AMETEK, Inc. (NYSE:AME) Q1 2024 Earnings Call Transcript

AMETEK, Inc. (NYSE:AME) Q1 2024 Earnings Call Transcript May 2, 2024

AMETEK, Inc. beats earnings expectations. Reported EPS is $1.64, expectations were $1.59. AMETEK, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to AMETEK’s First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Kevin Coleman: Thank you, Julia. Good morning and thank you for joining us for AMETEK’s first quarter 2024 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today’s call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK’s filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2023 or 2024 results or to 2024 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization and excluding the pretax $29.2 million or $0.10 per diluted share charge in the first quarter or integration cost related to the Paragon Medical acquisition.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We’ll begin today’s call with prepared remarks and then we’ll open the call for questions. I’ll now turn the meeting over to Dave.

Dave Zapico: Thank you, Kevin, and good morning, everyone. AMETEK delivered strong results in the first quarter of 2024 with outstanding operating performance leading to double-digit growth and earnings per share. During the quarter, we established records for sales, operating income, and EBITDA and delivered robust core margin expansion and excellent cash flows. Considering our first quarter results and the positive outlook for the back half of the year, we are increasing our earnings guidance for the full year. AMETEK’s continued success is a testament to the strength and resiliency of our growth model, the quality of our businesses, and the outstanding contributions from all AMETEK colleagues. Now, let me turn to our first quarter results.

Sales in the first quarter were $1.74 billion, up 9% over the same period in 2023. Organic sales were down slightly, acquisitions added nine points, and foreign currency had a small positive impact. Book-to-bill in the quarter was $0.96, and we ended the quarter with a very strong backlog of $3.46 billion near record levels. AMETEK’s operating performance to start the year was excellent. Operating income in the quarter was a record $446 million, a 10% increase over the first quarter of 2023. Operating margins were 25.7% in the quarter, up 30 basis points from the prior year. Excluding the dilutive impact from acquisitions, core margins were up a very strong 180 basis points versus the prior year. EBITDA on the quarter was also a record at $542 million, up 13% over the prior year, with EBITDA margins an impressive 31.2%.

This outstanding performance led to earnings of $1.64 per diluted share, up 10% versus the first quarter of 2023, and above our guidance range of $1.56 to $1.60. Now, let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group had a strong start to the year with tremendous operating performance leading to record operating margins and impressive margin expansion. Sales for EIG were $1.16 billion in the quarter, up 4% from the first quarter of last year. Organic sales were up 1% and acquisitions added three points. Growth in the quarter remained strongest across our aerospace and defense and materials analysis businesses. EIG’s operational execution in the first quarter was superb, with strong profit and exceptional operating margin expansion.

Operating income was $353 million, up 14% versus the prior year, while EIG operating margins were a record, 30.5% up a robust 280 basis points. This level of operating margins speaks to the quality and leadership positions of our highly differentiated businesses. The Electric Mechanical Group also delivered solid first quarter operating performance despite the headwinds from inventory normalization impacting some of our EMG businesses. EMG’s first quarter sales were a record $579 million, up 21% versus the prior year, driven by contributions from recent acquisitions of Paragon Medical and Bison Engineering. First quarter operating income was $120 million, while core operating income margins were 24.1% in the quarter. Our first quarter results reflect the unique capabilities of our growth model to successfully manage short term market headwinds and deliver robust margin expansion, outstanding cash flow, and strong double digit earnings growth.

Our businesses remain focused on executing our strategic initiatives and delivering differentiated technology solutions to support our customers’ most complex challenges. Our distributed operating structure enables flexibility in responding to market dynamics, while our robust cash flow and balance sheet provide ample support for our acquisition strategy. This acquisition strategy, along with our organic growth initiatives, is expanding AMETEK’s presence within high-growth markets. These markets include med tech, clean energy, electrification, and aerospace and defense, and help ensure our diverse portfolio is well-positioned to capitalize on these attractive, long-term, secular growth areas. We remain committed to investing across our businesses to accelerate new product development and expand our sales and marketing efforts.

In 2024, we expect to invest in incremental $100 million in growth initiatives with a sizable portion of this in support of our research, development, and engineering efforts. The effectiveness of these investments is reflected in our Vitality Index, which was a strong 25% in the first quarter. AMETEK’s commitment to invest in our RD&E and continuously innovate ensures a steady stream of new products that support our customers’ critical applications and position us for continued success. I wanted to take a moment to highlight an example of how the elements of the AMETEK growth model work together to deliver exceptional results. AMETEK Zygo, a global leader in the design and manufacture of advanced optical metrology systems and ultra-precise optical components, was recently awarded AMETEK’s Dr. John H.

Lux Award, an annual award provided to the AMETEK business, to best exemplifies the commitment to continuous improvement in achievements and operational excellence. As part of its market expansion strategy, Zygo identified an attractive new market segment, virtual and augmented reality applications, as a compelling growth opportunity for their advanced optical meteorology systems. This led to Zygo’s new product development and commercial teams working closely together to advance their technology capabilities and commercialize as a solution to support the highly precise requirements of this application. The success of this work resulted in strong demand and the need for Zygo to meaningfully increase production. Utilizing cross-functional teams and deploying tools like value stream mapping and Lean Six Sigma, they achieved a remarkable three-fold increase in production output, allowing them to meet the growing demand for the metrology solution.

This achievement highlights the synergy between our new product development, global market expansion, and operational excellence strategies to help identify, develop, and deliver exceptional technology solutions to address an important market need and accelerate growth. Congratulations to the Zygo team for a job well done. Now switching to our acquisition strategy. The acquisitions we completed in 2023 are integrating nicely into AMETEK. We are leveraging our proven integration capabilities and our global infrastructure to help accelerate their growth, drive operational improvements, and deliver strong returns. We are very excited about these acquisitions as they are expanding our market presence and attractor growth markets, including the Medtech space through the Paragon Medical Acquisition.

Paragon Medical, which we acquired in December, is a leading manufacturer of highly engineered medical components and single use and consumable surgical instruments. Paragon has an outstanding brand, leading innovation and design capabilities, and a strong position serving a number of high growth market segments. Our integration efforts are focused on supporting and accelerating this growth while also leveraging AMETEK’s infrastructure and operational excellence capabilities to drive efficiency improvements. The integration charge we took in the first quarter will allow us to drive these improvements and better position Paragon for accelerated growth and profitability. Looking ahead, our acquisition pipeline remains robust, and we are actively working on multiple opportunities.

We have the balance sheet and financial capacity to deploy meaningful capital on strategic acquisitions. We look forward to delivering continued value to our shareholders through strategic acquisitions and prudent capital deployment. Now turning to our outlook for the remainder of the year. We expect the impact of inventory normalization to continue through the first half of the year with improvements in the second half of the year as we indicated on our last earnings call. As a result, for the full year, we continue to expect overall sales to be up low double digits on a percentage basis with low to mid-single digit organic sales growth. Diluted earnings per share for the year are now expected to be in the range of $6.74 to $6.86, up 6% to 8% compared to last year’s results, an increase from the previous guidance range of $6.70 to $6.85.

For the second quarter, we anticipate overall sales to be up mid to high single digits with earnings of $1.63 to $1.65, up 4% to 5% versus the prior year. In summary, AMETEK delivered a strong first quarter with earnings growth which exceeded our expectations driven by exceptional operating performance. We are encouraged by these results and remain confident in our ability to navigate the current environment and benefit from improved sales growth in the back half of 2024. We are confident in the future of AMETEK as our world-class talent and the adaptability of the AMETEK growth model will continue to drive the long-term sustainable success for our stakeholders. I will now turn it over to Dalip Puri who will cover some of the financial details of the quarter.

Then we’ll be glad to take your questions. Dalip?

Dalip Puri: Thank you, Dave, and good morning, everyone. As Dave highlighted, AMETEK had a very strong first quarter with record level sales and exceptional operating performance highlighted by strong core margin expansion and free cash flow conversion. Now, let me provide some additional financial highlights for the first quarter. First quarter general and administrative expenses were $26.4 million, or 1.5% of sales, in line with last year’s first quarter. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.4% of sales. First quarter interest expense was $35 million, up $15 million from the prior year first quarter due to higher debt balances outstanding following the December 2023 acquisition of Paragon Medical.

Other operating expenses were down $5 million, primarily due to higher interest income and higher pension income compared to the prior year’s first quarter. The effective tax rate was 18.9%, down from 19.5% in the first quarter of 2023. For 2024, We continue to anticipate our effective tax rate to be between 19% and 20%. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full year estimated rate. Capital expenditures in the first quarter were $28 million, and we continue to expect capital expenditures to be approximately $160 million for the full year, or about 2% of sales. Depreciation and amortization expense in the quarter was $98 million. In 2024, we expect depreciation and amortization to be approximately $400 million, including after-tax, acquisition-related intangible amortization of approximately $190 million, or $0.82 per diluted share.

Operating working capital in the first quarter was 18.7% of sales. Operating cash flow was $410 million, up 6% versus the first quarter of 2023, while free cash flow was $383 million, up 4% over the prior year. For the quarter, free cash flow conversion was a strong 123% of net income. For the remainder of 2024, we continue to expect strong free cash flow conversion in the range of 110% and 120% of net income. Total debt at March 31st was $2.9 billion, down from $3.3 billion at the end of 2023. Offsetting this debt is cash and cash equivalents of $374 million. At the end of the first quarter, our gross debt to EBITDA ratio was 1.3x, and our net debt to EBITDA ratio was 1.2x. We continue to have excellent financial capacity and flexibility with approximately $1.8 billion of cash and available credit facilities to support our growth initiatives and our active acquisition pipeline.

While acquisitions remain our number one priority for use of our free cash flow, we also seek to opportunistically repurchase our shares and provide our shareholders with a consistently increasing dividend. In February, we announced a 12% increase in our quarterly cash dividend to $0.28 per share, our fifth consecutive year of 10% plus annual increases. In summary, our businesses delivered strong results to start the year with outstanding operating performance leading to robust core margin expansion and excellent free cash flow. Kevin?

Kevin Coleman : Thank you, Dalip. Julie, could we please open the lines for questions?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Deane Dray of RBC.

Deane Dray: Thank you. Good morning, everyone. Hey, can we start off with the usual kind of tour of the end markets and geographies and maybe finish up with the just kind of the de-stocking comments. It just continues to be drawn out, and we’re seeing it in all kinds of pockets, so it’s not AMETEK specific in any way, but just kind of what you refresh for you on that as well. Thanks.

Dave Zapico: Sure. Glad to do that, Deane. I’ll start with a walk around the company and I’ll start with our process business. Overall sales for our process businesses were roughly flat versus last year and in line with our expectations. Growth remained 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 of 2024.

We continue to expect organic sales for our A&D businesses to be up high single digits on a percentage basis, but 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 UVI 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 the 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, going to the automation and engineering 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 what’s going on in the various geographies, so 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%, so minus two, organic with notable growth in parts of our process and parts of our power businesses offset by weakness in automation. 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 our parts of our process businesses. So up low single digits in Asia and China was flat. Yes, you asked about the destocking and I think that it’s playing out as we had talked about the 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 the second half of the year is positive.

Deane Dray: Great, and just a quick follow up on the growth investments. We know this is your playbook. Is there anything unique in terms of how you’re deploying that capital? I mean, typically it’s salespeople is a component but any other kind of wrinkles here you could share?

Dave Zapico: Yes, it’s salespeople with the largest chunk of it is in the engineering, the 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.

Operator: Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners.

Jeffrey Sprague: Hey, thanks. Good morning, everyone. Hey, can you just address a little bit more, Paragon itself, how it’s performing and the charge that you took. I don’t recall a large charge like this on prior deals. Maybe they’re smaller ones that you just absorbed but didn’t break out, but kind of the nature of what you’re trying to accomplish. And is this kind of a one-time deal in this quarter issue to kind of bed down the asset?

Dave Zapico: Yes, that’s a great question, Jeff, and it’s kind of what you said. I mean, we typically absorb the smaller acquisitions as we proceed through the years and quarters. And the last time we did something like this, and 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 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 of what we’re doing. And I feel positive about the deal.

Jeffrey Sprague: Great. And then maybe just switching gears. And I’m sorry if I missed it. I was on a little bit late. But can we just decompose revenue growth in the quarter for the segments, some color on what the organic performance was at the segment level? And if you have any color on price or other elements of revenue, I’m interested to hear that.

Dave Zapico: Sure, yes, 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 0.5 point. EIG overall sales were plus 4%. The organic growth in EIG was plus 1%. EMG overall sales were plus 21%. And the organic sales at EMG were minus 4%. So you had that to find the group dynamics for revenue.

Jeffrey Sprague: And maybe just one last one back to this kind of whole destock question. Just a comment that it was more in Q1 than expected. And I know it’s kind of hard to know what your customers are going to do. But just your competence level that it actually is in fact destock and you have visibility on sell through being better on the other side. Maybe just kind of address that if you could.

Dave Zapico: Yes. 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 backend 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 the last quarter to compare to Q4 ‘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’ve 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 more 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 in — 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, H2 is very much aligned with our historical averages.

Jeffrey Sprague: And I’m sorry. Did you have a comment on price? I missed it and I’ll leave the floor. Thank you

Dave Zapico: No, that’s a good question, Jeff. Pricing 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 the pricing to come in a bit and inflation to come in a bit, but we expect to maintain a positive spread between them.

Operator: Our next question comes from the line of Brett Linzey of Mizuho.

Peter Costa: Hi, guys, this is Peter Costa on from Brett Lindsay. Hey, so as we look at a potentially more aggressive tariff regime, can you just talk about how nimble your supply chain configuration is and then your ability to flex around different regions, if needed? Thanks.

Dave Zapico: Yes, that’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. And to give you an idea across the whole company, tariffs are only going to cost us about a $1.00, 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 are really rebalancing our supply chain. We’re essentially finished with it, just a 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 largely, we source what we sell in China. So we’re in a pretty good position in terms of tariffs.

Peter Costa: Perfect, thanks. And then if you could just provide some color on the tempo or monthly cadence of trends in the quarter and then looking into April, thanks.

Dave Zapico: Yes, I mean, it was a pretty typical quarter. March was the strongest. March was the strongest quarter. Wait a minute. Okay, yes, pretty typical quarter with March being the strongest on both orders and sales. So sales were the highest of the quarter in March. And then in April, we’re right on plan. So we feel good about the guidance. And as I said, it’s bouncing around there. But we’re not seeing any incremental weakness at this point.

Operator: Our next question comes from the line of Scott Graham of Seaport Research Partners.

Scott Graham: Yes, hi. Good morning. Thanks for taking the question. Really, maybe the first question is about the M&A environment. EBITDA do seem to have firmed up, even though this first quarter, I think most would say industrial land has been a little uneven. Nevertheless when EBITDA’s firm up, that’s kind of when I think AMETEK does a lot of striking. And I’m just wondering, are we looking at a year this year that could mirror last year? I mean, what is like the really near term pipeline look like, Dave?

Dave Zapico: Yes, 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 deal meets our criteria, we could do over $4 billion of deals this year and that would only take our leverage up to about 2.5x. 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, a 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.

Scott Graham: Thank you for that. You answered one of Jeff’s questions earlier saying you’re expecting sales to be up modestly each quarter, were you referring to organic for the next three quarters?

Dave Zapico: Yes, this is sequential Scott.