Q2 2021 AMETEK Inc Earnings Call
So for your patience.
[music].
Good day and thank you for standing by welcome to the second quarter 2021, AMETEK, Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised for today's conference is being recorded.
If you require any further assistance. Please press Star then zero I would like to hand, the conference over to your Speaker today, Kevin Coleman, Vice President of Investor Relations. Please go ahead.
Thank you Michele good morning, and thank you for joining us for AMETEK second quarter 2021 earnings Conference call.
With me today are David <unk>, Chairman, and Chief Executive Officer, and Bill Burke Executive Vice President and Chief Financial Officer.
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 in ametek's filings with the SEC.
AMETEK disclaims any intention or obligation to update or revise any forward looking statements.
Any references made on this call for 2020 or 2021 results will be on adjusted basis, excluding after tax acquisition related intangible amortization and also excluding the gain from the sale of ready now alloys in the first quarter of 2020.
And the 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.
We'll begin today's call with prepared remarks by Dave and Bill and then open it up for questions I'll now turn the meeting over to David.
Thank you, Kevin and good morning, everyone.
AMETEK delivered outstanding results on the second quarter.
Strong sales growth on outstanding operating performance led to a high quality of earnings that exceeded our expectations.
We established record levels of sales.
<unk>.
Operating income on adjusted earnings per share on the quarter.
This performance comes as we are still early on our economic recovery.
Reflects the outstanding efforts of our teams.
We also ended the quarter with a record backlog driven by exceptionally strong and broad based orders growth for.
<unk> strong visibility across our mid and long cycle business profile.
The 5 acquisitions, we completed earlier this year are integrating nicely and are well positioned to drive strong growth.
Given our second quarter results on our outlook for the back half of 2021, we.
We have increased our sales on earnings guidance for the year.
Now, let me turn to our second quarter results.
Our businesses saw robust broad based sales growth in the quarter.
Overall sales were a record $1.39 billion.
Up 37% over the same period in 2020.
Organic sales growth of 25%.
Acquisitions added 10 points to growth, while foreign currency added 2 points.
Overall orders in the quarter were a record $1.91 billion.
A sharp increase of 92% over the prior year, while organic orders were an impressive 44% up in the quarter.
We ended the quarter with a record backlog of $2.5 billion.
Which is up over $700 million from the start of the year.
Our business has also delivered exceptional operating performance in the quarter.
While global supply chain remain tight our businesses are doing a fantastic job managing through these challenges as is reflected in our results.
Second quarter operating income was a record $317 million on nearly 40% increase over the second quarter of 2020.
And operating margins expanded 40 basis points to 22, 8%.
Excluding the dilutive impact of acquisitions core margin.
Core operating margins expanded an exceptional 160 basis points to 24%.
EBITDA in the quarter was $387 million up 34% over the prior year second quarter with EBITDA margins of 27, 9%.
This operating performance led to earnings of $1.15 per diluted share up 37% over the second quarter of 2020.
Part of our guidance range of $1.8 to $1.10.
Our business has also generated strong cash flows in the quarter.
Which position us well to continue investing on our businesses and on strategic acquisitions.
In the second quarter operating cash flow was $287 million and free cash flow conversion was 114% on net income.
Let me provide some additional details at the operating group level.
Both our electronic instruments group and electromechanical group delivered strong organic sales growth with excellent core margin expansion in the quarter.
Sales for AIG were a record $934 million.
44% over last year's second quarter.
Organic sales were up 27%.
Recent acquisitions added 16% and for.
Foreign currency added nearly 2 points.
Aig's second quarter operating income was $227 million up 42% versus the same quarter last year and operating margins were 24, 3%.
Excluding acquisitions.
<unk> has core margins were 26, 3% <unk>.
Expanding on an impressive 170 basis points over the comparable period.
The electromechanical group also delivered strong sales growth and outstanding operating performance.
Amg's second quarter sales increased 24% versus the prior year to $452 million.
Organic sales growth was 21% and currency added 3 points for the quarter.
Growth was broad based across our EMG businesses with particularly strong growth on our advanced motion solutions business.
Emg's operating income in the second quarter was a record $112 million.
Up 32% compared to the prior year period, and EMG as operating margins expanded on exceptional 170 basis points to a record 24, 9%.
Now switching to our acquisition strategy.
As we noted during our previous call, we completed the acquisitions of <unk> and <unk> at the beginning on the second quarter.
These acquisitions as well as the first quarter acquisitions of manageable Frank software and <unk> are performing very well and the integration work for these businesses is progressing as expected.
AMETEK strong cash flow generation continues to bolster our capacity for capital deployment, including investment in strategic acquisitions.
Our M&A teams continue to work diligently through a robust pipeline of attractive acquisition opportunities and we expect to remain active over the balance of the year.
Additionally, we're continuing to make key investments in support of our organic growth initiatives.
We remain committed to investing in research.
<unk> and engineering of our advanced technology products.
To continue to providing our customers with innovative solutions and maintaining our leading positions in niche markets and applications.
In the second quarter, we invested $72 million on Ardine and for the full year, we now expect to invest more than $300 million or approximately 5.5% of sales.
For all of 2021, we now expect to invest approximately $100 million on incremental growth investments.
In addition to already any of this total investment income.
Our front end sales and marketing functions, along with investments to help drive our digital transformation and allow our businesses to accelerate growth.
As noted operating performance in the second quarter was outstanding with strong core margin expansion, despite having to absorb the return on a temporary costs into our cost structure.
While we are seeing higher levels of inflation due to the tightness of the global supply chain, we are capturing higher levels of price given our differentiated solutions, allowing us to maintain a healthy price versus inflation spread.
Additionally, we continue to see the benefits of our various operational excellence initiatives.
For the full year, we now expect approximately $145 million of operational excellence savings.
Now moving to our updated outlook for the remainder of 2021.
Given our strong performance in the second quarter, along with our orders momentum and record backlog.
We have again raised our 2021 sales and earnings guidance.
For the full year, we now expect overall sales to be up approximately 20%.
On organic sales up approximately 10% over 2020.
Diluted earnings per share for 2021 are now expected to be in the range of $4.62 to $4.68.
An increase of 17% to 18% over 2000, twenty's comparable basis and above our prior guidance of $4.48 to $4.56 per diluted share.
For the third quarter, we anticipate that overall sales will be up in the mid 20% range versus the same period last year.
Third quarter earnings per diluted share are now expected to be between $1.16 to $1.18 up 15% to 17% over last year's third quarter.
In summary, AMETEK second quarter results were superb with excellent sales and orders growth and high quality earnings growth that exceeded expectations.
Our strong operating performance for the first half of the year shows the strength and flexibility of the AMETEK growth model.
Our differentiated technology solutions and market leading positions across diverse niche applications have allowed us to navigate through difficult economic cycles and emerge as a stronger company each time.
The proven sustainable nature of the AMETEK growth model continues to drive long term success for all of AMETEK stakeholders.
I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions Bill.
Thank you David.
As Dave highlighted AMETEK delivered outstanding results in the second quarter with strong sales and orders growth excellent operating performance and a high quality of earnings let.
Let me provide some additional financial highlights for the quarter.
Second quarter General and administrative expenses were $22.5 million up $5.6 million from the prior year largely due to higher compensation expense.
As a percentage of total sales G&A was 1.6% for the quarter versus 1.7% in the same period last year.
For 2021 general and administrative expenses are now expected to be approximately $15 million are expected to be up approximately $15 million on higher compensation costs.
The effective tax rate in the second quarter was 26% compared to 19, 5% in the same quarter last year.
Higher rate was driven by the impact for the UK rate change and the associated re measurement of our deferred tax liabilities.
For 2021, we continue to expect 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 exceptionally well for the quarter working capital was 13, 9% of sales down an impressive 570 basis points from the 19, 6% reported in the second quarter of 2020.
Capital expenditures in the second quarter for $23 million and we.
To expect capital expenditures to be approximately $120 million for the full year.
Depreciation and amortization expense in the second quarter was $75 million for.
For all of 2000.22021, we continue to expect depreciation and amortization to be approximately $300 million.
Including after tax acquisition related intangible amortization of approximately $141 million for 61 per diluted share.
As Dave highlighted our businesses continue to generate strong levels of cash given our asset light business model and strong working capital management and.
In the second quarter operating cash flow was $287 million and free cash flow was $264 million with free cash flow conversion on the quarter, a very strong 114% of net income.
Total debt at quarter end was $2.96 billion.
Offsetting this debt with cash and cash equivalents of $390 million.
As Dave noted we've been very active on the acquisition front.
During the second quarter, we deployed approximately $1.$5.8 billion on the acquisitions of Abaco systems and MSI emigh.
This was in addition to the acquisitions of EGF crank software and magnets role, which were completed in the first quarter of the year combined we have deployed approximately $1.85 billion.
On 5 strategic acquisitions, thus far in 2021.
At quarter end, our gross debt to EBITDA ratio and our net debt to EBITDA ratio for 1.9 times and 1.6 times respectively.
We remain well positioned to deploy additional capital and invest in our acquisition strategy, given our strong financial capacity and flexibility at quarter end, we had approximately $2 billion of cash and existing credit facilities to support our growth initiatives.
To summarize our businesses delivered excellent results in the second quarter that outperformed our expectations.
Performance of our businesses through the first half of the year, along with our strong balance sheet tremendous cash flow generation and the dedication of our world class workforce has positioned the company exceptionally well for meaningful growth in 2021 and beyond Kevin.
Thank you Bill Michelle we're ready to take questions.
Thank you as a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key.
Our first question comes from the line of Matt Summerville with D. A Davidson. Your line is open. Please go ahead.
Thanks, a couple questions. David you mentioned price cost, but could you talk about what sort of spread you actually experienced in Q2, what your realization was in terms of price year on year, and whether you're contemplating any incremental pricing actions or surcharges in the back half.
Great question, Matt in the second quarter.
We were very pleased that our pricing continues to offset inflation.
We achieved about 3% of price across our entire portfolio.
And total inflation was about 2 points so.
We had about 100 basis point positive spread.
And we want to stay in front of it and we want to stay there and.
And with all the acquisitions that we did in all of the costs from those acquisitions.
It showed up we had 170 basis points on core margin expansion.
And.
On that pricing really helped us deliver that so we're ahead of the game now we plan on staying there there is increasing inflation, but with a 3%.
Pricing in the 2% inflation, we were very pleased with our performance during the quarter.
And then just as a follow up can you speak to the organic order cadence you experienced over the course for the quarter and if you can give us a read on maybe what you saw on July. Thank you.
Yes, sure I mean, as we said before.
The organic orders were up substantially during the quarter. They grew every month with June being the strongest month for the quarter.
Sales also grew every months sequentially.
And June was also the strongest month of the quarter and so a very strong trend.
During the quarter.
And then with July it was a very solid month and it was supportive of our forecast and guidance. So we feel real good about the orders trends in the business.
Great. Thank you guys. Thank you Matt.
Thank you and our next question comes from the line of Josh <unk> with Morgan Stanley. Your line is open. Please go ahead.
Hi, Good morning, guys good morning, Josh.
Hey, Dave just on the inflation.
<unk> I guess the material side its only 1 piece of it you have labor you have logistics costs or kind of a cocktail of things in there how should we think of <unk> as being kind of the high watermark.
For the year relative to the.
The back half like when does that.
On gouge or get a little easier.
Yes, that's the number that I gave you the 2% is total inflation on our business. So that's not just material thats total inflation.
And then in terms of peaking out.
Inflation is increasing or staying in front of it I don't think were.
We're ready to say it's peaked yet.
Think that there is an element of temporary cost spiking, but it's very difficult to bifurcate that between the underlying inflation and what's happening on a temporary basis. So the honest answer is we're not sure but we're going to stay ahead of it and that's the way we're managing the business.
Got it and then.
Just in terms of kind of the end markets your customer behaviors that are standing out.
This recovery seems unusual in a few different ways, but you guys seeing kind of the classic more capex facing applications or industries bounce back or is it all just sort of in the mixed together or anything you could sort of comment on right.
On that would be helpful. Yes, great.
Yes, what we're seeing is kind of a.
We saw this quarter the beginning of what I think is a classic mid cycle recovery. So we're mainly mid cycle and long cycle businesses and we're seeing the beginning of a mid cycle recovery than what we saw on our businesses are on.
For our automation and engineered solutions business on classic mid cycle that picked up earlier in the year on its staying strong, but we saw during <unk>.
The quarter, our power business really picked up in the organic growth of our power business was a strong mid 30% organic growth.
I think the cycle is kind of following along we think where our automation businesses. We're kind of on lead us in and then we have the process on power businesses, and then down the road, maybe even a year or 2 we have our commercial aerospace business. So the cycles kind of following what we think.
It's a little bit.
No.
Difficult to bifurcate the classic cycle from.
Customers trying to get in the queue.
And reacting to supply chain issues in the Covid rebound that we're all we're all seeing but I'm feeling really confident in the underlying demand strength and have a longer tail as part of our broader cycle, because I think the industrial.
World has not invested a lot over the last 5 years, and we're well positioned to benefit from that investment so on them.
I'm kind of seeing beneath this.
This COVID-19 recovery, the a classic cyclical recovery and it's really hitting our businesses at the part of the cycle, where we think it would be.
Does that help you out a little bit.
Great color thanks debt.
Josh.
Thank you and our next question comes from the line of Allison <unk> with Wells Fargo. Your line is open. Please go ahead.
Good morning, good morning.
I just wanted to go back to your comments on the incremental investment into the business could you give us a little bit more color in terms of where that incremental investment is going is it specific vertical or is it much more bright spot just any additional color would be helpful. Sure.
As we said, we're putting about $100 million of incremental investment in our P&L and that was raised about $5 million from last quarter. So some new opportunities are coming up in.
I put it in several areas, we're investing in core product development, that's the future of our business and we want to stay.
With the best benefits on our products on our customers that is happening that's about probably a third of that $100 million and then the other 2 thirds is in sales and marketing in our Digitization efforts. So we're doing a lot of things to improve our customer facing capability.
On a lot of things around digital marketing or sales force effectiveness.
The teams are motivated and it's working well and we've been able to do.
Continued investing during the.
The depth of the for.
The virus and we're accelerating now so it's a $100 million in product development, and <unk> sales and marketing, but a lot of it is in the digital space.
Great and then just a little bit if you could give a little color on maybe the commercial aerospace market I know, we're getting a lot of concerns with the Delta variant.
I'll take your view in terms of the recovery of either the morale or just the commercial aerospace market in general.
Great question.
Commercial aerospace is about 7% of our portfolio on how and when.
We're obviously watching that delta variant very closely because we're not sure exactly what's going to happen.
We haven't seen a downturn yet.
From the Delta variant and our commercial aerospace business had a very good.
Very good quarter, I mean, we were up 25% in commercial aerospace.
Our aftermarket business on our business jet market were stronger than our OEM markets in that business for the year, we haven't changed our outlook for the year for our whole aerospace and defense business, where sterling sales, saying up low to mid single digits. So we're not seeing the same kind of traction in that business right now partially.
Because the aftermarket is doing better than the.
OE business, but it's stabilized for sure.
It's a 7% of our business and we're watching it closely what the Delta Varian I mean, we haven't seen it change it in passenger miles on but that could happen. So.
That's the best information I can give you.
Great. Thanks, so much thank you.
Thank you and our next question comes from the line of Scott Graham with Rosenblatt Securities. Your line is open. Please go ahead.
Thank you hi.
Good morning, Kevin.
Good morning to you. So I was just wondering.
You kind of quantify what the.
Add backs of the temporary reduction costs from last year were in the second quarter, maybe a feel for the second half.
Yes, the best way I can answer to that is as we talked about last year, we had about $90 million on temporary costs that we removed from the P&L.
Now.
Fast forward to the end of Q2 so.
On a month ago. They came in during the quarter, but by the end of the quarter they were pretty much all backend.
Except our travel expenses. So there was about 10 or $15 million of travel expenses that are bleeding and slower than we anticipated earlier in the year, but largely all of the expenses besides travel or back in the P&L.
So.
Correct me, if if you would on the math on that so we will see some add backs in the third quarter at fourth quarter, but on a declining basis, yes, there will definitely be add backs, because we will get full quarter effects and there'll also be some headwinds from aro.
Compensation systems.
We budget, we target our compensation systems, and we're having a good year so for the headwind from that too so there'll be some additional costs in the second half of the year that will impact that.
Got it. Thank you would you mind, giving us Dave.
Catch up what your research market looks like right now.
The research market is doing well starting to pick up a bit.
But that market is probably more impacted than the classic industrial market because a lot of other research institutions were slow to start up there is vivek.
Difficulty getting access to the facilities. So so the market is hanging in there it's doing well, but it's certainly not inflicting up as much as to general industrial markets.
Okay. Thank you and then lastly on the acquisition pipeline I know you.
<unk> talked about.
2.1 billion of availability.
What does that number look like when EBITDA in terms of the capacity because certainly you can borrow some more on what have you on.
More importantly, what does the quality of the pipeline look like right now you talked about on the last call the possibility of doing in the second half right something close to what you did in the first half could you update us on that thinking thanks, Kevin.
<unk>.
Our teams are very active now.
And we shortly.
We'd like to get a deal done between the end of the between now and the end of the year, but there is no guarantee on that.
There is a lot of properties in the market. There is a lot of activity going on right now for sure, but finding those Jim that we acquire and end up becoming.
Part of the AMETEK portfolio is a different story.
Told you before many times our acquisition strategy is not capital limited limited, it's finding the right acquisitions to acquire and we're very active now and our teams are doing a great job in terms of the capacity to do deals maybe have bill comment on that yeah. Thanks, Dave Yes, certainly you made the point, we could go borrow more.
Sure.
Our banks and others tell us they are more than happy to lend to us.
The couple of billion dollars would still only give us.
Mid twos kind of leverage so still you could even say somewhat under leveraged for the company so plenty of opportunity and plenty of resources available to us to do even more than the $2 billion.
And I think as David mentioned this isn't a capital constrained strategy. This is finding the right businesses that fit with our portfolio that we think can generate value for our shareholders over the long term.
Okay. Thank you both thank you Scott.
Thank you and our next question comes from the line of Andrew <unk> with Bank of America. Your line is open. Please go ahead.
Hi, Yes, good morning, good morning, Andrew.
Just a question just put in a couple of things together just said.
You are adding to growth investments and I know what it takes for AMETEK for sort of loosening the purse strings.
You did talk about.
Under investment amongst the industrials over the past 5 years looking forward do you see structurally higher need for Capex over the next couple of years from your customers.
Yes.
There could be there could be you had a situation where you have the industrial recession in 2015.2016 timeframe and then we had a few years of good growth, but then we.
We had the pandemic so so.
Clearly.
Supply chains are stressed and people are going to put their dealing with the current issues, but theres going to be some capacity put in and I think that.
That could be 1 of the outcomes of this.
Economic cycle that we're in so we're pretty bullish on the industrial cycle right now and we think there as I mentioned earlier, there is a COVID-19 balance and it's pretty difficult to bifurcate. The COVID-19 bounce from the long term growth, but we certainly are seeing customers planning in a way that's different than just a balance.
Thank you.
A follow up question I mean people asking about delta bearing impact on aerospace, but I think there are also some headlines in Asia people trying to figure out.
Delta variant is having any impact on the rate of growth.
In Asia in China, specifically.
Could you just talk about what it is you are seeing in China and Asia, not only as end market, but also going on what are you hearing from your supply chain is advair and sort of something that you are tracking in that region. Thank you.
Yeah.
During the second quarter, we had a pretty good month in Asia pretty good quarter in Asia, we were up about 30%.
And it was broad based strength it was.
Notable strength in many of our businesses, but our automation business and our process instruments business stood out.
Specifically went in within Asia, China growth was up 27%. So it remains strong and.
In China, our process and instrument process instrumentation businesses did very well so we're still seeing solid growth in China.
I understand the press reports as well as anybody about what's going on in those regions. We're still operating all of our plants, we do have pockets, where we're dealing with some some COVID-19 issues right now but it's.
It's not unlike it's Ben.
On the past 3 or 4 months ex.
The fact that Theres, probably a little more spread in China now so we're watching that closely and.
But the.
To your point to China growth remains strong for us 27% growth in the quarter.
Really appreciate your answers great quarter. Thanks, a lot. Thank you Andrew.
Thank you and our next question comes from the line of John Sprague with vertical research. Your line is open. Please go ahead.
Alright, Thanks, good morning, everyone. Good morning, Jim.
Morning.
Moving around to deals on actually what you've done year to date.
Thank you were previously thinking about.
18 centers, so accretion this year on the carryover benefit of <unk> 35, 38 and into next year. Just wondering now that these assets are actually fully in house and you're betting them down.
Has that outlook changed much.
Particular stand out.
No I think the <unk>.
Same outlook, it's we haven't changed at all and we said we'd get about 18 cents of benefit in 2021, and it's looking like that is going to be a good number for us.
Great.
And then just coming back to kind of supply chain that I am sorry is on the call few minutes late but.
Was there any place in the portfolio.
Sure.
You were unable to kind of meet demand or there was issues up and down the supply chain somewhere else, where perhaps even you could deliver both the customer didnt necessarily want it because of their own issues with deliverability and availability.
Yes, there are issues like that going on all over Jeff, but I would say that in general in the second quarter. Our teams did an excellent job.
We had the material and we had the labor and we have the execution to get out what we needed to.
There are certainly challenges in that broader materials and logistics right now.
Our guidance reflects the known risks.
These issues are going to be with us for some period of time and we.
We are managing the issue with the dedicated business unit personnel. So each business unit has a team on our supply chain, but we also have an overlay of our companywide resources, our global sourcing team and Theyre doing an effective job right now.
Big area of focus for US right now is on semiconductor chip availability.
We're looking at that.
Very closely trying to to secure our supply chains and you can end up with a situation where you think you have a firm delivery and.
And they come for the delivery and it's not there and I think everybody in the industrial world is delivering on that right now on it causes.
Game of whack, a mole where youre scrambling to.
You get your output output.
People did a good job on the second quarter end.
There is an element of <unk>.
Prudent judgment.
Our second half guide.
But.
Our guidance reflects all of our known risks.
Great I appreciate the perspective, thanks, a lot. Thank you Jeff.
Thank you and our next question comes from the line of Christopher Glynn with Oppenheimer. Your line is open. Please go ahead.
Thanks, Good morning, David.
Kevin.
Hey, So just wanted to clarify Dave I think you said June had the highest rate of year over year orders in sales organic growth.
I would've thought the comps got got steeper from April through June so.
1 just wanted to clarify too.
Whats implied there if youre accelerating on on steeper comps yes.
Yes.
I may have said the wrong thing if I said the acceleration of.
The orders.
Both orders and sales grew sequentially every month for the June being our highest strongest month for the quarter.
So that doesn't mean that the rate of change.
<unk> accelerated that means that Jim was higher than May may was higher than April.
For both orders and fulfill them.
And we had a very strong trend in July wholesale.
Okay. Thanks for that Might've heard you right.
Then just wanted to go into your advanced motion controls.
<unk> solutions.
You talked about front end investment there.
Curious, what you're seeing in terms of.
The types of automation architectures.
Are there changes go on there is that coming your way in particular.
On.
On increasing front and competitiveness.
I'm curious kind of panoramic of that automation space.
A lot of what we're doing is discrete automation and.
And we're also done some factory automation and we've invested heavily over the past few years position on our product portfolio and our capability at the top of the market and we're benefiting from it now because.
As customers ramp up our automation technology is helping them.
On our server customer bases and and the demand has been strong for for many quarters and we don't expect that to change.
Okay. Thank you.
Welcome.
Thank you on our next question comes from the line of Robert <unk> with Melius Research. Your line is open. Please go ahead.
Thanks, Good morning, everybody.
Good morning, Rob.
So I actually also had a question just on the comment on industrial investment in Capex et cetera.
Little bit curious if you get flushed out are you hearing the desired spend coming back from your customers. Maybe some technology changes are encouraging automation localization and so forth and I'm just curious if that's okay.
On where you think things will go based or whether youre hearing on strongly and then just maybe a comment on breadth of industry analyst Thats focused a little bit more on pharma and medical or wide across the businesses do you have an insight into thank you.
Yes. The first point is I think the.
Our localization of manufacturing and people developing more durable supply change is definitely 1 of the drivers of the demand we're seeing.
For your second question Robert.
Oh.
Well, so whether it's about technology changes are all kind of doing it and then breadth of portfolio for the portfolio.
Again, the first part of the question, we're definitely seeing localization drive demand as people look for more durable more local supply chains.
What we're really seeing it.
If you go through our portfolio.
Let's start with our process businesses, which are our largest.
Business. It grew 20 mid twenty's organic during the quarter.
John.
Really a strong level of demand essentially all end margin, leading to really robust sales and orders.
Growth was particularly strong in 1 of our instrumentation businesses called our ultra precision technology business has had a great quarter and they are benefiting from.
Metrology measurement technology related to automation and you think about the power and industrial business that business was up 30% organic in the quarter.
The businesses that did well, they're both segments power in industrial and particularly strong growth on our Brookfield business in our <unk> business.
Again that was broad based on the power and industrial business was kind of 1 of the laggards to on orders to pick up on where we're really pleased to see that.
And then we talked about our automation and engineered solutions business they were up.
Low twenty's organic and Thats been strong for a period of time with.
Robust and strong demand continuing so all of those are strong.
Our aerospace and defense business had a really good quarter.
Net sales were up high teens on a percentage basis versus the prior year. So this is about 19% of our portfolio organic sales were up high teens on a percentage basis on a.
Solid growth across all segments as I mentioned as an answer to Alex's question earlier, our commercial business was up 25%.
In our defense business was up about 10%.
And for all of 'twenty 1.
That business, we're still not changing we're continuing to expect low to mid single digit organic growth and 5 pool, the aerospace and defense business outside of the portfolio I'd say, that's the 1 that's.
It's bottomed and it's doing well, but we're still looking at that the commercial OEM business and and watching it bottom, but everything else. Besides that is showing an uptrend.
Great. Thank you thanks Robert.
Thank you on our next question comes from the line of Joe Giordano with.
Cowen Your line is open. Please go ahead.
Hey, guys. Good morning, good morning.
Joe Yes.
Was interested in the growth investment for $100 million and you talked about like.
2 thirds of it going towards like the sales and marketing and digital aspects of your business.
Are you seeing kind of coming out of Covid, just given like the.
<unk>.
On a bespoke nature of your products in my specialized nature of your products or is there like a fundamental change in how you sell these like is it going to be.
Are you finding it easier to do it digitally and less like in person and you just kind of like a <unk>.
The change in how you do business going forward.
I think there is a change Joe and I think that digital transformation is impacting all elements of our business and we have these different niche businesses, but some of the technology and the sales and marketing functions applies to all of them. So from.
From digital marketing to e-commerce to augmented reality used to demo and service of our products.
2.
The efficiency, we're getting out of automating.
Routine clerical tasks and remote process improvement there is a lot of things going into.
The digital plans that we have the digital transformation that we have and they do impact all of our businesses and it's kind of.
Theme across all of our independent niches. So we're focused a lot on improving their business in that area and we did learn a lot during the.
The pandemic downturn and we're taking what we learned in and we're making a better and we are institutionalizing some of our best practices.
And then just a follow up.
Yes.
Your Asia businesses on the margin more recently have you seen anything.
That kind of reflects the macro data at least in China getting a little weaker here or are you seeing anything like on the margins that debt kind of mirror that or are you kind of changing the way you're operating there a little bit.
Get ahead of that.
Yeah, we're not we're not changing anything yet and we're not seeing a downturn but.
China has been very strong they were 1 of the first economy is out of the pandemic. So we're looking at it closely and as I mentioned, our growth was up about 27%. It remains strong and we have strong quotation activity I've seen all the the reported about the Chinese economy slowing down and Theres, probably some of that going on.
On but in our particular niches, where we're playing.
We have notable strength.
Thanks, guys.
Okay. Thank you.
Thank you and our next question comes from the line of Deane Dray with RBC capital markets. Your line is open. Please go ahead.
Thank you and good morning, everyone. Good morning, David.
Hey, just in terms of some of the second half dynamics.
On the.
Some of the temporary costs coming back in as well as higher incentive compensation what is that.
Do for expectations on Incrementals.
Yes, I think the.
Core incrementals for the year for 35%.
But on that second half, we're going to have some cost coming back into the P&L. So the margins during the second half can be down a bit.
On.
Reflected in our guidance, but the acquisitions are margin dilutive or temporary costs are coming back into the cost structure.
Also theres a bit of us being cautious in terms of our guide related to the dynamics of the supply chain and as you may remember, we got a very tough.
Very difficult tough comparison in Q4, I think our EBITDA margins were over 30% so.
We have a tough comp also so theres going to be there can be a bit of margin dilution on that second half. We've got some of the onetime cost for the acquisitions working through the system. Those temporary costs that we talked about are coming back on but it's all reflected in our guidance.
That's very helpful.
And David.
The key question that everyone would love to hear your comments on on the supply chain challenges and you said you expect it to last for some period of time.
Just from what Youre seeing today across your businesses. How do you think this plays out is this.
Multiple quarters to carry into 2022.
We're handling it well on price costs, but just your expectation here how long. These conditions last that's a great question Deane I think the.
Semiconductor element of it kind.
Can last longer for that can go out.
234 quarters as capacity gets put in place.
On the the not specific to semiconductor, but the broader supply chain challenges.
Yes, I can see those moderating in a couple of quarters.
But semiconductor could last a little bit longer.
And are you carrying any more buffer inventory in your businesses just to kind of protect yourself from the surprises about.
You expected to delivery and that is not <unk>, but is that.
Are we seeing that in the working capital and other.
On working capital was down about more than 500 basis points, but actually embedded in that is about $50 million more on inventory. So we've allowed the operating teams that go out and secure the parts that they need and we're certainly not scrimping on that area, but at the same time.
It's tough to get the parts that you need so we're managing it closely and as I said, we have a good team both within our local business units combined with our corporate oversight, where we're getting good results, but that is a big challenge for us right now.
It's all good to hear thank you. Thank you Deane.
Thank you and our next question comes from the line of Steve Barger with.
I think capital markets. Your line is open. Please go ahead.
Yes.
Hey, Good morning, guys, it's Ken Newman on for Steve Hey, Ken Greg Good area.
Thanks.
I just wanted to touch back on the semiconductor market comments you. Just made can you just remind us how big that market is for you today and on.
I'm curious if you could just talk to the outlook for the sub sector in terms of.
Capital investments from your customers.
I'll do that Ken, but I want to be clear the what I was talking about was the semiconductor chips that are supplied to AMETEK when I was talking about.
The supply chain tightness, but for semiconductor market is an important market for AMETEK. So we do participate and participate in it from the viewpoint on sales and it's about 6% of our business.
A little under $300 million.
And we're in we're seeing some solid growth there because.
We participate both on the research market.
And the ramp in chip production and application areas, where we're seeing particular strength would be the <unk> optics market.
Yes.
The semiconductor research market our businesses.
Named Kamika and <unk> are doing quite well, there and we expect our semiconductor sales to be up in the mid teens to 20% level. This year.
Understood.
And then just touching back on the incremental R&D investments for new product development for the year.
Can you give us some color on where your vitality index has trended through the quarter and I'm. Just curious if you have any thoughts on how you're seeing that how you see that vitality index change as these new investments start to monetize.
Yes, our vitality index in the quarter was a little better than 23%. So it was a good number.
And.
We have to get our system put in place with some of these acquisitions that we've done so there is.
Tracking in AR.
Systems that we've put in place arent in all the acquisitions, yet so we can't look at those businesses. The same way we look at our current businesses, but in general we have a strong vitality, we have a number of in the low twenties, we're happy and we think there's good opportunities for our businesses and we're funding them in and.
It's a big area for US is important for us is to get our product development teams.
Working together, introducing new products, because that's fundamental for both the AMETEK pricing story to be able to stay in front of inflation and also growing organic growth on the niche markets that we're leaders in so it's really important to us.
Thanks for the color. Thank.
Thank you Kent.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Kevin Coleman for any further remarks.
Thank you Michelle and thank you everyone for joining our call today have a wonderful day.
This concludes today's conference call. Thank you for participating you may now disconnect.
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