Q4 2020 AMETEK Inc Earnings Call

February 4, 2021

[music].

Ladies and gentlemen, please remain on your lungs, the fourth quarter 'twenty and 'twenty AMETEK, Inc. Earnings Conference call will begin momentarily once again, the fourth quarter 'twenty and 'twenty AMETEK, Inc. Earnings Conference call will begin momentarily. Please remain on your lines. Thank you.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter, 'twenty and 'twenty AMETEK, Inc earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Be advised that today's conference is being recorded if you require any further assistance. Please press star zero.

It's now my pleasure to introduce vice President of Investor Relations, Kevin Coleman.

Thank you Andrew Good morning, and thank you for joining us for AMETEK <unk> fourth quarter 2020 earnings conference call.

With me today are David <unk>, Chairman, and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer and.

AMETEK fourth quarter and full year results were released earlier this morning and our.

Our available and market systems and in the investors section of our website.

This call is also being webcast and can be accessed on our website.

The webcast will be archived and made available on our site later today.

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 to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained and 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 2019 or 2020 results will be out and adjusted basis, excluding after tax acquisition related intangible amortization.

And also excluding the gain from the sale of reading alloys, and the first quarter of 2020 and realignment charge taken in the first quarter of 2020.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investors section of our website.

I'll 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.

AMETEK concluded 2020 with a strong fourth quarter.

Delivery record operating results despite ongoing challenges presented by the pandemic.

Our businesses saw a solid sequential sales and order improvement and the quarter, while year over year growth turn positive across several of our businesses.

We also drove exceptional operating performance during the quarter, leveraging our broad set of operational excellence initiatives.

These efforts led to record backlog margins and cash flow as well as the high quality of earnings that exceeded our expectations.

Joining us extremely well and we look ahead to 2021.

The safety of our employees remains our number one priority.

We continue to adjust our practices and enforce our safety protocols across our businesses to help limit the possible spread of the virus.

While we are cautious and the short term given COVID-19, and ongoing travel restrictions, we are highly confident and the strength of our businesses and our ability to deliver exceptional growth and shareholder returns over the long term.

The AMETEK growth model continues to provide the framework for long term sustainable success and our performance in 2020 was a testament to the strength and flexibility of the model.

Now, let me return to average.

<unk> for the quarter.

Sales and the quarter were $1 2 billion.

Down 8% compared to the fourth quarter of 2019.

Organic sales were also down 8%.

And with a divestiture of reading alloys, a three point and one.

The acquisition of <unk> low power contributing one point to growth and.

Foreign currency added two points.

As we saw in prior quarters, our commercial aerospace business was the most impacted by the pandemic with sales down approximately 35% and the quarter.

Orders continued to improve with our book to Bill at 1.07 for the fourth quarter.

This led to a record backlog of $1 8 billion.

Providing us with a positive line of sight into 'twenty and 'twenty one.

Operating income and the fourth quarter was $298 1 million.

Up slightly from the fourth quarter of 2020, and operating margins were a record 24, 9% up an impressive 210 basis points compared to the prior year period.

Yes.

EBITDA and the fourth quarter was a record $367 million and EBITDA margins were also a record of 31% up a robust 300 basis points over the fourth quarter of 2019.

This operating performance led to earnings per diluted share of $1 eight.

Matching last year's fourth quarter results and comfortably ahead of our guidance for the quarter.

Our business has also delivered outstanding cash flow during the quarter with.

And with operating cash flow up 13% to a record $386 million and free cash flow conversion exceptional 140, 158% of net income.

Now I'll, let and can provide additional detail the operating group level for the fourth quarter.

The electronic instruments group delivered superb operating performance despite challenging market conditions.

<unk> sales and the fourth quarter, where and $19 $4 million down 7% from the prior year and in line with our expectations of solid sequential improvement.

Organic sales were down 10%, while the acquisition of <unk> contributing 2%.

And foreign currency contributing 1%.

Commercial aerospace remained our largest driver of the sales weakness.

Other <unk> businesses saw improvements versus prior quarters.

Our materials analysis division returned to growth and the fourth quarter.

And while other AIG businesses, including <unk> and cellular also generated year over year growth.

Despite the overall sales decline Aig's operating income and the fourth quarter increased 3%.

Over the prior year to a record $236 million and operating margins reached a new high of 28, 8% expanding and exceptional 270 basis points over the same period and 2019.

Our electromechanical group also delivered strong operating results from the quarter.

EMG sales were $379 $5 million down 11.

<unk> percent from the fourth quarter and 2019.

Revenue in large part by the divestiture of reading alloys.

Organic sales were down 4% with a divestiture and eight point headwind and foreign currency, adding two points.

In addition to continued strong growth across our defense businesses.

We were pleased to see our automation business can generate solid organic growth and the Florida.

Fourth quarter operating income per EMG was $79 $8 million and an operating margin and expanded an impressive 110 basis points to 21%.

Now for the full year results.

Despite very difficult and market conditions and meaningful topline headwinds in 2020, AMETEK was able to expand full year operating margins, while delivering record levels of operating and free cash flow truly outstanding performance.

<unk> sales for the year were $4 5 billion.

Down 12% from 2019.

Organic sales declined 13% with acquisitions, adding 4%.

The divestiture of reading alloys, a 3% headwind and foreign currency flat for the year.

Operating income in 2021.

And $1 1 billion and operating margins were a record 23, 6% expanding 80 basis points over 2019.

EBITDA for the year was $1 three $2 billion and EBITDA margins were a record 29, 2% up 230 basis points from last year.

This led to full year earnings of $3 95 per diluted share down 6% versus the prior year.

As Bill will highlight our businesses did a fantastic job managing and working capital, which helped drive a record level of cash flow for full year operating cash flow up 15% to $1 8 billion.

In summary, while 2020 was very challenging I'm extremely proud of the way AMETEK colleagues manage through the pandemic and delivered tremendous results.

Yeah.

Before I cover the outlook for 'twenty and 'twenty one.

Wanted to highlight certain key elements of the AMETEK growth model and how each position us for long term success.

First and foremost.

AMETEK proven operational acumen stood out in 2020 with our business is doing and incredible job driving our operational excellence initiatives.

And the fourth quarter, we generated $60 million and total cost savings with 50 million and structural savings and $10 million and temporary savings.

And for the full year total incremental savings versus the prior year were $235 million with approximately 145 million and structural savings and $90 million and temporary savings, including furloughs and travel reductions and temporary pay actions.

As we look ahead to 2021, we expect a much more modest level of temporary savings versus 2020.

As the economy continues to recover from the worst from the pandemic and we continued to add back these temporary costs.

However, we do expect to drive meaningful incremental structural savings across our various operational excellence initiatives, including across our global sourcing activities.

For the full year 2021, we expect approximately $140 million of incremental operational excellence savings.

Shifting to new product development.

Even through this downturn, we remain committed to investing and new products and solutions that help our customers solve their most complex challenges.

And 2020, we invested $246 million and research development and engineering approximately five five percentage of sales.

These investments led to outstanding innovation, and dozens of new product launches and the fourth quarter Ive Italian index or the percentage of sales generated from products introduced over the last three years.

And was an impressive 25%.

And 2021, we expect to invest approximately $270 million or five five percentage of sales and research development and engineering to enhance our position as a global technology leader. This is a 10% increase over 2020 ardine spend.

Finally, I want to touch on our acquisition strategy.

Prior to the onset of the pandemic last year.

And we acquired and tell empower a leading provider of high reliability Ruggedized Uninterruptible power systems for mission critical defense and industrial applications.

And <unk> has integrated nicely into our power systems and instruments Division and is performing well.

While deal flow and 2020 was impacted by the pandemic. We are seeing continued improvements and the M&A markets and.

And are managing a strong pipeline of acquisition targets across a broad set of markets.

As Bill will discuss shortly AMETEK has significant balance sheet capacity and when combined with our robust cash flow generation provides us with meaningful capital to support our acquisition strategy, which remains our number one priority for capital development deployment.

Now shifting to our outlook for the year ahead.

While we remain cautious and the short term given the uncertainty and the timing and pace of the recovery.

We are confident and the strength of our businesses and our ability to manage through these uncertain times.

We continue to manage our businesses safely and prudently while ensuring continued investments in key growth initiatives.

For the year, we expect both overall.

And organic sales to be up mid single digits versus 2020.

Diluted earnings per share for the year are expected to be and the range of four.

And $4 18 to $4 30.

Up 6% to 9% compared to 2020.

For the first quarter, we anticipate continued year over year impact from the pandemic with overall sales down low to mid single digits and first quarter earnings of <unk> 97 to $1 two per share flat to down 5% versus the prior year.

In summary, the strength of the AMETEK growth model.

The asset light nature of our businesses.

Our leading positions and attractive niche markets and our world class workforce will continue to drive long term sustainable success.

I am confident that we are emerging from this unprecedented economic environment, even stronger than we were before.

Again, I would like to thank all of our employees for their continued hard work and tremendous efforts as we manage the.

And the ongoing global crisis.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter.

And then we'll be glad to take your questions Bill.

Thank you David as Dave highlighted AMETEK had an outstanding finish to 2020.

Record operating performance and a high quality of earnings and the fourth quarter.

I would also like to thank and recognize all of my AMETEK colleagues for their significant contributions in 2020, the way our teams persevered through the challenges of the past year was truly impressive.

With that I will provide additional finance financial highlights for the fourth quarter and the full year and will also provide some additional guidance for 2021.

Fourth quarter General and administrative expenses were $17 $7 million up modestly from the prior year.

For the full year G&A was down 11% from 2019 due to lower compensation costs and other discretionary cost reductions and.

And as a percentage of total sales was one 5% in both years.

For 2021 general and administrative expenses are expected to be up approximately 10% due primarily to the return of temporary costs, including compensation.

The effective tax rate and the fourth quarter was 21% up from 17, 6% and the fourth quarter of 2019.

The difference and tax rate was due primarily to the finalization of tax returns and each of the years.

For 2021, assuming the current tax regime, we anticipate our effective tax rate to be between 19% and 20%.

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.

Our businesses continue to manage their working capital and exceptionally well operating working capital was an impressive 14% and the fourth quarter down 330 basis points from the 17, 3% reported and the same quarter last year, reflecting the outstanding work by our teams.

Capital expenditures were $37 million and the fourth quarter and $74 million for the full year.

Capital expenditures in 2021 are expected to be approximately $110 million.

Depreciation and amortization and the quarter was $65 million and for the full year was $255 million and 2021, we expect depreciation and amortization to be approximately $260 million, including after tax acquisition related intangible amortization of approximately 107.

$17 million or <unk> 50 per diluted share.

As Dave highlighted our businesses continue to generate tremendous levels of cash flow.

Operating cash flow and the quarter was a record $386 million up 13% over last year's fourth quarter free cash flow was also a record at $349 million up 16% over the same period last year, resulting in a free cash flow conversion of 158% of net income.

Cash flow for the full year also set new record levels operating cash flow for 2020 was $1 $2 $8 billion.

Up 15% over the prior year and free cash flow was $1 billion to $1 billion a year over year increase of 19%.

Full year free cash flow conversion was 158% and net income adjusted for the reading alloys pain.

Total debt at December 31 was $2 41 billion down from $2 $77 billion at the end of 2019.

Offsetting this debt is cash and cash equivalents of $1 2 billion, our gross debt to EBITDA ratio was one eight times and our net debt to EBITDA ratio was <unk> nine times at year end.

We entered 2021 with approximately $2 6 billion and liquidity to support our growth initiatives.

This liquidity along with our strong balance sheet and no material debt maturities until 2024 enables us to manage the continued effects of the economic downturn, while also deploying meaningful capital and strategic acquisitions.

To conclude our business has performed exceptionally well and the fourth quarter and throughout the year delivering a high quality of earnings and a very challenging environment.

Our outlook for 2021 and beyond remains positive given our strong financial position, our proven growth model and our world class workforce.

Kevin Thank.

Thank you Bill Andrew we're now ready to take questions.

Certainly.

As a reminder to ask a question you will need to press star one on your telephone.

Withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Allison Pall and <unk> with Wells Fargo.

Hi, guys. Good morning, good morning, Allison and.

Obviously ending.

That piece on the $2 6 billion and liquidity as you think of that M&A pipeline today and in 2020, and 20 and even the beginning of 'twenty. One has been from Theres been a lot of noted challenges has that caused you to alterra sort of whats attractive and your mine towards the end of ametek's portfolio.

And.

And that's a great question, Allison and not really I mean, M&A remains our top priority for capital allocation and we feel there is going to be substantial opportunity for us.

As you mentioned and with the liquidity and our cash flow, we have a very strong balance sheet and we're really positioned to use.

We use that as a lever to increase our earnings and.

And we're seeing an uptick and pipeline opportunities.

Starting to see some of the pent up demand happened in Q4, the market's very hot.

We're maintaining our discipline.

We're working on deals of all sizes, we have some larger deals we're working on and we have some.

AMETEK typical size of deals and we haven't even have a couple of small technology acquisitions. We're looking at so so I would say we've never been busier on M&A and we're looking at it the same way, we think deploying our capital on M&A is the best way to get our shareholders' return.

Now within that are there any verticals that and.

Alright, and I guess increase in importance and your view just given what's happened.

I think.

We have.

<unk> 42 business units and they all develop and acquisition plan and we're looking at all of those and.

And we're certainly seeing.

Properties come available in all areas. We're also looking at.

Some places and we can get a high return on capital. So I would say that our bias is towards more technology deals, but net not necessarily our vertical market. We're looking at all of them right now.

Great and then just last on that temporary cost savings and one bill you talked about <unk> being up 10% should we layer that and more so in the back half how should we think of the cadence of that coming back.

I'd say, primarily the temporary costs with some small exceptions and the first quarter as we continue to see the effects of the pandemic, they're going to be coming back basically I'd say evenly across the year little bit lower and the first quarter.

Great. Thank you.

Thank you.

Thank you and our next question comes from the line of Deane Dray with RBC capital markets.

Thank you and good morning, everyone.

Morning, David.

Hey, nice strong finish to the year and we'd like to hear what the approach was this.

At this time to providing guidance I mean, there is still so much COVID-19 uncertainty and the macro.

So what was different this time and as you frame guidance and maybe give us some insight into how the cadence of the monthly sequential improvement.

That you saw this year sure and <unk>.

Thank you for your comments from the quarter.

We sat back and.

And near the end of the year and into January.

As you know situations that occur.

Youre, having to closed on your plans for a couple of days get everyone tested.

Clean it and you know people paperwork.

Bringing the virus to work I'll say and it created a difficult operating environment and it.

And certainly it made us.

I think through.

Giving guidance.

For the quarter and for the year.

But as we fought through it and we were executing well, so well, but we got confident that where we're able to operate and execute with the virus and we have good processes and protocols in place and and we're seeing the we're mid cycle and long cycle businesses and we're seeing those demand picks up it picks up pick up later in the year.

And we're assuming and.

And that all went into.

Discussion and we talked about it several times, but we feel comfortable with the guidance that we're giving and we feel comfortable going and we're going to be able to execute and we feel the processes and procedures. We have developed or are allowing us to operate safely and we also feel we're feeling and uptake and we're looking to the short cycle business.

And markets and seeing them trend up and we're assuming that's going to happen for us and a couple of quarters later.

That's helpful and if we're looking at the first quarter guide and.

And is there any of the usual seasonality and effect.

And with Covid, it's uncertain, how much is a reaction to coming back the recovery, but is there any of the usual seasonality and effect yeah, what happens to us usually in Q1.

Is that our process businesses are stronger and Q4.

And not as strong and Q1, that's the seasonality so you have a.

A drop in revenue there and and then on the bottom line and Q1, along with the contribution margin effect of that you have you have a lack of reading and you also have us resetting some compensation G&A type costs. So.

You add that altogether and our top line.

Guide for Q1 is down low to mid single digits, and we gave the earnings range of.

97 to $1 two so.

That's the way that we got we got to that and you also asked.

About the cadence and I didn't answer that and the first part of your question of the cadence throughout the quarter. It was.

And what are your typical trend for us.

Orders grew sequentially every month with December being the strongest months of a year.

And in fact, the strongest months of the quarter of 2020.

And in terms of sales, we had a similar pattern with.

Growing sequentially December was strong and also the strongest month of the year. So that was good.

And in January.

Orders and sales and they ended up at a level supportive over Q1, and our full year guide and I would characterize them as solid.

So <unk>.

Continuing the positive trend when you think about.

The low to mid single digit guide.

Back in Q2.

We had organic growth of about minus 22% and that improved in Q3 and believe it was minus 14% and.

And then you'll see the last quarter Q4 completed was minus 8% so to go from that minus 8% organic too.

Minus low to mid single digit organic do you see a continuing improvement. So we have a calendar organization seasonality issue, but underlying it is a continuing sequential improvement of the business.

Yes that really sounds and looks like a V shape recovery to us and there's a lot of hard work and getting that done and I. Appreciate it and you also answered my what would've.

And my question about January so I'm all set thank you very much. Thank you David.

Thank you and our next question comes from the line of Josh for Winski with Morgan Stanley.

Hi, Good morning, guys, Hey, Josh.

Okay.

Dave just on the incremental margin expectation I know, there's a lot of moving pieces some of which you touched on it.

Cheap amongst those is maybe to start the year organic.

Organic growth no need to get out ahead of yourself on expectations, but.

As year progresses or as growth starts to accelerate.

What should we think of as kind of the underlying incremental margin for AMETEK right now I know that with small numbers on the growth that you've kind of gets distorted by by other items, but what's the real number as we move forward, Yes, I think thats a great question and you'll recall that we talked about last quarter, we had about $90 million of temporary call.

So we're going to have to fit back in and.

To the visit to the budget model this year and what it turns out is that.

We got really strong opex cost reductions of 140 million.

On top of that we have continued stronger pricing.

And when you take the organic growth combined with the Opex structural savings combined with the pricing.

We're able to absorb the temporary costs coming back to the P&L and end up with incremental margin of about 35%.

And now typically.

And tech would have.

A bit higher incremental margin, but the 35 percentage is a solid number.

And it includes absorbing all the temporary costs. So we feel comfortable with the the margin forecast that we have for for 2021, and we think core operating margins will be up about 40 basis points.

And when we believe the incremental margins will be up about 35%.

Got it that's helpful. And then just on the end markets themselves obviously.

Pretty heady cocktail of businesses inside the portfolio.

Just given that this has been such an atypical downturn and recovery anything that you would call out as maybe being.

Our head of normal kind of recovery trajectory or behind for that matter relative to some of these early mid and late cycle markets that you guys participate and.

Not really it is I think the military market has been very strong for us we've talked about that we think that will continue.

Continue into 'twenty and 'twenty, one we are seeing.

Tick up and the semiconductor market.

Not atypical of a lot of people are seeing that but we have some.

Technology, that's more tied to the <unk>, which is the next technology and semiconductor. So we're seeing some research demands and that area that that business looks solid for us and.

In general.

Everything is behaving as we would think it would and we do have the mid and long cycle businesses and.

The aerospace business, we're not assuming it's going to the commercial aerospace business, we're not assuming a recovery during.

It's flat to up a bit flat to up low single for for 2021 most of the other markets are up mid single digits.

Okay, that's great detail, Thanks, Dave sure.

Thank you and our next question comes from the line of Nigel Coe with Wolfe Research.

Good morning.

And I wanted to pick up on the FY 'twenty, one sort of puts and takes.

Okay.

David.

Looking for very modest.

Semi et cetera, but anything.

By geography that you would call out next year and you and your planning process.

And particularly interested and what your views on the U S and China markets.

Yeah good.

Quick question.

Yes, I'll start with Q4 and Q4.

There were really mixed trends across geographies and with with.

Asia returning to strong growth.

And Europe, and the U S seeing continued sequential improvement, but still showing negative organic growth.

And when we talk about Asia first we had a great quarter and Asia, we were up.

Low double digits, and we had strong growth and both our process and automation businesses.

And China in particular grew 22% with us.

And with and the quarter so.

And really big pickup there both process and automation and if we talked about prior quarters.

<unk> picking up the process business fall off and that had a big impact on <unk> margins.

You can see and the account.

When.

You think about the U S.

We were down low double digits on broad based weakness other than the defense market and defense market was strong.

And when you think about Europe.

Mid teens on broad based weakness other than the automation business. So.

And in the U S and in Europe, It was down except for small <unk>.

All parts of our portfolio that were bright spots, but in China, we really knocked it out of the park and Asia, We did well what were thinking the incremental improvements in 2021 are going to continue.

And in Europe, and the U S. So the sequential improvements that we've been seeing are going to continue.

And we think that Asia, or our quotation activity and Asia is going to maintain strength. So I'm not sure we're going to go up 22% on China book, but.

Every quarter, but certainly we're seeing strength and the pipeline and in China and broader Asia.

Great. Thank you and.

With regards to the M&A pipeline can you talk about a variety of different sizes and the <unk>.

Multiple and cannot come up with right now.

Within the public market multiples are very high.

I come from all you can still do deals that ROI from makes sense to you.

Yes.

We've been able to do it so far and we have a.

Very strong pipeline and and.

So I'm pretty confident that we're going to be able to keep you on that debt.

And a lot of deals the thing Thats happened is we're able to derive more synergy than we were a few years or five or 10 years ago, we have a great synergy.

Capability to improve businesses and and.

We're disciplined.

Returns matter to us and.

And I'm confident that we're going to be able to deploy the cash on M&A.

Alright, Thanks, David Okay.

Thank you.

And our next question comes from the line of Brett Linzey with vertical research.

Hey, good morning, everybody good morning, Brett.

And wanted to come back to the structural cost programs. Obviously, you guys have done quite a bit over the last couple of years to navigate the pandemic, but also to integrate acquired businesses.

As we think about the programs in 2021 do those continue.

On a structural basis or do you think you've got the businesses.

Where they need to be from a from a cost structure standpoint.

I think there is still a structural programs.

We're going to execute and 2021 and that's ongoing because we are combining businesses and where.

Implementing acquisition synergies and.

And we got that $140 million and structural costs and others.

And there is $80 million of structural savings.

And $80 million of Opex savings and that so and when.

Remember, we have a spillover from 2020, but theres ongoing program. So.

And the way I look at it as we have.

And well over 150 operating facilities and we have a strategic plans on Opex and we take the advantages to combine and make things more efficient all the time and.

2021 will be no different.

Yes.

Got it that's great and just.

Just on back to the price cost question. What are you embedding for price real gross price realization for 2021.

And how are you thinking about freight steel and other raw mat inflationary pressures against that.

And then any.

Any.

Items.

In terms of supply chain that are a worry point that we should be thinking about or constraining your ability to serve customers.

Good question, so for all of 2020.

And had about one five points of price and total inflation was about one point.

So at a 50 basis point spread for all of the year, but actually in Q4 of 2020, our pricing ticked up a bit so it was a little higher than one and 5% and so that added the margins and.

For 2021, we see slightly higher pricings and one 5%.

But we're going to have slightly higher inflation, so think about it as a <unk>.

<unk> 50 basis point spread.

Higher price little higher inflation, and we are seeing.

Commodity price inflation.

We are seeing transportation costs.

But we got them under control, we have a very good supply chain people and we've got that factored in and with our.

Highly differentiated portfolio and our leadership position and these niche markets and we have those kind of costs, we're typically able to pass.

Pass them on to the customer and <unk>.

And very pleased to see our pricing out of wealth and the pandemic.

And in terms of.

Material shortages, I mean, theres a little bit of.

There are issues and the semiconductor market that had been and the press, where you see the automotive industry, having some issues now and our <unk>.

Supply chain people are on top of that and working at and.

But it hasn't caused us any any missed shipments or anything like that so it's just something to manage and it.

And issue we're working on.

And just one more and price is it fair to say with the exit of reading that the.

And your volatility on price up and down has dampened somewhat as part of the total portfolio is that fair that's exactly right right right got it okay, great I'll pass along thanks.

Thanks.

Thank you and our next question comes from the line of Christopher Glynn with Oppenheimer.

Hey, Thank you good morning, everybody good morning, Chris.

Nice numbers I think the balance sheet and might look the most sample have ever seen.

So you know my.

My understanding and Havent covered you long terms, usually guide kind of base case revenue with some hedge and the implied margin outlook and your <unk>.

Went through that with Josh and his question.

And this case, you're entering 2021 with record backlog and a minus 13% organic comp for the full year.

And.

And so that suggests mid single digits.

Pretty in the bag barring significant macro disruptions just want to reconcile the organic comp with the backlog number if you could share, but the backlog number is customers feeling confident and placing orders for the year.

So those arent just one quarter of the customers are.

And getting getting their orders and for the first couple of quarters of the year and.

And.

I think that AMETEK.

Covered a longtime for mid and long cycle businesses. So we typically see the uptick.

Quarters later, our automation business is seeing and now but.

The long cycle businesses, and oil arrow and oil and gas are not seeing an uptick.

So the fact that we have a negative organic growth and Q1 and Theres four numbers through the year. When you have one number that is negative and you add them up mid single digits.

Got it thanks for that.

Okay.

Thank you and our next question comes from the line of Scott Graham with Rosenblatt.

Hey, good morning.

Good morning, Scott Great great job on the cost side as usual discipline and thank you.

I wanted to ask maybe a little bit more on the cost add backs David is the plan to add back the entire.

90 that you took out and if so how does that go into the segments.

Yeah, I don't think we'll add back the entire 90, but I'll give you. An example, we left.

The temporary cost savings and Q4 were $10 million, so we really ramped down by that point.

And Q1, it's significantly lower than that so it's a.

And and we'll adjust that as we go through the year, but.

I think the temporary costs are going to become so small as we go throughout the year that are not meaningful anymore. So it's really the structural savings and that drive the margin improvement.

Got it and then maybe bill one for you.

Working capital numbers were.

Pretty incredible I was just wondering.

It's gonna have to go the other way this year.

What would you think from working capital percentage increases by <unk>.

2021.

Well and you think about it.

Our businesses did a fantastic job on working capital taking inventories down receivables performance was.

The best I've seen and my 30 years with the company 30 years, plus so it was fantastic.

Will that continue I don't know were going to were going to work real hard to make sure.

It does and our businesses are focused on that so there'll be some give back next year.

I would expect it to be a little bit, but we're very we're very much focused on trying to keep debt.

At the levels, we've seen and this fourth quarter and the full year, Okay, and the key point and the key point for US Scott is I think we had 158% free.

Free cash flow to net income conversion and 'twenty 'twenty and for 2021, and we're targeting 110% so.

The 100% even this environment.

And certainly we're going to have to put some cash back on the balance sheet, but are operating very efficiently and and we're going to we're going to put it back on the balance sheet grudgingly.

Got it. Thank you would you mind, if I squeeze and one more yeah sure.

Sure. So in terms of the liquidity number.

I mean Christmas time, it was like I haven't seen this level of liquidity you pouch.

And in my time.

Is there a little bit there for some share buybacks. If the first half of the year is maybe a little bit slower on M&A, then you're hoping because I know how disciplined you are there is there.

There are room for share buybacks and debt.

Clearly our number one priority is M&A and I really think we're going to be able to deploy the capital and M&A, but.

And if we can't we'll find a way to get the cash back to you either through buybacks or dividends we have.

Consistently increasing dividend and we've been operating and domestic on share buybacks, but I'm not feeling that way right now I think there's incredible acquisition opportunity for us and we're positioned at a level and to your point and liquidity position that we haven't been at before so.

It's very exciting to me and I'm very excited about the pipeline.

Great. Thank you.

Thank you.

Thank you and our next question comes from the line of Richard Eastman with Baird.

Yes.

Good morning.

Yes.

Hey, Rick here, we don't hear you so.

Yes.

Andrew why don't we go to the next.

Question <unk>.

Certainly our next question comes from the line of Andrew <unk> with Bank of America.

Hi, Yes, good morning, good morning, Andrew Hey, congratulations on another great quarter. Thank you.

And just a question for you on orders, we sort of try to back into the number from your book to Bill I think we're sort of cash.

Alkylate is something like down around 8% I was wondering if we could talk about the order rates and just maybe give us color by market and I think I sort of highlighted China, you highlighted aerospace, but might be a little bit more color. There, yes, I'll give you the numbers, our overall orders were down 8%, but organic growth.

But were down 2%, so okay, and AIG organic were down 2% and EMG organic were down 1%. So.

You backed into where the overall orders was correct and we had a good organic month at minus two.

Got you that makes a lot of sense. Thank you.

And then just talk about how you guys are thinking about your own capex spending into 'twenty and 'twenty, one and how you have changed in any way shape or form how we think about where you spend capex on what you spend capex on and the aftermath of the pandemic right.

Yes, Capex is we plan on $110 million this year.

And.

Opportunities, we have opportunities and they're going to provide excellent returns.

For growth Capex efficiency improvements.

Spanning our footprint and emerging markets.

And if you recall in 2020, we talked about at mid year, we had some <unk>.

Expansion projects and in emerging markets and we Couldnt get people there.

And we needed to get some expertise from different regions to the emerging markets, we couldnt travel and so we delayed them. So we spent $74 million and 2020 and and our original plan was $102 million. So we ended up.

Pending a little less than 2% and 2020 and 2021, we're going to spend a little over 2% were going to make up a bit of those projects because they are still there and theres great opportunity and in other areas.

We're still a longer term to percentage of sales is the capex number and we have a little bit of makeup this year with projects and <unk>.

These are these efficiency projects and growth projects have very high internal rates of returns are Richard returns like $30 $40, 50%. So this is the kind of stuff that you want to fund you wanted to get done and we have a whole slew of projects that we're getting after.

And just how you're spending anything different on what kind of equipment and you're buying is spending more and software are you changing of suppliers.

Yeah, I think there is a.

And Theres, a mix of all of that and there and it's bottoms up from the businesses.

<unk>.

Yes.

I think definitely software.

Our digital strategy and driving a lot of that and I think the.

The emerging market infrastructure that we're putting in place is driving that so so.

And youre right on it and the areas and we just have a particularly large group of projects and we're going to get those done this year and.

<unk> got great returns on them.

Fantastic Great to hear thank you very much thank you Andrew.

Yeah.

Thank you and our next question comes from the line of Andrew <unk> with bear and Barry.

Okay.

Good morning, guys.

Good morning.

I wanted to talk a little bit more about M&A.

Because I'm curious what.

And your philosophy is out of it.

Out of the pandemic.

And obviously have the capacity to do some larger sized deal first off do you see more medium and large sized deals.

And likely and secondly.

Is there is there.

The philosophy here to to buy stuff, that's kind of beaten down and beaten up that you could.

You are buying out of low here or are you.

And I'll go after certain assets that.

And I don't know whatever opportunistic at the time.

And wherever there is a good deal to be had.

Right I think it's both it's all of the above and when I think about the we expanded our revenue targets.

And the <unk>.

Acquisitions were looking at and so you could see deals and that two to three or $400 million range.

Those are considered big so we're not talking about.

Acquisitions would be the size of AMETEK or even half the size of AMETEK, we think of those bigger deals.

It's much harder to break value so.

Smaller deals but.

Size growing what's the size of the company were a bigger company now.

And so.

And like I said, it and technology deals, we're looking at that or augment our organic growth.

There's a there's deals and our sweet sweet spot very close to our existing positions that.

And we'll get a very high return on capital one.

And there are some bigger deals that.

Fit with us butter, and adjacent markets and and Theres multiple deals and each one of those categories. So tore busy we're wrong.

And approach, but I'm optimistic.

<unk>.

And we're going to be able to deploy our capital and add.

Very strong businesses to AMETEK.

Okay.

And.

Can you remind us what was medical as a percentage of sales this year and 2020 and then can you just remind us like what is that.

That area and I think it's pretty interesting as a buddy and a platform for you guys. What are you thinking about that going forward yes.

Yes, and medical sales.

2021, and 2020 or and the range of 15% of sales.

So that's approximately $700 million and.

We have.

Businesses that are doing very well and that area and.

And our niche positions like all of AMETEK and there's expansion opportunities. There. So we're actively looking at health care and medical space and.

We'd like to see that'd be a bigger and bigger percentage of the company.

I think you guys think.

And you.

Thank you and our next question comes from the line of Joseph Giordano with Cowen.

Hey, guys. Good morning. This is francisco on for Joe Hello, Francisco Good morning.

Hey, can you guys talk a little bit about your expectations on aerospace do you think just and.

And.

Coming to be bottoming out soon and what are the mix implications going forward.

Yes, it's a great question and that's the first point is.

Our aerospace business is one of our more profitable businesses is definitely.

Greater than the company average and.

That was before the pandemic and right now and.

And the team has done an excellent job of realigning the cost structure, lower volume, but still very profitable and more profitable than the average AMETEK business. So.

We think any change and volume is going to result in high contribution margins, because we so being down the cost structure.

And that business was up mid teens and the fourth quarter.

We think we still see growth and 'twenty, 'twenty, one, but and it'll be more mid single digits.

And and the commercial space that business was down about <unk>.

And 35% and the fourth quarter down about 30% for the entire full year and for 2021 there.

<unk> Aerospace business, we're seeing is flat to up low single digits.

And the commercial aerospace business is impacted by many variables.

And impacting demand, including government support airline capacity decisions and overriding and all of the confidence of the flying public and it's very difficult to predict that thing and.

To predict those things when the pandemic is raging so.

We're pretty conservative are looking and that the management team, we have and aerospace is outstanding.

And eventually.

And the commercial business is going to come back I don't think it's going to be.

'twenty 'twenty, one I think it's going to be beyond that and our guidance reflects that so we're really we've really done a hard work and done the right thing and our aerospace business. So.

And we're poised even for small incremental sales growth to deliver good margins and eventually that long cycle business will pick up and drive the earnings and the company.

Great. That's extremely helpful. Thank you very much okay.

Thank you and our next question comes from the line of Richard Eastman with Baird.

Alright, Thank you try this.

And by this try one more time.

I'm not sure what happened there.

A quick thoughts David when we talk.

Uh huh.

Rick Rick.

Rick I think we lost you again.

Yes.

However, if we got you now.

Okay.

Alright.

Hey, just when we tried to reconcile.

Our segment growth to the AMETEK.

Core growth outlook for 'twenty one.

Yes.

Yeah, So we're kind of 3% to 5% and my question is.

AIG I presume EMG with process coming back stronger does EOG and the high end of maybe a 3% to 5% core 'twenty one growth rate.

Yes, we gave a mid single digit range. So for me that says between four and 6% not three to five but and that 4%, 4% to 6% range. Both of the businesses are going to be in that range and certainly <unk> is going to probably start out a little better and the year, but we think the.

And we end the year theyre, both going to be.

Mid single digit growth.

And when I kind of run that math through the numbers here.

And I look at both segments of the business, perhaps being at a revenue range at the end of 'twenty, one that's below 19.

And I guess my thought is there the longer cycle I mean aerospace would.

It would be below and then with oil and gas there'll be projected to be below 19 level are there any other yes.

Yes oil and gas is projected to be lower and oil and gas is going to have the way it looks for us a strong 2022 right now.

But if you think about where we're at right now and in the fourth quarter.

And the businesses that showed positive organic growth for our defense business and process. Some of our research businesses like our materials analysis Division that division was all positive organic.

Our <unk> business and <unk> was positive organic.

And I will tell you and our business flows was positive organic and our automation business was positive organic so as we go out through the year that that will change but.

Yes, the fact of the matter is.

With our mid and long cycle exposure, while the strong second half and for some of our markets, we will not get back to 2019 and 2021.

Yes, fair enough and when you talk defense, Dave or is that long.

Rick I think we lost you and in.

And your question there.

Andrew why don't we wrap it up.

Correct Me here, you know I think.

And I don't understand that okay, but with the with defense, Dave when you speak to defense and Thats. All Aerospace defense is there anything else that you're capturing and that no. It's aerospace defense, but we do have some land based programs within aerospace, but it's all day.

And the business that's right. Okay. Thanks again, thanks for the thanks for tolerating the problems. Thank you.

Robert.

Thank you and I will now turn the call back over to the Vice President of Investor Relations, Kevin Coleman for any closing remarks.

Great. Thank you Andrew and thanks, everyone for joining our call today and as a reminder, a replay of today's webcast may be accessed and the investors section of AMETEK Dot com, Thanks, and have a great day.

Ladies and gentlemen, this concludes today's conference call.

And for participating and you may now disconnect.

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Ladies and gentlemen, thank you for standing by and welcome to the fourth quarter 2020, and would take Inc. Earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

Be advised that today's conference is being recorded.

Require any further assistance please press star zero.

It's now my pleasure to introduce vice President of Investor Relations, Kevin Coleman.

Thank you Andrew Good morning, and thank you for joining us for Ametek's fourth quarter 2020 earnings Conference call.

With me today are David <unk>, Chairman, and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer and.

Ametek's fourth quarter and full year results were released earlier this morning and.

And are available on market systems, and and the investors section of our website.

This call is also being webcast and can be accessed on our website.

The webcast will be archived and made available on our site later today.

Detailed discussion of the risks and uncertainties that may affect our future results is contained and 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 2019 or 2020 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization.

And also excluding the gain from the sale of reading alloys, and the first quarter of 2020 and realignment charge taken in the first quarter of 2020.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investors section of our website.

I'll begin today with prepared remarks by Dave and Bill and then open it up for questions I will now turn the meeting over to Dave. Thank you, Kevin and good morning, everyone.

AMETEK concluded 2020 with a strong fourth quarter.

And delivery record operating results despite ongoing challenges presented by the pandemic.

Our businesses saw a solid sequential sales and order improvements and the quarter, while year over year growth turn positive across several of our businesses.

We also drove exceptional operating performance during the quarter, leveraging our broad set of operational excellence initiatives.

These efforts led to record backlog margins and cash flow.

And as well as the high quality of earnings that exceeded our expectations.

Turning us extremely well as we look ahead to 2021.

The safety of our employees remains our number one priority.

We continue to adjust our practices and enforce our safety protocols across our businesses to help limit the possible spread and the virus.

The AMETEK growth model continues to provide the framework for long term sustainable success and.

And our performance in 2020 was a testament to the strength and flexibility of the model.

Now, let me return to average.

<unk> for the quarter.

Sales and the quarter were $1 2 billion down.

Down 8% compared to the fourth quarter of 2019.

Organic sales were also down 8%.

With the divestiture of reading alloys, a three point headwind.

The acquisition of Intel low power contributing one point to growth and.

Foreign currency added two points.

As we saw in prior quarters, our commercial aerospace business was the most impacted by the pandemic with sales down approximately 35% and the quarter.

Orders continued to improve with our book to Bill at 1.07 for the fourth quarter.

This led to a record backlog of $1 8 billion.

Providing us with a positive line of sight into 2021.

Operating income and the fourth quarter was $298 1 million up slightly from the fourth quarter of 2020 and operating margins were a record 24, 9% up an impressive 210 basis points compared to the prior year period.

EBITDA and the fourth quarter was a record $367 million and EBITDA margins were also a record of 31% up a robust 300 basis points over the fourth quarter of 2019.

This operating performance led to earnings per diluted share of $1 eight.

Matching last year's fourth quarter results and comfortably ahead of our guidance for the quarter.

Our business has also delivered outstanding cash flow during the quarter.

Operating cash flow up 13% to a record $386 million and free cash flow conversion exceptional 140, 158% of net income.

Now let me provide additional details of the operating group level for the fourth quarter.

The electronic instruments group delivered superb operating performance despite challenging market conditions.

Aig's sales and the fourth quarter were and $19 $4 million.

Down 7% from the prior year and in line with our expectations of solid sequential improvement.

Organic sales were down 10%, while the acquisition of <unk>, contributing 2% and foreign currency contributing 1%.

Commercial aerospace remained the largest driver of the sales weakness.

Other <unk> businesses saw improvements versus prior quarters.

And our materials analysis division returned to growth and the fourth quarter.

While other AIG businesses, including <unk> and tell you are also generated year over year growth.

Despite the overall sales decline AIG as operating income and the fourth quarter increased 3% over.

Over the prior year to a record $236 million and operating margins reached a new high of 28, 8% expanding and exceptional 270 basis points over the same period and 2019.

Our electromechanical group also delivered strong operating results from the quarter.

EMG sales were $379 $5 million down 11.

And percent from the fourth quarter and 2019, driven in large part by the divestiture of reading alloys.

Organic sales were down 4%.

And the divestiture and eight point headwind and foreign currency, adding two points.

In addition to continued strong growth across our defense businesses.

We were pleased to see our automation business.

Generate solid organic growth and the quarter.

Fourth quarter operating income per EMG was $79 $8 million and operating margin and expanded an impressive 110 basis points to 21%.

Now for the full year results.

Overall sales for the year were $4 5 billion.

Down 12% from 2019.

Organic sales declined 13% with acquisitions, adding 4%.

Divestiture of reading alloys, a 3% headwind and foreign currency flat for the year.

Operating income in 2020 was a $1 $1 billion and operating margins were a record 23, 6% expanding 80 basis points over 2019.

EBITDA for the year was $132 billion and EBITDA margins were a record 29, 2% up 230 basis points from last year.

This led to full year earnings of $3 95 per diluted share.

Down 6% versus the prior year.

As Bill will highlight our businesses did a fantastic job managing their working capital, which helped drive a record level of cash flow for full year operating cash flow of 15% to $1 8 billion.

In summary, while 2020 was very challenging I am extremely proud of the way AMETEK colleagues manage through the pandemic and delivered tremendous results.

Okay.

Before I cover the outlook for 2021, I wanted to highlight certain key elements of the AMETEK growth model and how each position us for long term success.

First and foremost.

Ametek's proven operational acumen and stood out in 2020 with our business is doing and incredible job driving our operational excellence initiatives.

And the fourth quarter, we generated $60 million and total cost savings with $50 million of structural savings and $10 million and temporary savings.

As we look ahead to 2021.

And much more modest level of temporary savings versus 2020 as the economy continues to recover from the worst of the pandemic and we continue to add back these temporary costs.

However, we do expect to drive meaningful incremental structural savings across our various operational excellence initiatives, including across our global sourcing activities.

For the full year 2021, we expect approximately $140 million of incremental operational excellence savings.

Shifting to new product development.

Even through this downturn, we remain committed to investing and new products and solutions that help our customers solve their most complex challenges.

And 2020, we invested $246 million and <unk>.

Research development and engineering, approximately five five percentage of sales.

It was an impressive 25%.

Finally, I want to touch on our acquisition strategy.

Prior to the onset of the pandemic last year, we acquired and talent power, a leading provider of high reliability Ruggedized Uninterruptible power systems for mission critical defense and industrial applications.

And <unk> has integrated nicely into our power systems and instruments Division and is performing well.

While deal flow and 2020 was impacted by the pandemic. We are seeing continued improvements and the M&A markets.

And are managing a strong pipeline of acquisition targets across a broad set of markets.

Now shifting to our outlook for the year ahead.

While we remain cautious and the short term given the uncertainty and the timing and pace of the recovery.

We are confident and the strength of our businesses and our ability to manage through these uncertain times.

We continue to manage our businesses safely and prudently while ensuring continued investments in key growth initiatives.

For the year, we expect both overall.

And organic sales to be up mid single digits versus 2020.

Diluted earnings per share for the year are expected to be and the range of four.

And four hours and 18 to $4 30.

Up 6% to 9% compared to 2020.

In summary, the strength of the AMETEK growth model.

The asset light nature of our businesses.

Our leading positions and attractive niche markets and our world class workforce will continue to drive long term sustainable success.

I am confident that we are emerging from this unprecedented economic environment, even stronger than we were before.

Again, I would like to thank all of our employees for their continued hard work and tremendous efforts as we manage the.

And the ongoing global crisis.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter.

And then we'll be glad to take your questions Bill.

Dave as Dave highlighted AMETEK had an outstanding finish to 2020.