Good day and thank you for standing by. Welcome to the Fourth Quarter 2023 AMETEK Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentations, there will be a question-and-answer session. Please be advised that today's 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.

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 be making forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risk and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2022 or 2023 results or to 2023 guidance will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our 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.

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'm 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 adviser 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 $1.68, up 11% versus the fourth quarter of 2022 and above our guidance range of $1.61 to $1.63 per share. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. The Electronic Instruments grew by 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 three points with currency accounting for the balance. EIG sales growth in the fourth quarter was strongest across our Aerospace & 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, while 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 share, 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 on our 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'm 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 and highly attractive growth markets and applications including renewable energy development and the modernization of the Power group. 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 the 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 3 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 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 $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'll be glad to take your questions.

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 share of 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 adviser until April 2025 to ensure a seamless transition. I'm 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.

Thank you, Bill, and good morning, everyone. I look forward to meeting and working with all of you in the 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.

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 and 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. In 2024, general and administrative expenses are expected to be approximately 1.4% of sales. Fourth quarter other income and expense was an 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 2022 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. For 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. Cash flow in the fourth quarter was superb with operating cash flow of a record $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 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 1.5x at the end of 2023, up from 1.2x 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.

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

And our first question will come from Matt Summerville of D.A. Davidson.

Thanks, good morning, and congrats, Bill. 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.

Sure, Matt. First, I want to clarify the outlook for 2024. The diluted EPS for the year is projected to be between $6.70 and $6.85. This is just a correction to what I mentioned earlier, in case it wasn’t clear. Regarding your question, we believe that the OEM parts of our business experienced destocking as we anticipated during Q4, and we expect this trend to continue through the first half of the year. We will face some challenging comparisons in Q1 that should conclude by Q2, after which we are optimistic about the second half of the year based on our forecasts. We are currently working through our backlog, so there won't be an immediate revenue impact. However, the destocking is likely to persist in the first half of the year, especially more in Q1 than Q2, but we are confident about the second half. This is already beginning to occur, as some customers are adjusting their inventory levels, and this process will continue through the first half.

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?

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 would 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.

Our next question will be coming from Deane Dray of RBC Capital Markets.

Thank you. Good morning, everyone. Just to add my congrats to Bill and Dalip, that is just the epitome of a distinguished career. So congratulations, and you'll be missed.

I appreciate that, Deane. Thank you very much.

Yes, I'll begin with that. With the Paragon acquisition, our portfolio now has about 21% of sales in the medical technology sector, and we would like to see that increase further. Thus, we are still pursuing acquisitions in this area and intend to expand significantly within it. In fact, in the fourth quarter, we experienced a mid-single digit growth, particularly strong for our EMC and Roland businesses, even before integrating Paragon. We're pleased with this sector and aim to continue our growth while actively seeking deals. Now, looking at our various subsegments and end markets, I'll start with our Process businesses, which make up the largest part of our segments. Organic sales for Process increased by low single digits in the quarter, rounding off a strong year with widespread growth across the segment. The most notable growth came from our CAMECA and Zygo businesses, thanks to their strong technological positions in research optics and medical applications. Looking ahead to 2024, we anticipate that organic sales for the Process businesses will rise by low single digits for the year. For Aerospace & Defense, we had a strong fourth quarter, concluding an excellent year with broad-based growth across all segments, showing high single-digit organic growth in the quarter, balanced between our commercial and aerospace divisions. For 2024, we expect organic sales in Aerospace & Defense to again rise by high single digits, maintaining similar growth across both commercial aerospace and defense. Regarding our power businesses, they increased by low double digits in the fourth quarter, benefiting from the acquisitions of RTDS, UEI, and Amplifier Research, although these were offset by low single-digit organic sales growth. Our power businesses have been highly active in making three strategic acquisitions over the past 15 months, enhancing our reach in attractive applications related to renewable energy and power grid modernization. In 2024, we forecast organic sales for the Power & Industrial businesses to increase by low to mid-single digits, with growth influenced by specific projects. We are optimistic about our ability to achieve low to mid-single digit growth in 2024, aided by positive project developments. Lastly, for our Automation & Engineered Solutions segment, there was a mid-single digit increase in the quarter, with contributions from the acquisitions of Paragon Medical and Bison Engineering, partially offset by a mid-single-digit decline in organic sales. Results aligned with expectations considering the normalization of inventory levels across our OEM customer base, which continued as projected during the quarter and is expected to persist into 2024. We anticipate the Automation & Engineered Solutions business to see low single digit growth in 2024, with stronger growth anticipated in the latter half of the year as customers normalize their inventory levels compared to the first half. Therefore, the latter part of the year for that segment is expected to show greater growth than the initial half. That's my overview, Deane.

That's fantastic. I really appreciate it. It's impressive to see the momentum from 2023 reflecting in your expectations for 2024. I have a quick follow-up regarding the $100 million in growth investments. How is that allocated among the product categories? Is there a concentration in certain areas or is it evenly spread out? Additionally, how do you anticipate new product vitality evolving from here? It was 29% this quarter and 26% last quarter. Is there a specific target you're aiming for?

Yes. I think anywhere between 20% and 30% is a good number. So that's what we've always said. And 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, we will pitch those plans and their budgeting and it's spread across the business. It goes to our best growth opportunities, and it's going to be about $100 million this year.

Our next question will be coming from Allison Poliniak of Wells Fargo.

Hi, good morning. Congrats, Bill and look forward to working with you, Dalip. Just following on Deane's R&D question. The $100 million is incremental from the '23 that did $1 million that you did $100 million, as you push into this med tech 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 business?

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 R&D, 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.

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? I know you mentioned med tech 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.

No, I think we're focusing on more traditional-sized deals. We have a few larger deals in our pipeline, with Paragon on the outer edge of that category. We're pleased with the five deals we've completed, deploying $2.25 billion across various parts of our business. These were high-quality additions that enhanced our presence in attractive growth markets, and we have a clear strategy to add value to these companies. Each business possesses a strong technology position, and the deals align with our financial criteria, targeting a 10% return on invested capital in year three. Our pipeline remains robust, and we are actively evaluating several high-quality deals across a wide range of markets. As always, we will maintain discipline in this process. I believe we have the potential to differentiate our performance through the M&A aspect of our growth strategy, along with our strong balance sheet and cash flow. We excel in slower or more volatile markets due to effective operational expenditure and M&A activities, and we are tracking significant values in the market. Given how the market is developing, most opportunities will likely emerge in the second, third, or fourth quarter. Overall, this year looks promising for our pipeline, and we feel optimistic.

Our next question will be coming from Jeffrey Sprague of Vertical Research.

Hi, thank you. Good morning, everyone. 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?

Well, sure. Related to Paragon specifically, during the first half of the year, we expect some muted growth for a couple of reasons. One reason is an inventory correction in the medtech market, and we will review our portfolio to potentially eliminate some less profitable product areas. This will involve a process during the first half. However, we anticipate a very strong second half due to some exciting new product introductions. We also continue to forecast an 8% to 10% increase in our guidance for 2024, with this growth being back-end loaded as we account for the integration costs.

Is that clarifying? $0.08 to $0.10?

Yes, $0.08 to $0.10. Yes. And then just drilling a little bit further into some of the end markets, thanks for kind of going and doing it around the world. But kind of the semi-related markets in particular, which have kind of been the vein of a lot of people that exist in 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 quarter specifically? And how does 2024 look?

We have a unique situation in the semiconductor industry, which I have discussed in previous calls due to the memory downturn that many are experiencing. We are affected by this as well; however, we have some outstanding technology in our CAMECA business. This next-generation technology is in high demand across nearly all fabs. Additionally, we have our Zygo business, where we are among the few companies capable of manufacturing EUV optics for semiconductor fabrication. These two dynamics are contributing to our growth. They helped mitigate some of the weakness we observed in the core memory segment of our portfolio. For 2023, we saw a 10% increase, indicating a growing market for us. Looking ahead to 2024, we anticipate further growth in the mid-single digits. The advancements in our technology have been instrumental in our growth in 2023, and we believe that momentum will continue into 2024.

Our next question will come from Nigel Coe of Wolfe Research.

Thanks. Good morning, everyone. And, Bill, congratulations on your retirement. So just a few border 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?

You're in the ballpark, Nigel.

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.

Are you talking about for 2024 or 2023?

2024.

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 incremental. 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 incremental 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 that's to the core margins being up 30 and the core incremental is 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.

Okay. That's really helpful. 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?

I will summarize Q4 by region to give you an overview of our performance. We experienced growth in the quarter, primarily driven by the U.S. and Asia. The U.S. has shown consistent strength, growing in the mid-single digits, particularly in our Materials Analysis and Aerospace & Defense divisions. Europe, on the other hand, declined in the high single digits, largely due to challenges in our automation sector. Asia increased by nearly 10%, with approximately 9% growth, supported by our Materials Analysis and Ultra Precision Technology divisions. Our performance in China was notable, with sales rising by 22% in Q4, and an overall increase of about 14% to 15% for the year. This growth stemmed from strong results in our Materials Analysis and UPT divisions. Looking ahead to 2024, we anticipate continued growth in Asia, although we expect the Chinese market to stabilize, leaning towards flatness. This is influenced by one-off project businesses that provided a boost in previous periods. While we expect favorable conditions, we are also aware of the broader economic impacts, predicting a flat trend in orders for China in 2024, while we continue to grow in the wider Asian market.

Our next question will be coming from Scott Graham of 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 invest to your family. Thank you.

Thank you very much, Scott. Appreciate it.

Yes, the total orders for the quarter were up 16%. This increase was mainly due to the Paragon acquisition, as orders are recorded as backlog when a business is acquired. EIG orders rose by 3% and EMG orders increased by 43%, with the growth in EMG orders also attributed to Paragon. On an organic basis, orders were down 2%, resulting in a book-to-bill ratio of 1.10.

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

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 in the second quarter, I think the orders will outpace sales.

Got it. Thank you. And then might just one other question. Within the guidance, I guess, I 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?

The overall organic growth for the company is expected to be in the low to mid-single-digit range, affecting both EIG and EMG segments. For Aerospace, we anticipate growth at a similar rate as this year, which is in the high single digits. The business has strong diversity, with robust military orders and a solid performance in the commercial OE aftermarket, as well as good results in commercial OE. Therefore, we expect both military and total commercial markets to see increases in the high single digits in 2024, and we are quite optimistic about that.

Our next question will be coming from Rob Wertheimer of 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 place 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.

Yes, that could definitely happen, Rob. I believe we are in a 3% pricing environment. I also think our volume might be a bit stronger in the second half compared to the first half. So what you're suggesting aligns with our thoughts. We've been quite cautious in our outlook for the second half. However, if there is anything that could surpass our expectations, it would be the volume for the second half, particularly organic sales volume.

Okay. Perfect. And then I wonder, just given the rise of med tech 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.

Yes, we have been acquiring promising medical businesses. Looking back, the Rauland business has been an exceptional success for us and is experiencing growth in the market. We also made an acquisition of EMC, which has performed exceptionally well. This business operates in a similar market to Paragon, which gives us confidence. They are typical AMETEK businesses. We excel in the market through technology and engineering. They tend to be more OEM focused rather than end market. Overall, our entire EMG business leans more towards OEM than end market, allowing us to have a longer-term view of our customers regarding future developments. This results in a relatively stable market. We anticipate that Paragon's growth over the next three years may be somewhat slower due to current circumstances, but we are confident it will achieve low double-digit growth in the coming years. We believe that these additions to our portfolio will grow at a slightly higher rate than our existing portfolio.

Our next question is going to come from Andrew Obin of Bank of America.

Hi, everyone. Good morning. Can you hear me? Congratulations, Bill. I just wanted to get a bit more context. Other automation companies that focus on short cycles are anticipating a rebound in the second half of the year, and your comments seem to suggest a similar outlook. How much visibility do you have regarding this? What gives you confidence that we will actually see improvement in the second half? I recognize that your perspective aligns with what we are hearing from others.

Yes, I believe that in the second half for Automation specifically, we are being cautious based on feedback from our customers and the market. For the entire segment, we anticipate growth in the low single digits. If we relied solely on customer input, the forecast would be higher. We have taken a conservative approach after discussions with customers about their inventory levels, which is standard practice for us when planning for the year. We expect to see a positive second half as those backlogs are cleared.

Excellent. And just maybe a follow-on building on that. You talked about sort of increasing investment, but are there 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?

Yes. In terms of supply chain, we took significant steps to reduce risks associated with China, and we actually completed this before COVID, which allowed us to be well-prepared during that time. Our supply chain is now more globally distributed and less reliant on China. Regarding capacity, we have made substantial investments in recent years while maintaining our low capital expenditure model. We have adhered to our standard guideline of 2% of sales for these investments. We have added capacity in our Mexican, Malaysian, and Serbian facilities. Our asset-light business model allows us to scale up quickly and also provides the flexibility to reduce costs efficiently. This is one of the strengths of the AMETEK model in a low capital expenditure environment. We can grow our sales and adjust in downturns without needing significant capacity investments. Overall, we are in an excellent position for growth, and we've laid the groundwork for this over the past few years, so I am very confident that we will be able to meet demand in the upcoming growth cycle.

Our next question is coming from Brett Linzey of Mizuho.

Hey. Good morning, all. 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?

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. And 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 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.

Yes. And then I have a second question regarding operating expenses compared to capital expenditures. As you assess the customer spending environment for this year, have the planning assumptions or the overall sentiment regarding capital-intensive businesses changed at all in the last few months?

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 typical projects. So we're tracking to a very high number.

Our next question will be coming from Joe Giordano at TD Cowen.

Hey everyone. I hope you’re all well. Many companies have experienced a natural decline in orders for several quarters, mainly due to inventory adjustments and supply chain issues. Harvey, no one has mentioned anything about the underlying conditions being unfavorable. I’m curious if you agree with that and if it concerns you that all companies are facing order declines without any explanation beyond supply chain adjustments.

It really doesn't because it's a hundred-year pandemic. I mean you saw what happened. The supply chains were broken. People put inventory in place. And as I just got done talking to the last call, the project business is so strong. So we have a similar view. We're 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're going to work off the inventory and then they're 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 costs 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 the number of new projects we have in the future.

Next question is going to come from Steve Bar with KeyBanc Capital Markets.

Hey, good morning. 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?

Yes. We have a little bit of exposure to advanced packaging, but it's spread across the business in different places, 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.

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?

Yes. I believe the memory market has essentially reached its lowest point. Therefore, when it starts to improve, I expect that will have an immediate positive impact on our bottom line. Most of the inventory has likely been cleared out.

And our next question will be coming from Rob Mason of Baird.

Yes, good morning, and I’ll offer my congratulations as well, Bill. Dave, a lot of questions have been asked. I 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, say what is the actual process industry exposure there now?

The process encompasses a comprehensive overview of our process and analytical instruments business, particularly within the process industry. Our energy sector performed well in the fourth quarter and has a positive outlook for 2024. We have significant business operations in Asia, with China seeing flat growth, which raises some concerns for the year in our process segment. However, as we continue to develop cutting-edge projects that our competitors cannot match, we expect to remain strong in this area. This is evident in our sales from CAMECA, Zygo, and broader UPT and MAD offerings. The research and optics markets are key drivers for our business, alongside some medical applications within our rolling business. Overall, we anticipate growth in the low single digits this year, with international segments showing weaker performance compared to the U.S.

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

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.

This concludes today's conference call. Thank you for participating. You may now disconnect.