AMETEK Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2024

There are 11 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to AMETEK's First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your first speaker today, Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Thank you, Julia. Good morning and thank you for joining us for AMETEK's Q1 2024 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer and Dalla 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.

Speaker 1

AMETEK disclaims any intention or obligation to update or revise any forward looking statements. Any references made on this call to 2023 or 2024 results or 2024 guidance will be on an adjusted basis, excluding after tax acquisition related intangible amortization and excluding the pretax $29,200,000

Speaker 2

or $0.10 per diluted share charge

Speaker 1

in the Q1 for integration costs related to the Paragon Medical acquisition. 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, and then we'll open the call for questions. I'll now turn the meeting over to Dave.

Speaker 3

Thank you, Kevin, and good morning, everyone. AMETEK delivered strong results in the Q1 of 2024 with outstanding operating performance leading to double digit growth in earnings per share. During the quarter, we established records for sales, operating income and EBITDA and delivered robust core margin expansion and excellent cash flows. Considering our Q1 results and the positive outlook for the back half of the year, we are increasing our earnings guidance for the full year. AMETEK's continued success is a testament to the strength and resiliency of our growth model, the quality of our businesses and the outstanding contributions from all AMETEK colleagues.

Speaker 3

Now let me turn to our Q1 results. Sales in the Q1 were $1,740,000,000 up 9% over the same period in 2023. Organic sales were down slightly, acquisitions added 9 points and foreign currency had a small positive impact. Book to bill in the quarter was 0.96 and we ended the quarter with a very strong backlog of $3,460,000,000 near record levels. AMETEK's operating performance to start the year was excellent.

Speaker 3

Operating income in the quarter was a record $446,000,000 a 10% increase over the Q1 of 2023. Operating margins were 25.7 percent in the quarter, up 30 basis points from the prior year. Excluding the dilutive impact from acquisitions, core margins were up a very strong 180 basis points versus the prior year. EBITDA in the quarter was also a record at $542,000,000 up 13% over the prior year with EBITDA margins an impressive 31.2%. This outstanding performance led to earnings of $1.64 per diluted share, up 10% versus the Q1 of 2023 and above our guidance range of $1.56 to 1 $0.60 dollars Now let me provide some additional details at the operating group level.

Speaker 3

First, the Electronic Instruments Group. The Electronic Instruments Group had a strong start to the year with tremendous operating performance leading to record operating margins and impressive margin expansion. Sales for EIG were $1,160,000,000 in the quarter, up 4% from the Q1 of last year. Organic sales were up 1% and acquisitions added 3 points. Growth in the quarter remained strongest across our Aerospace and Defense and Materials Analysis businesses.

Speaker 3

EIG's operational execution in the Q1 was superb with strong profit and exceptional operating margin expansion. Operating income was $353,000,000 up 14% versus the prior year, while EIG operating margins were a record 30.5%, up a robust 280 basis points. This level of operating margin speaks to the quality and leadership positions of our highly differentiated businesses. The Electromechanical Group also delivered solid Q1 operating performance despite the headwinds from inventory normalization impacting some of our EMG businesses. EMG's 1st quarter sales were a record $579,000,000 up 21% versus the prior year, driven by contributions from recent acquisitions of Paragon Medical and Bison Engineering.

Speaker 3

1st quarter operating income was $120,000,000 while core operating income margins were 24.1% in the quarter. Our first quarter results reflect the unique capabilities of our growth model to successfully manage short term market headwinds and deliver robust margin expansion, outstanding cash flow and strong double digit earnings growth. Our businesses remain focused on executing our strategic initiatives and delivering differentiated technology solutions to support our customers' most complex challenges. Our distributed operating structure enables flexibility in responding to market dynamics, while our robust cash flow and balance sheet provide ample support for our acquisition strategy. This acquisition strategy along with our organic growth initiatives is expanding AMETEK's presence within high growth markets.

Speaker 3

These markets include medtech, clean energy, electrification and aerospace and defense and help ensure our diverse portfolio is well positioned to capitalize on these attractive long term secular growth areas. We remain committed to investing across our businesses to accelerate new product development and expand our sales and marketing efforts. In 2024, we expect to invest an incremental $100,000,000 in growth initiatives with a sizable portion of this in support of our research, development and engineering efforts. The effectiveness of these investments is reflected in our vitality index, which was a strong 25% in the Q1. AMETEK's commitment to invest in RD and E and continuously innovate ensures a steady stream of new products that support our customers' critical applications and position us for continued success.

Speaker 3

I wanted to take a moment to highlight an example of how the elements of the AMETEK Grove model work together to deliver exceptional results. AMETEK ZYGO, a global leader in the design and manufacture of advanced optical metrology systems and ultra precise optical components was recently awarded AMETEK's Doctor. John H. Lutz Award, an annual award provided to the AMETEK business that best exemplifies the commitment to continuous improvement and achievements in operational excellence. As part of its market expansion strategy, ZIGO identified an attractive new market segment, virtual and augmented reality applications.

Speaker 3

As a compelling growth opportunity for their advanced optical metrology systems. This led to Zygo's new product development and commercial teams working closely together to advance their technology capabilities and commercialize as a solution to support the highly precise requirements of this application. The success of this work resulted in strong demand and the need for Zygo to meaningfully increase production. Utilizing cross functional teams and deploying tools like value stream mapping and Lean 6 Sigma, they achieved a remarkable threefold increase in production output, allowing them to meet the growing demand for the metrology solution. This achievement highlights the synergy between our new product development, global market expansion and operational excellence strategies to help identify, develop and deliver exceptional technology solutions to address an important market need and accelerate growth.

Speaker 3

Congratulations to the Zygo team for a job well done. Now switching to our acquisition strategy. The acquisitions we completed in 2023 are integrating nicely into AMETEK. We are leveraging our proven integration capabilities and our global infrastructure to help accelerate their growth, drive operational improvements and deliver strong returns. We are very excited about these acquisitions as they are expanding our market presence in attractive growth markets, including the MedTech space through the Paragon Medical acquisition.

Speaker 3

Paragon Medical, which we acquired in December, is a leading manufacturer of highly engineered medical components and single use and consumable surgical instruments. Veragon has an outstanding brand, leading innovation and design capabilities and a strong position serving a number of high growth market segments. Our integration efforts are focused on supporting and accelerating this growth, while also leveraging AMETEK's infrastructure and operational excellence capabilities to drive efficiency improvements. The integration charge we took in the Q1 will allow us to drive these improvements and better position Paragon for accelerated growth and profitability. Looking ahead, our acquisition pipeline remains robust and we are actively working on multiple opportunities.

Speaker 3

We have the balance sheet and financial capacity to deploy meaningful capital on strategic acquisitions. We look forward to delivering continued value to our shareholders through strategic acquisitions and prudent capital deployment. Now turning to our outlook for the remainder of the year. We expect the impact of inventory normalization to continue to the first half of the year with improvements in the second half of the year as we indicated on our last earnings call. As a result, for the full year, we continue to expect overall sales to be up low double digits on a percentage basis with low to mid single digit organic sales growth.

Speaker 3

Diluted earnings per share for the year are now expected to be in the range of $6.74 to $6.86 up 6% to 8% compared to last year results, an increase from the previous guidance range of $6.70 to $6.85 For the Q2, we anticipate overall sales to be up mid to high single digits with earnings of $1.63 to 1 0.65 up 4% to 5% versus the prior year. In summary, AMETEK delivered a strong first quarter with earnings growth, which exceeded our expectations driven by exceptional operating performance. We are encouraged by these results and remain confident in our ability to navigate the current environment and benefit from improved sales growth in the back half of twenty twenty four. We are confident in the future of AMETEK as our world class talent and the adaptability of the AMETEK growth model will continue to drive long term sustainable success for our stakeholders. I will now turn it over to Della Puri, who will cover some of the financial details of the quarter, then we'll be glad to take your questions.

Speaker 3

Talop?

Speaker 2

Thank you, Dave, and good morning, everyone. As Dave highlighted, OmniTek had a very strong Q1 with record level sales and exceptional operating performance, highlighted by strong core margin expansion and free cash flow conversion. Now let me provide some additional financial highlights for the Q1. 1st quarter general and administrative expenses were $26,400,000 or 1.5 percent of sales, in line with last year's Q1. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.4% of sales.

Speaker 2

1st quarter interest expense was $35,000,000 up $15,000,000 from the prior year Q1 due to higher debt balances outstanding following the December 2023 acquisition of Paragon Medical. Other operating expenses were down $5,000,000 primarily due to higher interest income and higher pension income compared to the prior year's Q1. The effective tax rate was 18.9 percent, down from 19.5% in the Q1 of 2023. For 2024, we continue to anticipate our effective tax rate to be between 19% 20%. As we have stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Speaker 2

Capital expenditures in the Q1 were $28,000,000 and we continue to expect capital expenditures to be approximately $160,000,000 for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $98,000,000 In 2024, we expect depreciation and amortization to be approximately $400,000,000 including after tax acquisition related intangible amortization of approximately $190,000,000 or $0.82 per diluted share. Operating working capital in the Q1 was 18.7 percent of sales. Operating cash flow was $410,000,000 up 6% versus the Q1 of 2023, while free cash flow was $383,000,000 up 4% over the prior year. For the quarter, free cash flow conversion was a strong 123 percent of net income.

Speaker 2

For the remainder of 2024, we continue to expect strong free cash flow conversion in the range of 110% 120% of net income. Total debt at March 31st was $2,900,000,000 down from $3,300,000,000 at the end of 2023. Offsetting this debt is cash and cash equivalents of $374,000,000 At the end of the Q1, our gross debt to EBITDA ratio was 1.3 times and our net debt to EBITDA ratio was 1.2x. We continue to have excellent financial capacity and flexibility with approximately $1,800,000,000 of cash and available credit facilities to support our growth initiatives and our active acquisition pipeline. While acquisitions remain our number one priority for use of our free cash flow, we also seek to opportunistically repurchase our shares and provide our shareholders with a consistently increasing dividend.

Speaker 2

In February, we announced a 12% increase in our quarterly cash dividend to $0.28 per share, our 5th consecutive year of 10% plus annual increases. In summary, our businesses delivered strong results to start the year with outstanding operating performance, leading to robust core margin expansion and excellent free cash flow. Kevin?

Speaker 1

Thank you, Della. Julie, could we please open the lines for questions? Thank

Operator

Our first question comes from the line of Deane Dray of RBC. Your line is now open.

Speaker 4

Thank you. Good morning, everyone.

Speaker 3

Good morning, Dean.

Speaker 5

Hey, can we start off with the usual kind of tour of the end markets and geographies and maybe finish up with the just kind of the destocking comments. It just continues to be drawn out and we're seeing it in all kinds of pockets. So it's not, AMETEK specific in any way, but just kind of what's your refresh view on that as well? Thanks.

Speaker 3

Sure, sure. Glad to do that all, Deane. I'll start with the walk around the company and I'll start with our process business. Overall sales for our process businesses were roughly flat versus last year and in line with our expectations. Growth remains solid across our energy and semiconductor businesses and we're really well positioned there to benefit from the sizable project and investment activity within these markets.

Speaker 3

For the full year, we continue to expect sales for our process businesses to be up low single digits. Next, I'll switch to Aerospace and Defense and our A and D businesses had a strong start to the year, approximately 10% organic growth in the quarter. Growth was very solid across both our commercial aerospace and defense segments. For all of 2024, we continue to expect organic sales for our A and D businesses to be up high single digits on a percentage basis, with similar growth across both our commercial aerospace and defense businesses. Next, I'll move to Power.

Speaker 3

Our Power businesses were up low double digits in the Q1 with contributions from the acquisitions of UBI and Amplifier Research being offset by a low single digit decrease in organic sales. These recent acquisitions along with the acquisition of RTDS in 2022 expanded our presence within a number of highly attractive market segments, which are expected to benefit from a strong investment cycle, including the expansion of renewable energy and the power grid infrastructure. And for the power segment, we continue to expect low to mid single digit organic sales growth for 2024. And finally, going to the Automation and Engineered Solutions market segment, overall sales for A and ES were up 20% on a percentage basis in the quarter or up mid-20s in the quarter with contributions from the acquisitions of Paragon Medical and Bison Engineering being offset by a high single digit decrease in organic sales. As we expected, the impact from normalization of inventory levels across our OEM customer base continued in the Q1 and we expect to see a return to growth in the second half of the year consistent with what we had indicated last quarter.

Speaker 3

And finally, as a result, we continue to expect organic sales for our automation businesses to be up low single digits with stronger growth in the back half of the year. So that's the walk around the company. And I think you also asked for what's going on in the various geographies. So get to that too, Deans. The U.

Speaker 3

S. Was down 1% against a pretty difficult comparison and our strongest growth was in our Aerospace and Defense Businesses. Moving to Europe, we were down 2%, so minus 2% organic with notable growth in parts of our process and parts of our power businesses offset by weakness in automation. And in Asia, we were up low single digits with strength across our process businesses. So we had a very good performance in Asia and digging down into that a little further, China was flat in the quarter with solid growth in parts of our process businesses.

Speaker 3

So up low single digits in Asia and China was flat.

Speaker 6

This all

Speaker 1

really helped.

Speaker 4

Go ahead.

Speaker 3

Yes, you asked about the destock, Dean. And I think that it's playing out as we had talked about last quarter. I think the destock will continue into the second quarter, but in the second half of the year, expect that to turn around. So we're watching that closely and it's really kind of playing out as we thought. I mean, these talk was probably a bit more than we thought it was going to be in Q1, but that may be positive for later in the year because we think second half of the year is positive.

Speaker 5

Great. And just a quick follow-up on the growth investments. We know this is your playbook. Is there anything unique in terms of how you're deploying that capital? I mean, typically, it's salespeople is a component, but any other kind of wrinkles here you could share?

Speaker 3

Yes, it's salespeople with the largest chunk of it is in the engineering, research development and engineering and we have a full slate of projects. We have excellent opportunities longer term and we're getting after them. So I'm very positive on what's happening in our new product development programs.

Speaker 5

Great. Thank you.

Speaker 3

Thank you, Dean.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners. Your line is now open.

Speaker 6

Hey, thanks. Good morning, everyone.

Speaker 3

Good morning, Jeff.

Speaker 6

Can you just address a little bit more, Paragon itself, how it's performing and the charge that you took? I don't recall a large charge like this on prior deals, maybe there's smaller ones that you just absorbed, but didn't break out, but kind of the nature of what you're trying to accomplish. And is this kind of a one time deal in this quarter as you kind of bed down the asset?

Speaker 3

Yes, that's a great question, Jeff. And it's kind of what you said. I mean, we typically absorb the smaller acquisitions as we proceed through the years quarters. And the last time we did something like this, we bought, I believe, Zygo. It's a bigger acquisition and because of the size of the acquisition and because of the opportunities that we see, we wanted to take that integration charge because there are tremendous, tremendous opportunities to improve the business.

Speaker 3

So it's a one time nature. It's for larger deals. As you know, Paragon was the largest acquisition that we have done. We spent about $1,900,000,000 So as we dug into it, as we work with our management team, we got really comfortable with this plan. Quite honestly, there's more opportunities than we thought.

Speaker 3

We have a good team of both AMETEK and Paragon leaders that are really getting after it now. So I feel really good about the business. The integration is being integrated into AMETEK well. It's very positive around the future. And I think this restructuring is largely going to happen over the next couple of years and we really see as a less than 2 year payback on it.

Speaker 3

So excellent payback and we started on that and we're really positive what we're doing and

Speaker 6

I feel positive about the deal. Great. And then maybe just switching gears and I'm sorry if I missed it, I was on a little bit late, but can we just decompose revenue growth in the quarter for the segments, some color on what the organic performance was at the segment level and if you have any color on price or other elements of revenue, I'd be interested to hear.

Speaker 3

That. Yes. If you look at our overall sales were up 9%, that's both groups. And the organic growth was just down modestly about 0.5 point. EIG overall sales were plus 4%.

Speaker 3

The organic growth in EIG was plus 1%. EMG overall sales were plus 21% and organic sales at EMG were minus 4%. So you had that defines the group dynamics for revenue.

Speaker 6

And maybe just one last one back to this kind of whole destock question. Just a comment that it was more in Q1 than expected and I know it's kind of hard to know what your customers are going to do, but just your confidence level that it actually is in fact destock and do you have visibility on sell through being better on the other side? Maybe just kind of address that if you could.

Speaker 3

Yes. The first point is when you look at AMETEK's first half, second half, we typically have 48% of our revenue and profits in the first half of the year and 52% of our revenue and profits in the second half of the year and that's exactly what we have this year. So our second half of the year is not back end loaded. So we feel good about that. Another point that you may not see, it really appears our orders have stabilized.

Speaker 3

Specifically, when I look at Q4 2023 to Q3 2023 and then I look at the next quarter, Q1, 2024, the last quarter to compare to Q2, 2023. So the last two quarters sequentially with all the acquired backlog removed. So really looking at a true run rate sequentially, we've seen low single digit growth in orders in both Q4 2023 and Q1 20 24. So it feels like we bottomed and we're starting to see some modest improvements. At the same time, in Q1 2023, we had an extremely good quarter.

Speaker 3

So we have a difficult comp that we're battling. And finally and perhaps most importantly, we've had customer commentary that continues to communicate to us in the second half of the year that destocking phase will come to an end and we should return to a positive book to bill. So in terms of the economic environment, we're watching it closely, but for the balance of the year, we're just assuming modest economic growth, not any kind of economic acceleration and at the same time, not a recessionary environment. And we expect that we'll grow sales modestly each quarter and the comparables get easier in the second half of the year. And as I said, this 48%, 52% split H1 to H2 is very much aligned with our historical averages.

Speaker 6

And I'm sorry, did you have a comment on price? I missed it and I'll cede the floor. Thank you.

Speaker 3

No, that's a good question, Jeff. Pricing was continued to more than offset inflation. Pricing was approximately 4% in the quarter and inflation was about 3%. The results speak to the highly differentiated nature of the AMETEK product portfolio and our leadership position in these niche markets around the globe. And for the full year, we do expect their pricing to come in a bit and inflation to come in a bit, but we expect to maintain a positive spread between them.

Speaker 2

Thank you.

Speaker 3

Thank you, Jeff.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Brett Linzey of Mizuho. Your line is now open.

Speaker 2

Hi, guys. This is Pete Bass on for Brett Lindsay. So as we look at a more potentially more aggressive tariff regime, you just talk about how nimble your supply chain configuration is and then your ability to flex around different regions if needed? Thanks.

Speaker 3

Yes. It's a great question. I mean, we look at tariffs and that became a bigger issue back in the 2017 timeframe. And in the quarter, we had a minimal impact from tariffs and they were completely offset for price. And to give you an idea across the whole company, tariffs are only going to cost us about $0.01 I would say $3,000,000 or $4,000,000 And what happened there is we've aggressively rebalanced our supply chain.

Speaker 3

It's largely done. So we're not overexposed to any region of the globe. And we have a strategy where from the U. S, we're largely sourcing from Mexico and other regions of the Americas and in Europe. We do a lot of sourcing from the Czech Republic and Serbia.

Speaker 3

And in Asia, we do a lot of sourcing from Malaysia. So we've got a nice balance around the world. So I think what the hard work that we did over the past few years are really rebalancing our supply chain. We're essentially finished with it, just very, very small bit of work that continues and we're very well positioned to be able to deal with an increasing tariff regime, specifically with China in particular, we don't have a real risk there. We do excellent business in China.

Speaker 3

It's a China for China strategy. It's about 9% of our sales and largely we source what we sell in China. So we're in pretty good position in terms of tariffs.

Speaker 2

Perfect. Thanks. And then if you can just provide some color on the tempo or monthly cadence of trends in the quarter and then looking into April? Thanks.

Speaker 3

Yes. I mean, it was a pretty typical quarter. Excuse me, March was the strongest quarter. Wait a minute. Okay.

Speaker 3

Yes, pretty typical quarter with March being the strongest on both orders and sales. So it's sales were the highest for the quarter in March and then in April, we're right on plan. So we feel good about the guidance and it's pretty as I said, it's bouncing around there, but we're not seeing any incremental weakness at this point.

Speaker 7

Perfect. Thank you.

Speaker 3

Thank you.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Scott Graham of Seaport Research Partners. Your line is now open.

Speaker 4

Yes. Hi. Good morning. Thanks for taking the question. Really, maybe the first question is about the M and A environment.

Speaker 4

EBITDAs do seem to have firmed up even though this Q1, I think, most would say industrial land has been a little uneven. Nevertheless, when EBITDA is firm up that's kind of when I think AMETEK does a lot of striking. And I'm just wondering, are we looking at a year this year that could mirror last year? I mean, what is like the really near term pipeline look like, Dave?

Speaker 3

It's very, very difficult to predict the very near term. But Scott, the pipeline remains very strong and we're actively looking at a number of high quality deals across a broad set of markets. So we have $1,800,000,000 of existing cash and credit facilities post Paragon. We have a balance sheet that would support if the deals meet our criteria, we could do over $4,000,000,000 of deals this year and that would only take our leverage up to about 2.5 times. So we're really in an excellent position and it's not a balance sheet issue, it's not a cash flow issue, we're performing extremely well.

Speaker 3

It comes down to finding the right businesses and we have a good pipeline right now, very good pipeline. And we really have the opportunity, as you said, we typically have this opportunity to differentiate our performance with the M and A element of our growth strategy with this strong balance sheet and with these strong cash flow positions. So in this market, it's a bit choppy. Our combination of OpEx and M and A and this proven acquisition strategy, I'm really looking to differentiate our performance with our M and A and our OpEx during the next couple of quarters.

Speaker 4

Thank you for that. You answered one of Jeff's questions earlier saying you're expecting sales to be up modestly each quarter. Were you referring to organic for the next three quarters?

Speaker 3

Yes. This is sequential, Scott.

Speaker 4

Okay. So sequentially, you're expecting sales dollars Q1 will

Speaker 3

be a bit higher than Q2, Q3 will be higher than Q2 and Q4 will be a bit higher than Q3.

Speaker 4

Okay. And the last one is just sort of back on the orders. I know you do have a pretty significant comp that you're up against when you stack them. What were orders in the quarter in dollars and in organic?

Speaker 3

Yes. The orders were minus 8 and organic orders were minus 10. And again, we had a tough comp and I went through the process of they sequentially grew low single digits the last couple of quarters when you take out the comp. I think in Q1 of 2023, we had exceptional orders from some project business and EIG in particular. So when you take that out and you look at what's going on sequentially, we get more comfortable.

Speaker 4

Yes. No, I get it. 2022 2021 were also exceptional organic periods for you. So, okay, thank you.

Speaker 3

Thank you, Scott.

Operator

Thank you. Our next question comes from the line of Andrew Obin of Bank of America. Your line is now open.

Speaker 8

Hey guys, good morning.

Speaker 3

Good morning, Andrew.

Speaker 8

Just a question, how to think about the Paragon Medical integration costs. So what's the payback on this restructuring that's now because I assume it's extra. So what's the payback on this restructuring that's embedded in 'twenty four guide? And how much of it should I add to 2025?

Speaker 3

Yes. In 2024, we had told you in a prior meeting that Paragon was going to contribute $0.08 to $0.10 to AMETEK's EPS and that still holds. When I look at that $22,000,000 charge, we said the payback is going to be less than 2 years and at run rate, so it will take us a couple of years to get there, but the run rate, we have $70,000,000 of benefits. So we spent approximately $29,000,000 We're going to get approximately $70,000,000 of benefits. The payback is less than 2 years.

Speaker 3

So that really tells you what a great return it has. And it's just there wasn't a lot of focus and we can run things really efficiently. And I'm just excited that the management team sees it that way too. And we're really going to make Paragon an exceptional business from an operating perspective. Regarding 2025, I we've come out and said that we should see a substantial increase in operating earnings related to Paragon in 2025.

Speaker 3

But I'm not willing to quantify what's going to happen in 2025. We're much too far away to do that. But again, the metrics I'd point you to are we spent $29,000,000 we'll see $70,000,000 in benefit at max run rate and the payback for the project is a little less than 2 years. We feel really good about it, good payback for our shareholders.

Speaker 8

Sorry, I probably and I should probably take it offline, but just to make sure. So I thought the Paragon restructuring was extra because you saw incremental opportunities. So you're saying that I should have that that was embedded all along, but was not in the guide? I'm sorry, I'm just Yes.

Speaker 3

I just think that it's a larger deal and we saw a lot of opportunities over it will take us a few years to do it,

Speaker 6

so we pulled it forward.

Speaker 8

Okay. I'll take it offline because I'm not sure if I so I should have had it in my numbers or this $0.10 is extra on top of your worth thinking, Just confirming that, I apologize. And I'm happy to take it offline with Kevin, I apologize.

Speaker 3

Yes, I don't know what you have in your numbers, Andrew. I don't really look at them. But I can tell you that we're expecting to get $0.08 to $0.10 of benefit from Paragon and this restructuring doesn't change that.

Speaker 8

Got you. That makes sense. And then just on revenue and you did give very good color. Was basically the destock, what drove, I guess, you were expecting, I think you guided for low double digit revenue in the Q1, a little bit below. So it's just you said, it's destock pull forward, correct?

Speaker 7

Yes.

Speaker 8

Thank you so much.

Speaker 3

Thank you, Andrew.

Operator

One moment for our next question. Our next question comes from the line of Christopher Glynn of Oppenheimer and Co Incorporated. Your line is now open.

Speaker 9

Thanks. Good morning, everyone. Good morning. Dave, I was curious just to go into the topic a little bit of the long term multi year kind of secular trends where you see it impact. It occurs to me maybe the power business could be on your leading edge with energy transition and electrification.

Speaker 9

But curious your comments in general on the kind of secular trends and in particular what you're seeing is kind of street level evidence on reshoring type trend?

Speaker 3

Yes. I think the when I think about the long term secular growth drivers and we talked about a little few of them in my talk, but a lot of project activity around the semiconductor market and that's finally we're moving closer and closer to the point where that's going to start turning into business for us in the West. There's a lot of project work on semiconductors. The power market, as you said, and there are really 2 drivers there, the driver for renewables energy, but also the driver for investments in the power grid. So our RTDS business, our power instrumentation are really levered to those.

Speaker 3

So that's starting to happen as work its way through. When I think about the, Aerospace and Defense business, again, we had a great quarter again and that's continuing. And I think both Airbus and Boeing have a 9 year backlog for the commercial market, but it's good. Our defense, we're in the right position in defense. We had another good quarter in defense.

Speaker 3

So I think about those kind of markets and those trends, I feel good about the future and a lot of fiscal stimulus in the U. S, which has not been there in the past And but it takes time to work through the system. So I think longer term, I think we're in the right places to do well.

Speaker 7

Thank you.

Speaker 3

Thank you, Chris.

Operator

One moment for our next question. Thank you. Our next question comes from the line of Joe Giordano of TD Cowen. Your line is now open.

Speaker 10

Hi, good morning. This is Zane on for Joe. Hi. Sorry, I know destocking and bottoming of orders within automation has been discussed

Speaker 6

a few times. So just a quick follow-up. This is obviously

Speaker 10

something a lot of companies have been struggling within the past few quarters. But some have also been talking about changing their internal processes to gain more visibility of end market and end users. Is there anything that you guys have done potentially more frequent conversations or reaching out to end market users to understand a bit better their demand going forward? Anything you've changed recently?

Speaker 3

I can't point to anything we changed. I mean, if you go back and you follow us, we kind of called exactly what happened. We talked about the first half

Speaker 7

of the

Speaker 3

year of sales outpacing orders. So that means you'd have a slightly below one book to bill. And we talked about the destock in the first half and we thought it would turn positive in the second half. We did that before this quarter. I think we have a pretty robust communication system with our field, but there's always opportunities to get better and we work on those and continuously improve our businesses.

Speaker 3

But I feel like the information that we got from the field is pretty accurate and we're on top of it. So but there's always rooms to improve and we're always looking at ways to improve.

Speaker 10

Great. Thank you. I'll relay that. Thank you so much.

Speaker 3

Thank you.

Operator

One moment for our next question. Our next question comes from the line of Nigel Coe of Wolfe Research. Your line is now open.

Speaker 7

Thanks. Good morning, everyone. Thanks for the question. Hey, David, I just want to come back to the order math. I think you said down 8% and then down 10% organic.

Speaker 7

We've got about 9 points of contribution from Paragon in our numbers. So just wondering what am I missing? Because I'd expected there'd be significant contribution from Paragon in the order numbers. So just help me out with that math, please.

Speaker 3

Yes. We had 9% acquisition growth and Paragon is in the acquisitions, not the organic. So the Paragon Sales. Sales, excuse me. Yes.

Speaker 7

Okay. But then the orders 8% organic to Danixent reported down 10% organic. Was there no material impact from Paragon there?

Speaker 3

Yes. With Paragon, we had obviously the large book to backlog as orders in Q4. And then in Q1, there's a timing issue because Paragon is going through the same destock that the EMG business is on.

Speaker 2

So there's

Speaker 3

a bit of a destock there.

Speaker 7

Okay. Okay.

Speaker 3

That impacts the order. So the medical market, it's in both our EMC business and Paragon, we're seeing the same kind of destock in the E and G businesses. If you look at the medical procedures, they're all growing at mid to high single digits, but the medical device wins are destocking their inventory, correcting their inventory. It's kind of a widely communicated piece of information and we monitor them and procedures and they're growing. So this destock we think is going to run a space through the first half of the year.

Speaker 7

Okay. Does that impact the full year forecast? I think we've got close to $5,000,000 of sales to Paragon. Does that destock impact that outlook? But also I do Go ahead.

Speaker 7

Sorry. No, no. Doug, please go ahead, Dave.

Speaker 3

Yes. I think for the year, when you bought Paragon, it was a little less than $500,000,000 And the 1st year we talked about the mid single digit growth. So that's still exactly what we have in our model. So we think that we get out of this year and we think it'll be double digit grower in the next couple of years. But the Paragon model from the viewpoint of what we had going into the year and what it is now is pretty much identical.

Speaker 7

Okay. And then just sorry, a follow-up on the $29,000,000 Is that all restructuring or is there some inventory and accounting back down?

Speaker 3

Yes, I'd say the vast majority of it was restructuring and there was a small part of it that were other integration but the vast majority

Speaker 7

And does some of that come into 2Q as well? Do we need to think about that into 2Q?

Speaker 3

Yes. We started the effort in Q1 and as I said, we pulled forward all the benefits that we had. And I think the restructuring is was done in Q1. So I don't think we're going to have another restructuring charge in Q2, if that's what you're asking.

Speaker 7

Okay. Great. Thanks, David.

Speaker 3

It's a one off charge. One off charge, if you look at the Zygo business, we had a big acquisition. We did a similar thing when we got comfortable with what we could do. And we may have another charge with Paragon down the road if we think there's other ways to improve it. But right now, this is a one time charge to dramatically improve the operating capability of that business and the returns that I communicated to you are very positive.

Speaker 7

Makes better sense. Thanks. I

Operator

am showing no further questions at this time. I would now like to turn it back to Kevin Coleman, Vice President of Investor Relations and Treasurer, for closing remarks.

Speaker 1

Thank you. Thanks everyone for joining our call today. And as a reminder, a replay of today's webcast may be accessed in the Investors section of ametek.com. Have a great day.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
AMETEK Q1 2024
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