AMETEK, Inc. (AME) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by for AMETEK's 2021 Annual Meeting of Stockholders. Please be advised that today's meeting is being recorded. It is now my pleasure to introduce AMETEK's Chairman and Chief Executive Officer, Dave Zapico. Please go ahead.

Good morning, and welcome to the annual meeting of stockholders of AMETEK, Inc. I'm Dave Zapico, Chairman and Chief Executive Officer of the company. Thank you for joining us today. We are hosting our second virtual meeting of stockholders, which allows us to be more inclusive while following the guidance from the Centers for Disease Control regarding large gatherings. The agenda for today's meeting consists of introductions, certain procedural items, a vote on the 3 proposals set forth in the proxy statement and our report to stockholders, followed by time for questions. Though we may not be able to answer every question, we will do our best to provide a response to as many as possible. Only stockholders may ask questions in the designated field on the web portal. Out of consideration for others, please limit yourself to one question. Please note that this meeting is being recorded. However, no one attending via the webcast is permitted to use any audio recording device. I would like to introduce my fellow directors of your company who are joining us today. They are Thomas Amato, Tod Carpenter, Ruby Chandy, Anthony Conti, Steve Kohlhagen, Gretchen McClain, Karleen Oberton, Elizabeth Varet and Dennis Williams. Elizabeth and Dennis are retiring from the Board today, and on behalf of the employees of AMETEK and the entire Board, I would like to thank them for their service to the company. I would also like to introduce our executive office: Bill Burke, Chief Financial Officer; Ron Oscher, Chief Administrative Officer; Tony Ciampitti, Group President; Wes Hardin, Group President; Tim Jones, Group President; Tom Marecic, Group President. Also present today are Pat Pruitt and Dave Burkavage of Ernst & Young LLP, our Independent Registered Public Accounting Firm. In keeping with the digital approach to this meeting, the meeting is officially called to order. Before getting to the 3 proposals, I'd like to address 3 procedural items. First, I'll preside as chairman of the meeting; second, Lynn Carino from AMETEK and John Holewa from American Election Services will serve as inspectors of election; and third, I appoint Lynn Carino, Assistant Secretary of the company, to act as secretary of the meeting. Ms. Carino will now report on the meeting attendance.

Thank you, Mr. Chairman, and good morning. We have available for inspection in the web portal by any stockholder a certified list of stockholders as of March 11, 2021, the record date. An affidavit has been delivered attesting to the fact that notice of the meeting and accompanying materials were mailed on or about March 15, 2021, to all registered stockholders as of the record date and will be incorporated into the meeting -- the minutes of this meeting. The majority of the total issued and outstanding shares of the company stock are represented at the meeting via the web portal or by proxy. Therefore, a quorum is present for purposes of conducting business.

Thank you, Lynn. We'll now turn to the items of business which are described in detail in the proxy statement furnished to stockholders. A copy of the proxy statement is available through the web portal. It is now 11:04 a.m., and the polls are now open for voting. The 3 proposals to be voted on by stockholders at this meeting are: first, the election of Tod Carpenter and Karleen Oberton as Class 3 Directors of the company to hold office for term of 3 years; second, the advisory vote to approve the compensation of the company's named executive officers; and third, the ratification of the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for 2021. Proxies have been received and tabulated, and they have been voted by written ballot in accordance with the terms of each proxy received. Any stockholder who has not yet voted may do so by clicking on the voting button on the web portal and following the instructions there. Stockholders who have sent in proxies or voted via telephone or the internet do not need to take any further action. I'll pause for a moment if anybody's voting online. [Voting]

Now that everyone has had the opportunity to vote, I now declare the polls closed at 11:06 a.m., Eastern Daylight Time on May 6, 2021. Ms. Carino, do we have the preliminary voting results?

We do. They are as follows: first, Tod Carpenter and Karleen Oberton have been elected as Class 3 Directors of the company to hold office for a term of 3 years; second, the compensation of the company's named executive officers has been approved; and third, the appointment of Ernst & Young LLP as the company's independent registered public accounting firm for the 2021 fiscal year has been ratified.

There being no further business to come before this meeting, the annual meeting of stockholders of AMETEK, Inc. is now adjourned. I will now report on our operations and financial results for 2020 and the first quarter of 2021. Please refer to this slide for information on forward-looking statements that may be made during the presentation. AMETEK is a global manufacturer of high-technology products and solutions. We have a very solid foundation, a strong culture and a proven growth model. Our businesses serve a diverse set of niche markets and applications where we're market leaders. We operate in a distributed structure, which provides a degree of autonomy for our businesses so they can quickly react to customer and market dynamics. AMETEK is very global, with approximately 50% of our sales outside the U.S. and over 150 operating locations worldwide. We have an experienced management team and a strong bench of talent across our divisions. Our management teams have successfully navigated difficult operating environments in the past, and each time, we emerged stronger and better positioned for growth. We have outstanding cash flow generation and the proven ability to deploy capital on value-enhancing acquisitions with a record level of capital deployed on acquisitions thus far in 2021. And finally, we have a long track record of creating substantial shareholder value by executing the AMETEK growth model, which I'll highlight on the next slide. As you can see, AMETEKs excellent performance has generated outstanding returns for our shareholders over an extended period of time. In 2020, our total shareholder return, which includes our stock price appreciation with reinvested dividends, was an outstanding 22%, which was double the returns of the S&P Industrials index. Over the last 3 years through the end of 2020, our total shareholder return was 71%, which was 46 basis points higher than the S&P Industrials index. And over the last 10 years, our total shareholder return was nearly 400% an impressive 185 basis points higher than the S&P's Industrials index and also well above the returns for the S&P 500 over that period. These excellent returns are driven by the strong execution of the AMETEK growth model. We have 2 reportable segments. The Electronic Instruments, or EIG, is approximately 2/3 of the business; and the Electromechanical Group, or EMG, is 1/3 of the business. Both segments have healthy operating margins, 27% and 22%, respectively. Both segments are comprised of niche market leaders serving a diverse set of attractive markets. EIG is comprised of highly differentiated businesses providing analytical test and measurement instrumentation for critical process, power and industrial markets as well as sensors and embedded computing systems for aerospace and defense markets. EMG also has highly differentiated businesses providing precision automation and motion control solutions, highly engineered interconnects and thermal management systems. In 2020, AMETEK delivered solid results despite extraordinary challenges with travel restrictions and lockdowns brought on by the COVID-19 global pandemic. At the start of the pandemic, we acted quickly to ensure the safety of our employees and to help mitigate the spread of the virus. We also worked to ensure we continued to support our essential customers. However, the pandemic had a meaningful impact on demand. While sales were down 12% to $5.4 billion, our businesses drove excellent operating performance. Operating income margins increased 80 basis points year-over-year to 23.6%. And EBITDA margins expanded an impressive 230 basis points to 29.2%. This led to adjusted earnings of $3.95 per share. Our businesses also generated tremendous cash flow with operating cash flow up 15% and free cash flow conversion of 158%. And finally, we completed the strategic acquisition of IntelliPower in the first quarter last year. Despite very difficult end market conditions and meaningful top line headwinds in 2020, AMETEK was able to expand operating margins while delivering record levels of operating and free cash flow. Truly outstanding performance. Coming off 2020, AMETEK rebounded exceptionally well in the first quarter of 2021. Despite continued challenges with the pandemic, our businesses delivered tremendous operating results. Sales growth returned faster than anticipated with both overall and organic sales growth up 1%. Orders also turned positive in the quarter with overall orders up 16% and organic orders up 9%. This order strength led to a record backlog of $2 billion. Operating performance was also outstanding in the quarter with operating income increasing 6% year-over-year to $293.4 million and operating margins up 110 basis points to 24.1%. This led to adjusted earnings per share increasing 5% to $1.07, which was above our guidance range of $0.97 to a $1.02 per share. We have had a busy and exciting start to the year on the acquisition front. Thus far in the year, we've deployed $1.85 billion on 5 strategic acquisitions, adding approximately $535 million in annual sales. These acquisitions, along with our strong first quarter results and solid orders momentum, led us to substantially increase our full year sales and earnings guidance. Overall sales are now expected to be up high teens on a percentage basis compared to 2020, with organic sales growth expected to be up high single digits. We now expect adjusted earnings per share to be in the range of $4.48 to $4.56 for 2021, up 13% to 15% over the prior year. In summary, an excellent start to the year with high-quality earnings in the first quarter. Next, I'd like to highlight the 5 acquisitions we've completed this year. First, I'll start with Abaco Systems, our largest acquisition to date. Abaco is a leading provider of mission-critical, embedded computing systems used on key aerospace and defense platforms. It's a great business for AMETEK as it nicely complements and expands our existing aerospace and defense platform. Abaco has approximately $325 million in annual sales, and we deployed $1.35 billion on the acquisition. Next, Magnetrol was a leading provider of level and flow control solutions for challenging process applications across a diverse set of end markets. Magnetrol is an outstanding strategic fit with our existing sensors test and calibration business. The business has annual sales of approximately a $100 million, and we deployed $230 million on the acquisition. Next is NSI-MI Technologies. It's a leading provider of radio-frequency and microwave test and measurement solutions, which is an exciting addition to our test and measurement platform. Their highly differentiated test and measurement solutions are uniquely positioned to support the development of advanced RF and microwave technologies for high-growth applications, including 5G wireless communications, autonomous vehicles and specialized defense systems. NSI-MI has annual sales of approximately $90 million, and we deployed $230 million on the acquisition. In addition, we also acquired 2 smaller yet highly strategic businesses in Crank Software and EGS Automation. Crank software is a provider of embedded graphical user interface software and services. And EGS Automation is an attractive bolt-on acquisition for our Dunkermotoren business, expanding our presence in the attractive automation market. In summary, these were 5 outstanding acquisitions, and we are excited to welcome these businesses to AMETEK. Going forward, our acquisition pipeline remains strong, and we have the balance sheet capacity to continue our acquisition strategy. I wanted to also touch on our continued work on the sustainability front. In 2020, we took a number of important steps forward in our sustainability efforts by enhancing our environmental, social and governance disclosures. This information can be found on our website and in our sustainability report. These efforts led to improved scores with various ESG rating agencies and a greater recognition of the work that AMETEK is doing across many important ESG topics. Through our focus on our core, our strategy, our people and our solutions, we remain committed to building a sustainable future for all of our stakeholders and making the world a better place. We understand the importance of ESG to many investors and other constituents, so we'll continue to expand and increase our disclosures in this important area. Our commitment to doing business the right way of delivering long-term value for our shareholders will never waiver. In summary, AMETEK is well-positioned to deliver long-term sustainable success. Our culture and our foundation are strong and driven by our world-class workforce. I'd like to thank our colleagues for their hard work and efforts over the last year. The impressive results AMETEK delivered during these challenging times are a testament to the commitment of our highly talented teams across the company. It is also a testament to the AMETEK growth model, our market leading businesses and their tremendous cash flow, along with our strong balance sheet, which allowed us to navigate these economic challenges very well. AMETEK is emerging from this downturn an even stronger company, firmly positioned for growth in 2021 and beyond. I'll now open the floor for questions. We will take stockholders questions that are being entered today on the web portal. Please note that we will only answer questions that are germane to the meeting.

Mr. Chairman. I have a couple of questions in the web portal.

Okay.

Mr. Chairman, the Carpenter Pension Fund holds a total of 343,200 shares of the company's stock. As long-term investors, we strongly believe that the company's executive compensation plan should be designed primarily to drive successful execution of the Board's long-term strategic business plan. Today's public company executive compensation plans are largely formulaic, peer-driven plans with simplistic annual say-on-pay voting, reinforcing plan homogeneity. Would you or the chair of the Compensation Committee speak to whether AMETEK might be better served by an executive compensation plan tailored specifically to the company's particular circumstances and its unique long-term strategic business plan? Thank you.

First, I'd like to thank the Carpenter Pension Plan for being a long-term shareholder. And our compensation plans -- our long-term executive compensation plans are specifically tailored to our long-term business plan. I'll give some examples. We have a short-term incentive and a long-term incentive. The short-term incentive is really targeted to each individual in our company, and it covers the things like sales growth, earnings growth, asset management, and there's also an element of our balanced scorecard approach where you can individually tailor the goals. So there's a very tailored approach to the short-term incentive, which has been a key factor in our success. The other element of our executive compensation plans are our long-term incentives, and these include performance shares. And these performance shares are tailored so that the executive management is rewarded only if we implement our long-term returns on capital, which we think is the best long-term driver of the business. And we have an element of our performance shares that are awarded only if our total shareholder return does well in comparison to an index. So we've done a lot of work on this matter. We have an excellent Compensation Committee. And I believe our plans are specifically tailored to our long-term plans. And it's been that way for quite a period of time, and I think it shows in our results.

Mr. Chairman, the topic of stakeholder capitalism as an alternative to shareholder capitalism has received considerable attention recently. As long-term pension fund investors, the Carpenter Funds appreciate the sentiments embodied in the stakeholder capitalism perspective but feel that execution could be complicated. Could you discuss the Board's perspective on the concept of stakeholder capitalism and what principles the Board would use to balance the interests of various stakeholders as it develops and implements the company's long-term business strategy. Thank you.

That's a long -- that's a great question, and in my prepared remarks, I mentioned that the stakeholders of AMETEK are very important. And we've had a long-term, long-held core belief that all of our stakeholders are very important, and these include our stockholders; our colleagues in the company; our customers; our suppliers; and importantly, the communities where we operate. I'll give you a specific example, the AMETEK Foundation, which has been around for a considerable period of time, focuses on the people that work in our company being more important and influential in their communities by supporting charitable causes that they're involved in. So we've been very successful with that. And fundamentally, we always do the right thing in all facets of the company, and we do that while delivering long-term results. So we've been able to balance those needs of our stakeholders for quite a period of time.

Mr. Chairman, there are no further questions at this time.

Okay. We're now finished with the Q&A session. Thanks to all you for your personal commitment to AMETEK. Goodbye.