Welcome to the First Quarter 2022 AMETEK Earnings Conference Call. My name is John and I'll be your operator for today's call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Now I will turn the call over to Kevin Coleman, Vice President of Investor Relations and Treasurer.

Thank you, John. Good morning and thank you for joining us for AMETEK's first 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 make forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. 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 open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. AMETEK delivered outstanding results in the first quarter with strong sales growth and excellent operating performance, driving robust core margin expansion and earnings which exceeded our expectations. We are also seeing continued strong demand. This demand remains broad based across our diverse set of niche markets, leading to outstanding orders growth and a record backlog. I'm very proud of the way our teams are managing a challenging and uncertain macro environment. AMETEK's flexible operating model allows our businesses to quickly adjust and adapt to changing economic conditions and deliver exceptional results. Before I provide more details on the results for the quarter, I wanted to comment on the ongoing geopolitical events in Ukraine. We are deeply saddened by the tragic events continuing to unfold in Ukraine. Our hearts and thoughts are with all those affected. To assist with the immediate needs of this mass humanitarian crisis, the AMETEK Foundation has made donations to several charities that are actively providing food, shelter and medical supplies to those impacted. Additionally, many AMETEK colleagues and our businesses have mobilized to help in whatever way they can through donations to charities supporting the crisis. Thank you to all employees who are supporting those in need. Now let me turn to our first quarter results. First quarter sales were $1.46 billion, up 20% over the same period in 2021. Organic sales growth was 14%, acquisitions added 7 points and foreign currency was a 1 point headwind in the quarter. Overall orders in the first quarter were $1.7 billion, an increase of 22% over the prior year period, while organic orders were up 18% in the quarter. Book-to-bill was 1.17 in the first quarter, reflecting continued robust and broad based demand. Backlog at quarter end was a record $3…

Thank you, Dave. As Dave noted, AMETEK delivered outstanding results to start the year highlighted by strong sales and orders growth, excellent operating performance, and a high quality of earnings. I'll provide some additional financial highlights for the quarter. First quarter general and administrative expenses were $19.7 million, up $1 million from the prior year due to higher compensation expenses in the quarter. For 2022 general and administrative expenses are expected to be roughly in line with 2021 levels, and approximately 1.5% of sales. The effective tax rate in the quarter was 19%, down from 19.5% in the first quarter of 2021. For 2022, 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 range. Capital expenditures in the first quarter were $26 million. For the full year capital expenditures are expected to be approximately $125 million or approximately 2% of sales. Depreciation and amortization expense in the quarter was $78 million. In 2022, we expect depreciation and amortization to be approximately $320 million, including after tax acquisition related intangible amortization of approximately $150 million or $0.64 per diluted share. For the quarter operating working capital was 17.1% of sales. Operating cash flow was $201 million and free cash flow was $175 million. Our first quarter working capital and cash flow results reflect our strategic decision to add inventory in certain areas to support continued strong customer demand and as a hedge against longer lead times we are experiencing across the supply chain. While investment resulted in lower cash flows and free cash flow conversion in the first quarter, we continue to expect a strong 110% free cash flow to net income conversion for the full year. During the first quarter, we repurchased approximately 1.2 million shares of stock in the open market for approximately $152 million. Total debt ended the first quarter at $2.54 billion unchanged from the end of 2021 and offsetting this debt is cash and cash equivalents of about $340 million. The end of the first quarter gross debt to EBITDA ratio was 1.5 times and the net debt to EBITDA ratio was 1.3. We continue to have excellent financial capacity and flexibility with approximately $2.3 billion of cash and existing credit facilities on March 31 to support our growth initiatives. As a reminder, our top priority for capital deployment remains strategic acquisitions, as we believe it provides AMETEK and our shareholders with the best returns on our capital. In summary, our businesses drove excellent performance in the first quarter, delivering strong earnings growth in a very challenging environment. We remain well positioned to manage ongoing economic challenges. We're continuing to invest strategically in our long-term growth initiatives. Kevin?

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

Thank you. [Operator Instructions] And our first question is from Matt Summerville from D.A. Davidson.

Thanks, good morning. Dave, could you maybe talk about where you were in Q1 from a price cost standpoint, what that spread looked like and how much realized price you expect for the full year? And then I have a follow up.

Sure, Matt. In the first quarter, our pricing continued to more than offset inflation. Pricing was about 5% and inflation was about 4%, so the spread was a little over 100 basis points. And for 2022, we expect price to be in the 4.5% to 5% range and the inflation to be in the 4% to 4.5% range, so about a 50% positive spread in our guide. And the results speak to the highly differentiated nature of AMETEK product portfolio and our leadership positions and niches, the investments we're making in our products and technologies. And we've been staying ahead of inflation, as we said we would for probably the last year or so when we saw it coming down the line, so…

Got it. And then Dave, given your second quarter guidance and kind of the normal in a more normal year, typical cadence would dictate second quarter being at least a few cents above where you're at in Q1. Obviously you're not guiding that way this year, so I guess I'm trying to understand maybe how much contingency you're factoring in disruption, if you want to call it that, can you kind of parse that out a little bit? Thank you.

Yes, it's a good observation, Matt and it's fundamentally driven by the China lockdown scenario. You know, we have about 9% of our sales are out of China and we've been successful running a profitable growing operation there for many years. We have tremendous customer base, improving manufacturing processes, making the environment cleaner, improving research and development capabilities, and that's going to continue. But right now, several of our major facilities are in the Shanghai area and they're in a lockdown situation either and not operating or operating in a significantly reduced capacity and that's impacting a lot of our business. And our best assessment of what we know right now is, about a half of our China sales will be impacted in the quarter. So that's about 4% to 5% of our sales or $65 million or $70 million. So if you take that out of the guide, you'll see that the balance of AMETEK is going up in Q2. So it's really the fact that, of lower business activities in China, because of the lockdown situations and because of our proximity to Shanghai and some of our major operations. Now those sales are just going to be delayed. They're going to get delayed from the second quarter to the second half of the year and so we have to get through the lockdown in Q2.

Understood, thank you very much, David.

Thanks, Matt.

And our next question is from Deane Dray from RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Deane.

Hey, I appreciate all the color. Could you take us through the key end markets and regional updates? We certainly just got the China update on the lockdowns. That's understood, but anything else especially European exposures? Thank you.

Sure Deane. I'll take you through the major markets first. Our process businesses were up 20% in the quarter, strong demand organic sales growth, contribution from the acquisitions of Magnetrol or and Alphasense. So organic sales for process were up mid teens in the quarter. Growth broad based, I mentioned in the prepared remarks the Ultra Precision Technologies business really saw excellent growth in the quarter. End market demand remained strong, all key and markets including semiconductor, research and medical are very strong. Additionally, we're seeing increased demand for our solutions serving sustainability initiatives with our instrumentation being used to reduce harmful emissions and process -- and improve process efficiency. So look at process our biggest segment for all of 2022, we continue to expect organic sales for our process businesses to be mid to high single digits. Next, our aerospace business. Our aerospace business was organically up low single digits in the quarter up in the mid 20s range for the first quarter in overall sales. In the quarter, we saw strength in commercial aerospace, being partially offset by delays in defense shipments caused by U.S. Government spending. So our commercial side of that business was up low double digits and our defense side of that business was down mid single digits. And for the full year we expect to be up mid single digits with commercial up high single digits and defense up low single digits for aerospace. Next, power and industrial. Overall sales were also up in the mid 20s, so good quarter at power and industrial. We had mid teens organic sales growth and the contributions from our acquisition of NSI-MI, so strong balanced sales growth across both power and industrial. And we expect organic sales for our power and industrial businesses to be up mid single digits with similar growth across both segments. And finally, our automation and engineering solutions, both overall and organic sales for automation and engineered solutions businesses were up mid teens on a percentage basis in the quarter with solid demand continuing across our end markets. For the full year, we continue to expect organic sales to be up for our automation engineered solutions business up mid to high single digits with similar growth across each business. So, strong performance across the entire business. I'll talk about the geography, you asked that question too. Strong broad based growth across all geographies, up mid teens in Europe, U.S. and Asia. China we were up 10% on an as reported basis, so good quarter there also. So when you look across the globe, there's really not a blemish in terms of growth, so we're feeling good about that also. With our orders, we think there's strong growth ahead.

That's really helpful. And just last one, just to clarify, I understand the push out from the second quarter that may be China related. I might have missed this, but were there any revenues pushed out of the first quarter?

There really wasn't. The closure of China occurred late in the quarter, very late in the quarter and we had a heads up that that was happening. So we were able to really meet our demand requirements in the first quarter. But at the same time, overall for the company, there was -- there continued to be orders that did not ship in the first quarter and they were in that $50 million plus range. So if we were operating at 100% of supply chain, and everything else that was going on, we probably would have shipped another $50 million plus out in the first quarter.

That's really helpful. Thank you.

Thank you, Deane.

And our next question is from Allison Poliniak-Cusic from Wells Fargo.

Hi, guys. Good morning.

Good morning, Allison.

So just poking on sort of that end market and customer demand, is there any sort of change in behavior that's sort of causing you a little bit of pause with a specific business or vertical, that kind of leading to that things might be shifting a little bit or is it -- it's still quite strong across the board here?

It is quite strong across the board. I think over 90% of our business units had double digit sales and double digit orders and the ones that didn't were in the high single digits. So the orders are good, the sales are good. There's absolutely no slowdown that we see. You know, as I told you, couple of quarters ago, customers are giving us an early look into their demands, that's continuing, and but I really see no slowdown at all on that, at 22% orders and 18% orders growth and it is broad based and I think, on an order basis, organic orders EIG was 19 and EMG was 15, so both very strong.

Great. And then you talked about the pipeline for M&A being quite filled at this point, which is not atypical for you. Would you describe sort of kind of the things that you're seeing, what's kind of holding things back, is pricing still high at this point? Just any incremental color on the pipeline and what you're seeing out there today?

Sure. We remain active. We're looking at multiple deals. As always, we are focused on long-term returns. The one point that's -- it's a factor right now, if you look at private company multiples, and public company multiples. And with the stock market obviously, public company multiples have come in a bit, but the private company multiples are above public company multiples, and they're being stingy and reflecting what's happening in public markets. So there's a bit of a delay and some of the private businesses were looking at premium multiples. And I think that's causing some transactions to get pushed to the right. The difference between private and public multiples and the fact that the owners of the private businesses are holding on right now to -- for higher multiples from the public market.

Perfect, thank you. I'll pass it on.

Thank you.

Our next question is from Rob Wertheimer from Melius Research.

Howdy, thank you. I was actually going to follow on the last statement you just made was an interesting one. I just wanted to see if you would characterize acquisition pipeline funnel backlog and size. You guys had a record year last year, maybe some of that was because of 2020 was a little slower. But then was your statement then to imply that things have to kind of normalize between public and private before acquisition activity picks up or is it more situational? And that's a comment on the forecast, if you see the mean on that price line?

No, not a forecast, it is a comment, but it is a factor that is impacting valuations. But we have a very, very good pipeline, both smaller deals, public and private and I expect that you'll be hearing from us this year. And as you know, we're always focused on long-term returns, so we have to see value in what we're buying and we're very active right now.

Okay, perfect. And then I think your comments have been really clear that 90% and double digits is an amazing stat in some ways. There's a lot of consternation around Europe, whether there's going to be a slide into recession or just uncertainty on spending, et cetera, I assume from your comment you're not seeing any of that in your orders and backlog specific to Europe?

Yes, Europe was up 16% in the quarter, broad base strength. We had notable strength in our process businesses. Clearly there's some impact in the energy area and what the Ukraine crisis, the war in Ukraine, some of our products are used to help people get fuel efficiency, some of our products are used in applications that are actually helping those customers deal with higher energy costs. So right now, we're not seeing a slowdown. We read the press clippings like you have, but right now we're full go in Europe.

Thank you.

Okay.

And our next question is from Scott Graham from Loop Capital Markets.

Hey, good morning, Dave, Bill, Kevin, how are you?

Good morning, Scott.

So I have two questions, one is on the price cost and I know that we came into this year with that fourth quarter, I think you had 100 basis point gap. In the first quarter you had the same. In the fourth quarter, I think you mentioned that you were expecting that gap to start to narrow, and it really didn't in the first quarter. So is it possible that you can get pricing enough to keep it at 100 for the rest of the year?

It is possible, Scott. I mean, that's -- our guidance is it, for it to narrow, but certainly we've been doing an excellent job. And I think our intention will be to try to maintain the same thread, but our guidance is for that to narrow a bit.

Understood, thank you. Next question is on aerospace. And you know, commercial you said was up low double. And I was hoping maybe you could unbundle that OE versus MRO?

Yes, what drove the growth in our commercial, the low double digits was really the aftermarket and the business jet. Those markets both outperformed the OE.

Okay. And from -- if I could just extend that last comment, what are you hearing from the big guys? Because they're -- obviously these guys are certainly mum on 2023? Are you hearing any changes in build rates for next year? Certainly costs a lot to take a flight these days, so I'm thinking that they're kind of padding things their -- their pockets a little bit? What is your sense there?

My sense is from our perspective, that market is going to continue to improve and it's one of our longer cycle exposures, and we're looking for a good continued growth in commercial in 2023.

Got it? And if I could just sneak this last one in, I know that your vitality has been at about 25% for quite some time. Honestly, correct me if I'm wrong, it's the first time I've heard 26%. And I was just -- that's a really awesome number three years and what have you, and I hear you talk more and more about new products on these calls. Could that number continue to creep up this year?

Yes it can continue to creep up and we've got an incredible credible range of new products were being introduced. And they're also you think about, were the heat exchangers I've talked about from our Hughes-Treitler/Rotron business, I mean, we're saving 1 million tons of CO2. That's almost the entire carbon footprint of AMETEK over 10 years. It's an incredible design. It reduces weight. It's just a fantastic thing design and were already designed in and it's really bullish for the future. So we have the engineering capability to meet the needs of the customers in these changing times where sustainability is a more important factor. And I'm very excited about our product development. That's why we're investing heavily in that area and we have good things to come.

Very good, Dave, thanks.

Thank you, Scott.

[Operator Instructions] And our next question is from Andrew Obin from Bank of America.

Good morning. This is David Ridley-Lane on for Andrew Obin. I know AMETEK is a sizable U.S. exporter. Given the U.S. dollar appreciation is that a drag on margins and can you remind us of your overall hedging strategy?

Sure, the first point is we are a sizable U.S. exporter and that's a correct statement, but our products are also very differentiated. So as evidenced by our price inflation spread so far, we're able to offset the higher U.S. dollar.

And our cost structure.

The second point is our hedging strategy and actually, we don't have hedging strategy, because we're naturally hedged. So pretty much across the board, we spent a lot of time and this is about tenure all the time, it's a long period of time. We're naturally hedged in each of our locations that we operate. So our revenues and expenses naturally offset. And to give you an example, in this quarter where, you had a strong dollar, and there was some currency implications, it did impact our top line, but our bottom line across the whole enterprise, it was less than a penny impact on earnings. So we've got this natural hedging strategy and through the past tenure, you can go back and look at it, it works very well. We are a U.S. exporter, but we got the pricing leverage through our differentiated technology. So strong dollar is not usually an insurmountable win [ph] for us.

Understood. And quick follow up on Abaco. Are you seeing any sort of incremental demand out there from international defense budgets, which are going up? I know, this is probably more of a 2023, 2024 story, but has the sort of pipeline for your defense businesses change meaningfully? Thank you.

Yes, the pipeline is improving in international markets. We have businesses located in the UK besides Abaco that are also benefiting. So the fact that the international defense market is improving is a good thing for our aerospace and defense business.

And our next question is from Joe Giordano from Cowen.

Good morning. This is Michael on for Joe.

Hello, Michael.

Hey, continuing with the defense theme, can you provide any color regarding the new U.S. defense budget now that it's been finalized?

Yes. Yes, the U.S. defense budget is good from our perspective in areas that we're investing. I mean, when you look at the whole thing, it was probably flattish to up a bit. So, but there's ample spending going on for us and we're really, it's a budget that we can work with. What hit us a bit in the first quarter and I talked about our defense businesses being down were the delays from the continuing resolution where no one has funding. So what we're seeing now is an uptick in order patterns and the second half of the year we expect that market to improve substantially.

Great, thank you.

Thank you.

And we have no further questions at this time. I'll now turn it back over to Kevin Coleman for closing remarks.

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

Thank you for joining ladies and gentlemen. That concludes today's conference. Thank you for participating and you may now disconnect.