阿美特克 (AME) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to this AMETEK, Inc.

second-quarter earnings release conference call.

This call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr.

Bill Burke, Vice President of Investor Relations and Treasurer.

Thank you, Christopher.

Good morning, everyone, and welcome to AMETEK's second-quarter earnings conference call.

Joining me this morning are Frank Hermance, Chairman and Chief Executive Officer, and John Molinelli, Executive Vice President and Chief Financial Officer.

AMETEK's second-quarter results were released earlier this morning, and have been distributed to everyone on our list.

These results are also available electronically on your market systems and on our Web site, at www.AMETEK.com/investors.

A tape of today's conference call may be accessed until August 3rd by calling 888-203-1112 and entering the confirmation code number 8382435.

This conference call is also being Webcasted and can be accessed at AMETEK.com and at StreetEvents.com.

The conference call will be archived on both of these Web sites.

I will remind you that any statements made by AMETEK during the call that are not clearly historical in nature are to be considered forward-looking statements.

As such, these statements are subject to change based on various factors and uncertainties that may cause actual results to differ significantly from expectations.

Those factors are contained in our SEC filings.

I will also refer you to the investors section of AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.

We will begin today with some prepared remarks, and then we will be happy to take your questions.

I'll now turn the meeting over to Frank.

Thank you, Bill.

Good morning.

AMETEK had an outstanding quarter, establishing records for sales, operating income, net income and diluted earnings per share.

Sales were up 15% to $519.5 million on excellent internal growth of 7% and the contributions from acquired businesses.

Operating income was up 22%, driven by the top-line growth and operational excellence improvements, resulting in a 100 basis point improvement in operating income margin.

Net income was up 25% and diluted earnings per share of $0.54 were up 26%.

Overall we are extremely pleased with these results.

Our markets are strong, our strategy of acquiring differentiated businesses is working well, and our focus on operational excellence continues to drive profitability.

Turning our attention to the individual operating groups, the Electronic Instruments Group had a great quarter.

Sales were up 15% on excellent core growth of 8% and the contributions from the acquisitions of Precitech, Land Instruments, Advanced Industries and B&S Aircraft Parts.

EIG's operating income was up 23% for the quarter.

Operating margins improved 140 basis points to 22.1% as compared to 20.7% in the second quarter of 2006.

The Electromechanical Group also had a great quarter with revenues up 15%.

Solid internal growth of 6% and the contribution from the PennEngineering Motion Technologies, Southern Aeroparts, Seacon Phoenix and Hamilton Precision Metals acquisitions, drove the revenue growth.

Operating income for the quarter was up 19% and operating margins improved 60 basis points to 18.4%, compared with 17.8% in last year's second quarter.

I'd like to focus my talk this morning on acquisitions, since there was a significant amount of activity in the second quarter.

Acquisitions have been a key part of AMETEK's past success and continue to be a strategic focus for us.

2007 is shaping up to be another great year, with three acquisitions completed in the second quarter.

These three acquisitions, representing four businesses, have combined annual revenue of approximately $70 million.

First, in April we acquired Seacon Phoenix, a privately held provider of undersea electrical interconnect subsystems focused on the global submarine market.

Seacon Phoenix adds to AMETEK's position in highly engineered, hermetically sealed electrical interconnects and microelectronic packages.

Seacon Phoenix is an excellent fit with AMETEK.

Its product, retrofit and service offerings complement those of AMETEK HCC Industries and extend our reach into an entirely new defense market.

On June 5th we announced the acquisition of two aerospace businesses.

These businesses, Advanced Industries and B&S Aircraft Parts, serve the expanding business and regional jet markets.

They have well-established relationships with the key aircraft manufacturers and provide AMETEK with a strategic footprint in Wichita, the center of the business jet market.

They each have excellent reputations within the aerospace industry and offer an excellent fit with our existing aerospace business.

Advanced Industries Inc.

manufactures starter generators, brush and brushless motors, vane-axial and centrifugal blowers, and linear actuators for the business jet, light jet and helicopter markets.

These differentiated products complement our AMPHION product line of power management products and enables AMETEK to provide full power and management systems for the business and regional jet markets.

B&S Aircraft Parts & Accessories provides third-party MRO services, primarily for starter generators and hydraulic and fuel system components.

They serve a variety of business aircraft and helicopter applications.

B&S is the second acquisition AMETEK has made in the third-party MRO market, building on our position in this attractive area.

The previous acquisition was Southern Aeroparts, which was completed in December of last year.

On June 14th we announced the acquisition of Hamilton Precision Metals, a niche specialty metals producer of precision metal strip and coil for medical, electronic and instrumentation markets.

Hamilton is a highly differentiated business and a great strategic fit with our engineered materials, interconnect and packaging business.

It has strong positions in growing niche markets for specialty metals that are used in medical implant devices, surgical instruments, electronic components, and measurement devices for aerospace and other industrial markets.

The acquisition of Hamilton is the latest example of our continuing strategic thrust to evolve AMETEK, and in particular the Electromechanical Group, into a more differentiated set of businesses.

These differentiated businesses have excellent growth and profitability characteristics and have been a key factor in our strong financial performance.

We also made a small technology acquisition for our power business in the second quarter.

We acquired the Halmar Robicon silicon control rectifier power supply and controller technology.

This technology fits well with our Solidstate Controls business and provides us with attractive opportunities to further broaden our capabilities and position in the global power market.

At the beginning of the year, we set a target of acquiring 100 to 150 million in annualized revenue during 2007.

The pipeline of acquisition candidates remains full, and 2007 has the potential to be a very strong year for us.

Given the $70 million of completed acquisitions in the first half of the year, and this strong pipeline, I'm optimistic about meeting and, hopefully, exceeding the top-end of our targeted range.

Turning to the outlook for 2007, all of our key markets remain strong and we are optimistic about the second half of the year.

Our long-cycle aerospace and power businesses, coupled with our medium-cycle oil and gas businesses, provide a natural portfolio hedge to a general economic downturn.

Operational excellence activities will continue to create substantial value and drive margins.

For the year, revenue is estimated to increase in the mid-teens on a percentage basis, on mid to high single-digit core growth in each group, and the annualized impact of acquisitions.

Electronic Instrument internal growth will benefit from continued strength in our aerospace, power and process businesses.

In the Electromechanical Group, the core growth will be driven by strong performance in our differentiated businesses.

The full-year impact of our 2006 acquisitions of PennEngineering Motion Technologies, Land Instruments, Precitech and Southern Aeroparts, together with this year's acquisitions, which I discussed earlier, will also be a key contributor to the top-line growth.

Given current market conditions and our strong second-quarter results, we are raising our earnings estimates for the year to approximately $2.01 to $2.05 per diluted share, an increase of 18 to 20% over the 2006 level of $1.71 per diluted share.

Our third quarter 2007 sales are expected to be up approximately 10% from last year's third quarter.

We expect third-quarter earnings to be approximately $0.50 to $0.51 per diluted share, an increase of 11% to 13% over last year's third-quarter level of $0.45 per diluted share.

So, in summary, we're very pleased with our performance in the second quarter.

It was really a picture-perfect quarter.

Solid internal growth and the contributions from acquired businesses enabled us to grow the top-line by 15%.

We've been able to translate the top-line growth into bottom-line performance, driving significant margin expansion and strong net income and earnings per share growth.

2007 is shaping up to be another great year.

Strong internal growth, continued focus on operational excellence, and our ability to make additional acquisitions, make me very optimistic for the balance of the year.

We look forward to building on our track record of success during 2007, and remain confident that our four growth strategies will continue to create value for our shareholders.

John will now cover some of the financial details, and then we'll be very glad to answer your questions.

Thank you, Frank.

As Frank has covered our financial results at a high level, I will provide some additional details on the Company's performance.

Compared to the same quarter of a year ago, we drove margin improvement at the group level and increased our operating income margins by 100 basis points.

Selling expenses were up 18% in the second quarter.

Excluding acquisitions, selling expense increased in line with our core growth.

The acquired businesses tend to have higher selling expenses as a percentage of sales than the base business -- base AMETEK businesses due to their differentiated nature.

Corporate G&A expense was 1.8% of sales in the second quarter, unchanged from the second quarter of last year.

The tax rate for the quarter was 31.0%, reflecting recognition of tax benefits from our international tax planning initiatives.

We expect our full year 2007 rate to be about 32.5%, reflecting the adoption of FIN 48 and the elimination of the FSC/ETI benefit.

I want to emphasize this is a full-year rate, and as we saw in 2006, actual quarterly rates can differ significantly, either positively or negatively, from this full-year rate.

On the balance sheet, our accounts receivable days outstanding was 59 days, a two-day improvement from the end of 2006, while our inventory turns were unchanged at five times.

Total debt was $711 million at June 30th, an increase of $62 million in the quarter.

During the quarter we spent approximately $100 million on acquisitions.

Our debt to capital ratio at quarter end was approximately 40%, down slightly from 41% at the beginning of the year.

Capital spending was $9 million for the quarter.

Depreciation and amortization was $12 million in the quarter.

For 2007, we expect that capital expenditures will total approximately $40 million, while depreciation and amortization is expected to be about $50 million.

The cash flow -- operating cash flow for the second quarter totaled $65 million.

The year-to-date operating cash flow was $120 million, an 18% increase over last year.

We expect operating cash flow for the Company to be about 285 to $295 million in 2007, reflecting growth in earnings, better working capital management, and the additional working capital needs of the growing business.

At the end of June we amended our revolving credit facility, increasing its size from 300 million to $450 million.

We also extended the term of the revolver to June of 2012 and amended a number of the terms in the revolver to provide us with greater flexibility.

In addition to the strong cash flow of the Company, we have substantial financial resources at our disposal to continue to fund our growth.

At the end of June we had $432 million available under our existing credit lines.

Since 2004, a portion of the long-term incentive compensation that is awarded to executives is in the form of restricted stock.

These grants of restricted stock vest on either a four-year cliff basis or a performance basis if our stock price doubles from the date of grant and remains at that level for five consecutive trading days.

On July 9th of this year, restricted stock granted in September of 2004 met this performance criteria, and the vesting of these shares were accelerated.

As a result, the unamortized compensation expense for these shares will be recognized in the third quarter, resulting in about a $0.01 charge to earnings.

This charge is included in the guidance that Frank gave to you earlier.

In summary, we continue to manage our cost structure and balance sheet effectively, generating excellent cash flow and positioning ourselves for future growth.

Bill?

Thanks, John.

That concludes our prepared remarks.

Christopher, I'd like to open the call up for questions.

(OPERATOR INSTRUCTIONS).

Jim Lucas, Janney Montgomery.

First, a housekeeping question, John.

Accounts Payable number?

Sure, Jim.

$171 million.

Thanks.

Frank, two strategic questions here.

Number one, if you could perhaps provide us a little bit of color of what you're seeing about the MRO strategy that is developing here, where the focus seems to be on business jets initially.

Is there an opportunity to perhaps other areas of the aerospace and defense market?

And secondly, we continue to hear good news after good news; to use your words, a picture-perfect quarter.

As you're going into the strategic planning session, what is the focus these days at AMETEK?

Great questions.

Let's start with the MRO strategy.

We see a real opportunity to roll up third-party MRO companies.

One of the key advantages of being an OEM, or being a supplier to OEMs like ourselves, is that we've got great engineering capability, and we can apply that to MRO-type companies in this sense, that for supplying to the airlines, you basically need PMA approval on parts to do that.

And what we can do is get PMA approval through our engineering capability and essentially leverage the operating margins of these companies.

So, as you know, we bought Southern Aeroparts at the end of last year, a company -- used this PMA strategy very aggressively and did a great job.

They've got great margins.

And bringing it into AMETEK, we can leverage that by getting further PMA approvals on their parts and, again, improving their profitability.

We saw the same thing with the recent acquisition of B&S.

We can bring that into AMETEK and substantially leverage its profitability.

And we're actually looking at a roll-up strategy of buying other companies and really getting aggressive in this third-party MRO marketplace.

So strategically, we just sort of see this as another adjunct to our basic businesses that, as you know, we have migrated into sort of adjacent areas that have strong profitability characteristics.

And we see this third-party MRO business as another example of that.

In terms of your second question, the strategic planning side of the business, it's a very apropos question, because we are just entering that process.

As a matter of fact, the week after next we're going to have a large set of meetings where we bring each of our divisions in.

And our focus here at the very top level is very clear, and that is to grow AMETEK to a $5 billion revenue company.

We are in the process and have done a significant amount of work at looking at what it's going to take to grow us to $5 billion.

As I have analyzed other companies and analyzed their growth, there's typically things that occur that could limit their ability and our ability to make that happen.

And we're focusing on those things.

And the first and the key item is the bench strength of the Company.

We are really pleased with the management talent we have.

We definitely have the best talent we've ever had in the Company.

However, in order to get to 5 billion, we've got to increase that bench strength.

And we're actively working on that and have an excellent process that, actually, I am involved in on a weekly basis, to look at the critical positions across the Company and get that bench strength in place.

I want to be very clear with this.

I don't see an issue [in the] bench strength for the next couple years; it's really further out than that, to make sure that our growth does not outstrip the capability of our management talent.

We're also looking intently at the infrastructure in the Company; our business systems, for instance; the amount of resource we have at M&A.

We're substantially increasing the level of resource in M&A, going from about four people that were involved in that function up to 10-plus people in that function, totally dedicated to M&A, because that's such a vital part of our strategy.

One more real critical item that we have put into our divisions is this concept of growing from the core.

We're using some methodology that actually came out of Bain Consulting, where you analyze your businesses, analyze their core, the core of those businesses, and then look at adjacencies.

And obviously, if you can get good growth opportunities that are close to your core, the risk profile goes down.

So every one of our divisions will be coming with maps that look at adjacencies, look at what opportunities they have, from both an acquisition viewpoint and an internal growth viewpoint.

And we believe that looking at sort of these two or three things that I talked about, in conjunction with the four strategies that we have been focused on, that we can move the Company to 5 billion, and that's really the overall focus.

So that's a very shorthand view of how we're thinking about it.

That's very helpful.

Just a clarification back to the MRO strategy.

Part of the question stems from the business jet focus seems to be initially -- are there opportunities, either on the commercial or on the military side as well?

Yes, absolutely.

The MRO thrust -- and you did ask that, and I didn't follow-up on it -- definitely could be in commercial.

Matter of fact, if you look at Southern Aeroparts, one of their biggest customers is American Airlines.

So there's definitely a focus here on, really, all segments of the business.

Wendy Caplan, Wachovia.

Could we talk a little bit about the margin, which was very impressive in the quarter?

On an incremental basis, I know I always ask this question, but it was 27% including some of these acquisitions.

Can you give us that incremental number excluding the acquisitions?

It was a really good number.

It was 34% for the quarter.

And when you talk about the improvement in the margin, in the segment margins, is it -- how do we sort of parse out -- is it -- is the margin improvement from businesses that you've owned for a long time, or does it tend more to be the acquisitions, or a little of both?

Can you help us understand that a little bit?

Basically, it's all of the above.

The acquisitions that we have done in recent times are showing excellent margin improvement.

I think you've heard me talk before that we love to buy companies that have 10% pre-tax and make them 20% plus over time.

So that's definitely a contributor to the margin question.

But in addition, our base businesses are doing great.

The operational excellence initiatives, which is a core strength of AMETEK, just continue to show excellent results.

Our offshore activities with the global sourcing organization, our strategic procurement initiative -- we got over $2 million of savings just from that activity in the quarter.

And that's focused more on our core businesses than our recently acquired businesses.

So it's really across the board, and it's a key part of our budgeting process, and a key part of how we run our operations.

So I've had a lot of questions in some of the analyst meetings recently that our margins have gotten so high, is it possible to continue to move them?

And I think you heard me say in some of those meetings that I'm pretty optimistic about margins.

We gave guidance this year of 70 to 80 basis points.

We did 110 basis points; [that was] at the operating income line in the first quarter; 100 basis points in the second quarter.

So we're off to a great start, and hopefully we're going to exceed that guidance by a reasonable amount.

Finally, Frank, that metric that you often give us, where you look at companies that you've owned for a year or more, and how you've improved the profitability of those businesses, do you have an updated number for us on that?

The number is that in our first year of ownership of companies that we've acquired essentially since I've been CEO is up about 40% [on the] pre-tax -- pre-tax profit line over the year before.

So, very substantial performance.

John, you just looked at the last couple, and you showed me some data (multiple speakers)

The pattern off the last two deals that reached their one-year anniversary fit right into that profile nicely, if not slightly exceeded it.

So we're continuing that trend, and the deals that we've got that have not yet reached that one-year anniversary are doing very nicely.

So that profile is intact, and we will meet or exceed those historical numbers, Wendy.

Ned Armstrong, FBR & Co.

Just with respect to the acquisition environment, which you commented that you had a very full pipeline, given the recent chatter out there, and worries about CDOs and all that type of thing, have you seen any real change in the amount of activity as far as what you're seeing for sale, or any trepidation on the part of those who might want to finance them?

There's probably -- just in general what we're seeing in the acquisition market is some sort of good news and bad news that are linked.

The good news is that there are a lot of companies available.

And I think that stems from the fact that the economy is good, those companies' EBITDAs are at very high levels, and therefore, the amount they can get for their companies is at a higher level than it was several years ago.

And that's why I'm fairly optimistic about our backlog and what I'm seeing.

Sort of the bad news -- and I think it is a result of the general environment, in terms of financing ability, etcetera -- is that the pricing on acquisitions has gone up.

We're not losing deals, for instance, to private equity kinds of buyers, because in essence we've got the strategic advantage over them.

And the type of companies we look for, we add substantial value, per the answer to our last questions.

However, what it has caused is the general market environment, in terms of EBITDA multiples, to go up.

So we are paying a multiple point probably above what we have historically paid, which obviously we don't like to do.

But on the other hand, when you get the kind of results we do -- say, we're paying eight times trailing EBITDA on a company, but a year later you've got a 40% improvement in their EBITDA or EBIT numbers, as we just talked about -- the true multiple we're paying is substantially less, so that our return on invested capital is still extremely good.

Having said that, I would prefer to pay a multiple point less, but the real world is what the real world is.

So we don't see it as a basic limiter, but that's sort of how I'd characterize the overall environment.

Just a follow-up to get a little more into it.

Again, one, given your success in making acquisitions, have you seen more strategic buyers getting involved in looking at the companies you're looking at?

Second, again, given the environment out there, have you seen any of the private equity buyers pulling in their horns, so to speak?

I haven't seen any of the private equity people really pulling their horns yet, although I think it's going to happen.

And I think they're still being pretty aggressive.

There's a lot of capital out there.

And, yes; there are definitely more strategic buyers involved.

If you look at the fact that everybody is -- not everyone, but many companies have very strong balance sheets right now, there is more aggressiveness on the part of companies to acquire given that environment.

And it's one of the reasons that we've increased the amount of resource we have in this area, so that we can basically put more deals on the table.

We can basically cull them for higher levels of synergy, and still meet our overall objectives, which obviously we are doing.

Scott Graham, Bear Stearns.

Frank, when you were talking about the organic growth by segment of 8% and 6%, respectively, I assume that that does not include the FX.

And therefore, what was the FX by segment?

You're absolutely right.

Let me give you all the numbers so there's no confusion on this.

First, if we look at the Company level, excluding currency, the internal growth was 7%, as we talked about in my opening comments.

With currency for the entire company it was 9%.

For EMG, excluding currency it was 6%.

With currency it was 7%.

And for EIG, excluding currency it was 8%, and with currency it was 10%.

That's helpful.

Thank you.

Would you mind going through your typical sub-segment analysis by business unit, if you wouldn't mind?

(multiple speakers) thanks.

Let's start with EIG.

As we already indicated, sales were up 15% in Q2.

Organic growth, again, was 8% excluding currency, 10% with currency.

Our long-cycle aerospace business is doing just great.

Markets are very strong.

There is strength in all parts of the business, Scott.

In commercial, Boeing and Airbus are having very strong production years.

Both are going to produce about 450 aircraft.

That's up approximately 15% for Boeing, 5% for Airbus, and we're enjoying that ride.

In the business and regional jet aircraft, just very, very strong market conditions.

Cessna is our largest customer.

They're actually driving [Textron] right now.

Their backlogs are very, very large.

I think they're sold out for the next four to five years.

So, very, very strong market conditions there.

And also, when we look at the military business, that's very strong, in particular because of our focus on helicopters and electronic cooling; both of those areas of helicopters and electronic cooling we got involved in a number of years ago.

We felt they would be good segments.

And in fact, if you look at the DOD budget, the budget for those particular two sub-segments is growing at a much higher rate than the basic DOD budget.

And we're enjoying some of that growth.

So, as we look at organic growth for aerospace, it was high single-digits in the quarter.

Total growth with acquisitions was double-digits.

For 2007 we expect continued strong growth, and we expect it really into 2008 and 2009.

And most of the industry forecasts talk about growth now through 2011.

And internal growth for this year should be high single-digits for aerospace, and we may actually hit that double-digit level depending on how strong we are in the second half of the year.

Moving to process, here the markets are very strong, again, driven by the price of oil.

I read this morning in Wall Street that oil is at $75 a barrel now.

Analytic instruments are doing just great; Process and Analytic Instruments division itself and SPECTRO had excellent performances in the quarter.

The new products and the investments that we put in last year, the incremental investments we put in last year, are really starting to pay off.

Q2 internal growth was up high single-digits.

Total growth with acquisitions was double-digits in the quarter.

And again, we expect that good growth to continue.

For 2007, internal growth should be high single-digits for the process businesses.

The last part of EIG is power and industrial.

That business continues to do very well.

Q2 was up mid single-digits organically.

We had very strong performance in our power business.

For 2007 we expect power and industrial to have mid single-digit organic growth, which will be driven by power, which probably power will be in the high single-digit growth environment.

Industrial will be flat due to the downturn in the heavy vehicle market.

As I've mentioned before in previous conference calls, the Dixon team has really done a great job diversifying this business away from heavy vehicles, heavy trucks in particular, so we will not be affected significantly by that market downturn.

Switching to the other half of the Company, in EMG, sales were up 15% in the quarter.

Organic growth was 6%.

That number would be 7% if currency is included.

The differentiated part of EMG was very strong, driven by the strength in aerospace and defense and specialty metals.

In particular, our UK military business was very strong in the quarter.

You may recall we bought a company in the UK a number of years ago, and it had a really fine quarter.

Q2 internal growth was up high single-digits, and total growth with acquisitions for the differentiated part of EMG was up double-digits.

And again, we are expecting good growth in 2007, with organic revenues up high single-digits.

And the last part of the Company is cost-driven motors, and that part of our business is doing fine.

Q2 internal growth was low single-digits, and we expect low single-digit growth for the year.

I think as you're aware, we run this business for maximum probability versus growth.

And we're being very aggressive on the operational excellence side.

We're continuing to move production to low-cost locales, which for us is China, Mexico and the Czech Republic.

For all of AMETEK last year, we had about $285 million produced in those low-cost locales.

And this year we're incrementing that 40 to $50 million additionally, and a good part of that comes from our cost-driven motor business.

Profit in the quarter was up double-digits for cost-driven motors.

And for 2007, we also expect double-digit profit growth for cost-driven.

So essentially, every sub-segment is performing extremely well right now.

That's a very helpful overview.

I'll get back in the queue.

Thanks.

Matt Summerville, KeyBanc.

A couple questions.

First, just more on low-cost sourcing.

Frank, I think you mentioned a $2 million number as far as year-over-year improvement in the second quarter.

Can you put that in context in terms of where you were for the full-year '06 and what you anticipate for the full-year '07, because I thought you've been increasing that target?

Scott, I don't actually remember the number last year.

Was it about 4 million?

4 to 6; I can't remember (multiple speakers) it was in that 5 million range.

Let's say approximately 5 million last year.

This year our target is 10 million, and in the first half of the year we've done about 4.1 million.

So we think we're on the trend to get to that $10 million this year.

So we'll basically be doubling it, assuming our $5 million is approximately correct.

And that 10 million is on top of the 5 million, so that's (multiple speakers)

Absolutely.

Absolutely on top of.

If you think about this over a three to five-year period, what sort of savings numbers do you look at internally?

We're just at the beginning of this.

This is really exciting.

Our divisions are really just ramping up, and success breeds success.

So that as the divisions that are the key drivers in the savings we've already got are having that success, others are seeing it and they're getting on the bandwagon.

So we're at the beginning of this, and these numbers are going to continue to go up.

And actually, in reference to Jim's opening question, it's going to be a key part of the strategic planning meetings we're going into, because we've asked them to come to us, our divisions, and actually put numerics on this that we will then follow up with in the budgeting process for 2008.

So I can't specifically answer your question that we have a numerical target right now, but we will generate that as part of these meetings.

As far as just the underlying margin potential that you have in your existing businesses, if you would stop acquiring today, how much upside to operating margins would you see over the next couple years?

It's a question that's difficult to answer because we're not going to stop acquiring.

The general guidance that I have given is on the longer-term, 40 to 50 basis points a year improvement in margin.

I think that's realistic.

And if you look at the fact of what the -- this sort of 10% of our volume coming from acquisitions, it's not going to be the predominant driver in the margins.

The predominant driver is going to come out of our core businesses and continuing our operational excellence initiative.

One thing that we just -- I was at an external conference, and we were talking specifically about TPS, the Toyota Production System.

And they've been at this for 30, 35 years, and they just continue to make improvements.

And that's the way we view it; it's going to be a continual process.

As far as the third quarter guidance, you're looking for earnings to be down sequentially.

Looking back, that typically doesn't happen.

Does that relate to the fact that you have a tough comparison in your businesses in the third quarter?

And John mentioned that $0.01 worth of cost associated with accelerated vesting of restricted stock.

Can you put the estimates here in context for me?

Sure.

No question, the $0.01 is included in there, which we initially were not anticipating.

And now that we have a little bit higher concentration of European businesses, they tend to be a little weaker in the third quarter.

So we'll see how it all rolls out.

But the way the numbers rolled up, we did see a little bit less in the third quarter.

But I've also never been accused of giving aggressive forecasts, so we'll see what happens.

Last question.

What was your core order activity in the first quarter in backlog -- second quarter in backlog?

Backlog was 615 million.

It was up 79 million from the beginning of the year.

Order growth was 16%.

Total and organic was right in line with our sales growth of 7%.

So very solid performance.

Richard Eastman, Robert Baird.

Frank, could you just talk for a second or two about price realization in the two pieces, EIG and EMG?

What did you see there?

There's no question that the pricing environment is better than what it had been.

And we did roll up the Company yesterday and took a look at it.

We're in excess of 2 points for the entire company.

And it's fairly balanced.

It's fairly balanced between the two groups, which might be somewhat of a surprise, because typically we don't get as much leverage in our cost-driven businesses.

But in essence, the differentiated part of EMG, we've got very strong differentiated products there, and we're able to get good pricing on those.

So it's roughly balanced performance.

2% or a little better?

A little better than 2%.

Also, on your guidance, you talk about core sales growth of mid to high single-digit.

Is that without FX?

That excludes FX.

Excellent.

Just lastly, if possible, in the quarter, could you just talk to the organic growth rate of 7% and how that looked geographically?

Was North America more or less than 7, and how did the international markets contribute?

That's a great question.

Actually, I asked John last night to do this analysis, and we don't have it right now.

But I can give you my sense.

And that's what it is, is a sense.

We have not actually extracted the organic growth excluding the acquisitions internationally versus the U.S.

My sense is that it really goes by what we have talked about before.

The best growth was in Asia.

The next best growth was in Europe and the Middle East.

We combine those in our -- the way we segment internationally.

And probably the weaker internal growth was in the U.S.

But still good growth.

We're talking probably 1 point or so variance between those three parts.

But again, that's my gut.

Are there any markets that -- as we look forward here, we face some tougher organic growth comparisons.

The second half of last year was very strong.

Are there any markets that you would say are maybe accelerating from the current level?

Tough question, because I know you have many strong markets.

But I'm just curious; is there anything accelerating at this point in the business cycle for you?

Yes, I think so.

I think aerospace is accelerating.

One thing that happened in the quarter -- you have heard me talk previously about IEDs, where we make cooling systems for the IEDs.

And the government recently awarded a very large contract to EDO on the IEDs.

And we have major content with EDO.

We should get at least $15 million of business from that award.

And that award will start for us in the fourth quarter and run into 2008.

So that's on, obviously, the military side.

And you couple this with the business jet environment, where they're trying to increase production, because in essence they're sold out to some degree, I think we're going to see some good performance in aerospace.

Sort of on a quarter-to-quarter basis, you're going to see improvements.

The comparisons do get more difficult.

There's no question about that.

So there'll be some moderation when you look quarter over quarter.

But I think it's fair to say that's an accelerating trend in that business.

I also feel some of that in power, maybe not to the same degree as aerospace, but some of that in power.

Scott Graham.

I took up a lot of time before; I didn't want to take up more.

Just a quick question on the acquisition pipeline, Frank.

Notwithstanding your answer to Jim's earlier question about MRO and the [idea here] to possibly roll this stuff up, where else would you see to be real areas of acquisition opportunity for you?

Connectors is kind of something newer for you guys.

Is this an area that you're exploring heavily?

Or are you kind of maybe more in the aerospace and power areas?

I know that you're looking in all areas.

But if there's one or two that you're really looking at to bolster more than others, would you name those?

I'd be very glad to do that.

[At] the highest level, as you've already indicated in your question, we're looking to acquire in any of our differentiated businesses, not in our cost-driven businesses.

Below that, if you sort of look at the segments that we previously talked about, actually, in answer to your previous question, the one area that I would put at the top of the list is the process businesses, process and analytic in particular.

Those businesses have great dynamics.

They're less cyclical than, for instance, the aerospace business.

There's lots of companies available in the size range that we look for, and we've got great technology to expand from.

So I would, clearly, put the process businesses sort of number one on the list.

After that, both aerospace and power are very attractive.

Power is attractive to us because in relative size to these other segments, it's smaller.

It's about $100 million right now, a little bit more than $100 million in overall volume.

And we think we can build that platform out to a major platform for AMETEK.

So we have some excitement there.

And obviously, aerospace and defense now, the fact that those markets are predicted to be up for a long period of time, they also are very attractive areas.

And in addition to the MRO strategy, we would be looking to acquire OEM-type suppliers to the aerospace business.

But at the end of the day, because there is a little bit larger cycle in that business, I'd put it a little bit lower on my priority list.

Finally, with respect to your -- I think your stated goal is to add something like $150-plus million of revenues a year.

It looks like you're at about 70 so far.

Are you implying here that since you think you could be higher possibly than your stated target this year, that there are a lot of things that are lining up that you have pretty good line of sight on for the second half?

That's exactly what I'm saying.

I'm sitting here with sort of a full backlog.

We're working on things as we speak.

You never can predict whether something is going to close.

In the past we've been right at the brink, and it doesn't close for some reason.

But I'm pretty optimistic and, as I said in my opening comments, pretty confident we'll reach the top-end of the range.

And if things go well, we'll go over it.

(OPERATOR INSTRUCTIONS).

Amit Daryanani.

(inaudible) looks like the inventory was up about 12% sequentially, about $21 million.

How much of that was due to acquisitions, [also] just organic inventory build, and where do you see that number trending for the next quarter?

The internal growth of inventory was about 5%, Amit.

The rest of it came from acquisitions.

So the inventory is up in line or below our core growth rate.

Where do you see that trend for the next quarter?

Should we see that kind of fall off a bit, or it remains at current levels?

We've got to build inventory to support the growth that Frank talked about.

We also expect to improve our turns a bit.

So I think the growth in inventory would be below the growth of the core growth of the Company.

That would be the trend I would predict.

Fair enough.

Just a question.

In terms of your procurement strategy, do different businesses within AMETEK tend to procure their own raw material and components, or do you tend to roll them up to the corporate level so you can get some savings from a bigger corporate scale-out effect?

Great question.

We've spent a lot of time in terms of how we manage this situation.

Because one of the key strengths of AMETEK is the distributed nature of our businesses, where the power in the Company is really with the operating people at the division level, not at the corporate level.

So what we have done is put business systems in place so that we can amalgamate volume at the corporate level, which really it's the spend with particular suppliers or particular areas.

And then we have contracts where we can leverage that spend for the entire corporation.

But then, the processes are such that each individual division can control their own buys, but they do it off of that contract that was negotiated at the corporate level.

So this way the divisions have control of their inventory, but they get the leverage off of the corporate spend.

And that is all the questions that we have at this time.

I will now turn the conference over to Mr.

Burke.

Thank you.

I'd like to thank everyone for joining our conference call.

As a reminder, a replay of the call can be heard by calling 888-203-1112 and entering the confirmation code number 8382435.

It's also archived on the Internet at AMETEK.com and StreetEvents.com.

Thank you.

This does conclude today's presentation.

Thank you for attending.