition growth and Paragon in the acquisition is not the organic, so the Paragon orders -- sales, excuse me. Yeah.

Yeah. With Paragon, we had obviously the large book, the backlog of orders in Q4, and then in Q1, there's a timing issue because Paragon is going through the same destock that the EMG businesses are. So there's a bit of a destock there.

That impacts the order. So the medical market, it's in both our EMC business and Paragon, we're seeing the same kind of destock in the EMG businesses. If we look at the medical procedures, they're all growing at mid to high single digits, but the medical device OEMs are destocking their inventory, correcting their inventories. It's kind of a widely communicated piece of information, and we monitor the procedures and they're growing. So this destock, we think is going to run its pace through the first half of the year.

Go ahead.

Yeah. I think for the year, when we bought Paragon, it was a little less than $500 million, and the first year, we talked about the mid-single digit growth. So that's still exactly what we have in our model. So we think that we get out of this year and we think it'll be double digit growth over the next couple of years, but the Paragon model from the viewpoint of what we had going into the year and what it is now is pretty much identical.

Yeah, I'd say the vast majority of it was restructuring, and there was a small part of it that were other integration costs, but the vast majority of...

Yeah. We started the effort in Q1. And as I said, we pulled forward all the benefits that we had, and I think the restructuring is -- was done in Q1. So I don't think we're going to have another restructuring charge in Q2, if that's what you're asking.

It's a one-off charge. It's a one-off charge --

If you look at the ZYGO business, we had a big acquisition. We did a similar thing when we got comfortable with what we could do, and we may have another charge with Paragon down the road if we think there's other ways to improve it. But right now, this is a one-time charge to dramatically improve the operating capability of that business and the returns that I communicated to you are very positive.

Yeah.

Thank you. Thanks, everyone, for joining our call today. And as a reminder, a replay of today's webcast may be accessed in the Investors section of ametek.com. Have a great day.