Q4 2022 AMETEK Inc Earnings Call

February 2, 2023

[music].

Good day and welcome to the AMETEK fourth quarter 2022 earnings Conference call.

All participants will be in listen only mode.

Jimmy the assistance. Please signal conference specialist by pressing the star followed by zero.

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

To ask a question you might put a starving touchtone phone to withdraw your question. 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 Sir.

Thank you Rocco good morning, and thank you for joining us for Ametek's fourth quarter 2022 earnings Conference call.

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

During the course of today's call, we will make forward looking statements, which are subject to change based on various risk factors and uncertainties.

That may cause actual results to differ significantly from expectations.

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 'twenty two results or 2023 guidance will be on an adjusted basis.

<unk> after tax acquisition related intangible amortization reckon.

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.

I am very pleased with ametek's results in the fourth quarter and for all of 2022.

Ametek's continued excellent performance reflects the quality of our niche differentiated businesses.

Strength of the AMETEK growth model and the expanding impact of our organic growth initiatives and most importantly, the outstanding efforts of our global employees.

Thank you to all AMETEK colleagues for their many contributions to our success.

Navigated many challenges over the last few years only to emerge stronger and even better positioned for sustained growth.

Our results in the fourth quarter were outstanding.

Stronger than expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter.

We ended the year with a record backlog as demand remains solid across our diverse end markets.

Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence serving attractive growth markets.

Operationally, we're performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion.

Additionally, cash flow in the quarter was outstanding providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions.

Now onto the results for the fourth quarter and all of 2022.

Fourth quarter sales were $1 63 billion up.

Up 8% over the same period in 2021.

Organic sales growth was 9% Act.

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

Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3 $2 billion.

Operating income in the quarter was a record $398 million, a 10% increase over the fourth quarter of 2021.

Operating margins were 24, 5% in the quarter up 50 basis points from the prior year.

EBITDA in the quarter was a record $489 million.

Up 12% over the prior year and EBITDA margins were an impressive 31%.

This outstanding operating performance led to record earnings of $1 52 per diluted share up 11% versus the fourth quarter of 2021 and above our guidance range of $1 45 to $1 47 per share.

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

First the electronic instruments group.

The electronic instruments group delivered continued strong sales growth and excellent operating performance.

Sales for AIG were a record $1 6 billion in the quarter up 10% from the fourth quarter of last year organic.

Organic sales were up 9% acquisitions added 3% and foreign currency was a three point headwind.

Yes.

Growth was broad based with particularly strong growth across our aerospace and defense and ultra precision technologies businesses in the quarter.

Aig's operating income in the fourth quarter was a record $307 million up 10% versus the prior year, while AIG margins were a very strong 26, 5% in the quarter.

The electromechanical group also finished the year with outstanding performance.

Amg's fourth quarter sales were $466 million up 4% versus the prior year with organic sales growing 8% and foreign currency, a three point headwind.

Growth was again broad based across AMG with our aerospace and defense business is leading the growth.

Emg's operating income in the fourth quarter was $115 million.

9% compared to the prior year period.

Amg's fourth quarter operating margins were 24, 6% up an impressive 100 basis points versus the prior year.

Now for the full year results.

Overall performance was outstanding in 2022, establishing annual records for essentially all key financial metrics.

Overall sales for the year were 615 billion up 11% from 2021.

Organic sales increased 11% acquisitions added 2% and foreign currency was a three point headwind.

Operating income for 2022 was $1 5 billion up 15% and operating margins were 24, 4% up 80 basis points versus the prior year.

While core margins were up an impressive 130 basis points, reflecting our ability to successfully manage inflation and supply chain challenges.

EBITDA for the year was 183 billion.

Up 15% from 2021 with EBITDA margins, a very strong 29, 7% up 100 basis points from the prior year.

Full year earnings were $5 68 per diluted share up an impressive 17% versus the prior year.

Ametek's performance in a challenging operating environment highlights to proven strength and flexibility of the AMETEK growth model and our ability to successfully navigate through uncertain economic times.

Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth <unk>.

Develop innovative new products and identify and execute on operational efficiency improvements.

Additionally, our business has worked closely with our corporate development team to manage our acquisition pipeline.

<unk> and continued strong deployment of capital on strategic acquisitions.

And 2021 and 2022 combined we deployed over $2 4 billion in capital.

On acquisitions and acquired over 600 million in annual sales.

We expect to remain active in 2023 is our deal pipeline remains very strong and our balance sheet provides us significant financial capacity to deploy capital.

In addition to our acquisition strategy, we remain convinced it.

Two investing in organic growth initiatives and are very pleased with the impact. These investments are having on ametek's growth.

As I highlighted during our last earnings call Ametek's portfolio strategically evolved with increased exposure to higher growth market segments.

This portfolio evolution.

Has been driven by our acquisition strategy and by the organic investments, we're making in our businesses.

In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research development and engineering and sales and marketing.

One way we measure the success of these investments is through our vitality index.

Which was an outstanding 27% of sales in 2022.

Our increased investments and already any continued to yield innovative advanced technology solutions, including within our <unk> business.

<unk>, which is based in midfield, Connecticut.

Designs and manufacturing advanced optical metrology systems, and ultra precise optical components and assemblies for a diverse set of end markets, including defense research and semiconductor.

<unk> partnered with the Lawrence Livermore National Laboratories National ignition facility to provide high end precision optics in support of their inertial fusion energy testing program, which provides a significant leap forward in our realization of sustainable fusion energy.

Achieving these types of energy production required the use of highly precise optics and scalable manufacturing processes, which were developed in partnership with <unk>.

I want to congratulate the <unk> team for their tremendous contributions supporting an important advancements in research and technology.

Lastly, let me briefly touch on the supply chain issues and inflation.

While <unk> remains in certain areas, where you're seeing improvements in our global supply chain and logistics.

Additionally, although inflation remains elevated we are seeing we are also seeing modest improvements versus levels experienced in 2022.

As we look ahead to 2023, we will continue to proactively proactively manage our supply chain and remain confident in our ability to offset inflation with price increases.

Now shifting to our outlook for the year ahead.

While macroeconomic uncertainties remain we are confident in the quality of our businesses the flexibility of the AMETEK growth model and our ability to navigate through these uncertain times.

Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023.

For 2023, we expect both overall and organic sales to be up mid single digits versus 2022.

Diluted earnings per share for the year are expected to be in the range of $5 84 to $6 up 3% to 6% compared to last year's results.

For the first quarter, we anticipate overall sales up mid single digits with adjusted earnings of $1 38 of $1 38 to $1 42 up.

4% to 7% versus the prior year.

In summary, ametek's fourth quarter and full year results were excellent.

Our record backlog, the strength and flexibility of the AMETEK growth model and a world class workforce position us nicely for 2023.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions Bill.

Thank you, Dave as Dave highlighted AMETEK had a very strong fourth quarter to complete an outstanding year.

In the quarter, we delivered record level operating performance and a high quality of earnings.

Let me provide some additional financial highlights for the fourth quarter and for the full year, along with some additional guidance for 2023.

Fourth quarter General and administrative expenses were essentially flat versus the prior year and.

And for the full year general and administrative expenses were up $6 million driven largely by higher higher compensation cost.

And as a percentage of sales were one 5% versus one 6% of sales in 2021.

For 2023 general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately one 5% of sales.

Effective tax rate in the fourth quarter was 18, 9% up from 17% in the fourth quarter of 2021.

For 2023, we anticipate our effective tax rate to be between 19% to 20% and as we've stated in the past actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Capital expenditures were $58 million in the fourth quarter and $139 million for the full year.

Capital expenditures in 2023 are expected to be approximately $140 million or about 2% of sales.

Depreciation and amortization expenses expense in the quarter was $89 million and for the full year was $320 million.

In 2023, we expect depreciation and amortization to be approximately $325 million, including after tax acquisition related intangible amortization of approximately $154 million or <unk> 66 per diluted share.

For the quarter operating working capital was 18, 9% of sales.

Cash flow in the fourth quarter was excellent with operating cash flow of $385 million up 37% versus the fourth quarter of 2021.

Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income.

Total debt at year end was $2 $39 billion down from $254 billion at the end of 2021.

Offsetting this debt is cash and cash equivalents of $345 million.

And during the fourth quarter, we deployed approximately $240 million on the acquisition of <unk> technologies.

Gross debt to EBITDA ratio at year end was one two times and our net debt to EBITDA ratio was one one times.

As Dave noted we remain active on the acquisition front with a solid pipeline of acquisition candidates.

Given our strong cash flow and modest levels of leverage we are well positioned to deploy additional capital we have approximately $2 3 billion of cash and existing credit facilities to support our growth initiatives.

In summary, our businesses performed exceptionally well in the fourth quarter and throughout all of 2022, delivering strong growth and a high quality of earnings in a challenging operating environment AMETEK is well positioned for 2023, given our strong financial position, our proven growth model and our world class workforce.

Kevin.

Thank you Bill Morocco could we please open the lines for questions.

Absolutely and as a reminder, ladies and gentlemen, if you would like to ask a question. Please press Star then the womb to remove yourself from queue. Please press Star then two.

Today's first question comes from Allison <unk> with Wells Fargo. Please go ahead hi.

Good morning, Good morning, Allison can.

Can we turn organic investment the $90 million, if I recall I think thats a step down from what you did in 2002, just any color. There is it just some conservative nature, just given the uncertainty out there I mean are there unusual projects in 'twenty, two just any thoughts on that side.

Yes.

As to start out the year end.

There is there is the potential to do more and.

But the $90 million was a good number as incremental keep in mind incremental over what we've done in 2022, so it's incremental and we're making healthy investments in Orange Ardine is up double digits for the year and healthy investments at four.

Sales and marketing so we think the 90 million as appropriate.

And obviously that can be flexed up or down if required.

Great and then a lot of concern out there about potentially some weakness showing up in each two just any thoughts on year end, what youre seeing in terms of that is there anything concerning or sort of popping out that kind of has a bit worried at the antares.

Hey, guys back half of 'twenty and into 'twenty four.

Not really I mean.

Obviously, our growth is slowing slowing but.

Record backlog and.

We're executing very well, we're getting the price.

And.

It still feels it still feels good to us it feels strong and good and when you get out to the second half of.

2023, I mean, there's less visibility because you're further out but our our backlog is at a record level. It's usually at about 30% of annual sales and right now it's running at about 50% of annual sales. So so we feel really good and.

We don't see a slowdown yet.

Perfect. Thank you okay. Thank you Allison.

And our next question today comes from Deane Dray with RBC capital markets. Please go ahead. Thank you. Good morning, everyone. Good morning, Deane. It was hoping you could take us through the key end markets and then also on the regional updates.

It's been interesting maybe people got too negative on Europe . So let us know how Europe did and then China reopening how does that impact you all sure I'll start with your second question the geographical outlook.

Strong broad based growth across most geographies.

Our Asia region was flat on China headwinds.

And to your point, our fastest growing market was Europe .

Europe was up 12% with notable strength in both our process and aerospace defense markets.

And then we had a really strong performance in the U S up 10% organically broad.

Broad based strength notable strengthen our process businesses.

And in Asia as I said it was flat with notable strength in aerospace and defense and process in China was down for us low double digits in the quarter on a difficult prior year comp and the impact of the zero carbon policy.

Asia.

We think that the.

The China situation is going to turnaround as the reopening occurs and we're pretty optimistic for it in the second half but.

That's the picture in Q4 really strong broad based growth strongest Europe second U S.

Most of Asia was really good in China, there was some weakness.

Okay and the second question was on the market segments summary.

I'll take a walk around the company and our process area.

Overall process businesses, they were up high single digits in the quarter Org.

Organic sales were up 10%.

And he also had the contributions from the acquisition of Navistar and it was offset by.

By foreign currency headwinds.

And as we saw throughout.

Last year growth across our process businesses.

<unk> was particularly with.

Broad based but it was particularly strong in our ultra precision technologies businesses in the quarter.

And as we look ahead to 2023.

We expect organic sales for process businesses to be up mid single digits for the year.

Next I will talk about aerospace and defense.

Our aerospace and defense businesses had a very strong finish to the year.

With overall and organic sales up mid teens.

So that was the strongest growth rate of the year for aerospace and defense.

Our commercial business has led the growth in the quarter.

Sales of high teens on.

On a percentage basis in the commercial business and defense was also strong in the quarter growing low double digits.

And for all of 2023, we expect organic sales for our aerospace and defense businesses to be up mid to high single digits.

With commercial aerospace growth expected to be modestly stronger than defense growth.

On Mexico to power and industrial.

Overall sales for our power and industrial businesses were up high single digits in the fourth quarter.

Driven by mid single digit organic growth and the contributions from the acquisition of <unk>.

Growth in the quarter was particularly strong across our programmable power business.

For all of 2023.

We expect organic sales for our power and industrial business to be up mid single digits with similar growth across both the power and industrial segments.

And finally, I'll talk about our automation and engineered solutions.

<unk> market segment.

And overall sales were up low single digits in the fourth quarter with.

Very solid mid single digit organic sales growth.

They had some currency headwind in that segment I was very pleased with the overall growth in the performance of automation and engineered solutions in 2022.

They are continuing to expand exposures in attractive niche markets.

In particular.

Our engineered medical components business saw strong growth in the quarter.

And in 2023, we expect organic sales for our automation and engineered solutions businesses to be up mid single digits.

Similar growth expected across both our automation and engineered solutions business.

That's a walk around the company Dean do you have any more questions. Yes, just as a follow up just how would you characterize the pace of orders.

Industrial demand.

The size of orders.

With respect to how normalization might be happening for AMETEK businesses. That's a great question Deane.

Overall orders were up one 5% in the quarter.

And the overall demand environment as I answered to allison's questions feels really solid.

We had our 10th straight.

Positive book to Bill quarter.

And we ended with an all time record backlog as I mentioned in the prepared remarks.

This level of backlog as I said was 50% of our annual sales well above the normal level of 30, and that's up 78% from the end of 2020.

So we're in a really strong position as we enter 2023.

To your question on <unk>.

Some of the nuances if you recall over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth.

The first was the difficult comparisons were facing.

Because those orders have been strong for an extended period of time to give some context over the prior nine quarters, our orders grew over 20% a quarter. So it's been sizable and sustained.

That helped build the backlog the second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns.

Now that the supply chain is improving and we started to see that dynamic play out in the fourth quarter.

So overall, we're comfortable with our order levels in Q4.

After starting off in January .

We just finished January we had another solid orders a month ahead of our expectations.

And solidly up from January 2022 order levels. So.

Again, we're feeling pretty good with a strong backlog and our orders are hanging in there. So we think that we are.

We're.

Looking at a pretty good year.

That's all really helpful. Thank you okay. Thank you Dave.

Our next question comes from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning, all good morning, Brad.

Just wanted to come back to inventories some of your peers have been talking about some elevated inventory and some of the OEM channels.

Just curious what youre seeing there in some of your serve businesses served markets and if there's any area of concern there.

Yes.

The first point I'd like to make is that.

When youre looking at customer inventories.

A lot of our products are customized and.

Theyre high value products. So we don't really have a lot of distributor stocking issues to worry about.

That's particularly true in AIG and EMG Theres more of an OEM feel with our customer base, and Thats, where youre seeing a bit of the.

Customer ordering patterns normalize.

But.

Overall.

We think we've got a good handle on it and we feel pretty good about where we're at.

Okay, that's great.

Just shifting to the 2023 outlook I was hoping maybe you could put a finer point on.

Just just the underlying assumptions how much price do you expect versus volume.

And then anything specific on the quarterly phasing I mean do you think you can get growth in both the first half second half or as you work down the backlog does it begin to decline there in the second half.

Yes, great question, I mean with our bus.

Budget model.

We pretty much have a traditional first quarter. So it's not really second half biased and we think we will grow in each of the quarters of the year.

In terms of pricing in our budget model, we have about four points of price and we assume that we are about three five points of inflation. So we're going to offset price and inflation by about 50 basis points now that's down a bit from from.

2022, where we had about six points of price and we offset about five points of inflation, but.

The guide for the entire year, and we're being a bit conservative now and we'll probably start out a little better than that but.

That's our plan for 2023.

Also in 2023 I mean in.

In addition to staying in front of inflation with price.

We think supply chain shortages are going to abate and we believe our working capital levels will decrease to more normalized levels.

So a very healthy 110% to 115% conversion to net income on the.

Free cash flow.

We also think that.

In terms of vertical markets, we do expect our longer cycle aerospace and defense businesses to be a bit stronger than the balance of the portfolio. So when I went through the market segment commentary on Dana was a little bit higher was had a mid to high outlook. So we think that's going to be true and that was accelerating as each quarter of 2022.

Really.

We expect the both of our groups to grow mid single digits, we talked about the historically strong backlog.

And.

That's some assumptions that went into our budget do you have any other questions Brett.

No that's a great quarter and I appreciate all the insight Thank you Brian .

Thank you and our next questioner today is Scott Graham from loop. Please go ahead.

Hey.

Good morning, all and really congrats on that as I go.

That's a pretty big deal.

Really really interesting when you are really helping that team there did a great job and is working on fusion energy is a great thing and it just shows our capability.

Yeah for sure. Thank you.

The orders, Dave you said up one five in the quarter was that organic and can you also tell us the split by segment.

Yeah.

That was overall orders organic was down minus two.

And so overall orders were up one 5% organic was minus two.

And both segments were about at that same one one book to Bill So it wasn't.

Distinct difference between the segments and as I said, our overall demand environment feels solid.

10th straight quarter of book to Bill So we have a strong backlog in.

As we have this dynamic of customers returning to more normalized ordering patterns.

We have a strong backlog so so.

Feel pretty good about it.

Okay.

Great. Thank you.

Just on your answer to the prior question is it possible then that.

Sales volumes could sort of flattened out in the second half of the year and your growth organic is essentially all price is that what youre thinking cadence wise.

I don't think in the second half of the year.

We're going to have some healthy price, but I think it's going to actually increase a bit in the second half and.

If you think about.

Our order rates, we are in that mid single digit.

Sales growth forecasted.

We think we're going to grow orders also so orders were going to grow a little bit less than sales as our forecast, but theyre going to grow and really by the end of the year. Our backlog is still going to be at elevated levels. It will be down a bit but at elevated levels. Historically so so.

Again at the end of the end of 2023 with.

Surely elevated levels of backlog similar to now.

Yep, Great Hey, thank you.

Scott.

Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.

Next question comes from Matt Summerville with D. A Davidson. Please go ahead.

Hi, Good morning. This is bill Johnson on for Matt Summerville today, Hello, Good morning.

I was curious about your recent acquisitions of maritime RTD.

Just about your first observations with those with those companies as part of the AMETEK portfolio, how did things unfold relative to expectations and how are things going with with bringing them in.

Yes, there are going very well I mean, bill and I have met with both of the acquisition integration teams and really positive yes.

To recap a little bit our Tds provides real time power simulations used by utilities and.

Various strategic acquisition that broadens our power instruments.

As with differentiated testing and measurement and simulation capabilities.

So it's an attractive position for us.

High growth market.

Good team.

Experts in the field and.

It's kind of fun interacting with them and they are really adopting AMETEK and feel good about that one.

Same with Avatar avatars and some good growth markets.

The optics market is doing quite well with us.

And even in the semiconductor space, where they play their main customer is.

One thats.

Very differentiated and has unique capabilities. So so that along with life sciences, along with long with a machine vision.

There is a very good outlook, there and that business is a little bit different is being integrated into our <unk> business, so and as new capability for <unk>.

Much needed capacity for <unk> and the integration is going very well.

Great. Thank you and then as a follow up staying on the theme of M&A. You mentioned your pipeline is very strong at this juncture.

I'm curious about what's your observations are in the market overall with respect to the level of competition for assets and where multiples seem to be moving in your observation right.

Yes, I think with the.

The interest rates are increasing.

With the money not as free as it was.

It's actually an advantage to us so we.

Have a good pipeline and.

A good balance sheet.

We remain very active with a solid pipeline of deals that valuations have come in a bit.

Of course, we are looking at some quality assets, though so there is still a bit elevated from historical levels, but no doubt they've come in.

And important for us and our pipeline, we have a very disciplined acquisition process and these deals were going to meet our traditional financial hurdles, which is primarily.

Our return on invested capital of 10% by the third year of ownership.

These are important thresholds for us as we want to ensure we are providing a strong level returns on the capital we deploy for our shareholders.

That's been a hallmark of AMETEK acquisition program for a long period of time.

Do this all with cash and debt don't use equity.

And.

Theres, a bigger pipeline right now than it has been historically because.

Theres less.

Less money around the system to bid up deals so we feel pretty good with where we're at.

And if we do something and I believe we will be talking to you about deals in the near future.

They're going to be they're going to meet all of our traditional hurdles and we're committed to to have investment grade credit rating and we got plenty of about $2 3 billion of capital and financing capacity available. So so in this in this environment discipline is going to be a key word as it's always been for AMETEK, but it would be very.

Key in terms of executing our forward looking M&A strategy.

That's great. Thank you for taking my questions, yes, okay.

And our next question comes from Andrew <unk> with <unk>.

Bank of America Merrill Lynch. Please go ahead.

Hi, This is David Ridley Lane on for Andrew <unk>.

Hi, David.

Morning.

How.

How much of the one time costs around supply chain disruptions last year, the higher freight costs.

Spot buys and electronics all of those things fall off in 2023.

Yes, I'm wondering is this a meaningful tailwind.

And kind of.

Your forecast.

I think thats, what youre going to see.

Still an elevated level of inflation.

But at the same time some of the.

The.

One time distributor purchases of inventory are going to go away. So there's going to be some natural.

Tailwind for us in terms of margins.

We expect that.

Working in the P&L in our budget model, our productivity slash cost savings of about $110 million. So we think it will be substantial and thats where were starting out the year, but we think theres, maybe even some upside to that and it's largely related to.

A couple of opposing forces youre dealing with inflation and some cost of things are still going up but at the same time some.

Some of those supply chain issues of working the other way, especially the higher prices that we paid on a onetime basis to some of the electronics distributors to continue shipping product.

Got it and then.

You have been adding capacity through 2022, I guess in the in the <unk>.

Capex.

Kind of growth versus maintenance or.

Whatever framework you want to use to discuss kind of.

How you're thinking about capacity additions.

<unk>.

We added a lot of capacity in 2022, we brought some low cost region facilities online we've talked about that.

For 2023.

We expect our capital expenditures to be flat.

A little bit more than 2% of sales as we've done historically so.

<unk>.

It's a good balance between.

Growth Capex.

Maintenance Capex and Capex funding cost reduction.

And if I could get one more in.

What is your expected EPS.

EPS contribution from <unk>.

Yes, I'm not going to breakout the deal, but there'll be slightly accretive.

Thank you very much okay. Thank you David.

And our next question today comes from Joe Giordano with Cowen. Please go ahead.

Yes.

You mentioned.

Customers kind of getting normalize on their behavior and their ordering patterns like can you maybe get a little bit finer point on that and like what youre seeing in our actual things getting pushed out or are they just bought.

Ordering more real time, yes, if you think about it from the customer's view.

They've kind of got to.

Trained by the pandemic.

Order things early and now most companies are getting including AMETEK is getting back to being able to deliver in lead time and in fact thats part of the reason that we grew our businesses at a faster rate during the pandemic period, we were able to ship and deliver and we had the inventory buffer.

So what's happening is as customers normalize there.

Buying patterns, they don't have to order early anymore.

And that's what's really happening.

I think across the broader supply chain and we're seeing that so thats. The main normalization that we're talking about.

And then when you mentioned the M&A pipeline looks good.

Do you think about.

Timing of execution, just given the macro year given it looks like industrial is getting light is getting weaker are.

Or are you relying on trailing 12.

Results that might be different in forward 12 acquired for a company that you are looking at so how does it impact your desire.

To be actionable right now given where we are in the business cycle.

AMETEK is historically bought through both up cycles and down cycles.

And sometimes you can get your best deals.

During a down cycle and you have to be cognizant of what the forward looking EBITDA is not not really the trailing but the forward. So.

It's something that we've been keenly aware of for years and we're focused on that.

Thanks, guys.

Thank you Joe.

And our next question today comes from Rob Mason.

Please go ahead.

Hi, Yes. Good morning, Good morning, Hi, Dave Good morning, good morning.

David I'm, just going to see if you could drill into the process segment, a little more you called out ultra precision.

Relative stronger growth does that carry forward into 'twenty three just in terms of what leads that part of the business.

And then just maybe higher level any way to.

But the mix of what that process segment.

That sales into more of an R&D function versus more of a production environment.

That's a good way to think about it and I'll try to put some more color on to that I mean.

If you look at 2022.

What stood out was our health care component.

In our health care component is a big part of process across all of AMETEK, It's about 15% of sales, but is a big part of process and I'll give you an idea in Q4, our raw <unk> business was up 20% organically. So they are really doing a good job in that market as a hospital spending has been fantastic for us and people were.

Putting in new systems.

<unk> pandemic.

The semiconductor market, it's about 6% of sales in the vast majority of that is in process.

The semiconductor market was up high single digits.

And the Q4 and we think.

2023, there will be a slight downtick there that'll be up low to mid but still growing because we have a lot of applications in.

Research and also end.

And the areas that are continuing to grow so we're in the right places and semiconductor so you've got health care you got semiconductor you got the research market, where we've had.

With our Kamika business just every lab in the world has to have one of our atom probes ever.

The lab in the World has to have some of our.

<unk> products. So their backlog is really good and theyre doing well.

And then you've got the oil all traditional oil and gas part of a process.

That's done.

Well in Q4, it was up high single digits.

And.

For all of 'twenty, two that was up low <unk> low double digits and for 'twenty, three we expect plus high single digits. So.

Process is going very well.

<unk>.

And we think it's going to continue in the future.

Excellent.

That's very helpful.

Just as a follow up could.

Could you speak to how you think the the Incrementals will look for.

<unk> <unk> versus EMG in 'twenty three they were.

<unk> was certainly very strong in 'twenty, two but just how did those look going forward compared to that good question.

In terms of Incrementals.

And both groups I think the core incrementals will be up 30% to 35%.

And I think.

Core and reported margins will be up 30 to 40 bps. So we really think we have a clear line of sight to grow margins again, and it will be healthy incrementals and we'll be able to increase our.

Core margins as we go forward.

Very good. Thank you. Thank you Rob.

And our next question today comes from Steve Barger of Keybanc capital markets. Please go ahead.

Hey, good morning, guys Hello, Steve.

Sure.

Some automation and robotics Oems have recently talked about distribution channel bottlenecks being a hindrance to growth can.

Can you just talk about what youre seeing in that market, both near term and expectations for how that market grows in the future.

Yes, I think.

Four.

2023.

We think that business will be up mid single digits and both our automation and our engineered solutions will be up mid single digits.

I think thats.

We're selling them, mainly OEM customers there.

So youre going to have a bit of the effect of the.

Ordering patterns of change in ordering patterns, there, but we have a really healthy backlog so.

It's really what we talked about customers are changing ordering patterns.

We're really good at delivery.

So we're meeting our customer commitments. So there are now ordering at normal lead time, so you'll see a little bit of the.

Corrections that we talked about in Q4, continuing but we still have a record backlog in and all the comments that I made hold for that part of the business also.

Got it thanks, and obviously semiconductor demand has been under pressure, especially on the memory side, Rob but you. Just said you are in the right places to grow yes does that mean, you supply youre supplying the makers of tools to go to foundry and logic or just how will you grow this year in context of what's a pretty tough.

Right right, it's pretty tough and again we.

We grew mid teens in 2022, so that growth for 2023 is up low to mid so.

Sure declined, but we're still growing and the reason we're growing the key application areas.

At our Kamika business. They are really involved in semiconductor research and development staying ahead in getting the next generation.

And we have some tools that are must haves for the semiconductor market and really strong backlogs and orders are continuing well.

And then the second area is we are in the <unk> optics area.

For use in semiconductor fabrication. So the EV market is kind of separate from the memory market and <unk>.

Really strong so those two areas are.

A good part of our semiconductor business and and they're really strong and Thats why we think we'll still be able to to grow low to mid single digits in the in an environment, where you have some of the headwinds.

That's great detail. Thank you okay. Thank you Steve.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Kevin Coleman for any closing remarks great.

Thank you again Rocco and thank you everyone for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the investors section of AMETEK Dot com have a great day.

Thank you ladies and gentlemen. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

[music].

Good day and welcome to the AMETEK fourth quarter 2022 earnings Conference call.

All participants will be in listen only mode.

Should you need assistance. Please signal conference specialist by pressing the star followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question here My first targeting one of a touchtone phone.

It's all of your questions. Please press Star then two.

Please note this event is being recorded.

Now I'd like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead Sir.

Thank you Rocco good morning, and thank you for joining us for Ametek's fourth quarter 2022 earnings Conference call.

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

During the course of today's call, we'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 or 'twenty two results or 2023 guidance will be on an adjusted basis.

Excluding after tax acquisition related intangible amortization.

Conciliations 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.

I am very pleased with ametek's results in the fourth quarter and for all of 2022.

Ametek's continued excellent performance reflects the quality of our niche differentiated businesses.

Ramp of the AMETEK growth model and the expanding impact of our organic growth initiatives and most importantly, the outstanding efforts of our global employees.

Thank you to all AMETEK colleagues for their many contributions to our success we have navigated many challenges over the last few years are only to emerge stronger and even better positioned for sustained growth.

Our results in the fourth quarter were outstanding.

Stronger than expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter.

We ended the year with a record backlog as demand remains solid across our diverse end markets.

Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence.

<unk> attractive growth markets.

Operationally, we're performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion.

Additionally, cash flow in the quarter was outstanding providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions.

Now onto the results for the fourth quarter and all of 2022.

Fourth quarter sales were 163 billion.

Up 8% over the same period in 2021.

Organic sales growth was 9%.

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

Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3 2 billion.

Operating income in the quarter was a record $398 million or.

A 10% increase over the fourth quarter of 2021.

Operating margins were 24, 5% in the quarter up 50 basis points from the prior year.

EBITDA in the quarter was a record $489 million up.

Up 12% over the prior year and EBITDA margins were an impressive 31%.

This outstanding operating performance led to record earnings of $1 52 per diluted share up 11% versus the fourth quarter of 2021 and above our guidance range of $1 45 to $1 47 per share.

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

First the electronic instruments group.

The electronic instruments group delivered continued strong sales growth and excellent operating performance.

Sales for AIG were a record $1 6 billion in the quarter up 10% from the fourth quarter of last year organic.

Organic sales were up 9% acquisitions added 3% and foreign currency was a three point headwind.

AIG AIG growth was broad based with particularly strong growth across our aerospace and defense and ultra precision technologies businesses in the quarter.

AIG is operating income in the fourth quarter was a record $307 million up 10% versus the prior year, while AIG margins were a very strong 26, 5% in the quarter.

The electromechanical group also finished the year with outstanding performance.

Amg's fourth quarter sales were $466 million up 4% versus the prior year with organic sales growing 8% and foreign currency, a three point headwind.

Growth was again broad based across AMG with our aerospace and defense business is leading the growth.

Emg's operating income in the fourth quarter was $115 million up 9% compared to the prior year period.

Amg's fourth quarter operating margins were 24, 6% up an impressive 100 basis points versus the prior year.

Now for the full year results.

Overall performance was outstanding in 2022, establishing annual records for essentially all key financial metrics.

Overall sales for the year were 615 billion.

By 11% from 2021.

Organic sales increased 11% acquisitions added 2% and foreign currency was a three point headwind.

Operating income for 2022 was $1 5 billion.

Up 15% and operating margins were 24, 4% up 80 basis points versus the prior year.

While core margins were up an impressive 130 basis points, reflecting our ability to successfully manage inflation and supply chain challenges.

EBITDA for the year was 183 billion.

Up 15% from 2021 with EBITDA margins, a very strong 29, 7% up 100 basis points from the prior year.

Full year earnings were $5 68 per diluted share up an impressive 17% versus the prior year.

Our businesses continue to leverage the key elements of the AMETEK growth model to accelerate global growth <unk>.

Develop innovative new products and identify and execute on operational efficiency improvements.

Additionally, our business has worked closely with our corporate development team to manage our acquisition pipeline.

<unk> and a continued strong deployment of capital on strategic acquisitions.

And 2021 and 2022 combined we deployed over $2 4 billion in capital on acquisitions and acquired over $600 million in annual sales.

We expect to remain active in 2023 is our deal pipeline remains very strong and our balance sheet provides us significant financial capacity to deploy capital.

In addition to our acquisition strategy, we remain convinced it.

Two investing in organic growth initiatives and are very pleased with the impact. These investments are having on ametek's growth.

As I highlighted during our last earnings call Ametek's portfolio add strategically evolved with increased exposure to higher growth market segments.

This portfolio evolution.

Has been driven by our acquisition strategy and by the organic investments, we're making in our businesses.

In 2023, we expect to invest an incremental $90 million in support of these growth initiatives, including investments across research development and engineering and sales and marketing.

One way we measure the success of these investments is through our vitality index, which was an outstanding 27% of sales in 2022.

Our increased investments in R&D and <unk> continued to yield innovative advanced technology solutions, including within our <unk> business.

<unk>, which is based in midfield, Connecticut.

<unk> designs and manufactures advanced optical metrology systems, and ultra precise optical components and assemblies for a diverse set of end markets, including defense research and semiconductor.

Yes.

Achieving these types of energy production required the use of highly precise optics and scalable manufacturing processes, which were developed in partnership with <unk>.

I want to congratulate the <unk> team for their tremendous contributions supporting an important advancements in research and technology.

Lastly, let me briefly touch on the supply chain issues and inflation.

While <unk> remains in certain areas, where youre seeing improvements in our global supply chain and logistics.

Additionally, although inflation remains elevated we are seeing we are also seeing modest improvements versus levels experienced in 2022.

As we look ahead to 2023, we will continue to proxy proactively manage our supply chain and remain confident in our ability to offset inflation with price increases.

Now shifting to our outlook for the year ahead.

While macroeconomic uncertainties remain we are confident in the quality of our businesses the flexibility of the AMETEK growth model and our ability to navigate through these uncertain times.

Additionally, given our record backlog and proven operating capability, we are confident in our outlook for 2023.

Our 2023, we expect both overall and organic sales to be up mid single digits versus 2022.

Diluted earnings per share for the year are expected to be in the range of $5 84 to $6 up 3% to 6% compared to last year's results.

For the first quarter, we anticipate overall sales up mid single digits with adjusted earnings of $1 38 of $1 38 to $1 42 up 4% to 7% versus the prior year.

In summary, ametek's fourth quarter and full year results were excellent our.

Our record backlog, the strength and flexibility of the AMETEK growth model and a world class workforce position us nicely for 2023.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we'll be glad to take your questions Bill.

Thank you, Dave as Dave highlighted AMETEK had a very strong fourth quarter to complete an outstanding year.

In the quarter, we delivered record level operating performance and a high quality of earnings.

Let me provide some additional financial highlights for the fourth quarter and for the full year, along with some additional guidance for 2023.

Fourth quarter General and administrative expenses were essentially flat versus the prior year and.

And for the full year general and administrative expenses were up $6 million driven largely by higher higher compensation costs.

And as a percentage of sales were one 5% versus one 6% of sales in 2021.

For 2023 general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately one 5% of sales.

<unk> tax rate in the fourth quarter was 18, 9% up from 17% in the fourth quarter of 2021.

Capital expenditures were $58 million in the fourth quarter and $139 million for the full year.

Capital expenditures in 2023 are expected to be approximately $140 million or about 2% of sales.

Depreciation and amortization expenses expense in the quarter was $89 million and for the full year was $320 million.

For the quarter operating working capital was 18, 9% of sales.

Cash flow in the fourth quarter was excellent with operating cash flow of $385 million up 37% versus the fourth quarter of 2021.

Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income.

Total debt at year end was $2 $3 9 billion down from 254 billion at the end of 2021.

Offsetting this debt is cash and cash equivalents of $345 million.

And during the fourth quarter, we deployed approximately $240 million on the acquisition of <unk> technologies.

Gross debt to EBITDA ratio at year end was one two times and our net debt to EBITDA ratio was one one times.

As Dave noted we remain active on the acquisition front with a solid pipeline of acquisition candidates.

Given our strong cash flow and modest levels of leverage we are well positioned to deploy additional capital we have approximately $2 $3 billion of cash and existing credit facilities to support our growth initiatives.

Kevin.

Thank you Bill Morocco could we please open the lines for questions.

Absolutely and as a reminder, ladies and gentlemen, if you'd like to ask a question. Please press Star then one to remove yourself from two please first start them to.

Today's first question comes from Allison <unk> with Wells Fargo. Please go ahead hi.

Hey, good morning, good morning Allison.

Can we turn organic investments the $90 million, if I recall I think thats a step down from what you did in 2002, just any color. There is it just some conservative nature, just given the uncertainty out there and they're unusual projects in 'twenty, two just any thoughts on that side.

Yes.

As to start out the year end.

There is there is a potential to do more in.

But the $90 million was a good number of incremental keep in mind incremental over what we've done.

In 2022, so it's incremental and we're making healthy investments in R&D <unk> is up double digits for the year and healthy investments at four.

Sales and marketing so we think the 90 million as appropriate.

And obviously that can be flexed up or down if required.

Great and then a lot of concern certainly out there about potentially some weakness showing up in <unk> just any thoughts on your on what Youre seeing in terms of that is there anything concerning or sort of popping out that kind of has you worried as we enter.

The back half of 'twenty and into 'twenty four.

Not really I mean.

Obviously, our growth is slowing slowing but.

Record backlogs and.

We're executing very well, we're getting the price.

And.

It still feels it still feels good to us it feels strong and good and when you get out to the second half of.

<unk> 23, I mean, there's less visibility because you're further out but our our backlog is at a record level. It's usually at about 30% of annual sales and right now it's running at about 50% of annual sales. So so we feel really good and.

We don't see a slowdown yet.

Perfect. Thank you okay. Thank you Allison.

And our next question comes from Deane Dray with RBC capital markets. Please go ahead. Thank you. Good morning, everyone. Good morning, Jane I was hoping you take us through the key end markets and then also on the regional updates.

Strong broad based growth across most geographies.

Our Asia region was flat on China headwinds.

And to your point, our fastest growing market was Europe Europe was up 12% with notable strength in both our process and aerospace defense markets.

And then we had a really strong performance in the U S up 10% organically.

Broad based strength notable strength in our process businesses and.

Asia.

We think that the.

The China situation is going to turnaround as the reopening occurs and we're pretty optimistic for it in the second half but.

That's the picture in Q4 really strong broad based growth strongest Europe second U S.

Most of Asia was really good in.

In China, there was some weakness.

Okay and the second question was on the market segments summary.

I'll take a walk around the company and our process area.

Our overall process businesses, they were up high single digits in the quarter.

Organic sales were up 10%.

But he also had the contributions from the acquisition of Navistar and it was offset.

By foreign currency headwinds.

And as we saw throughout.

Last year growth across our process businesses.

Was particularly with was broad based but it was particularly strong in our ultra precision technologies businesses in the quarter.

And as we look ahead to 2023.

We expect organic sales for our process businesses to be up mid single digits for the year.

Next I'll talk about aerospace and defense.

Our aerospace and defense businesses had a very strong finish to the year.

With overall and organic sales up mid teens.

So that was the strongest growth rate of the year for aerospace and defense.

Our commercial businesses led the growth in the quarter.

Sales of high teens on a percentage basis in the commercial business and defense was also strong in the quarter growing low double digits.

And for all of 2023, we expect organic sales for our aerospace and defense businesses to be up mid to high single digits with commercial aerospace growth expected to be modestly stronger than defense growth.

Our Mexico to power and industrial.

Overall sales for our power and industrial businesses were up high single digits in the fourth quarter.

Driven by mid single digit organic growth and the contributions from the acquisition of <unk>.

Growth in the quarter was particularly strong across our programmable power business.

For all of 2023.

We expect organic sales for our power and industrial business to be up mid single digits with similar growth across both the power and industrial segments.

And finally, I'll talk about our automation and engineered solutions.

Market segment.

And overall sales were up low single digits in the fourth quarter with.

Very solid mid single digit organic sales growth.

They had some currency headwind in that segment I was very pleased with the overall growth in the performance of automation and engineered solutions in 2022.

They are continuing to expand exposures in attractive niche markets.

In particular.

Our engineered medical components business saw strong growth in the quarter.

And in 2023, we expect organic sales for our automation and engineered solutions businesses to be up mid single digits.

Similar growth expected across both our automation and engineered solutions business.

That's a walk around the company Dean do you have any more questions. Yes, just as a follow up just how would you characterize the pace of orders.

Industrial demand.

The size of orders is just with respect to how normalization that might be happening for AMETEK businesses. That's a great question Deane, our overall orders were up one 5% in the quarter.

The overall demand environment and as I answered allison's questions feels really solid.

Our 10th straight.

Positive book to Bill quarter.

And we ended with an all time record backlog as I mentioned in the prepared remarks, and this level of backlog as I said was 50% of our annual sales well above the normal level of 30, and that's up 78% from the end of 2020.

So we're in a really strong position as we enter 2023.

To your question on some of the nuances of you'll recall over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth.

The first was the difficult comparisons we are facing.

Because those orders have been strong for an extended period of time to give some context over the prior nine quarters, our orders grew over 20% a quarter. So it's been sizable and sustained.

That helped build the backlog the second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns.

Now that the supply chain is improving and we started to see that dynamic play out in the fourth quarter.

So overall, we're comfortable with our order levels in Q4.

After starting off in January .

We just finished January we had another solid orders a month ahead of our expectations in <unk>.

Solidly up from January 2022 order levels.

Again, we're feeling pretty good with a strong backlog and our orders are hanging in there. So we think that.

We're looking at a pretty good year.

It's all really helpful. Thank you okay. Thank you Dave.

Our next question good it sounds from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning, all good morning, Brad.

Just wanted to come back to inventories some of your peers have been talking about some elevated inventory and some of the OEM channels.

Just curious what youre seeing there in some of your serve businesses served markets and if theres any.

Are you a concern there.

Yes.

The first point I'd like to make is that.

When youre looking at customer inventories.

A lot of our products are customized and.

They are high value products. So we don't really have a lot of distributor stocking issues to worry about.

That's particularly true in AIG and EMG Theres more of an OEM deal with our customer base, and Thats, where youre seeing a bit of the.

Customer ordering patterns normalize.

But.

Overall.

We think we've got a good handle on it and we feel pretty good about where we're at.

Okay, that's great.

Just shifting to the 2023 outlook I was hoping maybe you could put a finer point on.

Just just the underlying assumptions how much price do you expect versus volume.

And then anything specific on the quarterly phasing I mean do you think you get growth in both the first half second half or as you work down the backlog does it begin to decline there in the second half.

Yes, great question, I mean with our.

Budget model.

We pretty much have a traditional first quarter. So it is not really second half biased and we think we will grow in each of the quarters of the year in.

In terms of pricing in our budget model, we have about four points of price and we assume that we have about three five points of inflation. So we're going to offset price and inflation by about 50 basis points now that's down a bit from from.

2022, where we had about six points of price and we offset about five points of inflation, but.

The guide for the entire year, and we're being a bit conservative now and we'll probably start out a little better than that but.

That's our that's our plan for 2023.

Also in 2023 I mean in.

In addition to staying in front of inflation with price.

We think supply chain shortages are going to abate and we believe our working capital levels will decrease to more normalized levels. So a very healthy 110% to 115% conversion to net income on the.

Free cash flow.

We also think that.

In terms of vertical markets, we do expect our longer cycle aerospace and defense businesses to be a bit stronger than the balance of the portfolio. So on a 1% through the mortgage segment commentary on Dana was a little bit higher was had a mid to high outlook. So we think thats going to be true and that was accelerating as each quarter of 2022.

Really.

We expect the both of our groups to grow mid single digits, we talked about the historically strong backlog.

And.

That's some assumptions that went into our budget do you have any other questions.

No thats, a great quarter and I appreciate all the insight. Thank you Brent.

Thank you and our next questioner today is Scott Graham for loop. Please go ahead.

Hey, good morning, all and really congrats on that <unk>.

That's a pretty big deal.

That's really really interesting when you are really helping.

The team there did a great job and is working on fusion energy is a great thing and it just shows our capability.

Yeah for sure. Thank you.

The orders, Dave you said up one five in the quarter was that organic and can you also tell us the split by segment.

Yeah.

That was overall orders organic was down minus two.

And so overall orders were up one 5% organic was minus two.

Both segments were about at that same one one book to Bill So it wasn't.

Distinct difference between the segments and as I said, our overall demand environment feels solid.

10th straight quarter of book to Bill So we have a strong backlog in.

As we have this dynamic of customers returning to more normalized ordering patterns.

We have a strong backlog so so.

I feel pretty good about it.

Okay.

Great. Thank you.

Based on your answer to the prior question is it possible then that.

Sales volumes could sort of flattened out in the second half of the year and your growth organic is essentially all price.

What youre thinking cadence wise.

Yes.

I don't think in the second half of the year, we're going to have some healthy price, but I think it's going to actually increase a bit in the second half and the.

If you think about.

Order rates, we are in that mid single digit.

Sales growth forecasted we think we're going to grow orders also so orders are going to grow a little bit less than sales as our forecast, but theyre going to grow.

And really by the end of the year, our backlog is still going to be at elevated levels. It will be down a bit but at elevated levels. Historically so so.

We clearly don't with our strong backlog, which will provide a buffer if there is some kind of downturn, we don't see it right now in our orders orders will be up will just be up a little less in sales and again at the end of the end of 2023 with historically elevated levels of backlog similar to now.

Yep, Great Hey, thank you.

Scott.

And ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press Star then one.

Next question comes from Matt Summerville with D. A Davidson. Please go ahead.

Hi, Good morning. This is bill jellison on for Matt Summerville today, Hello, Good morning.

I was curious about your recent acquisitions of maritime RTD.

Just about your first observations with those with those companies as part of the AMETEK portfolio, how did things unfold relative to expectations and how are things going with with many of them yes.

Yes, there are going very well I mean, bill and I have met with both of the acquisition integration teams and really positive.

Sure.

You recap a little bit Rts provides real time power simulations used by utilities and.

Various strategic acquisition that broadens our power instruments.

<unk> with differentiated testing and measurement and simulation capabilities.

So it's an attractive position in the high growth.

<unk>.

Really good team.

Experts in the field and <unk>.

It's kind of fun interacting with them and they are really adopting AMETEK and feel good about that one same with navistar and avatars and some good growth markets.

The optics market is doing quite well with us.

And even in the semiconductor space, where they play their main customer is.

One <unk>.

Very differentiated and has unique capabilities. So so that along with life sciences, along with along with our machine vision.

There is a very good outlook, there and that business is a little bit different is being integrated into our <unk> business, so and as new capability for <unk>.

Much needed capacity for <unk> and the integration is going very well.

Great. Thank you and then as a follow up staying on the theme of M&A. You mentioned your pipeline is very strong at this juncture and I'm curious about what's your observations are in the market overall with respect to the level of competition for assets and and where multiples seem to be moving in your observation.

Alright.

Yes, I think with the.

The interest rates are increasing.

And with the money not as <unk> as it was.

It's actually an advantage to us so so.

We have a good pipeline and.

A good balance sheet.

And we remain very active with a solid pipeline of deals that valuations have come in a bit.

Of course, we're looking at some quality assets, though so there is still a bit elevated from historical levels, but no doubt they've come in.

And important for us and our pipeline, we have a very disciplined acquisition process and these deals were going to meet our traditional financial hurdles, which is primarily.

Our return on invested capital of 10% by the third year of ownership.

These are important thresholds for us as we want to ensure we're providing a strong level returns on the capital we deploy for our shareholders.

That's been a hallmark of Ametek's acquisition program for a long period of time we.

We do this all with cash and debt don't use equity.

There is a bigger pipeline right now than it has been historically because.

When there is less so.

Less money around the system to to bid up deals. So we felt pretty good with where we're at.

And if we do something and I believe we will be talking to you about deals in the near future.

They're going to be they're going to meet all of our traditional hurdles and we're committed to have investment grade credit rating and we got plenty of about $2 3 billion of capital and financing capacity available. So so in this in this environment. Our discipline is going to be a key word as it's always been for AMETEK.

Key in terms of executing our forward looking M&A strategy.

That's great. Thank you for taking my questions. Okay.

And our next question comes from.

Andrew.

Bank of America Merrill Lynch. Please go ahead.

Hi, This is David Ridley Lane on for Andrew Open Hi, David.

Good morning.

Yeah.

How much of the one time cost around supply chain disruptions last year, the higher freight costs.

Spot buys and electronics all of those things fall off in 2023, I'm guess I'm wondering is this a meaningful tailwind.

And kind of your forecast.

I think thats, what youre going to see there is still an elevated level of inflation.

But at the same time some of the.

The one time distributor purchases of inventory are going to go away. So there's going to be some natural <unk>.

Tailwind for us in terms of margins.

We expect that.

Working in the P&L in our budget model, our productivity slash cost savings of about $110 million. So we think it'll be substantial and thats where were starting out the year, but we think theres, maybe even some upside to that and it's largely related to a couple of opposing forces youre dealing with inflation and some cost of things are still going.

Up but at the same time.

Some of the supply chain issues of working the other way, especially the higher prices that we paid on a onetime basis to some of the electronics distributors to continue shipping product.

Got it and then.

You have been adding capacity through 2022.

I guess in the in the Capex whats kind of growth versus maintenance or whatever framework, you want to use to discuss kind of.

How youre thinking about capacity additions.

We added a lot of capacity in 2022, we brought some low cost region facilities online we've talked about that.

For 2023, we expect our capital expenditures to be flat.

A little bit more than 2% of sales as we've done historically so.

And.

It's a good balance between.

Growth Capex.

Maintenance Capex and Capex funding cost reduction.

And if I could get one more in.

What is your expected.

EPS contribution from an avatar in our TTS.

Yes, I'm not going to break out the deals, but there'll be slightly accretive.

Thank you very much okay. Thank you David.

And our next question today comes from Joe Giordano with Cowen. Please go ahead.

You mentioned.

Customers kind of getting normalize on their behavior and their ordering patterns like can you maybe get a little bit finer point on that and like what you are seeing in our actual things getting pushed out or are they just.

Ordering more real time, yes, if you think about it from the customers view this.

They've kind of got.

Trained by the pandemic to order things early.

And.

Now most companies are getting including AMETEK is getting back to being able to deliver in lead time and in fact thats part of the reason that we grew our businesses at a faster rate during the pandemic period, we were able to ship and deliver and we had the inventory buffer.

So what's happening is as customers normalize there.

Buying patterns and they don't have to order early anymore.

That's what's really happening.

I think across the broader supply chain and we're seeing that so thats. The main normalization that we're talking about.

And then when you mentioned the M&A pipeline looks good.

Do you think about.

I'm being of execution, just given the macro year given it looks like industrial is getting light is getting weaker.

Are you relying on trailing 12.

That might be different in forward 12 for its acquired companies that youre looking at so how does it impact your desire.

To be actionable right now given where we are in the business cycle.

AMETEK is historically bought through both up cycles and down cycles.

And sometimes you can get your best deals.

During a down cycle and you have to be cognizant of what the forward looking EBITDA is not not really the trailing but the forward. So it's.

It's something that we've been keenly aware of for years.

Our focus on that.

Thanks, guys.

Thank you Joe.

And our next question comes from Rob Mason of Baird. Please go ahead.

Hi, Yes. Good morning, Good morning, Hi, Dave Good morning, good morning.

David just going to see if you could drill into the process segment, a little more you called out ultra precision.

With relatively stronger growth does that carry forward into 'twenty three just in terms of what leads that part of the business.

And then just maybe higher level any way to.

The mix of what that process segment.

That sales into more of an R&D function versus more of a production environment.

Yes, that's a good way to think about it and I'll try to put some more color into that.

If you look at 2022.

What stood out was our health care component.

In our health care component is a big part of process across all of AMETEK, It's about 15% of sales, but is a big part of process and I'll give you an idea in Q4, our rolland business was up 20% organically. So they've really done a good job in that market as a hospital spending has been fantastic for us and people were.

Putting in new systems.

<unk> pandemic.

The semiconductor market, it's about 6% of sales in the vast majority of that is in process.

The semiconductor market was up high single digits.

And the Q4 and we think.

2023, there will be a slight downtick there that'll be up low to mid but still growing because we have a lot of applications in.

Research and also in.

In the areas that are continuing to grow so we're in the right places and semiconductor so you've got health care, you've got semiconductor you got the research market, where we've had.

With our Kamika business just every lab in the World has to have one of our atom probes every lab in the world has to have some of our.

<unk> product. So your backlog is really good and theyre doing well.

And then you've got the oil all traditional oil and gas part of our process.

That's on <unk>.

Well in Q4, it was up high single digits.

And.

For all of 'twenty, two that was up low <unk> low double digits and for 'twenty, three we expect top plus high single digits. So.

Process is going very well.

Sure.

And we think it is going to continue in the future.

Excellent that's very helpful.

Just as a follow up could.

Could you speak to how you think the the Incrementals will look for.

<unk> <unk> versus EMG in 'twenty three they were.

EMG was certainly very strong in 'twenty two.

How do those look going forward compared to that good question.

In terms of Incrementals.

And both groups I think the core incrementals will be up 30% to 35%.

And I think.

Core and reported margins will be up 30 to 40 bps. So we really think we have a clear line of sight to grow margins again, and it will be healthy incrementals and we'll be able to increase our.

Core margins as we go forward.

Great. Good. Thank you. Thank you Rob.

And our next question today comes from Steve Barger of Keybanc capital markets. Please go ahead.

Hey, good morning, guys Hello, Steve.

Sure.

Some automation and robotics Oems have recently talked about distribution channel bottlenecks being a hindrance to growth can.

Can you just talk about what youre seeing in that market, both near term and expectations for how that market grows in the future.

Yes, I think.

Four.

2023.

We think that business will be up mid single digits and both our automation and our engineered solutions will be up mid single digits.

I think thats.

We're selling them, mainly OEM customers there.

So youre going to have a bit of the effect of the.

Ordering patterns of change in ordering patterns, there, but we have a really healthy backlog so.

It's really what we talked about customers are changing ordering patterns.

We're really good at delivery.

So we're meeting our customer commitments. So there are now ordering at normal lead time, so you'll see a little bit of the.

Corrections that we talked about in Q4, continuing but we still have a record backlog in and all the comments that I made hold for that part of the business also.

Got it thanks, Ed and obviously semiconductor demand has been under pressure, especially on the memory side, Rob but you. Just said you are in the right places to grow yes, let me new supply you are supplying the makers of tools that go to foundry and logic or just how will you grow this year context of what's a pretty tough.

Right right, it's pretty tough and again, we we.

We grew mid teens in 2022, so that growth for 2023 is up low to mid so it's a substantial decline, but we're still growing and the reason we're growing I think the key application areas.

At our Kamika business. They are really involved in semiconductor research and development and staying ahead in getting the next generation.

And we have some tools that are must haves for the semiconductor market and really strong backlogs and orders are continuing well.

And then the second area is were in the <unk> optics area.

For use in semiconductor fabrication, so the EU market as kind of separate from the memory market and <unk>.

Really strong so those two areas are.

A good part of our semiconductor business and they're really strong and Thats why we think we'll still be able to to grow low to mid single digits in the in an environment, where you have some of the headwinds.

That's great detail. Thank you okay. Thank you Steve.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Kevin Coleman for any closing remarks great.

Great. Thank you again, Rocco and thank you everyone for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the investors section of AMETEK Dot com have a great day.

Thank you ladies and gentlemen, this concludes today's conference call.

Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Q4 2022 AMETEK Inc Earnings Call

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