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EDITED TRANSCRIPT
AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
CORPORATE PARTICIPANTS
Kevin Coleman Ametek Inc - VP of IR
Frank Hermance Ametek Inc - Chairman & CEO
Bob Mandos Ametek Inc - EVP & CFO
David Zapico Ametek Inc - EVP & COO
PRESENTATION
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the second quarter 2015 earnings conference call.
(Operator Instructions)
As a reminder, this conference is being recorded on Tuesday, August 4, 2015. I would now like to turn the conference over to Kevin Coleman, Vice
President of Investor Relations. Please go ahead.
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. I will also refer you to the investors section of
AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.
We will begin today with prepared remarks and then we will open it up for questions. I will now turn the meeting over to Frank.
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Subsequent to the end of the second quarter, we completed the acquisition of the Surface Inspection Systems Division of Cognex Corporation.
The Surface Inspection Systems Division, or SISD, develops and manufactures software enabled vision systems, used to inspect surfaces of
continuously processed materials, for flaws and defects. SISD's proprietary, high-speed defect-recognition technology detects, classifies and
accurately maps specific defects over the entire area of the surface.
This business is also an excellent strategic acquisition for AMETEK, as it expands our presence in a nondestructive process inspection market. In
addition, SISD will be able to leverage a number of AMETEK's complementary technologies, and products, within it's vision systems. SISD is
headquartered in Hayward, California and has annual sales of about $60 million.
Now, turning to global and market expansion. Global and market expansion continues to be an important driver for our growth, to the expansion
of our presence in attractive, higher-growth market segments, and geographic regions. In the second quarter of 2015, international sales represented
51% of our total sales. We continue to make investments to develop and expand our global sales channels, service capabilities and manufacturing
footprint, in order to position our businesses to capitalize on the attractive global growth opportunities.
For example, we continue to make sizable investments, in both India and Serbia, to drive our global and market expansion initiatives. In India, our
business continues to add sales and service capabilities, to support increased demand for our products and technology. Additionally, we've been
very pleased with the tremendous success of our Engineering Center of Excellence in India. As a result, we continue to expand and broaden our
RD&E capabilities and infrastructure in that region.
In Serbia, we have a low-cost manufacturing facility, which was acquired as part of the Dunkermotoren acquisition in 2012. This facility primarily
serves our Precision Motion Control customers in Europe and the Middle East. As other AMETEK businesses identify incremental growth opportunities
in Europe, and especially the Middle East, we are expanding our presence within Serbia to adequately support their growth.
Now, turning to new product development. We continue to see excellent results from our new product development efforts here. Our businesses
are doing a great job developing new products to serve both their existing markets, and to help penetrate adjacent markets or applications. We
will continue to make sizable investments in RD&E, to ensure we are developing the right products to serve our customers and target markets. In
2015, we expect to spend approximately $210 million on RD&E, or approximately 5% of sales.
We've made a number of recent new product introductions. SPECTRO Analytical Instruments, a global leader in instruments for advanced elemental
analysis, introduced their new portable SPECTROSCOUT x-ray fluorescence spectrometer, designed for at-line use. This durable and compact XRF
analyzer delivers reliable, precise and fast laboratory-quality, elemental composition monitoring and quality control testing, for the field or
manufacturing floor. The new SPECTROSCOUT delivers results on site, eliminating the need to transport samples back to a quality-control laboratory.
Zygo, a leader in optical metrology solutions, high-precision optics and optical assemblies, released its Verifire XL high-precision, Large Aperture
Fizeau Interferometer. It is the latest addition to Zygo's industry-leading line of the phase-shifting laser interferometers. And, is designed to measure
large plano surfaces such as mirrors, semiconductor wafers and wafer chucks.
The product is a compact, cost effective and complete turnkey solution, for the highly accurate characterization of flat surfaces up to 12 inches in
diameter. To further increase precision and reliability, this new Zygo product incorporates a vibration isolation platform from another AMETEK
business, our TMC business.
Lastly, Solidstate Controls, a recognized leader in highly-customized, uninterruptible power supplies, has released its DSE UPS system. This new
DSC system is an interesting first. It combines the robust design of a ferroresonant transformer with the enhanced digital communications,
monitoring and diagnostic capabilities, of a pulse-width modulation UPS system. It is a true online double-conversion UPS system that provides
highly reliable, clean and regulated power, for critical AC loads in demanding process control applications.
From an overall perspective, revenue from products introduced over the last three years was 24% of sales in the second quarter, up from 22% in
last year's second quarter. It's a very high number, which we're very proud of.
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Lastly, I will touch on operational excellence. Operational excellence is the cornerstone strategy for AMETEK. We continue to see tremendous results
from our various operational excellence initiatives. Our teams continue to do an excellent job driving operational improvements in their business,
by leveraging the numerous operational excellence tools we have in place throughout the Company.
In low growth environments, the success of our operational excellence initiatives takes on even greater importance. So, we are able to continue
to drive meaningful margin expansion, while allowing us to continue to invest in key growth initiatives. Overall, in 2015, we anticipate approximately
$145 million of total operational excellence savings. And, we believe that's a conservative number. The largest contributor to this savings is our
global sourcing and strategic procurement initiatives, where we expect approximately $70 million in savings in 2015.
Turning to the outlook for the remainder of 2015. We anticipate 2015 revenue to be up low-single digits, on a percentage basis, from 2014. Organic
growth is expected to be roughly flat for all of AMETEK, and for both operating groups. We continue to expect adjusted earnings for 2015 to be in
the range of $2.58 to $2 63 per diluted share up, 7% to 9% over last year's adjusted earnings per share.
Third quarter 2015 sales are expected to be approximately flat, versus the third quarter of 2014. We estimate our earnings to be approximately
$0.64 to $0.65 per diluted share in the third quarter, up 3% to 5% over last year's third quarter.
So, in summary, we delivered strong results in the second quarter, with record earnings. While global growth remains challenging, we are very
confident in our ability to execute on our growth strategies and to deliver excellent earnings growth. Our balance sheet remains strong. And, we
generate significant cash flow that provides us with plenty liquidity, to operate the business, and pursue our acquisition strategy. Bob will now
cover some of the financial details. And then, we will be glad to take your questions.
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Moving to EMG, starting with the differentiated part of EMG, overall sales were down low-single digits, on a percentage basis, in the quarter, as
foreign currency headwinds were only partially offset by the contribution from the Global Tubes acquisition. Organically, we saw solid growth in
our Precision Motion Control business. But, weakness in our Engineered Materials Interconnects and Packaging business, due to the continued
soft macro environment. For 2015, we expect our differentiated EMG businesses to be approximately flat, organically.
And the last part of the Company, our Floorcare and Specialty Motors business, organic sales in our Floorcare and Specialty Motors business were
flat in the second quarter. And for 2015, we expect sales for this business to be up low-single digits, organically. So in 2015, for all of EMG thus, we
expect roughly flat organic sales growth, on a percentage basis. So, the bottom line here is, with organic growth, very difficult for just about every
industrial company. The focus really becomes cost.
And, we've done an excellent job, as typical of AMETEK, in terms of reducing our cost structure. And, obviously, getting record earnings and record
performance as a result. Scott, that's a recap of what you asked for.
Operator
Allison Poliniak, Wells Fargo
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Operator
Mark Douglass, Longbow Research
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Mark Douglass - Longbow Research - Analyst
Finally, on the power and industrial, can you go into a little bit detail, what businesses within there, or what markets were particularly good for
you?
Operator
Matt McConnell, RBC Capital Markets
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Conversely, AMETEK does manufacture in Europe and Asia. And, we have to take advantage of that, to our competitive advantage. So, it's certainly
an issue, but I think we are managing it well. We've done an analysis, business by business, every business unit in the Company. And, we have plans
in place to relocate to lower cost regions. We have, as Frank mentioned, we have 24% of sales from new products. We're really emphasizing new
product development, to enhance our competitive advantage. So, it's an issue for every company. There is a competitive issue with it, but we're
managing well.
Operator
Joe Radigan, KeyBanc
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
a US business. And, with the acquisition of Dunkermotoren in Germany and a real focus on growing in Asia, this Company has diversified its global
reach.
And, it's basically looking at the stronger parts of the industrial market, and being able to serve them well. To me, this is an example of really strong
management, in a difficult global macro environment, that is actually taking advantage of their approach to the market. And, therefore, their
organic growth has been very good.
Operator
Robert McCarthy, Stifel Nicolaus
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
And, some of the growth is also being muted by just the general macro conditions that we have talked a lot about on this call, and most industrial
companies are talking about. I actually believe the organic growth of the companies that we acquired is higher than the base organic growth of
the core business. If we take the last one, the Cognex deal. Dave, do you remember what it was, organic growth, before we acquired it? 5%, 6%?
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
And, again, this speaks to the quality of our acquisition program. And, our backlog is good right now. The free cash flow of the Company, this year,
is going to be on the order of $740 million. And, my objective is to spend that free cash flow on acquisitions, and we're pretty much right on target.
You look at what we've done in the first half of the year. As Bob mentioned, we did $360 million. So, we're right on target to spend that.
And, that's the best utilization of that capital. If we can take the free cash flow of the Company, invest in businesses and then make them better.
It's sort of a no-brainer, from an economic analysis viewpoint. So, no. I'm not overly worried about it.
One good metric that I like to focus on is, no pack to total average capital. And, you look at this and, although you really probably shouldn't look
at it on a quarter basis, but in the second quarter that number was just under 14%. So, you look at our cost to capital which, depending on how
you value cost of capital, a reasonable number for us would probably be 8%. So, you take 8% and you get no pack to total capital of 14%, we are
creating sizable value. And that's the name of the game, is you've got to create value. So I hope that helps.
Operator
Christopher Glynn, Oppenheimer
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Operator
Richard Eastman, Robert W. Baird
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Richard Eastman - Robert W. Baird & Company, Inc. - Analyst
And, I recall the mid-downstream piece was expected to track down maybe 5%, upstream down 20%. And, that's how you were waiting for this
10% number? Those two were --
Operator
Matt Summerville, Alembic Global Advisors.
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Frank Hermance - Ametek Inc - Chairman & CEO
Yes, through the second quarter, orders actually went up. So, we saw a positive trend on orders. For July, we have orders and sales data. We don't
have profitability data yet. Will have that in another day or two. But, on orders and sales, they were basically in line with the forecast that I've given
you. So, we have pretty good confidence going into the beginning, at least of Q2, that the estimates are going to hold.
Operator
(Operator Instructions)
Nigel Coe, Morgan Stanley
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AUGUST 04, 2015 / 12:30PM, AME - Q2 2015 Ametek Inc Earnings Call
Operator
Gentlemen, there are no further questions at this time.
Operator
Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please
disconnect your lines.
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