阿美特克 (AME) 2020 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 AMETEK, Inc.

Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) It is now my pleasure to introduce Vice President of Investor Relations, Kevin Coleman.

Thank you, Andrew.

Good morning, and thank you for joining us for AMETEK's First Quarter 2020 Earnings Conference Call.

With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer.

AMETEK's first quarter results were released earlier this morning and are available on market systems in the Investors section of our website.

This conference call is also being webcast and can be accessed on our website.

The webcast will be archived and made available on our site later today.

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 2019 or 2020 results will be on an adjusted basis excluding after-tax, acquisition-related intangible amortization and excluding a pretax $141 million or $0.47 per diluted share, gain from the sale of Reading Alloys in the first quarter, and also a pretax $44 million or $0.15 per diluted share realignment charge taken in the first quarter.

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.

Despite a challenging and highly uncertain economic environment due to the COVID-19 global pandemic, AMETEK delivered solid first quarter results, highlighted by excellent operating performance with earnings in line with our guidance range.

I will provide more details on the first quarter results shortly, but first, I wanted to extend my thanks to all my AMETEK colleagues and recognize them for their amazing dedication and commitment through these difficult times.

The courage and resilience I witness has been truly impressive.

As AMETEK has been deemed an essential or life-sustaining business at all our operating facilities, our employees continue to provide critical solutions and services to customers across many industries, including healthcare, defense, food and beverage and laboratory research.

The health, safety and well-being of our employees as they support these essential customers is our highest priority.

We've implemented numerous safety measures aimed at providing a safe work environment.

Our pandemic response plan provides a framework for our businesses to manage their facilities and workforce during this pandemic.

Among other things, the plan establishes personal and workplace hygiene practices, a global communications network of site and country pandemic coordinators, and a supply chain, logistics and operations team to provide solutions to help mitigate the impact of the pandemic on our business.

Daily communication with local pandemic coordinators and senior management ensures we are complying with the Centers for Disease Control and local government regulations.

As part of the plan, we also implemented various safety measures, including work-from-home requirements for those whose job allow, social distancing on our facilities and on our factory floors, daily temperature monitoring of employees reporting to work, use of personal protective equipment and staggered work shifts.

We remain vigilant as we return to a higher level of operating activity.

Now let me return to the first quarter results.

First quarter sales were $1.2 billion, down 6.6% from the same quarter in 2019.

Recent acquisitions contributed 4%.

The divestiture of Reading Alloys was a 2 point headwind.

Foreign currency was a 1 point headwind, and organic sales were down 8% in the quarter.

The measures we took during the quarter led to strong operating performance.

While operating income decreased 3% year-over-year to $276 million, operating margins expanded an excellent 100 basis points to 23%.

Excluding the dilutive impact of acquisitions, operating income margins expanded 110 basis points over the prior year period.

Decremental margins in the quarter of approximately 10% showed our operating capability, reflecting our ability to reduce our cost structure as well as the strength and flexibility of our operating model.

Adjusted EBITDA in the quarter was $342 million, up 2% over the prior year with record adjusted EBITDA margins of 28.5%.

The operating performance led to earnings of $1.02 per diluted share, up 2% versus the comparable basis in the first quarter of 2019 and in line with our guidance range of $1.01 to $1.04.

The $44 million restructuring charge we took in the quarter is expected to generate approximately $85 million in annualized structural savings.

We also generated a strong cash flow in the first quarter with operating cash flow up 38% to $271 million.

Free cash flow conversion was also strong at 148% of adjusted net income excluding the Reading Alloys gain.

Next, I will provide additional details at the operating group level.

Sales for our Electronic Instruments Group were $774.2 million, down 4% over last year's first quarter.

The acquisitions of Gatan and IntelliPower contributed 6%.

Foreign currency was a modest headwind and organic sales were down 9%.

EIG's operating income in the first quarter was $194.1 million, down 4% versus the prior year.

EIG operating margins were 25.1% in the quarter.

Excluding the dilutive impact of acquisitions, operating margins expanded 20 basis points over the prior year period.

The Electromechanical Group also delivered strong operating performance in the quarter despite top line weakness as a result of the coronavirus.

EMG's first quarter sales were $428 million, down 11% versus the prior year.

The acquisition of PDT added 3%.

The divestiture of Reading Alloys was a 6 point headwind.

Foreign currency was a 1 point headwind, and organic sales were down 7%.

EMG's proactive cost mitigation actions led to impressive margin expansion.

While operating income was down slightly to $97.5 million in the quarter, operating margins, excluding acquisitions, expanded 220 basis points to a record 22.8%.

During the first quarter, we also completed the acquisition of IntelliPower, a leading provider of high-reliability, ruggedized uninterruptible power systems for mission-critical defense and industrial applications.

Their products and solutions nicely complement our Power Systems and Instruments businesses and they deepen our expertise in high-reliability power protection applications.

Annual sales for IntelliPower are approximately $40 million, and we deployed $115 million on the acquisition.

We also completed the divestiture of Reading Alloys to Kymera for $250 million.

The closing of the transaction, which occurred near the end of the first quarter, was a positive outcome for all parties as Kymera is an outstanding strategic partner for Reading Alloys.

For AMETEK, proceeds from the sales will be deployed on our acquisition strategy, which remains our priority for capital deployment.

While we are pleased with the first quarter results, the global economic environment has obviously changed since the start of the first quarter.

In January, global demand was solid.

In February, an extended Lunar New Year holiday due to the coronavirus resulted in disruptions in China-based activity for customers and suppliers.

Later in the month, as China slowly reopened for business, Europe and the U.S. and other parts of Asia started to feel the impact of the virus.

At that time, we started to limit discretionary spend and nonessential travel.

In addition, each of our businesses developed detailed contingency plans to prepare for a potential slowdown.

In March, the impact of COVID-19 on the global economy was broadening.

Many countries, states and counties started to impose travel restrictions, stay-at-home orders and social distancing measures for all but essential employees.

Supply chain delays started to emerge and customers turned cautious given the building uncertainty.

Although our facilities were operational throughout the first quarter given our essential business designation, we did see a direct impact on sales in the first quarter due to the virus.

Worldwide travel restrictions limited our ability to provide support and installation services.

This impacted our EIG process and Power businesses most significantly in the quarter and a broad set of customer delayed shipments.

Now a few comments on the demand environment in April.

Demand in April was meaningfully weaker than we experienced in March.

Travel restrictions and social distancing mandates shut down all but essential activities as customers and suppliers temporarily closed or implemented furloughs for all or parts of April.

This has inevitably led to significant disruptions and impacts on demand.

Restructurings across many -- restrictions across many geographies are slowly being loosened.

However, we remain cautious on the pace of recovery.

Now let me provide some comments on what we are seeing in select end markets.

Although we are seeing challenging conditions across most end markets, we're seeing solid demand continue across our healthcare, medical and defense markets, which account for approximately 20% of our sales.

Our most challenged markets are commercial aerospace and oil and gas, which combined, account for approximately 16% of AMETEK's sales.

We expect meaningful weakness across these markets throughout all of 2020.

In the balance of our markets, including power, industrial, semiconductor, research, metals and automations, we expect weak conditions in the second quarter with sequential improvements during the second half of the year.

Shifting now to the actions we are taking to proactively manage our business while ensuring we are supplying and supporting our key customers.

As the spread of the virus expanded and restrictions widened in March, our business began to execute on contingency plans and implemented cost reduction actions.

These contingency plans focused on maximizing cash flow, ensuring critical sources of supply and protecting key investments, all while ensuring appropriate safety measures were in place.

The cost reduction actions we are taking include structural actions such as reduction in force and facility consolidations as well as temporary reductions such as discretionary spend reductions, furloughs, temporary facility shutdowns, short-time work weeks and temporary pay reductions.

Given the reduction in demand we are experiencing, we made the difficult decision to reduce our workforce.

The total reduction enforced is approximately 10% of our employee base across direct, indirect and SG&A functions.

In addition, in the second quarter, many of our businesses are implementing furloughs or temporary facility shutdowns.

These furloughs generally range in length from 1 week to 3 weeks, depending on the operating location and their customer market dynamics.

The decision to furlough operations was made to help mitigate the spread of the virus, to better align our cost structure with demand and to position us to quickly respond when demand returns.

The temporary pay reductions we implemented generally range between 15% and 20% for salaried employees, including all AMETEK officers, with a similar reduction of fees paid to our Board of Directors.

As a result of these actions, we expect total cost savings in the second quarter of approximately $80 million, with approximately $50 million of these savings from temporary actions and $30 million from structural actions.

As we proceed into the second half of the year, we expect the benefit from our structural cost actions to ramp up with full year structural savings targeted at approximately $125 million.

We will flex our temporary cost savings either up or down in the third and fourth quarters based on volume levels.

In addition to these cost savings initiatives, we also reduced our capital expenditures by over 25% from our initial plans in the year, with full CapEx -- full year CapEx now expected to be roughly $75 million.

Before I provide commentary on our outlook for the quarter, I wanted to highlight the work AMETEK is doing where we operate to assist in the fight against COVID-19.

Through the AMETEK Foundation, we have made more than $1.5 million in contributions to charitable organizations, many of whom are providing food and essential items to those in need, along with personal protective equipment to the men and women on the front lines of this pandemic.

We are proud to partner with numerous organizations around the world, where we have an operating presence to support the immense humanitarian crisis caused by the pandemic.

I also wanted to highlight a few of AMETEK's businesses are involved in the fight against COVID-19.

AMETEK Rauland, a leading provider of mission-critical communication and workflow solutions used in hospitals and other healthcare facilities, has developed the Rauland Rapid Response Kit.

This solution allows nurses and healthcare providers to quickly triage patients, gather necessary supplies and determine the appropriate clinical response, all while keeping a safe distance to minimize repetitive safe -- staff-to-patient contact.

They are being deployed for use in temporary medical facilities and new patient care facilities within hospitals to meet the surge of additional patients.

AMETEK Land is another great example.

Land is a leading manufacturer of monitors and analyzers for industrial infrared noncontact temperature measurement.

In March, they released their vIRalert solution, a temperature screening thermal imaging system designed for highly accurate human body temperature measurement.

This technology can be utilized for screening at point of entry into key facilities such as offices, factories, schools, government buildings and transportation hubs.

They are seeing strong initial interest for the solution as temperature screening at this scale will play a fundamental role in helping to contain the spread of the COVID-19 and allowing return to our normal daily lives.

AMETEK's Powervar business is providing customized uninterruptible power systems to a number of leading medical device diagnostic equipment providers used for coronavirus testing.

These UPS systems are being deployed worldwide.

And lastly, AMETEK Advanced Motion Solutions is providing critical solutions to manufacturers of ventilators and laboratory diagnostic equipment used in the COVID-19 response.

These are just a few of the examples of the critical roles our businesses are playing in combating this global crisis.

We are proud to be part of the solution and committed to supporting our customers in these efforts.

As we previously announced, due to the uncertainties presented by the COVID-19 global pandemic, we have withdrawn our full year guidance and will not be issuing quarterly guidance at this time.

We will issue guidance as condition stabilizes and visibility improves.

However, I did want to provide some level of comments about the second quarter and the balance of the year, given what we know now.

First, we expect that the quarter will be the low point in sales and earnings this year given the broad-based uncertainty and the impact on global demand from stay-at-home orders and travel restrictions.

Second, we expect sequential improvements in sales and earnings in the third and fourth quarters as the economy slowly reopens.

And third, we expect to manage full year decremental margins in the 25% to 30% range, with the second quarter decrementals being between 30% and 35%.

To summarize, AMETEK delivered solid results in the first quarter on strong execution through unprecedented market dynamics.

Bill will speak to this in a moment.

But the actions we took in the first quarter strengthened our already strong balance sheet and liquidity, and we are poised to emerge from this economic crisis in a strong financial position, which will allow us to continue to deploy capital on acquisitions and invest in our growth initiatives.

We are confident in the future of AMETEK as our world-class talent and the adaptability of the AMETEK Growth Model will continue to drive long-term sustainable success for our stakeholders.

The message we've given to our employees is simply, while these are truly unprecedented times, AMETEK has faced challenging and uncertain environments before.

And each time, the collective strength and talents of all AMETEK colleagues has allowed us to emerge stronger and better positioned.

Together, we're working to make sure AMETEK again emerges stronger and better positioned for the next chapter of our growth.

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.

I would also like to thank our colleagues around the world for their tremendous efforts over the past few months.

We have asked a lot of our colleagues as we manage the impact of COVID-19 on our business.

And as always, they have risen to the challenge.

The actions our businesses took in the first quarter helped us deliver strong operating performance and improved our already strong balance sheet and liquidity position.

Let me provide some financial highlights for the quarter.

First quarter general and administrative expenses were down $3 million compared to the same period in 2019 due largely to lower compensation costs.

General and administrative expenses were 1.3% of sales versus last year's level of 1.4% of sales.

The adjusted effective tax rate in the quarter was 19.4%, down from last year's first quarter tax rate of 20.5% with this lower rate in the quarter being due to tax planning initiatives.

For 2020, we expect our effective tax rate to be between 20% and 21%.

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.

Operating working capital in the quarter was 18.9% versus 18.2% in the first quarter of 2019.

Capital expenditures were $17 million for the first quarter.

As Dave indicated, we now expect full year capital expenditures to be approximately $75 million, down from our initial expectations of $100 million.

Depreciation and amortization expense in the quarter was $66 million.

For the full year, we continue to expect depreciation and amortization to be approximately $255 million, which includes after-tax acquisition-related intangible amortization of approximately $120 million or $0.52 per diluted share.

Operating cash flow in the quarter was outstanding at $271 million, up 38% over 2019's first quarter.

Free cash flow was $254 million, up 45% over the prior year period.

And free cash flow conversion adjusted for the Reading gain was excellent at 148%.

Total debt at the end of the quarter was $3.25 billion, up from $2.77 billion at the end of 2019.

During the first quarter, we drew down $500 million from our revolver to bolster our liquidity position.

We also deployed approximately $115 million on the acquisition of IntelliPower during the quarter.

Offsetting this debt is cash and cash equivalents of $1.25 billion, which includes the proceeds from the sale of Reading Alloys and the drawdown on the revolver.

Our gross debt-to-EBITDA ratio at the end of the first quarter was 2.2x as we are intentionally holding higher-than-normal cash balances.

This ratio was comfortably below our debt covenants of 3.5x.

Our net debt-to-EBITDA ratio was 1.4x at the end of the quarter.

AMETEK is extremely well positioned to manage this economic downturn.

We have more than $1.8 billion in liquidity to support our operations and growth initiatives, including $550 million in available revolver capacity.

We have a robust balance sheet with no material debt maturities due until 2023.

To conclude, our business has delivered a solid quarter despite extraordinary challenges due to COVID-19.

Our world-class workforce, the strong cash generation of our niche businesses, and our balance sheet strength position us well to manage this downturn and will position us well to invest in our growth strategies over the long term.

Kevin?

Thank you, Bill.

Andrew, could we please open the lines for questions?

(Operator Instructions) Our first question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Dave, if you wouldn't mind just talking a little bit about April or maybe March exit rates, just give us a sense for what you're seeing out there.

I appreciate all the color on decrementals and certainly how margins held up in the first quarter, but maybe give us a sense for demand cadence.

I know a few weeks maybe isn't a trend at this point, but just to kind of calibrate where we're at on that first.

Sure, Josh.

So there will be a substantial revenue drop in April.

We were down about 25% in April.

And as we look ahead to the quarter, we can be down about 25% or a bit more or a bit less because we have limited availability.

But I'd point to that 25% that we actually were down in April.

Got it.

That's really helpful.

I appreciate it, Dave.

And then I guess on the other side of this, understanding that some of these countermeasures on the cost side end up being temporary, some are a little bit more permanent in nature.

Anything that would prevent kind of a normal incremental margin on the other side, i.e., are you pulling on the temporary levers such that you do need to kind of reflate the cost base or compensation metrics, et cetera, when we do finally recover it?

It doesn't look like the case, but just want to make sure that's the way you're thinking about it.

Yes.

That's a good question, and that's why there's a balance of structural and temporary cost reductions.

I mean when we -- historically, when AMETEK recover out of these downturns, we've had very high contribution margins and I would expect the same thing to occur this time.

But we're using our best judgment and our experience with these businesses to balance the structural cost reductions with the temporary.

So we're going to have $80 million in cost savings in Q2.

About $30 million of that is structural and about $50 million of that is temporary.

And then as we go through the quarters, we'll increase or decrease the temporary cost reductions based on demand.

And if it looks like demand is not materializing, it doesn't do any good to leave around excess and unutilized resources.

So we have the capability to do more.

But we have a good feel for these businesses, and we want to get through this thing with our businesses intact.

At the same time, focus on the decrementals as we get through that.

And I would expect that we would have very good incrementals as -- when we ultimately get through the crisis and we recover.

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

Just to clarify, the down 25% in April, was that an organic revenue growth?

And how did orders shake out?

Orders and sales were about the same.

Orders were about that 25-point level, sales were just a bit more.

And that's really on the total orders and sales.

Good.

And Dave, can you talk about visibility?

I mean part of the AMETEK business model is you've got healthy recurring revenues around 30%.

So how do you think those hold up?

And just kind of connect us what we're seeing in terms of customer behavior, push-outs, cancellations and so forth.

Yes, sure.

That's a good question, Deane.

I mean when I think about Q1 or the end of Q1, we left probably $40 million or $50 million, 4 or 5 points of organic growth we could not ship because our customers weren't available to take delivery or we could not travel to the site to do the installation and commissioning work.

So it's -- that was a big deal for us.

And we have to get to places in China and around the world and in the U.S., especially in our Process and Power businesses and do that commissioning and get that recurring revenue.

So part of -- the customer behavior part of your question is that they delayed shipments and we weren't able to access them.

And part of the recurring revenue is it's driven by the ability to service them.

So I think the recurring revenues will hold up relatively well, maybe except in the Aerospace business.

But we have to be able to travel and get to our customers have to return to some normalcy there for that to happen.

That's real helpful.

And I appreciate all the color on the decrementals because that's absolutely within the band that we'd expect based upon the cost-outs that you've taken.

So I kind of feel like we can ask a more forward-looking question regarding when and how can you pivot to playing offense.

You've got just an exceptionally strong balance sheet.

We know M&A markets need to settle down.

But what's expectation in terms of line of sight on potential acquisitions at this stage?

Or is it just too early?

I think it's a great question, Deane, because we feel we're going to emerge from this crisis with an excellent M&A opportunity.

It's going to remain our first priority for capital allocation.

Bill already went through the strong balance sheet, the cash flow-generating capability of the companies.

And we had a very strong pipeline going into this crisis.

We closed on IntelliPower in Q1.

We were very close on another deal, a very nice business.

We had just felt we could not finalize our diligence and integrate it with the restrictions caused by the virus.

Certainly, it's a potential to continue with that deal post crisis because we really like it and we have a good relationship with the sellers.

And we're going to keep developing our pipeline.

We have multiple tangible opportunities post crisis, I mean a great pipeline going into this.

And we're going to use our business development team to maintain those relationships.

In terms of the current environment, buyers and sellers are focused inwardly with challenges they have in their business.

New set of buyer, there's a new set of buyer price expectations that need to get aligned with seller expectations.

You don't have the ability to perform face-to-face diligence to negotiate, to integrate it.

So I think it's going to be late 2020, maybe the fourth quarter of 2020, before the market begins returning to normal, but I think we're well positioned to really capitalize on the opportunity there.

And that's the way we're thinking about this thing.

We're going to preserve our balance sheet now and make sure it's strong, and we're going to see a big opportunity when we get out of this.

And our next question comes from the line of Ivana Delevska with Gordon Haskett.

So just wanted to ask as we emerge from this, what percent of your businesses do you think could kind of more quickly come back versus what could take longer time to get back to normal?

Yes.

That's a good question, Ivana.

And it's really -- it's both end market and the time -- and the type of business that we're talking about.

As I mentioned earlier, we serve a range of different end markets.

And some of these markets are seeing solid demand.

These include medical, healthcare, defense businesses.

And some markets are very challenged, and they're oil and gas and aerospace.

So I think the Oil and Gas and Aerospace businesses are going to be the last to pick up positively.

Probably Oil and Gas will pick up well before Aerospace.

But the Aerospace downturn, we could have a couple or 2 or 3 years.

But the majority of our businesses, I think, are going to recover quite well from this.

And we have high incremental margins, and we're managing the decrementals on the way down.

So I'm pretty optimistic that we'll be able to -- we were able to expand -- the last 3 years to 2019, we grew organically 5% in a year, greater than industrial production, and we got great margin expansion.

And the environment that we're going to have in the second half of the year and into 2021, you may be in an environment where we're growing a little bit faster than that.

So I would expect our businesses to respond and our businesses to have better margins on the way out, and with the exception that Aerospace and Oil and Gas could be down for a while.

And in terms of mix, in terms of margin impact of those businesses kind of underperforming, would it be a positive for margins?

Yes.

I think it will be a positive for margins.

On the way down, our Aerospace is a pretty profitable business.

It's a couple of points more profitable than the base business.

And our Oil and Gas is about at the base business profitability.

We had 20% EBITDA in the first quarter.

So -- but I think if you go back and look at the prior downturns and AMETEK's recovery from them, we've always had healthy contribution margins on the way out because we're such a profitable business.

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

So I'm hoping you can help me with a couple of questions on the cost save.

So we came into the year with about $90 million of sort of base productivity, as I call it.

And I think I heard you say that the restructuring charges are going to give us $85 million in savings.

Do we add those numbers together?

No.

Well, yes, you do on an annualized basis.

The $85 million is on an annualized basis.

So when I think about the second half of the year, we talked about $30 million, maybe $30 million in structural savings in Q3, combined with about $50 million of variable.

When we get to the second half of the year, Q3 and Q4, we'll have about $75 million of structural savings split across those 2 quarters.

So the structural savings will ramp up.

And if it plays out like we think, the temporary savings will ramp down.

And we'll exit 2021 with a pretty healthy level of cost reductions on a run rate basis going into 2021.

And -- right.

So the 2021 carryover on structural, what would that be?

It's going to depend on some things, but I think it will be about $40 million.

40, 4-0.

Got it.

And if you could just maybe help us understand the cadence of sales in aerospace -- commercial aerospace and oil and gas.

Certainly, we understand that they're worse, perhaps a lot worse, than the April sales number.

But is there any kind of parameter you can throw around those numbers to help us understand what the real deltas are?

Yes.

I'll give you an idea with Aerospace.

And again, there's a caveat that we don't have good visibility.

But our commercial aerospace business is about 10% of the company.

That includes our OE and aftermarket.

That could be down 50% and the aftermarket part of it can be down more.

The OE part of it down a little less.

So that market is going to drop.

It's going to be pretty significant, and we're seeing that happen.

So that's just a fact for a considerable amount of time.

Yes.

And oil and gas?

Oil and gas is going to have a tough time.

I think the recovery is going to be faster because it's going to be more based on a commodity price and it's not going to be as long term.

It's going to be people start driving the cars again.

It's going to be definitely less than 50% for the year, but I put in the 25% range or something like that.

More so in the upstream than the downstream.

And our next question comes from the line of Nigel Coe with Wolfe Research.

So just going back to the decremental margins.

Obviously, very impressive management of those.

So before the discretionary cost savings, what kind of gross decremental margin are we looking at here?

Is it sort of 45%-type numbers?

And are you confident that there's enough discretionary cost you can go after to manage decrementals into those ranges within a reasonable revenue range?

Yes.

It's an excellent question, Nigel.

And if you think about this kind of environment, yes, you're going to end up with the decremental margins of -- if we did nothing, we'd be in that 50%, 55%, some businesses at 60% range.

So what we're doing is we're mitigating that greater than 50% decremental margin in this kind of environment.

And we have a higher margin business.

And the costs that we're taking out are getting us to the 25% to 30% decrementals for the year.

Okay.

But what you're saying is there's enough discretionary cost in the short term to comfortably manage within that range.

There's no breakpoint that you see right now.

Yes.

I don't see the -- it's going to be difficult.

And we didn't give guidance, but we're pretty good at managing the decrementals, and that's our focus right now.

We're going month-to-month and our operating operations are making adjustments on the level of capacity and the level of customer demand.

And I think that we can manage to that 25% to 30% level for the year.

Great.

And then my follow-up question is, one of the keys to success for AMETEK in the past has been the right incentives at the divisional level.

Some of those for growth, some for margin, cash flow, et cetera.

Given the lack of visibility right now, how have you changed the incentive structure for your divisional managers?

We haven't changed them as of yet.

They're still based on the original targets that were set for the year.

And we're managing through this thing.

And I personally -- everybody is going to feel some pain through this process.

And resetting targets to the existing level of our business isn't fair for everyone, including our shareholders.

So it's going to be a tough year, and there's going to be less variable compensation.

That opportunity is still there, but it's not going to materialize.

And that's just the way it is.

And I'll talk to my comp committee about the appropriate things in these areas.

But in general, there's going to be lower variable payments from our incentive systems this year.

And our next question comes from the line of Brett Linzey with Vertical Research.

I just wanted to come back to the comments on the medical, healthcare and defense bucket at 20%.

Were you suggesting in April that was actually a positive in terms of sales and orders?

And then how are you thinking about that for the year?

Yes.

I think the defense, the medical, the healthcare are going to be positive for the year.

And in April, they didn't decline as much.

So that's how we're thinking about it.

That piece of our business at this point seems that they're pretty solid.

And the thing that we -- it was very encouraging in Q1, and we bought Gatan.

We have a couple of quarters of Gatan.

It's still above its acquisition model.

So they're doing a great job for us.

And some of our recent acquisitions, like our Rauland in the healthcare space, MOCON in the food space and Telular in the IoT space, those are 3 pretty sizable deals we did over the last couple of years.

All 3 of those businesses in Q1 had double-digit quarters growth.

So we're expecting those kind of businesses to hold up pretty well.

We're not sure if it's going to be plus or minus, but it's certainly not going to be the -- they did not see that kind of decline in the quarter.

We're not going to -- you're not going to see that decline in the quarter.

Okay.

Great.

And then just shifting to free cash flow, very solid start to the year.

What is the expectation as we go forward here?

I mean should we assume that the working capital should get a lift as the business cycle is down?

And maybe just a little bit of a framework on conversion or maybe a range you're thinking about for the year.

Yes.

I think in the second quarter, you'd expect a working capital lift as you have the impact to the lower sales level.

But then some of that will get added back given the sequential increases in sales that will impact what we're expecting.

I think, overall, a good place to be would be north of 120% of free cash flow conversion to net income for the year.

And our next question comes from the line of Robert McCarthy with Stephens.

I guess the first question is a little bit to amplify your comments around the realignment charges you took.

I mean I guess this is consistent with kind of your practice periodically.

I think the last time you did this was kind of in the '16 time frame with the oil and gas retrenchment.

You talked about a payback, I think, of 2x or something along those lines.

But could you talk about that in terms of what you're expecting for the run rate savings again?

And then just in that context, where are you -- where are you taking out the most capacity?

Is it presumably aerospace?

Is it presumably these businesses that seem to be a little more longer cycle and structurally challenged and obviously are in the news because you see a lot of capacity being taken out across the complex?

Right.

That's a great question, Rob.

I mean we attempt to balance these permanent cost reductions in an area where demand had been more impacted.

So as an example, in the commercial aerospace market, we had about a 20% headcount reduction, and we had a little bit more than the average in our oil and gas business.

And then we use a temporary approach in other areas to be positioned to respond quickly when demand recovers.

And when you think about the structural savings, that was about $30 million in Q2, and that will increase sequentially as we go through the year.

And then we'll exit the year with -- as a question I answered earlier, with about a $40 million benefit to 2021.

But we'll see increased structural savings in Q3 and then in Q4.

And we'll take our temporary savings and adjust that based on volume.

But we felt it was necessary for the permanent reductions.

It's a very difficult decision, but where demand is most impacted, not short term but more long term, we took those actions.

Yes.

And just for pedagogical purposes, presumably, that's all baked into the decrementals you already highlighted.

That's all baked into the decrementals.

Correct.

Yes.

Okay.

Of course.

Right.

And then the second question is -- obviously, I think you answered Deane's question very well about M&A and the opportunity set.

But you are sitting on a lot of cash, but it is a very difficult environment for potential share repurchase.

You have done share repurchase in the past.

I think, notably in the fourth quarter of '18, you thought it was particularly prudent given the intrinsic value of your company, well, if memory serves.

But how do you think about share repurchase in this environment?

Or perhaps you don't have as much visibility?

And then obviously, you have the whole populism problem with share repurchase as a whole in terms of use of capital allocation.

How do you think about it?

Because you do have a sizable cash balance and even despite what we're going to see right now, still a strong prospect for continued cash generation here.

Yes.

The first point is our priority is M&A.

So we want to be able to execute on those M&A opportunities as we clear the crisis.

And we've been opportunistic with buybacks, and we have the capacity to do buybacks.

So that's something we'll consider.

And our third priority, we'll maintain the consistent dividend that we pay.

But right now, with the situation being so uncertain, we've built some extra cash.

We have the liquidity.

And we're going to make sure our balance sheet is strong as we get through this crisis.

And if there's an opportunity to do buybacks, it's something we'll consider.

But clearly, capital allocations, #1 priority is acquisitions.

And right now, we're just making sure we get through this thing with a healthy, strong balance sheet and a strong company.

And our next question comes from the line of Eastman Richard (sic) [Richard Eastman] with Baird.

Yes.

Dave, could you just speak to -- I'm curious a little bit here, as we move forward into the -- through the second quarter and into the back half of the year.

When I look at EIG and that segment of the business, it does -- I think oil and gas shows up in there.

Could you just talk a little bit more about some of the process industries, how they're -- that process instruments, how they're holding together?

And then also the large commercial business, I think, falls largely in EIG.

So does that suggest that EIG is weaker than EMG as we track through the balance of the year?

No, I -- the way -- if you think about, first, our aerospace businesses where because it's predominantly in EMG.

So that's going to be a headwind to EMG.

But on the EMG side, I think our automation business has been through a lot of -- it was the first business that went in.

And we're already starting to see some improvements out of China for automation business.

So our automation business could be the first part of the business that does well or recovers, it could be.

When you think about EIG, your question about process is a good one because process serves a wide range of end markets which are experiencing different dynamics, different end market dynamics.

On the positive side, we're seeing solid demand in our medical, healthcare and high-end research businesses within that segment.

And that segment includes Rauland and MOCON and Telular end demand, and I've already commented on those businesses and their growth drivers.

Conversely, it's the part of our business that has oil and gas, which will count overall to about 6% of AMETEK sales.

And we're going to be challenged in that part of it until the oil prices recover because there's supply and demand imbalance.

And while we expect process sales to improve sequentially in the second half of the year, we expect the oil and gas component of it to remain challenged because of the sizable cuts of the capital budgets and the supply and demand imbalances.

Okay.

Okay.

And then just a quick question.

Just a couple of thoughts, if you will, about geographies here in the quarter and maybe do we see the same type of cadence out of Asia, China?

Do we see some recovery late in March, modest recovery?

Just maybe the cadence around the geographies here as we exited first quarter and into the second.

Sure, Rick.

I mean the headline on the geography story is that there are broad-based weaknesses in all geographies, with Europe and Asia is most challenged.

And when you think about it, Asia was down high-teens, and it was -- China was down first.

It was driven by travel restrictions, inability to install and commission our products.

It was China, Japan, Korea.

And then we look at China specifically.

As you got to the end of the quarter, it started to recover.

And it's recovering and improving, but it's not completely back.

Our facilities over there are operating with pretty much full capacity now.

And we got our supply base up and running.

But we very recently started traveling to most customer sites.

We're allowed to travel when doing installation and doing service work.

I'll give you an example in the research end market.

There are some universities that still haven't opened back up yet.

And we have some equipment waiting to be installed there.

So in China, I would say it's improving, but it's definitely not the whole way back up.

And then when we think about Europe and it was down low double digits and driven -- same kind of drivers.

The biggest impacts were our Dunkermotoren business and our process businesses in Europe.

And then when we got to the U.S., the U.S. in the first quarter was down about 3% and due to the same customer delays and delays -- inability to commission products.

So it feels like we're kind of coming out of it in the opposite way that it surfaced.

So Asia feels like China is recovering a bit.

And it seems like the U.S. may be still heading in a bit and Europe might be at the bottom right now.

So with a broad-based weakness, Europe and Asia were most challenged.

Yes.

Understood.

And just maybe the last question for me, sorry.

But is the -- when you look at the overall business and the type of downturns here that we're seeing in demand, that has historically not had much impact on your pricing.

Is that correct?

Yes.

It's a great question.

I mean this environment is different.

So we're going to have to see.

But I expect that we're going to be able to achieve the same level of price.

I mean we did in Q1.

Q1 '20 pricing was good.

We got 1.5% of price across our entire business.

Total inflation and the impact of tariffs was about 1%.

So we had a 50 basis point positive spread adding to our margin expansion.

And I expect that's going to continue for the year.

But we're in an environment now where you really don't know with the fluctuating demand patterns.

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

Just a couple of questions.

Thank you for providing more information and great execution.

Just in terms of your supply chain in Asia and just globally, how has it -- how is it holding up with all the shutdowns in places like India, Malaysia?

I'm not sure what's happening in Indonesia.

And how are you rethinking your supply chain for the post-COVID-19 world?

Yes, good question.

I mean our philosophy is to always supply in the region where the demand is.

And we were moving to that even before the tariffs started.

And even now with COVID, we think that makes sense.

So we want to build where the demand is.

So that will give us a regional thought process around there.

You mentioned Malaysia.

Malaysia was one of the areas where we had some difficulty in the first quarter.

I mean the government came in and told us we couldn't operate.

And we could not -- that was the only place in the world that happened.

And we couldn't operate for a period of time.

And then we got the authorization to operate at 25% and then authorization to go to 50%.

And eventually, right now, we're at about 100%.

So it's -- the different governments around the world responded differently.

And we have a really good supply chain team, and they're out battling with all these problems and getting them solved.

And they did a good job solving that one.

So what we see across the world is -- I'll give Mexico as an example.

We have suppliers in Mexico.

And Mexico was a little bit later to recognize the coronavirus threat.

And then the government jumped in and started to do all the same things that were done around the rest of the world.

But they seem to implement it with the local authorities having different levels of judgment in what was essential and what was not essential.

So we spent a lot of time.

And our supply chain team did a great job during the quarter getting suppliers turned on in Mexico when the local authorities had them -- tell them to shut them down.

And that involved us going to the authorities, telling them why they were essential as a supplier and we got those all working.

So it's been a really, really difficult time for our supply base.

And our people have done just a fantastic job in managing it, and we expect to continue to have big problems like that during the second quarter and as we go through this thing and we have localized problems and outbreaks that we have to deal with.

And we've got good management, and they know how to deal with these things, and we're dealing with them.

But at the same time, it creates enough of a visibility issue.

That's why we went through our guidance.

And just another question on China.

You did sort of say that China is getting better.

What kind of lessons -- because I think people are trying to figure out what lessons does China hold for the shape of recovery in Europe and the U.S., like we've heard from some companies.

I think Parker or Honeywell sort of seemed to have said that March, there was this big spurt of demand coming back.

But then April is a little bit slower because the economy is not back to normal.

So no, maybe it's not all the way straight up.

Could you just give more color on what's happening in China, April versus March, relative and absolute terms?

And as I said, more importantly, what lessons do you think this recovery holds for Europe and the U.S.?

Yes.

I think the lessons for Europe and the U.S. is you have to follow the social distancing mandates that the governments are putting through and you will recover.

And when you recover, it's not going to be -- across China, it was a choppy recovery with different regions having different requirements on travel.

I think we're going to have the same things here.

So in terms of China, specifically, as I said before, it's recovering, but it's not completely back.

So our plants are now operating near 100% capacity because -- but what's causing us a bit of the difficulty now is being able to travel to the customer sites and do service work and do install work.

And just recently, that started to open up, just very recently.

I think in the last week, we started traveling in places like Beijing and things to do service work.

So I think you learn from that.

I mean we learned from China.

It was interesting to watch within the company, our operating people did a fantastic job in China managing through this, the COVID-19 problem.

And we have essential customers in China, and we were probably one of the few plants that were still operating there, serving the medical customers in China.

But they kind of set a work plan for us of using temperature monitoring and PPE and thinking about how to relay out production lines and how to relay out factory floors and talking about the flows of people within the buildings and how you quarantine someone within the building.

And we learned from that as a company.

So we learned from that.

We helped in developing in China, and we saw how it worked and what didn't work.

And now that's informing our decisions in Europe and the U.S. So it's -- and we learn something new every day and something changes every day.

So I don't know if...

And just a follow-up.

Is China up sequentially in April versus March?

And thank you for answering my questions.

Yes.

China is up in April.

But in March, it was very diminished and it just picked up at the end.

And our next question comes from the line of Andrew Buscaglia with Berenberg.

I wanted to dig into aerospace just a little bit more.

So obviously, the outlook's weak for that area long-term -- or longer term.

But can you talk about that business?

How do you guys think about it and where there's exposure?

And I'm talking about where you're exposed to production versus miles flown.

And what do you need to see come back within your businesses the most for that market to recover?

Right.

That's an excellent question, Andrew.

And as a reminder, AMETEK has a balanced exposure across our aerospace and defense markets.

So our total exposure is about 15% of sales.

15% of AMETEK is in aerospace with roughly 5% to defense.

So we're seeing that defense still strong, and we expect that to continue for the balance of the year.

5% of the 15% is in commercial and business jet OEM and 5% in the aftermarket.

So that 5% in commercial and business jet OEM and the 5% in the aftermarket, that's a roughly 10% exposure to commercial OEM and aftermarket that we think is going to be very challenged.

So when I was talking about the potential to be down 50% and the potential that the aftermarket is down more and the OEs maybe 50% or a little less, that's really what I was talking about.

And in terms of our exposures, we have broad exposures across essentially all key aerospace and defense platforms.

And we have a great business.

I mean we have leadership positions in aerospace power generation.

We kind of revolutionized the way power is distributed around an aircraft.

We're winning lots of business there.

We have an excellent business in advanced sensors and airframes and engines in all parts of aircraft.

And we have an excellent thermal management business that handles heating and cooling of aircraft on very difficult applications.

So the fundamental businesses that we have in that space are just great businesses, and they're going to go through a tough time.

And the aerospace market is going to look different, but we have really good management there.

And as I said, we're adjusting to it now.

Yes.

I mean it sounds like you're generally still positive on that business over the long term and that -- the next question was going to be what's going on to discourage you from acquiring in that space and building that business more or not.

It seems like the latter.

Yes.

I think the way that we think about it is we want a balanced end market exposure.

And right now, we're dealing with a lot in that business as we decrease.

But we really like the business.

We have really sustainable businesses there with wide moats around the business.

They're good businesses.

They're essential.

And those businesses are going to be fine.

So there's going to be an adjustment in volume where you reset the cost structure.

But when those businesses start growing, they're going to grow with a healthy incremental margin.

So we still feel good about it.

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

So you touched most of the operational stuff already.

So Dave, I just wanted to, like a bigger picture -- I mean when you stepped into the role, it was like maybe the worst possible situation in terms of timing.

So what can you kind of -- what did you learn from managing that initially through an energy crisis and how your businesses were impacted?

I mean I know that, that's all smaller as a percentage of sales and you just sold Reading.

So it's a different portfolio, but like what were some of the critical lessons you learned then and how you're applying that now?

That's a great question.

And I just come back to the seasoned management team that we have at AMETEK.

I mean all of my executive office, they've been through many downturns, and they know what to do.

We know what to do.

And a big part of our -- because we have such a good culture and we have such long-term employees, they realize we're going to get through this.

And the new people in our businesses are learning from them.

And we're getting through this.

And Bill and I, we've changed our management cadence.

And in March, we had operating meetings with every one of our business units.

And we're going to do that again probably -- I think it starts next week when we get through our -- [this fiscal period.] It's changing the cadence.

And through those meetings, we have [to identify what's going on] with the business and make sure we're focused on cash flow.

We make sure we're doing the right things for our customer base.

And people learn from that.

So -- and we understand what's going on in the business.

But I think the biggest thing, when you step back and you think about this thing long term, we're very well positioned.

We have proven management capability to manage through this downturn.

Our businesses are well positioned with leadership positions, high barriers to entry, strong technology positions, the quintessential business.

And we're executing very well, generating excellent cash flow, as evidenced by the first quarter, as evidenced by the past few years.

We got the question earlier.

We have a proven capability to get price and offset inflation with price.

We have that capital deployment strategy, world-class acquisition products.

There's no doubt, in my mind, we're going to get through this and we're going to be stronger for it.

But it all comes back to the people, and we have the experience to get it done.

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

This is Ken Newman on for Steve.

I just want to circle back to your -- on your comments around aero.

Obviously, I know the environment is very challenging right now, but just trying to think about your 2Q trough comments.

And maybe any color that you've been having -- on the conversations that you've been having with your customers there in terms of the cadence for volumes in the back-half as some of these facilities, especially for Boeing, are starting to start back up.

Curious if you would expect to feel the pull from the facilities as soon as they start up.

Or do you think they have enough inventory to start initially and then they would come back to you once that normalizes?

Yes.

I think it's a mix, Ken, because there's going to be -- as you think about a production line, there's going to be something they need right away.

And there's going to be some excess inventory.

So it's a mix of things.

And as I said before, what we're seeing in -- what we saw in April is that business is challenged, substantially challenged.

So that -- it's going to take a while for that business to adapt to -- those customer bases to the new demand.

And the fact that we have balance in our Aerospace business, and we have 5% of it in defense of the 15%, it really helps us because we have some solid demand there.

So -- but we'll definitely recover as the business recovers, but it's going to take some time.

And quite honestly, all those customers haven't even decided what the new build rates are going to be.

So they're just deciding that now and those conversations are going on.

Got it.

No, that's helpful.

And then just one more for me, bigger picture.

I'm just curious about your conversations with customers around the automation solutions that you guys provide.

Do you think customers may be looking more towards automation after having the deal with, first, tariffs and now the pandemic?

Just how are you thinking about that market as we kind of progress through this down cycle and may be looking towards the other side?

Yes.

I mean the automation business has an excellent opportunity because if you want to eliminate -- in the area of social distancing, that's going to drive demand for automation.

So it's a demand driver on the exit of this that wasn't there before we went in.

And again, in our Automation business that was weaker in 2019.

We started to see that business normalized run rate later in the first quarter, particularly in China.

So pretty positive on our Automation business.

And we think we were always positive on it because there's long-term demand drivers.

And right now, our Automation business is spending time a lot with the medical -- in the medical world with providing automation systems for some of these testing devices for coronavirus, where they have to test multiple samples.

So they're using our -- more automation equipment to do that.

So we're positive on it, and that business is going to do well going forward.

And just one quick follow-up to that is do those automation markets typically have -- are those considered margin accretive to the base business?

Yes.

I think it's margin accretive to EMG, for sure.

I'm showing no further questions at this time.

So with that, I'll turn the call back over Vice President of Investor Relations, Kevin Coleman, for closing remarks.

Great.

Thank you, Andrew, and thank you, everyone, for joining our call today.

And as a reminder, a replay of the webcast can be accessed on the -- on our website in the Investors section.

Have a great day.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program, and you may all disconnect.