Q2 2024 AMETEK Inc Earnings Call

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 risk 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, 2023 or 2024 results?

Reconciliations between GAAP and adjusted measures can be found in our press release and on the investor section of our website. We'll begin today's call with prepared remarks and then we'll open it up for questions. I'll now turn the meeting over to Dave.

Kevin Coleman: These cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results. Containing in Ametek's filings with the S.C. Ametek disclaims any intention or obligation to update or revise any forward-looking statement. Any references made on this call to 2023 or 2024 results? Our 2024 guidance will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding a pre-tax $29.2 million or $0.10 diluted share charge in the first quarter for integration costs related to the Paragon Medical Act.

Kevin Coleman: Reconciliations between GAP and adjusted measures can be found in our press release and on the investor section of our website. We'll begin today's call with prepared remarks, and then we'll open it up for questions. I'll now turn the meeting over to Dave.

Dave: Thank you, Kevin, and good morning, everyone. Ametek delivered solid results with strong operating performance in the second quarter against the backdrop of more subdued global growth. In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base, leading to lower than expected sales volume. Additionally, we are seeing signs of customers turning more cautious, leading to some temporary delays in project spend. Despite these headwinds, our businesses delivered strong operating performance in the quarter.

Dave: In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base, leading to lower than expected sales volumes.

Dave: Despite these headwinds, our businesses delivered strong operating performance in the quarter with solid growth in cash flow and earnings and robust core margin expansion reflecting the strength and flexibility of the Ametek operating model.

Dave: Ametek saw its growth in cash flow and earnings and robust core margin expansion reflect the strength and flexibility of the Ametek operating system. We expect the inventory de-stocking and more cautious customer behavior to continue in the back half of the year. As a result, we are adjusting our outlook for the remainder of the year. We remain confident in our ability to successfully navigate these near-term headwinds.

Dave: We expect the inventory de-stocking and more cautious customer behavior to continue in the back half of the year.

Dave: As we've done in the past, we will expand our focus on operational efficiency, continue to invest back in our business, and utilize our strong balance sheet to deploy capital on strategic acquisitions and ensure we position Ametek for continued growth in the long term. Now let me turn to our second quarter financial results. Sales in the quarter. Sales in the second quarter were $1.73 billion, up 5% from the same period in 2020. Organic sales were down 2%, acquisitions added eight points in the quarter, and foreign currency was a slight headwind.

Dave: Ametek's operational performance in the quarter was excellent, with a robust margin of. Operating income in the quarter was a record $448 million, a 7% increase over the second quarter of 2020. Operating margins were 25.8 percent in the quarter, about 40 basis points from the prior year.

Speaker Change: Ametek's operational performance in the quarter was excellent with robust margin expansion.

Dave: Excluding the dilutive impact from acquisition, core margins were up a sizable 180 basis points in the quarter. EBITDA in the quarter was a record, $545 million, up 10% over the prior year, with EBITDA margins at an oppressive 31.4%. Cash Flow in the Quarter was excellent, reflecting our operating capability and asset-light business. Operating cash flow in the quarter was up 14% to $381 million, with free cash flow up 17% and free cash flow conversion of 107%.

Speaker Change: EBITDA in the quarter was a record, $545 million, up 10% over the prior year, with EBITDA margins

Speaker Change: Cash flow in the quarter was excellent, reflecting our operating capability and asset-light business model.

Speaker Change: Operating cash flow in the quarter was up 14% to $381 million, with free cash flow up 17% and free cash flow conversion of 107%.

Dave: This operating performance led to earnings of $1.66 per diluted share, up 6% versus the second quarter of 2023 and above our guidance range of $1.63 to $1.65 per share. Now, I'm going to provide some additional details about the operating group. First, the electronic... EIG delivered strong operating performance with outstanding margins. EIG sales were $1.15 billion, a 2% increase from the second quarter of last year. Organic sales were flat, and acquisitions contributed.

Speaker Change: This operating performance led to earnings of $1.66 per diluted share, up 6% versus the second quarter of 2023, and above our guidance range of $1.63 to $1.65 per share.

Speaker Change: Now I'm going to provide some additional details of the operating group level.

Speaker Change: First, the Electronic Instruments Group.

Speaker Change: EIG delivered strong operating performance with outstanding margin expansion.

Speaker Change: EIG sales were $1.15 billion, a 2% increase from the second quarter of last year.

Dave: Growth was strongest within our aerospace and defense and Comica businesses. EIG operating income was $350 million, up 14% versus the prior year, and operating margins were at 30.3%, up 320 basis points from the prior year. Our EIG businesses are operating at a very high level with excellent operating performance. They remain well-positioned to benefit from a number of important long-term secular growth drivers, given their increasing exposures to attractive markets across process, aerospace, power, and energy.

Speaker Change: Organic sales were flat and acquisitions contributed two points.

Speaker Change: Growth was strongest within our Aerospace and Defense and Comica businesses in the quarter.

Speaker Change: EIG operating income was $350 million, up 14% versus the prior year, and operating margins were at 30.3%, up 320 basis points from the prior year.

Dave: The Electromechanical Group continues to navigate the impacts of inventory normalization across our automation and engineering solutions. In the quarter, EMG sales were a record $581 million, a 14% increase compared to the prior year, driven by contributions from the acquisition of Paragon Medical Services. However, organic sales declined 6% due to weakness in our automation and engineered solutions.

Speaker Change: The Electromechanical Group continues to navigate the impacts of the inventory normalization across our automation and engineered solutions businesses.

Speaker Change: Organic sales declined 6% due to weakness in our automation and engineered solutions businesses, more than offsetting solid growth across our EMG aerospace and defense businesses.

Dave: More than offsetting solid growth across our EMG aerospace and defense business, acquisitions contributed 20%. Operating income for the second quarter was $123 million, with operating margins at 21.2%, while core operating income margins were 25%. As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory built up during the supply chain crisis. Well, as we had expected to see, conditions should improve in the second half of the year.

Speaker Change: Acquisitions contributed 20% in the quarter.

Dave: We now believe demand within this OEM customer base will remain subdued at current levels through the end of 2020. This inventory normalization is also impacting our medical OEM businesses, including Paragon Medical, leading to near-term delays and orders. Paragon remains very well-positioned for strong growth once the inventory correction is complete, given its leadership position across a number of high-growth med-tech markets. Additionally, Paragon has won a number of new programs that we're currently investing in, which will drive incremental growth in 2025.

Speaker Change: As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory built up during the supply chain crisis.

Speaker Change: Paragon remains very well positioned for strong growth once the inventory correction is complete, given their leadership position across a number of high-growth MedTech market segments.

Speaker Change: Additionally, Paragon has won a number of new programs they are currently investing in, which will drive incremental growth in 2025 and beyond.

Dave: As we noted last quarter, we are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success. As the volumes return following these talks, we believe the business will be leveraged to deliver outstanding sales growth and profit.

Speaker Change: As we noted last quarter, we are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success.

Dave: In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion. We continue to generate strong cash flow with 17% free cash flow growth in the quarter. And for the full year, we expect free cash flow to net income conversion to be between 110% and 125%. The strength of Ametek's operational excellence strategy is evident in our operating results.

Speaker Change: In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion in the quarter.

Ametek: The strength of Ametek's operational excellence strategy is evident in our operating results. We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OPEX initiatives. This year we now expect to generate $140 million in savings.

Dave: We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OPEX, and this year, we now expect to generate $140 million. We also remain committed to investing back into our businesses, and this year, we expect to invest an incremental $90 million in, largely focused on research, development, and engineering and sales and marketing. The effectiveness of these investments is reflected in our vitality, which was a strong 24%. Additionally, our strong free cash flow and flexible balance provide us with ample financial capacity for strategic acquisitions. Our pipeline of acquisition opportunities remains strong.

Ametek: Largely focused on research, development, engineering, and sales and marketing. The effectiveness of these investments is reflected in our Vitality Index, which was a strong 24% in the quarter.

Ametek: Additionally, our strong free cash flow and flexible balance sheet provides us with ample financial capacity for strategic acquisitions.

Dave: Ametek is very well positioned to continue to expand our portfolio of highly differentiated businesses, through both our organic growth investments and our acquisitions strategy. Turning to our Outlook for the remainder of the year, with de-stocking expected to continue through the balance of the year, and some customers turning more cautious on project spending. We are adjusting our sales and earnings guidance for the. Overall sales are now expected to be up 5 to 7% versus the prior year, with organic sales expected to be flat to down.

Ametek: Now.

Ametek: Turning to our outlook for the remainder of the year.

Ametek: With destocking expected to continue through the balance of the year and some customers turning more cautious on project spending, we are adjusting our sales and earnings guidance for the full year.

Ametek: Overall sales are now expected to be up 5-7% versus the prior year, with organic sales expected to be flat to down low single digits.

Dave: Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80, up 5% to 7% compared to last year. This is less than a 1% reduction from our prior earnings guidance range of $6.74.

Ametek: Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80, up 5-7% compared to last year's results.

Ametek: This is less than a 1% reduction from our prior earnings guidance range of...

Dave: $6.86 as our proactive productivity actions, along with a lower expected fourth quarter tax rate, help offset the impact of the reduced sales. This guidance reflects second half sales and operating earnings essentially in line with our first half results. For the third quarter, we anticipate overall sales to be up mid-single digits with earnings in the range of $1.60 to $1.62 per share, down 1-2% versus their prior year.

Ametek: $6.74 to $6.86 as our proactive productivity actions along with a lower expected fourth quarter tax rate help offset the impact of the reduced sales forecast.

Dalip Puri: In summary, we are pleased with our business's strong operating performance in the last. We have a proven operating model and experienced management, and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long-term results. I will now turn it over to Dalip Puri, who will cover some of the financial details of the quarter. Then, we will be glad to take her call. Thank you, Dave, and good morning, everyone.

Ametek: In summary, we are pleased with our business' strong operating performance in the second quarter.

Ametek: We have a proven operating model and an experienced management team and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long-term results.

Dalip Puri: As Dave noted, Ametek had a solid second quarter, with excellent operating performance leading to outstanding margin expansion and strong cash. Now, let me provide some additional financial highlights for this section. Second quarter general and administrative expenses were $25 million, or 1.5% of sales, in line with last year's budget. For fiscal year 2024, general and administrative expenses are expected to be approximately $1.5 billion. Second quarter interest expense was $31 million.

Ametek: For fiscal year 2024, general and administrative expenses are expected to be approximately 1.5% of sales.

Dalip Puri: Up $12 million from the second quarter of 2023 due to higher debt balances following the acquisition of Paragon Medical. The second quarter other expense was down approximately $4 million versus the prior quarter, due largely to higher pension income and higher investment. The effective tax rate was $19, up from 18.2% in the second quarter of 2020.

Ametek: Second quarter interest expense was $31 million, up $12 million from the second quarter of 2023 due to higher debt balances following the acquisition of Paragon Medical in December .

Ametek: Second quarter other expense was down approximately $4 million versus the prior period, due largely to higher pension income and higher investment income in the quarter.

Dalip Puri: For 2024, we now expect our effective tax rate to be between 17 and 18 percent, driven by a lower fourth-quarter tax rate due to statute expiration. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from the full year. Capital expenditures in the second quarter were $21 million, or $150 million for the full year, or about 2%. The appreciation and amortization expense in the quarter was $99,000.

Ametek: As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from the full year estimated rate.

Ametek: Capital expenditures in the second quarter were $21 million, and we expect capital expenditures to be approximately $150 million for the full year, or about 2% of sales.

Ametek: Depreciation and amortization expense in the quarter was $99 million.

Dalip Puri: In 2024, we expect depreciation and amortization to be approximately $400,000. This includes after-tax, acquisition-related, intangible amortization or $0.82 per dilution. Operating working capital in the second quarter was $18.6 billion. Operating cash, up 14% versus the second quarter. While free cash flow was $360 million, up 17% over the prior year. For the quarter, free cash flow conversion was a strong $107 million

Ametek: In 2024, we expect appreciation and amortization to be approximately $400 million. This includes after-tax, acquisition-related intangible amortization of approximately $190 million, or $0.82 per diluted share.

Ametek: Operating cash flow was $381 million, up 14% versus the second quarter of 2023.

Ametek: For the quarter, free cash flow conversion was a strong 107% of net income.

Dalip Puri: For the full year, we continue to expect strong free cash flow conversion. Unknown Executive, Scott Graham, Michael Anastasiou, Dalip Puri, Ametek, Michael Anastasiou, Dalip. Total debt at June 30th was $2.65 million, down from $3.3 billion. Offsetting this debt is cash and cash equivalents. At the end of the second quarter, our gross debt-to-EBITDA ratio was 1.0, and our net debt-to-EBITDA ratio was 1.0. We have significant financial capacity and flexibility with $2.2 billion of cash and available credit facilities. [inaudible] Summary Ametek had a solid second quarter of 20.

Ametek: For the full year, we continue to expect strong free cash flow conversion in the range of 110 and 120% of net income.

Ametek: Total debt at June 30th was $2.65 billion, down from $3.3 billion at the end of 2023.

Ametek: Offsetting this debt is cash and cash equivalent of $397 million.

Ametek: At the end of the second quarter, our gross debt to EBITDA ratio was 1.2 times.

Ametek: And our net debt to EBITDA ratio was one times.

Dalip Puri: Delivering Strong Results with Robust Margin Expansion and Leading Positions across attractive market segments. Combined with our strong balance sheet and outstanding operating capability, we are well positioned to navigate the current environment and deliver on our. Thank you, Dalip.

Ametek: In summary, Ametek had a solid second quarter of 2024, delivering strong results with robust margin expansion and excellent free cash flows.

Meg: Meg, could we please open the lines for questions? Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via the loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.

Speaker Change: Thank you. The floor is now open for questions.

Matt Summerville: Your first question comes from the line of Matt Summerville with D. A. Davidson. Please go ahead. Thanks, morning. A couple of questions. First, Dave, you seemed pretty convinced a quarter ago that the de-stocking phenomenon would sort of wrap itself up by mid-year. So I guess, relative to 90 days ago, can you maybe talk a little bit about what's changed, what gives you confidence that we're only in for another six months of this, and then maybe touch on what end markets and businesses are starting to be impacted by some of the project delays? Yeah, our outlook for the year has changed. And as we noted in my prepared remarks, we now expect.

Dave: The improvements in the second half of the year are not going to happen as originally anticipated, and we talked about that earlier in the year. We now expect our Sales and Operating Performance in the second half will be similar to the growth. Sales and Operating Performers in the First Half. So we're not going to see increases that we had anticipated.

Speaker Change: Thanks. Good morning. A couple of questions. First, Dave.

Speaker Change: What's what's changed? What gives you confidence that we're only in for another six months of this and then maybe touch on What end markets and businesses are starting to be impacted by some of the project delays you referenced and then I have a follow-up Thank you

Dave: And this change results in about a 4-Point Reduction in our Sales Outlook, and, You know, to your question, where is it coming from? Roughly three points of this reduction are from our automation and engineering solutions subset, which is the business that we talked about being exposed to the OEM just talking. And within that area.

Dave: We have two points of reduction tied to our automation business and one point from Paragon. That makes up about three to four points of reduction in our output across our EIG businesses. We expect about one point of lower sales due to short-term projects, and we're seeing customers are being just a bit more cautious given the cumulative impact of a wide range of economic, political, and geopolitical factors. We feel these are temporary delays. Our new funnel pipelines remain very solid.

Speaker Change: Yeah, our outlook for the year has changed. And as we noted in my prepared remarks, we now expect

Speaker Change: The improvements in the second half of the year are not going to happen as originally.

Dave: Projects are not being canceled; they're being delayed. And given the expected lower sales, we reduced our earnings guidance by about a nickel at the midpoint. You know, another couple points. I mean, we're really doing a good job running the company for reflection. When you take that sales decrease, it reflects about a 20%... Sacramento margin on the expected lower sales, And as Dalip mentioned, the tax rate. Lowering Q4.

Dave: So I'm pleased with how the team is managing through these temporary demand changes. You know, I'm confident that we're positioned to accelerate Accelerated Profit Growth when the economic conditions change. I think the. To your point, we missed the timing of the recovery, and the inventory corrections will take a bit longer. As Ametek does, we're adapting to the current situation, and we're going to manage our businesses accordingly. And, as I said, I'm really pleased how the team responded to this. You know, 20% decrements to the volume. No, thanks, David. I would definitely agree on the deck.

Dave: Can you also, I think probably from a timing standpoint, Nicole, can you kind of go ahead and do the around the horn you typically do across the business? How Expectations Have Kind of Changed in Some of the Subverters As noted in my prepared remarks, we've seen customers, as we just talked about, turn more cautious, and that business was up mid-single digits in the quarter. Next, I'll move to our power and industrial businesses, and overall sales for our power and industrial businesses. We're up mid single digits in the second quarter, and for all the 24, we now expect organic sales for our processed and industrial businesses to be flat.

Dave: And as a result, we expect organic sales for our automation engineer solution. Macro. Are they having trouble getting financing? Is it election worries?

Speaker Change: Sales and Operating Performance in the first half, so we're not going to see the increases that we had anticipated. And this change results in about a...

Speaker Change: Four point reduction in our sales outlook.

Speaker Change: We expect about one point of lower sales due to short-term project delays.

Speaker Change: And there, we're seeing customers are being...

Speaker Change: Just a bit more cautious given the cumulative impact of a wide range of economic, political, and geopolitical factors, but we feel these are temporary delays.

Speaker Change: When you take that sales decrease, it reflects about a 20 percent

Speaker Change: Check our amount of margin on the expected lower sales.

Speaker Change: To your point, we missed the timing of the recovery.

Speaker Change: And the inventory corrections will take a bit longer.

Speaker Change: As Ametek does, we're adapting to the current situation and we're going to manage our businesses appropriately. And as I said, I'm really pleased how the team responded with 20% decrementals to the volume change.

Matt: Sure, Matt.

Matt: As noted in my prepared remarks, we've seen customers, as we just talked about, turn more cautious.

Speaker Change: We expect this to continue as a second half as we discussed.

Speaker Change: And we expect our process businesses to be flat to up those single digits versus a prior year.

Speaker Change: Then I'll move to Aerospace and Defense, and that business was up mid-single digits in the quarter.

Speaker Change: Growth was strongest across our commercial aerospace businesses, while defense experienced some shipment delays in the quarter.

Speaker Change: For the full year we continue to expect strong high single-digit organic sales growth for our A&E business with similar growth across both our commercial and defense businesses.

Speaker Change: And overall sales for our power and industrial businesses were up mid-single digits in the second quarter, with contributions from recent acquisitions being offset by a low single-digit decrease in organic sales.

Speaker Change: Delaying some projects due to broader macro uncertainties.

Speaker Change: And for all the 24, we now expect organic sales for our processed and industrial businesses to be flat compared to 2023.

Speaker Change: And finally, our final segment, Automation and Engineering Solutions.

Speaker Change: This was driven by the contributions from the acquisition of Paragon Medical.

Speaker Change: Due to the continued normalization of inventory levels across our OEM customer base.

Speaker Change: We expect to see improvements in return of growth as we talked about in the second half of the year. And as we just mentioned, that's not going to happen. Inventory normalization is going to continue through the end of the year.

Speaker Change: And as a result, we expect organic sales for our automation engineer solution businesses to be down mid-single digits for the full year.

Speaker Change: Again, if you would like to ask a question, press star 1 on your telephone keypad.

Speaker Change: Hey Dave, I'd like to pick up where you left off with Matt and just some more color on the customers kind of sentiment here and the delays in project spending. What kind of

Dave: Any kind of way that you could characterize and frame for us about, around the world, it's the. It's the wars; it's just a lot of things that are, you know. The thing that is different than some other downturns... There may be some delays in phasing in some new products. Maybe it's taken longer to get the financing, although that's not the primary feedback we're getting, but I think it's just...differentiated components and subsystems to people that are typically, you know, smaller dollar amounts. And when people bought inventory because we're very specialized, and they wanted to keep shipping their products, and now we're just dealing with a destocking process that's just taking a little longer than we So that's pretty familiar to me.

Speaker Change: Reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries? Any kind of way that you could characterize and frame for us about this degree of cautiousness?

Dave: I think the

Dave: and they're going further up the sign-off chain to get sign-offs. These are typically, they're not even large projects and you see those resulting in delays. I think it's a culmination of the

Dave: Elections in the U.S. you know I think two-thirds of the world's have elections this year so it's elections

Dave: around the world. It's the

Dave: You know some financing related to to the higher interest rate higher inflations. I mean, it's

Dave: It's just a lot of things that they're combining to affect people's decisions and they're just delaying a bit. I mean, the thing that is different than some other downturns is we still have very strong pipelines of new activity.

Dave: So I, you know, thinking about past downturns, I've been through a bunch of these.

Dave: I don't think there's been any where we have a strong...

Dave: new activity pipeline from our customers. So the projects aren't being cancelled, you know, they're

Dave: There may be some delays in phasing some new products in, and maybe it's taken longer to get to financing, although that's not the primary feedback we're getting, but I think it's this broader macro issue that's honestly a bit of a smaller issue for us.

Dave: The bigger issue is the OAMD stock. So I think we had the pandemic and

Dave: And then we had the supply chain crisis and...

Dave: We're selling in our automation and engineer solutions businesses differentiated components and subsystems to people that are typically smaller dollar value amounts to the...

Speaker Change: Yeah, David, that's really helpful. I love the way you characterized it because

Speaker Change: In slowing, that's one of the first things you see customers do is they kind of delay the spending or approvals. And so that's pretty familiar. Do you have any sense that it's snowballing from here? Does it get like as a quarter progress? Did those type of behaviors increase?

Dave: Do you have any sense that it's snowballing from here? Yeah, I think the monthly cadence in both sales and orders was our typical monthly cadence. So otherwise, we typically stair step through a quarter with the first month being the lowest and the second month, Okay. All right, just last question on the de-stocking. And when we look back on this period, that's been the biggest surprise and how long it has been. How are they, what's their visibility like?

Speaker Change: Yeah, I think the monthly cadence in both sales and orders was our typical monthly cadence. So otherwise, we typically stair-step through a quarter with the first month being the lowest and the second month being the lowest.

Speaker Change: Got it. All right, just last question on the destocking and when we look back on this period, that's been the biggest surprise and how long it has persisted and you're not by far the only one. We've seen this everywhere. Anyone that has anything to do with medical or life sciences

Speaker Change: Supply Chain. It has just taken more than 2x longer than anyone thought. And just the question is for Paragon.

Dave: You said they, you know, a percent of the point was from their D-stock. Right. What's their visibility, you know, versus your comparison of the rest of Ametek businesses? Where do they fit in? Yeah, because, you know, Paragon's, you know, mainly in one end market, and they're talking to their customers daily. I think there's better visibility, and you can also, you know, talk to customers and get market information. So, these talks that we're seeing are really happening everywhere. Just to refresh everybody's memory, Paragon manufactures single-use and consumable surgical instruments and implantable devices, orthopedic implantable devices, and drug delivery systems, really attractive markets years ahead. Dave, thanks for all that color.

Dave: Really helpful. Yeah, thank you. Again, if you would like to ask a question, press star on your telephone keypad. Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Speaker Change: Yeah, I, because, you know, Paragon's, you know, mainly in one end market, and they're talking to their customers daily.

Speaker Change: I think there's better visibility and you can also, you know, talk to customers and get market information.

Speaker Change: is really happening everywhere.

Speaker Change: Manufacture single-use and consumable surgical instruments and implantable devices, orthopedic implantable devices, drug delivery systems, really attractive markets.

Speaker Change: At the same time, this is going on, we're working on substantial efficiency improvements in the businesses. We talked about that last quarter, and this process is proceeding very well.

Speaker Change: We have a similar business and similar markets in another part of Ametek, and it's seeing the same kind of destock. Paragon won a tremendous amount of new programs, so we're still investing and driving those things in the market.

Speaker Change: generator for our long-term shareholders and we're very optimistic about the business. It's unfortunate about the DSTOC process but we're in this game for the long run.

Speaker Change: Again, if you would like to ask a question, press star on your telephone keypad.

Speaker Change: Single-digit. And then my follow-up question, you know, it also struck me about the quarter

Speaker Change: The operating margins there. What's structural? What's the risk that, you know, some of this goes away if pricing gets more difficult? I'm just trying to understand the performance in EIG margins, the good performance, you know, given a tough macro. Thank you. Good questions, Jamie.

Speaker Change: Price, and our inflation was about two and a half points.

Speaker Change: You know, the pricing environment is moderating a bit and the inflation is moderating a bit.

Jamie Cook: In terms of the, and a really good product mix and that was consistent from Q2 to Q3, a difficult one because that was a high-margin year, but in general, you think about EIG, the margins are good, and they're going to be in our process and our power industrial and our aerospace businesses. We've got an excellent market. And just talking about the EMG part of the business, they had core margins of over 25%.

Speaker Change: You know we we had

Speaker Change: You know 300 320 basis points up

Speaker Change: Driven by high leverage.

Speaker Change: Excellent price-cost, strongly performing acquisitions.

Speaker Change: And we see that continuing for the rest of the year. I mean, we do have a...

Speaker Change: The comp and Q3 margins is a difficult one, because that was a high margin order for us if you look back the past few years. But in general, you think about EIG, the margins are good, and they're going to stay there, and that business is very well positioned. And you know, it's...

Speaker Change: You know, it's a, in our process, in our power industrial, in our aerospace businesses, we got excellent market positions.

Dave: So they got some dilution there because of the acquisition and de-stocking and automation in our medical businesses. But when we look at our businesses, they're running; both segments are running very well, generating excellent margins. I think EIG has historically had a bit of a higher margin entitlement because they sell mainly to end users, and they get the aftermarket revenue stream. And EMG is selling more to an OEM customer base, so a little bit lower margin. So they're in relation to each other. And I see that continuing. I'm not really concerned that those margins are going to fall off or anything like that.

Speaker Change: And, you know, just talking about the EMG part of the business, they had core margins of over 25%, so they got some dilution there because of the acquisition and destocking and automation in our medical businesses.

Speaker Change: And they get the aftermarket revenue stream, and EMG is selling more to an OEM customer base, so a little bit lower margin. So they're in relation to each other. And I see that continuing. I'm not really concerned that those margins are going to fall off or anything like that.

Speaker Change: Does that answer your question, Jamie? Yes, very helpful. Thank you so much. Thank you.

Speaker Change: Your next question comes from the line of Jeff Sprague with Vertical Research. Please go ahead.

Jeff Sprague: I hope it's going well, Dave. Hey, just on Paragon, I want to just make sure I have things dialed right here. I think your comment about a point of headwind, right, is on a total Ametek basis. So I guess that implies.

Speaker Change: 40 or 50 million bucks. So we're sort of talking about the business being down, you know, kind of 8, 9, 10 percent for the year. Is that basically where we're at? Yeah, I'd say you're between 10 and 15 percent is the paragon. You're right on.

Dave: Okay. And then, you know, just thinking about it. Our orders for the past couple of quarters have had small, sequential improvements. And we think in the second half of the year, we're going to have, you know, a modest improvement versus the first half. So it kind of feels like the business has really stabilized. When you go to sales, you know, we wanted to, uh... He risked a year because... and it's really flat.

Speaker Change: Okay, and then, you know, just thinking about...

Speaker Change: EMG, right? I mean the...

Speaker Change: The comps are getting fairly easy on a year-over-year basis, but really the commentary is we should kind of think sequentially revenues are quite similar to acute.

Speaker Change: or do you actually see a little bit of step up there? No, that's a good question, and when we step back and look at this,

Speaker Change: First I'll go to orders.

Dave: So even though you have a little bit of movement from quarter to quarter, if you, and we have the benefit of a lower tax rate in Q4, if you back that out and you look at sales in the first half of the year versus sales in the second half. Then you look at operating profit above the tax line in the first half of the year versus operating profit in the second half of the year; it's a 50-50 split.

Speaker Change: He risked the year because...

Speaker Change: So even though you have a little bit of movement from quarter to quarter if you and we have a benefit of a tax rate in q4 if you back that out and you look at

Speaker Change: Sales in the first half of the year versus sales in the second half of the year. Then you look at operating profit above the tax line in the first half of the year versus operating profit in the second half of the year. It's a 50-50 split.

Dave: Historically, Q4, because of the seasonality, is always higher than Q3, and we have a typical seasonality there, and again, as Dalip mentioned, we have the benefit of the tax rate in Q4, but we really feel we have de-risked the year to reflect the current environment. Your next question comes from Scott Graham with Seaport Research. Please go ahead.

Speaker Change: We really feel we de-risked the year to reflect the current environment and we think it's going to stay that way through the balance of the year.

Speaker Change: And then maybe we could just touch on that tax rate. So.

Speaker Change: Summa 19 again in Q3 would imply, I don't know, 14 or 15 in Q4. But the bigger question is, just jumping off into 2025, do we stay at that 17 to 18 range? Or do we move back up into the 19 to 20 range?

Speaker Change: in 2025. Yeah, no, you see it right. We move, we move back up in 2025 to our typical tax rate.

Speaker Change: Your next question comes from the line of Scott Graham with Seaport Research. Please go ahead.

Scott Graham: Yeah, hi, good morning. Thanks for taking the question. Hello Scott, good to hear from you. Likewise.

Scott Graham: Essentially, three points on it in EMG, one point in EIG, and you talked about project delays there. My question is, in your, you know, sort of round the horn, you indicated project delays in power. And I was just wondering if there's any vulnerability to project delays spreading into processes because you didn't say anything.

Scott Graham: and you talked about project delays there. My question is, in your, you know, sort of round the horn, you indicated project delays in power. And I was just wondering if there's any vulnerability to project delays.

Dave: We should have cited process and power or scene. Government customers And there's a little delay in projects, but we're very well positioned, a bit larger, and it's more, you know, it's a, but it's, it's, it's, it's, but that was only. 1% of the changes from all of EIGM, which is both. Plus Heist.

Speaker Change: Yeah, if I didn't cite it, I...

Speaker Change: I should have cited process and power are seeing similar activities. I mean, in the power segment, we have some power test and measurement businesses, and those sell to multiple markets, including the...

Speaker Change: The government customers, and there's a little delay there in projects, but we're very well positioned, and those are just delayed, and process is...

Speaker Change: a bit larger and it's more, you know, it's a but it's kind of the same thing. But that was only 1% of the change in sales from all of the EIGM which is both process and power.

Dave: So what we saw in the second quarter was a very good commercial, and you got some defense delays. But for the full year, we're saying that defense and commercial are still going to be the same. Thank you.

Dave: If I could just squeeze this last one in, Dave, the net leverage of 1x is pretty low for you guys. We have discussions going on, and there are... Federal Businesses that we're having. So, I'm optimistic that the pipeline is going to be strong and the discussions we're having are good ones, and you know, our capital allocation is very clear. Our first priority is to deploy our free cash flow on strategic acquisitions.

Speaker Change: How are the sizes of the deals out there? Maybe you can give us a little color.

Speaker Change: Yeah, the pipeline looks really good. The size of the deals are throughout the whole spectrum. I mean, there are smaller deals, mid-size, and larger deals, and as we talked about before, we'll probably buy a big business. Big for us is, you know...

Speaker Change: They're late in their ownership cycle and they're struggling now because they have to go back and refinance their businesses at higher rates and and they're also trying to sell the business in a slowing environment and and but but those those those are we have discussions going on and there's a

Speaker Change: Our first priority is to deploy our free cash flow on strategic acquisitions. It remains a clear priority, and like we're going to see from Paragon next year, that's how we generate value.

Dave: It remains a clear priority, and like we're going to see from Paragon next year, that's how we generate value. Priority two is opportunistic buybacks, and as we've shown in the past, if we see a dislocation in our valuation, we're poised to act. And our third priority is consistently, modestly increasing dividends. So our capital allocation doesn't change.

Speaker Change: And priority two is opportunistic buybacks. And as we've shown in the past, if we see a dislocation in our valuation, we're poised to act.

Speaker Change: And our third priority is consistently, modestly increasing dividends. So our capital allocation doesn't change, and with a net leverage of one, we're ideally positioned right now, and there's a lot of activity going on.

Dave: And with a net leverage of one, we're ideally positioned right now, and there's a lot of activity going on. The project cost, I think, was your first question, and you're right. We are typically a small portion of the project, and with good technology, a small part of a bigger project. So it's a nice place to be.

Speaker Change: Your next question comes from the line of Rob Wertheimer with Mellius Research. Please go ahead.

Rob Wertheimer: So my question, I understand that the kind of delays here and there that you're talking about aren't the biggest, the biggest driver in the quarter, but I'm still a little bit curious. And so, is the project delay

Speaker Change: The project cost, I think, was your first question, and you're right, we are typically a small portion of the project, and, you know, with good technology, a small part of a bigger project, so it's a nice place to be.

Dave: In terms of pricing, we have very differentiated technology, and we're conscious of the value that we're adding to Classic Bounters. Thank you very much. Your next question comes from the line of Joe Giordano with TD Cohen.

Speaker Change: In terms of pricing, you know, we have very differentiated technology and we're conscious of the value that we're adding. What you'll typically see in the most classic downturns is...

Rob Wertheimer: They may mix down. They may buy our project, buy our product, but it will maybe have less features. Because we're in a pretty good position with the customer base and our positions in our niche portfolio. We're not seeing that now. And we're not seeing the activity pipeline change. So I think on the...

Rob Wertheimer: Price for Value, and we do a lot of investment in our portfolio.

Rob Wertheimer: But, you know, we went through the, or, you know, we're confident we're not losing share. We're confident that our pipelines are very strong, so it's a temporary delay.

Speaker Change: Thank you much. Thank you.

Speaker Change: Your next question comes from the line of Joe Giordano with T.D. Cohen. Please go ahead.

Joe Giordano: Yeah, I think...

Joe Giordano: Please go ahead. Yeah, I think, and we have a team of Paragon people and a team of Ametek people and a team of our operational excellence talent across the business all working on the project. The OPEX work that's going on, combined with some new product introductions that we're heavily investing in to phase in, so, you know, it's unfortunate that we can't get it. Thank you for that. Very helpful.

Speaker Change: And we have a team of Paragon people and a team of Ametek people and a team of our operational excellence talent across the business all working on the project.

Joe Giordano: Next year you have a sizable improvement because we expect the volumes to come back from the D-stock combined with the...

Speaker Change: The ramp is more than usual for historical, is there, especially considering that you guys are not anticipating any easement and destocking for the latter half. Could you comment on what's driving that? Yeah, I kind of disagree with your conclusion.

Speaker Change: As I said, the operating performance in the first half of the year

Speaker Change: is very similar to the operating performance in the second half year. And you add to that a little bit of a tax benefit in Q4. So I think it's pretty typical from what we've done in the past.

Speaker Change: Your next question comes from the line of Andrew Obin with Bank of America. Please go ahead.

Dave: Hey, just going back to inventory, just how to think about it. Are your OEM customers bringing inventory levels back to pre-COVID levels or below pre-COVID levels? I guess just trying to better understand, you know, how to think about the destocking impact versus history.

Speaker Change: Yes, good morning. Morning, Andrew.

Andrew Obin: Hey, just going back to Inventory, just how to think about it.

Dave: And, you know, where do you think inventories will be on a going forward basis relative to pre-COVID levels? Yeah, I think there will be differences because there are a lot of customers and a lot of different market segments, but in general, I think you're getting back to. Unknown Speaker We're becoming more regional and less dependent on Asia, so it could be a bit higher. But in general, I believe that the general statement across the customer base is that they're trying to get back to something at the pre-COVID level. They might be a bit higher for some of them.

Speaker Change: becoming more regional and less dependent on Asia so it could be a bit higher but in general I believe it's a general statement across the customer base they're you know trying to get back to something at the pre-COVID level they might be a bit higher for some of the

Speaker Change: Gotcha. And just maybe I missed it, but you know, could you just cover major geographies? What are we seeing? North America versus Europe versus Asia versus China. I apologize if I missed it. Sure, Andrew. No, you didn't miss it. We saw a modest growth in Europe .

Dave: We saw modest growth in Europe in the second quarter. We actually had strong growth in our materials analysis division and our A&D businesses, but our automation business was down a bit. Again, weakness in our automation business offset by strong growth in process. And for Asia, we were down low single digits, you know, pretty difficult comps in China. China was down a bit, but when you look at Asia, excluding China, it was flat. So it It's kind of a flat world.

Speaker Change: So I'm going to go a step lower. We had a low single digit in the U.S.

Speaker Change: Europe was up below single digit, again weakness in our automation business, offset by strong growth in process.

Speaker Change: And for Asia, we were down low single digits.

Speaker Change: Thanks so much.

Dave: Yeah, I think right now we're levered to both. Our semiconductor business was up, and, and, uh... Defect Detection.

Speaker Change: It was up because we had strong growth in our Comica business and you think about that business, they're doing next generation.

Dave: And it's kind of like you're going to want one of these Kamika systems in just about every new FAS operation. There's a lot of R&D activity to get at the no transitions to get at some of the to be able to detect defects that Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers has been stronger than I think people expected. Do you have exposure there?

Speaker Change: Defect Detection, and it's kind of like you're going to want one of these

Speaker Change: There's a lot of R&D activity to get at.

Speaker Change: these smaller nodes. So we're going very well there driven by the uniqueness of our product portfolio. But then, you know, when the market picks up, we also have a good part of our businesses tied to the

Speaker Change: Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers has been stronger than I think people expected. Do you have exposure there and do you have an outlook for that market in the back half and next year?

Dave: And do you have an outlook for that market in the back half and next year? I don't have that level of resolution for next year. We do sell into the Chinese market, but it's typically lower technology products.

Speaker Change: I don't have that level of resolution for next year. We do sell into the Chinese market. It's typically lower technology products. It's been healthy this year.

Speaker Change: Your next question comes from the line of Nigel Coe with Wolf Research. Please go ahead.

Dave: It's been very healthy this year. Oh, good morning. Hi David. Hi Dalip, and Kevin.

Unknown Speaker: Thanks for the question. Good, thanks. How are you, sir?

Dave: Just a few more details. I know you cover a lot of ground here, but on Paragon, I just want to make sure I've got the right base for FY23. I've got about 450, 460 in revenues for FY23. Is that about right? We took the charge. There's also some... We took the charge. [inaudible] solidly positioned for Paragon.

Nigel Coe: A little bit high of a 23. Okay, that's helpful.

Speaker Change: Yeah.

Nigel Coe: So, down 10-15% this year, I mean, what sort of cost measures are you taking? I know the charge you took in 1Q is much longer tail, but what measures are you taking to sort of preserve the earnings there, and where do we stand right now on the accretion for FY 2024? Yeah. I think the...

Dave: Yeah, it's a couple of pennies, and it's in the fourth quarter. That's helpful. Thanks, David. And then on orders, I think you said a 4% organic decline. I think that's better than the 8% you saw in the first quarter. I'm calculating $1.6 billion of orders this quarter. Is that in the right zone?

David: That's helpful. Thanks, David. And then on orders, I think you said 4% organic decline. I think that's better than the 8% you saw.

Dave: Yeah, if you look at overall orders, they were up 1.5%. That's improved from what we saw in Q1 where we were down organically minus 10. And we saw a sequential improvement in orders in Q2. So they're up low single digits from Q1. So we're definitely seeing stability in orders.

Speaker Change: and we saw a sequential improvement in orders in Q2. So they're up low single digits from Q1. So we're definitely seeing stability in orders.

Dave: No, there's no question about it. Okay, thank you very much. Thank you, Nigel. Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.

Speaker Change: And then just a quick one on the 4Q tax rates issue and any qualification there.

Speaker Change: Thank you very much. Thank you, Nigel.

Speaker Change: Since there are no more questions I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.

Kevin Coleman: Thank you, Meg. And thanks, everyone, for joining our call today. And as a reminder, a replay of the webcast can be accessed in the Investors section of ametek.com. Have a great day. This concludes conference call. You may now disconnect. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? Scott Graham, Michael Anastasiou, Dalip Puri, Ametek Scott Graham, Michael Anastasiou,

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