Q1 2022 AMETEK Inc Earnings Call
Time, all participants are in a listen only mode. Later, we will conduct a question and answer session during.
During the question and answer session. If you do have a question, perhaps zero one on your Touchtone phone.
I'll now turn the call over to Kevin Coleman, Vice President of Investor Relations and Treasurer.
Thank you John Good morning, and thank you for joining us for Ametek's first quarter 2022 earnings Conference call with me today are Dave <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 could differ significantly from expectations.
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 to 2021, our 2022 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization.
Reconciliations between GAAP and adjusted measures can be found in our press release and on the investors section of our website.
I will 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 Dave.
Thank you, Kevin and good morning, everyone.
AMETEK delivered outstanding results in the first quarter with strong sales growth and excellent operating performance driving robust core margin expansion and earnings which exceeded our expectations.
We are also seeing continued strong demand.
This demand remains broad based across our diverse set of niche markets.
The outstanding orders growth and a record backlog.
I am very proud the way our teams are managing a challenging and uncertain macro environment.
Ametek's flexible operating model allows our businesses to quickly adjust and adapt.
To changing economic conditions and deliver exceptional results.
Before I provide more details on the results for the quarter.
I wanted to comment on the ongoing geopolitical events in Ukraine.
We are deeply saddened by the tragic events continue to unfold in Ukraine, Our Hearts Hearts and thoughts.
All of those affected.
To assist with the immediate needs of this mass humanitarian crisis.
The AMETEK Foundation has made donations to several charities that are actively providing food shelter and medical supplies to those impacted.
Additionally, many AMETEK colleagues on our businesses have mobilized to help in whatever way they can through donations to charities supporting the crisis.
Thank you to all employees, who are supporting those in need.
Now, let me turn to our first quarter results.
First quarter sales were $1 46 billion.
Up 20% over the same period in 2021.
Organic sales growth was 14% acquisitions.
Acquisitions added seven points and foreign currency was a one point headwind in the quarter.
Overall orders in the first quarter were $1 7 billion, an increase of 22% over the prior year period.
While organic orders were up 18% in the quarter.
Book to Bill was 117 in the first quarter.
Reflecting continued robust and broad based demand.
Backlog at quarter end was a record $3 billion.
Up approximately $1 $2 billion from the end of 2020.
Operating income in the quarter was $353 million of.
A 20% increase over the first quarter of 2021.
Operating margins were 22% in the quarter up 10 basis points from the prior year.
Core operating margins were 25, 5%.
Up an impressive 140 basis points versus the first quarter of 2021.
With strong core margin expansion in each operating group.
This outstanding margin expansion is a testament to the strength of our operating capability and a great work of our teams in managing inflationary and supply chain impacts across our business.
EBITDA in the first quarter was $434 million.
Up 22% over the prior year with EBITDA margins of 29, 7%.
This outstanding operating performance led to earnings of $1 33 per diluted share.
Up 24% versus the first quarter of 2021 and.
And above our guidance range of $1 24 to $1 28.
Next let me provide some additional details at the operating group level.
First the electronic instruments group.
Sales for our electronic instruments group were $987 8 million.
25% from last year's first quarter.
Organic sales were up 15% in the quarter.
Recent acquisitions contributed 11% and foreign currency was a one point headwind.
Organic growth was particularly strong across our ultra precision technologies Division.
With Choreiform record technologies in TMC Pressey tech businesses, leading the growth.
<unk> operating income in the first quarter was $244 8 million.
18% versus the prior year, while AIG operating margins were 24, 8% in the quarter.
Aig's core margins were up a very strong.
130 basis points over the prior year to 27, 5%.
Yeah.
The electromechanical group also had a great quarter with excellent organic sales growth driven by broad based demand and strong operating performance.
Emg's first quarter sales increased 11% versus the prior year to $478 million.
Organic sales growth was 12% and foreign currency, a one point headwind.
Demand within our automation businesses remains excellent, reflecting ametek's highly differentiated motion control capabilities and leadership positions within our niche applications.
Emg's operating income in the first quarter was a record $128 2 million up 22% to the prior year period.
Emg's operating margins expanded an exceptional 250 basis points to 27, 2%.
Which includes an approximate $7 million gain on the sale of a facility in the quarter.
On a core basis, excluding this gain EMG.
<unk> margins were up a very strong 100 basis points versus last year's first quarter.
Our teams continued to deliver outstanding performance in a very challenging and dynamic operational environment.
In addition to ensuring we successfully navigate the current macro environment.
We are focused on ensuring AMETEK is positioned for long term success.
Sustainable growth by making investments in our organic growth initiatives.
In 2022, we expect to invest approximately $110 million in support of these growth initiatives, including strong growth across our research development and engineering groups.
Ametek's leadership positions in our niche markets are driven by deep industry expertise and the differentiation of our technology.
Our research and engineering team is doing a wonderful job developing innovative next generation products and technologies to support their customers' applications.
For the full year, we now expect to invest more than $345 million or over five 5% of sales in <unk>.
Our vitality index, which reflects the level of sales from products introduced over the past three years.
Was a very strong 26% in the first quarter.
One way, we recognize and celebrate the great work of our businesses.
New product development efforts is through the AMETEK Innovation Award.
This award provided annually to the AMETEK businesses, who best demonstrates breakthrough innovation of new technology driving expanded growth opportunities.
The most recent innovation award winner was our used trailer <unk> business unit.
A leading provider of advanced thermal management systems for use in support of critical aerospace defense industrial and commercial applications.
Utilizing various elements of the AMETEK new product development process. The team developed a highly innovative heat exchanger that provides meaningful improvements in aircraft engine performance versus the incumbent technology.
This new product will deliver strong incremental sales for AMETEK.
Providing important sustainability benefits through the reduction of approximately 1 million tons of carbon dioxide over a 10 year period.
Advanced more thermally and aerodynamically efficient design of the heat exchanger.
Driving such benefits aligns with ametek's core value of social responsibility.
By using innovative solutions to help our customers create a more sustainable future.
Congratulations to the used trailer <unk> team.
And all of the AMETEK colleagues contributing to the development of outstanding new products and technologies.
Now switching to our acquisition strategy.
We had a record year of capital deployment in 2021 deploying approximately $2 billion.
On the acquisition of six businesses.
Those businesses are integrating nicely and we expect contributions from the acquisitions in the coming years as they further implement key elements of the AMETEK growth model.
Our acquisition pipeline remains strong and our M&A teams remain busy and identifying attractive acquisition opportunities.
We have ample balance sheet capacity and strong cash flows to support our acquisition strategy and expect to remain active over the coming quarters.
Now, let me touch on the supply chain issues.
Overall, the global supply chain and logistics channels remained tight and unreliable.
Our supply chain and logistics environment in the first quarter was similar to what we experienced during the fourth quarter with.
With expanded with extended lead times for a broad range of materials and components.
These issues are leading to higher inflation, but given our product differentiation.
We were able to more than offset disinflation with higher pricing.
Leading to a strong price inflation spread and outstanding margin expansion.
Now to our outlook for the remainder of the year.
While we are bullish on the future we remain cautious in the short term given.
Given uncertainty related to the supply chain challenges the war in Ukraine, and the Covid Lockdowns in China.
However, given the strength of the AMETEK growth model and our proven operational capabilities. We are confident in our ability to manage these ongoing headwinds.
Additionally, our record backlog and leadership positions across attractive mid and long cycle markets position us well for continued strong growth.
For the full year, we continue to expect organic sales growth.
Up mid to high single digits.
While overall sales growth are expected to be up high single digits down slightly versus our prior guidance given increased foreign currency headwinds.
Given our first quarter results, we are increasing our full year earnings guidance.
Diluted earnings per share for the year are now expected to be in the range of $5 34 to $5 44.
Up 10% to 12% compared to 2021.
This is an increase from our previous guidance range of $5 30 to $5 42 per diluted share.
While confident in our increased outlook for the year. The COVID-19, lockdowns throughout China are expected to shift some sales from the second quarter into the second half.
For the second quarter overall sales are expected to be up low to mid single digits compared to the same period last year.
Second quarter earnings are expected to be in the range of $1 27 to $1 30 per diluted share up 10% to 13% versus the prior year.
To summarize AMETEK delivered a strong first quarter.
With solid orders and sales growth.
Strong margin expansion and a high quality of earnings, allowing us to increase our earnings guidance for the year.
These outstanding results speak to the strength of the AMETEK growth model.
Along with the resilience of our World class workforce.
Our differentiated technology solutions and market leading positions across diverse.
Niche applications have allowed us to navigate through these difficult economic cycles.
While we expect these challenges will continue throughout 'twenty, two we remain well positioned for continued long term growth.
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 Dave.
As Dave noted AMETEK delivered outstanding results to start the year highlighted by strong sales and orders growth excellent excellent operating performance at our high quality of earnings.
I'll provide some additional financial highlights for the quarter.
First quarter general and administrative expenses were $19 $7 million up $1 million from the prior year due to higher compensation expenses in the quarter.
For 2022 general and administrative expenses are expected to be roughly in line with 2021 levels at approximately one 5% of sales.
The effective tax rate in the quarter was 19% down from 19, 5% in the first quarter of 2021.
For 2022, we anticipate our effective tax rate to be between 19 and 20%.
As we've stated in the past actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.
Capital expenditures in the first quarter were $26 million for the full year capital expenditures are expected to be approximately $125 million or approximately 2% of sales.
Depreciation and amortization expense in the quarter was $78 million in 2022, we expect depreciation and amortization to be approximately $320 million, including after tax acquisition related intangible amortization of approximately $150 million or <unk> 64 per diluted share.
For the fourth for the quarter operating working capital was 17, 1% of sales operating cash flow was $201 million and free cash flow was $175 million.
Our first quarter working capital and cash flow results reflect our strategic decision to add inventory in certain areas to support continued strong customer demand and as a hedge against longer lead times, we are experiencing across the supply chain.
While this investment resulted in lower cash flows and free cash flow conversion in the first quarter. We continue to expect a strong 110% free cash flow to net income conversion for the full year.
During the first quarter, we repurchased approximately one 2 million shares of stock in the open market for approximately $152 million.
Debt ended the first quarter of 254 billion unchanged from the end of 2021 and offsetting this debt is cash and cash equivalents of about $340 million.
At the end of the first quarter gross debt to EBITDA ratio was one five times and our net debt to EBITDA ratio was one three.
We continue to have excellent financial capacity.
<unk> and flexibility with approximately $2 $3 billion of cash and existing credit facilities as of March 31 to support our growth initiatives.
As a reminder, our top priority for capital deployment remains strategic acquisitions as we believe it provides AMETEK and our shareholders with the best returns on our capital.
In summary, our businesses drove excellent performance in the first quarter delivering strong earnings growth in a very challenging environment.
We remain well positioned to manage ongoing economic challenges, while continuing to invest strategically in our long term growth initiatives Kevin.
Thank you Bill.
Can we please open the lines for questions.
Thank you we will now begin the question and answer session. If you do have a question Chris zero one on your Touchtone phone.
We should be removed from the queue. Please present zero into using a speakerphone you may need to pick up the handset first before Christina numbers. Once again, if you do have a question press <unk> one on your Touchtone phone.
And our first question is from Matt Summerville from D. A Davidson.
Thanks morning.
Dave can you maybe talk about where you were in Q1 from a price cost standpoint, what that spread looks like and how much realized price you expect for the full year and then I have a follow up.
Sure Matt in the first quarter, our pricing continued to more than offset inflation.
Pricing was about 5% and inflation was about 4% so the.
Spread was a little over 100 basis points.
And for 2022.
We expect price to be in the four 5% to 5% range in the.
Inflation to be the <unk>.
In the four to four 5% range, so about a 50% positive spread in our guide.
And the results speak to the highly differentiated nature of the AMETEK product portfolio, and our leadership positions and niches to investments, we're making in our products and technologies and we've been staying ahead of inflation as we said we would.
For probably the.
The last year or so when we saw it coming down the line so.
Got it and then Dave given.
Your second quarter guidance and kind of the normal.
A more normal year.
Typical cadence would dictate second quarter being at least a few cents above where you were at in Q1, obviously, you're not guiding that way. This year. So I guess I'm trying to understand maybe how much contingency you are factoring in disruption if you want to call. It that can you kind of parse that out a little bit.
Thank you, yes, it's a good observation, Matt and it's fundamentally driven by the China Lockdown scenario.
About 9% of our sales.
Out of China, and we've been successful running a profitable growing operation there for many years, we have tremendous customer base.
Improving manufacturing processes, making the environment cleaner, improving research and development capabilities and that's going to continue but right now several of our major facilities are in the Shanghai area.
And they are in a lockdown situation either.
Not operating are operating in a significantly reduced capacity.
And thats impacting a lot of our business and.
Our best assessment of what we know right now is about a half of our China sales will be impacted in the quarter. So that's about four 5% of our sales were $65 or $70 million.
So if you take that out of the Guy Youll see that the the balance of AMETEK.
Is going up in Q2, so it's really the fact that.
Lower business activities in China, because of the lockdown situations and because of our proximity to Shanghai and some of our major operations.
Those sales are just going to be delayed theyre going to get delayed from the second quarter to the second half of the year.
<unk>.
So we have to get through the lockdown in Q2.
Understood. Thank you very much David Thanks, Matt.
And our next question is from.
Oh.
Our next question is from Deane Dray from RBC capital markets.
Thank you and good morning, everyone.
Indeed.
Hey, I appreciate all the color could you that.
Take us through the key end markets and regional update.
Certainly just got the China update on the Lockdowns.
Understood, but anything else, especially.
European exposures. Thank you.
Sure Deane.
I'll take you through the.
Major markets first our process business was were up 20% in the quarter.
Strong demand organic sales growth.
Contribution from the acquisitions of <unk> and Alpha.
So organic sales for process were up mid teens in the quarter.
Growth broad based I mentioned in the prepared remarks, the ultra precision technologies business really saw excellent growth in the quarter.
End market demand remains strong all key end markets, including semiconductor research and medical are very strong.
Additionally, we are seeing increased demand for our solutions, serving sustainability initiatives with our instrumentation being used to reduce harmful emissions and process improvement process efficiency. So for.
Look at process, our biggest segment for all of 2022, we continue to expect organic sales for our process businesses to be up mid to high single digits.
Next our aerospace business, our aerospace business.
Was organically up low single digits in the quarter.
20, and up in the mid twenties range for the first quarter on overall sales.
In the quarter, we saw strength in commercial aerospace.
Being partially offset by delays in defense shipments caused by U S government spending so our commercial side of that business was up low double digits.
And our defense side of that business was down mid single digits.
And for the full year, we expect to be up mid.
Mid single digits with commercial up high single digits and defense up low single digits for aerospace.
Next power and industrial.
Overall sales were also up in the mid 20, so good quarter.
Power and industrial.
We had mid teens organic sales growth and the contributions from our acquisition of NSS.
So strong books.
Sales grew across both power and industrial and we expect organic sales for power and industrial businesses to be up.
Mid single digits was similar growth across both segments.
And finally, our automation and engineered solutions, both overall and organic sales for automation and engineered solutions businesses were up mid teens on a percentage basis in the quarter.
With solid demand continuing across our end markets.
For the full year, we expect to continue to expect organic sales to be up.
For our automation and engineered solutions business up mid to high single digits with similar growth across each business. So.
Strong performance across the entire business.
About the geography, you asked that question too.
Strong broad based growth across all geographies.
Mid teens in Europe U S and Asia.
China, we were up 10% on an as reported basis. So good quarter. There also so.
When you look across the globe, there's really not a blemish in terms of growth. So we're feeling good about that also.
With our orders we think there is strong growth ahead.
That's really helpful and just last one.
Just to clarify I understand the push out from the second quarter that maybe China related.
I might've missed this but was there any revenues pushed out of the first quarter.
There really wasn't.
Closure of China occurred late in the quarter very late in the quarter and we had a heads up that that was happening so.
We were able to really.
Meet our meet our demand requirements in the first quarter.
But at the same time overall for the company.
There continued to be orders that did not ship in the first quarter.
And they were in that $50 million plus range. So.
We were operating at a 100% of supply chain and everything else that was going on we probably would have shipped another $50 million plus up in the first quarter.
That's real helpful. Thank you. Thank you Deane.
And our next question is from Allison <unk> from Wells Fargo.
Hi, guys good morning.
Good morning Allison.
So just poking on sort of that end market and customer demand is there any sort of change in behavior, that's causing you a little bit of pause with a specific business or vertical.
<unk>.
And kind of leading to that things might be shifting a little bit or is it still quite strong across the board here.
It's quite strong across the board I think.
Over 90% of our business units had double digit sales and double digit orders and the ones that didnt were in high single digits. So so.
So.
The orders the orders are good the sales are good.
There is absolutely no slowdown that we see as.
As I told you.
A couple of quarters ago customers are giving us an early look into their demands that's continuing and.
But I really see no slowdown at all on that 22% orders and 18% orders growth.
It's broad based and I think.
On an orders basis organic orders AIG was 19 and EMG was 15, so both very strong.
Great and then you talked about the pipeline for M&A be being quite filled at this point, which is not atypical for you.
We do.
Would you describe sort of kind of the things that youre seeing what's kind of holding things back as pricing still high at this point just any incremental color on the pipeline and what youre seeing out there today.
Sure we remain active we're looking at multiple deals.
As always we are focused on long term returns.
The one point that's.
It's a factor right now as you look at.
Private company multiples and public company multiples.
And with the stock market obviously.
Public company multiples have come in a bit but.
The private company multiples are above public company multiples and Theyre being stingy in.
And.
Reflecting what's happened in the public market, so theres a bit of a delay and some of the private businesses. We're looking at premium multiples and I think thats, causing some transactions to get pushed to the right. The difference between private and public multiples and the fact that the the owners of the private businesses are holding on right.
Now too.
Oh.
For higher multiples in the public market.
Perfect. Thank you I'll pass it on.
Thank you.
Our next question is from Rob Wertheimer from Melius research.
Thank you.
And to follow on.
The last statement you just made which is an interesting one I just wanted to see if you would characterize acquisition pipeline funnel backlog in size you guys had a record year last year, maybe some of that was because of the 2020 years little slower but then.
I meant to imply that things have to kind of normalize between public and private before acquisition activity picks up or is it more situational and that's that's a comment.
Forecasting continues I mean on the price not a forecast as a comment but it is a factor impacting valuations, but we have a very very good pipeline.
Both smaller deals public and private.
I expect that youll be hearing from us.
This year and as you know we're always focused on long term returns. So we have to see value in what we're buying and what we're very active right now.
Okay, Perfect and then I think your comments have been really clear the 90% in double digits as an amazing stat in some ways. There's a lot of consternation around Europe , you know, whether theres going to be a slotted recession or just uncertainty on spending et cetera, I assume from your comment youre not seeing any of that in your orders and backlog specific to Europe Europe was up 16.
Percent in the quarter.
Broad based strength, we had notable strength in our process businesses clearly there is some impact in the energy area and with the Ukraine crisis. The work in Ukraine. Some of our products are used to help people get fuel efficiency. Some of our products are used in.
Right now we're not seeing a slowdown we have read the press clippings like you have but right now were.
Full go in Europe .
Thanks.
Okay.
And our next question is from Scott <unk> from loop capital markets.
Hey, Good morning, Dave Bill Kevin how are you.
Good morning, Scott.
So I have two questions. One is on the price cost and I know that we came into this year with that fourth quarter. I think you had a 100 basis point gap in the first quarter you had that same in the fourth quarter. I think you mentioned that you were expecting that gap to start to narrow and it really didn't in the first quarter. So is it possible that.
So you can get pricing enough to keep it at 100 for the rest of the year.
It is possible Scott.
Our guidance is for it to <unk>.
Narrow, but certainly we have been doing an excellent job and I think our intention will be to try to maintain the same spread but.
Our guidance is for that to narrow a bit.
Understood. Thank you next question was on.
But aerospace.
And commercially you said was up low double and I was hoping maybe you could unbundle that OE versus MRO.
Yes.
What drove the growth.
In our commercial but the upload low double digits was really the aftermarket and the business jet that those markets both outperformed the OE.
Okay.
If I could just extend that last comment.
What what are you hearing from the big guys because they are now.
These guys are certainly mum on 23.
Are you hearing any changes in build rates for next year.
Certainly.
Cost a lot to take flight.
So I think Brian that they're kind of padding things there their pockets so a little bit.
What is your sense there.
My sense is from our perspective that market is going to continue to improve and is one of our longer cycle exposures and we're looking for are good.
Continued growth in commercial in 2023.
Got it and if I could just sneak this last one and I know that.
Year vitality has been at about 25% for quite some time honestly.
Correct me if amongst some first time effort 26%.
And I was.
That's really awesome number three years and what have you and I hear.
Hearing you talk more and more about new products on these calls can that number continue to creep up this year.
It can continue to creep up and we've got an incredible.
Credible.
A range of new products were being introduced and there also you think about <unk>.
Sure.
The heat exchanges I talked about from our used trailer business I mean.
We're saving 1 million tonnes of Cotwo.
That's almost the entire.
Carbon footprint of AMETEK over 10 years.
It's an incredible design it reduces weight, it's just a fantastic design in.
We're already designed in and.
Is really bullish for the future. So we have the engineering capability to meet the needs of our customers in these changing times, where sustainability is a more important factor and I'm very excited about our product development. That's why we're investing heavily in that area and we have good things to come.
Very good Dave Thanks, Thank you Scott.
Once again, if you do have a question for zero then one on your Touchtone phone.
And our next question is.
It's from Andrew <unk> from Bank of America.
Good morning. This is David Ridley Lane on for Andrew Ruben.
I know AMETEK has a sizable U S exporter.
Even the U S dollar appreciation is that a drag on margins and.
Can you remind us of your overall hedging strategy.
Sure.
First point is we are a sizable <unk> quarter.
That's a correct statement, but our products are also very differentiated.
No.
As evidenced by our price inflation spread.
So far we're able to offset the.
Higher U S dollar.
Our cost structure.
The second point is our hedging strategy and actually we don't have hedging strategy.
Because we're naturally hedged so.
Pretty much across the board we spent a lot of time and this is this is about 10 years worth of time, it's a long period of time, we're naturally hedged in each of our locations that we operate.
So our revenues and expenses naturally offset and to give you. An example in this quarter.
Sure.
You had a strong dollar and there was some currency implications it did impact our top line.
Our bottomline across the whole enterprise it was less than a penny impact on earnings. So we've got this natural hedging strategy and through.
The past 10 years, you can go back and look at it. It works very well we are U S exporter, but we got the pricing leverage through our differentiated technologies. So strong dollar is not usually.
Insurmountable I went for us.
Understood and a quick follow up on Abaco are you seeing any sort of incremental demand out there from international defense budgets, which are which are going up I know this is probably more of a 'twenty three 'twenty four story.
Has the sort of pipeline for your defense businesses changed meaningfully thank you.
The pipeline is improving in international markets, we have businesses.
Located in the UK. Besides abaca that are also benefiting so the fact that the international defense market is improving is a good thing for our aerospace and defense business.
And our next question is from Joe Giordano from Cowen.
Good morning, this is Michael in for Joe.
Hello, Michael.
Hi.
With the defense theme can you provide any color regarding the new U S defense budget now that it's been finalized.
Yes.
Yes, the U S defense budget is good from our perspective is in areas that were investing I mean, when you look at the whole thing it was probably flattish to up a bit.
But there is.
There is ample spending going out for us and.
We're really.
It's a budget that we can work with what hit us a bit in the first quarter and I talked about our defense business as being down where the delays from the continuing resolution where no. One has funding. So what we're seeing now is an uptake in order patterns.
And the second half of the year, we expect that market to improve substantially.
Great. Thank you.
Thank you.
And we have no further questions at this time I will now turn it back over to Kevin Coleman for closing remarks.
Thank you everyone for joining our call today and as a reminder, a replay of the webcast may be accessed in the investors section of AMETEK Dot com have a great day.
Thank you for joining ladies and gentlemen that concludes today's conference. Thank you for participating and you may now disconnect.
Okay.
Okay.
Yes.
Okay.
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