Good day and thank you for standing by. Welcome to the AMETEK Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead..

Good morning and thank you for joining us for AMETEK's second quarter 2023 earnings conference call. Joining me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer.

During the course of today's call, we will be making forward-looking statements which are subject to change based on various risk factors and uncertainties and that may cause actual results to differ significantly from expectations.

A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2022 or 2023 results or to 2023 guidance will be on an adjusted basis, excluding after tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website.

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

Navitar, RTDS and Bison Engineering. Each of these businesses is integrating nicely into AMETEK and each is very well positioned to capitalize on attractive growth opportunities in their markets. Our acquisition pipeline remains very strong and our businesses and internal M&A teams are actively managing a number of opportunities.

AMETEK remains committed to leveraging our strong cash flow to pursue strategic acquisitions that align with our growth objectives. With a robust balance sheet and significant financial capacity, we are well positioned to support our acquisition strategy and capitalize on value-creating opportunities in the future.

Now, turning to our outlook for the remainder of the year. While uncertainties in the macroeconomic environment continue to warrant caution in the short term, we are confident in our ability to navigate through these challenges and deliver strong results.

Building upon our strong first half results and positive outlook for the remainder of the year, we are again increasing our earnings guidance. For the full year, we expect overall sales to be up mid- to high single digits with organic sales expected to be up mid-single digits.

Diluted earnings per share for the year are now expected to be in the range of $6.18 to $6.26, up 9% to 10% compared to last year's results. This is an increase from our previous guidance range of $5.96 to $6.10 per diluted share.

For the third quarter, we anticipate overall sales to be up mid-single digits, with adjusted earnings of $1.56 to $1.58 per share, up 8% to 9% versus the prior year. In summary, AMETEK's second quarter results were excellent.

Our businesses continued to deliver excellent performance, benefiting from differentiated technology solutions that cater to diverse and growing niche markets. The implementation of our organic growth initiatives has yielded higher levels of growth, while our portfolio remains aligned with attractive mid- and long-cycle markets.

Our asset-light business model and strong cash flows provide us with the flexibility to navigate challenging, environments while actively deploying capital to drive increased shareholder value. As a result, AMETEK remains firmly positioned to deliver long-term sustainable growth.

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

Bill?.

Thank you, Dave. As Dave highlighted, AMETEK had a very strong second quarter with record level operating performance and a high quality of earnings. Now let me provide some additional financial highlights for the second quarter.

Second quarter general and administrative expenses were $24.5 million, essentially unchanged from the prior year and as a percentage of sales were 1.5% versus 1.6% in last year's second quarter. For 2023, general and administrative expenses are expected to be approximately 1.5% of sales, in line with last year's G&A to sales level.

Second quarter other income and expense was a $6 million headwind versus the prior period due largely to lower pension income in the quarter. The effective tax rate was 18.2%, down slightly from the 18.5% in the second quarter of 2022. For 2023, we now anticipate our effective tax rate to be between 19% and 19.5%.

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

Capital expenditures in the second quarter were $28 million and we continue to expect capital expenditures to be approximately $145 million for the full year or about 2% of sales, reflecting our asset-light business model. Depreciation and amortization expense in the quarter was $82 million.

For the full year, we expect depreciation and amortization to be approximately $335 million, including after-tax, acquisition-related intangible amortization of approximately $157 million or $0.68 per diluted share. Operating working capital in the second quarter was 19% of sales. Cash flow in the quarter was up meaningfully from the prior year.

Operating cash flow was $335 million, up 42% from the prior year and free cash flow was $307 million, up 47% from the second quarter of 2022. Free cash flow conversion was 95% in the quarter. And for the full year, we continue to expect approximately 120% free cash flow to net income conversion.

Total debt at June 30 was $2.2 billion, down from $2.4 billion at the end of 2022. Offsetting this debt is cash and cash equivalents of $606 million. At the end of the second quarter, our gross debt-to-EBITDA ratio was 1.1x and our net debt-to-EBITDA ratio was 0.8x.

We continue to have excellent financial capacity with approximately $2.9 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses continue to deliver exceptional results in the second quarter of 2023. We delivered strong sales growth, achieved robust margin expansion and a high quality of earnings.

Our leading positions across attractive market segments, record backlog and outstanding operating capabilities have positioned us well for continued success in the back half of the year.

Kevin?.

Thank you, Bill.

Benny, can we please open the lines for questions?.

All right, sure. [Operator Instructions] Our first question is from the line of Allison Poliniak of Wells Fargo..

Could you maybe talk to about, obviously, book-to-bill being positive is very strong outcome here just given some of the uncertainties -- but could you maybe talk to order trends that you're seeing since then? Anything concerning I know you talked about sort of you've been to looks more in the longer term but any short-term kind of headwinds that you're starting to see there?.

Great question. The overall demand environment still feels solid. We had the 12th straight quarter of positive book-to-bill and ended with an all-time record of $3.44 billion. So our book-to-bill was 1.01 and it was positive in both groups; so that's really great. Our backlog is over 50% of our annual sales and well above normal historical levels.

So normal historical level of about 30%. So we're in a strong position as we proceed throughout 2023. If you recall in the last couple of earnings calls, we highlighted a couple of dynamics that would impact order growth. The first are difficult comparisons.

If you look at our -- over an extended period of time, in fact, in all 2021 and '22, we averaged 18% organic growth. So we have some difficult comps that we're running up against. And the second dynamic we highlighted, is our expectation to return to more normalized ordering patterns.

We had a situation where customers were ordering early and now that the supply chain is improving and getting back to normal, lead times are getting back to normal or seeing this dynamic play out. But we're well positioned to deal with it and our record backlog and positive book-to-bill give us confidence for the remainder of the year..

And leverage, clearly low here. You talked about a pipeline pretty active. Can you maybe give us some color on sort of what's been holding it back? Is it still in terms of executing, is it still, I would say, valuations at this point? You're just not seeing anything of great interest. Just any color there would be helpful..

Yes. Our pipeline remains very strong and we're actively looking at a number of high-quality deals across a broad set of our markets. And as always, we will remain disciplined. So the discipline is in full force but we expect it to be active in the back half of the year.

And more broadly, over the next couple of years, we really have the opportunity to differentiate our performance with the M&A aspect of our growth strategy.

We're very well positioned with a strong balance sheet and we're really working hard at it and sometimes you can't predict what quarter they're going to close on or what quarters are going to happen but the backlog is at an elevated -- that backlog of deals at an elevated level and we are extremely busy..

Our next question comes from the line of Matt Summerville from D.A. Davidson & Company..

David, could you maybe just go ahead and do the kind of around the horn, if you will, with respect to the businesses, the divisions, what you saw in Q2 and how that informs your organic expectations for those areas for the balance of the year?.

I'd be glad to, Matt. I'll start with our largest market segment, our process segment and overall sales for our Process businesses, were up high single digits in the quarter and that included mid-single-digit organic growth and contributions from the recent acquisition of Navitar.

Growth remains solid across each of our process divisions with -- as mentioned in the prepared remarks, our Ultra Precision Technologies business delivered notably strong growth and driven by high-end optics and metrology businesses.

We also grew solid growth across our med tech businesses and the Rauland business that we mentioned a couple of quarters ago continues to perform extremely well. So for the full year, we continue to expect mid-single-digit organic growth for the Process businesses, very solid. Aerospace and Defense.

The growth remains very strong across our aerospace and defense businesses. In the quarter, both overall and organic sales were up low double digits on a percentage basis. And it really was reflective of strong performance in all of the subsegments in A&D.

Growth was particularly strong across our aftermarket businesses as air travel returns to pre-pandemic levels, driving very strong demand for MRO products and services. And given the strong growth in the quarter, we now expect sales for the full year to increase low double digits on a percentage basis versus 2022.

So we increased our outlook for our Aerospace and Defense businesses. Moving to Power & Industrial, overall sales were up mid-teens on a percentage basis in the second quarter. And that was really fueled by mid-single-digit organic sales growth and the contributions from the RTDS acquisition which has performed extremely well.

Organic growth in the quarter was strongest in our power test and measurement business, programmable power. And for the full year, we continue to expect mid-single-digit organic sales growth for our Power and Industrial businesses. And finally, our Automation & Engineered Solutions.

Overall sales were up mid-single digits, with mid-single-digit decline in organic sales being offset by the contributions from the Bison acquisition.

And as we noted previously and in my question to Allison, I talked about normalization of inventory levels is continuing across our OEM businesses and the impact is most significant in our automation business.

For the full year, we now expect organic sales for our Automation & Engineered Solutions business to be up low single digits with stronger growth expected across our EMIP businesses. That's across the -- around the horn on that..

And then maybe just to your last point, can you maybe comment on how long this normalization -- this normalization period, you feel may last with respect to automation.

And then if you could maybe just to switch gears a little bit, give a little bit of geographic color in terms of what you're seeing, both organically and from an incoming order rate standpoint..

Yes, I'd be glad to. In terms of the automation business, I think it's going to last a couple of quarters. It's probably going to bottom near the end of this year. And what we have there is the end markets for automation are very interesting.

The places where the inventory correction is steepest, as with our medical technology customers, with our life science customers. We have been positioned on a lot of COVID test equipment. Also our semiconductors, especially in the memory area is weak right now. So the -- that is correcting and it's going to correct in the second half.

But I really think what the end markets that business serves is coiled the response. So in an upward fashion. So we kind of saw this coming. It's impacting OEM businesses but very significantly in our automation business but we're positioned well to manage through that, increase our guidance and because we're really operating well.

Our productivity programs are progressing nicely. As I mentioned, the recent acquisitions are performing very well. Price inflation, we have good visibility and the A&D business is accelerating. It's our highest margin segment. Now moving on to your next question. I really feel good about the geographical story around AMETEK too.

We saw a strong broad-based growth across all segments. The U.S. was up mid-single digits. We had broad-based strength -- notable strength in our process and aerospace and defense businesses. Europe was up high single digits, really, really positive performance there with notable strength in our process and power businesses.

And Asia was up with 3 points with notable strength in process..

Our next question comes from the line of Deane Dray of RBC Capital Markets..

First, I got to start with the shout-out complement for that one pager in your website that gives you the quarter recap and backlog and free cash flow. I don't know, I didn't see the timing in the first quarter but we really appreciate having that up on the website; so, thank you. Listen, a lot of good questions. We've gone through already.

Just on this normalization and we're seeing that everywhere and it seems to be not very disruptive for you all. Is there an opportunity? Maybe this is for Bill, would you be releasing any buffer inventory as things start to normalize, you go from just in case a bit closer to just in time.

Is that an opportunity?.

Absolutely and that's something our businesses are very much focused on. We did all the right things to work our way through the supply chain, protect our customers given our extensive backlogs. But as that starts to normalize, our businesses are pivoting now to reducing inventories.

And I think you'll see that happen as we move through the second half of the year..

Good. That was the timing we were looking for.

And maybe some commentary on price cost, any kind of pricing carryover benefit and contribution from new products in the quarter?.

Yes. On the price issue in the second quarter, we continued to more than offset inflation. Our pricing was about 5% and inflation was about 4%. And that gave us a positive spread of approximately 100 basis points. So solid performance there. We're seeing decreasing costs in some commodities and logistics, offset by other costs and wages in travel.

But I feel like we have that really under control with good visibility and the results there speak to the highly differentiated nature of AMETEK's product portfolio..

Great new products?.

Yes. New products were a solid quarter. 24% of sales is our vitality index. So what's happening is our customers are buying our new products. And our new products at really good markets. And so we feel really good about that. And significant introductions across the business, I mentioned the Abaco introduction and the word Day 1.

But while these are not home run-type swings and our product development is spread out across the business but we have a lot of good things going on..

You can get to the Hall of Fame with lots of singles and doubles..

That's right. That's AMETEK's strategy..

Our next question comes from the line of Christopher Glynn of Oppenheimer & Company Inc..

So Dave, reacting to your pitch on Abaco, you closed that out talking about demand for high computing power and analytics like many other AME businesses. Wondering if we could dive into that last dilution there..

Yes. When I'm talking about other businesses, I'm talking about what's happening, for example, in some of our process instrumentation businesses, we're doing a lot of work there to improve bringing some technologies that were in the lab to the field.

And especially in our Spectro Scientific business where there's a lot of technology that we're putting in smart technology, where there's AI algorithms in it and we're doing measurements that were previously done in the lab, now we're doing them in the field.

So that's really good and that's all around our predictive maintenance programs that we have with Spectro Analytics. So we're really positive on that. If you think about our -- some of our materials analysis businesses, there is a tremendous amount of data that we're taking from materials analysis.

And we're showing our users that in unique and ways highlighting the technologies, our measurement technology. So you have situation where the graphics power, the graphics intensity of what we're doing is kind of a state of the art.

So really, across our businesses, a couple of the trends around predictive maintenance, trends around moving the measurements to the field and trends around in the research environment, the analytical computational power to take the data that we have and provide our users with actionable intelligence is would be the areas I'd highlight..

It's very interesting. And then curious about any areas that might be inflecting higher? I think the question is yours more about anything kind of reaching an inflection or peak junctures. But you did raise the Aero defense market. And I think defense might be one particular area, if you could elaborate..

Yes. On both our Aerospace and Defense market, we have not peak. Demand is strong in the commercial market but I talked about it but outlook for the year, both commercial and the defense market have low double-digit outlook. So we're really well positioned in the defense market and some of the things I talked about with Abaco played to that.

But both sides of A&D, commercial and defense are strong and we clearly have not peaked..

[Operator Instructions] And our next question comes from the line of Brett Linzey of Mizuho..

Just wanted to come back to orders. I was hoping you might be able to provide some context for how things track throughout the quarter, any preliminary view on July.

And is there anything notable to glean from the changes in the mix of orders between project or CapEx related versus more OpEx purchases?.

Yes, I'll answer the second part of that first. And -- the thing that I would glean, it's more OEM versus end user. So if we have OEMs between our product and the end customer, the OEMs have inventory in place and as we get back to more normalized activities, the OEM parts of the business are where the order is normalizing.

On the end user side of the business, we're not seeing that really at all and end demand still remains strong. Regarding to your first question -- regarding the -- how we progressed throughout the month, we had solid orders in Q2. As typical, orders ramp higher each month of the quarter. So June was the highest month of the quarter.

And notably, when we adjust for acquisitions because when you close an acquisition, you book the entire backlog as order input. So we take that out. And if we look to the last couple of years, cumulus like the highest booking or the second highest booking month the last couple of years. So June was really strong.

So -- and in terms of July, it's just to close last night and we haven't really dug into it at a deep level but it's certainly up to that point was in line with the growth that we're telling we're communicating here where we're increase our guidance for the second half of the very substantially..

And then just shifting over to pricing.

As we do work through this normalization of some of the destock dynamic, are there any areas you think there's maybe price concessions? Or do you think you can hold the line on price, if not grow it, in your businesses there?.

Yes, there's going to be just a small amount of giveback. We're going to retain the vast majority. We're going to retain the vast majority of pricing. And on a go-forward basis, I expect that inflation to moderate a bit but we're going to keep the 100 basis point spread.

So we feel real good about the analysis and the control and what's playing out with price. So we'll retain the price and is certainly not going to be a big giveback..

Our next question comes from the line of Andrew Obin of Bank of America..

This is David Ridley-Lane on for Andrew Obin. I guess what's directionally embedded in the revenue guidance for year ending backlog. I understand there's going to begin this normalization of the backlog.

I'm wondering if you see that sort of playing out in the second half? Or is that more of a 2024 story?.

Yes. As I mentioned in the last couple of calls, I do expect our sales to outpace orders in the second half of the year. But it will be a moderate impact and we'll end the year with historically high backlog in comparison to what we've done in the past. So it will be a modest impact as we progress through the second half of the year..

And then if I'm doing the math right, guidance seems to imply about 40% core incremental margins versus kind of prior expectations of 30% to 35%.

What's been improving, what's been going better than you expected?.

Yes. Margin performance has been great. And in fact, in -- the second quarter, we had really healthy core incrementals of 52%. So you're correct on your outlook for the year and it probably is a bit higher because of our performance has been outstanding.

And if you look at reported Anchor, we're both up 130 basis points at the company level, healthy incrementals and -- we think for the full year, the incrementals will be similar in both groups and 40% is a good number..

Our next question comes from the line of Joe Giordano of Cowen..

This is [indiscernible] on for Joe Giordano.

I just wanted to check if there's any color you guys can provide on like some specific end markets in terms of any customer in specifically looking forward, if you have any color on any slowdowns on the medical side, like pressure on biotech because we're hearing from other people who are in the industry that there's been some pressure and some slowdown in that area..

I mentioned that some of our automation customers are in the med tech and life sciences world and we are seeing the impact of inventory destock and that's included in our overall guidance. But in terms of our overall medical business, not including that piece of the automation business. Q2, we were up mid-teens.

So really strong and strong growth in our engineered medical components business and a very significant performance for AMETEK in the second quarter and for the full year..

So, I do not see any other questions at this point. I would now like to turn the conference back to Kevin Coleman for closing remarks..

Thank you, Benny, for all your help and thank you for joining us for our conference call today. And as a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day..

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect..