AMETEK Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• Kevin Coleman, Vice President of Investor Relations and Treasurer
• David Zapico, Chairman of the Board and Chief Executive Officer
• William Burke, Executive Vice President and Chief Financial Officer
• Dalip Puri, Senior Vice President of Operational Finance

Analysts

• Matt Summerville, D.A. Davidson
• Deane Dray, RBC Capital Markets
• Allison Poliniak-Cusic, Wells Fargo & Company
• Jeffrey Sprague, Vertical Research Partners
• Nigel Coe, Wolfe Research
• Scott Graham, Seaport Research Partners
• Rob Wertheimer, Melius Research
• Andrew Buscaglia, BNP Paribas Exane
• Andrew Obin, Bank of America Co.
• Brett Linzey, Mizuho Group
• Joseph Giordano, Cowen & Co.
• Steve Barger, KeyBanc Capital Markets
• Rob Mason, Robert W. Baird

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to the Fourth Quarter 2023 AMETEK Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded.

I would now like to hand the conference over to your speaker, Kevin Coleman, Vice President of Investor Relations and Treasurer. You may begin.

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Thank you, Tanya. Good morning, and thank you for joining us for AMETEK's fourth quarter 2023 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; Bill Burke, Executive Vice President and Chief Financial Officer; and Dalip Puri, Senior Vice President, Operational Finance.

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 2022 or 2023 results or to 2024 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 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.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Kevin, and good morning, everyone. Before I get into the financial results for the quarter, it is with mixed emotions that I share the news of changes in our financial leadership, which we announced on January 16. After an outstanding 36 year career at AMETEK, our Chief Financial Officer, Bill Burke has decided to embark on a well deserved retirement effective April 2, 2024. Bill's tremendous leadership of our finance organization and his strategic guidance has been instrumental in AMETEK's long-term growth and success. His legacy is deeply woven into the fabric of our organization and we express our heartfelt gratitude for his exceptional contributions.

In light of this transition, I'm delighted to announce the appointment of Dalip Puri as our new Executive Vice President and Chief Financial Officer. Dalip, currently serving as Senior Vice President, Operational Finance, brings a wealth of experience and expertise to this role. Dalip joined AMETEK in 2017 as Treasurer and subsequently took on the role of Group Controller, providing financial oversight for over half of AMETEK's businesses before transitioning into his current role of Operational Finance.

Dalip's leadership of key financial initiatives at AMETEK, along with a proven track record, make him the natural choice to lead our financial organization into the future. I am confident that under Dalip's leadership, our financial organization will continue to thrive, contributing significantly to the success of AMETEK. To ensure a seamless transition, Bill will stay on as a senior advisor until April 2025. Thank you, Bill for your exceptional service and congratulations Dalip. I'm truly excited about the future.

Now, let me turn to this quarter's results. AMETEK delivered exceptional performance in the fourth quarter, delivering record results and outstanding operational execution, leading to results ahead of our expectations. In the quarter, we set records for sales, operating income, earnings per share, EBITDA and cash flow. We also ended the quarter with record backlog.

Furthermore, in the quarter, we successfully deployed over $2 billion on strategic acquisitions, enhancing our portfolio with the acquisitions of Amplifier Research and Paragon Medical. These results cap a record year for acquisitions and underscore the strength of the AMETEK growth model, the quality of our businesses and the success of our organic growth initiatives. AMETEK's continued success is also the result of the dedicated efforts of our global employees. I want to thank all AMETEK colleagues for your efforts and significant contributions in 2023.

Now let me turn to our fourth quarter financial results. Fourth quarter sales were a record $1.73 billion, up 6.5% over the same period in 2022. Organic sales growth was approximately 1.5%. Acquisitions added 4 points and foreign currency added 1 point. We ended the quarter with a record backlog of $3.53 billion, which is up 10% from the start of 2023.

AMETEK's operational performance in the quarter was outstanding with robust margin expansion and strong incremental margins. Operating income in the quarter was a record $445 million, a 12% increase over the fourth quarter of 2022. Operating margins were 25.7% in the quarter, up an impressive 120 basis points from the prior year, while core margins were up 200 basis points in the quarter. This strong margin expansion reflects the strength and flexibility of our operating model and the quality and differentiation of our businesses.

EBITDA in the quarter was a record $526 million, up 8% over the prior year with EBITDA margins, an impressive 30.4%. Our strong growth and operating performance led to robust cash generation with free cash flow up 47% in the quarter to a record $481 million. This tremendous operating performance led to record diluted earnings per share of a $1.68, up 11% versus the fourth quarter of 2022 and above our guidance range of a $1.61 to a $1.63 per share.

Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments Group had an excellent quarter with strong sales growth and tremendous operating performance. Sales for EIG were a record $1.24 billion in the quarter, up 7% from the fourth quarter of last year.

Organic sales were up 3.5%. Acquisitions added 3 points, with currency accounting for the balance. EIG sales growth in the fourth quarter was strongest across our aerospace and defense businesses and our materials analysis division. EIG's operating performance was impressive with strong profit growth and exceptional margin expansion. Operating income was a record $359 million, up 17% versus the prior year, while EIG operating margins were 29%, up an outstanding 250 basis points from the prior year.

The Electromechanical Group also finished the year with strong performance despite the continued impact from the normalization of inventory levels across our OEM customer base. Fourth quarter sales for EMG were $495 million, up 6% versus the prior year driven by the contributions from recent acquisitions. EMG's fourth quarter operating income was $112 million, where operating margin -- operating income margins were 22.7% in the quarter. Excluding the dilutive impact from acquisitions, EMG core margins were up 100 basis points versus the prior year.

Now, for the full year results. Overall performance was outstanding in 2023, establishing annual records for essentially all key financial metrics. Overall sales for the year were $6.6 billion, up 7% from 2022. Organic sales increased 4%, with acquisitions accounting for the balance of the growth. Operating income for 2023 was $1.7 billion, up 14%, and operating margins were 25.9% for the full year, with margins up 150 basis points versus the prior year. EBITDA for the year was $2 billion, with EBITDA margins, a very strong 30.5%. In full year 2023, earnings were $6.38 per diluted year, up 12% versus the prior year.

Our performance in the fourth quarter and full year highlights the strength of the AMETEK growth model. Our differentiated businesses are strategically aligned with diverse and attractive markets, while our organic growth initiatives position us for sustained long-term growth. Our distributed operating structure empowers our businesses to execute in their growth strategies and quickly adapt to evolving market dynamics. This structure is a cornerstone of the success in navigating throughout different economic cycles.

Furthermore, our asset-light business model and strong operational execution result in exceptional cash flow generation. This robust cash flow coupled with our strong balance sheet provides AMETEK with plenty of firepower to support our growth initiatives and to deploy on acquisitions.

Speaking of acquisitions, we were very active in 2023, successfully deploying approximately $2.25 billion on five acquisitions, including the acquisitions of Amplifier Research and Paragon Medical in the fourth quarter. I am very excited to welcome all acquired companies to AMETEK. Each acquisition is an excellent strategic fit with AMETEK as they help expand our product and technology offerings in highly attractive growth markets and applications, including renewable energy development and the modernization of the power grid.

In addition, our latest acquisition, Paragon Medical, which we closed in the middle of December, nicely expands our presence in the medical technology market. Paragon is a leading manufacturer specializing in highly engineered medical components and single-use and consumable surgical instruments. Their product portfolio spans crucial medical applications, and their reputation for quality and precision has earned them the trust of a diverse customer base including top tier medical device OEMs. Looking ahead to 2024, our acquisition pipeline remains robust. As noted, we have a strong and flexible balance sheet and anticipate remaining active deploying capital on acquisitions.

In addition to our acquisition strategy, AMETEK remains committed to making strategic investments in organic growth initiatives. In 2023, we invested an incremental $100 million in growth initiatives, and in 2024, we expect to invest another incremental $100 million. The majority of this investment will be within our research, development and engineering and sales and marketing functions.

In the quarter, our vitality index, which reflects sales from new products introduced in the last three years, was a very healthy 29%. Through these strategic investments and acquisitions, we have seen a steady transition of AMETEK's portfolio with an expanded presence in secular growth markets and reduced exposures in more cyclical markets. This strategic evolution of the portfolio, combined with our proven operational acumen, positions AMETEK well for continued strong and sustained growth.

Now, shifting to our outlook for the year ahead. For 2024, we expect overall sales to be up low double-digits on a percentage basis with low to mid single-digit organic sales growth. Diluted earnings per share for the year are expected to be in the range of $6.00 to $6.85, up 5% to 7% compared to last year's results. For the first quarter, we anticipate overall sales to be up low double-digits with adjusted earnings of $1.56 to a $1.60 per share, up 5% to 7% versus the prior year.

In summary, AMETEK's performance in the fourth quarter and throughout the full year of 2023 was outstanding. Our businesses delivered exceptional results, with all elements of the AMETEK growth model playing a key role in our success.

I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter, and then we'd be glad to take your questions. Bill?

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you, Dave. I appreciate your kind words at the top of the call. As Dave noted, I have made the decision to retire after 36 years with AMETEK, nearly eight of which I had the privilege of serving as Chief Financial Officer. I want to express my deepest gratitude and thanks to the entire AMETEK family for the incredible journey we've shared. It has been an honor to contribute to the tremendous growth and success of AMETEK.

To Dave and the Board of Directors, thank you for your confidence in me. Your support and leadership have been invaluable. And to my colleagues, your dedication has been the driving force behind our shared success, and I am truly thankful for the privilege of working closely with you. I look forward to remaining with the company as a senior advisor until April 2025 to ensure a seamless transition. I am confident in Dalip's leadership and in the very strong and talented financial organization at AMETEK.

Before I get into the results for the fourth quarter, Dalip would like to say a few words. Dalip?

[Dalip Puri, Senior Vice President of Operational Finance at AMETEK]

Thank you, Bill, and good morning, everyone. I look forward to meeting and working with all of you in the near future. I too want to express my thanks to Dave, to Bill, to the Board of Directors, and the leadership team for their trust and confidence in me. It is an honor to serve as AMETEK's EVP and CFO, and I'm very excited to lead AMETEK's incredible finance organization and to partner with Dave as we continue to deliver sustained and strong growth across our portfolio of businesses. I also want to express my thanks to Bill for his guidance and mentorship over the years and his commitment to a smooth transition.

With that, I'll turn it back to you, Bill.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you, Dalip. Now on to the fourth quarter results. As Dave highlighted, AMETEK had an impressive finish to 2023 with outstanding operating performance, leading to better than expected results in the fourth quarter. Let me provide some additional financial highlights for the fourth quarter and the full year, as well as some additional guidance for 2024.

Fourth quarter general administrative expenses were $26.3 million, up $3 million from the prior year, but unchanged at 1.5% of sales. For the full year, general and administrative expenses were up $7 million, and as a percentage of sales were 1.5% in line with 2022 levels. For 2024, general and administrative expenses are expected to be approximately 1.4% of sales.

Fourth quarter other income and expense was additional expense of $7 million compared to the fourth quarter of 2022, driven by higher due diligence costs and lower pension income. For 2024, we expect other income and expense to be largely in line with 2023 levels.

The effective tax rate in the quarter was 17.8%, down from 18.9% in the fourth quarter of 2023 due to statute expirations. For 2024, 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 $60 million in the fourth quarter and $136 million for the full year. Capital expenditures in 2024 are expected to be approximately $160 million, or about 2% of sales. Depreciation and amortization expense in the quarter was $92 million and for the full year was $338 million. 2024, we expect depreciation and amortization to be approximately $400 million, including after tax acquisition related intangible amortization of approximately $190 million or $0.82 per diluted share.

For the quarter, operating working capital was 17.2% of sales and cash flow in the fourth quarter was superb, with operating cash flow a record at $541 million, up 40% versus the fourth quarter of 2022. Free cash flow was also a record in the quarter, up 47% to $481 million with free cash flow conversion of 140% for the quarter. Free cash flow for 2023 was $1.6 billion, up 58% versus the prior year, and 122% of net income. For 2024, we expect free cash flow conversion to be between 110% and 120% of net income.

Total debt at year end was $3.31 billion, up from $2.39 [Phonetic] billion at the end of 2022, due largely to the Paragon acquisition in December. Offsetting this debt is cash and cash equivalents of $410 million. As Dave noted, during the fourth quarter, we deployed approximately $2 billion on the acquisitions of Amplifier Research and Paragon Medical.

Our gross leverage was 1.5 times at the end of 2023, up from 1.2 times at the end of 2022 despite deploying approximately $2.25 billion on acquisitions during the year. We remain very well positioned to deploy additional capital and have approximately $1.5 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 2023, delivering strong growth and a high quality of earnings. We are well positioned for continued growth and success in 2024.

Thank you once again. And now I'll turn it back to Kevin.

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Great. Thank you, Bill. Tanya, can we please open the line for questions?

Questions and Answers

[Operator]

Certainly. [Operator Instructions] And our first question will come from Matt Summerville of D.A. Davidson. Your line is open.

[Matt Summerville, Analyst at D.A. Davidson]

Thanks. Good morning, and congrats, Bill.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you.

[Matt Summerville, Analyst at D.A. Davidson]

I wanted to first ask about the EMG business and the inventory normalization you're seeing there. Using a baseball analogy, what inning are we in with respect to that normalization? And when do you start to see inflection in organic orders within EMG? So if you can first, maybe start by elaborating there? And then I have a follow-up. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Sure, Matt. Maybe the first thing, I want to do is, in the outlook for 2024, Kevin told me that it may have not come through clearly. Diluted EPS for the year is $6.70 to $6.85, so that's just maybe a correction of what I had said before if it didn't come through clearly.

Now, I'll get to your question, Matt. I mean, we think that, as we talked about the OEM parts of our business, and we think that OEM destocking largely played out as we expected during Q4. We expect it to continue through the first half of the year. We're going to have some difficult comps in Q1, then it will finish in Q2, and then we're pretty good for the second half of the year the way we're forecasting.

So the -- again, we're working off our backlog right now, so it's not an immediate impact on revenue, but that destock will continue for the first half of the year, probably a bit more in Q1 than Q2, but we think we'll be good for the second half of the year. And it's already starting to happen. Some customers are -- have corrected their inventory levels, but it will continue through the first half of the year.

[Matt Summerville, Analyst at D.A. Davidson]

Got it. And then can you review what you experienced in terms of price capture in '23 over '22 and what we should be thinking about in '24 and ultimately what that price cost relationship looks like this year? Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, sure. In the fourth quarter, price was about 5% of sales and total inflation was about 3.5%. And when we transition to 2024, we really see inflation decreasing. So the time where we had very significant price increases to be at or above inflation is coming to an end. And we think pricing in 2024 will be about 3% across the entire portfolio. And we think inflation will be at about 2.5%. And so, we maintain a positive spread. We have the product differentiation. We're creating value. You see, our new products are selling very well, but we budgeted, I would say, conservatively, at 3% price capture during 2024.

[Matt Summerville, Analyst at D.A. Davidson]

Great. Thanks, David.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Matt.

[Operator]

And one moment for our next question. And our next question will be coming from Deane Dray of RBC Capital Markets. Your line is open.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you. Good morning, everyone.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Good morning, Deane.

[Deane Dray, Analyst at RBC Capital Markets]

Hey, I'd just like to add my congrats to Bill and Dalip. And Bill, that is just the epitome of a distinguished career. So congratulations and you'll be missed.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

I appreciate that, Deane. Thank you very much.

[Deane Dray, Analyst at RBC Capital Markets]

Dave, maybe you can take us through the key end markets and what you're seeing in terms of demand orders. And then what does Paragon do in terms of increasing your percent of medical? Is that in the range that you're comfortable with? And how do you expect to grow from there?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I'll start with that. With the Paragon acquisition, our portfolio has about 21% of sales into the medtech space, and we like to see that even larger. So we're still looking for acquisition in that space and we plan to grow nicely within that space. And in fact, in the fourth quarter, Q4, we were up mid single-digits with strong growth on our EMC and Rauland businesses before we got Paragon integrated. So we're happy with the space. We want to continue to grow it, and we're still looking for deals in the space.

Now, I'll go around the horn per se, and I look at our various subsegments and end markets. And I'll start with our process businesses, which are the largest component of our subsegments. Organic sales for process were up low single-digits in the quarter, completing a strong year that saw broad base growth across the segment. Growth was strongest within our CAMECA and Zygo businesses, given their strong technology position with attractive research, optics and medical applications. We look to 2024. We expect organic sales for the process businesses to be up low single-digits for the full year. So it's low single-digits in 2023, low single-digits in 2024.

Aerospace and defense strong fourth quarter to complete an excellent year. Growth was broad-based across all segments. Organic growth was up high single-digits in the quarter. The growth was balanced across our commercial and aerospace businesses. And for 2024, we expect the organic sales of the aerospace and defense businesses to again be up high single-digits, with similar growth across commercial, aerospace and defense.

I'll move to our power businesses. They were up low double-digits in the fourth quarter, with contributions from the acquisitions of RTDS, UEI and Amplifier Research, being offset by low single-digit organic sales growth. Our power businesses have been very active on the acquisition front with three highly strategic acquisitions over the past 15 months. These acquisitions broaden our exposure to attractive applications tied to renewable energy and modernization of the power grid.

For 2024, we expect organic sales for the power and industrial businesses to be up low to mid single-digits. So there are some projects -- that business is more impacted by certain projects and we feel pretty good that we're going to be able to grow low to mid single-digits in 2024. Some positive project evolutions.

And then finally, our automation and engineering solutions. The segment was up mid single-digits in the quarter, with contributions from the acquisitions of Paragon Medical and Bison Engineering being offset by a mid single-digit decrease in organic sales. Results were in line with expectations with the impact of the normalization of inventory levels that Matt asked about across our OEM customer base. And they really continued in the quarter as expected, and we expect them to continue into 2024.

In 2024, we expect the automation and engineering solutions business to be up low single-digits with stronger growth in the back half of the year as our customer base normalizes inventory levels in the first half. So the second half for that subsegment will be stronger growth than the first half. That's around the horn, Deane.

[Deane Dray, Analyst at RBC Capital Markets]

That's fabulous. I appreciate. And just it's remarkable how we're seeing that momentum from '23 carry into your expectations for '24. And just one quick follow-up on the $100 million in growth investments, how does that stack up in terms of the product categories? Is there anything -- is it skewed in one way or the other? Is it evenly distributed? And where does new product vitality go from here? You're 29% this quarter, you were 26% last quarter. Is there a target in mind?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I think anywhere between 20% and 30% is a good number. So that's what we've always said. And when we started tracking this, it was back in the 15% range. So we certainly have made tremendous progress with our new product development efforts. In terms of where the $100 million comes from, it's really bottom up. So our business units put plans together, and if they want to go beyond what they invested in the prior year, they'll pitch those plans in their budgeting. And it's spread across the business. It goes at our best growth opportunities, and it's going to be about $100 million this year.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Deane.

[Operator]

And one moment for our next question. Our next question will be coming from Allison Poliniak of Wells Fargo. Your line is open.

[Allison Poliniak-Cusic, Analyst at Wells Fargo & Company]

Hi. Good morning. Congrats, Bill, and look forward to working with you, Dalip. Just following on Deane's R&D question, the $100 million incremental from the '23 that you did $100 million. As you push into this medtech space, does that number need to go up higher? I mean, I'm just trying to think through the investment needed to continue those trajectories for those businesses.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes. We're currently investing just under 5.5% of sales on research, development, and engineering. And as we buy higher technology businesses, that number will increase modestly. I think this year we expect to spend $400 million on RD&E, which is up a good, healthy double-digit amount on the total R&D spend. So our R&D is a key part of our business. We have a lot of industrial technology products that we want to maintain leadership positions in. It allows us to get the pricing that we can get because we're providing unique value to our customers. I don't think you're going to see a big jump anywhere, but it's happening as we naturally evolve our portfolio to higher technology products.

[Allison Poliniak-Cusic, Analyst at Wells Fargo & Company]

Great. And just any color on M&A. You obviously had a record year last year. Still in a good position from a leverage standpoint. What are you seeing or what are we expecting? You mentioned medtech is sort of a vertical you want to go into. Where are you seeing the greatest opportunities? Any difference in terms of size that we should be thinking through? Just any thoughts there? Thanks.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

I think we're looking at the more traditional size deals, and we also -- we have a few of the larger size deals in our pipeline. And I would characterize Paragon on the outer edge of the larger size. We're very happy with the five deals that we got done. We deployed $2.25 billion. We did it across our business in different parts of it. They were high quality additions. They expanded our presence in attractive growth markets. We have a very clear path to add value to these companies. Each business has a strong technology position. The deals will meet our traditional financial hurdles. Remember, it's a 10% return on invested capital in year three.

In terms of a pipeline, our pipeline remains very strong and we are actively looking at a number of high quality deals across a broad set of markets. As always, we'll remain disciplined when we do this. And I really think that we have the opportunity to differentiate our performance with the M&A element of our growth strategy combined with our balance sheet and cash flow positions.

I mean, we excel when the markets are slowing or choppy because we have great opex and great M&A and we see tremendous values in the market that we're tracking. The way the market is evolving, it's probably going to be two, three, four -- second quarter, third quarter, fourth quarter, where the bulk of the opportunities are. So -- but really this year, the pipeline looks good and we're optimistic.

[Allison Poliniak-Cusic, Analyst at Wells Fargo & Company]

Great. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

And one moment for our next question. Our next question will be coming from Jeffrey Sprague of Vertical Research. Your line is open, Jeffrey.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Hi. Thank you. Good morning, everyone.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Good morning, Jeff.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Hey, good morning. Hey, just on deals, Dave, I think on Paragon, you're expecting most or the accretion to really kick in, in 2025 not so much in '24. But can you just give us a little color on what is the EPS impact embedded in your guide for Paragon in '24, and the other deals also?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

I will, sure. Related to Paragon specifically, during the first half of the year, we're going to be doing some -- expect some muted growth for a couple of reasons. One, there is an inventory correction going on in the medtech market and we're going to look at the portfolio and potentially prune some less product -- less profitable product areas. So there's a whole process that we're going to go through during this first half.

And -- but all that said, we're expecting the second half to be very strong because they got some new product introductions that are very exciting. But we continue to expect within the -- in our guidance is $0.08 [Phonetic] to $0.10 [Phonetic] accretion in 2024. And this is back-end loaded as we layer in the integration costs.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

To clarify $0.08 to $0.10.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, $0.08 to $0.10.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

$0.08 to $0.10, yes. And then just drill in a little bit further into some of the end markets, thanks for kind of going doing around the world. But kind of the semi-related markets in particular, which have kind of been the bane of a lot of people's existence here recently, kind of looking for the bottom and the turn, like, what are you seeing in those markets? What do you see in the quarters specifically, and how does 2024 look?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

We have a little different dynamic in semiconductor, and I talked about it on a couple of past calls because we have the memory downturn that a lot of people are seeing. We saw that, too. But at the same time, we have some exceptional technology in our CAMECA business. It's a next generation technology that really is in demand in just about all fabs. And we also have in our Zygo business, we're one of the few companies that can manufacture EUV, extreme ultraviolet optics and semiconductor fabrication.

So those are two growing dynamics. It's a good place to be. They were able to offset some of the weakness we had in the, I'll call it, the core memory part of the portfolio. And for 2023, we ended up 10%. So it was a growing market for us. And for 2024, we expect to additionally grow another plus mid single-digits. So, largely because of the technology, we were able to grow in '23, and we think we'll continue to grow in '24.

[Jeffrey Sprague, Analyst at Vertical Research Partners]

Great. Thank you for the color.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Jeff.

[Operator]

And one moment for our next question. Our next question will come from Nigel Coe of Wolfe Research. Nigel, your line is open.

[Nigel Coe, Analyst at Wolfe Research]

Thanks. Good morning, everyone. And Bill, congratulations on your retirement. So, just a few bottom lines for me for '24, the guidance for revenue growth of low double-digits, I've got high single-digits coming in from M&A, obviously mainly Paragon. Is that the right kind of ballpark, about 9% coming in from M&A, which implies sort of 2%, 3% organic. Is that the right level?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

You're in the ballpark, Nigel.

[Nigel Coe, Analyst at Wolfe Research]

Okay, great. That's helpful. And then just anything to call out on incremental margins across both segments? We're coming off some pretty tough comps in EIG. So just curious how we should think about maybe overall margins, but more importantly, core incremental margins.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Are you talking about for 2024 or 2023?

[Nigel Coe, Analyst at Wolfe Research]

For 2024.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

2024?

[Nigel Coe, Analyst at Wolfe Research]

Yes.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes. I mean, we had a fantastic margin year in 2023, and margins were up. Core margins were up 200 basis points in the fourth quarter. Reported margins are up 120 basis points. EIG had a great quarter. EMG, it was dilutive because of acquisitions. And when you peel away what was going on, they're actually up 100 basis points. So really good margins, really good incrementals. And we think for 2024, they're going to moderate a bit. They're going to continue to grow them, but they're going to moderate a bit.

And for 2024, we believe that core margins are going to be up 30 basis points. We think that the core incrementals are going to be up about 30 basis points. And we have built on our model cost reductions and pricing and things like that, but the whole thing nets to the core margins being up 30 and the core incrementals up 30 basis points. When you look at as reported margins for the year, those will be down probably about 50 basis points due to acquisition dilution. So that's the whole story.

[Nigel Coe, Analyst at Wolfe Research]

Okay. That's really helpful. Thanks, David. And then just quickly on geographies, you've gone through the end markets, but just wondering if there's anything to call out in '24 geographically?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I'll do a summary of Q4 geographically. So you know where we stand. And we had growth in the quarter, led by the US and Asia. So the US has been strong all along. Asia is picking up a bit. The US was up mid single-digits, with notable strength in our materials analysis division and aerospace and defense. Europe was down high single-digits, driven in part by our automation business. And Asia was up about a little under 10%, about 9% with strength in our materials analysis division and our ultra precision technology division. We have a dynamic that was a little different than what's going on in the general marketplace.

Our China sales were up 22% in Q4. They were up about 14%, 15% in the year, 22% in Q4. Strong growth in our materials analysis division and UPT. And when we look into 2024, we think we'll grow in Asia, but we think China is going to moderate to more of a flattish market because it was some -- one of the project businesses that we benefited from. So it's still going to be good for us. But we are seeing the broader impacts in the economy and we think it'll be flattish on an orders basis in 2024 in China and will grow in Asia.

[Nigel Coe, Analyst at Wolfe Research]

Great. Thank you very much.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Nigel.

[Operator]

And one moment for our next question. Our next question will be coming from Scott Graham of Seaport Research Partners. Scott, your line is open.

[Scott Graham, Analyst at Seaport Research Partners]

Hi. Good morning. Bill. Congratulations on a great run. It's been a complete pleasure working with you. I hope you remain happy and best to your family. Thank you.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you very much, Scott. Appreciate it.

[Scott Graham, Analyst at Seaport Research Partners]

I was hoping, Dave, you could go through the orders a bit for the quarter, both in total and organically.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, sure. The -- yes, let me make sure I'm looking at the right stuff here. Yes, the orders in total for the quarter were up 16%. Now, that was largely driven by the Paragon acquisition, because the orders get booked as a backlog at first when you acquire a business, so that 16% orders, EIG orders were up 3% and EMG orders were up 43%. And again, the EMG orders were driven by Paragon. Organically, the orders were minus 2, and it translated into a book to bill of 1.10, pretty much [Speech Overlap]

[Scott Graham, Analyst at Seaport Research Partners]

Thank you. And would you expect, Bill, that sometime in the first half, perhaps the second quarter, that the orders maybe really kind of flatten out for you organically and then start to progress into the second half?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I think in the first quarter, we have some pretty difficult comps, so I expect a similar trend with orders trailing sales. But then as we get out in the second half of the year, maybe even the second quarter, I think the orders will outpace sales. Yes.

[Scott Graham, Analyst at Seaport Research Partners]

Got it. Thank you. And then my -- just one other question. Within the guidance, I guess, was a little bit surprised at the level of organic you're expecting, in a good way, and it looks to me, off of your summary, that that's stemming from the aerospace and defense businesses. Would you mind parsing out for the total company, kind of what you're expecting in sort of aerospace versus defense this year, and maybe tack on what the drivers are, particularly in commercial?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes. I mean, the overall organic growth for the company is a low to mid single-digit number, and that's going to be in both groups, EIG and EMG. And in terms of aerospace, we think we're going to grow about the same level that we did this year at plus high single-digits. And we have really good diversity in that business. And the military orders deal are strong and the commercial OE aftermarket are strong, and the commercial OE are good, too. So we think largely both the military and the total commercial markets are going to be up high single-digits in 2024. Pretty optimistic about that.

[Scott Graham, Analyst at Seaport Research Partners]

That's great. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Scott.

[Operator]

And one moment for our next question. Our next question will come from Rob Wertheimer of Melius Research. Your line is open.

[Rob Wertheimer, Analyst at Melius Research]

Thank you. So first question is just on growth into '24 and maybe even beyond on the growth algorithm. It seems like your expectations starting out the year is more price-led than volume. And I assume, obviously, some of the destock or channel that you talked about is holding that back. But as we get into 2H, are we looking at return to normal volume growth?

And then maybe we're in an inflation environment. I don't know if you have a bigger picture view on where pricing is going. Are we in more of a 3% world, and as volume comes back, that kind of ticks up core as we exit the year? That's my first question. Thanks.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, that very well could happen, Rob. I think we're in a 3% pricing world, and I think our volume has the potential to be a little stronger in the second half than the first half. So that -- what you're saying is kind of how we're thinking about it. We've been pretty conservative in our second half outlook, but if there was something that could exceed it, it would be the second half volume, sales volume, organically.

[Rob Wertheimer, Analyst at Melius Research]

Okay, perfect. And then I wonder, just given the rise of medtech in the portfolio, if you could just give a general thought on your value add there. Is it different from anything in the core? General thoughts on core growth there? And then if the acquisition environment differs at all, if it's more white space, if it's more competing against others and deals? Just a couple of general thoughts there, if you would. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, we've acquired some good medical businesses. I mean, if we go back and look, the Rauland business has been a fabulous winner for us, and that business is growing in the market. And we made an EMC acquisition, and that business has been very successful. And that business is in the same similar market that Paragon is in. So that gave us confidence in it.

And they're classic AMETEK businesses. We win in the market based on technology, based on engineering. They're a little more OEM than end market, but basically our whole EMG business is more OEM than end market. You have longer looks at your customers in terms of what you're going to be building in the future. So it's a pretty stable market.

And we just think the -- that growth in the case of Paragon over the next three years will be a little bit slower, getting out of that gate because of some of the things that are going on. But we're pretty confident it's going to be a low double-digit grower over the next few years. So we think with those portfolio additions, they're going to grow just a bit greater than the rate of our base portfolio.

[Rob Wertheimer, Analyst at Melius Research]

Great. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Rob.

[Operator]

And one moment for our next question. One moment. And our next question will come from Andrew Buscaglia of BNP Paribas Exane. Your line is open. Again, Andrew your line is open.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Andrew?

[Operator]

If you are on mute...

[Andrew Buscaglia, Analyst at BNP Paribas Exane]

Can you hear me?

[Operator]

Yes.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Andrew, are you there?

[Andrew Buscaglia, Analyst at BNP Paribas Exane]

Can you hear me, okay?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, we hear you. Yes. Tanya, let's go to the next caller. And Andrew can get back in the queue.

[Operator]

Certainly, moving forward. Our next question is going to come from Andrew Obin of Bank of America. Andrew, your line is open.

[Andrew Obin, Analyst at Bank of America]

Yes, good morning. Can you hear me?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, hello, Andrew. Good morning.

[Andrew Obin, Analyst at Bank of America]

Excellent. Hey, Bill, congratulations.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you. Appreciate it.

[Andrew Obin, Analyst at Bank of America]

Yes. So just a little bit more color, I think other automation/shortcycle companies expect second half rebound. Your comments sort of indicate something very similar. What kind of visibility do you have on that? And what gives you confidence that things are -- actually are going to turn in the second half? And I acknowledge that your view is very much consistent with what we hear from everybody else.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I think that in that second half, for automation, in particular, we're conservative on the input that we're getting from our customers in the marketplace. I think that for the entire segment, we're forecasting it to be up low single-digits. So we are not -- if we just put in there what our customers are telling us, it would be higher. So we've been a bit of conservative that we placed in it. And it's largely from talking to customers and understanding their inventory levels. And it's the typical work that we do to set a plan for the year. And we think the -- we'll see a positive second half as those orders -- as those backlogs are depleted.

[Andrew Obin, Analyst at Bank of America]

Excellent. And just maybe a follow-up building on that, you talked about sort of increasing investment. But other business units that need to start expanding capacity, where are you broadly in capacity utilization? And finally, as you are expanding capacity, what are you going to do differently about your supply chain and where you are putting this capacity versus maybe pre-COVID? Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I mean, in terms of supply chain, we did a lot of work to eliminate the risks from China and we did it actually before COVID. So we were well positioned during it. And I think the -- our supply chain is developing naturally around the different regions of the world and it's not as China centric because of that. So that's one item. I think that in terms of capacity, we put significant capacity investments in over the past few years.

We're a low capex business and we don't have to come to you and get away from our typical 2% of sales. We did it within our 2% of sales guideline. We put incremental capacity in our Mexican facilities. We put incremental capacity in our Malaysian facilities. We put incremental capacity in our Serbian facilities. So I think we are pretty -- we have an asset-light business model and we can usually ramp up pretty quickly and we have the flexibility to reduce costs very quickly.

So that's one of the advantages of the AMETEK model. With our low capex environment, we can grow sales and adjust sales on the downside without big capacity investments or without stranded investments when we downsize. So we're in excellent position to grow and we've done all that work over the past few years. So I feel really confident that we're going to be able to keep up with the growth through the next growth cycle.

[Andrew Obin, Analyst at Bank of America]

Well, you guys make it look easy. Thanks a lot.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Andrew.

[Operator]

And one moment for our next question. Our next question is coming from Brett Linzey from Mizuho. Your line is open, Brett.

[Brett Linzey, Analyst at Mizuho Group]

Hey, good morning all, and congratulations to everyone. I wanted to come back to the pruning comment on Paragon. So you indicated you're running down some of the less profitable areas. Makes sense. I guess, in the context of the broader portfolio, as you continue to shift towards this higher growth, higher margin areas, is there more pruning to do on the other side in the context of the total AMETEK portfolio?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

I -- this pruning process is something that we do with just about every new acquisition. So this is not new. And Paragon is a little bigger business and we're going to be careful with it, but it's something that we do all the time. So all M&A deals will go through this process. Paragon is going to be going through it in the first half. And we look at our own portfolio and we do that kind of thing all the time. So yes, it can continue and we're pretty good at that portfolio rationalization things. You have another question, Brett?

[Brett Linzey, Analyst at Mizuho Group]

Yes. Thanks. And then just a second question on opex versus capex, I guess, as you look at the customer spending environment for this year, and if you were to hone in on just those capital spending intensive businesses, have the planning assumptions or the tone changed in the last few months in the capital spending type businesses at all.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

In the U.S., there's a record number of projects from clean energy, power grid, semiconductor. They're just at a different level than they've been before. And a lot of that is from the government spending and backing. So that's largely continued. And at some point, it's going to provide an optimistic playing field for a lot of people in the industry. And I don't think we have that kind of upside built into our model right now. But there's planning going on with those projects right now. And that particular dynamic about the U.S. spending is driving the difficult projects that we're tracking to a very high number.

[Brett Linzey, Analyst at Mizuho Group]

Okay great. Thanks a lot. Best of luck.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes. Thank you, Brett.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Thank you.

[Operator]

And one moment for our next question. Our next question will come from Joe Giordano at TD Cowen. Giordano?

[Joseph Giordano, Analyst at Cowen & Co.]

Hey, guys. How are you doing? Yes, so a lot of companies are seeing -- have seen orders kind of decline organically for multiple quarters now. And predominantly, it's all attributed to inventory adjustment and supply chain, and hardly anyone has said anything about underlying conditions not being fine. So just curious, one, if you would agree with that, and two, if it worries you that everyone is seeing order declines and no one is saying anything is happening other than supply chain adjustments.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

It really doesn't because it's 100 year pandemic. I mean, you saw what happened. Supply chains were broken, people put inventory in place. And as I just got done talking to the last caller, the project business is so strong. So we have a similar view. Our businesses in healthcare, aerospace and defense, power and energy are performing well. They have a lot of projects and we just think that we got to work off the inventory and then there's going to be a return to more typical growth for the industrial market. I mean, at the end of the day, though, nobody knows.

And if we run into a recession, we have good muscle memory in that area, so we'll be able to react as we always react and we can run our business appropriately. And in fact, select businesses have already been doing that during '23 margins in our automation business. Those people did a great job of removing excess cost from the business. So we're pretty good at reacting. But right now, we don't see that. We see the inventory being worked off mainly in our OEM businesses and looking toward the future. We're optimistic with a number of new projects we have in the future.

[Joseph Giordano, Analyst at Cowen & Co.]

Thanks, Dave.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you. Joe.

[Operator]

Thank you. One moment for our next question. Our next question is going to come from Steve Barger of KeyBanc Capital Markets. Your line is open.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Hey, good morning.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Hey, Steve. How are you doing?

[Steve Barger, Analyst at KeyBanc Capital Markets]

Dave -- good. For the semi business, you mentioned your exposure to optics, which is great. But does that extend to advanced packaging applications, which are expected to show strong growth rates for the next couple of years? And if not, is getting specific exposure there something the team is looking at for M&A?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, we have a little bit of exposure to advanced packaging, but it's spread across the business in different places where we're selling some components. So that's one of the items that our M&A teams are looking at. And we have exposure, but we'd like to have more.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Okay. And then on the memory side, it seems like pricing is improving finally, and maybe fab utilization rates are starting to improve a bit. Is that translating into product inflection for you yet, or is there still inventory that needs to be cleared on the memory side, specifically?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, I think that market -- on the memory side, that market is pretty much bottomed. So I don't think there's -- when that ticks up, there's going to be -- I think that's immediately going to flow to the bottom line. I think the inventory there is mainly cleared out.

[Steve Barger, Analyst at KeyBanc Capital Markets]

Yes, Great. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Okay, Steve.

[Operator]

And one moment for our next question. Thank you. Our next question comes from Andrew Buscaglia of BNP Paribas Exane. Your line is open.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Hello, Andrew.

[William Burke, Executive Vice President and Chief Financial Officer at AMETEK]

Andrew, go ahead, Andrew.

[Operator]

Okay. I'm going to release Andrew's line.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you.

[Operator]

You're welcome. And our next question will be coming from Rob Mason of Baird. Rob, your line is open.

[Rob Mason, Analyst at Robert W. Baird]

Yes, good morning, and I'll offer my congratulations as well, Bill. Dave, a lot of questions have been asked. Just circle back to the process business you talked about that going to be up low single-digits for the year. There's a lot in there from a business mix and market standpoint. Could you maybe speak to anything that could outperform that low single-digits or anything that would stand out? And just for clarity's sake, what is the actual process industry exposure there now?

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Yes, the process is a broader look at our process and analytical instruments business, and the specific process industry would be more the process and analytical instruments business, which is a good part of it. And -- I think that what you're going to see there is our energy businesses, they -- perhaps, they grew nicely in Q4 and they have a good outlook for 2024.

I think we sell a lot of business to Asia and China is, I told you -- talked about it being flat. So that's something that we're concerned with in the year for process. But as long as we keep developing state-of-the-art projects that are unmatched by our competitors, we're going to be fine in process. And as evidenced by our CAMECA, Zygo, broader UPT, broader MAD sales. So it's the research market, it's the optics market that are driving the business.

And there are some medical applications in our Rauland business that are in that segment. So there's a mix of different end-market drivers. But when you look at the thing in total, we're calling it up low single-digits this year. And again, the international parts of the business will be weaker than the U.S. parts.

[Rob Mason, Analyst at Robert W. Baird]

That's great. Thank you.

[David Zapico, Chairman of the Board and Chief Executive Officer at AMETEK]

Thank you, Rob.

[Operator]

Thank you. And I'm showing no further questions. I would now like to turn the conference back to Kevin Coleman for closing remarks.

[Kevin Coleman, Vice President of Investor Relations and Treasurer at AMETEK]

Thank you again, Tanya, and thank you everyone for joining us for the conference 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.

[Operator]

[Operator Closing Remarks]