AMETEK, Inc. ($AME)

Ladies and gentlemen, thank you for standing by. My name is Christa, and I will be your operator today. At this time, I would like to welcome everyone to AMETEK acquisition of Indicor Instrumentation Conference Call. [Operator Instructions]. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer. Kevin, please go ahead.

Thank you, Christa. Good morning, and thank you for joining us to discuss this exciting acquisition. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, 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 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. This morning, we announced that AMETEK has entered into a definitive agreement to acquire the instrumentation group of businesses from Indicor-LLC. We will refer to the acquired businesses as Indicor throughout this call. The press release and the presentation slides to be used during today's call can be accessed on the Investors section of our website. We'll start the call with some prepared remarks, and then we'll open it up for questions. I'll now pass the call over to Dave.

Thank you, Kevin, and good morning, everyone. We are very pleased to be with you today to announce our pending acquisition of Indicor. I'm excited to share more details on the strategic merits of the acquisition and the meaningful value creation this acquisition will provide. Starting with Slide 3. This is a highly strategic acquisition and as a result of AMETEK's disciplined approach to capital deployment and is compelling and unique opportunity to acquire a portfolio of outstanding industrial technology businesses in one transaction. These businesses provide highly differentiated mission critical solutions to a diverse set of customers within attractive niche markets. Indicor's strategic approach to niche market segmentation and technology innovation along with their deep domain expertise and strong embedded customer relationships fit very well with AMETEK's long-term strategy. We have identified meaningful opportunities to create value through integration of the Indicor businesses into AMETEK's operating model and our distributed operating structure. Integration is our secret sauce, and we have created substantial value over time with our well-defined and proven process. This value creation will provide for accelerated growth and market expansion as well as improved profitability cash flow and strong returns on capital. Additionally, we are excited about the opportunity to further innovate and support our customers' critical applications given the complementary nature of Indicor's product and technology profile. Indicor generates approximately $1.1 billion in annual sales with strong profitability, providing a unique opportunity to acquire highly profitable niche differentiated technology businesses at scale. And one last point on this slide, we included the logos of the individual Indicor businesses on the right-hand side of the slide. These businesses each strategically aligned with different AMETEK businesses allowing for a distributed efficient integration into AMETEK's operating model. Now turning to Slide 4. As noted, the fit between Indicor and AMETEK's existing businesses is compelling and perfectly aligned with our mission-critical niche market strategy. Each of the businesses is well positioned within their respective markets and applications or technological capability is paramount. These businesses nicely complement AMETEK's end markets with balanced geographic exposures. Indicor's strong customer relationships and intellectual property helps support a sizable aftermarket services capability with approximately 50% of their sales derived from recurring proprietary aftermarket sales and services. As noted, there are compelling sales and cost synergy opportunities, which will drive us to further improve their profitability. We anticipate annualized synergies of 10% to 12% of sales in line with AMETEK's typical synergy levels. Altogether, we are excited about the opportunity to acquire a high-quality portfolio of industrial technology businesses of scale and are confident that this portfolio of businesses will generate attractive year 1 cash earnings accretion and strong returns on capital. Switching to Slide 5. As I mentioned, Indicor is very closely aligned with AMETEK's portfolio, what the businesses fitting within both our EIG and EMG reportable segments. Our end market exposures following the acquisition are largely consistent with our current exposures as noted in the table on the right. The close strategic alignment of Indicor businesses within AMETEK's existing group and divisional structure will provide for an efficient and low-risk integration. Integration responsibility will be distributed amongst experienced group presidents and division general managers who will provide ownership of the results. Each of the Indicor businesses will be placed in our structure where they fit best for long-term growth. So while we are acquiring a large business, it will look like a number of smaller distributed integrations led by experienced AMETEK business leaders. On Slide 6, I'll spend a few moments walking through the transaction details. The total cash consideration for the transaction is $5 billion, which represents an approximate 14x multiple of EBITDA. We expect to fund the transaction with a combination of borrowings under AMETEK's credit facility and new debt issuance. At transaction closing, we expect our ratio of debt to EBITDA to be roughly 2.3x, providing us with continued capacity to support our growth initiatives and capital allocation strategy. As noted, we expect the transaction to be solidly accretive to cash earnings in year 1 with solid returns on capital. The transaction is subject to customary closing conditions and regulatory approvals, and we expect closing in the second half of the year. On Slide 7, we include a 1-page summary of the 10 Indicor businesses to provide more background on each of the businesses and key end markets. The summary highlights diversity of their end market exposures and the fit within each of the AMETEK segment. Moving to Slide 8. So in summary, this transaction represents a disciplined deployment of capital on a highly strategic return accretive acquisition of a high-quality portfolio. Indicor provides AMETEK with further scale and diversification, niche differentiated technologies and a sizable recurring revenue stream. We're excited about the opportunity to add value through integration into AMETEK's operating model and to create meaningful shareholder value. With all that said, I'd like to take a quick moment to thank my AMETEK colleagues who spent considerable time supporting the acquisition process. And I would also like to thank the Indicor team for their support during this process, we're excited about the future and what we'll bring together. I'll now turn it back to Kevin.

Thank you, Dave. Christa, could we please open the line for questions?

[Operator Instructions] Your first question comes from Matt Summerville with D.A. Davidson.

So David, I was curious, if you look at the group of brands you're acquiring, are there 1 or 2 that drive the overwhelming majority of that aftermarket revenue? Or is that aftermarket revenue? Would you say fairly distributed across the 10 or so businesses you're acquiring? And then I have a follow-up.

Yes. I think it's a relatively broad distribution. The businesses are in size wise from a little over $200 million to slightly below $50 million, but they're all about that $100 million level and the aftermarket is relatively evenly distributed.

And then would you say if you think about maybe just -- I'll walk through a couple of examples where you -- the larger sort of portions here, so maybe those that are around that couple of hundred million range. How you plan to drive the cost synergy, I understand, but where you see maybe in some of the bigger divisions you're acquiring, where you see maybe more of the opportunity to drive commercial revenue synergy? And is the price capture typically seen in these businesses? Is that also pretty similar to the price power AMETEK has in the market?

Yes. Because of their niche differentiated market leadership, Indicor has substantial ability to capture price similar to AMETEK. I just -- there's a lot of businesses. So I'll give you an example. [indiscernible] is one of the larger businesses, and they focus on material prep, so preparing a sample before it's analyzed or our equipment does the analysis and they do the material prep before it's analyzed. So it's a sequence of a customer's unit process that's a perfect fit for our Materials Analysis division. That's an example, and that's the largest business that we're acquiring, but they all have similar type of fit with AMETEK, it fits like a glove. And as we integrate these into businesses, we're putting them in the places where they can capture the fit the most. So there will be sales synergies by the integration into the different parts of EIG and EMG.

Your next question comes from the line of Andrew Buscaglia with BNP Paribas.

Are you able to share historically what -- how this business has grown or some of these businesses have grown relative to maybe AMETEK's core business? And then how have margins trended based on corporate average currently, but maybe you can just give us a little context on that history.

Yes. I mean these businesses over the last 4 years have grown in the 6%, 7% range. And we have a build on to our model. We are a little bit more conservative. We have a 6% number. So these are mid-single digits growers in that 5% to 7% range is what we settled on.

Yes. Okay. And then it looks like it's in both EIG and EMG. Are there like where you consider like sister businesses that you have already that but align really well with some of these names. Could you talk a little bit more about that, like...

I mentioned the [indiscernible] business that's really complementary I mean, it's amazing the impact that we have. If you take the things that we're putting into EMG, for example, one of the businesses is named [indiscernible] and we're putting the businesses into EMG versus EIG really because of product and customer fit. But [indiscernible] is really in the -- they're automating their customers' processes, they have actuation systems and there's other businesses that have valve and valves and safety shutdown systems. We put those businesses in our automation business in EMG. Really, really close fit there. I mentioned [indiscernible]. I mean we have our P&A [ process and antical ] instruments is very strong in the energy market. the PAC business is a complementary fit. Those businesses are going to go tremendously well together. I could go through the whole thing. There's a great fit. And our people are very excited on both sides to be able to serve our customers at a different level.

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

Congratulations on the deal. Covered some good ground here already, and I just wanted to probe a little bit further on your approach to the integration. So these -- we're familiar with the businesses having covered Roper. And so there are not in the category of what we would call [indiscernible] kind of just the opposite. So in aggregate, the restructuring of these businesses would be less on the scale of the businesses that you typically acquire less restructuring needed. But in aggregate, because there are so many businesses, there could be a restructuring lift. So how are you approaching -- the thought would be pay-as-you-go? Just any help there for starters?

Yes. I mean we're -- it's a great question because these are very high-quality businesses. The management team understand accountability. The management teams understand how to run businesses and generate cash flow. So we're getting some premier assets. At the same time, the businesses are run very independently like AMETEK, but they don't have an overriding business system that we use and we've had tremendous amount of value by adding our business system. So that's something that we're highly confident in our ability to add to typical synergy levels. And I'll give you some examples. We look at deals, the AMETEK global sourcing is an incredible delivery mechanism for deal synergies. There really wasn't much of an aggregation of spend across the businesses that we're acquiring. So that's -- we'll leverage our global sourcing organization immediately. I mean that's been typically the largest driver of [ Synergia ] deal, and we understand what prices are being paid and what we're paying, and we think there's a lot of room there. The second thing is our international infrastructure facilities. We run them as one AMETEK facility, essentially, we have a hotel that everybody operates out of. And these businesses were so independent that they went and established their own sales and service infrastructure. So without changing how the business operates, there's really 130 sales and service offices that we're going to shrink and run our model that's going to generate significant synergy. We have a global shared services infrastructure, places like India, Malaysia, Mexico. There really wasn't a shared infrastructure. We get cost reductions out of G&A relatively shorter. We have a philosophy about localized production for local market growth, that's different than the acquired businesses. We have talented country managers in each country of the globe, if you're not successful in a market, our country managers can get involved and help you grow. And this is a small, very talented team that the businesses that we acquired didn't really have. So I think all these standard AMETEK tools will be used to support the Indicor synergy plan. We've done it successfully or many times -- and you combine the premier assets, the [indiscernible] businesses that we're acquiring with our growth model with the synergy capability that we have, it's a financial home run.

That's really good to hear. Can you help us -- help size for us, the acquisition in total, we can see it adds roughly 14% to the revenue base. But how many P&Ls are actually coming in. So how many -- how many P&Ls do you have today, just to kind of size organizationally, how that fits and how many senior leaders, group presidents will be involved in this? Just kind of give us that dimension.

So AMETEK has about 40 P&Ls and they're a little bit bigger than Roper's than in the core because we've consolidated some businesses over time. So we have 40. We're bringing in 10 separate P&Ls. So that will make 50 in total. One of the things I'm very pleased with is we have all 10 of these talented business leaders signed up with AMETEK, they're signed up to take us forward. So we're really pleased that we've got the management on board that's critical for -- it was critical for me. So we're basically going from 40 to 50. They're a little bit smaller than our business units, but we're perfectly comfortable with that. And about 80% of the businesses are in EIG and about 20% of the businesses are in EMG.

All right. That's really helpful. And just a last quick one for me is what -- have you been able to calculate the new product vitality index from the Indicor businesses? I know that's a real high priority for AMETEK, but it gives us also a dimension of what kind of emphasis and investment in new products that they had, what upside that might be?

Yes, it's much lower than ours. And the -- and we think we can move the needle there.

Your next question comes from the line of Jamie Cook with Truist Securities.

Congrats on the acquisition. I guess 2 questions. One, I mean, I think you talked about the long-term organic growth of the company being between 6% to 7%, and you're assuming 6%, but can you talk about the cyclicality within that range, if there is any. I'm just wondering if we're in a world where PMIs and industrial short cycle is improving, do you get some you get some benefit there. And then I guess my second question, just how the deal came about? It looks like you -- if the press is right, it wasn't -- maybe it wasn't a competitive bid situation. And I don't think so, but do we need to be concerned about any antitrust issues?

Yes. Great questions, Jamie. The first one is, it was really your question about the cycle and -- so our experience that mission-critical products may be delayed in the short term, but they'll eventually be purchased because they're a necessity. And when I think about this business, they have a 50% recurring revenue profile that will help provide a buffer if there is or when the next industrial downturn comes. I mean right now, the business has some very healthy backlog, so we're very optimistic on that. And as you know, AMETEK has a very good track record of managing businesses in all market conditions. And if I go back and I look at an example, during the 2020 downturn, our margin and cash flow actually improved. So we have contingency plans to put in place if something happens. But we're not -- we're -- we go into this with open eyes. And what I think about is the 50% recurring revenue profile really helps buffer any downturn. And you asked about the regulatory approvals. Yes, it's -- they're progressing through standard regulatory process -- we do not anticipate any issues. It will just take some time because of all the government agencies around the world that we need to get their approvals from, I mean we expect closing in the second half of the year.

And then just, sorry, the last was just how the deal came about. I mean there was a lot of press speculating this, but if you could give any color there.

Yes. I'm not going to speculate on press reports, but I can just tell you that Indicor is run by a premier private equity firm and we have relationships with them and they knew we were a logical buyer, and we've been talking about them for some time. And when you have a transaction like this that when we had the management capability to do it. We have the financing to execute from a really leverage -- underleveraged balance sheet, and we're 2.3x post transaction, and it just came together, and we're very pleased with it.

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

Congratulations. How long do you think it will take you to delever and what leverage level which you'll start contemplating M&A again?

Let me take that one, Andrew. So as you know, we're going to fund this acquisition through a combination of cash on hand and new debt. Pro forma leverage at the close is expected to be about 2.3x. So still conservative levels. The combined businesses are going to throw off a lot of cash. So we'll have the ability to delever quickly. But as Dave mentioned in his remarks, we're still very much focused on our key capital allocation priority, which continues to be acquisitions. And even though we're buying a big asset with this transaction, we'll continue to have considerable firepower. In terms of the deleveraging, it will be about 0.2 to 0.3 of a turn each quarter. So we have the ability to delever quickly if we wanted to.

And then what's the time line on this 10% to 12% synergy? Is it by year 3, by year 4?

It's exactly is by year 3.

Your next question comes from the line of Chris Snyder with Morgan Stanley.

Is there anything you could provide on Indicor's gross margin profile? It seems like at an operating margin level, the business has run quite well with similar margins to your own. So just trying to see if there is -- if it is coming in a premium gross margin, which could make that pathway to be more clear.

Yes. Yes. It's greater than 50%, Chris. So there -- it's a premium business with premium gross margins.

I appreciate that. And then if I could just follow up on the 10% to 12% synergy combination. Is that -- is that a combination of both revenue and cost synergies. And I guess, this seems like it's the typical AMETEK expectation to drive that 10% to 12% by year 3. So just how does that typically split between revenue and costs?

Yes. We've learned over time to value cost synergies much more than sales synergies. So that number is a cost synergy number. There's a model that has sales synergies that's much greater than what we're talking about, but we don't value that just based on history. We just -- the cost synergies for us have been a certainty, and that's where we rely on when we price the deal.

Your next question comes from the line of Joe Giordano with TD Cowen.

Is the 14x EBITDA multiple that you mentioned? Is that inclusive of the synergies? Or is that like as of today?

That's year one.

Year 1, okay. And then was this like a package deal? Like did you get to go in there and kind of pick the assets that you wanted out of the larger portfolio? Or is this already kind of prepackaged as this group of assets?

We didn't buy all of Indicor and the decision to acquire only the businesses that we acquired reflects our discipline to only acquire businesses that fit best with us.

Your next question comes from the line of Julian Mitchell with Barclays.

Congratulations on this news. I guess I was focused on Slide 4. It's a very non U.S. very global business here. And so in that light, the sort of 6%, 7% organic sales growth you mentioned in recent years is particularly impressive. Just wondered sort of -- have you seen the growth of this business be very U.S. centric or has been pretty diverse, even including that large slug in Europe? And maybe any color on what the China exposure is of the business, please?

Yes. I mean the business has grown well. It's growing well globally. It's grown well in China. It's a really balanced geography. I mean it is levered to some of the industrial themes now. There's an energy transition theme. There is a bit of a data center power theme in the business. The business, in particular, in the European businesses of stores and as a global business. [ Technolog ] primarily drives a lot of revenue from critical infrastructure in the U.K. So that business has done well, and they have a kind of a locked-in revenue stream by U.K. government programs that we're excited about. So they have some businesses that are -- the infrastructure world in the U.K., there's a business there. But mainly, it's a global business. It's differentiated technology. When you have differentiated technology businesses, you sell in the U.S. and you sell in Germany and you sell in Japan and sell in China, those are all the places that we look at to understand the differentiation of the technology, and they're selling well in the [indiscernible].

That's helpful. And then just following up on the point around sort of reinvestment. So it sounds like NPI, you can do a lot more with it there. But I guess the organic growth rate also tells us that it's probably not been underinvested in. Just wondered any sort of comfort you could provide around that point. I think most investors looking at a business that came out of [indiscernible] would say it probably hasn't been overinvested in. So just how you're thinking about any kind of true-up needs on CapEx or R&D or anything like that? Or do you feel those should be pretty minor after the close?

Yes. I think they're pretty minor after the close. I think we're going to focus on new product development, and I think we can improve the vitality of the businesses for sure. And we have some amount. We've done that successfully with our businesses over time. The PE firm, their focus was to improve growth. So they've done a few smaller acquisitions to really augment the growth profile, really additive to the business in terms of acquiring technology, small technology deals that really built nice technology that the core business didn't have. So they've done that work to improve the growth profile. And we just think it's a great fit for us and there's -- AMETEK is run by a lot of technical people in a lot of different places. And we think there's great opportunities to take the current portfolio of Indicor and the AMETEK portfolio, put them together, let's look at what's happening, and we think there's growth opportunities that will drive that weren't there before as separate companies.

Your next question comes from the line of Rob Mason with Baird.

Congratulations as well. I'm just curious, conceptually, after you get 3 years into this with the synergy capture as it is, I know maybe not one answer here, but if you could summarize what would you attribute the source to the premium margins? Is it market structure these businesses in? Is it a higher aftermarket mix than maybe AMETEK overall? Or just what would you attribute that to?

I think it's the basic mission-critical niche strategy. I mean they're leaders in market niches. They do a good job of servicing their customers. And because of that, they can get some good pricing from unique capability and unique value add that they have. And that's AMETEK's strategy. In a way, it's a perfect fit -- and we are very pleased on the recurring revenue side. They have a 50% aftermarket mix. That's a bit -- it's higher than ours, and we're pleased about that. And as I mentioned before, that's a buffer in difficult times. So the 50% aftermarket mix, that's reinforced by strong IP, embedded customer relationships, and it's a key part of the deal.

I see. And just as a follow-up. Within the 10 businesses, since they went into private equity, how has the leadership been, I guess, has there been much leadership turnover since they've been owned by private equity at the top?

No. They had some retirements and things like that over a period of time. But we're acquiring experienced leaders of businesses. They're very familiar with the businesses in the markets and they're all signed up to stand with AMETEK. So we have a seasoned mature leadership team, and I think they're going to adapt to the AMETEK growth model and the tools we have very well, and we're looking forward to working with them. And as I said before, it was important to have them all signed up with AMETEK and we have all 10 of leaders signed up to take the business forward.

SP1 Your next question comes from the line of Christopher Glynn with Oppenheimer.

Congratulations. Dave. So a lot of ground covered, and one was any portfolio moves since [ Roper ] sold. And I think you covered that. I didn't recognize Alpha or ADR. So I assume those were the pickups you're referring to but...

AGR was a new acquisition that was added during that period of time. Alpha, I believe, was existing and there were some other smaller brands that they added to augment the technology profile of the business.

Okay. And just the other one was just the idea of folding into your existing P&L. So I was surprised to hear you put out the equation of 40 plus 10 equals 50. I would have maybe thought might have been a net 4 new platforms, but I just want to kind of organize my thinking around that.

Yes. I mean as things logically make sense, they may come together over time. But we're going to take our time on the integration, make sure it's going well, and we're perfectly comfortable with that. When I started of AMETEK. I think we had 30 business units, and we are about less than $1 billion in sales. So now we're a lot bigger, and we have 40 going to 50. So we -- as we acquire businesses, we integrate them, and that's been a key thing for us, but we have some good businesses and it is 40 to 10 equals 50.

We have no further questions in our queue at this time. I would like to turn the back over to Kevin Coleman for closing comments.

Great. Thank you, everyone, for joining our 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.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.