Q2 2020 AMETEK Inc Earnings Call
[music].
Any by and welcome to the second quarter 2020, AMETEK Inc. earnings Conference call.
At this time all participants are in listen only mode. After the speaker presentation, there will be a question and answer session.
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Please be advised in today's conference is being recorded.
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Well my pleasure to introduce vice President of Investor Relations, Kevin Coleman.
Thank you Andrew Good morning, Thank you for joining us for AMETEK second quarter 2020 earnings Conference call.
With me today, our days, the Pico Chairman and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer.
AMETEK second quarter results were released earlier this morning and are available on markets systems, and any investor section of our web site.
This call is also being webcasted.
And can be accessed on our website.
During the course of today's call, we will make forward looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results could differ significantly from expectations a.
A detailed discussion of the risks and uncertainties that may affect our future results is contained in ametek's filings with the FCC, including in our 10-Q, which we filed later today.
AMETEK disclaims any intention or obligation to update or revise any forward looking statements.
Any references made on this call to 2019 or 2020 results will be on adjusted basis, excluding after tax acquisition related intangible amortization.
And also excluding the gain from the sale of ready now ace in the first quarter of 2020.
And the realignment charge taken in the first quarter 2020.
Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investor section of our web site.
I will begin today with prepared remarks by Dave and Bill and then open it up for questions I'll now turn the meeting over to Dave.
Thank you, Kevin and good morning, everyone.
Despite an economic environment is challenging and uncertain as any we have ever faced and AMETEK.
Our businesses to strong in the second quarter, delivering outstanding operating performance that exceeded expectations.
I wanted to start by thanking all AMETEK colleagues, who are working tirelessly through this pandemic to provide our customers with great products and exceptional service.
As our result to test our employees are doing an amazing job.
The safety of employees remains our highest priority.
We continue to implement our pandemic response plan.
Which provides a pandemic for our businesses to managed care facilities and workforce during this pandemic.
We are falling CDC and local health and safety guidelines and are adjusting and enhancing our safety protocols as required to ensure a safe working environment for our employees.
Now, let me turn to our results for the quarter.
Sales in the second quarter were $1.01 billion down 22% versus the second quarter of 2019.
Organic sales were also down 22% with recent acquisitions contributing 4%.
The Divesture are ready now is a three point headwind and foreign currency, a one point headwind.
Despite substantial demand weakness as our business delivered exceptional operating performance.
Operating income in the quarter was $227 million and operating margins were very strong at 22.4%.
While decremental margins weren't impressive 25%.
EBITDA in the second quarter was $289.7 million, an EBITDA margins were a record 28.6% up 160 basis points over last year's second quarter.
This drove earnings of 84 cents per diluted share down 20% versus the second quarter of 2019.
Our cash generation in the quarter with suffer.
Operating cash flow was up 28% year over year to $315 million.
Free cash flow conversion was also exceptionally strong at 183% of net net income.
Our businesses are focused on controlling what they can.
The operating performance in the quarter is validation of the strength and flexibility of our asset light business model.
The quality of our niche businesses and most importantly, the talent and commitment of our workforce.
Next I will provide some additional details at the operating group level.
Second quarter sales for electronic instruments group were $647.9 million down 21% from the same period last year.
Organic sales were down 26% with the acquisitions, a good tan and Intel power contributing 5%.
Despite the impact Coven 19 had on sales are yaghi businesses delivered excellent operating performance.
He is operating income in the second quarter was $159.6 million and operating margins remained strong at 24.6%.
The electromechanical group also delivered excellent operating results driven by better than expected organic sales and their operational excellence initiatives, which contributed to exceptional margin expansion.
EMG sales were $364 million down 22% versus the prior year second quarter.
Organic sales were down 60% with the recent acquisition, but PDT, adding 3%. The divesture renting alloys was an eight point headwind and foreign currency was a one point headwind.
Mgs margin expansion was outstanding in the quarter.
Our operating income decreased to $84.3 million.
Operating margins expanded and impressive 170 basis points to a record 23.2% driven by our proactive operational excellence initiatives.
Truly exceptional work by our teams.
Now let me provide some color on the different end market dynamics, we are experiencing within our business.
AMETEK serves a diverse set of end market San across these end markets. We are seeing very different levels of demand and co with 19 impacts.
So as I did last quarter, a group our businesses into three buckets based on the levels of demand we are experiencing and provide some commentary on each.
I'll start with the most challenging markets commercial aerospace and oil and gas, which combined accounted for approximately 15% of AMETEK sales.
The weakness in commercial aerospace was largely as expected and driven by the impacts of Cowen 19 on both our commercial OEM and aftermarket businesses.
We expect these businesses to remain challenged for the balance of the year.
Along with the impact from coal to 19 weakness in our oil and gas business was a result of difficult prior year comparison, given several large project shipments last year.
As a result, we expect solid sequential improvements in this business during the third and fourth quarters.
Combined sales for aerospace commercial aerospace and oil and gas were down approximately 45% in the quarter.
Excluding these two markets AMETEK sales were down mid teens on a percentage basis in the second quarter.
Next our strongest markets defense and medical.
Combining these markets account for over 20% of our sales and we have been experiencing solid internal growth also strategically expanding our portfolio in these areas through acquisitions.
In the second quarter sales were up low single digits for these businesses and we expect this trend to continue in the third and fourth quarters.
And for the balance of our markets, which include power industrial automation metals food and beverage and research we are seeing demand level somewhere in between those other two extremes.
We expect to see sequential improvements through the balance of the year for these businesses also.
To offset these co in 19, driven demand challenges, we remain focused on actively managing our cost structure through a mix of structural and temporary cost actions.
Our executive office meets regularly with each of our businesses to review career current market conditions their demand outlook for the coming months and their operational plans.
It is critical that each of our businesses develop an operating plan customized for their business and that this operating plan b adjusted if conditions change.
This flexibility is key and our out asset light operating model were costs can be quickly variabilized.
This approach allows us to best to align our cost structure with demand levels, we are experiencing by market and by business.
We have the flexibility to expand cost savings initiatives or as demand continues demand conditions improve we can add back costs as required.
In the second quarter, we generated 85 million in total cost savings.
With 35 million structural savings and $50 million temporary cost savings.
This level of savings was above our initial estimate of 80 million total cost savings in the quarter.
As we look ahead of the third quarter, we expect approximately 65 million total cost savings were $35 million to $40 million structural and 25 $30 million in temporary savings.
And for the full year, we now expect structural savings.
Of $135 million, and we will flex our temporary cost savings either up or down.
Based on volume levels in the fourth quarter.
The spread of their client of ours is awfully forced companies to adapt and adjust how they do business.
Work from home requirements and travel restrictions have changed how companies interact and engage with customers.
Our businesses have been proactive in developing and utilize digital capabilities to help them stay engaged with our customers.
Our sales and engineering teams are working side by side with our customers through digital channels to cultivate and built relationships.
These initiatives have included virtual events.
Through newly implemented digital platforms provide product demos webinars and collaborative business meetings.
Finally, some of our teams are finding innovative ways to hell provide aftermarket services for our customers through interactive technologies.
I commend our teams were quickly adapting to the new reality and for embracing these new ways of doing business.
We remain committed to investing an additional technologies to support our customer experience.
Despite the global demand challenges ametek's continues to invest meaningfully in new product development initiatives.
We are seeing great success from these investments as our businesses are introducing many new innovative solutions to help solve our customers' greatest challenges.
Our vitality index, which measures the amount of sales generated from new products introduced during the last three years was very strong at 26%.
And here just a few of the recent examples of new product.
Introductions.
AMETEK land, a leading manufacturer of Noncontact temperature measurement solutions saw robust demand in the second quarter for their new viral load three.
This newly developed Noncontact temperature measurement solution is used to rapidly detect elevated skin temperature, while allowing users to adhere to social distancing requirements.
The safe Noncontact Edcs easy to use and highly accurate temperature solution is being used and entry points of offices warehouses hospitals schools and recreational facilities.
Given the products ability to complete accurate temperature screenings that scale viral load three is playing a role and reopening key facilities around the world.
Pre reform.
A leader in Threed measurement technologies released the latest solution in their metro scan Threed lineup.
The Metro scam Black is the fastest most accurate threed scanner in the world, what four times, a speed and resolution of his predecessor.
The measure scam black can withstand harsh product production environments and is utilized in the most complex quality control and quality assurance applications.
This incredibly versatile instrument can be used to scan various parts sizes and service finishes and real time, all with the same device.
And Additionally, Mohan a leading global provider of food package testing instruments released their latest version of the Dansensor checkpoint.
This new portable headspace gas analyzer provides quality control managers are more precise faster and more stable solution for measuring gases and specific food applications using modified atmosphere packaging for MLP.
And these are used to extend the shelf life for packaged foods and pharmaceutical products requires specialized packaging.
Congratulations to the land pre reform Oaklawn teams on these impressive new product development.
Now shifting to acquisitions.
The overall M&A market remains relatively quiet given the high levels of uncertainty around the corner virus and its impact on the economy.
That being said our M&A teams remain very active and we are managing several opportunities.
We have a very strong balance sheet and liquidity position in the ability deployed to deploy meaningful amounts of capital on acquisitions.
Our preference remains deploying that capital and strategic acquisitions that provide us the ability to add quite high quality companies to our portfolio and drive excellent returns for our shareholders.
Now turning to the outlook for the remainder of the year.
Hi levels of uncertainty remain given the continuing spread of their current survivors, especially throughout parts of the U.S.
Well visibility is improved from this point last quarter. It is still limited as customers remain cautious.
As a result, we will not be providing guidance for the third quarter over the full year.
What we issued guidance has conditions stabilize and visibility improves.
However, I did want to provide some high level comments around the third quarter in the balance of the year given what we know now.
First we expect to see sequential improvements in the third and fourth quarters with commercial aerospace being the only business not expected to see sequential improvements.
Second we still expect very strong decremental margins at approximately 30% in the third quarter.
And lastly, we now expect full year decremental margins in the 25% range versus our previous estimate of 25% to 30% Decrementals.
In summary, AMETEK managed well through was extraordinarily challenging environment during the second quarter.
The strength of the AMETEK growth model was evident in our second quarter performance and we will continue.
To allow us to operate at a high level.
Through this dynamic market conditions.
We are taking responsible cost the cost actions and continuing to invest our businesses.
To ensure they are poised to generate strong growth coming out of the downturn.
We also have a robust balance sheet and liquidity position to allow us to capitalize on what we believe will be an opportunistic period for acquisitions.
Finally, we're confident that AMETEK will emerge from these challenges is stronger organization given the growth profiles of our differentiated businesses, the companys financial strength and most importantly, the impressive level of talent.
Within our world class workforce.
I will now turn over to Bill Burke, who will cover some of the financial details of the quarter than we'd be glad to take your questions Bill.
Thank you, Dave I'd like to Echo Daves comments on the outstanding efforts of our employees around the world. They continue to deliver exceptional performance during these challenging times.
Let me provide some additional financial highlights for the quarter.
Second quarter General and administrative expenses were down $1.7 million compared to the same period in 2019 due to lower compensation costs and other discretionary spending cuts.
The effective tax rate in the quarter was 19.5% down from 20.4% in the same period last year, the lower rate in the quarter was due to tax planning initiatives.
For 2020, we now expect our effective tax rate will be approximately 19.5%.
And as we've stated in the past actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.
Working capital in the quarter was 19.6% versus 18.3% and last year's second quarter.
Capital expenditures in the second quarter were $10 million, we continue to expect full year capital expenditures to be approximately $75 million down from our initial expectations to start the year of $100 million.
Depreciation and amortization expense in the quarter was $61 million for the full year, we expect depreciation and amortization to be approximately $260 million, which includes after tax acquisition related intangible amortization of approximately $117 billion or 51 cents.
And share.
Our business has continued to generate high levels of cash operating cash flow in the quarter was excellent at $315 million up 28% over last year's comparable quarter.
Free cash flow was also outstanding at $305 million up 36% over the same period last year and free cash flow conversion was superb at 183% of net income.
Total debt at the end of the quarter was $2.87 billion up modestly from $2.77 billion at the end of 2019 and down $383 million from the end of the first quarter as we repaid a portion of the borrowings under our revolving credit facility.
Offsetting this debt is cash and cash equivalents of $1.13 billion.
Our gross debt to EBITDA ratio at the end of the second quarter was 2.1 times as we are intentionally holding higher than normal cash balances. This ratio was comfortably below our debt covenants of three and a half times, our net debt to EBITDA ratio was 1.3 times at quarter end.
And both our gross and net debt to EBITDA ratios improved 5.1 turns in the quarter.
AMETEK remains well positioned to manage this economic downturn with approximately $2.1 billion and liquidity to support our operations and growth initiatives. This includes over $950 million and available revolver capacity.
As we highlighted on our last call AMETEK has a robust balance sheet with no material debt maturities due until 2023.
To conclude our ability to deliver solid results with outstanding cash generation. Despite these unprecedented challenges is a testament to the strength of our businesses and the dedication of our world class workforce.
The AMETEK growth model and our financial strength firmly position us to manage this economic environment and nest and invest in future growth to deliver long term success Kevin.
Thank you Bill Andrew could we please open the line for questions.
Certainly.
As a reminder to ask a question you will need to press star one on your telephone.
Gary a question Chris the penalty. Please stay lie while we took all the culinary roster.
First question comes from the line of Matt Summerville with D.A. Davidson.
Thanks. Good morning couple of questions first Dave can you talk about what you saw from in organic quarter standpoint in the quarter and maybe provide some color on kind of what the monthly year over year cadence may have looks like from April into July.
Right.
Our overall orders were down.
Negative, 22% and organic was down about the same so really align with our sales.
Both of our groups were down.
And really fall as sales.
And we ended up with the book to Bill about 0.99.
And for orders the April was a low point in the quarter a grew nicely in May and then again in June so it follows a similar trend for sales.
And then can you talk about your expectation for second half Decrementals you indicated in Q3, maybe expecting something a little worse than what you had in Q2, so maybe what's driving that maybe within the context of the sustainability you see for the record EMG.
Margin performance you generated in the quarter. Thank you.
Yes. The first point is the end the second one I answer your second question first the PMT margins were exceptional and.
And they were driven by strong operating performance, we had positive mix and our defense businesses and we also had the.
Divestiture of reading hours to contributed 50 basis point incentive.
MG level, so EMG at a great quarter and the majority of that margin expansion was driven by excellent operating capability.
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In terms of the Decrementals I mean.
We had the good decrementals in both parts of the business, we had the 16% decrementals in the Mg and the.
31% in emerging and those are really good and and in terms of the guidance of 30, 30% Decrementals for Q3, we're going at we're adding back some cost and and we're really preparing for a larger fourth quarter. So.
It's still for the full year, we've increased our decrementals from 30% at 25%. So so that's what we're doing we're managing the business looking at the.
Focused on cash focused on managing the Decrementals and focused on driving key growth opportunities and we're done an excellent job of managing the Decrementals and.
Really kept our.
Our net income Mark our cash EPS down at the same level or sales drop which is pretty amazing when you consider their profitability level. The company saw pretty pleased with them.
Got it thanks.
Thank you Matt.
Thank you and our next question comes from the line of Allison Holiday with Wells Fargo.
Hi, guys. Good morning, good morning.
Yes, Dave could you talk with I know you mentioned the structural versus cyclical costs.
Thank you, Steve give a little bit more color on the structural cost savings that you're doing is widespread across the verticals or is it took a specific on the more challenge once it like aerospace.
I would say the structural.
Cost are more focused on the the more challenged markets and.
They are re sizing those businesses to the new demand level that we'll have those businesses are profitable that remain profitable the way down and the way we're looking at it as the businesses start to grow from a bottom will be very profitable in the way up so.
As a quick change in revenue and the team has done an excellent job of adjusting.
Adjusting to the new demand level also there was an element of those structural savings that are pulled forward from projects and our strategic plans. So we look forward out every three years and we've got a time like this we pull for some projects that are.
Some efficiencies from some on.
Plant consolidations, but mainly the structural conns on there while across the board they were mainly targeted at the commercial aerospace in the oil and gas business.
Great and then just turning to the M&A market I mean, obviously still challenge there, but could you give us a little coloring your pipeline in terms that size have you pivoted and my head specific end market vertical and I guess, even just comfort level, just given the uncertainty relative to the size of potential deals like you're likely looking at.
Right Great question, I mean, as you know Allison M&A remains our first priority and we feel there's going to be a substantial opportunity for us as we get through this crisis, because we're going to be pent up demand on deals and we have the balance sheet and the cash flow generating capability to execute.
On the opportunity and while the broader deal activity is do right now, we're very active and pipeline development and we actually have a couple of deals were looking at right now so we're actually in diligence.
And the.
Those are deals that.
We have been working through our pipeline there there are larger deals and there are smaller deals.
So I'm quite optimistic on the pipeline, but you still have the situation where to get to the end of the.
Deal buyers and sellers have to agree on new pricing expectations based on based on the.
Cash flow visibility and that impacts evaluation process and.
We're adjusting our process because we have the inability perform the face to face diligence that we used to.
Take for granted and we still need to have some of that to fill where are the comfortable where we're buying so we still think it's going to be late 2020 before the the market returns to new to some kind of normal but we are active on some properties right now so so I'm pretty pleased with how hard to team is.
Driving the pipeline has some good candidates in our pipeline.
Great. Thanks, so much thank you.
Thank you.
Question comes with a lot of Josh scores density with Morgan Stanley.
Hi, good morning.
Good morning, Josh.
Can you just just remind us.
With all of the structural and temporary costs elements coming in and I know you still kind of.
Leaving open on the fourth quarter based on demand.
How should we always think about incremental margins for next year, because obviously, there's a lot of torque in the business gross margins are high so volume recovery would feel pretty good.
But if I had to cross checked out against maybe some of the temporary costs that come out.
Still fair to say that Incrementals can start with the three next year or.
Should we think about that you definitely or maybe more specifically, knowing what we know about the temporary side.
Right Thats a great question I don't think Theres any doubt the incrementals was to can start with a three if you look at past downturns ametek's really driven margin expansion as we come out of the downturns.
And as a temporary costs were going to put back end as we progressed throughout the year, but that's not stopping us from putting up positive incremental so so I think largely you're going to end up with contribution margins in 2021 in that kind of range and I'm optimistic about that because the other thing you have to factor is as our price.
Similar pricing was very strong in the quarter and is holding up well in a very pleased with them.
Got it Thats helpful and then.
[laughter] kind of a two part second question first sight anything on July I think Matt Summerville asked about it but I don't know if there's anything specific and maybe talk around the role of backlog in some of the momentum or are you feeling like you're living hand to mouth and most of the businesses or.
Backlog, maybe kind of.
Distorting Twoq, you, where there's still some longer cycle businesses that need to run off.
No our backlog is pretty flat at $1.7 billion and.
As you know, we went through our guidance, but but.
But you in men with Matt we're asking is a sense, where the business is going forward and we can give you that I mean, if you start with Q2 or sales. The April was the worst than and improved in May and further improvement in June and.
If you look at that improvement trend and you look at.
July which is supportive of it we think that will be down roughly 50% in the third quarter, but thats an estimate based on what we know and there are many uncertainties, but that's kind of what we're tracking to right now.
And then.
Yep.
Okay.
That's very helpful. Thanks, a lot at I'll get back.
Thanks, Josh.
Thank you next question comes from the line of Nigel Coe with Wolfe Research.
Thanks, Good morning.
So you mentioned research.
I'm, just curious kind of how your research end markets phones.
Can imagine stay at home and you will come home.
Trend is very helpful. Thats. It. It's just curious where you see an x. I know that's moving edgy.
Of exposure.
Yes, I think the.
Ill.
Break the research market into a couple of different areas in the material science area of research both University and.
Corporate R&D it was weak.
Those those projects have been pushed the right.
In the life Sciences area, the market's holding up very well and.
As shown by our Tam business the business that we acquired last year that.
Performed very well slightly ahead of our expectations and.
Actually had flat revenue year over year in the second quarter for the topline as well and that was driven by the life Sciences market and.
The content products have been influential and the fight against Cove and in fact, the researchers at the University of Texas, Tuesday, Catan Cadthree camera.
They were the first people to structurally image the spike protein on the kroner virus, so thats driven a lot of excitement in demand around the.
Demand tools in fact, the demand Catan K three was the first person to.
Structure, the Cronto virus in the next to people that did it used to K, two which is slower in the speed of the cameras. The K threes faster allowed the researchers to get done quicker. So good demand drivers on that business and it really points are again, our research market Theres. Some areas that are doing very well some areas that aren't and in certain parts of the world The zone.
Research.
Institutions have not really opened up there are still close so we're hanging in there but that it's a it's a complex story. Okay. So unbalanced doesn't doesn't feel like it's any with from the average.
And then maybe just a little bit context on the on the Geo markets. If you could give us how U.S. Europe.
China et cetera, performing drivers and then and then just on the export exposure is changed materially.
Over the last several years and I'm just curious how the U.S. dollar weakness maybe benefits you going forward.
As you know where we're naturally hedged at the at the the topline in the bottom line based on currency. So the currencies swing doesn't really impact our profitability, but when the dollar weakens we do get more competitive so it's something that we're looking at so it's a good thing for us because we export over $1 billion.
And in terms of the geographical story line, we're really have broad base weakness and the Europe and the US were most challenged.
Europe was was down 29% on broad weakness and then also add a.
Difficult comp with those some middle East project business for oil and gas business.
I guess was down about 20%.
But it's pretty broad based and Asia was the best of the markets that was.
Mid teens and add notable strength in Asian or automation business.
China improved for US China was actually up 3%.
So positive rebound in China.
Driven by our automation in kmiec of business. So.
Thats the story broad based weakness and Asia was the best and driven by China.
Thanks, David Good luck.
Thank you.
Thank you.
Next question comes from the lighter Deane dray with RBC capital markets.
Thank you good morning, everyone although date.
Hey, I did notice that you guys put free cash flow in your release for the first time. So we really do appreciate that.
Now that Kevin, though that Kevin has got to smile on a space Im sure he does because I've.
Pestered him about that for quite awhile, but that we really do appreciate it but now I feel obligated to ask a free cash flow question. So here. It is did you benefit.
From the timing of tax payments.
We see another companies that have had upside on free cash flow. So was that a factor, yes, not not a huge factored being there was probably about $18 million or so so that 183 would still be a pretty strong number probably in the thing.
Mid 160 to 170 kind of a place.
Good and I really like how you segment the business.
And so those three buckets just to kind of give us the color real time as to the covert impact and last quarter I'm pretty sure you included defense and the better bucket better performing.
And it got called out is.
Positive mix this quarter as well for the M. GE can you comment on defense and should it be in that bucket.
Ill defense was in the good markets in both last quarter and this quarter.
So defense or the the the buckets and change in defense and medical were positive in Q2 and they were also positive in Q3 and is your car defense business is about 5% of the company.
And it's going extremely well it was up low double digits in the quarter.
So while the commercial market was challenged defense defense market with strong great.
And then on Catan really like that the update there and especially on the imaging of explore.
When is the next generation due to be release would that be the K for.
It is theres a case cadthree process in the K for aren't we're working on them, both and we haven't announced when the next want to come to market.
Terrific.
Last question on Capex. So you had caught 25 million out just for cash preservation.
When might that come back and just share with us a bit of your decision, making as to what would you trim and why and when you bring what types of projects you bring back on thanks, Yes.
Yes, the important point for us is our.
Our R&D spending is roughly flat with 2019, so we thought that was going to be up coming into the year and we trim that back to flat, but we're really investing in R&D and the types of things we've delayed our.
Expansions in regions of the World, where we're trying to put extra capacity in place and a new region in a world that were put in some capacity and so those kind of projects got delayed quite honestly, we have a decentralized the entrepreneurial team and.
They they understand the situation so they make natural decisions and we really don't have to push that number that's what comes up to us thats, what our business leaders want to spend.
And I can see as we get later in the year start evaluating turning on some of those of expansion projects we have in the.
Various geographies the world that we put on hold but there is very difficult to complete those.
That's real helpful. Thank you. Thank you.
Thank you.
Question comes on the line of Rob Wertheimer with Lilly's research.
Thanks, and good morning, everyone. Good morning rock congratulations on the book.
Thank you so much since kind.
So I just had two questions on the temporary side, if I can I think last quarter, you talked about delays difficulties in getting the customer sites or whatever pushing a little bit revenue is that still ongoing does that does that come back at any point. That's the first yeah. That's a that's certainly was with us throughout all of Q2.
And.
Still bit of an issue.
Especially now travel in the U.S. and really when it comes through as you can travel by your quarantined.
And.
That was a big issue in China, now, that's abated and its but thats a spotty issue around the world and it was a big factor in Q2, it'll be a diminishing factor in Q3.
And then does that does a few points of revenue the kind of come back to you and for Q or whatever or is there risk cancels or two so now that said that so that will come back and the they've been rescheduled the pushing things out, but it will definitely come back.
Perfect and then on cost side, if I may can you kind of roll the temporary costs indefinitely. The way you described it's obvious that commercial Aero, maybe maybe in trouble oil and gas for a bit and so maybe more per permanent restructuring as appropriate there but for the other markets that are just depressed during covidien and we don't know when it comes back and can you roll that indefinitely or does that.
I'm, a point where cost have to sort of come back in the system yes.
As a good question Robin when we did a restructuring early on you'll recall and we think we got the balance correct, but.
And we'll bring back those temporary costs, but if it gets to the point where theres diminished.
Long term viewpoint on revenue than it doesn't we can't run with the temporary cost forever. So its a.
I view, those temporary cost us coming out during the coming back during the course of the year end if demand doesn't come back then we may have to do something extra on the cost side, but we're certainly not looking that as the long term situation.
Okay. Thanks.
Thank you.
Next question comes from the line of Christopher Glynn with Oppenheimer.
Thanks, Good morning, everybody.
Hey, you mentioned that some some different adaptations around delivering administering some of your aftermarket services operations I'm wondering if you're revealing any or any businesses coming up with delivery models that might may actually be productivity levers and kind of remain.
Most of it.
That's really the case and accelerate adoption of digital capabilities as really opening arise.
And it's obviously in the digital marketing here in the way, we interact with our customers. The one thing I'd point to isn't the.
We have complex systems that are installed and calibrated and indeed.
Commissions and.
We have some service teams that are using augmented reality to remotely service and install our products and.
Really interesting tools right now so so I think some of those will be long lasting and we're certainly.
Tapping our business and.
Learning as we move through this pandemic.
Okay. Thanks, and then in terms of the third quarter outlook for kind of everything getting a little better versus other than commercial aerospace any some areas. Maybe you could call out where you are seeing the sharpest.
Kind of rebalancing in particular or anything just getting back to normal.
Our automation business is.
Kind of let us back that's doing well, our oil and gas business is going to going to recover but that's because of a lack of a comp as much as anything so those two businesses or ones that.
We'll recover and I think our defense business will be strong and the other thing we see is and the medical space. We saw really good demand on the Cove is related products like covert testing and covert breathing apparatus, where we saw the elective surgeries tail off and then second half the year, what our medtech customers are telling us as the electric.
Surgeries are going to rebound so.
Thats kind of things I pointed to.
Thank you.
Thank you.
Thank you Terry's question comes from the line of Scott Graham will Rosenblatt Securities.
Hey, Good morning, Dave Bill Good morning, Scott.
So I wanted to understand a little bit more on the cost side, where.
You talked about third quarter your cost reductions are going to be 65 million as my calculations here right that you were a little bit below what the annualized number would be for structural.
In the quarter and that that should pick up in the second half of the year, which would suggest a pretty significant reduction in year temporary.
Third quarter, yet you are not.
By the full year EPS guidance.
I guess I'm trying to meet connect those dots there if you're down on temporary.
Why don't you feel more comfortable giving died.
Yes.
There are too many variables and uncertainties that give guidance with our difficult.
Precision and I do appreciate your question and I understand what you're asking for that information in normal times.
We give you that type of information, but these are normal times and.
Well, we withdrew our guidance and we just don't feel comfortable putting back inflation.
Because of co bid in the lack of visibility and.
But the typical precision that we we have.
Okay, maybe take a stab at one of them would it be that you're unable to predict what's your second half next will be is that part of it.
No I don't think Thats, that's I mean, I was pleased at the mix out up the pricing out up that's.
On that that isn't the concern it's really if you think about it and we're in a pandemic.
And then.
We can have a hot spots.
Show up in places and we're constantly managing things so.
As a lot of uncertainty now and we just don't feel we can give guidance with the typical precision.
Understood. Thank you couple of others. If you could sure typically you give that by business unit stuff. Maybe you can just kind of coal out specifically what you saw in the quarter in automation power research, specifically and maybe if you could split for us.
Commercial aerospace OE versus aftermarket.
Right.
I'll take you through the market segment commentary because that covers a lot of ground and.
I think we'll be able to answer your question.
And our process business overall sales were down high teens in the quarter.
And we had the contributions from Japan offset by organic sales declines in line with ametek's organic sales decline.
And we talked about widespread travel restrictions and in addition to project push outs and delays on our ability to provide service so that impacted process significantly.
The largest weakness and process was oil and gas business.
Our medical businesses performed well in the quarter as did our Zygo business.
Zygo seeing solid growth driven by.
Some semiconductor fabrication work and Xtremio movie.
Okay.
And while the end markets remain challenged and visibility is limited.
We do expect to see sequential improvements in the third and fourth quarters across our process businesses, including one in gas.
In aerospace we've talked about that we were.
The defense business was up low double digits. The commercial business was was.
Down in the high Fortys.