阿美特克 (AME) 2021 Q2 法說會逐字稿

Good day and thank you for standing by. Welcome to the Second Quarter 2021 AMETEK, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would like to hand the conference over to your speaker today, Kevin Coleman, Vice President of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, and thank you for joining us for AMETEK's Second Quarter 2021 Earnings Conference Call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer.

During the course of today's call, we will make forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2020 or 2021 results will be on an adjusted basis, excluding after-tax, acquisition-related intangible amortization and also excluding the gain from the sale of Reading Alloys in the first quarter of 2020 and the realignment charge taken in the first quarter of 2020. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website.

We'll begin today's call with prepared remarks by Dave and Bill and then open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. AMETEK delivered outstanding results in the second quarter. Strong sales growth and outstanding operating performance led to a high quality of earnings that exceeded our expectations. We established record levels of sales, orders, operating income and adjusted earnings per share in the quarter. This performance comes as we are still early in our economic recovery and reflects the outstanding efforts of our teams.

We also ended the quarter with a record backlog driven by exceptionally strong and broad-based orders growth, providing strong visibility across our mid- and long-cycle business profile. The 5 acquisitions we completed earlier this year are integrating nicely and are well positioned to drive strong growth. Given our second quarter results and our outlook for the back half of 2021, we have increased our sales and earnings guidance for the year.

Now let me turn to our second quarter results. Our businesses saw robust, broad-based sales growth in the quarter. Overall sales were a record $1.39 billion, up 37% over the same period in 2020. Organic sales growth was 25%. Acquisitions added 10 points to growth, while foreign currency added 2 points.

Overall orders in the quarter were a record $1.91 billion, a sharp increase of 92% over the prior year, while organic orders were an impressive 44% up in the quarter.

We ended the quarter with a record backlog of $2.5 billion, which is up over $700 million from the start of the year.

Our business has also delivered exceptional operating performance in the quarter. While global supply chains remain tight, our businesses are doing a fantastic job managing through these challenges as is reflected in our results.

Second quarter operating income was a record $317 million, a nearly 40% increase over the second quarter of 2020. And operating margins expanded 40 basis points to 22.8%.

Excluding the dilutive impact of acquisitions, core margins -- core operating margins expanded an exceptional 160 basis points to 24%.

EBITDA in the quarter was $387 million, up 34% over the prior year's second quarter, with EBITDA margins of 27.9%. This operating performance led to earnings of $1.15 per diluted share, up 37% over the second quarter of 2020 and above our guidance range of $1.08 to $1.10.

Our businesses also generated strong cash flows in the quarter, which position us well to continue investing in our businesses and on strategic acquisitions. In the second quarter, operating cash flow was $287 million, and free cash flow conversion was 114% of net income.

Let me provide some additional details at the operating group level. Both our Electronic Instruments Group and Electromechanical Group delivered strong organic sales growth with excellent core margin expansion in the quarter.

Sales for EIG were a record $934 million, up 44% over last year's second quarter. Organic sales were up 27%. Recent acquisitions added 16%, and foreign currency added nearly 2 points. EIG's second quarter operating income was $227 million, up 42% versus the same quarter last year. And operating margins were 24.3%. Excluding acquisitions, EIG's core margins were 26.3%, expanding an impressive 170 basis points over the comparable period.

The Electromechanical Group also delivered strong sales growth and outstanding operating performance. EMG's second quarter sales increased 24% versus the prior year to $452 million. Organic sales growth was 21%, and currency added 3 points to the quarter.

Growth was broad-based across our EMG businesses with particularly strong growth in our Advanced Motion Solutions business.

EMG's operating income in the second quarter was a record $112 million, up 33% compared to the prior year period. And EMG's operating margins expanded an exceptional 170 basis points to a record 24.9%.

Now switching to our acquisition strategy. As we noted during our previous call, we completed the acquisitions of Abaco and NSI-MI at the beginning of the second quarter. These acquisitions as well as the first quarter acquisitions of Magnetrol, Crank Software and EGS are performing very well, and the integration work for these businesses is progressing as expected.

AMETEK's strong cash flow generation continues to bolster our capacity for capital deployment, including investment in strategic acquisitions. Our M&A teams continue to work diligently through a robust pipeline of attractive acquisition opportunities, and we expect to remain active over the balance of the year.

Additionally, we're continuing to make key investments in support of our organic growth initiatives. We remain committed to investing in research, development and engineering of our advanced technology products and to continue to providing our customers with innovative solutions and maintaining our leading positions in niche markets and applications.

In the second quarter, we invested $72 million in RD&E. And for the full year, we now expect to invest more than $300 million or approximately 5.5% of sales. For all of 2021, we now expect to invest approximately $100 million in incremental growth investments. In addition to RD&E, this total investment includes our front-end sales and marketing functions, along with investments to help drive our digital transformation and allow our businesses to accelerate growth.

As noted, operating performance in the second quarter was outstanding with strong core margin expansion despite having to absorb the return of temporary costs into our cost structure. While we are seeing higher levels of inflation due to the tightness of the global supply chain, we are capturing higher levels of price given our differentiated solutions and allowing us to maintain a healthy price versus inflation spread.

Additionally, we continue to see the benefits of our various operational excellence initiatives. For the full year, we now expect approximately $145 million of operational excellence savings.

Now moving to our updated outlook for the remainder of 2021. Given our strong performance in the second quarter, along with our orders momentum and record backlog, we have again raised our 2021 sales and earnings guidance.

For the full year, we now expect overall sales to be up approximately 20% and organic sales up approximately 10% over 2020. Diluted earnings per share for 2021 are now expected to be in the range of $4.62 to $4.68, an increase of 17% to 18% over 2020's comparable basis and above our prior guide of $4.48 to $4.56 per diluted share.

For the third quarter, we anticipate that overall sales will be up in the mid-20% range versus the same period last year. Third quarter earnings per diluted share are now expected to be between $1.16 to $1.18, up 15% to 17% over last year's third quarter.

In summary, AMETEK's second quarter results were superb, with excellent sales and orders growth and high-quality earnings growth exceeded expectations. Our strong operating performance through the first half of the year shows the strength and flexibility of the AMETEK Growth Model.

Our differentiated technology solutions and market-leading positions across diverse niche applications have allowed us to navigate through difficult economic cycles and emerge as a stronger company each time. The proven sustainable nature of the AMETEK Growth Model continues to drive long-term success for all of AMETEK's stakeholders.

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

Thank you, Dave. As Dave highlighted, AMETEK delivered outstanding results in the second quarter with strong sales and orders growth, excellent operating performance and a high quality of earnings. Let me provide some additional financial highlights for the quarter.

Second quarter general and administrative expenses were $22.5 million, up $5.6 million from the prior year largely due to higher compensation expense. As a percentage of total sales, G&A was 1.6% for the quarter versus 1.7% in the same period last year. For 2021, general and administrative expenses are now expected to be approximately $15 million -- or expected to be up approximately $15 million on higher compensation costs.

The effective tax rate in the second quarter was 20.6% compared to 19.5% in the same quarter last year. The higher rate was driven by the impact of a U.K. rate change and the associated remeasurement of our deferred tax liabilities. For 2021, we continue to expect 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.

Our businesses continue to manage their working capital exceptionally well. For the quarter, working capital was 13.9% of sales, down an impressive 570 basis points from the 19.6% reported in the second quarter of 2020.

Capital expenditures in the second quarter were $23 million, and we continue to expect capital expenditures to be approximately $120 million for the full year.

Depreciation and amortization expense in the second quarter was $75 million. For all of 2021, we continue to expect depreciation and amortization to be approximately $300 million, including after-tax, acquisition-related intangible amortization of approximately $141 million or $0.61 per diluted share.

As Dave highlighted, our businesses continue to generate strong levels of cash given our asset-light business model and strong working capital management. In the second quarter, operating cash flow was $287 million and free cash flow was $264 million, with free cash flow conversion in the quarter a very strong 114% of net income.

Total debt at quarter end was $2.96 billion. Offsetting this debt was cash and cash equivalents of $390 million.

As Dave noted, we've been very active on the acquisition front. During the second quarter, we deployed approximately $1.58 billion on the acquisitions of Abaco Systems and NSI-MI. This was in addition to the acquisitions of EGS, Crank Software and Magnetrol, which were completed in the first quarter of the year. Combined, we have deployed approximately $1.85 billion on 5 strategic acquisitions thus far in 2021.

At quarter end, our gross debt-to-EBITDA ratio and our net debt-to-EBITDA ratio were 1.9x and 1.6x, respectively. We remain well positioned to deploy additional capital and invest in our acquisition strategy given our strong financial capacity and flexibility. At quarter end, we had approximately $2 billion of cash and existing credit facilities to support our growth initiatives.

To summarize, our businesses delivered excellent results in the second quarter that outperformed our expectations. The performance of our businesses through the first half of the year, along with our strong balance sheet, tremendous cash flow generation and the dedication of our world-class workforce, has positioned the company exceptionally well for meaningful growth in 2021 and beyond.

Kevin?

Thank you, Bill. Michelle, we're ready to take questions.

(Operator Instructions) Our first question comes from the line of Matt Summerville with D.A. Davidson.

A couple of questions. Dave, you mentioned price cost, but could you talk about what sort of spread you actually experienced in Q2, what your realization was in terms of price year-on-year and whether you're contemplating any incremental pricing actions or surcharges in the back half?

Great question, Matt. In the second quarter, we were very pleased that our pricing continues to offset inflation. We achieved about 3% of price across our entire portfolio, and total inflation was about 2 points. So we had about 100 basis point positive spread. And we want to stay in front of it. We want to stay there. And with all the acquisitions that we did and all the costs from those acquisitions, it showed up. We had 170 basis points of core margin expansion. And that pricing really helped us deliver that.

So we're ahead of the game now. We plan on staying there. There is increasing inflation, but with the 3% pricing and the 2% inflation, we were very pleased with our performance during the quarter.

And then just as a follow-up, can you speak to the organic order cadence you experienced over the course of the quarter? And if you can give us a read on maybe what you saw in July.

Yes, sure. I mean, as we said before, the organic orders were up substantially. During the quarter, they grew every month, with June being the strongest month of the quarter. Sales also grew every month sequentially, and June was also the strongest month of the quarter. And so a very strong trend during the quarter. And then with July, it was a very solid month and was supportive of our forecast and guide. So we feel real good about the orders trend in the business.

And our next question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Dave, just on the inflation discussion, I guess the material side is only one piece of it. You have labor, you have logistics costs, there's kind of a cocktail of things in there. How should we think of 2Q as being kind of the high watermark inflation for the year relative to the back half? Like when does that start to peak out or get a little easier?

Yes. That's -- the number that I gave you, the 2%, is total inflation in our business. So that's not just material. That's total inflation.

And in terms of peaking out, I mean, inflation is increasing. We're staying in front of it. I don't think we're ready to say it's peaked yet. I think that there's an element of temporary cost spiking. But it's very difficult to bifurcate that between the underlying inflation and what's happening on a temporary basis. So the honest answer is we're not sure, but we're going to stay ahead of it. And that's the way we're managing the business.

Got it. And then just in terms of kind of the end markets or customer behaviors that are standing out, this recovery seems unusual in a few different ways. But are you guys seeing kind of the classic more CapEx-facing applications or industries bounce back? Or is it all just sort of in the mix together? Anything you could sort of comment on that would be helpful.

Yes, great. Yes. What we're seeing is kind of a -- we saw this quarter the beginning of what I think is a classic mid-cycle recovery. So we're mainly mid-cycle and long-cycle businesses, and we're seeing the beginning of a mid-cycle recovery.

And what we saw in our businesses are our Automation & Engineered Solutions business, this is our classic mid-cycle, that picked up earlier in the year and it's staying strong. But we saw during the quarter our Power business really picked up. And the organic growth of our Power business was a strong mid-30% organic growth.

So that's -- I think the cycle is kind of falling along. We think our automation businesses would kind of lead us in. And then we have the Process and Power businesses. And then down the road, maybe even a year or 2, we have our commercial aerospace business. So the cycle is kind of following what we think.

It's a little bit difficult to bifurcate the classic cycle from customers trying to get in the queue and reacting to supply chain issues and the COVID rebound that we're all seeing, but I'm feeling really confident. And the underlying demand strength can have a longer tail as part of a broader cycle because I think the industrial world has not invested a lot over the last 5 years, and we're well positioned to benefit from that investment.

So I'm kind of seeing beneath this COVID recovery the -- a classic cyclical recovery, and it's really hitting our businesses at the part of the cycle where we think it would be. That's -- does that help you out a little bit?

Perfect. Great color.

And our next question comes from the line of Allison Poliniak with Wells Fargo.

I just want to go back to your comments on the incremental investment into the business. Could you give us a little bit more color in terms of where that incremental investment is going? Is it specific verticals? Or is it much more broad spread? Just any additional color would be helpful.

Sure. As we said, we're putting about $100 million of incremental investment in our P&L, and that was raised about $5 million from last quarter. So some new opportunities are coming up. And I put it in several areas. I mean we're investing in core product development. That's the future of our business, and we want to stay with the best benefits in our products with our customers. That's happening. That's about probably 1/3 of that $100 million. And then the other 2/3 is in sales and marketing and our digitization efforts.

So we're doing a lot of things to improve our customer-facing capability. We're doing a lot of things around digital marketing, sales force effectiveness. And teams are motivated, and it's working well. And we've been able to do continued investing during the depths of the virus, and we're accelerating now.

So it's $100 million. It's in product development and it's in sales and marketing, but a lot of it's in the digital space.

Great. And then just a little bit color -- if you could give a little color on maybe the commercial aerospace market. I know we're getting a lot of concerns with the Delta variant. Has that altered your view in terms of the recovery of either the MRO or just the commercial aerospace market in general?

Great question. The commercial aerospace is about 7% of our portfolio now. And we're obviously watching that Delta variant very closely because we're not sure exactly what's going to happen. We haven't seen a downturn yet from the Delta variant.

And our commercial aerospace business had a very good quarter. I mean we were up 25% in commercial aerospace. Our aftermarket business and our business jet market were stronger than our OEM markets. And that business, for the year, we haven't changed our outlook for the year. For our whole Aerospace & Defense business, we're still saying up low to mid-single digits. So we're not seeing the same kind of traction in that business right now, partially because the aftermarket is doing better than the OE business.

But it's stabilized for sure. It's 7% of our business, and we're watching it closely with the Delta variant. I mean we haven't seen it change yet in [passthrough] model, but that could happen. So that's the best information I can give you.

And our next question comes from the line of Scott Graham with Rosenblatt Securities.

So I was just wondering, could you kind of quantify what the add-backs of the temporary reduction costs from last year were in the second quarter and maybe a feel for the second half?

Yes. The best way I can answer to that is we talked about last year, we had about $90 million in temporary costs that we removed from the P&L. Now we're -- fast forward to the end of Q2, so about a month ago, they came in during the quarter. But by the end of the quarter, they were pretty much all back end, except our travel expenses. So there was about $10 million or $15 million of travel expenses that are bleeding in slower than we anticipated earlier in the year, but largely all the expenses besides travel are back in the P&L.

So correct me if you would on the math on that. So we will see some add-backs in the third quarter and fourth quarter but on a declining basis.

Yes. There'll definitely be add-backs because we'll get full quarter effects, and there will also be some headwinds from our compensation systems. We're -- we budget, we target our compensation systems. And we're having good year, so there's a headwind from that, too. So there'll be some additional costs in the second half of the year that will impact that.

Got it. Would you mind giving us, Dave, a sketch of what your research market looks like right now?

Yes. The research market is doing well. It's starting to pick up a bit. But that market is probably more impacted than the classic industrial market because a lot of the research institutions were slow to start up. There's a difficulty getting access to the facility. So the market's hanging in there. It's doing well, but it's certainly not inflecting up as much as the general industrial markets.

Okay. And then lastly, on the acquisition pipeline, I know you talked about the $2 billion of availability. What does that number look like in terms of the capacity? Because, certainly, you can borrow some more and what have you. And -- but more importantly, what does the quality of the pipeline look like right now? You talked about on the last call the possibility of doing in the second half something close to what you did in the first half. Could you update us on that thinking?

Yes, the -- our teams are very active now. And we certainly -- we'd like to get a deal done between the end of the -- between now and the end of the year, but there's no guarantee on that. There's a lot of properties in the market. There's a lot of activity going on right now for sure. But finding those gems that we acquire and end up becoming the part of the AMETEK portfolio is a different story.

As we told you before many times, our acquisition strategy is not capital limited. It's finding the right acquisitions to acquire. And we're very active now, and our teams are doing a great job. In terms of the capacity to do deals, I'll maybe have Bill comment on that.

Yes. Thanks, Dave. Yes. Certainly, you made the point we could go borrow more. And our banks and others tell us they're more than happy to lend to us. That couple of billion dollars would still only give us a mid-2s kind of leverage. So still, you could even say somewhat under leveraged for the company. So plenty of opportunity and plenty of resources available to us to do even more than the $2 billion. And I think as Dave mentioned, this isn't a capital-constrained strategy. This is finding the right businesses to fit with our portfolio that we think can generate value for our shareholders over the long term.

And our next question comes from the line of Andrew Obin with Bank of America.

Just a question, just putting a couple of things together. You've said, you are adding to growth investments, and I know what it takes for AMETEK to sort of loosen its first strings. You did talk about underinvestment among the industrials over the past 5 years. Looking forward, do you see structurally higher need for CapEx over the next couple of years from your customers?

Yes. That's -- I'm -- there could be. There could be. You had a situation where you had the industrial recession in the 2015, 2016 time frame. And then we had a few years of good growth, but then we had the pandemic. So clearly, supply chains are stressed, and people are going to put -- they're dealing with the current issues, but there's going to be some capacity put in. And I think that, that could be one of the outcomes of this economic cycle that we're in.

So we're pretty bullish on the industrial cycle right now. And we think there -- as I mentioned earlier, there is a COVID bounce, and it's pretty difficult to bifurcate the COVID bounce from the long-term growth. But we certainly are seeing customers planning in a way that's different than just a bounce.

And then the follow-up question. I mean people are asking about Delta variant impact on aerospace. But I think there are also some headlines in Asia, people trying to figure out if Delta variant is having any impact on rate of growth in Asia and China specifically. Could you just talk about what it is you're seeing in China, Asia, not only as end market, but also what are you hearing from your supply chain? Is Delta variant sort of something that you're tracking in that region?

Yes. During the second quarter, we had a pretty good month in Asia -- a pretty good quarter in Asia. We were up about 30%. And it was broad-based strength. It was notable strength in many of our businesses, but our automation business and our process instruments business stood out. And specifically, within Asia, China growth was up 27%. So it remains strong. And in China, our process and instrument -- process instrumentation businesses did very well.

So we're still seeing solid growth in China. We understand the press reports as well as anybody about what's going on in those regions. We're still operating all of our plants. We do have pockets where we're dealing with some COVID issues right now, but it's not unlike it's been the past 3 or 4 months, except the fact that there's probably a little more spread in China now. So we're watching that closely. And -- but to your point, the China growth remains strong for us. 27% was its growth in the quarter.

And our next question comes from the line of Jeff Sprague with Vertical Research.

Just coming around to deals and actually what you've done year-to-date. I think you're previously thinking about $0.18 or so accretion this year and a carryover benefit of $35 million to $38 million into next year. Just wondering now that these assets are actually fully in-house and you're betting them down, has that outlook changed much? And does anything in particular stand out?

No. I think the same outlook. It's -- we haven't changed it at all. And we said we get about $0.18 of benefit in 2021, and it's looking like that's going to be a good number for us.

Great. And then just coming back to kind of supply chains, and I'm sorry, I was on the call a few minutes late. But was there any place in the portfolio where you were unable to kind of meet demand? Or there was issues up and down the supply chain somewhere else where perhaps even you can deliver but the customer didn't necessarily want it because of their own issues with deliverability and availability?

Yes. There are issues like that going on all over, Jeff. But I'd say that, in general, in the second quarter, our teams did an excellent job. And we had the material and we had the labor and we had the execution to get out what we needed to.

There are certainly challenges in that broader material and logistics right now. Our guidance reflects the known risks. These issues are going to be with us for some period of time, and we're managing the issue with dedicated business unit personnel. So each business unit has a team on their supply chain, but we also have an overlay of our company-wide resources, our global sourcing team, and they're doing an effective job right now.

The big area of focus for us right now is on semiconductor chip availability. And we're looking at that very closely trying to secure our supply chains. And you can end up with a situation where you think you have a firm delivery and the day comes for the delivery, and it's not there.

And I think everybody in the industrial world is delivering with that right now, and it causes a game of whack-a-mole where you're scrambling to get you [up and] out. But our people did a good job in the second quarter, and there is an element of prudent judgment in our second half guide, but our guidance reflects all of our known risks.

And our next question comes from the line of Christopher Glynn with Oppenheimer.

So I just wanted to clarify, Dave, I think you said June had the highest rate of year-over-year orders and sales organic growth. I would have thought the comps got steeper from April through June. So one, just wanted to clarify. And two, what's implied there if you're accelerating on steeper comps?

Yes. I may have said the wrong thing if I said acceleration of the orders in -- both orders and sales grew sequentially every month, with June being the highest, strongest month of the quarter. So that doesn't mean that the rate of change accelerated. That means that June was higher than May, May was higher than April for both orders and sales. And we had a very strong trend in July also.

Okay. I might have heard you right. And then just wanted to go into your Advanced Motion Controls -- Motion Solutions. You talked about front-end investment there. Curious what you're seeing in terms of the types of automation architectures. Are there changes going there? Is that coming your way in particular? You had increasing front-end competitiveness. Just curious kind of panoramic of that automation space.

Yes. A lot of what we're doing is discrete automation. And we're also doing some factory automation, and we've invested heavily over the past few years to position our product portfolio and our capability at the top of the market. And we're benefiting from it now because as customers ramp up, our automation technology is helping them better serve their customer bases. And the demand has been strong for many quarters, and we don't expect that to change.

And our next question comes from the line of Rob Wertheimer with Melius Research.

So I actually also had a question just on the comment on industrial investment and CapEx, et cetera. I'm a little bit curious if you can flesh it out. Are you hearing the desire to spend coming back from your customers, maybe some technology changes that are encouraging, automation, localization and so forth? And I'm just curious if that's kind of where you think things will go based or whether you're hearing it strongly.

And then just maybe a comment on breadth of industry. I don't know if that's focused a little bit more on pharma and medical or wide across the businesses you have an insight into?

Yes. The first point is I think the localization of manufacturing and people developing more durable supply chains is definitely one of the drivers of the demand we're seeing.

What was your second question, Rob? What was the...

Just -- well, so whether technology changes are also doing it and then breadth of portfolio, yes.

Breadth of portfolio. So again, the first part of the question, we're definitely seeing localization drive demand as people look for more durable, more local supply chains. What we're really seeing -- if you go through our portfolio, look, let's start with our Process businesses, which are our largest business. It grew 20 -- mid-20s organic during the quarter, really a strong level of demand essentially all end March, leading to really robust sales and orders.

Our growth was particularly strong in one of our instrumentation businesses called our Ultra Precision Technology business that had a great quarter, and they're benefiting from metrology measurement technology related to automation.

And you think about the Power & Industrial business, that business was up 30% organic in the quarter. The businesses that did well there, both segments, Power & Industrial, and particularly strong growth in our Brookfield business and our IntelliPower business. Again, that was broad-based. And the Power & Industrial business was kind of one of the laggers on orders to pick up. And we're really pleased to see that.

And then we talked about our Automation & Engineered Solutions business. They were up low 20s organic, and that's been strong for a period of time with robust and strong demand continuing. So all of those are strong.

The -- our Aerospace & Defense business had a really good quarter. The sales were up high teens on a percentage basis versus the prior year. So this is about 19% of our portfolio. Organic sales were up high teens on a percentage basis, solid growth across all segments.

As I mentioned as an answer to Allison's question earlier, our commercial business was up 25%, and our defense business was up about 10%. And for all of '21, that business were still not changing. We're continuing to expect low to mid single-digit organic growth.

So if I pull the Aerospace & Defense business outside of the portfolio, I'd say that's the one that's -- it's bottomed and is doing well, but we're still looking at that commercial OEM business and watching it bottom. But everything else besides that is showing an uptrend.

And our next question comes from the line of Joe Giordano with Cowen.

I was interested in the growth investments, the $100 million, and you talked about like 2/3 of it going towards like the sales and marketing and digital aspects of your business. Like are you seeing kind of coming out of COVID, just given like the kind of bespoke nature of your products and like specialized nature of your products, is there like a fundamental change in how you sell these? Like is it going to be -- are you finding it easier to do it digitally and less like in person? And is this kind of like a sea change in how you do business going forward?

I think there is a change, Joe. And I think the digital transformation is impacting all elements of our business. And we have these different niche of businesses, but some of the technology and the sales and marketing functions applies to all of them. So from digital marketing, to e-commerce, to augmented reality used to demo and service our products, to the efficiency we're getting out of automating routine clerical test and remote process improvement, there's a lot of things going into the digital plans that we have, the digital transformation that we have. And they do impact all of our businesses, and it's kind of a theme across all of our independent niches.

So we're focused a lot on improving the business in that area, and we did learn a lot during the pandemic downturn. And we're taking what we learned, and we're making it better, and we're institutionalizing some of our best practices.

And then just a follow-up. In your Asia businesses, at least on the margins more recently, have you seen anything that kind of reflects the macro data at least in China getting a little weaker here? Are you seeing anything like on the margins that kind of mirror that? Are you kind of changing the way you're operating there a little bit to kind of get ahead of that?

Yes. We're not changing anything yet and we're not seeing a downturn, but China has been very strong. They were one of the first economies out of the pandemic. So we're looking at it closely. And as I mentioned, our growth was up about 27%. It remains strong, and we have strong quotation activity. I've seen all the reports about the Chinese economy slowing down, and there's probably some of that going on. But in our particular niches where we're playing, we have notable strength.

And our next question comes from the line of Deane Dray with RBC Capital Markets.

Just in terms of some of the second half dynamics on the -- some of the temporary costs coming back in as well as higher incentive compensation. What does that do for expectations on incrementals?

Yes. I think the core incrementals for the year are 35%. But in that second half, we're going to have some costs coming back into the P&L. So the margins during the second half can be down a bit. It's reflected in our guidance. But the acquisitions are margin dilutive or temporary costs are coming back into the cost structure. And also, there's a bit of us being cautious in terms of our guide related to the dynamics of the supply chain.

And as you may remember, Deane, we had a very tough -- very difficult, tough comparison. In Q4, I think our EBITDA margins were over 30%. So the -- we have a tough comp also. So there's going to be -- there can be a bit of margin dilution in that second half. We got some of the onetime costs for the acquisitions working through the system. Those temporary costs that we talked about are coming back in, but it's all reflected in our guidance.

That's very helpful. And Dave, I think the key question that everyone would love to hear your comments on the supply chain challenges. And you said you expect it to last for some period of time. Just from what you're seeing today across your businesses, how do you think this plays out? Is this a multiple quarter? Does it carry into 2022? You're handling it well on price cost, but just your expectation here, how long these conditions last.

That's a great question, Deane. I think the semiconductor element of it can last longer. So that can go out to 2, 3, 4 quarters as capacity gets put in place on the -- not specific to semiconductor but to broader supply chain challenges. Yes, I can see those moderating in a couple of quarters, but semiconductor could last a little bit longer.

And are you carrying any more buffer inventory in your businesses just to kind of protect yourself from the surprises about you expected a delivery and it's not there? But is that -- are we seeing that in the working capital?

Yes. The working capital was down about -- more than 500 basis points. But actually, embedded in that is about $50 million more in inventory. So we've allowed the operating teams to go out and secure the parts that they need, and we're certainly not scrimping in that area. But at the same time, it's tough to get the parts that you need. So we're managing it closely. And as I said, we have a good team, both within our local business units combined with our corporate oversight, where we're getting good results. But that is a big challenge for us right now.

And our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

It's Ken Newman on for Steve. I just wanted to touch back on the semiconductor market comments you just made. Can you just remind us how big that market is for you today? And I'm curious if you could just talk to the outlook for the subsector in terms of capital investments from your customers.

I'll do that, Ken, but I want to be clear, the -- what I was talking about was the semiconductor chips that are supplied to AMETEK when I was talking about the supply chain tightness. But the semiconductor market is an important market for AMETEK, so we do participate in it from the viewpoint of sales. And it's about 6% of our business, so a little under $300 million. And we're seeing some solid growth there because we participate both in the research market and the ramp in chip production.

And application areas where we're seeing particular strength would be the EUV optics market, the semiconductor research market. Our businesses of named CAMECA and Zygo are doing quite well there. And we expect our semiconductor sales to be up in the mid-teen, 20% level this year.

Understood. And then just touching back on the incremental R&D investments for new product development for the year. Can you give us some color on where your vitality index has trended through the quarter? And I'm just curious if you have any thoughts on how you're seeing that -- how you see that vitality index change as these new investments start to monetize?

Yes. Our vitality index in the quarter was a little better than 23%. So it was a good number. And we have to get our system put in place with some of these acquisitions that we've done. So there's -- the tracking in the systems that we put in place aren't in all the acquisitions yet. So we can't look at those businesses the same way we look at our current businesses.

But in general, we have a strong vitality. We have a number of -- in the low 20s, we're happy. And we think there's good opportunities for our businesses, and we're funding them. And it's -- a big area for us is -- important for us is to get our product development teams working together, introducing new products because that's fundamental for both the AMETEK pricing story to be able to stay in front of inflation and also growing organic growth in the niche markets that we're leaders in. So it's really important to us.

And I'm showing no further questions at this time. And I would like to turn the conference back over to Kevin Coleman for any further remarks.

Thank you, Michelle, and thank you, everyone, for joining our call today. Have a wonderful day.

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