AMETEK, Inc. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and thank you for standing by. Welcome to AMETEK's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
Thank you, Julia. Good morning, and thank you for joining us for AMETEK's First Quarter 2024 Earnings Conference Call. We 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.
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 in earnings per share. During the quarter, we established records for sales, operating income and EBITDA, and deliver 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.
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.
Thank you, Dalip. Julie, can we please open the lines for questions?
[Operator Instructions] Our first question comes from the line of Deane Dray of RBC.
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 destocking 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's your refresh feel on that as well?
Sure, sure. Glad to do that all, Deane. I'll start with the 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 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.
It's all really help. Go ahead.
Yes. You asked about the destock, Deane. Yes, 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.
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?
Yes. It's salespeople with 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.
Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners.
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 there are 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 onetime deal in this quarter as you kind of bed down the asset?
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, when we bought, I believe, Zygo, is 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 onetime nature. It's for larger deals as you know, Paragon was largest acquisition that we have done.
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 curious...
Yes, if you look at -- our overall sales were up 9%. That's because both groups. And go 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 defines the group dynamics for revenue.
And maybe just 1 last 1 back to this kind of destock question. Just to 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 confidence level that it actually is, in fact, destock and like you have visibility on sell-through being better on the other side? Maybe just kind of address that, if you could?
Yes, 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 back-end loaded. So we feel good about that.
And I'm sorry, did you have a comment on price? I missed it, and I'll see the floor.
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 their pricing to come in a bit and inflation to come in a bit, but we expect to maintain a positive spread between them.
Our next question comes from the line of Brett Linzey of Mizuho.
This is [indiscernible] for Brett Linzey. So as we look at a more 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?
Yes, it's a great question. I mean we look at tariffs, and that became a bigger issue back in the 2017 time frame. 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 $0.01, a $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 U.S., we're largely sourcing from Mexico and other regions of the Americas and in Europe. We do a lot of sourcing from to Czech Republic and Serbia. And in Asia, we do a lot of sourcing from Malaysia.
Perfect. And then if you can just provide some color on the tempo or monthly cadence of trends in the quarter and then looking into April?
Yes. I mean it was a pretty typical quarter. March was the strongest -- excuse me, March was the strongest quarter. Wait a minute. Okay, yes, 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're right on plan. So we feel good about the guidance. And it's pretty -- as I said, it's bouncing around there. But we're not seeing any incremental weakness at this point.
Our next question comes from the line of Scott Graham of Seaport Research Partners.
Really, maybe the first question is about the M&A environment. EBITDAs 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 is firm up, that's kind of when I think the 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?
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 deals meet our criteria, we could do over $4 billion of deals this year, and that would only take our leverage up to about 2.5x. So we're really in an excellent position. And it's not a balance sheet issue. It's not a cash flow issue.
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 3 quarters?
Yes. This is sequential, Scott.
Okay. So sequentially, you're expecting sales dollar to be up.
Q1 will be a bit higher than Q2, Q3 a bit higher than Q2 and Q4 will be a bit higher than Q3.
Okay. And the last one is just sort of back on the orders. I know you do have a pretty significant comp that you're up against when you stack them. What were orders in the quarter in dollars and in organic?
Yes. The orders were -- 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.
Yes. No, I get it, '22 and '21 were also exceptional organic periods for you.
Yes.
Our next question comes from the line of Andrew Obin of Bank of America.
Just a question, how to think about the Paragon Medical integration costs. So what's the payback on this restructuring that's now -- because I assume it's extra. So what's the payback on this restructuring that's embedded in '24 guide? And how much of it should I add to '25?
Yes. Well, in '24, we had told you in prior meetings that Paragon is 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 2 years, and at run rate, so it will take us a couple of years to get there. But the run rate, we have $70 million of benefit. So we spent approximately $29 million. We're going to get approximately $70 million of benefits. The payback is less than 2 years. So that really tells you what a great return it has, and it's just -- there wasn't a lot of focus, and 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.
Sorry, I'd probably -- and I'd probably take it offline, but just to make sure, so I thought the Paragon restructuring was extra because you saw incremental opportunities. So you were saying that I should have -- that, that was embedded all along but was not in the guide. I'm sorry...
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 put it forward.
Okay. I'll take it offline because I'm not sure if I -- so I should have had it in my numbers or this $0.10 is extra on top of view we're thinking, just confirming that, I apologize. And I'm happy to take it offline with Kevin, I apologize.
Yes. 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.
Got you. That makes sense. And then just on revenue and you did give very good color was basically the destock what drove -- I guess you were expecting I think you guided for low double-digit revenue in the first quarter, a little bit below. So it's just you said it's destock pulled forward, correct?
Yes.
Our next question comes from the line of Christopher Glynn of Oppenheimer & Co. Inc.
Dave, I was curious just to go into the top a little bit of the long-term multiyear kind of secular trends where you see an impact. It occurs to me maybe the Power business could be on your leading edge with energy transition and electrification. But curious your comments in general on the kind of secular trends, and in particular, what you're seeing as kind of street level evidence on reshoring type trend.
Yes. 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, but 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.
Our next question comes from the line of Joe Giordano of T.D. Cowen.
This is Dan on for Joe. Sorry, I know destocking and bottoming of orders within automation has been discussed a few times. So just a quick follow-up. This is obviously something a lot of companies have been struggling with in the past few quarters. But some have also been talking about changing their internal processes to gain more visibility of end market and end users. Is there anything that you guys have done potentially more frequent conversations or reaching out to like end market users to understand a bit better their demand going forward? Anything you've changed recently?
I can't point to anything to change. I mean if you go back and you follow us, we kind of call 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.
Our next question comes from the line of Nigel Coe of Wolfe Research.
David, I just want to come back to the order math. I think you said down 8% and then down 10% organic.
Right.
We've got about 9 points of contribution from Paragon in our numbers. So just wondering what am I missing, I've expected that there would be significant contribution from Paragon in the order numbers. So just help me out with that math, please.
Yes. We had 9% acquisition growth, and Paragon is in the acquisition is not the organic. So the Paragon sales orders -- sales, excuse me. Yes.
Okay. But then the orders, 8% organic to, that makes sense, reported downtimes in organic. Was there no material impact from Paragon there?
Yes. With Paragon, we had obviously, the large -- look the backlog as orders in Q4. And then in Q1, there's a timing issue because Paragon has gone through the same destock that the EMG business is. So there's a bit of a destock there. That impacts the orders.
Okay. Does that impact the full year forecast? I think we've got close to $5 million of sales Paragon, does that destock impact that outlook. But also... I do.
Go ahead.
No, no. Please go ahead, Dave.
Yes. 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 will be a double-digit grower 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.
Okay. And then just, sorry, a follow-up on the $29 million. Is that all restructuring? Or is there some inventory and accounting break down?
Yes. 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...
And does some of that come into 2Q as well? Do we think about that into 2Q?
Yes. 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.
I am showing no further questions at this time. I would now like to turn it back to Kevin Coleman, Vice President of Investor Relations and Treasurer, for closing remarks.
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.
Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.