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

Okay. Great. So next up, we have AMETEK. AMETEK is a leading manufacturer of electronic instruments and electromechanical devices. The company's product portfolio includes Test and Measurement, Metrology and Precision Motion Control equipment in addition to aftermarket services. Joining us today from AMETEK is Treasurer and Vice President of Investor Relations, Kevin Coleman. Kevin was named Treasurer in November 2021 and has also previously held the role of Director of Corporate Strategy and Development at AMETEK during his more than 20-year career with the company. AMETEK has 231.7 million shares outstanding, stock trades around $127, $29.4 billion market cap, $2.2 billion in net debt, $31.6 billion total enterprise value. So Kevin, thank you very much for joining us. I'll turn it over to you briefly.

Okay. Great. Thank you, Brett. Hopefully, everyone can see my slides. I'll just spend a couple of minutes providing an overview of AMETEK, and then we'll get into some questions. So AMETEK, who are we? We're a global manufacturer of we'll call it, higher technology products and solutions. Sales approaching -- quickly approaching north of $6 billion, very balanced geographically. About 50% of our sales are outside the U.S., with a pretty good balance throughout parts of Europe and parts of Asia. AMETEK is a very diverse company from the viewpoint of markets, products, technologies, and that's by design as part of our strategy. We want to be able to serve a wide range of markets. And we talk about niche markets and niche applications where we can be the leader in those markets and be the leader on the basis of the technology that we develop and provide. About 18,500 colleagues worldwide. A very experienced management team, a lot of tenure at AMETEK from senior levels all the way through to business unit levels, which I think speaks a bit to the culture and really the growth and the opportunity that AMETEK has provided to employees over the years. And I'll speak to the growth model, which you could see in a little visual on the right there is really the kind of operating model of AMETEK, and it's been consistently applied now for 25-plus years. Our mission statement, we have over 40 different businesses, and really the unifying factor is really this mission statement of solving our customers' most complex challenges with very differentiated technologies. So we spend a good bit on R&D to make sure we can continue with that leadership position and help our customers solve their challenges. Core values, it starts -- we've been publicly traded for 91 years. And so we've built up a real important set of core values over that time, which are embedded across the company, supports our growth vision and then, ultimately, our strategy, which we'll speak to more today. Certainly, sustainability is a critical part of how we think and how we do business. We have increased our efforts in communicating all the different things we're doing relative to sustainability, both how we manage our business and how we manage our human capital inside the company, but then also with the products and solutions we provide to our customers. So we do a lot of things that we have, but we need to make sure we're out explaining what those are and the importance of those to our different constituents. Again, pretty high level, and I'm moving fairly quickly, but 2 reportable business segments across AMETEK. Electronic Instruments Group is the largest, about 2/3 of sales, a little more than 2/3, highly profitable, as you can see, at about 25% operating margins with high 20% EBITDA levels. Electromechanical Group is also very profitable as well, and that profitability has increased in the last couple of years to about this 25% level. And then you could see some of the different broad market areas both of those segments serve at the bottom. Across all of AMETEK and, again, across those 40 businesses, I mentioned we serve a lot of different end markets across or maybe even above those end markets or a broad set of, we'll call them, secular growth themes that a good majority of our revenue falls within these different buckets. There's others, but we just decided to list these out. So the way we think about growth is making sure we're diverse, as I noted, but also making sure our products and our businesses are focused on aligning their next-generation investments in technologies with important growth trends and important growth themes. So we'll continue to do that, both organically, but also when we look at acquisitions. And then I noted the growth model. And again, this is a visual of how we think about it. It starts at the top with operational excellence. That is the management system, if you will, relative to cost, asset, management and efficiency. It's really well embraced across the company. And then it gets into the growth elements of new products, market expansion. The cash flows we generate support the strategic acquisition model and support the reinvestments back in the business. And all embedded within that is obviously the talent in the company. We continue to focus on developing the talent. And Dave Zapico, our CEO, and our management team talk a lot about wanting and making sure that we have the talent today to support the doubling of AMETEK. So to support us becoming $12 billion, $14 billion in revenue. So that's really where the focus is, and we're in a very good shape. And that growth model has been very successful. I mean this is just a visual of the last 3-, 5-, 10-year performance or outperformance, I should say, versus the S&P 500 and then the S&P Industrials. If you extend it out 15 or 20 years, actually the returns are equally good, if not even better. So a very consistent strategy, very high levels of outperformance and growth and expect more as we move forward. So yes, again, we feel very well positioned. I mean there's a lot of short-term dynamics, which I'm sure we'll get into. We're managing them very, very well. We feel confident that we'll continue to be able to manage those. And again, feel confident in the growth model and look forward to the next stage of growth for AMETEK. So I'll stop there and open it up for some questions.

Great. That was very, very thorough. I wonder if we could just start with those challenges you referenced and how AMETEK's unique decentralized business model, which you touched on, but also with a centralized team to capture the scale and resources of the enterprise, how has that enabled AMETEK to continue to navigate the meaningful supply and inflation headwinds we've seen across the industry the past 18 months?

Sure. Sure. Yes. I mean, I think the design of the model and the structure of AMETEK really allows us to be both flexible and adapt quickly, but then also provide, I'll call it, broader infrastructure global support to the businesses. And I noted roughly 40 business units across the company. So they're -- think of them as their own P&Ls, the general managers have full responsibility for that business all the way from sales, marketing, new product development, finance, all functions essentially sit under each of those business units, supply chain. So they own their business and own their global P&L. What we do is we provide some infrastructure, I'll call it, at the corporate level to support those 40 business units in what they're doing. So we have -- in the case of the specific dynamics we're dealing with today, we have a global sourcing organization, 35 to 40 people that are based globally and certainly a good presence in different parts of Europe, Eastern Europe, parts of Asia that allow or help our businesses as they're considering expanding their supply base or identifying new lower cost of supply or additional suppliers. So you can envision in an environment like this, the local teams are managing the supply chain challenges day-to-day based on their inputs, based on their supplier base, their day-to-day. But they're really leveraging this global supply team who is putting additional resources on putting out issues or solving issues, they're aggregating purchases, they're aggregating the strength of AMETEK and our presence, if you will, to put pressure on suppliers to the extent we need to, to identify alternative sources of supply. So the mix of businesses managing the businesses that they have and the functions they have with an infrastructure in the case of supply chain. We have the same thing relative to manufacturing footprint, sales offices, et cetera. So there's other elements of this. But in this case, that mix and balance, we find the most valuable and has really allowed us to navigate this very well. I mean our pricing in 2021 was a full point ahead of inflation as a percent of sales. So we were about 4 points of price and about 3 points of inflation. So we're able to manage the inflationary side reasonably well, but also get the price back to the differentiated nature of our products allows us to do that.

And can we discuss AMETEK's automation platform, how you've built that over the years, about how large it is today and the future prospects for this platform within AMETEK going forward?

Sure, sure. Yes. I mean it's a really good story. It's a business that is in the 15% -- I'm sorry, 10% to 12% of AMETEK sales. So it's in $600 million, $700 million and growing very well. The business has formed over the last 15 years. We always had an automation, we call it motion control capability. We have acquired a number of companies over the years, probably the largest being Dunkermotoren, which many of you may be familiar with, the German-based automation provider. That really gave us a footprint in Europe to complement the footprint we had in the U.S. and really helped globalize that business. And the growth, again, has been outstanding for the last 3 to 4 years. When we say automation, for us, it's very discrete, precise automation. We're not factory automation providers. We're not large process automation players, but it's very discrete. It's tied to very accurate repeatable motion. So if you think of applications in medical devices, medical testing instruments, semiconductor fabrication equipment, different types of transportation applications where there's a need for high reliability motion, often very small footprint environment, that's where we specialize in developing technical solutions for our customers. And the end markets are endless for us. The shift to automation globally in really all aspects of life, industrial, consumer is really creating a nice tailwind here. And the business is well managed globally, a lot of opportunity. They're pretty active on the M&A side and finding niche businesses to bolt in to what they're doing to add additional technologies or maybe some geographic reach. So yes, I feel really good about that business. And again, it's in that 10% to 12% of sales.

Great. And I wanted to touch on Abaco Systems, one of AMETEK's larger acquisitions last year, of the 6 you were able to complete in the year. What capabilities does that bring to AMETEK? And then more broadly, how are you seeing activity levels play out across your diversified aerospace and defense platform this year?

Sure. Sure. Yes. Abaco is -- as you know, it was our largest acquisition. We acquired it almost a year ago now. It's April of 2021 when we acquired it. Integration has been going very well. We do a very thorough diligence. So we felt very comfortable when we bought that business, and it's been playing out as we expected. Their value proposition, if you will, is they provide embedded computing systems that are used in defense, in commercial aerospace applications. So they're designing very unique capabilities that are needed within the communication networks of these applications. They're kind of, again, value differentiators. They're able to take commercial technology solutions and ruggedize them for military and defense applications. And that's a unique skill set. So the defense areas throughout the world, certainly the U.S. is looking more and more to commercial technologies as a way for them to accelerate their development. And a company like Abaco is really helping them do that by playing that middle man between the commercial providers, developing the custom ruggedized solutions that the defense departments need, and they have a legacy. It's a former GE business, a set of businesses that were embedded in GE couple of decades ago that spun out into a private equity ownership. And then we acquired it from that private equity ownership. It nicely complements what we do within commercial aero and defense. And if you add up total commercial aero and defense for AMETEK, we're in the about 18% to 19% of our sales, with defense about 10% and then commercial aero in that 8% to 9% range. So a nice mix, a nice balance. And to your question about what are we seeing in that space, defense for the last 3 years has been very good. It's been growing at a, call it, a low double-digit rate. This year, we're targeting about mid-single-digit growth, so still very healthy. Commercial aero, certainly last year -- or I should say, the prior year was very challenging. Last year, we started to see a return to growth. I expect more of the same this year. Certainly, we're paying attention to the COVID dynamic and its variants, but we're seeing the aftermarket pick up. We saw late last year, it's continuing this year. The OEM takes a little bit longer for it to cycle up, but we do expect that to continue and also expect commercial aero to be up about mid-single digits in 2022 as well.

Great. And as we think about sustainability, some of the targets your customers have put out that they want to achieve over the next 5 to 10 years, can you discuss the products that AMETEK has been developing internally as well as the capabilities you've added through M&A that enable your customers to execute against the aspirations they have in that area?

Sure. Yes, absolutely. So I mean sustainability is an important area for us. We're seeing strong demand from our customers in this area. I mean it's across the broad process spectrum, which is a big end market we serve, be it oil and gas, chemical. There is an importance to make sure that there's controls, emission reduction, instrumentation. And our products play a really key role in that. So our instrumentation really is measuring and analyzing different process variables. So if you take an oil and gas environment, there are various emissions. There's regulations and controls that are required. AMETEK's products play a role in that. So it helps our customers become more efficient, measure output, be it emission, greenhouse gas emissions and then ultimately control that. So that's just a kind of a legacy part of AMETEK that certainly is a key player in that space. And then if you convert to maybe more of the renewable energy space, we have a broad set of businesses within our Power Instruments division that is providing a variety of instrumentation, measurement devices that are used to support solar, wind and nuclear development. So we play a role in the early-stage research. We play a role in the actual production of those renewable energies. And there's a wide range of products. There's probably 10 to 12 different product categories that we have. And even the automation space plays a role. We have a number of different products that are serving and providing capabilities in areas like wind power development, let's say, we have automation products that are embedded within those wind farms. So it touches a lot of different parts of AMETEK across those 40 businesses, not even to speak of the medical and health care exposure, again, not a specific renewable energy space, but the broader health care medical exposure for AMETEK has now grown to about 15% as well. We have a number of great businesses there. So yes, we feel really good about the portfolio from the viewpoint of, again, it's diverse. It's focused in these growth areas that make sense. And we're seeing good secular trends. We're seeing our businesses organically invest in these areas. And then the M&A pipeline, if you look back at the last 6, 7 deals we've done, they're aligned with a lot of these characteristics, too. So we feel really good.

Great. And within traditional energy markets, are you seeing customers get more comfortable potentially moving forward with larger projects at some point this year? Could that provide a further uplift to that part of AMETEK late 2022?

It could. It could. Yes. I mean just to size it, oil and gas is in that 4% to 5% range of sales. So that's down a good bit from where it was 7, 8 years ago. And so it's at a modest level. But to your point, yes, I think there could be more upside there this year than maybe we were anticipating. As far as your question specific to projects, yes, I think middle part, late last year, we started to see more projects come to fruition. I think they're slower, as you know, right? Longer cycle, it tends to take a little bit longer for those to actually happen, but it feels like, yes, there's a tailwind there that's going to be needed. And right, you have to be reasonable and balanced here. I think there needs to be continued investment in that space as the transition to the renewable world happens, and we'll play a part in that. So yes, I expect there could be some decent growth this year.

Great. And Kevin, wondering what you're hearing and seeing from customers in terms of potential uplift activity from them seeking to reshore or near-shore their own production capabilities, both in the U.S. as well as international markets.

We're hearing a little bit of that. I mean we've been probably consistent over the last year saying that it hasn't been a major driver that we've seen. We can't quantify and say it's added a point or 2 to growth. I think it's a dynamic that's playing out. I almost would equate it to thinking about our business, right? Yes, we've done some reshoring or if you will, onshoring of production capacity that we had built up in China. But as we move that production to parts of Europe or parts of the U.S., we did not need to add much infrastructure, right? We were able to comfortably absorb that within our current factory footprint without any really need for incremental capital. And I think our customers, by and large, would maybe fall more into that bucket where yes, they may be shifting some things back to the U.S. or Europe, but I don't know that it needs a significant amount of incremental investment. It's happening, yes, but I can't say it's going to be -- has been or will be a major, major driver for AMETEK. We'll benefit from it on the fringes, given how diverse we are, but not maybe a major driver.

Great. And I was wondering if you could discuss the base of resource that supports AMETEK's M&A initiatives for the company to be able to execute 6 deals last year in a fairly challenging operating environment and what the ability to take on additional acquisitions this year looks like, whether they would skew to certain parts of the portfolio that are already undertaking significant integration activities.

Right, right. Yes. So just to size it, we have 10 resources -- 10 people dedicated to M&A. So full-time work is related to M&A. 6 of those people really are, I call them, the deal execution team. I think of them as the investment bankers. They interact with sellers, manage the diligence process, the valuation negotiations. So they're point people for the projects. We have another 4 resources that are more -- think of them as the strategic side, the deal sourcing team. And they're aligned with different parts of AMETEK in supporting the businesses as they build out and identify acquisition targets. So we have a mix of people there doing that work. In addition to those 10, each of the business units I noted has a focus and has an effort of identifying strategically where they may want to expand via the acquisitions. So they're driving that in addition to the 10 people helping them with that. So we have a really nice infrastructure in place, a lot of experience, a lot of people very knowledgeable. The bandwidth is really good. I mean last year, you noted we did 6 acquisitions. We deployed a record amount of capital, about $2 billion. As we did that, if you look at our -- from a balance sheet leverage perspective, we only added 0.2 turns to our debt-to-EBITDA levels despite deploying $2 billion of capital. And that's really a testament to the cash flows we have. So the capacity we have to do deals from a financial perspective is tremendous, strong, flexible balance sheet, great cash flows. The internal capability is equally strong. In addition to the 10 people, we have various business units that can support acquisitions. So I would say all businesses at this point are open and ready to do acquisitions. Even the businesses that are integrating acquisitions from last year, those are now becoming about 1 year into ownership, which is typically the point that they're ready to do another deal if it makes sense. So yes, we're ready to go. The pipeline remains good. I was just talking to someone on our M&A team yesterday, and the pipeline remains solid. And like always, though, we're going to remain disciplined, make sure we can hit the return hurdles we have, which we are one of the maybe few companies these days that still feel returns matter. And we're going to find those deals that are strategic to us.

Great. And from both an M&A as well as internal development standpoint, can you talk about the intelligence capabilities you've been incorporating into greater proportions of AMETEK's equipment portfolio?

Yes, right. The one thing that's important to understand, again, a lot of products, a lot of technologies and a lot of people think, well, we're providing just hardware products. While that's generally true and we don't really sell much in the way of discrete software, the large majority of our products, certainly almost all of our products within our Electronic Instruments Group have embedded software firmware that's really the critical differentiator, if you will, for those products. So we're providing measurement capability, analytics, algorithms, communication protocols that are all embedded within these instruments. And yes, I think the advancements around the real-time communication, the wireless connectivity over the years is really where you're seeing a lot of investments and a lot of development. The instruments now need to be smart certainly, and that's where a lot of the investment has gone. But really, our customers find the value in the unique capabilities our products provide. We have a large history of being leaders in these niche markets. So we understand the dynamics, we understand the requirements of the customers. So we have built up, if you will, a legacy of algorithms and capabilities that the customers provide value. The one thing that we're doing now in an acquisition we did a couple of years ago called Telular is really helping us shift into this direction in a bigger way, is kind of the space of IoT. And Telular as part of their business model has that embedded where they get paid a subscription revenue for the IoT capability they have embedded within their hardware solutions. So we're taking that capability and rolling it out across other AMETEK instrumentation businesses. So they can embed, if you will, an IoT approach into their sales model. And we're seeing good traction across a number of businesses, and a number of other ones are in the process of driving that. So that will increase the recurring revenue side -- recurring revenue stream of AMETEK, which is certainly a focus.

Terrific. And from an organic standpoint, can you discuss the portfolio that AMETEK has created in the research space and your expectations for that part of the portfolio this year?

Right. Research is kind of a unique market. I'm not sure many people size that in their company, but it's about 10% of sales. And when we say research, we mean typically pretty high-end instrumentation that we sell into laboratories, universities, commercial research institutions. And it's tied to -- you think of areas like material science analysis, semiconductor research and development. Certainly, medical and life science is another big area. So these instruments are very, very unique, differentiated, often very expensive. These are $1 million, $2 million, $3 million per instrument, have a reputation and a brand in these spaces that were kind of the known and go-to provider. So it's a good space. I would say, back in the worst of COVID, 2020, it was a little challenged. I think a lot of the laboratories and universities were physically shut down. So I think there was a little bit of a pause in activity in 2020. Even in early '21, it was a little bit slower. We started to see the pickup happen midyear and late last year and, this year, expect it to be running at a pretty healthy level, high single-digit level. So yes, a really nice market, 10%. Some, I would say, the higher technology parts of AMETEK reside within that broader market.

Great. And then maybe just the last question, which I think we covered it in the discussion of AMETEK's decentralized business model. But given today's news, just how you think about and strategize through geopolitical risk, both in areas we're seeing it today and more broadly across your footprint?

Sure. Yes. I mean we have an internal risk management committee here that looks at all areas of risk, cyber or supply chain, but certainly geopolitical areas as well. And we pay attention to that. In the case specifically of Russia and Ukraine, we have very little physical infrastructure, next to nothing, quite honestly, and a very small level of sales and customers in those areas. So the exposure specifically to those regions is minimal to almost none. But again, the diversity and the balance of our footprint geographically is one way we address the geopolitical dynamics as best we can. Certainly, you do things tactically to make sure you're not exposed to those regions financially. But yes, we try to just make sure we maintain a balance. Areas like China is a good example. We want to make sure we have continued exposure and presence in China, but you have to be appropriate in how much that is. So over time, as I noted earlier, we've shifted some production out of China to other parts of the world just to find a better balance there. So we look at things holistically from that viewpoint. But then in the short term, yes, we need to make sure if we are selling into areas where there's risks that we're protected, and we'll make sure we do that.

Great. Kevin, thank you so much for joining us this morning. Really appreciate your participation.

Thanks all. Have a great day. Bye.