Q3 2022 AMETEK Inc Earnings Call

November 1, 2022

Welcome to the AMETEK third quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. You ask a question you May Press Star then one on your car.

Tom Tom Joyce.

Do you withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you Kate good morning, and thank you for joining us for Ametek's third 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 could differ significantly from expectations.

Tailed 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 2022 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization rec.

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 will now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK delivered record results in the third quarter.

It was stronger than expected sales growth and outstanding operational execution.

Leading to earnings above our expectations.

Operationally, our businesses are performing exceptionally well and successfully offsetting inflation with price increases, resulting in an impressive margin expansion.

We are also seeing continued strong and broad based demand across our diversified niche markets.

Two impressive organic order growth and a record backlog of $3 2 billion.

And this morning, we announced the acquisition of two excellent businesses and Avatar and Rts technologies.

Expanding our presence in high end precision optics and in testing solutions for the electric power grid and renewable energy applications.

I will provide more details on these acquisitions shortly.

Given our results in the third quarter and outlook for the fourth quarter. We are again, increasing our earnings guidance for the full year.

Now, let me turn to our third quarter results.

Yeah.

Third quarter sales were a record $1 55 billion.

Up 8% over the same period in 2021.

Organic sales were up 11%.

Acquisitions added one point and foreign currency was an approximate four point headwind in the quarter.

Demand also remains solid across our niche markets with organic orders growing 9% in the quarter.

While book to Bill was 107.

Our ninth consecutive quarter of positive book to Bill.

Backlog at quarter end was a record $3 2 billion.

Up approximately $1 4 billion from the end of 2020.

Operating income in the quarter was a record $385 million of.

A 14% increase over the third quarter of 2021.

While operating margins were 24, 8% in the quarter.

Up a robust 140 basis points from the prior year with strong margin expansion in each operating group.

Our ability to drive meaningful margin expansion. Despite the inflationary environment reflects the differentiation of our technology solutions and our flexion flexible operating model.

EBITDA in the quarter was also a record of $463 million up 12% over the prior year with EBITA EBITA margins a record 29, 8%.

This outstanding performance led to a record of.

Earnings of $1 45 per diluted share up 15% versus the third quarter of 2021 and above our guidance range of $1 36 to $1 38.

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

First the electronic instruments group.

The electronic instruments group delivered excellent operating performance with continued strong and broad based growth.

Sales for our electronic instruments group were $1.05 billion.

In the quarter up 7% from the third quarter of last year.

Organic sales were up 10% with a one point contribution from acquisitions being more than offset by an approximate three foreign currency headwinds.

Growth was again broad based across our <unk> businesses, with particularly strong growth within our rolland.

TMC pressing tech and thermo process management businesses.

Third quarter operating income was $272 7 million.

Up 11% versus the prior year and operating margins were 25, 9% in the quarter up 90 basis points from the prior year.

The performance of our electromechanical group in the quarter was exceptional with excellent sales growth and record operating results.

Amg's third quarter sales were a record $497 7 million up eight.

<unk> versus the prior year with organic sales growing 13% in the quarter and foreign currency of four point headwind.

Growth was very broad based across all of our EMG businesses.

Emg's operating income in the third quarter was a record $136 $5 million up 19% compared to the prior year period.

Emg's third quarter operating margins were a record 27, 4% up an impressive 240 basis points versus the prior year.

Overall, our businesses delivered outstanding performance in the third quarter, allowing.

Allowing us to manage an uncertain macro environment.

Meaningfully expand margins and drive earnings ahead of our expectations.

Now switching to our acquisition strategy.

We are very pleased to announce the acquisition of two highly strategic businesses.

And avatar and <unk> technologies are both excellent businesses and highly strategic acquisition for AMETEK.

Expanding our presence in attractive secular growth markets.

Now, let me take a moment to provide additional color on both of these acquisitions starting with avatar.

<unk> is a leading provider of optical solutions for critical applications across several markets, including medical and life Sciences Research machine vision and robotics.

Semiconductor and industrial automation.

They are comprehensive suite of high precision custom optical solutions includes fully integrated imaging systems sensor.

Sensors cameras optics and software.

Navistar is an excellent strategic and complementary fit with our <unk> business unit.

As our technical capabilities around cameras and optical systems further expands <unk> product offering.

Additionally, <unk> is a high growth business well positioned to benefit from the growth in demand for precision optical solutions across attractive growth markets.

Navistar was privately held and is based in Rochester, New York.

Now switching to our Tds technologies.

Our Tcs provides real time digital simulation systems used by utilities, and research and educational institutions and the development and testing of the electric power grid and renewable energy applications.

Their simulation solutions allow engineers to rapidly prototype verify and test the performance of the electric grid power instruments and networks in a closed loop system to help accelerate product development lifecycle and decreased testing costs.

Our Tds is simulation solutions are playing a key role in the modernization of the electric grid infrastructure.

As well as supporting secular growth drivers, including renewable energy.

Distributed power generation and energy storage.

The acquisition of <unk> brands, our power instruments businesses testing and simulation capabilities, while expanding our exposure to the renewable energy space.

<unk> is privately held and based in Winnipeg, Canada.

We are very excited to welcome the Navistar and <unk> teams to the AMETEK family.

We deployed approximately $430 million on these acquisitions acquiring approximately $100 million in annual sales.

Over the past two years, we deployed more than $2 4 billion in capital in acquisitions and acquired eight businesses.

Our acquisition pipeline remains solid we have a strong balance sheet and significant financial capacity look to remain active in deploying capital on strategic acquisitions.

In addition to the recent acquisitions, we continue to focus on ensuring AMETEK has strategically positioned for long term sustainable growth.

Our businesses are driving broader adoption of our organic growth initiatives, including growth <unk> digitalization and new product development.

This includes making strategic growth investments across our businesses to help support and accelerate growth.

For all of 2022, we now expect to invest approximately $110 million in support of these growth initiatives.

We're seeing great results from these efforts over both the short term and long term and.

In the third quarter sales from new products introduced over the last three years was 27%.

A record level for our vitality index, reflecting the great work of our teams.

These efforts have helped lead to double digit organic sales growth in each of the past six quarters.

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

While we remain cautious in the short term given the dynamic macro environment.

We are highly confident in the quality of our businesses and our ability to manage through these challenging times.

Given our strong third quarter results and outlook for the balance of the year.

We are again, increasing our sales and earnings guidance.

For the full year, we now expect overall and organic sales to be up approximately 10% versus our prior guidance of up high single digits.

Diluted earnings per share for the year are now expected to be in the range of $5 61.

To $5 63.

Up 16% compared to 2021.

This is an increase from our previous guidance range of $5 46 to $5 54 per diluted share.

For the fourth quarter.

Overall sales are expected to be up mid single digits compared to the same period last year.

And fourth quarter earnings are expected to be in the range of $1 45 to $1 47 per diluted share up 6% to 7% versus the prior year.

To summarize AMETEK had another excellent quarter.

We delivered record performance strong orders and sales growth robust margin expansion increased our earnings guidance for the year and acquired two strategic businesses.

The strength of the AMETEK growth model and our talented global workforce is evident in our results. Thus far this year and we will continue to allow us to operate at a high level through challenging market conditions.

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 will be glad to take your questions Bill.

Thank you, Dave as Dave highlighted AMETEK delivered outstanding results in the third 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.

Third quarter General and administrative expenses were $24 $7 million up $3 million from the prior year due to higher compensation expense in the quarter.

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 third quarter was 19% down from 19, 5% in the third quarter of 2021.

For 2022, we anticipate our effective tax rate to be approximately 19% 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 third quarter were $28 million and we expect capital expenditures to be approximately $130 million for the full year or about 2% of sales.

Depreciation and amortization expense in the quarter was $76 million for the full year, we expect depreciation and amortization to be approximately $310 million.

Including after tax acquisition related intangible amortization of approximately $148 million or <unk> 64 per diluted share.

For the quarter operating working capital was 18, 4% of sales.

We generated strong levels of cash flow in the quarter operating cash flow was $327 million up 7% versus the third quarter of 2021.

Free cash flow was $299 million in third quarter up 6% from the prior year and free cash flow to net income conversion was 100%.

Total debt ended the third quarter at $236 billion.

Down from to $5 $4 billion at the end of 2021.

Offsetting this debt is cash and cash equivalents of $310 million.

At the end of the third quarter gross debt to EBITDA ratio was one three times and our net debt to EBITDA ratio was one one times.

As Dave noted we've been active on the acquisition front during the third quarter, we acquired an avatar and subsequent to the end of the third quarter, we acquired our TBS technologies.

Combined we deployed approximately $430 million on these two acquisitions.

We remain very well positioned to deploy additional capital given the strength of our balance sheet and strong cash flows we have no material debt maturities due until 2024 and modest levels of leverage we continue to have excellent financial capacity and a strong balance sheet. Following our two recent acquisitions, we still have over $2 billion of cash.

And existing credit facilities to support our growth initiatives.

In summary, our businesses performed exceptionally well in the third quarter and through the first nine months of 2022.

Our outlook for the remainder of the year remains positive given our strong financial position, our proven growth model and world class workforce, Kevin. Thank you Bill Hey could we please open the lines for questions.

We will now begin the question and answer session Youre asking a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

Our first question is from Matt Summerville of D. A Davidson. Please go ahead.

Thanks.

Morning.

David.

Could you talk a little bit about.

The organic performance you saw by geographic region, and what if anything for lack of a better word your Canary type of businesses might be telling you about the macro environment.

Sure.

Okay, yes regarding the.

Geographic storyline, it was really strong broad based growth of cost all geographies and.

A very balanced growth I mean, the U S was up about 11%.

Broad based growth there notable performance in our process and automation businesses.

U S was the strongest up 11%.

Europe was up 9%.

Notable strength in process in our aerospace business.

And Asia was up 9% notable strength in our process business. So.

No no canaries in the coal mine for us orders are strong.

Sales were strong geographically in all regions showed solid broad based growth very balanced.

Got it and then could you maybe comment a little bit on what your price realization was in the third quarter, what your price cost sort of ratio look like and how we should be thinking about incremental price actions for 23. Thank you.

In the third quarter, our price continued to more than offset inflation and the pricing was very consistent across our portfolio.

Pricing was about 6% and.

Net inflation was about 5% so at a positive spread of approximately 100 basis points and.

We expect a similar price inflation spread for Q4 of 100 basis points and the results speak to the highly differentiated nature of our product portfolio and our leadership position in niches.

In terms of.

Next year.

Really not not ready to talk about pricing and inflation next year.

I will say that.

We do expect that we.

We will be able to offset inflation with price in 2023 from a philosophy and an operating capability but.

We're going to refrain from discussing 2023 until we get.

So through our bottoms up reviews with each of our businesses. So there's no reason to think it's not going to be positive next year, but we don't have the data yet so I'm going to hold off on that one but.

Really good performance on pricing in Q3, and we expect it to continue in Q4.

To answer your question, Matt Thanks, David sure, Yes. It did thank you very much.

The next question.

<unk> is from Allison <unk> of Wells Fargo Wells Fargo. Please go ahead.

Hi, Good morning, good morning Allison.

David talked a little bit.

Some caution out there.

You guys are really strong just maybe give your perspective on this.

And maybe more importantly, how do you think that.

Ametek's relative position is answering maybe next downturn priority relative to past cycles, just any thoughts on kind of those are great questions.

I think.

Terms of AMETEK I think.

Our underlying demand remained strong as I answered <unk> question were not seen weakness yet it's really broad based.

Our organic orders are strong they were up 9% it was both.

Both groups had positive organic growth both groups were strong.

We are growing at healthy <unk>.

Growth rates in all major regions of the world as I just went through and.

So we feel good about that and we ended the quarter with a record backlog. So that is really good and.

Can you talk about 2023.

I think our portfolio is in much better shape as.

As we're going forward because if you think about what's happened we continue to shift our portfolio.

Two exposures in attractive growth markets.

Growth markets like automation health care.

<unk>.

This recent acquisition as more renewables.

The market shifts are attractive for us and our technology, our differentiation is stronger than it was six or seven years ago now, we see that playing out in our organic growth in both relative and absolute performance.

And the big picture, leaving incrementally improved our portfolio.

Without sacrificing a couple of years of growth to do it and have delivered an exceptional way along the.

The path.

I'll give you some examples of our healthcare portfolio.

It was about 10% six years ago now it's 15%.

Aerospace and defense. It was about it was low double digits part of the business about six or seven years ago now is high teens are.

Our automation business went from about 7% to 12% so.

Good improvements in all of those areas.

As a percentage of our total portfolio and on the flip side more cyclical businesses like our oil and gas and metals there were more than 20% of sales six years ago and right now combined the sales or about 8%. So we feel good about the portfolio and is performing now and we think it's going to perform in any kind of economic.

Environment that we run into.

Great. That's helpful. And then just on the acquisitions I know you said at least Avatar high Gorilla could you maybe give a little bit more color on is it the growth of these acquisitions sort of in line with AMETEK, a little better and just any color on the margin performance relative to AMETEK score.

Right right I think the.

Okay.

<unk>.

Both acquisitions are going to grow in the.

High single digit to low double digit range. So they are both good growers.

And both acquisitions are very profitable businesses.

The blended multiple.

Was about 11 times, so so both very profitable growing businesses and a fair price paid.

We're excited to have each of these companies each fit perfectly with our acquisition strategy. They are leaders in niche markets. Each has very strong technology differentiation positions that are backed by excellent engineering capabilities.

To expand our presence in attractive growth markets.

<unk> is in the high growth optical solutions and life Sciences machine vision robotics, and Rts is really well positioned to benefit from the modernization and electrical power grid and the investments being made there with excellent exposure to the renewables market. So we've been working on these businesses for a good period of time and I'm just.

Really glad to have them in the portfolio.

Great. Thanks, so much okay. Thank you.

The next question is from Deane Dray of RBC capital markets. Please go ahead.

Thank you and good morning, everyone. Good morning Deane.

Hey, we touch on it a bit so far in the earlier questions, but maybe just more methodically take us through the key end markets.

Sounded like process Arrow were strong, but can you just kind of go from the strongest of the weakest and we will take it from there.

Sure Deane I'll be glad to do that the strongest was process.

They had the strongest growth in the third quarter organic sales up low teens on a percentage basis.

The growth is really broad based and as I said in my prepared remarks, it was particularly strong growth across our Rolland health care business.

<unk> Tec and our thermal process management businesses and.

And for all of 'twenty, two we now expect organic sales for our process businesses.

To be up approximately 10%.

Yes.

Segment that grew the fast second fastest was our automation and engineered solutions.

Very strong third quarter with organic sales up low double digits.

Our balanced growth across both automation and engineered solutions for.

And for that sub segment, we now expect organic sales to be up approximately 10% up from high single digits up to 10% for the full year with similar growth across each segment.

Then I would take you to the power and industrial business.

Mid single digits on a percentage basis in the quarter.

We saw notable strength across our power instruments and programmable power business.

And we now expect that sub segment to grow 10% also.

It was.

We rose that from high single digits to 10% and I'll talk about the aerospace and defense business organic sales for our aerospace and defense businesses were up mid single digits in the third quarter commercial sales were really strong up mid teens in the quarter.

Driven by strong underlying demand across the industry.

Commercial OE aftermarket in business jet all grew nicely.

The strongest were aftermarket in business jet and defense sales.

We're up low single digits in the quarter.

For the full year, we expect organic sales for A&D to be up high single digits on a percentage basis with our commercial aerospace business to growth to be stronger than the defense growth.

I'll walk around the company Dave.

That's fabulous.

How about just.

The idea of any changes at the margin and customer buying behavior.

In some cases, we've seen.

As supply chains are normalizing a bit lead times come in a bit.

Not have to put customers will have to give you the bigger orders just to get in line is there any kind of change there.

And maybe share with us the key.

Cadence of the quarter in terms of orders right I'll start with the cadence.

We had strong quarters and each month.

With the strongest being September we had a very strong September end.

For that matter. Our October results are consistent with our outlook showing solid performance yeah. A good question about the underlying orders in.

The way I think about it.

We will certainly be running into more difficult comparisons for order input in the coming quarters.

And we do expect our orders to moderate due to the fact that youre talking about our customers placed orders early due to supply chain dynamics.

And we believe that the return to more normalized ordering patterns in.

But even with these factors I expect our backlog to be in an excellent position as we enter 2023.

That's real helpful. Thank you no problem.

Okay.

The next question is from Josh Poker and ski.

Morgan Stanley . Please go ahead.

Hi, Good morning, guys good morning, Josh.

Dave I want to follow up on Dan's last question.

And your last comment about backlog with supply chain, starting to improve and really some of the kind of extra backlog really being more supply side driven than anything else.

What would you say is sort of the amount of backlog do you think you could convert next year I guess, how should we think about.

The timeframe for getting from where we are today and maybe down to more of a more typical levels because the entire business isn't long cycle just pockets of it that's a good question.

One way that I'd think about it it may help you.

If you go back a few years, our annual sales were about.

30% in backlog.

So that was a typical year for us we had about 30% of annual sales and backlog.

Right now.

We are a little more than 50% of annual sales and backlog.

A 20% difference there.

That's why I think we have solid visibility in that.

That's in place because of the ordering patterns of our customers has changed and we've had really strong order input and we enter protect our customers with inventory because of the supply chain prices. So.

The increase of backlog went from about 30% of annual sales to 50% of annual sales.

And thats, the kind of way I think about them that option.

That is helpful. I guess, how fungible should we think of backlog. So, let's say book to Bill starts to trend well below one for for a couple of quarters between comps and maybe a little bit of a demand slowdown are you guys able to pull that in sort of in real time or is that have specific dates associated with it where.

You cant really pull it in as much.

Yeah, Josh I would say as you look at the backlog we have.

Almost all of it could be shipped there'll be a small portion of it that will flip over into <unk>.

2024, but when you look at what's coming due over the next 12 months next 12 really if you look at 15 months to get you through the balance of 2023. There is a large portion of it the great majority of that will ship in the next year.

Got it that's helpful I'll leave it there thanks guys. Thank you.

Yes.

Our next question is from Nigel Coe of Wolfe Research. Please go ahead.

Thanks, Good morning, everyone. Thanks.

Thanks for the question.

Just go back to the acquisitions.

I'm guessing these are more north American centric acquisition. So just wondering if there is a globalization sort of angle to this and just want to confirm some numbers since it sounds like these are high 30%.

EBITDA margin combined is there any difference between the two acquisitions would you say that quite consistent across that.

Both of them and can they go even higher than that are there any sort of easy synergies from supply chain et cetera.

Actually move the needle on those margins.

Yes, youre right about the profitability of their higher profitability businesses.

Navistar is maybe has a little higher growth rate in a little lower profitability than than Rts. It has higher profitability and still show a healthy growth rate, but maybe slower than and avatars.

There is a normal amount of synergy for us. These deals are both private businesses.

There is.

Excellent opportunities for us to improve the cost and revenue generation capabilities of the business.

There is a globalization theme.

Our Tds is.

More globalized already then avatar, but.

Both of them will benefit from Ametek's global scale. So good insight on your part.

That's great and then my follow on is really digging into the EMG margins, which were pretty exceptional.

A disproportion amount of price cost land in in EMG or are we seeing some mixed impact from commercial aero aftermarket any deals that would be great. Yes.

Amg's performance was excellent in the quarter as you mentioned they had record margins of 27, 4% and.

The biggest factor when you look at it.

Is.

Our higher margin businesses are growing faster.

In the quarter in particular in <unk>.

<unk> pretty much doing what AMETEK continues to do in moving up the differentiation curve.

With their product portfolio.

<unk>.

We exited some of the lower margin consumer businesses over time, so they're really good book of business as we go forward up the differentiation curve and theyre getting better pricing because of that but in terms of pricing. It was really broad based across all of AMETEK. So it wasn't.

<unk> were similar in terms of price it's really.

If you want to think about it.

Certain mix effect because of the higher margin businesses grew faster in the quarter.

Very clear thanks, David Thank you.

Okay.

The next question is from Scott Graham of Loop capital markets. Please go ahead.

Hey, good morning, Dave Bill Kevin.

Morning, Scott.

Wanted to talk a little bit more about the backlog piggyback onto Josh question Matt.

Bill you indicated I think it was built.

<unk>.

15 months is kind of like the shippable.

Are you also saying that customers can't push that back that these are sort of contracted shipment dates.

Whats the dynamic look like Theyre, yes. The reason I say 15 months was to get us to the end of next year.

That's really the point I was making there and you always have to work with your customers on pushing.

Pushing both push outs or pull ins and but I think I think the point I was trying to make is that much of that backlog is due and shippable next year and we'll work through it but as Dave said, it's only half of next year's shipments we're going to continue to continue to book orders and be able to ship against those.

Okay. So when you say talk about talk with customers about this there is a chance that some of these things could be pushed out a quarter or two.

Yes, yes, yes.

Annie is typical business I mean, there is a.

Firm backlog backed by firm pillows, but we work with our customers on both pull ins and push outs.

Inevitably that happens every quarter.

Got it. Thank you my other question is around acquisitions so.

Two deals.

<unk> been quiet this year at least so maybe is this a situation.

Hope Springs eternal.

Are you starting to see a bid ask spreads close into a point, where there might be an acceleration or was this just.

This is something that a couple of deals and I am asking the question because it's too it's not one right. So Brian .

Yes.

So what does that mean for like the next six months do you think.

Hi.

When I look at our backlog of deals and potential deals I feel very optimistic.

Over the next say 12 months, we're going to be able to deploy our free cash flow on acquisitions.

The pipeline is very very strong.

There is.

We're working with quite a few businesses right now and <unk>.

Actually exploring some exciting opportunities. So can we have the financing to do it I mean the.

The pricing is starting to come in on deals now and.

Our relative position versus some other competitive buying.

Like private equity has improved.

I'm looking at I'm pretty optimistic about deals for 2023, and our backlog is going to support in our balance sheet supports strong cash flow supported so it's going to be a big part of the future of AMETEK story.

So youre seeing Dave Youre confident that over the next 12 months you can deploy 100% of your free cash flow on deals.

Yes, I believe that I believe that to be true.

Great. Thank you.

Okay.

Again, if you have a question. Please press Star then one.

Next question is from Rob Wertheimer of Melius Research. Please go ahead.

Hi, Thanks My.

My questions.

On.

I'll now turn it on if you can expand on the niches they participate in and the reason for the question is just there is some very large changes in the way the world's working with re shoring with.

<unk> battery factories in semiconductor factories in North America and <unk>.

So on and I'm wondering about that historical growth rate future growth rate.

Where theyre really attack and whether that's helped some.

Ongoing investment.

Yes, I think some of the re shoring is going to help them.

They're logging largest market segment is in the medical and life Sciences area.

Where they are.

Very very.

Very successful penetration.

The optics used in various types of microscopes.

There are also there.

The optics are very very good and they are in a lot of machine vision and robotics applications.

<unk> has some big name semiconductor companies.

High end of the market and.

And we just think the combination of this business with our <unk> business is a premier optical business just puts us together and it gives us some additional tools to go to our customers with <unk>.

Very optimistic.

In the future and very low risk deal for us.

Okay, great and if I may can I ask the same sort of question on <unk> with some of the upcoming changes to power grids, maybe that younger term situation, but I hope youre seeing opportunity an inflection there.

And I think we got this business at the right time because.

People put renewable energy on the grid.

Whether its a wind farm or.

Field of solar panels or.

Electrification.

Charging devices for electric vehicles, each one of those things that they add to the grid.

Is not simple there has to be a lot of analysis done and then you have to understand the impact of of the they are adding to the grid.

At the same time, there's a lot of investment in the grid.

Some of the infrastructure <unk> is putting an investment in the grid or Tds is really used to help stimulate and modernize the grid. So they have a high market share and they are used by all the utilities to understand what's going to happen with modernizing our electric grid. So there were really well positioned for the future and they have an edge.

Excellent team of technical people. So we're optimistic on what that business can do without under AMETEK.

Great. Thank you for the answers.

Okay.

The next question is from Andrew <unk> of Bank of America. Please go ahead.

Hey, guys. Good morning can you hear me.

Good morning, Andrew.

Hey, just a question of art Tds.

As you guys move into more software I know some of your peers as they were making that transition.

You tried to apply the business system, but how do you fit something like churn into your framework and to optimizing the bank loan.

Clearly you have an amazing playbook for.

Integrating assets.

<unk> taken the margins up how do you apply your playbook to more digital assets like our Tds and what adjustments have you had to make.

Because that sounds very interesting.

In the case of our TTS, it's like many AMETEK businesses.

It's a combination of hardware and software to operate the business. So it's really not different and it's not a software only business in.

We have largely stayed away from software only businesses because the.

But pricing has been very high and we Couldnt get a good return on it and to your point, we don't see the synergy that will add to the businesses. So but at the same time software is very important to AMETEK <unk> combined.

System is very complex hardware systems, and the software and that's our specialty and <unk> fits right into that.

No that's a great way to get smart on software.

And then another question for you.

Are there any businesses, where AMETEK has added capacity or has plans to add capacity given what's happening out there just to follow up on some of the questions were asked before yes, we haven't we're bringing on a lot of capacity in low cost regions and.

And we during this year we've expanded our.

Our facilities in Mexico, we expanded our facility in Serbia, we expanded our facility in Malaysia.

<unk>.

We have more in the works, but those were all put in place this year to add additional capacity. So we're dealing with our volume in low cost regions and it provides a synergy too.

In local market access for us so we've been investing heavily in low cost production manufacturing in Malaysia, as becoming a good facility for us again.

Again, Eastern Europe , Serbia.

In Mexico for the U S. So we have these regional hubs that we're building up and.

Very successful for us and we've put a lot of capacity in place this year.

Thanks, so much.

Okay.

The next question is from Christopher Glynn of Oppenheimer. Please go ahead. Thanks, Good morning, Dave Bill Kevin.

Morning, Chris.

Hey.

Was curious about the vitality index at 27% a record level.

That ties into some of the discussion on the EMG margins, but.

<unk>.

Is there a level you think of as a mature level.

Vitality.

For the business and I don't mean that as a negative but.

You've got entrenched market for a lot of your products in.

Curious, how you're thinking about that.

First thing is.

Not only is a vitality index.

Asked us what our pricing because.

Because we're continually adding new features and benefits to our products and our customers and enables us to.

Garner a higher price because of the engineering investment that we're making very consistent engineering investment over 5% over many years.

When we first started tracking the vitality. It was then.

The mid teens and over the past 10, or 15 years, you got into the <unk> in the mid <unk> and now I'm just very pleased with our two.

27% vitality are clearly our new product development process is working we're developing.

Products, our customers want to buy in at 27% of sales for our end markets. We think that's a really good number.

And in general I put a range around it I think between 20 and 30% is a very good number for AMETEK.

And again, the vitality helps not only from new products, having fresh new products that you can.

Win share with but it also helps with pricing.

Realized pricing.

Great. Thanks, and then I just wanted to go into the process markets a little bit.

It's called.

Called out some of your brands Im curious if youre seeing any particular inflection certain end markets or applications really stepping out whether it's leaning towards capacity investments or maybe modernizations.

I would say.

Strong across the board in process, but the health care space.

The energy space or two areas that stood out in the quarter.

And then with TMC pressing tech is just a precision technology, where we're doing things that other people can't do and our orders have been high for multiple quarters and now the sales are catching up.

Great. Thanks for the color.

Thank you Chris.

The next question is from Joe Giordano of Cowen. Please go ahead.

Hi, Joe.

Hey, guys good morning.

Tristan in for Joe Thanks for taking the question.

I'd like to go back to <unk> question, a little bit and maybe ask it there'll be different fee, but.

If we were to have.

Industrial recession of 2016 for example, do you think your current portfolio would fare.

Is your portfolio six years ago, just trying to get a sense of the.

The magnitude there thank you.

Yes.

Difficult to understand the specifics until you're in a recession, because theyre all different but as I said.

Our portfolio has been improved dramatically.

And I think that.

When you think about all the other.

Things that I mentioned, we would stay in front of inflation with pricing.

I think in 2023 as a supply chain shortages abate, we believe our working capital will decrease to more normalized level.

And the vertical markets I'm going to wait and see what we learn from our businesses.

We do expect our longer cycle businesses to be strong in both A&D and energy and.

And we do expect to have a historically strong backlog.

When we enter 2023.

And in terms of our recession playbook, let's say, we do see slowing and we start to see a recession.

We will react and manage our business appropriately as we have done in the past.

We think we have a proven model that works well in both up markets and down markets.

And the most recent example of this was during the Covid driven recession in 2020, and if you look at how we performed through that despite the weakness in sales during the time.

Our margins actually grew 80 basis points and Decker mine, our margins were only 17%.

So we've got the capability to manage and both up cycles and down cycles and.

I believe that the next recession will be no different whenever it comes.

Awesome Thats all I had thank you.

This concludes our question and answer session I would like to turn the conference back over to Kevin Coleman for closing remarks.

Great. Thank you again, Kate and thank you everyone for joining us for our conference call and as a reminder, a replay of today's webcast.

Can be accessed in the investors section of AMETEK Dot com have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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Welcome to the AMETEK third quarter 2022 earnings conference call all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

I'll ask a question you May press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you Kate good morning, and thank you for joining us for Ametek's third 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.

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 or 2022 results will be on an adjusted basis, excluding after tax acquisition related intangible amortization rec.

A reconciliation 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 we'll open it up for questions I will now turn the meeting over to Dave.

Thank you, Kevin and good morning, everyone.

AMETEK delivered record results in the third quarter.

It was stronger than expected sales growth and outstanding operational execution.

Leading to earnings above our expectations.

Operationally, our businesses are performing exceptionally well and successfully offsetting inflation with price increases, resulting in impressive margin expansion.

We are also seeing continued strong and broad based demand across our diversified niche markets.

<unk> impressive organic order growth and a record backlog of $3 2 billion.

And this morning, we announced the acquisition of two excellent businesses <unk>.

<unk> and <unk> technologies.

Expanding our presence in high end precision optics.

And in testing solutions for the electric power grid and renewable energy applications.

I'll provide more details on these acquisitions shortly.

Given our results in the third quarter and outlook for the fourth quarter. We are again, increasing our earnings guidance for the full year.

Now, let me turn to our third quarter results.

Third quarter sales were a record $1 55 billion up eight.

Sent over the same period in 2021.

Organic sales were up 11%.

Acquisitions added one point and foreign currency was an approximate four point headwind in the quarter.

Demand also remains solid across our niche markets with organic orders growing 9% in the quarter.

While book to Bill was 107.

Our ninth consecutive quarter of positive book to Bill.

Backlog at quarter end was a record $3 2 billion.

Up approximately $1 4 billion from the end of 2020.

Operating income in the quarter was a record $385 million.

A 14% increase over the third quarter of 2021.

Our operating margins were 24, 8% in the quarter.

Up a robust 140 basis points from the prior year with strong margin expansion in each operating group.

Our ability to drive meaningful margin expansion. Despite the inflationary environment reflects the differentiation of our technology solutions and our flexion flexible operating model.

EBITDA in the quarter was also a record of $463 million up 12% over the prior year with EBITA EBITA margins a record 29, 8%.

This outstanding performance led to a record of earning.

Earnings of $1 45 per diluted share up 15% versus the third quarter of totaling 21 and above our guidance range of $1 36 to $1 38.

Okay.

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

First the electronic instruments group.

The electronic instruments group delivered excellent operating performance with continued strong and broad based growth.

Sales for our electronic instruments group or $105 billion.

In the quarter up 7% from the third quarter of last year.

Organic sales were up 10% with a one point contribution from acquisitions being more than offset by an approximate three foreign currency headwinds.

Growth was again broad based across our <unk> businesses, with particularly strong growth within our rolland.

TMC Pressey tech and thermal process management businesses.

Third quarter operating income was $272 7 million.

Up 11% versus the prior year and operating margins were 25, 9% in the quarter up 90 basis points from the prior year.

The performance of our electromechanical group in the quarter was exceptional with excellent sales growth and record operating results.

Amg's third quarter sales were a record $497 7 million up.

Up 8% versus the prior year with organic sales growing 13% in the quarter and foreign currency of four point headwind.

Growth was very broad based across all of our EMG businesses.

Emg's operating income in the third quarter was a record $136 5 million up 19% compared to the prior year period.

Emg's third quarter operating margins were a record 27, 4% up an impressive 240 basis points versus the prior year.

Overall, our businesses delivered outstanding performance in the third quarter allows.

Allowing us to manage an uncertain macro environment.

Meaningfully expand margins and drive earnings ahead of our expectations.

Now switching to our acquisition strategy.

We are very pleased to announce the acquisition of two highly strategic businesses.

An avatar in Rts technologies are both excellent businesses and highly strategic acquisition for AMETEK.

Expanding our presence in attractive secular growth markets.

Now, let me take a moment to provide additional color on both of these acquisitions starting with avatar.

Now <unk> is a leading provider of optical solutions for critical applications across several markets, including medical and life Sciences Research machine vision and robotics.

Semiconductor and industrial automation.

They are comprehensive suite of high precision custom optical solutions includes fully integrated imaging systems sensor.

Sensors cameras optics and software.

Navistar is an excellent strategic and complementary fit with our <unk> business unit.

As our technical capabilities around cameras and optical systems further expands <unk> product offering.

Additionally, <unk> is a high growth business well positioned to benefit from the growth in demand for precision optical solutions across attractive growth markets.

Navistar is privately held and is based in Rochester, New York.

Now switching to <unk> technologies.

Our Tds is simulation solutions are playing a key role in the modernization of the electric grid infrastructure.

As well as supporting secular growth drivers, including renewable energy.

Distributed power generation and energy storage.

The acquisition of <unk> brands, our power instruments businesses testing and simulation capabilities, while expanding our exposure to the renewable energy space.

<unk> is privately held and based in Winnipeg, Canada.

We are very excited to welcome an avatar in Rts teams to the AMETEK family.

We deployed approximately $430 million on these acquisitions acquiring approximately $100 million in annual sales.

Sure.

Over the past two years, we deployed more than $2 4 billion in capital on acquisitions and acquired eight businesses.

Our acquisition pipeline remains solid we have a strong balance sheet and significant financial capacity look to remain active in deploying capital on strategic acquisitions.

In addition to the recent acquisitions, we continue to focus on ensuring AMETEK is strategically positioned for long term sustainable growth.

Our businesses are driving broader adoption of our organic growth initiatives, including growth <unk> digitalization and new product development.

This includes making strategic growth investments across our businesses to help support and accelerate growth.

For all of 2022, we now expect to invest approximately $110 million in support of these growth initiatives.

We're seeing great results from these efforts over both the short term and long term.

Third quarter <unk>.

Sales from new products introduced over the last three years was 27% a record level for our vitality index, reflecting the great work of our teams.

These efforts have helped lead to double digit organic sales growth in each of the past six quarters.

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

While we remain cautious in the short term given the dynamic macro environment.

We are highly confident in the quality of our businesses and our ability to manage through these challenging times.

Given our strong third quarter results and outlook for the balance of the year.

We are again, increasing our sales and earnings guidance.

For the full year, we now expect overall and organic sales to be up approximately 10% versus our prior guidance of up high single digits.

Diluted earnings per share for the year are now expected to be in the range of $5 61.

To $5 63.

Up 16% compared to 2021.

This is an increase from our previous guidance range of $5 46 to $5 54 per diluted share.

For the fourth quarter overall sales are expected to be up mid single digits compared to the same period last year.

And fourth quarter earnings are expected to be in the range of $1 45 to $1 47 per diluted share up 6% to 7% versus the prior year.

To summarize AMETEK had another excellent quarter.

We delivered record performance strong orders and sales growth robust margin expansion increased our earnings guidance for the year and acquired two strategic businesses.

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 will be glad to take your questions Bill.

Thank you, Dave as Dave highlighted AMETEK delivered outstanding results in the third 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.

Third quarter General and administrative expenses were $24 $7 million up $3 million from the prior year due to higher compensation expense in the quarter.

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 third quarter was 19% down from 19, 5% in the third quarter of 2021.

Capital expenditures in the third quarter were $28 million and we expect capital expenditures to be approximately $130 million for the full year or about 2% of sales.

Depreciation and amortization expense in the quarter was $76 million.

For the full year, we expect depreciation and amortization to be approximately $310 million.

Including after tax acquisition related intangible amortization of approximately $148 million or <unk> 64 per diluted share.

For the quarter operating working capital was 18, 4% of sales.

We generated strong levels of cash flow in the quarter operating cash flow was $327 million up 7% versus the third quarter of 2021.

Free cash flow was $299 million third quarter up 6% from the prior year and free cash flow to net income conversion was 100%.

Total debt ended the third quarter at $236 billion.

Down from $2 $5 $4 billion at the end of 2021.

Offsetting this debt is cash and cash equivalents of $310 million.

At the end of the third quarter gross debt to EBITDA ratio was one three times and our net debt to EBITDA ratio was one one times.

As Dave noted we've been active on the acquisition front during the third quarter, we acquired an avatar and subsequent to the end of the third quarter, we acquired our TBS technologies.

Combined we deployed approximately $430 million on these two acquisitions.

Following our two recent acquisitions, we still have over $2 billion of cash and existing credit facilities to support our growth initiatives.

In summary, our businesses performed exceptionally well in the third quarter and through the first nine months of 2022.

We will now begin the question and answer session. If you ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

Our first question is from Matt Summerville of D. A Davidson. Please go ahead.

Thanks.

Turning.

Davidson.

Could you talk a little bit about.

The organic performance you saw by geographic region, and what if anything for lack of a better word your temporary type of businesses might be telling you about the macro environment and then I have a follow up.

Okay, yes regarding the.

Geographic storyline, it was really strong broad based growth across all geographies and.

A very balanced growth I mean, the U S was up about 11%.

Broad based growth there notable performance in our process and automation businesses.

<unk> was the strongest up 11%.

Europe was up 9%.

Notable strength in process in our aerospace business.

And Asia was up 9% notable strength in our process businesses. So.

No no canaries in the coal mine for us orders are strong.

Sales were strong geographically in all regions showed solid broad based growth very balanced.

Got it and then Dave could you maybe comment a little bit on what your price realization was in the third quarter, what your price cost sort of ratio look like and how we should be thinking about incremental price actions for 2003. Thank you.

In the third quarter, our price continued to more than offset inflation and the pricing was very consistent across our portfolio.

Pricing was about 6% and.

Net inflation was about 5% so at a positive spread of approximately 100 basis points and.

We expect a similar price inflation spread for Q4 of 100 basis points and the results speak to the highly differentiated nature of our product portfolio and our leadership position in niches.

In terms of.

Next year.

Really not not ready to talk about pricing and inflation next year.

I will say that.

We do expect that we.

We will be able to offset inflation with price in 2023 from a philosophy and an operating capability but.

We're going to refrain from discussing 2023 until we get.

So really good performance on pricing in Q3, and we expect it to continue in Q4.

To answer your question, Matt Thanks, David sure, Yes. It did thank you very much.

The next question is from Allison <unk> of Wells Fargo Wells Fargo. Please go ahead.

Hi, Good morning, good morning Allison.

David you talked a little bit.

Some caution out there.

You guys are really strong.

Just maybe give you a perspective of the cycle and maybe more importantly, how do you think that ametek's relative.

<unk> position is entering maybe in next downturn prior two relative paths just any thoughts on kind of those are great questions.

I think.

Terms of AMETEK I think.

Our underlying demand remains strong as I answered <unk> question, we're not seeing weakness yet it's really broad based.

Our organic orders are strong they were up 9% it was both.

Both groups had positive organic growth both groups were strong.

We are growing at healthy.

Growth rates in all major regions of the world as I just went through and.

So we feel good about that and we ended the quarter with a record backlog. So that is really good and.

Can you talk about 2023.

I think our portfolio is in much better shape as.

As we're going forward because if you think about what's happened we continue to shift our portfolio.

Two exposures in attractive growth markets.

Growth markets like automation health care.

<unk>.

This recent acquisition as more renewables.

The market shifts are attractive for us and our technology, our differentiation is stronger than it was six or seven years ago, and we see that playing out in our organic growth in both relative and absolute performance.

And the big picture, leaving incrementally improved our portfolio.

Without sacrificing a couple of years of growth to do it and have delivered an exceptional way along the.

The path.

I'll give you some examples of our health care portfolio.

It was about 10% six years ago now it's 15%.

Aerospace and defense. It was about it was low double digits part of the business about six or seven years ago now is high teens are.

Our automation business went from about 7% to 12% so.

Good improvements in all of those areas.

As a percentage of our total portfolio and on the flip side more cyclical businesses like our oil and gas and metals. They were more than 20% of sales six years ago and right now combined the sales or about 8%. So we feel good about the portfolio.

It's performing now and we think it's going to perform in any kind of economic environment that we run into.

Great. That's helpful. And then just on the acquisitions I know you said at least avatar high growth could you maybe give a little bit more color on is it the growth of these acquisitions sort of in line with AMETEK are at or better than just any color on the margin performance relative to AMETEK score.

Right right I think the.

Okay.

Both acquisitions are going to grow in the.

High single digit to low double digit range. So they are both good growers.

And both acquisitions are very profitable businesses.

The blended multiple.

It was about 11 times, so so both very profitable growing businesses and a fair price paid.

To expand our presence in attractive growth markets.

<unk> is in the high growth of optical solutions in life Sciences machine vision robotics, and Rts is really well positioned to benefit from the modernization and electrical power grid and the investments being made there with excellent.

Closure to the renewables market. So we've been working on these businesses for a good period of time and I'm, just really glad to have them in the portfolio.

Great. Thanks, so much okay. Thank you.

The next question is from Deane Dray of RBC capital markets. Please go ahead.

Thank you and good morning, everyone. Good morning Deane.

Hey, we've touched on it a bit so far in the earlier questions, but maybe just more methodically take us through the key end markets.

Like process Arrow were strong, but can you just kind of go from the strongest of the weakest and we will take it from there.

Sure Deane I'll be glad to do that the strongest was process.

They had the strongest growth in the third quarter organic sales up low teens on a percentage basis.

The growth is really broad based and as I said in my prepared remarks, it was particularly strong growth across our Rolland health care business.

TMC Pressey tech and our thermal process management businesses.

For all of 'twenty, two we now expect organic sales for our process businesses.

To be up approximately 10%.

Yes.

Segment that grew the fast second fastest was our automation and engineered solutions.

Very strong third quarter with organic sales up low double digits.

Our balanced growth across both automation and engineered solutions.

And for that sub segment, we now expect organic sales to be up approximately 10% up from high single digits up to 10% for the full year with similar growth across each segment.

Then I would take you to the power and industrial business.

Mid single digits on a percentage basis in the quarter.

We saw notable strength across our power instruments and programmable power business.

And we now expect that sub segment to grow 10% also.

Was we.

Driven by strong underlying demand across the industry commercial OE aftermarket in business jet all grew nicely the.

The strongest were aftermarket in business jet and defense sales.

We're up low single digits in the quarter.

And for the full year, we expect organic sales for A&D to be up high single digits on a percentage basis with our commercial aerospace business to growth to be stronger than the defense growth.

As I walk around the company Dave.

That's fabulous.

How about just.

The idea of any changes at the margin and customer buying behavior.

In some cases, we've seen as supply chains are normalizing a bit lead times come in a bit.

Don't have to put customers will have to give you the bigger orders just to get in line is there any kind of change there.

And maybe share with us the key.

Cadence of the quarter in terms of orders right I'll start with the cadence.

We had strong quarters and each month with the strongest being September we had a very strong September end.

For that matter. Our October results are consistent with our outlook showing solid performance yeah. A good question about the underlying orders in.

The way I think about it.

We will certainly be running into more difficult comparisons for order input in the coming quarters.

And we do expect our orders to moderate due to the fact that youre talking about our customers placed orders early due to supply chain dynamics.

And we believe that the return to more normalized ordering patterns in.

But even with these factors I expect our backlog to be in an excellent position as we enter 2023.

That's real helpful. Thank you no problem.

The next question is from Josh <unk> Morgan Stanley . Please go ahead.

Hi, Good morning, guys good morning, Josh.

Dave I want to follow up on Dean's last question.

On your last comment about backlog with supply chain, starting to improve and really some of the kind of extra backlog really being more supply side driven than anything else.

What would you say is sort of the amount of backlog do you think you could convert next year I guess, how should we think about the timeframe for getting from where we are today and maybe down to more of a more typical levels because the entire business isn't long cycle just pockets of it that's a good question.

The way one way that I think about it it may help you.

If you go back a few years, our annual sales or about <unk>.

30% in backlog. So so that was a typical year for us we had about 30% of annual sales and backlog.

Right now.

We have a little more than 50% of annual sales and backlog. So there was a 20% difference there.

That's why I think we have solid visibility in and that's in place because of the ordering patterns of our customers has changed and we've had really strong order input and we enter protect our customers with inventory because of the supply chain prices. So.

The increase of backlog went from about 30% of annual sales to 50% of annual sales.

And thats, the kind of way I think about them that option.

You cant really pull it in as much.

Yeah, Josh I would say as you look at the backlog we have.

Almost all of it could be shipped there'll be a small portion of it that will flip over into <unk>.

Got it that's helpful I'll leave it there thanks guys. Thank you.

Yes.

Our next question is from Nigel Coe of Wolfe Research. Please go ahead.

Thanks, Good morning, everyone.

Thanks for the question.

Just going back to the acquisitions.

I'm guessing these are more north American centric acquisition. So just wondering if there is a globalization sort of angle to this and just want to confirm some numbers. So it sounds like these are high 30%.

EBITDA margin combined is there any difference between the two acquisitions would you say that quite consistent across that.

Across the both of them.

And can they go even higher than that are there any sort of easy synergies from supply chain et cetera.

Actually move the needle on those margins.

Yes, youre right about the profitability of their higher profitability businesses.

Navistar is maybe has a little higher growth rate in a little lower profitability than than Rts. It has higher profitability and sales a healthy growth rate, but maybe slower than an avatar.

There is a normal amount of synergy for us. These deals are both private businesses.

There is.

Excellent opportunities for us to improve the cost and revenue generation capabilities of the business.

And.

There is a globalization theme.

Our Tds as a more globalized already then avatar, but both of them will benefit from Ametek's global scale. So good insight on your part.

That's great and then my follow on is really digging into the EMG margins, which were pretty exceptional.

A disproportion amount of price cost lands in EMG.

AMG or are we seeing some mixed impact from commercial aero aftermarket any deals that would be great.

I mean the.

Amg's performance was excellent in the quarter as you mentioned they had record margins of 27, 4%.

The biggest factor when you look at it.

Is.

Our higher margin businesses are growing faster.

In the quarter in particular in <unk>.

<unk> pretty much done what AMETEK continues to do an it moving up the differentiation curve.

With their product portfolio.

<unk>.

We exited some of the lower margin consumer businesses overtime. So they're really good book of business as we go forward up the differentiation curve and theyre getting better pricing because of that but in terms of pricing. It was really broad based across all of AMETEK. So it wasn't.

<unk> were similar in terms of price it's really.

If you want to think about it.

Certain mix effect because of the higher margin businesses grew faster in the quarter.

Very clear thanks, David Thank you.

Okay.

The next question is from Scott Graham of Loop capital markets. Please go ahead.

Hey, good morning, Dave Bill Kevin.

Morning, Scott.

Wanted to talk a little bit more about the backlog piggyback onto Josh question that.

Bill you indicated I think it was bill that.

15 months is kind of like the shippable.

Are you also saying that customers can't push that back that these are sort of contracted shipment dates.

Whats the dynamic look like Theyre, yes. The reason I say 15 months was to get us to the end of next year.

That's really the point I was making there and you always have to work with your customers on.

Okay. So when you say talk about talk with customers about this there is a chance that some of these things could be pushed out a quarter or two.

Yes, yes, yes.

Annie is typical business I mean, it's a firm backlog backed by firm Pos, but we work with our customers on both pull ins and push outs.

Inevitably that happens every quarter.

Got it thank you.

Question is around acquisitions so.

Two deals.

<unk> been quiet this year at least so maybe is this a situation, yes hope springs eternal.

Are you starting to see bid ask spreads close into a point, where there might be an acceleration or was this just this.

It's something that a couple of deals and I am asking the question because it's too it's not one right so right.

So what does that mean for like the next six months do you think.

When I look at our backlog of deals and potential deals I feel very optimistic.

Over the next say 12 months, we're going to be able to deploy our free cash flow on acquisitions.

<unk>.

The pipeline is very very strong.

<unk>.

There is.

We're working with quite a few businesses right now.

And.

Actively exploring some exciting opportunities. So can we have the financing to do it I mean.

The pricing is starting to come in on deals now.

And our relative position versus some other competitive buying.

Like private equity has improved.

So youre, saying, Dave Youre confident that over the next 12 months you can deploy 100% of your free cash flow on deals yes.

Yes, I believe that I believe that to be true.

Great. Thank you.

Okay.

Okay and then if you have a question. Please press Star then one.

The next question is from Rob Wertheimer of Melius Research. Please go ahead.

Hi, Thanks My.

My questions.

On.

I'll now turn it over if you can expand on the niches they participate in and the reason for the question is just there is some very large changes and from the way the world's working with re shoring with.

<unk> battery factories in semiconductor factories in North America, and so on and I'm wondering about that historical growth rate future growth rate.

Where theyre really attack and whether thats helped by some of the ongoing investment.

Alright.

I think some of the re shoring is going to help them.

They are the largest largest market segment is in the medical and life Sciences area.

Or are there.

Very very.

Very successful penetration.

The optics used in various types of microscopes.

There are also there.

The optics are very very good and they are in a lot of machine vision.

Robotics applications.

Sell through some big name semiconductor companies.

We have high end of the market and.

And we just think the combination of this business with our <unk> business is a premier optical business just puts it together and it gives us some additional tools to go to our customers with <unk>.

We are very optimistic.

On the future and very low risk deal for us.

Okay, great and if I may can I ask the same sort of question on <unk> with some of the upcoming changes to power grids, maybe that the average term situation, but I hope youre seeing opportunity an inflection there.

We are at and I think we got this business at the right time because.

As people put renewable energy on the grid.

Whether its a wind farm or.

The field of solar panels or.

Electrification.

Charging devices for electric vehicles, each one of those things that they add to the grid.

It is not simple there has to be a lot of analysis done and then you have to understand the impact of the they are adding to the grid at the same time, there's a lot of investment in the grid.

Excellent team of technical people. So we're optimistic on what that business can do without under AMETEK.

Great. Thank you for the answers.

Okay.

The next question is from Andrew <unk> of Bank of America. Please go ahead.

Hey, guys. Good morning can you hear me yeah, good morning, Andrew.

Just a question on Rts.

As you guys move into more software I know some of your peers and so we're making that transition.

You tried to apply the business system, but how do you fit something like churn into your framework and to optimizing the bank loan.

Clearly you have an amazing playbook for.

Integrating assets.

<unk> taken the margins up how do you apply your playbook to more digital assets like our Tds and what adjustments have you had to make.

Because that sounds very interesting.

In the case of our TTS is like many AMETEK businesses.

It's a combination of hardware and software to operate the business. So it's really not different and it's not a software only business.

We have largely stayed away from software only businesses because the.

But pricing has been very high and we couldn't get a good return on it and to your point, we don't see the synergy that will add to the businesses. So but at the same time software is very important to AMETEK <unk> combined.

System is very complex hardware systems, and the software and that's our specialty and <unk> fits right into that.

No that's a great way to get smart on software.

And then another question for you.

Are there any businesses, where AMETEK has added capacity or has plans to add capacity given what's happening out there just to follow up on some of the questions were asked before yes. We have we have a we're bringing on a lot of capacity in low cost regions and.

And we during this year we've expanded our.

Our facilities in Mexico, we expanded our facility in Serbia, we expanded our facility in Malaysia.

We have more in the works, but those were all put in place this year to add additional capacity. So we're dealing with our volume in low cost regions and it provides a synergy too.

In local market access for us so we've been investing heavily in low cost production manufacturing in Malaysia, as becoming a good facility for us.

Again, Eastern Europe , Serbia and in Mexico for the U S. So we have these regional hubs that we're building up.

<unk>.

Very successful for us and we've put a lot of capacity in place this year.

Thanks, so much.

Okay.

The next question is from Christopher Glynn of Oppenheimer. Please go ahead. Thanks, Good morning, Dave Bill Kevin.

Morning, Chris.

Hey.

Was curious about the vitality index of 27% a record level.

That ties into some of the discussion on the EMG margins, but.

<unk>.

Is there a level you think of as a mature level.

Vitality.

For the business and I don't mean that as a negative but.

Got it.

<unk> market for a variety of products and.

Curious, how you're thinking about that.

First thing is.

Not only is a vitality index and helps us with our pricing because.

Because we're continually adding new features and benefits to our products and our customers and enables us to.

Garner a higher price because of the engineering investment that we're making very consistent engineering investment over 5% over many years.

When we first started tracking the vitality. It was then.

The mid teens and over the past 10, or 15 years, you got into the <unk> in the mid <unk> and now I'm just very pleased with a.

27% vitality are clearly our new product development process is working we're developing.

Products, our customers want to buy in at 27% of sales for our end markets. We think that's a really good number.

And in general I put a range around it I think between 20 and 30% is a very good number for AMETEK.

And again, the vitality helps not only from new products, having fresh new products that you can.

When share with but it also helps with pricing.

Realized pricing.

Great. Thanks, and then I just wanted to go into the process markets a little bit.

It's called.

I would say.

Strong across the board in process, but the health care space.

The energy space are two areas that stood out in the quarter.

And then with TMC <unk> is just a precision technology, where we're doing things that other people can't do and our orders have been high for multiple quarters and now the sales are catching up.

Great. Thanks for the color.

Thank you Chris.

The next question is from Joe Giordano of Cowen. Please go ahead.

Hi, Joe.

Hey, guys good morning.

Tristan in for Joe Thanks for taking the question.

So I'd like to go back to <unk> question, a little bit and maybe ask it may be different fee, but.

If we were to have an industrial recession of 2016 for example.

Thank you for joining portfolio would fare.

As your portfolio six years ago, just trying to get a sense of the.

The magnitude there thank you.

Yes.

Difficult to understand the specifics until you're in a recession, because theyre all different but as I said.

Our portfolio has been improved dramatically.

And I think that.

When you think about all the other.

Things that I mentioned, we would stay in front of inflation with pricing.

I think in 2023 as a supply chain shortages abate, we believe our working capital will decrease to more normalized level.

And the vertical markets I'm going to wait and see what we learned from our businesses.

But we do expect our longer cycle businesses to be strong in both A&D and energy.

And we do expect to have a historically strong backlog.

When we enter 2023.

And in terms of our recession playbook, let's say, we do see slowing and we start to see a recession.

We will react and manage our business appropriately as we have done in the past.

We think we have a proven model that works well in both up markets and down markets.

And the most recent example of this was during the Covid driven recession in 2020, and if you look at how we performed through that despite the weakness in sales during the time.

Our margins actually grew 80 basis points and <unk> margins were only 17%.

So we've got the capability to manage them, both up cycles and down cycles.

I believe that the next recession will be no different whenever it comes.

Awesome, that's all I had thank you okay.

This concludes our question and answer session I would like to turn the conference back over to Kevin Coleman for closing remarks.

Great. Thank you again, Kate and thank you everyone for joining us for our conference call and as a reminder, a replay of today's webcast.

It can be accessed in the investors section of AMETEK Dot com have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q3 2022 AMETEK Inc Earnings Call

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