AMETEK Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

Key Takeaways

  • Inventory destocking headwinds across OEM customers and more cautious project spending emerged in Q2 and are expected to continue through the second half of 2024, pressuring near-term sales volumes.
  • Record Q2 financial results with operating income of $448 million (up 7% YoY), a 25.8% operating margin (up 40 bps), EPS of $1.66 (up 6%), and strong free cash flow growth of 17% with 107% conversion.
  • Revised full-year guidance now calls for overall sales growth of 5%–7% (organic flat to down low single digits) and diluted EPS of $6.70–$6.80, a modest reduction from prior ranges due to ongoing destocking.
  • Paragon Medical integration saw organic sales down ~10% this year amid inventory normalization, but new program wins and operational improvements are expected to drive strong growth and profitability in 2025.
  • Strong balance sheet and capital deployment with net debt/EBITDA at 1.0×, $2.2 billion in available liquidity, $140 million targeted OpEx savings, $90 million in growth investments, and a robust M&A pipeline.
AI Generated. May Contain Errors.
Earnings Conference Call
AMETEK Q2 2024
00:00 / 00:00

There are 14 speakers on the call.

Operator

Thank you for standing by. My name is Meg, and I will be your conference operator today. At this time, I would like to welcome everyone to the AMETEK, Inc. 2nd Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer Thank you. I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations and Treasurer. Please go ahead.

Speaker 1

Thank you, Meg. Good morning and thank you for joining us for AMETEK's Q2 2024 Earnings Conference Call. With me today are David 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 a pre tax $29,200,000 or $0.10 diluted share charge in the Q1 for integration cost 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 it up for questions. I'll now turn the meeting over to Dave.

Speaker 2

Thank you, Kevin, and good morning, everyone. AMETEK delivered solid results with strong operating performance in the 2nd quarter against the backdrop of a more subdued global growth environment. In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base leading to lower than expected sales volumes. Additionally, we are seeing signs of customers turning more cautious leading to some temporary delays in project spending. Despite these headwinds, our businesses delivered strong operating performance in the quarter with solid growth in cash flow and earnings and robust core margin expansion, reflecting the strength and flexibility of the AMETEK operating model.

Speaker 2

We expect the inventory destocking and more cautious customer behavior to continue in the back half of the year. As a result, we are adjusting our outlook for the remainder of the year. We remain confident in our ability to successfully navigate these near term headwinds. As we've done in the past, we will expand our focus on operational efficiencies, continue to invest back on our businesses, utilize our strong balance sheet to deploy capital on strategic acquisitions and ensure we position AMETEK for continued long term growth. Now let me turn to our Q2 financial results.

Speaker 2

Sales in the quarter sales in the 2nd quarter were $1,730,000,000 up 5% from the same period in 2023. Organic sales were down 2%, acquisitions added 8 points in the quarter and foreign currency was a slight headwind. AMETEK's operational performance in the quarter was excellent with robust margin expansion. Operating income in the quarter was a record $448,000,000 a 7% increase over the Q2 of 2023. Operating margins were 25.8% in the quarter, up 40 basis points from the prior year.

Speaker 2

Excluding the dilutive impact from acquisitions, core margins were up a sizable 180 basis points in the quarter. EBITDA in the quarter was a record $545,000,000 up 10% over the prior year with EBITDA margins an impressive 31.4%. Cash flow in the quarter was excellent reflecting our operating capability and asset light business model. Operating cash flow in the quarter was up 14% to $381,000,000 with free cash flow up 17% and free cash flow conversion of 107%. This operating performance led to earnings of 1.6 $6 per diluted share, up 6% versus the Q2 of 2023 and above our guidance range of $1.63 to $1.65 per share.

Speaker 2

Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. EIG delivered strong operating performance with outstanding margin expansion. EIG sales were $1,150,000,000 a 2% increase from the Q2 of last year. Organic sales were flat and acquisitions contributed 2 points.

Speaker 2

Growth was strongest within our Aerospace and Defense and Kamika businesses in the quarter. EIG operating income was $350,000,000 up 14% versus the prior year and operating margins were 30.3%, up 3 20 basis points from the prior year. Our EIG businesses are operating at a very high level with excellent operating margins. They remain well positioned to benefit from a number of important long term secular growth drivers given their increasing exposures to attractive markets across process, aerospace, power and energy markets. The Electromechanical Group continues to navigate the impacts of the inventory normalization across our automation and engineered solutions businesses.

Speaker 2

In the quarter, EMG sales were a record $581,000,000 a 14% increase compared to the prior year, driven by contributions from the acquisition of Paragon Medical. Organic sales declined 6% due to weakness in our automation and engineered solutions businesses more than offsetting solid growth across our EMG Aerospace and Defense businesses. Acquisitions contributed 20% in the quarter. Operating income for the 2nd quarter was $123,000,000 with operating margins at 21.2%, while core operating income margins were 25%. As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory build up during the supply chain prices.

Speaker 2

While we had expected to see conditions improve in the second half of the year, we now believe demand within this OEM customer base will remain subdued at current levels through the end of 2024. This inventory normalization is also impacting our medical OEM businesses, including Paragon Medical, leading to near term delays in orders and shipments. Paragon remains very well positioned for strong growth once the inventory correction is complete given their leadership position across a number of high growth medtech market segments. Additionally, Paragon has won a number of new programs that we're currently investing in which will drive incremental growth in 2025 and beyond. As we noted last quarter, we are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long term success.

Speaker 2

As the volumes return following destocking, we believe the business will be levered to deliver outstanding sales growth and profitability. In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion in the quarter. We continue to generate strong cash flow with 17% free cash flow growth in the quarter. And for the full year, we expect free cash flow to net income conversion to be between 110% 120%. The strength of AMETEK's operational excellence strategy is evident in our operating results.

Speaker 2

We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OpEx initiatives. And this year, we now expect to generate $140,000,000 in savings. We also remain committed to investing back into our businesses. And this year, we expect to invest in an incremental $90,000,000 in growth, largely focused on research, development and engineering and sales and marketing. The effectiveness of these investments is reflected in our vitality index, which was a strong 24% in the quarter.

Speaker 2

Additionally, our strong free cash flow and flexible balance sheet provides us with ample financial capacity for strategic acquisitions. Our pipeline of acquisition opportunities remains strong. AMETEK is very well positioned to continue to expand our portfolio of highly differentiated businesses that both are organic growth investments and our acquisition strategy. Now turning to our outlook for the remainder of the year. With destocking expected to continue through the balance of the year and some customers turning more cautious on project spending, we are adjusting our sales and earnings guidance for the full year.

Speaker 2

Overall sales are now expected to be up 5% to 7% versus the prior year with organic sales expected to be flat to down low single digits. Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80 up 5% to 7% compared to last year's results. This is less than a 1% reduction from our prior earnings guidance range of $6.74 to $6.86 as our proactive productivity actions along with a lower expected 4th quarter tax rate help offset the impact of the reduced sales forecast. This guidance reflects second half sales and operating earnings essentially in line with our first half results. For the Q3, we anticipate overall sales to be up mid single digits with earnings in the range of $1.60 to $1.62 per share, down 1% to 2% versus the prior year.

Speaker 2

In summary, we are pleased with our business' strong operating performance in the 2nd quarter. We have a proven operating model and an experienced management team and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long term results. I will now turn it over to Dalipuri, who'll cover some of the financial details of the quarter, then we will be glad to take your questions. Dalip?

Speaker 3

Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK had a solid second quarter with excellent operating performance leading to outstanding margin expansion and strong cash flows. Now let me provide some additional financial highlights for the Q2. 2nd quarter general and administrative expenses were $25,000,000 or 1.5 percent of sales, in line with last year's Q2. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.5 percent of sales.

Speaker 3

2nd quarter interest expense was $31,000,000 up $12,000,000 from the Q2 of 2023 due to higher debt balances following the acquisition of Paragon Medical in December. 2nd quarter other expense was down approximately $4,000,000 versus the prior period, due largely to higher pension income higher pension income and higher investment income in the quarter. The effective tax rate was 19%, up from 18.2% in the Q2 of 2023. For 2024, we now expect our effective tax rate to be between 17% 18%, driven by a lower 4th quarter tax rate due to statute expirations. As we have stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from the full year estimated rate.

Speaker 3

Capital expenditures in the 2nd quarter were $21,000,000 and we expect capital expenditures to be approximately $150,000,000 for the full year or about 2% of sales. Depreciation and amortization expense in the quarter was $99,000,000 In 2024, we expect depreciation and amortization to be approximately $400,000,000 This includes after tax acquisition related intangible amortization of approximately $190,000,000 or $0.82 per diluted share. Operating working capital in the 2nd quarter was 18.6 percent of sales. Operating cash flow was $381,000,000 up 14% versus the Q2 of 2023, while free cash flow was $360,000,000 up 17% over the prior year. For the quarter, free cash flow conversion was a strong 107 percent of net income.

Speaker 3

For the full year, we continue to expect strong free cash flow conversion in the range of 110% 120% of net income. Total debt at June 30 was $2,650,000,000 down from $3,300,000,000 at the end of 2023. Offsetting this debt is cash and cash equivalents of $397,000,000 At the end of the second quarter, our gross debt to EBITDA ratio was 1.2x and our net debt to EBITDA ratio was 1x. We have significant financial capacity and flexibility with $2,200,000,000 of cash and available credit facilities to support our growth initiatives and to deploy on strategic acquisitions. In summary, AMETEK had a solid Q2 of 2024, delivering strong results with robust margin expansion and excellent free cash flows.

Speaker 3

Our leading positions across attractive market segments, combined with our strong balance sheet and outstanding operating capabilities, leaves us very well positioned to navigate the current environment and to deliver on our growth strategies. Kevin?

Speaker 1

Great. Thank you, Dalla. Meg, could we please open the lines for questions?

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Matt Summerville with D. A. Davidson.

Operator

Please go ahead.

Speaker 4

Thanks. Good morning. A couple of questions. First, Dave, you seemed pretty convinced a quarter ago that the destocking phenomenon would sort of wrap itself up by mid year. So I guess relative to 90 days ago, can you maybe talk a little bit about what's changed?

Speaker 4

What gives you confidence that we're only in for another 6 months of this? And then maybe touch on what end markets and businesses are starting to be impacted by some of the project delays you referenced? And then I have a follow-up. Thank you.

Speaker 2

Yes. Our outlook for the year has changed. And as we noted in my prepared remarks, we now expect the improvements in the second half of the year are not going to happen as originally anticipated and we talked about that earlier in the year. We now expect our sales and operating performance in the second half will be similar to the growth that we the sales and operating performance in the first half. So we're not going to see the increases that we had anticipated.

Speaker 2

And this change results in about a 4 point reduction in our sales outlook. And to your question, where is it coming from roughly three points of this reduction is from our automation and engineered solutions subset, which is the businesses that we talked about being exposed to the OEM just talking. And within that area, we have 2 points of reduction tied to our automation business and one point from the Paragon destock. So that makes up about the 3 to 4 point reduction in our outlook. Across our EIG businesses, we expect about 1 point of lower sales due to short term project delays.

Speaker 2

And there we're seeing customers are being just a bit more cautious given the cumulative impact of a wide range of economic, political and geopolitical factors. And but we feel these are temporary delays. Our new funnel pipelines remain very solid. Projects are not being canceled. They're being delayed.

Speaker 2

And given the expected lower sales, we reduced our earnings guidance by about a nickel at the midpoint. Another couple of points, I mean, we're really doing a good job running the company reflects when you take that sales decrease, it takes reflects about a 20% decremental margin on the expected lower sales. And as Sal mentioned, the tax rate will be lower in Q4. So I'm pleased with how the team is managing through these temporary demand changes. I'm confident that we're positioned to see accelerated profit growth when the economic conditions change.

Speaker 2

I think the Tayo, to your point, we missed the timing of the recovery and the inventory corrections will take a bit longer. And as AMETEK does, we're adapting to the current situation and we're going to manage our businesses appropriately. And as I said, we had really pleased how the team responded with 20% decrementals to the volume change.

Speaker 4

No, thanks, David. I would definitely agree on the decremental comment. Can you also I think it's probably good from a timing standpoint in the call. Can you kind of go ahead and do the around the horn you typically do across the businesses and how expectations have kind of changed in some of the subverticals?

Speaker 2

Yes. Sure, Matt. I'll start with our largest sub segment, the process. Sales for our process businesses were up low single digits with solid growth across our energy businesses and our Kamika business in the quarter. As noted in my prepared remarks, we've seen customers, as we just talked about, turn more cautious.

Speaker 2

We expect this to continue as the second half, as we discussed, and we expect our process businesses to be flat to up low single digits versus the prior year. Then I'll move to Aerospace and Defense and that business was up mid single digits in the quarter. Growth was strongest across our commercial aerospace businesses, while defense experienced some shipment delays in the quarter. For the full year, we continue to expect strong high single digit organic sales growth for our A and D business with similar growth across both our commercial and defense businesses. Next, I'll move to our Power and Industrial businesses.

Speaker 2

And overall sales for our Power and Industrial businesses were up mid single digits in the 2nd quarter with contributions from recent acquisitions being offset by a low single digit decrease in organic sales. Similar to our process businesses, our Power and Industrial are seeing the same kind of customers delaying some projects due to the broader macro uncertainties. And for all of 24, we now expect organic sales for our Process and Industrial businesses to be flat compared to 2023. And then finally our final segment Automation and Engineered Solutions, sub segment sales, they were up high teens on a percentage basis in the quarter. This was driven by the contributions from the acquisition of Paragon Medical.

Speaker 2

Organic sales in the quarter were down approximately 10% due to the continued normalization of inventory levels across our OEM customer base. We expected to see improvements in return to growth as we talked about in the second half of the year. And as we just mentioned, that's not going to happen. Inventory normalization is going to continue through the end of the year. And as a result, we expect organic sales for our Automation and Engineered Solutions businesses to be down mid single digits for the full year.

Speaker 2

So that's a picture around the Hornet.

Speaker 4

Great. Thank you, David.

Speaker 2

Thank you,

Operator

Your next question comes from the line of Deane Dray with RBC Capital Markets. Please go ahead.

Speaker 2

Thank you. Good morning, everyone. Good morning, Dean.

Speaker 5

Hey, Dave, I'd like to pick up where you left off with Matt and just some more color on the customers' kind of sentiment here and the delays in project spending. What kind of reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries?

Speaker 5

Any kind of way that you could characterize and frame for us about this degree of cautiousness?

Speaker 2

Yes. I think the I think what we see from our customer base is they're just taking longer to approve projects And they're going further up the sign off chain to get sign offs. These are typically they're not even large projects. And you see those resulting in delays. And I think it's a combination of the elections in the U.

Speaker 2

S. I think 2 thirds of the world have elections this year. So it's elections around the world. It's the some financing related to the higher interest rate, higher inflations. I mean, just the worst.

Speaker 2

It's just a lot of things that they're combining to affect people's decisions and they're just delaying

Speaker 5

a bit.

Speaker 2

I mean the thing that's different than some other downturns is we still have very strong pipelines of new activity. So I thinking about past downturns, we've been through a bunch of these. I don't think there's been any where we have a strong new activity pipeline from our customers. So the projects aren't being canceled. There may be some delays in phasing some new products in and maybe it's taken longer to get the financing, although that's not the primary feedback we're getting.

Speaker 2

But I think it's this broader macro issue, that's honestly a bit of a smaller issue for us. The bigger issue is the OEM destock. So I think we had the pandemic and then we had the supply chain crisis and we're selling in our automation and engineered solutions businesses differentiated components and subsystems to people. There are typically smaller dollar value amounts to the entire system. And when people bought inventory because we're very specialized and they wanted to keep shipping their products and now we're just dealing with a destocking process that's just taking a little longer than we thought.

Speaker 2

And I think that's

Speaker 6

Yes.

Speaker 5

David, that's really helpful. I love the way you characterized it because in slowing, that's one of the first things you see customers do is they kind of delay the spending or approvals and so that's pretty familiar. Do you have any sense that it's snowballing from here? Does it get like as the quarter progressed did those type of behaviors increase? And any kind of monthly cadence would be helpful.

Speaker 2

Yes. I think the monthly cadence in both sales and orders was our typical monthly cadence. So otherwise we typically stair step through a quarter with the 1st month being the lowest and the 2nd month being a little bit higher than the 3rd month being the highest month of the quarter. That same process occurred, but definitely as the quarter went on, we saw some incremental weakness mainly in the project area.

Speaker 5

Got it. All right. Just last question on the destocking and when we look back on this period, that's been the biggest surprise and how long it has persisted. And you're not by far the only one. We've seen this everywhere.

Speaker 5

Anyone has anything to do with medical or life sciences supplies chain. It has just taken more than 2x longer than anyone thought. And just the question is for Paragon. How are what's their visibility like? You said they a percent of point was from their destock.

Speaker 2

Right.

Speaker 5

What's their visibility versus your comparison of the rest of AMETEK businesses? Where do they fit on that scale?

Speaker 2

Yes. Because Paragon is mainly in one end market, and they're talking to their customers daily, I think there's a better visibility. And you can also talk to customers and get market information. So this destock that we're seeing is really happening everywhere. Just to refresh everybody's memory, Paragon manufacture single use and consumable surgical instruments and implantable devices, orthopedic implantable devices, drug delivery systems, really attractive markets.

Speaker 2

At the same time, this is going on. We're working on substantial efficiency improvements in the businesses. We talked about that last quarter and this process is proceeding very well. So this combination of the market growth that follows the destock along with the new program wins and a lean cost structure is really going to provide substantial sales and profit growth for Paragon in the years ahead. We have a similar business and similar markets in another part of AMETEK and it's seeing the same kind of destock.

Speaker 2

And Paragon won a tremendous amount of new programs. So we're still investing and driving those things in the market. So I think when you take a step back, this is going to be a tremendous generator for our long term shareholders and we're very optimistic about the business. It's unfortunate about the destock process, but we're in this game for the long run and we're doing all the right things for the business and we've got a new management team with some really talented people from AMETEK that are working with people that are from Paragon and they have a great plan to take the business forward. So we're really optimistic about how that business is going to perform for us long term.

Speaker 5

Dave, thanks for all that color. Really helpful.

Speaker 2

Yes. Thank you,

Operator

Your next question comes from the line of Jamie Cook with Truett Securities. Please go ahead.

Speaker 7

Hi, good morning.

Speaker 2

Good morning, Jamie.

Speaker 7

Nice quarter. Nice quarter considering the environment. I guess just my first question, can you talk to sort of what price cost was in the quarter by segment and what your expectation is in an environment where organic growth is going to be flat to down single digit? And then my follow-up question, what also struck me about the quarter or over the past couple of quarters is the margins in EIG above 30% with mediocre growth. So is there anything like was there anything unusual to drive the operating margins there?

Speaker 7

What's structural? What's the risk that some of this goes away if pricing gets more difficult? I'm just trying to understand the performance in EIG margins, the good performance given a tough macro?

Speaker 8

Thank

Speaker 2

you. Good questions Jamie and I'll try to answer them both. The first thing is, you talked about pricing in the quarter and our pricing in Q2 was about 3.5 points price and our inflation was about 2.5 points. So we had a positive benefit from that. So the pricing environment is moderating a bit and inflation is moderating a bit, but we're pleased with that.

Speaker 2

And it was across our portfolio and maybe a little bit more in ENG, just a bit than EMG, but it was pretty much across the portfolio, pretty consistent performance and that's driven by our differentiated portfolio on the heavy level of investments we're putting in new products. We talked about vitality index of 24%. We got newer products, fresh products in the market. Our customers are buying them. So that's resulting in some good pricing.

Speaker 2

And as I said, inflation is moderating. And we think that general environment, the moderation of inflation, but our ability to continue to leverage our investments are going to continue throughout the year. So no change there, very, very consistent and it's kind of the AMETEK portfolio is very differentiated and kind of performed very well. In terms of the margins in EIG, you think about that we've had a similar performance in the Q1 and excellent operating quarter. We had 3 20 basis points up driven by high leverage, excellent price cost, strongly performing acquisitions and a really good product mix.

Speaker 2

And that was consistent from Q2 to Q3 and we see that continuing for the rest of the year. I mean we do have a comp in Q3 margins is a difficult one because that was a high margin quarter for us if you look back the past few years. But in general, you think about EIG, the margins are good and they're going to stay there and that business is very well positioned. And it's in our process, in our power and industrial, in our aerospace businesses, we've got excellent market positions. And then just talking about the EMG part of the business, they had core margins of over 25%.

Speaker 2

So they got some dilution there because of the acquisition and destocking and automation in our medical businesses. But when we look at our businesses, they're running both segments are running very well, generating excellent margins. I think EIG has historically a bit of a higher margin entitlement because they sell mainly to end users and they get the aftermarket revenue stream. And EMG is selling more to an OEM customer base, so a little bit lower margin. So they're in relation to each other.

Speaker 2

And I see that continuing. I'm not really concerned that those margins are going to fall off or anything like that. So does that answer your question, Jamie?

Speaker 7

Yes. Very helpful. Thank you so much.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Jaeme Sprague with Vertical Research. Please go

Speaker 9

ahead. Hey, thank you. Good morning, everyone.

Speaker 2

Good morning, Jay.

Speaker 9

Good morning. Hope it's going well, Dave. Just on Paragon, I want to make sure I have things dialed right here. I think your comment about a point of headwind, right, is on a total AMETEK basis. So I guess that implies $40,000,000 or $50,000,000 So we're sort of talking about the business being down kind of 8%, 9%, 10% for the year.

Speaker 9

Is that basically where we're at?

Speaker 2

Yes. I'd say you're between 10% 15% is the paragraph. You're right on.

Speaker 9

Okay. And then just thinking about EMG, right? I mean the comps are getting fairly easy on a year over year basis, but really the commentary is we should kind of think sequentially revenues are quite similar to Q2 or do you actually see a little bit of step up there?

Speaker 2

That's a good question, Joe. And when we step back and look at this, first I'll go to orders. Our orders for the past couple of quarters have had small sequential improvements. So like if you go back to Q4 of last year, you have Q1 of this year and now the quarter recently completed, the orders sequentially were up low single digits each quarter. So I feel like the orders have stabilized.

Speaker 2

We had a minus 10 organic in Q1. The orders in Q2 organically were minus 4. And we think in the second half of the year, we're going to have modest improvement versus the first half. So it kind of feels like the business has really stabilized. When you go to sales, we wanted to derisk the year because and it's really flat.

Speaker 2

So even though you have a little bit of movement from quarter to quarter, if you and we have a benefit of a tax rate in Q4, if you back that out and you look at sales in the first half of the year versus sales in the second half of the year, then you look at operating profit above the tax line in the first half of the year versus operating profit in the second half of the year, it's a fifty-fifty split. AMETEK traditionally is a forty eight-fifty two split. And that's why we think we really derisked the year with that fifty-fifty split in the second half. Now we still have some seasonality in our business. Historically, Q4 because of the seasonality is always higher than Q3 and we have a typical seasonality there.

Speaker 2

And we again, as Dalit mentioned, we have the benefit of the tax rate in Q4, but we really feel we derisked the year to reflect the current environment and we think it's going to stay that way through the balance of the year.

Speaker 9

And then maybe we could just touch on that tax rate. So assuming 2019 again and Q3 would imply, I don't know, 2014 or 2015 in Q4. But the bigger question is, just jumping off into 2025%, do we stay at that 17% to 18% range or do we move back up into the 19% to 20% range in 2025?

Speaker 3

Yes. No, you see it right. We move back up in 2025 to our typical tax rate. And we haven't done our planning for 2025, but based on where we're sitting that's what we would expect.

Speaker 9

Great. Thank

Operator

you. Your next question comes from the line of Scott Graham with Seaport Research. Please go ahead.

Speaker 10

Yes. Hi. Good morning. Thanks for taking

Speaker 2

my questions. Hello, Scott. Good to hear from you.

Speaker 9

Likewise. So

Speaker 10

I want to understand, so the reduction in sales guidance for the year, you indicated that it was essentially 3 points on EMG, 1 point in EIG and you talked about project delays there. My question is, in your sort of round the horn, you indicated project delays in power. And I was just wondering if there's any vulnerability to project delays spreading into process because you didn't cite anything there.

Speaker 2

Yes. If I didn't cite it, I should have cited process and power are seeing similar activities. I mean in the power segment, we have some power test and measurement businesses and those sell to multiple markets including the government customers and there's a little delay there in projects. But we're very well positioned and those are just delayed and process is a bit larger and it's more it's a but it's kind of the same thing, but that was only 1% of the change in sales from all of EIG and what which is both process and power.

Speaker 10

Okay. Thank you. I want to maybe shift to defense because that's a pretty high margin business for you guys. Is that sort of sort of push out of shipment? Is that something that you'll see in the Q3 or the Q4?

Speaker 10

Is there anything more to discuss there?

Speaker 2

No, I think that on the defense side for our A and D business, we kept the guide for the year the same, it's like plus high single digits. So what we saw in the second quarter was a very good commercial and had some defense delays. But for the full year, we're saying that defense and commercial is still going to be the same. They're going to be up high single digits. So there is doing very well there.

Speaker 2

As you said, there's good margins in our A and D segment and we feel confident in that segment.

Speaker 10

Thank you. If I could just squeeze this last one in Dave, the net leverage of 1x, it's pretty low for you guys. Just kind of wondering the pump, I assume, is pretty darn primed at this point. How does the pipeline look for you? How are the sizes of the deals out there?

Speaker 10

Maybe you can give us a little color.

Speaker 2

Yes. The pipeline looks really good. The size of the deals are throughout the whole spectrum. I mean, there are smaller deals, mid size and larger deals. And as we talked about before, we'll probably buy a big business, big for us is deployment of greater than $1,000,000,000 in capital every couple of years and that's just because we're generating so much cash flow.

Speaker 2

I think we really have the opportunity to differentiate our performance in this period. What you really see is there's a lot of PE owned sponsor businesses that are long in the tooth. They're late in their ownership cycle and they're struggling now because they have to go back and refinance their businesses at higher rates and they're also trying to sell the business in a slowing environment. And but those are we have discussions going on and there's a very, very large pipeline of opportunities that fit our businesses that we're having discussions with. So I'm optimistic that the pipeline is going to be strong and the discussions we're having are good ones.

Speaker 2

And you remember our capital allocation is very clear. Our first priority is to deploy our free cash flow, strategic acquisitions that remains a clear priority and like we're going to see from Paragon next year, that's how we generate value. And priority 2 is opportunistic buybacks. And as we've shown in the past, if we see a dislocation in our valuation, we're poised to act. And our 3rd priority is consistently modestly increasing dividends.

Speaker 2

So our capital allocation doesn't change and with a net leverage of 1, we're ideally positioned right now and there's a lot of activity going on. Does that answer your question, Scott?

Speaker 10

That answers everything fully.

Speaker 5

Thank you.

Speaker 2

Thank you, sir.

Operator

Your next question comes from the line of Rob Pertheimer with Melius Research. Please go ahead.

Speaker 8

Thanks. Good morning, everybody. Good

Speaker 2

morning, Rob.

Speaker 8

So my question and I understand that the kind of delays here and there that you're talking about aren't the biggest driver in the quarter, but I'm still a little bit curious. And so is the project delay often one where you're a small piece of the total project cost is one question. And the second one is probably pretty easy to answer given the nature of your business. But is there any pushback on price? Do customers have any option to change out?

Speaker 8

I mean is there any downshifting or anything like that? I know it's unlikely. Just probably sort of check around those dynamics.

Speaker 2

Yes. The project cost I think was your first question. And you're right, we are typically a small portion of the project and with good technology, small part of a bigger project. So it's a nice place to be. In terms of pricing, we have very differentiated technology and we're conscious of the value that we're adding.

Speaker 2

What you'll typically see in the most classic downturns is they may mix down. They may buy our project, buy our product, but it will maybe have less features because we're pretty good position with the customer base and our positions in our niche portfolio. We're not seeing that now. And we're not seeing the activity pipeline change. So I think on the we're typically smaller projects, typically price for value and we do a lot of investment in our portfolio.

Speaker 2

So I think delays are more just related to the general macro that we talked about with Dean about the elections and some of the uncertainty with the geopolitical issues. And but we went through the we were confident we're not losing share. We're confident that our pipelines are very strong. So it's the temporary delay.

Speaker 8

Thank you much.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Joe Giordano with TD Cowen. Please go ahead.

Speaker 11

Hi, good morning. This is Jim. I wanted to talk about the Paragon charges you took last quarter. Now that you're another quarter in, do you expect any additional charges? I know there were just one time, but just any update on that and when you might start seeing any impact from those charges?

Speaker 2

Yes. I think we don't anticipate another charge. I mean that's that doesn't mean we won't change our mind, but we don't anticipate Yes, that activity is going on now. So we're in process of improving that business, of fixing that business, making it run as efficiently as AMETEK does. And we have a team of Paragon people and a team of AMETEK people and a team of our operational excellence talent across the business, all working on the project and the responses is very, very solid to it.

Speaker 2

I think that's ongoing and it will occur through the balance of this year. I think next year you'll start to see the benefits of it. But the project, if you recall, goes up 2 or 3 years as we continue to improve it. So I think next year you have a sizable improvement because we expect the volumes to come back from the destock combined with the OpEx work that's going on combined with some new product introductions that we're heavily investing in the phase it's unfortunate that we have this destock downturn right now, but couldn't be happier with the business.

Speaker 11

Thank you for that. And another question I had was on the 4Q ramp. So I understand the normal cyclicality, there's usually a 4Q ramp, but it does look like the implied guide implies the ramp is more than usual for historical. Is there especially considering that you guys are not anticipating any easement in destocking for the latter half. Could you comment on what's driving that?

Speaker 2

Yes. I kind of disagree with your conclusion. I think there's a tax benefit in Q4 and when you factor that in, we have a pretty I think the ramp is very similar to what it was last year. So it's and we derisked Q3. So as I said, the operating performance in the first half of the year is very similar to the operating performance in the second half of the year And you add to that a little bit of a tax benefit in Q4.

Speaker 2

So, I don't I think it's pretty typical from what we've done in the past.

Speaker 11

Got it. Thanks for that. Very helpful.

Operator

Your next question comes from the line of Andrew Obin with Bank of America. Please go

Speaker 2

ahead. Yes. Good morning. Good morning, Andrew.

Speaker 12

Hey, just going back to inventory, just how to think about it. Are your OEM customers, are they bringing inventory levels back to pre COVID levels or below pre COVID levels? I guess just trying to understand how to think about the destocking impact versus history and where do you think inventories will be on a going forward basis relative to pre COVID levels?

Speaker 2

Yes, I think there is different because there's a lot of customers and a lot of different market segments. And but in general, I think you're getting back to pre COVID levels. There might be slightly higher because of some of the geopolitical things that happened and the supply chains becoming more regional and less dependent on Asia. So it could be a bit higher. But in general, I believe that the general statement across the customer base, They're trying to get back to something at the pre COVID level.

Speaker 2

They might be a bit higher for some of the other geopolitical issues going on.

Speaker 12

Got you. And just maybe I missed it, but could you just cover major geographies? What are we seeing? North America versus Europe versus Asia versus China? I apologize if I missed it.

Speaker 2

Sure, Andrew. No, you didn't miss it. We saw modest growth in Europe in the Q2 and we saw low single digit declines in both the U. S. And Asia.

Speaker 2

So I'm going to go a step lower. We had low single digit in the U. S. We actually had strong growth in our Materials Analysis division, our A and D businesses, but our automation business was down a bit. Europe was up low single digit, again weakness in our automation business and offset by strong growth in process.

Speaker 2

And for Asia, we were down low single digits. It's pretty difficult comps in China. China was down a bit, but when you look at Asia, excluding China, it was flat. So it's kind of a flat world. And but we are seeing some improvements in Europe.

Speaker 12

Thanks so much.

Speaker 2

Thank you, Andrew.

Operator

Your next question comes from the line of Steve Marger with KeyBanc Capital Markets. Please go ahead.

Speaker 13

Thanks. Good morning.

Speaker 2

Good morning, Steve.

Speaker 13

Dave, we're hearing a lot of optimism about cycle having a strong 2025 led by AI related devices, of course, but also some leading edge node transitions later next year. What are you seeing in that business? And are you more levered to node transitions or unit volume increases?

Speaker 2

Yes. I think right now, we're levered to both of them. But in our second quarter, our semiconductor business was up and it was up because we had strong growth in our Kamika business. And you think about that business, they're doing next generation defect detection. And it's kind of like you're going to want one of these Comeka systems in just about every new fab.

Speaker 2

And then we also have the strong benefits from our Zygo business and there we're one of the few businesses that can operate with technology in the EUV, the extreme UV and that's more of the transitioning to smaller nodes. So right now what you see is even though the market was down tremendously, there's a lot of R and D activity to get at the node transitions, to get at some of the to be able to detect defects at these smaller nodes. So we're going very well there driven by the uniqueness of our product portfolio. And but then when the market picks up, we also have a good part of our business is tied to the just the right production. So, it feels pretty good for us in terms of moving into next year, Steve.

Speaker 13

Got it. And activity over the past year for mature nodes in domestic Chinese manufacturers has been stronger than I think people expected. Do you have exposure there? And do you have an outlook for that market in the back half and next year?

Speaker 2

We don't I don't have that level of resolution for next year. We do sell into the Chinese market. It's typically lower technology products. It's been healthy this year.

Speaker 5

Yes. Okay. Thanks.

Speaker 2

Thanks, Steve.

Operator

Your next question comes from the line of Nigel Coe with Wolfe Research. Please go ahead.

Speaker 6

Good morning. Hi, David, hi, Dileep and Kevin.

Speaker 2

Thanks for

Speaker 6

the question. Thanks. How about yourself? Just a few more details. I know you covered a lot of ground here, but on Paragon, just want to make sure I've got the right base for FY 'twenty three.

Speaker 6

I've got about $450,000,000 $460,000,000 of revenues for FY 'twenty three. Is that about right?

Speaker 2

A little bit higher for 'twenty three.

Speaker 6

A little bit higher for 'twenty three. Okay. That's helpful. So down 10%, 15% this year, I mean, what sort of cost measures are you taking? I know that charge you took in 1Q is much longer tail, but what measures are you taking to sort of preserve the earnings there?

Speaker 9

And where

Speaker 6

do we stand right now on the accretion for FY 2024?

Speaker 2

Yes. I think the we're doing a lot of work on the cost structure. They have excess capacity in plants. So that work is going on right now. And we took the charge.

Speaker 2

There's also some expenses related to knowing the things that are non accruable that we're spending. And then more importantly, there's a lot of new product introductions going on that we're spending that spending on right now that are very, very solidly positioned for Paragon. When you talk about the accretion for this year, it's a couple of pennies and it's in the 4th quarter.

Speaker 8

That's where we're going. A couple

Speaker 6

of pennies in the 4th quarter.

Speaker 8

Yes. Okay. That's helpful. Thanks, David.

Speaker 6

And then, on orders, I think you said 4% organic decline. I think that's better than the 8% you saw in the Q1. I'm calculating $1,600,000,000 of orders this quarter. Is that in the right zone?

Speaker 2

Yes. If you look at overall orders, they were up 1.5% in the quarter.

Speaker 8

1.5%, okay, that's Yes.

Speaker 2

The overall orders were up 1.5%. Organic orders were down 4%. That's improved from what we saw in Q1 where we were down organically minus 10%. And we saw a sequential improvement in orders in So they're up low single digits from Q1. So we're definitely seeing stability in orders.

Speaker 2

No question about it. June was the strongest.

Speaker 6

And then just a quick one on the 4Q tax rates issue, I mean, any quantification there?

Speaker 3

Yes. I mean, if you think about the way we're seeing our expected tax rate play out, Nigel, Q3 as we said, we're projecting our typical expected tax rate. Q4, we're now projecting a lower tax rate in the range of 10% to 15%. That lower effective tax rate in Q4 is primarily due to statute expirations. So that brings our expected tax rate for the full year to 17% to 18%, which is expected to provide an earnings benefit in the range of 0 point dollars per share in Q4.

Speaker 8

Okay. Thanks very much.

Speaker 2

Thank you, Nigel.

Operator

Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead.

Speaker 1

Thank you, Meg, and thanks everyone for joining our call today. And as a reminder, a replay of the webcast can be accessed in the Investors section of ametek.com. Have a great day.

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