Q2 2022 AMETEK Inc Earnings Call

August 2, 2022

Ladies and gentlemen, thank you for holding your conference will begin shortly.

You for your patience.

[music].

Okay.

Welcome to the second quarter 2020 to AMETEK earnings Conference call. My name is Richard and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero one on your Touchtone phone.

I'll now turn the call over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Mr. Coleman you may begin.

Thank you Richard Good morning, and thank you for joining us for Ametek's second 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'll be making forward looking statements, which are subject to change based on various risk factors and uncertainties.

That may cause actual results to differ significantly from expectations.

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 to 2021 for 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, we'll begin today's call with prepared remarks by Dave and Bill and then we'll open it up for questions I'll now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK had another excellent quarter.

With stronger than expected organic sales growth outstanding operating performance robust margin expansion and record earnings.

Importantly, demand remains strong and broad based across our diversified niche markets.

Leading to impressive organic order growth and a record $3 $1 billion backlog.

Given our second quarter results and our outlook for the back half of 2022.

We have increased our earnings guidance for the year.

Now, let me turn to our second quarter results.

Second quarter sales were a record 151 billion.

Up 9% over the same period in 2021.

Organic sales were up 12%.

Acquisitions added a point and foreign currency was a three point headwind in the quarter.

Organic orders were up a very strong 11% despite a highly challenging prior year comparison.

Book to Bill was 1.09 in the second quarter, our eighth consecutive quarter of positive book to Bill.

Operating income in the quarter was a record $365 million, a 15% increase over the second quarter of 2021.

Operating margins were 24, 1% in the quarter up 130 basis points from the prior year with strong incremental margins.

EBITDA in the quarter was a record $444 million up 15% over the prior year with EBITDA margins of 29, 3%.

This outstanding performance led to record earnings of $1 38 per diluted share up 20% versus the second quarter of 2021.

And above our guidance range of $1, 27% to $1 30, driven by stronger than expected sales and excellent operating performance.

Now let me provide some additional details at the operating group level.

First the electronic instruments group.

Sales for our electronic instruments group were $1.0 billion to $3 billion.

Up 10% from last year's second quarter.

Organic sales were up 12% in the quarter, what foreign currency headwinds more than offsetting acquisition contributions.

Growth remains very strong across our <unk> businesses, with particularly impressive growth across our ultra precision technologies and P&I P&I Division.

<unk> operating performance was impressive.

Zoning and record operating profit and robust margin expansion in the quarter.

Second quarter operating income was $265 1 million up.

Up 17% versus the prior year and operating margins were 25, 8% in the quarter.

The electromechanical group also delivered strong sales growth and excellent operating performance in the quarter.

Amg's second quarter sales were a record $486 $3 million up 7% versus the prior year with organic sales growing 11% in the quarter.

<unk> growth was also broad based with strong growth across both our EBIT and automation businesses.

Emg's operating income in the second quarter was $124 $4 million up 11% compared to the prior year period.

Emg's second quarter operating margins were excellent at 25, 6% up 70 basis points versus the prior year.

Overall outstanding results in the quarter, reflecting the quality of our differentiated businesses the strength of our operating model and a tremendous.

Efforts of our employees.

I would like to thank all AMETEK colleagues for your commitment to AMETEK and for the many important contributions you make to our sustained success.

Now, let me touch on the supply chain.

Overall, the global supply chain remains constrained.

The largest challenging challenges continuing to be the availability of electronic components.

As we noted previously we have strategically decided to hold additional inventory of select components to support the strong customer demand.

And as a hedge against the tight supply chain.

Additionally, ametek's global sourcing teams are doing an outstanding job working to identify additional sources of supply.

While the supply chain issues are leading to higher inflation.

We have been able to more than offset this inflation with higher pricing.

Okay.

Adding to a strong price inflation spread again, this quarter and outstanding margin trends.

The combination of our global supply chain capabilities and pricing power provides us the confidence in our ability to manage through these uncertain times.

During our first quarter earnings call, we noted that the Cowen driven lockdowns across parts of China.

We're expected to delay some China sales from the second quarter into the second half of the year.

These lockdowns costs less impact on the business in the quarter than we anticipated.

Due to the excellent efforts of our China team, we're able to operate in a closed loop system and adjust our logistics and supply chain networks to support production and shipments.

Additionally, during the last two weeks of the quarter has restrictions were lifted we were able to resume multi ship production and recover much of the delayed shipments.

The impact of China's zero carbon policy is something we're closely watching as we need to react and adjust in the future.

Thank you to our entire team in China for your tremendous commitment and resilience during this time.

Now switching to our acquisition strategy.

Our top priority for capital allocation remains the value enhancing strategic acquisitions.

Our M&A pipeline is very strong.

Our business unit and corporate development teams are busy managing an active pipeline of attractive acquisition candidates.

As Bill will highlight in a moment.

We have a strong balance sheet and excellent cash flows providing us with meaningful capacity to support our acquisition strategy.

We expect to be active in the second half of the year.

We also remain focused on driving higher levels of organic growth by consistently investing in our businesses to support their strategic growth initiatives.

We're seeing the benefits of these investments and stronger organic growth.

Our investments in research development and engineering continues to yield advanced technology solutions, allowing us to expand our leadership position across our niche markets.

One measure of the success of these efforts is our vitality index, which was a very strong 26% of sales in the second quarter.

This level of vitality reflects our businesses ability to develop new products align with compelling growth opportunities.

One example of this is ametek's expansion into the high growth areas of precision optics.

Ametek's <unk> business based in midfield, Connecticut.

<unk>, leading edge extreme precision optics for the design and protection are very large complicated a spherical lenses.

These capabilities supported the manufacturer of the 18 hexagon will shape mirrors, which make up the James Webb space telescopes primary mirror.

The James Webb telescope, very recently produced the deepest and sharpest infrared images of the deep universe.

Truly amazing images.

And part two <unk> capability.

<unk> also provides advanced optical systems for use in the next generation of semiconductor production equipment.

They are incredibly precise mirrors are playing an important role.

And supporting the development of <unk> or extreme ultraviolet opex for the next generation of semiconductor technologies.

Just two of the many examples across AMETEK of the unique and highly differentiated capabilities and technologies, we provide our customers.

Now turning to our outlook for the remainder of the year.

With our strong results in the second quarter <unk>.

Continued solid orders momentum and record backlog.

We've increased our full year earnings guidance.

For the full year, we expect overall sales to be up high single digits.

With organic sales now also expected to be up high single digits.

First is our prior guidance of up mid to high single digits.

Diluted earnings per share for the year are now expected to be in the range of $5 46 to $5 54.

13% to 14% compared to 2021.

This is an increase from our previous guidance range of $5 34 to $5 44 per diluted share.

For the third quarter, we expect overall sales to be up in the high single digits compared to the same period last year.

Third quarter earnings are expected to be in the range of $1 36 to $1 38 per diluted share up 8% to 10% versus the prior year.

While we are closely monitoring the various macroeconomic headwinds.

We are not seeing slowing in our businesses as demand remains solid and our businesses are operating at a high level.

We are confident in our ability.

Improved outlook for the year, given our strong backlog ability to offset inflation with price increases and outstanding operating capability.

In summary.

Ametek's second quarter results were excellent our.

Our businesses are well positioned with differentiated technology solutions, serving a diverse set of growing niche markets.

Our organic growth initiatives are driving higher levels of growth and our portfolio is aligned with attractive mid and long cycle markets.

Additionally, our SLA business model and strong cash flows provides us the flexibility to navigate challenging environments, while continuing to deploy capital and drive increased shareholder value.

AMETEK remains firmly positioned to deliver long term sustainable growth.

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 Dave as Dave noted AMETEK delivered excellent results in the second quarter led by strong sales and orders growth and tremendous operating performance let.

Let me provide some additional financial highlights for the quarter.

Second quarter General and administrative expenses were $24 $6 million up $2 million from the prior year.

And as a percentage of total sales was one 6% in line with the second quarter of 2021.

For the full year general and administrative expenses are expected to be up modestly from 2021 levels and approximately one 5% of sales versus one 6% of sales in 2021.

The effective tax rate in the second quarter was 18, 5% down from 26% in the second quarter of 2021, the lower rate. This quarter was driven by lower tax on foreign income.

For 2022, we anticipate our effective tax rate to be between 19% and 19, 5%.

And as we've stated in the past actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Capital expenditures in the second quarter were $26 million and we continue to expect capital expenditures to be approximately $125 million for the full year or about 2% of sales, reflecting our asset light business model.

Depreciation and amortization expense in the quarter was $77 million and for the full year, we expect depreciation and amortization to be approximately $315 million, including after tax acquisition related intangible amortization of approximately $148 million or <unk> 64 per diluted.

Sure.

For the quarter operating working capital was 18% of sales operating cash flow was $236 million and free cash flow was $210 million in the second quarter, we expect approximately 100% free cash flow to net income conversion for the full year.

Our working capital and cash flow results reflect our strategic decision to add select inventory in certain areas to support continued strong customer the customer demand and.

And to hedge against the longer lead times, we are experiencing across the supply chain.

During the second quarter, we repurchased 144 million shares of stock in the open market for approximately $173 million and year to date, we've repurchased approximately two 6 million shares for a total of $330 million.

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.

Total debt ended the second quarter at $2 $5 billion down.

From the $2 $5 4 billion at the end of 2021.

Offsetting this debt is cash and cash equivalents of $349 million.

At the end of the second quarter, our gross debt to EBITDA ratio was one four times and our net debt to EBITDA ratio was one two times.

As Dave noted AMETEK has a robust balance sheet with no material debt maturities due until 2020 for modest levels of leverage and strong cash flows.

As a result, we are well positioned to deploy meaningful capital investment or acquisition strategy with approximately $2 $3 billion of cash and existing credit facilities to support our growth initiatives.

To conclude our business has performed exceptionally well in the second quarter delivering strong sales growth outstanding operating performance and a high quality of earnings in a very challenging environment.

We remain well positioned going into the back half of the year and we'll continue to invest strategically in our long term growth initiatives Kevin.

Great. Thank you Bill Richard can we please open the lines for questions.

We will now begin the question and answer session. If you have a question. Please press zero.

One on your Touchtone phone.

If you wish to be removed from the queue. Please press zero two.

If youre using a speakerphone you may need to pick up the handset first before pressing the numbers. Once again, if you have a question. Please press zero one on your Touchtone phone.

Question on the line comes from Allison <unk> from Wells Fargo.

Good morning.

Good morning Allison.

Just going back to you and obviously very strong orders and you mentioned youre really not seeing any slowing but has there been any change in the cadence intra quarter in terms of what youre seeing coming in or the region or end market just any more color there.

Yes, I mean, we had strong orders each month of the quarter was our strongest month being June so pretty typical.

And we just ended July and our results were strong in July .

And very consistent with our outlook so.

Theres really continuing order strength that was.

We had strength in.

Both groups AIG was up 11, and EMG was up nine.

Overall organic growth was up 11.

We're growing at healthy rates in all major regions of the world.

All segments or sub segments that we operate in are growing nicely. So.

It feels pretty good from where we sit in addition to that we have as we mentioned in the prepared remarks, our record backlog of $3 1 billion and that's up.

About 80% from just prior.

Prior to the start of the Covid pandemic.

We're feeling good and we're not seeing any weakness anywhere right now.

Great and then there was obviously a step up in inventory again this quarter sequentially I suspect thats due to some of the orders that you're seeing coming in how should we think about inventory level as we look to the back half of the year has it stabilized or is it really just dependent on the orders coming in and some of that supply chain issues that are still out there.

You've hit on it there Allison we've got.

With the strong order rate coming in we've got to make sure we have the inventory to support those orders.

And we are still concerned about supply chain and we're going to continue to react to that so.

I would say you hit the nail on the head and I think we've.

We've increased them now and will continue to manage it closely obviously you know we're very focused on.

Running lean, but we've got to make sure we're supporting the orders that are in place.

Great. Thank you.

Thank you Allison.

Thank you.

Our next question online comes from Mr. Josh <unk> from Morgan Stanley .

Yes.

Hi, good morning, guys.

Morning, Josh.

Dave just I guess first question on Europe , I guess, the totality of AMETEK is doing well you mentioned the orders growth.

And you're seeing I guess underneath the surface of the kpis that you're watching there.

Because obviously.

More than macro challenges.

Things like the energy cost is up a lot of it just wondering any way that that's manifesting yourself itself in your business.

And the last quarter orders were up 9% in Europe , and we had notable strength in our automation and aerospace businesses in the aerospace businesses really started to accelerate.

So it feels pretty good from a demand perspective, right now but.

With the geopolitical things going on in Russia, and Ukraine, and the fuel cost in Germany. We are certainly looking watching that very closely as you know.

That may be a sign of the first place for it as it turned out for us, but right now it's not in Europe is strong and we had a good quarter. There again Europe was up 9%.

Got it that's helpful. And then just on the aerospace and defense side I.

I think a lot of supply chain bottlenecks, starting to get worse and theyre not.

Necessarily for the stuff that you guys are producing but are you seeing that at all either in your supply chain are being told by your customers to kind of throttle back delivery because they are waiting for some other component.

To come in and don't want to just kind of be building gliders are.

Accumulate inventory in the meantime.

Yes.

Sure.

Yes, I mean.

Right now I'd say, it's quite the opposite our orders in our aerospace and defense business were up low double digits in the quarter.

Our commercial business was up stronger and.

They grew mid teens.

And the strongest growth was in the commercial aftermarket and.

Defense market was up low single digits for us better than in the first quarter. So.

We're looking at a very strong second half in.

Most of the interactions we have with our customers are asking us for more.

So we're not seeing any slowdown in demand or anything and I think that markets.

Because of pent up demand is kind of long.

Our cycle of growth ahead of it.

Got it that's helpful. And then just one more clean up if you don't mind.

In the quarter.

Right. So in the second quarter, our price continued to more than offset inflation.

Pricing was about 6%.

And then inflation was about 5% of sales. So we've maintained about 100 basis point spreads.

The results speak to the highly differentiated nature of the AMETEK product portfolio and our leadership position in niche markets and we think about as we had 6% volume growth in <unk>.

6% price growth and 12% organic growth. So we think it was a really good quarter from that viewpoint.

Ken are you with that thanks, Okay. Thank you Josh.

Thank you. Our next question online comes from Nigel Coe from Wolfe Research.

Thanks, Good morning.

I certainly echo those comments.

So mark just on the third quarter outlook for mid single digit sales growth.

In context of 12% this quarter just wondering.

Especially with the order rates are pretty strong as well whats coloring that mid single digit outlook I'm. Just wondering if we should be looking at the upper end of mid single digits. If it can be volatile.

You dig into it.

<unk> actually reflects mid.

Mid to high single digits, because we have some some currency headwinds and.

Really.

<unk> three is kind of a carbon copy of quarter two.

And we have a little bit of seasonality in quarter, three because of the European exposure, but the difference between quarter, two and quarter, three and we're expecting a little higher tax rate. So.

So.

We would consider it appropriately conservative, but there are some dynamics with tax sequentially and the organic rate is mid to high. So it is not mid currencies holding us back a bit.

And the comp is tougher, but I think it would be just comp adjusted 12% goes to maybe not defense.

Just wondering if that was how you thought about it and then on the margins. So obviously very strong.

It seems like price cost is at least neutral to margin rates.

The margin rates. If you just maybe confirm that and then just wondering if there's any geographic impacts from obviously Europe .

It's pretty strong but.

Was there any <unk> impacts the margin this quarter.

No I mean, when I look at the margin for the whole business. It was up one.

130 basis points as reported and 140 basis points core so you'll really see strong flow through through price.

When you look at total cost of sales I think the margins improve there.

Ian stronger in both groups AMG margins were up 70 basis points in AIG margins were up 150 basis points as reported and we had very healthy core incrementals of 40%.

Our reported 38 core Incrementals of 38, 40% so.

It feels like we're more than offsetting inflation with price and we're getting margin expansion. So I think it's a great margin story and.

And our teams are really executing in their business as well.

No question Thanks, guys.

Module.

Sure.

Thank you. Our next question on line comes from Brett Linzey from Mizuho Americas.

Hi, good morning, all.

Good morning.

Hey, first question is just on inventories and more channel inventories I know a lot of your businesses tend to be two to three linkages upstream from end user final assembly.

Just curious what level of visibility you might have into some of those value chains.

In your assessment versus those levels relative to end demand.

Yes, if you think about our electronic instruments group.

Largely selling to end users there. So we have a good view of the end user and and our products are customized so we don't have the prop.

Problem of people double ordering.

There could be over ordering but they are not ordering to put stuff on the shelf just in case, because as you are expensive customized highly engineered products.

When you think about our EMG business that has more of we're back on the food chain a couple of levels like you talked about in the.

You could have.

Backup there, but we're not seeing it right now and it's indicated by our strong orders growth. So.

It feels it feels like we're in the right areas and demand is still growing and we're pretty optimistic about the second half of the year.

Okay, Great and then just just back to price cost so price, 6%. How are you thinking about some of the wrap around price into early 'twenty three.

Based on some of the mid year actions and just curious on price cost what that might look like in terms of a tailwind as we get into 'twenty, three and what what the kind of volume decrement incrementals or decrementals could look like.

For the algorithm for 'twenty three right. It's a little early to start talking about 2023.

But the.

Same pricing strategy that we've employed will continue.

Do you think about the second half of the year and we want to maintain that 100 basis points spread.

We had that we had in the second quarter. So the difference between 6% and 5% of sales is 100 basis points, we want to continue that and.

No.

Second half of the year and the.

Future pricing is going to be a big part of our budget discussions in.

And we think inflation is going to be here for a while so that's going to influence our thought process. So I would expect to make a positive spread into next year also.

And just a quick follow up would you say the complexion of a lot of your pricing actions as more or less normal normal course verse surcharges or anything you can share there.

It's a combination of both I mean.

Its list, but in a lot of situations there are.

We're tied to certain indexes and for shipping and things like that.

Commodity is there could be.

Retracement of it but most of it is.

In the base price, so we try to get it in base price, but in some situations.

Obviously, it's transparent with your customer and you have to give it back when things go down but at the same time, we're <unk>.

We will maintain that 100 basis points spread for the second half of the year.

Okay, great good quarter. Thanks, Thank you Chris.

Thank you. Our next question on line comes from Jeff Sprague from vertical research.

Thank you good morning, everyone. Good morning, Joe.

Hey, good morning.

So let's talk about the kind of the deals that were done last year that sort of kind of anniversary here.

Last month or two or three.

How they are performing now as they kind of last year and our anniversary at the end of the portfolio and any any change in your view.

Kind of the accretion outlook for those businesses.

No I think the outlook for all of our businesses is positive and we're really pleased to have bought them all in the.

The management teams are now getting embedded into AMETEK I'd make a.

The business has had the same problems with supply chain.

<unk> that we experienced across our businesses in those problems were more experienced in the.

Electronic instruments group they were.

Impact us a lot in the second half of the year.

We took the advantage we took the opportunity to realign those businesses get them integrated into AMETEK and for the second half of the year I really think we're going to have some significant momentum.

H two related to those deals so.

We've made a lot of progress during the first year and I think into the second half of this year and also 2023, I really see significant momentum.

And I missed the first couple of minutes of the call. David did you say anything about kind of the current deal pipeline or.

Potential action ability on things as you look here into the balance of the year.

No Thats a good question Jeff.

We remain very active we mentioned that in our prepared remarks, we're looking at multiple deals.

As always we're focused on long term returns.

One of the thing is I'm excited about is our debt profile.

About 86% of our debt is long term and fixed at a three 2% interest rate. So.

If there is a.

If interest rates rise, it's really going to have limited effect on us is.

As Bill mentioned in his prepared remarks, we have no debt maturities in the next couple of years.

We recently Upsized our revolver.

So we're in a very good position to be.

In terms of executing our M&A strategy and as I said.

Our pipeline is strong and I expect you'll be hearing for a pre hearing from us in the second half of the year regarding M&A.

Great. Thanks, I'll leave it there thanks.

Thank you again for any questions or follow ups Zero then one on your Touchtone phone. Our next question on the line comes from Andrew <unk> from Bank of America.

Hey, good morning, Andrew.

Just another question on price and volume in terms of your guide right.

How much.

It was price and how much was better volume in the second half.

No I appreciate that there is effect FX headwind there as well right. So we're not giving that information out it's really tough to.

Two.

I understand that what we're saying is we will maintain a spread of 100 basis points positive.

And it's a very complicated very complicated and when you take into account.

FX and a different mix of businesses in.

And what's happening in the market with some commodity <unk>.

Starting to come down so, but what we're saying is we will maintain a 100 basis points spread.

<unk> price and inflation in the second half of the year.

Got it yeah, and just to follow up on Jeff's question on M&A.

You have a sort of bottoms up a lot of your M&A activity is sort of bottoms up in the organization.

Are you hearing anything new from your business units as they chase these market leaders.

Do you take a look at that.

Are you seeing private equity back away any change in behavior or anything different about this market versus where we were maybe six to 12 months ago.

Yes.

I mentioned in a prior call that.

The multiples are very high.

And for quality assets, theyre still attracting a bit of a premium but.

The multiples between public and private markets are coming in they're coming closer together.

And.

If you have to go out and finance the deal.

And AMETEK and pay from it from its balance sheet. It gives us an advantage right now because there is some difficulty in getting financing impacting some private equity potential.

Buyers and sellers for that matter.

I appreciate it thanks a lot.

Thank you. Our next question on line comes from Mr. Matt Summerville from D. A Davidson. Please go ahead.

Hi, This is bill jellison on for Matt Summerville. This morning, good morning Mutlu.

So on the call you mentioned.

The supply chain actions that you're taking including some supply diversification and I was I was wondering bigger picture across the last year plus the supply chain challenges you face are there any best practices that you've learned about throughout the organization that you would want to sustain even went supply chain reach more normalized now.

Also in the future.

It's a great question and I think we learned several things we learned that our business model is fundamentally sound.

Because our distributor business model, having those committed P&L managers running their business units.

Really drive their businesses and Theres, a good interaction between them and the.

Centralized corporate supply chain team.

We also learned that our engineering capability is first rate and they saw shortages.

Through redesign and qualified components substitution through this whole time.

We did probably one thing that will change is how we purchase electronics going forward.

Looking for to.

To leverage our spend more and develop closer relationships with.

Both the semiconductor chip manufacturers and.

And the distributors for that matter Sylvia.

Little bit of a change in that area. That's one thing I can put two or being more direct as opposed to relying on distribution.

But fundamentally it.

Navigating through this as we did.

Dealing with these challenges we've had excellent results in it.

As I said key from my view is our distributor business model, we have people owning these businesses and making good decisions and our strong engineering capability.

It is also a key factor to help us solve these shortages and redesigning.

<unk> qualified compounded substitution so.

Did that answer your question.

Yes that was great. Thank you, Okay and then.

Absolutely and then as a follow up I was wondering.

To the point that you made about.

Having content on the James Webb telescope.

I'm wondering if events like that that are highly visible of historic nature do those start to meaningfully increase the visibility of what a business like <unk> offers to the extent that it catalyzes more orders than you might otherwise have.

I think in the research community and it really stands out and it does drive customers to us.

The other thing I mentioned in the.

<unk> market.

Designing and developing optics there.

There's really only a couple of people that can do it so cycles.

Already well known but those type of events to help us.

Drive customers to us because they see our expertise and it also is positive for our employees to see that kind of thing and how we're improving the world. So.

It does help and.

We have a lot of businesses like that around AMETEK.

Understood. Thanks for taking my questions. Thank you.

Thank you. Our next question on line comes from Mr. Joe Giordano from Cowen.

Hey, guys. Good morning, good morning, Joe.

Hey, I'm.

Just curious just the way you guys have set up when we think about the chip that what does that have to.

How do you think about the impact you're kind of agnostic as to where our plant is built globally or is this helpful.

The U S is incentivizing it specifically.

Yes, I'd say in general we're agnostic wherever it is felt in the world what we're going to have our <unk>.

Fair shot at it but what's happening now is theres, probably going to be some incremental capacity put in to satisfy things like <unk>.

Security and National Defense and with more opportunities, we will certainly get fair.

A fair share of our business there.

Perfect.

And then Dave can you go through kind of like any changes in the outlook by market.

Yes.

Yes, I think on our on our process businesses.

Organic sales for process were up low double digits in the quarter data.

Broad based growth across essentially all process businesses.

Growth in the quarter was particularly strong across Taylor Hobson <unk> and our fluid analysis businesses.

And you take that all in and now we're expecting organic sales for our process businesses to be up high single digits.

So we've raised that.

Aerospace and defense organic sales for our aerospace and defense businesses were up low double digits.

Growth across each segment.

Total commercial sales were up mid teens in the quarter with strong growth across commercial OEM and aftermarket.

And defense sales were up low single digits, so stronger than commercial.

But defense was growing also.

For the full year, we now expect organic sales to be up high single digits for A&D businesses with growth in both commercial and and also defense.

And if you look at our power power and industrial businesses.

Excellent in the quarter up mid teens on a percentage basis with.

Notable strength in our grammar will power business.

And we now expect organic sales.

Our power and industrial businesses to be up high single digits. So that was raised also and finally our automation.

In engineered solutions.

Really good quarter in both automation and engineered solutions, both seeing strong growth.

We raised the year for that segment also to the high single digits. So.

We're <unk>.

Reflecting the strength of our businesses and improve the organic guide for the rest of the year and really all of those sub segments are now forecasted to grow at high single digits.

Okay Joe.

Joe Thank you.

Yes.

Thank you.

Our next question comes from Mr. Scott Graham from loop capital markets.

Yes, hi, good morning, David.

And Kevin Hey, yes, so thanks for doing that just now you saved me a question.

The can you just give us the productivity number in the quarter and the expectation for the year.

Yes cost savings in the quarter.

$35 million, so really good quarter and.

We're getting a lot of that through value engineering, we're redesigning some of these things and.

Getting them designed at a lower cost level. So so that's helping us a lot and for the year the cost savings number is $125 million.

No change there no change about half of its opex and half of its materials.

Okay. Thank you.

You went through a longer sort of acquisition.

Our response.

I've heard you before it sounds to me like.

No.

<unk> been signaling that more than <unk> expect second half deals.

Could you kind of is this a situation where things are just sort of been lined up at the gate and there is this going to be.

A couple of different.

Closings of deals do you think.

Perhaps your comment was directed more at one in particular.

I mean, how close are we on some did we lose any.

Just maybe a little bit more color on what youre thinking on the second half.

Yeah.

Yes, you never can tell with Scott and the.

Things can happen and things can change but I.

I feel really confident right now because the volume of deals that we're looking at in processing and having some positive interactions are are high and they are both they are both the typical deals that AMETEK has and there are some that are on the bigger size within the constraint of the types of deals we look at so we're busy.

Z with deals were busy and we get our people are real busy in the situation that I talked about with our strong balance sheet fixed debt.

The strong cash flow, we think thats going to be a differentiator for us as we look into the second half of the year in 2023.

Thank you for that David just one more if I may.

Unbundling of the organic and for the full year up high single digits really for all four.

Could you tell us of those four.

Which ones are maybe a little bit more that youre optimistic on in the second half because obviously in the second quarter, you did better than we all expected on organic so sort of how much of those raises where because the second quarter was better versus what youre seeing in the second half.

Good question in General we had a good good second quarter across the board. The one area that I point out is the the order growth rates in the commercial aerospace market.

One of the things that caught my attention. So I'm looking for some positive there in the second half of the year and into 2023.

Very good thanks, Thank you.

Thank you.

Question on line comes from Mr. Brett Hardeman familiar research.

Hey, good morning, everyone. Good morning, Brett.

Thanks for taking my question, you've already given good color on price cost, but I just wanted to get more of a sense on what youre seeing in terms of cost inflation in particular and your outlook going forward sorry, if I missed this but inflation impact is 4% last quarter.

This quarter, you said supply chain, so bad for us.

Chronic components in particular in that inflation will be here for a while but I'm just wondering do you expect.

Inflation impact in general across your business to continue to increase or is it sort of plateauing or decreasing as we move through the rest of the year.

Yes, that's a good question what you really see is some things are coming back in decreasing in price like inflation like the commodities.

But at the same time you have.

Wages and other areas that are increasing.

So the net effect is inflation still increasing it went from.

Florida, 5% sequentially in the quarter then.

Right now I think that's going to stabilize at that but.

It's difficult to predict that's why we have things in place, we're going to maintain that 100 basis points positive spread.

But clearly there are different dynamics that are happening right now where some things are coming back and some things are still inflating, but the net is still still still increasing costs. So we've got a good system to manage that but that may change over the next quarter and we'll tell you about it but right now thats where it is.

Alright, great. That's helpful for me Okay. Okay.

We have no further questions at this time I will now turn the call over to Kevin Coleman for closing remarks.

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

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.

Yes.

Okay.

Yes.

Okay.

Yeah.

Okay.

So.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Sure.

Yes.

[music].

Okay.

Thank you.

Yes.

Okay.

Sure.

[music].

Yes.

Okay.

Alright.

Yes.

Thanks.

Okay.

Yes.

Okay.

Thank you.

[music].

Okay.

Yes.

Okay.

Yes.

[music].

Sure.

Yes.

Okay.

Yeah.

Okay.

Yes.

Okay.

Sure.

Yes.

<unk>.

Okay.

Sure.

[music].

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Sure.

Yes.

I will now turn the call over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Mr. Coleman you may begin.

Thank you Richard Good morning, and thank you for joining us for Ametek's second 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 be making forward looking statements, which are subject to change based on various risk factors and uncertainties.

And 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 to 2021 for 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, we'll begin today's call with prepared remarks by Dave and Bill and then we'll open it up for questions I'll now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK had another excellent quarter.

With stronger than expected organic sales growth outstanding operating performance robust margin expansion and record earnings.

Importantly, demand remains strong and broad based across our diversified niche markets.

Leading to impressive organic order growth and a record $3 $1 billion backlog.

Given our second quarter results and our outlook for the back half of 2022.

We have increased our earnings guidance for the year.

Now, let me turn to our second quarter results.

Second quarter sales were a record 151 billion up 9% over the same period in 2021.

Organic sales were up 12% acquisitions added a point and foreign currency was a three point headwind in the quarter.

Organic orders were up a very strong 11% despite a highly challenging prior year comparison.

Book to Bill was 1.09 in the second quarter, our eighth consecutive quarter of positive book to Bill.

Operating income in the quarter was a record $365 million or.

A 15% increase over the second quarter of 2021.

Operating margins were 24, 1% in the quarter up 130 basis points from the prior year with strong incremental margins.

EBITDA in the quarter was a record $444 million up 15% over the prior year with EBITDA margins of 29, 3%.

This outstanding performance led to record earnings of $1 38 per diluted share up 20% versus the second quarter of 2021 and above our guidance range of $1 27 to $1 30, driven by stronger than expected sales and excellent operating performance.

Now let me provide some additional details at the operating group level.

First the electronic instruments group.

Sales for our electronic instruments group were $1.0 billion to $3 billion.

Up 10% from last year's second quarter.

Organic sales were up 12% in the quarter with foreign currency headwinds more than offsetting acquisition contributions.

Yes.

Organic growth remains very strong across our <unk> businesses, with particularly impressive growth across our ultra precision technologies and P&I P&I Division.

<unk> operating performance was impressive.

<unk> and record operating profit and robust margin expansion in the quarter.

Second quarter operating income was $265 $1 million.

Up 17% versus the prior year and operating margins were 25, 8% in the quarter.

The electromechanical group also delivered strong sales growth and excellent operating performance in the quarter.

Amg's second quarter sales were a record $486 $3 million up 7% versus the prior year with organic sales growing 11% in the quarter.

<unk> growth was also broad based with strong growth across both our EBIT and automation businesses.

Emg's operating income in the second quarter was $124 $4 million up 11% compared to the prior year period.

Emg's second quarter operating margins were excellent at 25, 6% up 70 basis points versus the prior year.

Overall outstanding results in the quarter, reflecting the quality of our differentiated businesses the strength of our operating model and a tremendous.

Efforts of our employees.

I would like to thank all AMETEK colleagues for your commitment to AMETEK and for the many important contributions you make to our sustained success.

Now, let me touch on the supply chain.

Overall, the global supply chain remains constrained.

The largest challenging challenges continuing to be the availability of electronic components.

As we noted previously we have strategically decided to hold additional inventory of select components to support the strong customer demand.

And as a hedge against the tight supply chain.

Additionally, ametek's global sourcing teams are doing an outstanding job working to identify additional sources of supply.

While these supply chain issues are leading to higher inflation, we have been able to more than offset this inflation with higher pricing.

Leading to a strong price inflation spread again, this quarter and outstanding margin expansion.

The combination of our global supply chain capabilities and pricing power provides us the confidence in our ability to manage through these uncertain times.

During our first quarter earnings call, we noted that the Cowen driven lockdowns across parts of China.

We're expected to delay some China sales from the second quarter into the second half of the year.

These lockdowns costs less impact on the business in the quarter than we anticipated.

Due to the excellent efforts of our China team, we're able to operate in a closed loop system and adjust our logistics and supply chain networks to support production and shipments.

Additionally, during the last two weeks of the quarter has restrictions were lifted.

We're able to resume multi ship production and recover much of the delayed shipments.

The impact of China's zero carbon policy is something we're closely watching as we may need to react and adjust in the future.

Thank you to our entire team in China for your tremendous commitment and resilience during this time.

Now switching to our acquisition strategy.

Our top priority for capital allocation remains the value enhancing strategic acquisitions.

Our M&A pipeline is very strong.

Our business unit and corporate development teams are busy managing an active pipeline of attractive acquisition candidates.

As Bill will highlight in a moment.

We have a strong balance sheet and excellent cash flows providing us with meaningful capacity to support our acquisition strategy.

And we expect to be active in the second half of the year.

We also remain focused on driving higher levels of organic growth by consistently investing in our businesses to support their strategic growth initiatives.

We're seeing the benefits of these investments and stronger organic growth.

Our investments in research development and engineering continues to yield advanced technology solutions, allowing us to expand our leadership position across our niche markets.

One measure of the success of these efforts is our vitality index, which was a very strong 26% of sales in the second quarter.

This level of vitality reflects our businesses ability to develop new products align with compelling growth opportunities.

One example of this is ametek's expansion into the high growth areas of precision optics.

AMETEK <unk> business based in midfield, Connecticut provides leading edge extreme precision optics for the design and protection are very large complicated aspherical lenses.

These capabilities supported the manufacturer of the 18 hexagon will shape mirrors, which make up the James Webb space telescopes primary mirror.

The James Webb telescope, very recently produced the deepest and sharpest infrared images of the deep universe.

Truly amazing images.

Due in part to <unk> capability.

<unk> also provides advanced optical systems for use in the next generation of semiconductor production equipment.

They are incredibly precise mirrors are playing an important role in.

In supporting the development of <unk> or extreme ultraviolet opex for the next generation of semiconductor technologies.

Just two of the many examples across AMETEK of the unique and highly differentiated capabilities and technologies, we provide our customers.

Now turning to our outlook for the remainder of the year.

With our strong results in the second quarter.

Continued solid orders momentum and record backlog.

We have increased our full year earnings guidance.

For the full year, we expect overall sales to be up high single digits.

With organic sales now also expected to be up high single digits.

Versus our prior guidance of up mid to high single digits.

Diluted earnings per share for the year are now expected to be in the range of $5 46 to $5 54.

Up 13% to 14% compared to 2021.

This is an increase from our previous guidance range of $5 34 to $5 44 per diluted share.

For the third quarter, we expect overall sales to be up in the high single digits compared to the same period last year.

Third quarter earnings are expected to be in the range of $1 36 to $1 38 per diluted share up 8% to 10% versus the prior year.

While we are closely monitoring the various macroeconomic headwinds.

We're not seeing slowing on our businesses as demand remains solid and our businesses are operating at a high level.

We are confident in our ability.

And an improved outlook for the year, given our strong backlog ability to offset inflation with price increases and outstanding operating capability.

In summary, AMETEK second quarter results were excellent.

Our businesses are well positioned with differentiated technology solutions, serving a diverse set of growing niche markets.

Our organic growth initiatives are driving higher levels of growth and our portfolio is aligned with attractive mid and long cycle markets.

Additionally, our asset light business model and strong cash flows provides us the flexibility to navigate challenging environments, while continuing to deploy capital and drive increased shareholder value.