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

So with that, next up is AMETEK headquartered in Berwyn, Pennsylvania, placed near and dear to my heart. AMETEK is a leading global manufacturer of electronic instruments, electromechanical devices. The company has 232 million shares outstanding. The stock is at $188 for a $43.6 billion market cap, $1.7 billion in net debt and a $45.3 billion total enterprise value. AMETEK operates in 2 segments. Electronic Instruments or EIG and electromechanical or EMG. The company achieved earnings growth through the AMETEK growth model, operational excellence, strategic acquisitions, global and market expansion and new product development with a focus on cash generation and capital deployment. So joining us today from AMETEK once again is Kevin Coleman, Vice President, Investor Relations and Treasurer. And I think with that, we will dive right into questions. If that's okay with you, Kevin.

Yes. Great. Thank you.

So I guess, first of all, we've talked a lot about M&A today, both the environment company's appetite for it, regulatory dynamics regarding it. It's always been a big priority for you. It does feel a bit like you've been talking more about your capacity and appetite for acquisitions in your pipeline than in the recent past. And also along those lines, you did just announce the acquisition of Kern Microtechnik. Maybe you could review the rationale for that deal. And how you source it? And if you expect more deals along those lines or larger deals like Paragon?

Yes, sure. Yes. Good place to start. I mean for those of you who know AMETEK know that we're very acquisitive. It's a core element of our growth model in addition to organic initiatives and operating capabilities. So we do look to deploy the very strong cash we generate on acquisitions. And the focus on acquisitions just to maybe size it and put it in context of our growth algorithm is we target and have delivered over decades now, a high single-digit sales CAGR and translate that into low to mid-teens earnings per share CAGR. So very, very good history of develop -- or driving that level of growth. Breaking down the 9% target sales growth, we look to have that pretty balanced now between organic and acquisitions. So let's just for argument's sake, say 4% of organic and 5 of M&A. So that's kind of our target. In any given year, we may look a little bit above or below either of those, but generally speaking, that's how we view it. And so we do put a big focus on acquisitions. Our strategy is to acquire companies like Kern, which you noted, which I would call very much a traditional type deal of size and strategy and that it bolts right into something we currently do or a business we currently have. And then we also look -- are now looking to do larger acquisitions. So we did a deal about 14 months ago called Paragon Medical, which was larger, still very strategic and a good fit with what we do, but larger from the viewpoint of its size and the capital we deployed. So given our aspirations to keep growing, we want to do a mix of both. We want to do the traditional size deals, and we want to do the occasional larger deals. And our pipeline largely reflects that fact. And so we feel comfortable about that. Specific to Kern, that's, again, a nice bolt-on acquisition for one of our existing businesses called Creaform. And really, they provide very unique capabilities around quality control and ability -- I'm sorry, Creaform was a prior acquisition. This is a fit for a business called Precitech, which provide very precise accurate machining capability down to like the nanometer level. So very, very high end, very niche capabilities. And what Kern does is really add to the existing capability we have within our existing business, it really rounds out that technology portfolio. So great business, we're able to expand their geographic presence given they're largely European based. So we have that ability to allow them to scale and really the ability to combine their product set with ours to provide a customer a broader solution. So it's ultimately going to be a really good deal for us.

Great. And correct me if I'm wrong, but a lot of times that your acquisition model usually you'll go in and buy a company with margins, call it, either high teens or low 20s and then you very quickly ramp those margins up as you implicate -- as you implement the AMETEK growth model onto that company. Is that a fair way of assessing that?

Yes. Yes. I think we're somewhat agnostic as to the profitability levels of the business we acquired from the viewpoint of -- if we find a business that's, call it, mid-teens pretax, if we see line of sight to improving those margins, at least to AMETEK levels and ultimately above because of the value we can add. In many cases, these businesses are just undermanaged, is a term we often use, right? Good quality businesses, great technology, great market position, which is generally undermanaged. Those are great deals because we can add a ton of value. So we found a lot of acquisitions of businesses or we've acquired a lot of companies with profit margins at or above AMETEK already. But in those cases, we're still able to add value, right? We can still improve those margins. So for us, we're happy to acquire companies like that as well. But the key is, strategically, how do they fit? Competitively, where do they stand in the market? How sustainable is that competitive position and then can we add that value through our operating model. And if you piece all those things together, you have a great deal we generate great returns on the capital we deploy, which is reflected in our total return on capital at the AMETEK level. And really, the thing we're very proud of is the consistency of that return on capital. We're one of the very few multi-industry companies that hasn't seen that return on capital decrease over time by acquiring companies overpaying, let's say. So we feel like that's a core capability of us and something that we believe very important to investors to see that return on capital history.

Absolutely. Maybe with that, diving into the business a little bit, could you talk about your end markets by industry. I mean you touch a lot of different aspects of the economy, maybe especially for those less familiar with AMETEK kind of give us a rough breakdown of those end markets where you're currently seeing strength? And what areas, at least so far in 2024 were a bit more challenged.

Yes. So very diverse certainly. I'll give a quick rundown and then we can get into more of the market-specific commentary. Largest market for us is medical or MedTech, it's about 20%, 21% of sales. The next largest is Aerospace & Defense. So combined, that's about 18%. So right there, we have almost 40% of sales tied to MedTech and A&D. And then you get into 3 markets that are all about 10% in size, Power, Research, which think of that as high-end instruments selling into a laboratory or a testing environment, and then 10% into what we call discrete automation applications. So a bit of a unique market. But nonetheless, it's discrete automation. So those are about 10% each. So they're 70%. Then we have semiconductor of about 6%, 7% and energy or Oil & Gas at about 5%. And then below that, you get into general industrial and some miscellaneous markets. As far as market dynamics, not surprisingly, the strongest market in the last couple of years has been A&D. It's been our biggest or best grower, if you will. I would say MedTech -- parts of MedTech have been very strong the last couple of years with the only exception being a business like Paragon that I mentioned, they're going through an inventory destocking dynamic with their customer base. And I think as you may be aware, others that are familiar with that space. A lot of these medical component providers or medical life science providers are seeing their customer base work down excess inventory from the supply chain crisis. So we're certainly not immune from that same dynamic, and we're seeing a weaker top line because of that. And then you get into areas like Oil & Gas or energy in general, probably next in line. Power markets have been solid. So I think the markets generally have been good other than those areas that have seen that destocking over the last 18 months.

Got you. And on the life science and medical aspect, any concern there in terms of government funding and how that makes its way into labs that use your products?

Yes, not particularly. I think we're diverse. We touch a lot of markets. We touch a lot of customers. Directly -- yes, I won't see a ton of impact, but will there be indirect impacts potentially as that's happened throughout different organizations potentially. I think we would tie that into some of what we've been saying in the last couple of quarters where you're seeing projects just generally get delayed a little bit, not across the board, but there's semblances of things getting delayed. And we would chalk that up to a combination of uncertainty, maybe funding levels having to be reassessed. Nothing from a viewpoint of lost business or competitive dynamics. It's really more just delays as this uncertainty plays itself out. So I don't expect anything meaningful there as far as a headwind.

Okay. Maybe then looking at in your Q4 results, you had record sales, but organic sales were down 3%. It's generally been, I think, the last few quarters where organic sales have been a little bit sluggish, but your orders have been positive. Looking forward, how do -- how should investors expect you to convert your backlog of $3.4 billion into sales where that organic growth is hopefully going to inflect positive at some point in 2025?

Yes. So given the diversity of businesses, as you can imagine, we have a lot of different cycles from the viewpoint of, we have many long-cycle businesses. I mentioned Aerospace & Defense, Power, Oil & Gas. So their backlog is out 6, 9, 12 months. So a lot of that $3.4 billion backlog you quoted, which is about half of our sales is longer term in nature. It's not book and ship, right? It's not going out at all in the next month or quarter. So there is the need to continue to drive order growth to support the short-term organic growth in addition to the backlog we have. So it's a good -- it gives us good visibility. But again, it doesn't get you all the way there. You have to rely on incoming order patterns to help you. And I think the positive we've seen, and I think the reaction from investors has been positive that we've seen 2 quarters in a row now after 4 -- I think it was 5 quarters of negative orders growth. We've seen 2 quarters in a row of positive organic orders growth. So again, it speaks to a little bit of the stabilization we're seeing in some of those destocking markets starting to turn up, right? We're cautious as to how quickly, but we're seeing some stabilization that is leading to those positive orders. So we hope we continue to build on that momentum. And that ultimately will certainly translate into organic sales here at some point as we get through the year.

I guess along those lines, in addition to the destocking dynamic, you've cited for the last couple of quarters, project delays due to uncertainties over interest rates, election, macro -- kind of where are we at? We have new uncertainties now. There are tariffs, which I'm happy to hear you comment about the impact of those -- what those might be to AMETEK. But what do we need to have happened, do you think, for those delayed projects to eventually go forward and not turn into cancel projects?

Yes, a really good question. There's not 1 or 2 magic things that have to happen. It's just the accumulation of uncertainties that have been building over the last 12 to 18 months, right? As we all know, it just creates a bit of caution from CEOs or customers where they say, maybe I need to rescope this project or maybe I want to just wait and see how this clears or there could be some funding dynamics in certain instances. What I would say is some of those project delays we've spoken to have turned into projects or turned into orders or sales, it's just that there's another set that maybe happens that creates a continuous stream. It will get better. I think the election cycle certainly created some uncertainty. After the election was over, the question we get is, did it change? No. People did not all of a sudden say, "Great, we're back." I think as we all know, the last couple of months have been not being short of just confusion and uncertainty. So yes, the election helped us determine who's going to be running the show, but there's still a ton of uncertainty. So that uncertainty will continue to play its way through and likely lead to some continued project delays for a period of time. And there won't be 1 magic thing that changes it. I think it's just going to naturally have to improve as we get a little more visibility. I think what customers need and certainly what the markets need is just visibility, right? Good or bad. If tariffs are going to be x percent, that's fine. Let's just know that so we can move forward. I think the uncertainty is what's the issue.

And on tariffs, your manufacturing tends to be very localized, but if you could just kind of review that with people and talk through where would you be potentially impacted the most there?

Yes. Yes. So we manufacture globally. I mean, as we said, we're very diversified. We have a large number of businesses globally. They all have manufacturing facilities in U.S., U.K., Europe, certainly the predominance of them. But we do have a number of what we call low-cost manufacturing centers throughout the world, a couple in Asia, a couple in the Southeast or a couple in Eastern Europe and 2 in Mexico. So we have the capability for our businesses to produce locally there, a portion or a majority if they want, but a portion of their products if they want -- and we have that flexibility to react. And that's what we did in 2018 when the China tariffs became a real issue. We had the flexibility to shift production and also sourcing that we had done in China to other parts of the world, I'd say, fairly efficiently, right? It took a little bit of time for some products, but we've got things moved pretty quickly. But while we were doing that, we were able to pass tariff cost on through price increases. So that would be the same set of actions or the same playbook we would use if and when tariffs come into place now, right? Pricing in the short term, maybe even the medium term depending and then look to rejuggle or reallocate your production and sourcing as needed. But because of the global manufacturing footprint and the fact that we have capacity, if needed, in other places, it's not going to be a really large incremental cost to us to reallocate that.

Great. I'm going to go to the audience now for questions.

Kevin, before I get into how you rooted for [ Brunson ] and the other guy as a wildcat, -- can you go over some little dots? Your CapEx maintenance is $150 million -- $175 million more or less, and that's why you get that extra cash flow. From a deal point of view, if you were in the administration, what tax dynamics, 100% bonus depreciation, you would like to get a 15% max cash tax. How do you -- do you have any ticks that would stimulate your customers and you to kind of have a little more clarity? And then the third part of that, is obviously with the change in deal structure, the -- the FTC, the DOJ divestiture in Europe are changing. Does that change your attitude towards the size of deals or the tuck-ins that you might look at?

Yes. Sure, [ Mario ]. Good questions. And yes, I mean I need a couple of big wins from Villanova to get us in the tournament this year...

No comment about that. All right. I was more thinking about the 76 versus that the team where your experts are all?

That's right. That's right. Yes. So as far as the first question, when I think about internally and you noted our CapEx, relatively modest, right? We're a light CapEx company, 2% of sales there's nothing that would lead us to become more incented to deploy capital, right? It's just a really minimal capital needs A good portion of that is tied to, I'll call it, maintenance CapEx, but there's an element of growth CapEx tied to efficiency improvements, modernizing our production capacity. So it's really, to us, depending on the tax structure and tax incentives is not going to change our view there. Will it change customers? Some, yes. We don't view it to say we would like this to happen or that to happen? And if it does, it's going to stimulate demand. I think a lot of the things the administration has been talking about doing would be pro growth. Now we've got to balance that with the potential tariff and trade wars, but I do think, generally, it will be pro growth, in many cases, less regulation, which then gets to your second point around M&A. Given the size of the deals we do and even if we move up and do some of the larger deals like Paragon -- go ahead.

No, sorry, I'm signaling for a mic, for somebody else.

Okay. Yes. So given the size of deals we do and the amount of capital we deploy and really the types of deals we do, we have not seen much in the way of any for that matter, regulatory issues with the deals we do. Yes, we need to do filings in antitrust filings of course for the deals, but have never really had an issue and don't envision that changing. We're not changing our philosophy, now the fact that there may be less regulation tied to that, we would say is a good thing because if nothing else, it may stimulate some more demand or more opportunity for the M&A market. So we think that would be good. But I don't necessarily sit here and feel like we're being hampered today and we'll benefit if things change. But net-net, I think it would help us.

Great. I think we've got another one back here and then Tony next.

This is maybe a little bit out of left field for your A&D business, especially. I'm sure you know the Department of Defense, especially through DARPA, are increasingly looking to introduce companies of your size and your technology infrastructure to the defense industrial complex of other allied nations such as Australia, Japan, Israel, U.K. so that you guys can coordinate technology development in your very niche areas. I wonder, do you have any experience with your own staff being involved either with the Department of Defense in those efforts or promoting it yourself contacts with small and midsized companies in the allied nations, defense industrial complexes like the countries I just named.

Yes. Absolutely. And one data point I'd give you is if you think about our defense sales, which is about 10% of AMETEK. A good portion of that, close to 35%, even 40% is selling into non-U.S. defense, military or countries for that matter. So we do have good exposure outside the U.S. The way we sell into that space is typically as a Tier 1 or Tier 2 systems provider, component provider, technology provider into a Tier 1 or a large system integrator. So to answer your question, do we directly need to go to foreign militaries to sell our products? In some cases, yes, that does benefit us -- but in many cases, we are somewhat agnostic when it comes to the platforms we're on. We have content essentially on all platforms on the defense and military side as well as the commercial side. So we tend to get pulled through as those opportunities arise. So we do find it as a good opportunity, and it's been a really nice balance to what we've had in the U.S. and with the U.S. DoD.

Great. As we're waiting for the mic to move, maybe I'll just jump in on a couple of bright spots recently in EIG, Zygo and CAMECA. Could you just help us out with the products that they make? What's been driving the success there in those businesses?

Yes. Yes. I mean 2 really good stories, 2 really good acquisitions that we did many years ago, both some of the, I'll say, higher growth businesses in the portfolio and probably 2 of the more technology unique businesses, right, higher technology capabilities. Zygo, some of you may recall, going back almost 15 -- 12, 15 years ago, was a small public company. So we acquired Zygo, and they provide optics, very unique, very differentiated, very precise optical devices that are used in things like space, defense, research, semiconductor manufacturing. So a lot of very, very high-end applications that require very advanced optics and development of those optics. So they have the capability and engineering pedigree to do that. So they're seeing good growth tied to a lot of those markets I noted, very good market position in the areas they play. And it's been a -- we shared this for and certainly can do it again, but we shared the performance of Zygo since we've acquired it. And it's very much a case study in how we've been able to integrate a business, drive profit improvement. But in the case of Zygo really refocus them on the right markets and opportunities to accelerate that growth, right? That's often underappreciated element of our model where we can redirect or make sure they're aligned as opposed to being too broad and too diverse, we focus them in on the best opportunities. CAMECA is another tremendous business, locations in Madison, Wisconsin and in France outside of Paris. They provide high-end Atom Probe technology that's really sold into a research and laboratory environment. So you think about next-generation material science research, space, environmental monitoring, semiconductor development, next-generation semiconductor. They provide these very technologically rich, multimillion dollar instruments into that customer base. So again, it's a tremendous story. We've been able to take that business, bolt on an acquisition, improve them operationally. And it's a really good business and one that's got good growth potential because of its leadership position in those markets.

Great. And Tony, do you want to jump up.

Yes. Thanks, Kevin. Kevin, a great job. Regarding the -- on the Aerospace side, the OE -- sort of the shift to the OE as we start to see the ramp coming in '25, '26, '27. How are you positioned there maybe versus the aftermarket? And then where do you sit as far as -- we've been talking a lot about those here. And the 17 exclusion areas for Department of Defense. How do you guys feel positioned there?

Yes. So to size it, I mentioned defense is about 10% -- so commercial is about 8% of total AMETEK sales, pretty balanced between commercial OEM products that we design and manufacture and then commercial aftermarket. So very good balance both nicely profitable businesses. And yes, you're right in that the last couple of years have been led a little bit more by the aftermarket, not surprisingly. But we're still seeing solid growth on the OEM side. Those could probably -- to your point, probably come back into a little better balance, if not being led by OEM at some point here in the next couple of years. But we have a good healthy balance between the two. And again, I mentioned we were agnostic, and this is very much true for commercial. If you do look at the large players, Boeing and Airbus, very balanced and very agnostic when it comes to platforms. We do not have an outsized position on one and an undersized position on another platform. And that when the issues with the MAX surfaced, right? Yes, we have good content on them. We want to continue to grow that content, but it wasn't sizable enough to impact the AMETEK. So that's kind of been our approach. We don't have any one customer or program for that matter, that can truly impact us. So we want to benefit from that up cycle in the growth rates and to build out of that capacity, certainly. And the aftermarket is in a really good place to be, and we see our businesses continuing to develop the capabilities of the service for their products, but we also have a, we call it a third-party MRO business that is able to provide service and maintenance capabilities to a broader suite of products, and that business is very well positioned and has seen good growth because of the dynamics. And then lastly, relative to [ Dodge], don't see a ton of concern there. I think we're going to monitor it directly given the areas in the departments and the functions they're focused on today, don't see a direct impact to AMETEK. But as we all know, these things tend to filter out and spread out. So there could be some indirect impact. We'd have to monitor over time, but nothing directly today as we're aware.

So I probably just have a couple of final quick ones. First, exposure to AI, whether selling products in to AI semiconductor companies or use of it within the organization?

Yes. So kind of both ways, and now we do sell some technologies into AI applications, like many, we have some content within the data center space. I'd say it's smaller size, relatively small, but higher growth, obviously. And one thing our businesses have done a nice job is identifying those programs or opportunities to attach themselves. So we think that's going to be one of the better growth markets moving forward, albeit off of a lower base. Semiconductor, much the same. A lot of the research businesses we do, a lot of the optics and quality control businesses we have tie into that broader space that's utilized tangentially within that AI space. And then internally, there's a number of different work streams that are underway, some at corporate, many of them at our business levels to continue. And we say continue because the concept of AI was called something different a couple of years ago. So we've continuously just build on what we've been doing. So really, our view is drive efficiency, right? You want to drive efficiency in your service capabilities, your R&D processes, your production environments, your back office, right? There's a lot more you can do in the back office if you utilize technology in the right way. So we're definitely going down the path with a number of different opportunities that will really drive that efficiency improvement. So yes, it's a great space. You have to be careful, of course, but it's a space we're going to see become a larger part of the internal operating structure.

Okay. Last one here. Just I know the focus is on M&A for cash deployment, but you did approve a new share repurchase program, $1.25 billion this year. You haven't really used share repurchase to really shrink the share base much over time. Is that something that could change going forward? Or we're still going to be pretty squarely focused on M&A?

Right. Yes. I mean the focus is still and has been for a while deploying the majority of our cash, free cash on acquisitions. So we don't view changing that strategy. So if you look historically, 75% roughly of our free cash has been deployed on acquisitions, the balance pretty much split between buybacks and dividend. I think fast forward, that's a good optimal mix that we would like to see. Now we'll be opportunistic, though, as we tell investors like we'll step in if we see a dislocation, not afraid and we have that capital available to be able to do all of the above. So yes, if we see a dislocation, we'll step in, and that's what we've done before. And when we do it in large chunks like that, to your point, it's kept the share count flat. But we don't necessarily, as part of our strategy, want to see that share count decline. Certainly, if it comes in place with M&A, we really don't want that to happen.

Yes. Great to clarify. Thank you again for joining virtually. I know you're on the road today. So we really appreciate it and look forward to hearing from you again next year.

Thanks, Ken. Thanks, everyone. Have a good day.