AMETEK Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2022

There are 13 speakers on the call.

Operator

Welcome to the AMETEK Third Quarter 2022 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kevin Coleman, Vice President of Investor Relations and Treasurer.

Operator

Please go ahead.

Speaker 1

Thank you, Kate. Good morning, and thank you for joining us for AMETEK's Q3 2022 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer and Bill Burke, Executive Vice President and Chief Financial Officer. During the course of today's call, we'll 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.

Speaker 1

AMETEK disclaims any intention or obligation to update or revise Any forward looking statements any references made on this call to 2021 or 2022 results will be on an adjusted basis, excluding after tax, acquisition related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks by Dave and Bill, and then we'll open it up for I'll now turn the meeting over to Dave.

Speaker 2

Thank you, Kevin, and good morning, everyone. AMETEK delivered record results in the 3rd quarter With stronger than expected sales growth and outstanding operational execution leading to earnings above our expectations. Operationally, our businesses are performing exceptionally well and successfully offsetting inflation with price increases resulting in impressive margin expansion. We are also seeing continued strong and broad based demand across our diversified niche markets We are seeing 2 impressive organic order growth and a record backlog of $3,200,000,000 And this morning, we announced the acquisition Two excellent businesses, Navatar and RTDS Technologies, expanding our presence in high end precision optics and in testing solutions for the electric power grid and renewable energy applications. I will provide more details on these acquisitions shortly.

Speaker 2

Given our results in the Q3 and outlook for the Q4, we are again increasing our earnings guidance for the full year. Now let me turn to our 3rd quarter results. 3rd quarter sales were a record 1,550,000,000 Up 8% over the same period in 2021. Organic sales were up 11%. Acquisitions added 1 point And foreign currency was an approximate 4 point headwind in the quarter.

Speaker 2

Demand also remained solid across our niche markets with organic orders Growing 9% in the quarter, while book to bill was 1.07, our 9th consecutive quarter of positive book to bill. Backlog at quarter end was a record $3,200,000,000 up approximately $1,400,000,000 from the end of 2020. Operating income in the quarter was a record $385,000,000 a 14% increase over the Q3 of 2021, Our operating margins were 24.8 percent in the quarter, up a robust 140 basis points from the prior year With strong margin expansion in each operating group. Our ability to drive meaningful margin expansion despite the inflationary Environment reflects the differentiation of our technology solutions and our flexible operating model. EBITDA in the quarter was also a record of $463,000,000 up 12% over the prior year With EBITDA margins a record 29.8%.

Speaker 2

This outstanding performance led to a record of Earnings of $1.45 per diluted share, up 15% versus the Q3 of 2021 and above our guidance range of $1.36 to 1.38 Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group delivered excellent operating performance with continued strong and broad based growth. Sales for our Electronic Instruments Group were $1,050,000,000 in the quarter, up 7% from the Q3 of last year. Organic sales were up 10% with a 1 point contribution from acquisitions being more than offset by an approximate 3.4 in currency headwind.

Speaker 2

Growth was again broad based across our EIG businesses with particularly strong growth within our Ryland, TMC, Precitec and Thermal Process Management Businesses. 3rd quarter operating income was $272,700,000 Up 11% versus the prior year and operating margins were 25.9% in the quarter, up 90 basis points from the prior year. The performance of our electromechanical group in the quarter was exceptional with excellent sales growth and record operating results. EMG's 3rd quarter sales were a record $497,700,000 up 8% versus the prior year With organic sales growing 13% in the quarter and foreign currency a 4 point headwind. Growth was very broad based across all of our EMG businesses.

Speaker 2

EMG's operating income in the 3rd quarter was a record $136,500,000 up 19% compared to the prior year period. EMG's 3rd quarter operating margins were a record 27.4%, up an impressive 2 40 basis points versus the prior year. Overall, our businesses delivered outstanding performance in the 3rd quarter, allowing us to manage an uncertain macro environment, meaningfully expand margins and drive earnings ahead of our expectations. Now switching to our acquisition strategy. We are very pleased to announce the acquisition of 2 highly strategic businesses.

Speaker 2

Navatar and RTDS Technologies are both excellent businesses and highly strategic acquisitions for AMETEK, expanding our presence within attractive secular growth markets. Now let me take a moment to provide additional color on both these acquisitions starting with Navatar. Navitas is a leading provider of optical solutions for critical applications across several markets, including Medical and Life Sciences Research, Machine Vision and Robotics, Semiconductor and Industrial Automation. Their comprehensive suite of high precision custom optical solutions includes fully integrated imaging systems, Sensors, Cameras, Optics and Software. Navitas is an excellent strategic and complementary fit With our Zygo business unit, as their technical capabilities around cameras and optical systems further expand Zygo's product offering.

Speaker 2

Additionally, Navatar is a high growth business well positioned to benefit from the growth and demand for precision optical solutions across attractive growth markets. Navator was privately held and is based in Rochester, New York. Now switching to RTDS Technologies. RTDS provides real time digital simulation systems used by utilities and research and educational institutions in the development and testing of the electric power grid and renewable energy applications. Their simulation solutions allow engineers to rapidly prototype, Verify and test the performance of the electric grid, power instruments and networks in a closed loop system to help accelerate Product development life cycles and decreased testing costs.

Speaker 2

RTDS' simulation solutions are playing a key role in the modernization of the electric grid As well as supporting secular growth drivers including renewable energy, distributed power generation and energy storage. The acquisition of RTDS runs our power instruments businesses, testing and simulation capabilities, while expanding our exposure to the renewable energy space. RTDS is privately held and based in Winnipeg, Canada. We are very excited to welcome the Navator and RTDS teams to the AMETEK family. We deployed approximately $430,000,000 on these acquisitions, acquiring approximately $100,000,000 in annual sales.

Speaker 2

Over the past 2 years, we deployed more than $2,400,000,000 in capital and acquisitions and acquired 8 businesses. Our acquisition pipeline remains solid. We have a strong balance sheet and significant financial capacity and look to remain active in deploying capital and strategic acquisitions. In addition to the recent acquisitions, we continue to focus on ensuring AMETEK Strategically positioned for long term sustainable growth. Our businesses are driving broader adoption of our organic growth initiatives, including growth kaizen's, digitalization and new product development.

Speaker 2

This includes making strategic growth investments across our businesses to help support and accelerate growth. For all of 2022, we now expect to invest approximately $110,000,000 in support of these growth initiatives. We are seeing great results from these efforts over both the short term and long term. In the 3rd quarter, Sales from new products introduced over the last 3 years was 27%, a record level for our Vitality Index, reflecting the great work of our teams. These efforts have helped lead to double digit organic sales growth in each of the past 6 quarters.

Speaker 2

Now turning to the outlook for the remainder of the year. While we remain cautious in the short term given the dynamic macro environment, we are highly confident in the quality of our businesses and our ability to manage through these challenging times. Given our strong Q3 results and outlook for the balance of the year, we are again increasing our sales and earnings guidance. For the full year, we now expect overall and organic sales to be up approximately 10% versus our prior guidance of up high single digits. Diluted earnings per share for the year are now expected to be in the range of $5.61 to 5.63 16% compared to 2021.

Speaker 2

This is an increase from our previous guidance range of 5.4 $6 to $5.54 per diluted share. For the Q4, overall sales are expected to be up Mid single digits compared to the same period last year and 4th quarter earnings are expected to be in the range of 1.45 to $1.47 per diluted share, up 6% to 7% versus the prior year. To summarize, AMETEK had another excellent quarter. We delivered record performance, strong orders and sales growth, Robust margin expansion, increased our earnings guidance for the year and acquired 2 strategic businesses. The strength of the AMETEK growth model and our talented global workforce is evident in our results thus far this year and will continue to allow us to operate at a high level through challenging market conditions.

Speaker 2

We remain well positioned for continued long term growth. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, then we will be glad to take your questions. Bill?

Speaker 3

Thank you, Dave. As Dave highlighted, AMETEK delivered outstanding results in the Q3 with strong sales and orders growth, Excellent operating performance and a high quality of earnings. Let me provide some additional financial highlights for the quarter. 3rd quarter general and administrative expenses were $24,700,000 up $3,000,000 from the prior year due to higher compensation expense in the quarter. For the full year, general and administrative expenses are expected to be up modestly from 2021 levels and approximately 1.5% of sales versus 1.6 percent of sales in 2021.

Speaker 3

The effective tax rate in the Q3 was 19%, down from 19.5% in the Q3 of 2021. For 2022, we anticipate our effective tax rate to be 19%. And as we've stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate. Capital expenditures in the Q3 were $28,000,000 and we expect capital expenditures to be approximately $130,000,000 for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $76,000,000 For the full year, we expect depreciation and amortization to be approximately $310,000,000 including after tax acquisition related intangible amortization of approximately $148,000,000 or $0.64 per diluted share.

Speaker 3

For the quarter, operating working capital was 18.4 percent of sales. We generated strong levels of cash flow in the quarter. Operating cash flow was $327,000,000 up 7% versus the Q3 of 2021. Free cash flow was $299,000,000 in the 3rd quarter, up 6% from the prior year and free cash flow to net income conversion was 100%. Total debt ended the 3rd quarter at 2 point $36,000,000,000 down from $2,540,000,000 at the end of 2021.

Speaker 3

Offsetting this debt As cash and cash equivalents of $310,000,000 At the end of the 3rd quarter, gross debt to EBITDA ratio was 1.3 times And our net debt to EBITDA ratio was 1.1 times. As Dave noted, we've been active on the acquisition front. During the Q3, we acquired Navatar and subsequent to the end of Q3, we acquired RTBS Technologies. Combined, we deployed approximately $430,000,000 on these two acquisitions. We remain very well positioned to Deploy additional capital given the strength of our balance sheet and strong cash flows.

Speaker 3

We have no material debt maturities due until 2024 and modest levels of leverage. We continue to have excellent financial capacity and a strong balance sheet. Following our 2 recent acquisitions, we still have over $2,000,000,000 of cash Existing credit facilities to support our growth initiatives. In summary, our business has performed exceptionally well in the Q3 and through the 1st 9 months of 2022. Our outlook for the remainder of the year remains positive given our strong financial position,

Speaker 1

our proven growth model and world class workforce. Kevin? Thank you, Bill. Kate, could we please open the lines for questions?

Operator

Our first question is from Matt Somerville of D. A. Davidson, please go ahead.

Speaker 4

Thanks. Good morning. Dave, maybe could you talk a little bit about the organic performance you saw by geographic region and what, if anything, For lack of a better word, your canary type of businesses might be telling you about the macro environment? And then I have a follow-up.

Speaker 2

Okay. Yes. Regarding the geographic storyline, it was really strong Broad based growth across all geographies and a very balanced growth. I mean, the U. S.

Speaker 2

Was up about 11%. We had broad based growth there, notable performance in our Process and Automation businesses. U. S. Was the strongest, up 11%.

Speaker 2

Europe was up 9%, notable strength in process and our aerospace business And Asia was up 9%, notable strength in our process businesses. So no canaries in the coal mine for us. Orders are strong, sales were strong geographically and all regions showed solid broad based growth, Very balanced.

Speaker 4

Got it. And then Dave, could you maybe comment a little bit on what your price realization It was in the Q3 what your price cost sort of ratio looked like and how we should be thinking about incremental price actions for 2023? Thank you.

Speaker 2

Yes. In the Q3, our price continued to more than offset inflation

Speaker 5

and the pricing was

Speaker 2

very consistent across our portfolio. Pricing was about 6% and inflation was about 5%. So we had a Positive spread of approximately 100 basis points and we expect a similar price inflation spread for Q4 Of 100 basis points and the results speak to the highly differentiated nature of our product portfolio and our leadership position in niches. In terms of next year, really not ready to talk about pricing and inflation next year. I will say that we do expect that we will be able to offset inflation with price in from a philosophy and an operating capability, but we're going to refrain from discussing 2023 until we get Go through our bottoms up reviews with each of our businesses.

Speaker 2

So there's no reason to think it's not going to be positive next year, but we don't have the data yet.

Speaker 6

So I'm going to Hold off on

Speaker 2

that one, but really good performance on pricing in Q3 and we expect it to continue in Q4.

Operator

The next question is from Allison Poliniak of Wells Fargo. Please go ahead.

Speaker 7

Hi, good morning. Good morning, Allison. So Dave, you talked a little bit, certainly some caution out there. Your orders are really strong. Just maybe give your perspective of this cycle and maybe more importantly, how you think AMETEK's relative position is entering maybe a next down Turn prior to relative past cycles.

Speaker 7

Just any thoughts there?

Speaker 2

Those are great questions. I mean, the I think in terms of AMETEK, I think our underlying demand remains strong as I answered Matt's question. We're not seeing weakness yet. It's really broad based. Our organic orders are strong.

Speaker 2

They were up 9%. It was both groups had positive organic growth. Both groups are strong. We're growing at healthy growth rates in all major regions of the world as I just went through. And so So we feel good about that and we ended the quarter with a record backlog.

Speaker 2

So that is really good. And you talk about 2023, I think our portfolio is in much better shape to as we're going forward because if you think about what's happened, we Continue to shift our portfolio to exposures in attractive growth markets. Growth markets like automation, healthcare, Power, this recent acquisition is more renewables and the market shifts are attractive And our technology, our differentiation is stronger than it was 6 or 7 years ago. And we see that playing out in our organic growth Both relative and absolute performance. We've been and the big picture, we've incrementally improved our portfolio Without sacrificing a couple of years of growth to do it and have delivered an exceptional way along the path.

Speaker 2

I'll give you some examples. Our healthcare portfolio, it was about 10% 6 years ago, now it's 15%. Aerospace and Defense, it was about it was low double digits part of the business about 6 or 7 years ago, now it's high teens. Our automation business went from about 7% to 12%, so good improvements in all those areas As a percentage of our total portfolio and on the flip side, more cyclical businesses like our oil and gas and metals, they were more than 20% of sales 6 years ago and right now combined these sales are about 8%. So we feel good about the portfolio And it's performing now and we think it's going to perform in any kind of economic environment that we run into.

Speaker 7

Great. That's helpful. And then just on the acquisitions, I know you said, Elyse Navitar high growth. Could you maybe give a little bit more color on, is it are the growth of these acquisitions In line with AMETEK a little better and just any color on the margin performance relative to AMETEK's core? Thanks.

Speaker 2

Right. I think the Both acquisitions are going to grow in the high single digit to low double digit range. So they're both good growers And both acquisitions are very profitable businesses. The blended multiple It was about 11 times. So both very profitable, growing businesses and a fair price paid.

Speaker 2

We're excited to have each of these companies. Each fit perfectly with our acquisition strategy. They're leaders in niche markets. Each has very strong technology differentiation positions that are backed by excellent engineering capabilities And they expand our presence in attractive growth markets. Navicar is in the high growth optical solutions and life And RTDS is really well positioned to benefit from the modernization in electrical power grid and the investments Excellent exposure to the renewables market.

Speaker 5

So we've been working

Speaker 2

on these businesses for a good period of time and I'm just really glad to have them in the portfolio.

Speaker 7

Great. Thanks so much.

Speaker 2

Okay. Thank you.

Operator

The next question is from Deane Dray of RBC Capital Markets. Gits, please go ahead.

Speaker 8

Thank you. Good morning, everyone.

Speaker 2

Good morning. Good morning, Dean.

Speaker 8

Hey, we touched on it a bit So far in the earlier questions, but maybe just more methodically take us through the key end markets. Sounded like process Aero, we're strong, but can you just kind of go from the strongest to the weakest and we'll take it from there? Thanks.

Speaker 2

Sure, Dean. I'd be glad to do that. The strongest was process. They had the strongest growth in the Q3. Organic sales up low teens On a percentage basis, the growth is really broad based.

Speaker 2

And as I said in my prepared remarks, it was particularly strong growth Across our Rolland Healthcare business, TMC Precitec and our Thermal Process Management businesses. And for all of 'twenty two, we now expect organic sales for our process businesses to be up approximately 10%. The segment that grew the 2nd fastest was our automation and engineered solutions. Very strong Q3 with organic sales up low double digits, a balanced growth across both automation and engineered solutions. And for that sub segment, we now expect organic sales to be up approximately 10%, up from high single digits up to 10% for the full year with similar growth across each segment.

Speaker 2

Then I take you to the Power and Industrial Business, Mid single digits on a percentage basis in the quarter. We saw a notable strength across our power instruments and programmable power business And we now expect that sub segment to grow 10% also. So that was we rose that from high single digits To 10%. And now I'll talk about the Aerospace and Defense Business. Organic sales for our Aerospace and Defense businesses were up mid single digits In the Q3, commercial sales were really strong, up mid teens in the quarter, driven by strong underlying demands across Industry, commercial OE, aftermarket and business jet all grew nicely.

Speaker 2

The strongest were aftermarket and business jet. And defense sales were up low single digits in the quarter. And for the full year, we expect organic sales for A and D To be up high single digits on a percentage basis with our commercial aerospace business to growth to be stronger than the defense growth. That's a walk around the company team.

Speaker 8

That's fabulous. How about just The idea of any changes at the margin and customer buying behavior. Now in some cases, we've seen as supply chains are normalizing a bit, lead times come in a bit, They don't have to put customers will have to give you the bigger orders just to get in line. Is there any kind of change there? And maybe Share with us the cadence of the quarter in terms of orders.

Speaker 2

Right. I'll start with the cadence. We had strong quarters in each month with the strongest being September. We had a very strong September and For that matter, our October results are consistent with our outlook showing a solid performance. Yes, a good question about The underlying orders and the way I think about it, we'll certainly be running into more difficult comparisons for order input in the coming quarters.

Speaker 2

And we do expect our orders to moderate due to the fact that you're talking about our customers Placed orders early due to supply chain dynamics. And we believe that the return to more normalized ordering patterns and But even with these factors, I expect our backlog to be in an excellent position as we enter 2023.

Speaker 8

That's real helpful. Thank you.

Speaker 2

Yes. No problem.

Operator

The next question is from Josh Pokrzywinski at Morgan Stanley. Please go ahead.

Speaker 9

Hi, good morning guys. Good morning, Josh.

Speaker 10

Dave, I want to follow-up on Dean's last question and then your last comment about backlog. With supply chain starting to improve And really some of this kind of extra backlog really being more supply side driven than anything else. What would you say is sort of the amount of backlog you think You

Speaker 4

could convert

Speaker 10

next year. I guess, how should we think about the timeframe for getting from where we are today, maybe down to more typical levels because The entire business isn't long cycle, just kind of pockets of it.

Speaker 2

No, no, that's a good question. And the way one way that I think about it may help you. If you go back a few years, our annual sales were about 30% in backlog. So that was a typical year for us. We had about 30% of annual sales and backlog.

Speaker 2

Right now,

Speaker 5

we We

Speaker 2

have a little more than 50% of annual sales and backlog. So there's a 20% difference there. And that's why I think we have solid visibility And that's in place because of the ordering patterns of our customers have changed and we've had really strong order input and we had to protect our customers with inventory Because of the supply chain crisis. So the increase of backlog went from about 30% of annual sales to 50% of annual sales. And that's the kind of way I think about it, if that helps you.

Speaker 10

That is helpful. I guess how fungible should we think of backlog? So let's say Book to bill starts to trend well below 1 for a couple of quarters between comps and maybe a little bit of a demand slowdown. Are you guys able to pull that in sort of in real time? Or does that have specific dates associated with it where you can't really pull it in as much?

Speaker 3

Yes, Josh, I'd say as you look at the backlog we have, I mean, almost all of it could be shipped. There'll be a small portion of it that will flip over into 2024. But when you look at what's coming due Over the next 12 months, next well, really, if you look at it 15 months to get you through the balance of 2023, there's a large portion of it, a great majority of it will ship In the next year.

Speaker 10

Got it. That's helpful. I'll leave it there. Thanks guys.

Speaker 2

Thank you.

Operator

The next question is from Nigel Coe of Wolfe Research. Please go ahead.

Speaker 11

Thanks. Good morning, everyone. Thanks for the question. Just going back to the acquisitions. I'm guessing these are more North American centric acquisitions.

Speaker 11

So just wondering if there's

Speaker 6

a globalization Sort of angle to this

Speaker 11

and just want to confirm some numbers. It sounds like these are high 30% EBITDA margin combined. Is there any difference between the 2 acquisitions? Or would

Speaker 6

you say they're quite consistent across that across the both

Speaker 11

of them? And can they Go even higher than that? I mean, are there any sort of easy synergies from supply chain, etcetera, that can actually move the needle on those margins?

Speaker 2

Yes, you're right about the profitability. They're high profitability businesses. Navatar is maybe has a little higher growth rate and a little lower profitability than RTDS that has higher profitability and still has a healthy growth rate, but maybe slower than Navitas. There's a normal amount of synergy for us. These deals are both private businesses and there's Excellent opportunities for us to improve the cost and revenue generation capabilities of the business.

Speaker 2

And Yes, there is a globalization theme. RTDS is more globalized already than Avatar, but Both of them will benefit from AMETEK's global scale. So good insight on your part.

Speaker 11

That's great. And then my follow on is really digging into the EMG G margins, which were pretty exceptional. Did a disproportionate amount of price cost land in EMG or are we Seeing some mix impact from commercial aero aftermarket. Any details there would be would be great.

Speaker 2

Yes. I mean the EMG's Performance was excellent in the quarter. As you mentioned, they had record margins of 27.4%. And the biggest factor when you look at it is Our higher margin businesses are growing faster in the quarter in particular and EMG is Pretty much, John, what AMETEK continues to do, moving up the differentiation curve with their product portfolio And we exited some of the lower margin consumer businesses over time. So they're really good Book of business as we go forward up the differentiation curve and they're getting better pricing because of that.

Speaker 2

But in terms of pricing, it was really broad based across all of AMETEK. So it wasn't EIG and EMG were similar in terms of price. It's really, if you want to think about it, the Certain mix effect because the higher margin businesses grew faster in the quarter.

Speaker 6

Very clear. Thanks, David.

Speaker 5

Thank you. The

Operator

next question is from Scott Graham of Loop Capital Markets. Please go ahead.

Speaker 9

Hey, good morning, Dave, Bill, Kevin.

Speaker 6

Good morning, Scott.

Speaker 9

I wanted to talk a little bit more about The backlog piggyback on to Josh's question. Bill, you indicated, I think it was Bill, that 15 months is kind of like the shippable. So are you also saying that customers can't push that back that these are sort of Contracted shipment dates, what's the dynamic look like there?

Speaker 3

Yes. The reason I took the 15 months was to get us to the end of next year. That's really the point I was making there. And you always have to work with your customers on push outs or pull ins. And But I think the point I was trying to make is that much of that backlog is due and shippable next year and we'll work through it.

Speaker 3

But as Dave said, it's only half of next year's Shipments, we're going to continue to book orders and be able to ship against those.

Speaker 9

Okay. So when you say you talk about talk with customers about this, There is a chance that some of these things could be pushed out a quarter or 2.

Speaker 6

Yes.

Speaker 2

Yes. Like any It's a typical business. I mean, there it's a firm backlog backed by firm POs, but we work with our customers on both pull ins and push outs and Inevitably that happens every quarter.

Speaker 9

Got it. Thank you. My other question is around acquisitions. You know, 2 deals, it's been quiet this year at least. So, maybe is this a situation Hope springs eternal is that are you starting to see bid ask spreads close into a point where There might be an acceleration or was this just something that a couple of deals and I'm asking the question because it's 2, it's not 1, right?

Speaker 9

So, right. So, what does that mean for like the next 6 months do you think?

Speaker 2

When I look at our backlog and deals and potential deals, I feel very optimistic that Over the next, say, 12 months, we're going to be able to deploy our free cash flow and acquisitions. We the pipeline is very, very strong. There's a we're working with quite a few businesses right now and Actively exploring some exciting opportunities. So and we have the financing to do it. I mean the pricing is starting to come in on deals now And our relative position versus some other competitive buying, like private equity is improved.

Speaker 2

So I'm looking I'm pretty optimistic about deals for 2023 and our backlog is going to support it and our balance sheet supports Strong cash flow is supported. So it's going to be a big part of the future AMETEK story.

Speaker 9

So you're saying, Dave, you're confident that over the next 12 months, You can deploy 100% of your free cash flow on deals.

Speaker 3

Yes, I believe that to be true.

Speaker 1

Great. Thank you.

Speaker 2

Okay.

Operator

The next question is from Rob Wertheimer of Melius Research. Please go ahead.

Speaker 5

Hi, thanks. Hey, Brock. My question is hey, on Navistar, I don't know if you can Stand on the niches they participate in. And the reason for the question is just there's some very large changes in the way the world Growth rate, future growth rate and where they really attack and whether that's helped by some of the ongoing investment.

Speaker 2

Right. Yes, I think some of the reassuring is going to help them. I mean the largest Market segment is in the medical and life sciences area where they're very they've had very successful penetration And optics used in various types of microscopes, they're also Their optics are very, very good and they're in a lot of machine vision and robotics applications. They sell to some big name semiconductor companies at the high end of the market. And We just think the combination of this business with our Zygo business, that's the premier optical business, just puts us together and gives us some Additional tools to go to our customers with and it's very optimistic on the future and very low risk deal for us.

Speaker 5

Okay, great. And if I may, can I ask the same sort of question on RTDS with some of the upcoming changes to power grids, maybe that's a longer term Situation, but I don't know if you're seeing opportunity and inflection there?

Speaker 2

We are. We are. And I think we got this business at the right time because As people put renewable energy on the grid and whether it's a wind farm

Speaker 5

or a

Speaker 2

field of solar panels or On the electrification, they have charging devices for electric vehicles. Each one of those things that they add to the grid It's not simple. There has to be a lot of analysis done and they have to understand the impact of the they're adding to the grid. At the same time, there's a lot of investment in the grid. Some of the Infrastructure Act is putting investment in the grid.

Speaker 2

RTDS is really used to help Simulate and modernize the bridge. So they have a high market share and they're used by all the utilities to understand what's going to happen with modernizing their electric grid. So They're really well positioned for the future and they have an excellent team of technical people. So we're optimistic on what that business can do with under AMETEK.

Speaker 5

Great. Thank you for the answers. Okay.

Operator

The next question is from Andrew Obin of Bank of Please go ahead.

Speaker 5

Hey, guys. Good morning. Can you hear me?

Speaker 2

Good morning. Yes. Good morning, Andrew.

Speaker 5

Hey, just a question on RTDS. As you guys move into more software, I know some of your peers as they were making a transition, you Try to apply the business system, but how do you fit something like churn into your framework and to optimizing the business? Clearly, you have an amazing playbook for integrating assets and taking the margins up. How do you apply your playbook to a more digital asset like RTDS and what adjustments have you had to make? Because that sounds very interesting.

Speaker 5

Thank

Speaker 2

you. Yes. In the case of RTTS, it's like many AMETEK businesses. It's a Combination of hardware and then software to operate the business. So it's really not different and it's not a Software only business and we've largely stayed away from software only businesses because Pricing has been very high and we couldn't get a good return on it.

Speaker 2

And to your point, we don't see the synergy that we'll add to the businesses. So But at the same time, software is very important to AMETEK. It's in these combined systems, very complex hardware systems and these software and that's our specialty and RTDS fits right into that.

Speaker 5

Now that's a great way to get smart on software. And then another question for you. Are there any businesses where AMETEK has added capacity or has plans to add capacity given what's happening out there? Just to follow-up on some of the questions were asked before.

Speaker 2

Yes. We have we're bringing on a lot of capacity in low cost regions. And we During this year, I mean, we've expanded our facilities in Mexico. We expanded our facility in Serbia. We expanded our facility in Malaysia and we have more in the works, but those were all put in place this year To add additional capacity, so we're dealing with our volume in low cost regions and it provides a synergy to and local market access for us.

Speaker 2

So we've been investing heavily in low cost production manufacturing and Malaysia is becoming a good facility for us. Again, Eastern Europe, Serbia and Mexico for the U. S. So it's we have these regional hubs that we're building up and it's Very successful for us and we've put a lot of capacity in place this year.

Speaker 5

Thanks so much.

Speaker 6

Okay.

Operator

The next question is from Christopher Glynn of Oppenheimer. Please go ahead.

Speaker 12

Thanks. Good morning, Dave, Bill, Kevin. Good morning, Chris. Hey, I was curious about the vitality index at 27%, a record level. I That ties into some of the discussion on the EMG margins.

Speaker 12

But is there a level you think of as a mature level of Vitality for the business, and I don't mean that as a negative, but you've got an entrenched Market for a lot of your products and just kind of curious how you're thinking about that?

Speaker 2

Yes. The first thing is not only is the vitality index, It helps us with our pricing because we're continually adding new features and benefits to our products and our customers and it enables us to Garner, a higher price because of the engineering investment that we're making, very consistent engineering investment over 5% over many years. We first started tracking the vitality. It was in the mid teens and over the past 10 or 15 years, it got into the 20s and The mid-20s and now I'm just very pleased with the 27% vitality. Clearly, our new product development process is working.

Speaker 2

We're developing Products our customers want to buy and 27% of sales for our end markets, we think that's a really good number. And in general, I put a range around it. I think between 20% 30% is a very good number for AMETEK. And again, the vitality helps Not only from new products, having fresh new products that you can win share with, but it also helps with pricing, realized pricing.

Speaker 12

Great. Thanks. And then I just wanted to go into the process markets a little bit. It's you called out some of your brands. I'm curious if you're seeing any Particular inflections, certain end markets or applications really stepping out, whether it's leaning towards capacity investments or Maybe modernizations.

Speaker 12

Yes, I would say

Speaker 2

the strong across The Board in process, but the healthcare space and the energy space For 2 areas that stood out in the quarter. And then with TMC Precitech, it's just a precision Technology where we're doing things that other people can't do and our orders have been high for multiple quarters and now the sales are catching up.

Speaker 12

Great. Thanks for

Speaker 2

the color. Thank you, Chris.

Operator

The next question is from Joe Giordano of Cowen. Please go ahead.

Speaker 6

Hi, Joe. Hey, guys. Good morning. This is Tristan in for Joe. Thanks for taking the question.

Speaker 6

I guess I'd like to go back to I assume question a little bit and maybe ask it a little bit differently, but if we were to have an industrial recession in the likes of 20 Gene, for example, how do you think your current portfolio would fare versus your portfolio 6 years ago? Just trying to get a sense of the magnitude there. Thank you.

Speaker 2

Yes. I mean, it's difficult to understand the specifics until you're in a recession because they're all different. But as I said, I think our portfolio has been improved dramatically. And I think that When you think about all the other things that I mentioned, we would stay in front of inflation with pricing. I think in 2023 as the supply chain shortages abate, we believe our working capital will decrease to more normalized level.

Speaker 2

In the vertical markets, I'm going to wait and see what we learn from our businesses, but we do expect our longer cycle businesses Be strong in both A and D and Energy, and we do expect to have a historically strong backlog when we enter 2023. And in terms of our recession playbook, let's say we do see slowing and we start to see a recession, We'll react and manage our business appropriately as we have done in the past. And we think we have a proven model that works well in both up markets and down markets. And the most recent example of this was during the COVID driven recession in 2020. And if you look at How we performed through that despite the weakness in sales during the time, our margins actually grew 80 basis points And Decor Minor margins were only 17%.

Speaker 2

So we've got the capability to manage in both up cycles and down cycles and I believe that the next recession will be no different whenever it comes.

Speaker 6

Awesome. That's all I had. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Kevin Coleman for closing remarks.

Speaker 1

Great. Thank you again, Kate, and thank you everyone for joining us for our conference call. And as a reminder, a replay of today's webcast Can be accessed in the Investors section of amatek.com. Have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
AMETEK Q3 2022
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