Good day, and welcome to the AMETEK’s Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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. Please go ahead, sir.

Thank you, Rocco. Good morning and thank you for joining us for AMETEK’s fourth quarter 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 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 risk 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. Any references made on this call to 2021 or 2022 results or 2023 guidance 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 Web site. We'll begin today's call with prepared remarks by Dave and Bill, and then we'll open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. I'm very pleased with AMETEK's results in the fourth quarter, and for all of 2022. AMETEK's continued excellent performance reflects the quality of our niche-differentiated businesses, the strength of the AMETEK growth model, and the expanding impact of our organic growth initiatives, and most importantly, the outstanding efforts of our global employees. Thank you to all AMETEK colleagues for your many contributions to our success. We have navigated many challenges over the last few years only to emerge stronger and even better positioned for sustained growth. Our results in the fourth quarter were outstanding. Stronger-than-expected sales growth and excellent operating performance led to a high quality of earnings which exceeded our expectations in the quarter. We ended the year with a record backlog as demand remains solid across our diverse end markets. Organic growth was again very strong in the quarter as our teams are successfully driving key organic growth initiatives across their businesses and expanding their presence serving attractive growth markets. Operationally, we're performing exceptionally well and offsetting inflation with price increases, resulting in strong margin expansion. Additionally, cash flow in the quarter was outstanding, providing us the flexibility to invest in our businesses and deploy capital on strategic acquisitions. Now, on to the results of the fourth quarter and all of 2022, fourth quarter sales were $1.63 billion, up 8% over the same period in 2021. Organic sales growth was 9%, acquisitions added two points. And foreign currency was a three-point headwind in the quarter. Orders were solid in the fourth quarter against a challenging comparison, resulting in a record backlog of $3.22 billion. Operating income in the quarter was a record $398 million, a 10% increase over the fourth quarter of 2021. Operating margins were 24.5% in the quarter, up…

Thank you, Dave. As Dave highlighted, AMETEK had a very strong fourth quarter to complete an outstanding year. In the quarter, we delivered record level operating performance at a high quality of earnings. Let me provide some additional financial highlights for the fourth quarter and for the full-year along with some additional guidance for 2023. Fourth quarter general and administrative expenses were essentially flat versus the prior-year and for the full-year general and administrative expenses were up $6 million, driven largely by higher compensation costs. And as a percentage of sales were 1.5% versus 1.6% of sales in 2021. For 2023, general and administrative expenses are expected to be up modestly versus 2022 levels and remain at approximately 1.5% of sales. The effective tax rate in the fourth quarter was 18.9%, up from 17% in the fourth quarter of 2021. For 2023, we anticipate our effective tax rate to be between 19% and 20% 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 were $58 million in the fourth quarter, and $139 million for the full-year. Capital expenditures in 2023 are expected to be approximately $114 million, or about 2% of sales. Depreciation and amortization expense in the quarter was $89 million, and for the full-year was $320 million. In 2023, we expect depreciation and amortization to be approximately $325 million, including after-tax, acquisition-related intangible amortization of approximately $154 million or $0.66 per diluted share. For the quarter, operating working capital was 18.9% of sales. Cash flow in the fourth quarter was excellent with operating cash flow of $385 million, up 37% versus the fourth quarter of 2021. Free cash flow was also up 37% to $327 million in the quarter, while free cash flow conversion was 106% of net income. Total debt at year-end was $2.39 billion down from $2.54 billion at the end of 2021. Offsetting this debt is cash and cash equivalents of $345 million and during the fourth quarter, we deployed approximately $240 million on the acquisition of RTDS Technologies. Gross debt-to-EBITDA ratio at year-end was 1.2 times and our net debt-to-EBITDA ratio was 1.1 times. As Dave noted, we remain active on the acquisition front with a solid pipeline of acquisition candidates. Given our strong cash flow and modest levels of leverage, we're well-positioned to deploy additional capital. We have approximately $2.3 billion of cash and existing credit facilities to support our growth initiatives. In summary, our businesses performed exceptionally well in the fourth quarter and throughout all of 2022 delivering strong growth and high quality of earnings in a challenging operating environment. AMETEK is well-positioned for 2023, given our strong financial position, our proven growth model, and our world-class workforce. Kevin?

Thank you, Bill. Rocco, can we please open the lines for questions?

Absolutely. [Operator Instructions] Today's first question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning.

Good morning, Allison.

Can we turn organic investments, the $90 million, if I recall, I think that's a step-down from what you did in '22, just any color there, is there just some conservative nature just given the uncertainty out there, are there unusual projects in '22, just any thoughts on that side?

Yes, that's to start off the year, and there a potential to do more, and -- but the $90 million was a good number, and it's incremental; Keep in mind, incremental over what we've done in 2022. So, it's incremental, and we're making healthy investments in RD&E, it's up double digits for the year, and healthy investments for sales and marketing. So, we think the $90 million is appropriate. And, obviously, that can be flexed up or down if required.

Great. And then a lot of concerns, I mean, out there about potentially some weakness showing up in H2. Just any thoughts on your end, what you're seeing in terms of that? Is there anything concerning or sort of popping out that has you a bit worried as we enter the back-half of '23 and into '24?

Not really. I mean, the -- obviously, our growth is slowing, but the record backlogs and we're executing very well, we're getting the price, and it still feels good to us. It feels strong and good. And when you get out to the second-half of 2023, I mean this is a -- there's less visibility because you're further out, but our backlog is at a record level. It's usually at about 30% of annual sales. And right now, it's running at about 50% of annual sales. So, we feel really good. And we don't see a slowdown yet.

Perfect, thank you.

Okay, thank you, Allison.

And the next question today comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

I was hoping you'd take us through the key end markets. And then also on the regional updates, it's been interesting, maybe people got too negative on Europe. So, like to know how Europe did. And then China reopening, how does that impact you all?

Sure, Deane. I'll start with your second question, the geographical outlook. Strong, broad-based growth across most geographies. Our Asia region was flat on China headwinds. And to your point, our fastest growing market was Europe. Europe was up 12% with notable strength in both our process and aerospace defense markets. And then we had a really strong performance in the U.S., up 10% organically; broad-based strength, notable strength in our process businesses. And in Asia, as I said, it was flat, with notable strength in aerospace and defense, and process. And China was down for us low double digits in the quarter on a difficult prior-year comp, and the impact of the Zero COVID policy. And Asia, we think that the China situation is going to turn around as the reopening occurs. And we're pretty optimistic for it in the second-half. But that's the picture in Q4, really strong broad-based growth, strongest Europe, and second U.S. Most of Asia was really good, and in China there was some weakness. Okay, and the second question was in market segment's summery. I'll take a walk around the company. In our process area, our overall process businesses, they were up high-single digits in the quarter. Organic sales were up 10%, and you also had the contributions from the acquisition of Navitar and it was offset by foreign currency headwinds. And as we saw throughout last year, growth across our process businesses was particularly -- was broad-based, but it was particularly strong in our Ultra Precision Technologies businesses in the quarter. And as we look ahead to 2023, we expect organic sales for process businesses to be up mid-single digits for the year. Next I'll talk about Aerospace & Defense. Our Aerospace & Defense businesses had a very strong finish to the year, and…

Yes, just as a follow-up, just how would you characterize the pace of orders, industrial demand, the size of orders, is there -- just with respect to how normalization might be happening for AMETEK's businesses?

That's a great question, Deane. Our overall orders were up 1.5% in the quarter. And the overall demand environment, as I answered Allison's questions, feels really solid. We had our 10th straight positive book-to-bill quarter. And we ended with an all-time record backlog as I mentioned in the prepared remarks. And this level of backlog, as I said, was 50% of our annual sales, well above the normal level of 30%. And it's up 78% from the end of 2020. So, we're in a really strong position as we enter 2023. So, your question on some of the nuances, if you recall, over the last couple of earnings calls, we highlighted a couple of dynamics that would impact our order growth. But the first was the difficult comparisons we're facing because as orders have been strong for an extended period of time. To give some context, over the prior nine quarters, our orders grew over 20% a quarter. So, it's been sizable and sustained that that helped build the backlog. The second dynamic we highlighted was the expectation of customers to return to more normalized ordering patterns. Now that the supply chain is improving and -- we started to see that dynamic play out in the fourth quarter. So, overall, we're comfortable with our order levels in Q4. After starting off in January and we just finished January, we had another sold orders a month, ahead of our expectations, and solidly up from January 2022 order levels. So, again, we're feeling pretty good with a strong backlog and our orders are hanging in there. So, we think that we're in -- looking at a pretty good year.

It's all really helpful. Thank you.

Okay, thank you, Deane.

And our next question today comes from Brett Linzey with Mizuho. Please go ahead.

Hey, good morning, all.

Good morning, Brett.

Hey. And just wanted to come back to the inventories, some of your peers have been talking about some elevated inventory in some of the OEM channels. Just curious what you're seeing there in some of your serve businesses, serve markets, and if there's any area of concern there?

Yes, the first point I'd like to make is that when you're looking at customer inventories, a lot of our products are customized, and they're high-value products. So, we don't really have a lot of distributor stocking issues to worry about. That's particularly true in EIG. In EMG, there's more of an OEM deal with the customer base, and that's where you're seeing a bit of the customer ordering patterns normalize. But overall, we think we've got a good handle on it, and we feel pretty good about where we're at.

Yes, okay, that's great. And just shifting to the 2023 outlook, I was hoping maybe you could put a finer point on just the underlying assumptions. How much price do you expect verses volume? And then anything specific on the quarterly phasing, I mean do you think you'll get growth in both the first-half, second-half, or as you work down the backlog, does it begin to decline there in the second-half?

Yes, great question. I mean with our budget model, we pretty much have a traditional first quarter. So, it's not really second-half-biased. And we think we'll grow in each of the quarters of the year. And in terms of pricing, in our budget model we have about four points of price. And we assume that we assume that we have about 3.5 points of inflation. So, we are going to offset price and inflation by about 50 basis points. Now, that’s down a bit from 2022 where six points of price. And we offset about 5 points of inflation. But, it’s the guide for the entire year. And we are being a bit conservative now. And, we will probably start out a little better than that. But, that’s our plan for 2023. Also in 2023, I mean in addition to staying in front of inflation with price, we think supply chain shortages are going to abate. And we believe our working capital levels will decrease to more normalized levels to a very healthy 110% to 115% conversion to net income on the free cash flow. We also think that in terms of vertical markets we do expect our longer cycle aerospace and defense businesses to be a bit stronger than the balance of the portfolio. So, one through the mortgage segment commentary, Deane, it was a little bit higher, was -- had a mid- to-high outlook. So, we think that’s going to be true. And that was accelerating as we -- each quarter of 2022 really. We expect both of our groups to grow mid single digits. We talked about the historically strong backlog. And, that’s some assumptions that went into our budget. Do you have any questions, Brett?

No, that’s it. Great quarter, and I appreciate all the insight.

Thank you, Brett.

Thank you. And our next questioner today is Scott Graham from Loop. Please go ahead.

Hey, good morning all. And really congrats on that Zygo, that’s a pretty big deal.

Hey, that’s a really interesting, that's really helping, but that team did a great job. And it’s working on fusion energy is a great thing. And, it just shows our capability.

Yes, for sure. Thank you. The orders gave you said up 1.5 in the quarter. Was that organic? And can you also tell the split by segment?

Yes. That was overall worse. Organic was down minus 2. And so, overall orders were up 1.5. Organic was minus 2. And both segments were about at that same 1:1 book-to-bill. So, wasn’t a distinct difference between the segments, and as I said, overall demand environment showed a solid 10 straight quarter of book-to-bill. So, we have a strong backlog. And as we have this dynamic of customers returning to more normalized ordering patterns, we have a strong backlog. So, we feel pretty good about it.

Okay, great. Thank you. Based on your answer to the prior question, is it possible then that sales volumes could sort of flatten out in the second half of the year. And your growth organic is essentially all price? Is that what you are what you are thinking cadence wise?

I don’t think in the second half of the year. I mean we are going to have some healthy price. But I think it’s going to actually increase a bit in the second-half. And, if you think about our order rates we have that mid single digit sales growth forecasted. We think we are going to grow orders also. So, orders are going to grow a little bit less than sales as our forecast. But, they are going to grow. And really by the end of the year, our backlog is still going to be at elevated levels. It will be down a bit, but at elevated levels historically. So, we are clearly done with our strong backlog which will provide a buffer is there is some kind of downturn. We don’t see it right now. And our orders will be up, but it will be up a little less than sales. And again, at the end of 2023, we have historically elevated levels of backlog similar to now.

Yes, great. Hey, thank you.

Yes, Scott.

[Operator Instructions] Our next question comes from Matt Summerville at D.A. Davidson. Please go ahead.

Hi, good morning. This is Will Jellison on for Matt Summerville today.

Hello, good morning.

I was curious about your recent acquisitions with Navitar and RTDS. And just about your first observations with those companies as part of the AMETEK portfolio. How did things unfold related to expectations? And how are things going with bringing them into the fold?

Yes, they are going very well. I mean Bill and I have met with both of the acquisition integration teams and really positive. Just to recap a little bit, RTDS provides real-time power simulations used by utilities and various strategic acquisitions that broadens our power instruments businesses with differentiated testing and measurement and simulation capabilities. So, it's attractive position and high growth market. Really good team, I mean, just experts in the field. And it's kind of fun interacting with them. And they're really adopting AMETEK and feel good about that one. Same with Navitar, Navitar is in some good growth markets. The optics market is doing quite well with us. And even in the semiconductor space, where they play their main customers is one that's very differentiated and has unique capabilities. So, that along with Life Sciences along with machine vision, there's a very good outlook there. And that business is a little bit different as being integrated into our Zygo business. So, it has new capability for Zygo. Much needed capacity for Zygo and the integration is going very well.

Great, thank you. And then, as a follow-up, staying on the theme of M&A, you mentioned your pipeline is very strong at this juncture. And I'm curious about what your observations are in the market overall, with respect to the level of competition for assets and where multiples seem to be moving in your observation?

Right, yes, I think with the interest rates increasing, and with money, not as free as it was, is actually an advantage to us. So, we have a good pipeline and a good balance sheet. And we remain very active with a solid pipeline of deals, the valuations have come in a bit. We're looking at some quality assets, though. So, they're still a bit elevated from historical levels, but no doubt they've come in. And important for us in our pipeline, we have a very disciplined acquisition process. And these deals are going to meet our traditional financial hurdles, which is primarily a return on invested capital of 10% by the third year of ownership. These are important thresholds for us as we want to ensure we're providing a strong level returns on the capital we deploy for our shareholders. And that's been a hallmark of AMETEK's acquisition program for a long period of time. We do this all with cash and debt, don't use equity. And there's a bigger pipeline right now than has been historically because when there's less, less money around the system to bid up deals. So, we feel pretty good with where we're at. And if we do something, and I believe we will be talking to you about deals in the near future, they're going to be, they're going to meet all of our traditional hurdles. And we're committed to have an investment grade credit rating, and we got plenty of about $2.3 billion of capital and financing capacity available. So, in this environment, discipline is going to be a key word as it's always been for AMETEK. But have been very key in terms of executing our forward-looking M&A strategy.

That's great. Thank you for taking my questions.

Yes, okay.

And our next question today comes from Andrew Obin with Bank of America Merrill Lynch. Please go ahead.

Hi, this is David Ridley-Lane on for Andrew Obin.

Hi, David.

Good morning. How much of the one-time costs around supply chain disruptions last year, the higher freight costs, the spot buys and electronics, all those things fall-off in 2023? I'm guessing I'm wondering is this a meaningful tailwind in kind of your forecasts?

Yes, I think that what you're going to see, there's still an elevated level of inflation. But at the same time, some of the one-time distributor purchases of inventory are going to go away. So, there's going to be some natural tailwinds for us in terms of margins, we expect that working in the P&L in our budget model, our productivity/cost savings of about $110 million. So, we think it'll be substantial. And that's where we're starting out the year but we think there's maybe even some upside to that. And it's largely related to a, and there is a couple of opposing forces, you're dealing with inflation and some costs of things are still going up. But at the same time, some of the supply chain issues are working the other way and especially the higher prices that we paid on a one-time basis to some of the electronics distributors to continue shipping products.

Got it and then you have been adding capacity through 2022, I guess in the CapEx, what's kind of growth versus maintenance or whatever framework you want to use to discuss kind of how you're thinking about capacity additions here in 2022?

We added a lot of capacity in 2022, we brought some low cost region facilities online, we've talked about that. For 2023, we expect our capital expenditures to be flat, a little bit more than 2% of sales, as we've done historically. So, and it's a good balance between growth CapEx, maintenance CapEx and CapEx funding cost reductions.

Then, if I could get one more in, what is your expected EPS contribution from Navitar and RTDS?

Yes, I'm not going to break out the deal, but there'll be slightly accretive.

Thank you very much.

Okay, thank you, David.

And our next question today comes from Joe Giordano with Cowen. Please go ahead.

Yes, you mentioned -- you mentioned customers kind of getting normalized on their behavior and their ordering patterns, like, can you maybe get a little bit finer point on that? And like, what you're seeing, are actual things getting pushed out, or are they just ordering more real times?

Yes, if you think about it from the customer's view, they've kind of got trained by the pandemic, to order things early. And now, most companies are getting including AMETEK is getting back to being able to deliver in lead time. And in fact, that's part of the reason that we grow our businesses at a faster rate during the pandemic period, we were able to ship and deliver and we had the inventory buffer. So, what's happening is, as customers normalize their buying patterns, they don't have to order early anymore. And that's what's really happening, I think across the broader supply chain, and we're seeing that. So, that's the main normalization that we're talking about.

And then when you mentioned the M&A pipeline looks good. How do you think about timing of execution, just given the macro year, given it looks like industrial is getting lighter, is getting weaker and are you relying on trailing 12 results that might be different than forward 12 for acquired for companies that you're looking at. So, how does it impact your desire to do be actionable right now, given where we are in the business cycle?

AMETEK has historically bought through both upcycles and down cycles. And sometimes you can get your best deals during a down cycle. And you have to be cognizant of what the forward-looking EBITDA is not really the trailing, but the forward. So, it's something that we've been keenly aware of for years, and we're focused on it.

Thanks, guys.

Thank you, Joe.

And our next question today comes from Rob Mason of Baird. Please go ahead.

Yes, good morning.

Hello, Rob.

Hey, Dave. Good morning, good morning. Dave, I'm just going to see if you could drill into the process segment a little more, you called out Ultra Precision with relative stronger growth, does that carry forward into '23 just in terms of what leads that part of the business? And then just maybe higher level anyway to cut the mix of what that process segment, that sales into more of an R&D function versus more of a production environment?

Yes, that's a good way to think about it. And I'll try to put some more color into that. I mean, if you look at 2022, what stood out was our healthcare component. And our healthcare component is a big part of process across all of AMETEK, it's about 50% of sales, but it's a big part of the process. And I'll give you an idea. And Q4, our rolling business was up 20% organically, so they're really doing a good job. And that market has -- hospital spending has been fantastic for us, and people were putting in new systems post-pandemic. Also the semiconductor markets about 6% of sales, and the vast majority of that is in process and the semiconductor market was up high single-digits in the Q4. And we think in 2023, there'll be a slight downtick there, that'll be up low-to-mid but still growing because we have a lot of applications and research and also in the areas that are continuing to grow. So, we're in the right places in semiconductor. So, you got healthcare, you got semiconductor. You got the research market where we've had with our CAMECA business just every lab in the world has to have one of our atom probes, every lab in the world has to have some of our SIMS products. So, their backlog is really good. And they're doing well. And then, you got the old traditional oil and gas part of process. And that's doing very well in Q4, it was up high-single-digits. And for all '22, it was up low double-digits. And for '23, we expect plus high-single-digits. So, process is doing very well. And we think it's going to continue in the future.

Excellent. That's very helpful. Just as a follow-up, could you speak to how you think the incrementals will look for EIG versus EMG, in '23 they were, EMG was certainly very strong in '22. But just how did those look going forward comparatively?

Good question. In terms of incrementals, in both groups, I think the core incrementals will be up 30% to 35%. And I think the core and reported margins will be up 30 to 40 Bps. So, we really think we have a clear line of sight to grow margins. Again, there'll be healthy incrementals. And we'll be able to increase our core margins as we go forward.

Very good. Thank you.

Thank you, Rob.

And our next question today comes from Steve Barger at KeyBanc Capital Markets. Please go ahead.

Hey, good morning, guys.

Hello, Steve.

Some automation and robotics OEMs have recently talked about distribution channel bottlenecks being a hindrance to growth, can you just talk about what you're seeing in that market, both near-term and expectations for how that market grows in the future?

Yes, I think for 2023, we think that business will be at mid-single-digits. And both our automation and our engineering solutions will be up mid-single-digits, I think that we're selling to mainly OEM customers there. So, you're going to have a bit of the effect of the ordering patterns, a change in ordering patterns there, but we have a really healthy backlog. So, it's really what we talked about customers are changing ordering patterns. We're really good at delivery. So, we're meeting our customer commitments, so they're now ordering at normal lead times. So, you'll see a little bit of the order corrections that we talked about in Q4 continuing. But we still have a record backlog and all the comments that I made hold for that part of the business also.

Got it. Thanks. And obviously semiconductor demand has been under pressure, especially on the memory side. But you just said you're in the right places to grow. That mean, you're supplying the makers of tools that go to foundry and logic or just how will you grow this year in the context of what's a pretty tough memory side?

Right, it's pretty tough. And again, we grew mid-teens in 2022. So, that growth for 2023 is up low-to-mid. So, it's a substantial decline. But we're still growing and the reason we're growing the key application areas, at our CAMECA business, they're really involved in semiconductor research and development and staying ahead and getting the next generation. And we have some tools that are must haves for the semiconductor market, and really strong backlogs and orders are continuing well. And then, the second area is we're in the EUV optics area for used in semiconductor fabrication. So, the EUV market is kind of separate from the memory market and really strong. So, those two areas are the good part of our semiconductor business and they're really strong. And that's why we think we'll still be able to grow low to mid-single-digits in an environment where you have some of the headwinds.

That's great detail. Thank you.

Okay, thank you, Steve.

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Kevin Coleman for any closing remarks.

Great. Thank you again, Rocco. And thank you, everyone for joining us for our conference call. As a reminder, a replay of today's webcast can be accessed in the Investors section of ametek.com. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.