阿美特克 (AME) 2010 Q4 法說會逐字稿

Good day everyone.

Welcome to the Ametek, Inc.

fourth quarter 2010 earnings conference call.

As a reminder, today's call is being recorded.

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

Bill Burke, Vice President of Investor Relations and Treasurer.

Please go ahead, sir.

Good morning everyone, and welcome to Ametek's fourth 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 fourth quarter results were released earlier this morning.

These results are available electronically on Market Systems, and on our website at the Investors section of ametek.com.

A tape of today's conference call may be accessed until February 10th by calling 888-203-1112 and entering the confirmation code number 1207835.

This conference call is also webcasted.

It can be accessed as ametek.com and at streetevents.com.

The conference call will be archived on both of these websites.

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

As such, these statements 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 Securities and Exchange Commission.

Ametek disclaims any intention or obligation to update or revise any forward-looking statements.

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 take your questions.

I will now turn the meeting over to Frank.

Thank you, Bill and good morning, everyone.

Ametek had a tremendous fourth quarter to complete an outstanding 2010.

We established quarterly records for orders, sales, operating income, diluted earnings per share and operating cash flow.

In addition, our backlog at the end of 2010 was $829 million, an all-time high.

Orders in the fourth quarter were strong, up 25% to $721 million, with organic growth of 13%.

Sales in the fourth quarter were up 30% to $678 million.

Internal growth was very strong at 20%.

Acquisitions added 11% and foreign currency translation reduced sales by 1%.

Operating income for the fourth quarter increased 52% to $135.5 million from $89.2 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Net income was up 57% to $81.2 million, and diluted earnings per share of $0.50 were up 56% over last year's fourth quarter.

Cash flow was superb with both the fourth quarter and full year results representing records.

Operating cash flow was $128 million for the quarter, and $423 million for the year, up 18% and 16% respectively.

Free cash flow was 137% of net income in the fourth quarter and 135% of net income for the full year.

Turning our attention to the individual operating groups -- the electronic instruments group had a tremendous fourth quarter.

Sales were up 32%, to $377.8 million, on continuing strength in our process power and industrial businesses and the contribution from the Atlas Material Testing Technology acquisition, which we completed in November.

As expected, our oil and gas businesses showed sizeable improvement.

Internal growth was 27%, acquisitions added 6%, and foreign currency translation reduced sales by 1%.

EIG's operating income increased 61% to $90.4 million.

Operating margins were very strong at 23.9%, up 430 basis points over last year's fourth quarter.

The electromechanical group also had an excellent fourth quarter.

Sales were up 26% to $300.1 million, on the strength in our differentiated businesses and the contribution from the acquisitions of Haydon Enterprises technical services for electronics and Ameron.

Internal growth was 12%, acquisitions added 15%, foreign currency translation reduced sales by 1%.

EMG's operating income increased 45% to $58.9 million, and operating margins were very strong at 19.6%, up 250 basis points over last year's fourth quarter.

Operational excellence is the cornerstone strategy for the company, and our focus on cost and asset management has been a key driver to both our competitive and financial success.

Operational excellence has many facets within Ametek, including Lean manufacturing, Six Sigma in our factories or back office operations, Design for Six Sigma in our new product development efforts and the movement of production to low-cost locales.

We also continue to drive lower costs through our global sourcing office and strategic procurement initiatives.

From these sourcing activities we recognize $7 million in savings in the fourth quarter and $27 million in savings for all of 2010.

These efforts were key drivers in our achieving a fourth quarter operating income margin of 20%.

Full year operating margins were 19.5%, an all-time record for Ametek.

Global market expansion continued to be a driver for Ametek's growth.

In the fourth quarter of 2010, international sales represented 50% of our total sales.

Organic growth in Asia, Europe, and the Americas outside the US were all very strong.

Due to the investments we made over the last several years, growth in the BRIC locations was excellent at 50% in the quarter.

New product development is key to our long term health and growth.

We consistently developed in RD&E.

In 2010 the total was $112 million and we expect to spend $128 million in 2011, up approximately 15%.

We're excited about some recent introductions.

Our programmable power division was awarded a $2.3 million order from Brookhaven National Labs to supply the steering magnet power supplies for the next generation National Synchrotron Light Source or NSLS.

The NSLS generates beams of X-rays, ultraviolet light, and infrared light used for research in such diverse fields as biology, medicine, chemistry, environmental science, physics and material sciences.

Our aerospace and defense business was proud to be part of the HondaJet first flight on December 20th.

Ametek supplies key engine and airframe systems such as the starter generators, generator control units, primary power distribution, circuit breaker panels and the fuel flow and fuel gauging systems with ship set content of approximately $100,000.

When the HondaJet enters production in 2012, Ametek will realize annual sales of over $10 million from this new aircraft.

From an overall perspective, revenue from products introduced over the last three years was 19% of sales in the fourth quarter, up from 17% last year, reflecting excellent work of our businesses in developing the right products to serve their customers.

We also had a tremendous year for acquisitions.

We deployed nearly $540 million on acquisitions in 2010, a record level for us, and acquired more than $220 million in annual revenue.

We acquired an excellent set of highly differentiated businesses that expanded our market opportunities and technology base in the areas of precision motion control, materials testing, electrical interconnects, preventable power and high end analytical instrumentation.

The last acquisition completed in November was Atlas Material Testing Technology, the world's leading provider of weather test instruments and related testing and consulting service.

Atlas, which we acquired for 159 million, has expected 2011 sales of approximately $85 million.

Atlas products include weather exposure test systems, corrosion test instruments specialty lighting systems and large scale weathering test chambers.

In addition, Atlas offers indoor laboratory and outdoor testing services, photovoltaic and solar testing and consulting.

Its customers include testing laboratories and leading aerospace paint, polymer, plastic, photovoltaic, pharmaceutical, LED and automotive manufacturers.

Atlas's products and services are used by their customers in both new product development and quality insurance applications to assess product performance, reliability, and compliance with industry standards and specifications.

These instruments test the effects of weathering by simulating exposure to sunlight, temperature, moisture, and corrosion.

Atlas is an excellent addition to Ametek.

It's a clear global leader in this niche market, and enjoys an excellent reputation with its customers and international standard-setting organizations.

Atlas provided us with another growth platform in the highly attractive material testing market and broadens our presence in the fast growing photovoltaic testing market.

Acquisitions will continue to be a focus for us during 2011, as we see this strategy as a key driver to the creation of shareholder value.

We have the financial and managerial capacity and disciplined approach to support this acquisition focus.

Our backlog of deals was excellent, our balance sheet is strong, and our cash flow and financing facilities provide us with ample liquidity to pursue this strategy.

Turning to the outlook for 2011 -- we expect our businesses it continue to show solid growth in 2011 with our longer cycle oil and gas, power, and aerospace businesses showing particular strength.

Our record backlog strong portfolio of businesses, proven operational capabilities, and a successful focus on strategic acquisitions should enable us to perform well in 2011.

We anticipate 2011 revenue to be up low double digits on a percentage basis from 2010.

Organic growth is expected to be up mid to high single digits.

Earnings for 2011 are expected to be in the range of $2.00 to $2.07 per diluted share, up 14% to 18% over 2010, reflecting a leveraged impact of core growth and our streamlined cost structure.

First quarter 2011 sales are expected to be up high teens on a percentage basis from last year's first quarter.

We estimate our earnings to be approximately $0.46 to $0.48 per diluted share, up 28% to 33% over last year's first quarter of $0.36.

In summary, our overall business has performed very well in 2010, producing records for essentially all key financial metrics.

We expect top and bottom line growth to continue in 2011, as our longer cycle, higher profit businesses show particular strength and the benefits from our 2010 acquisitions are fully realized.

We've got a strong balance sheet that generates significant cash flow that provides us with plenty of liquidity to operate the business and pursue our acquisition strategy.

In addition to acquisitions, we continue to make sizeable investments at new product development as well as global and market expansion to position ourselves for future growth.

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

Thank you, Frank.

As Frank noted, we had an outstanding fourth quarter with tremendous financial performance and a high quality of earnings.

I will touch on some further details.

Core growth in selling expenses was approximately 15% -- below the 20% core growth in revenue.

General and administrative expenses were up over last year's fourth quarter levels driven by higher compensation and consulting costs.

The effective tax rate for the quarter was 29.4%, up from last year's fourth quarter rate of 27.5%.

The full year tax rate was 30.1%, essentially unchanged from last year's tax rate of 30.2%.

We anticipate a tax rate of between 30% and 31% for 2011.

As we have said before, actual quarterly tax rates can differ dramatically, either positively or negatively from this full-year rate.

On the balance sheet, working capital defined as receivables, plus inventory, less payables, was 18.0% of sales for the fourth quarter, a substantial improvement from last year's level of 21.2%.

This excellent performance enabled us to minimize the amount of working capital added to support the 20% organic growth in the business.

Compared to a year ago, our collection cycle improved to 50 days from 55 days, a 9% improvement.

Inventory turns improved by 15%.

Capital spending was $17 million for the quarter and $39 million for the full year.

2011 capital expenditures are expected to be about $45 million.

Depreciation and amortization was $21 million for the quarter and $73 million for the year.

2011 depreciation and amortization is expected to be approximately $83 million for the year.

Operating cash flow for the fourth quarter and full year were records.

In the fourth quarter operating cash flow was $128 million, up 18% over last year's fourth quarter.

Free cash flow was $112 million for the fourth quarter, representing 137% of net income.

For 2010, free cash flow was up $384 million or 135% of net income.

This superb cash flow was deployed to support our acquisition strategy where we expended nearly $540 million on deals in 2010.

As well, we repurchased $78 million of stock in 2010.

Total debt was $1.17 billion at December 31st, up $127 million from a year ago.

Offsetting this debt is cash and cash equivalents of $163 million, resulting in a net debt to capital ratio at December 31st of 36.2%, up from 33.7% a year ago.

At December 31st we had approximately $500 million in cash and existing credit facilities to fund our growth initiatives.

Our defined benefit plans are in great shape and are fully funded.

Overall pension expense in 2011 will be slightly lower than that recognized in 2010.

In summary, we had an outstanding 2010, establishing records for essentially all the key financial metrics.

We are well positioned for further growth both organically and through acquisitions with a strong balance sheet and cash flows.

Bill?

That concludes our prepared remarks.

Alan, we will be happy to take questions now.

(Operator Instructions).

And we'll take our first question from Allison Poliniak, Wells Fargo.

Hi, good morning.

Good morning Allison.

Seeing you set the bar higher for operating margins in 2010, how should we be thinking about them for 2011 at this point?

Sure.

I think there's two key factors in the margin improvement in the company that we expect to see in 2011.

The first is the organic growth of the business and the second is the cost improvements that we're putting through the P&L.

Let me talk about each of those and then I'll give you some numbers as to what we expect in margins.

From the organic growth side, in our 2011 budgets, we're going to put about $30 million into investments.

And there are some key areas we're focusing on.

In the BRIC countries, as I mentioned in my prepared remarks, we saw 50% growth in Q4 of 2010, for the full year 2010 I think was about 25%.

So that, in essence, we're seeing that growth accelerate.

And we're going to continue to add resources in those countries.

Between 2010 and 2011, we expect to add about 125 people, and a little bit less than half of those are already in place.

So we're going to continue to fuel that BRIC country growth.

The second thing is the R&D investment where, as I mentioned again in my prepared remarks, we're basically going to be up about 15% in R&D expenditures, which brings us to a level of about $128 million.

And obviously, that is a key driver in the organic growth of the company.

And the third element here is the long cycle businesses.

Just our portfolio is going to help us in 2010.

The long cycle businesses are showing strength.

Our aero, power, and oil and gas businesses are just under 40% of our total sales and a higher percentage of our profitability.

So that will fuel that growth.

So you take that organic growth that I've said, mid to high single digits.

I hope we're really at the high single digit level.

Our contribution margin we conservatively estimated that at about 35%.

Actually, in Q3 and Q4, it was 40%.

So as that incremental growth goes to the bottom line, we're going to see margin expansion.

In addition, the other side of the equation is the cost reductions themselves.

And rolling through the P&L is about $50 million of savings.

This is from the sourcing activities I mentioned, value engineering, movement to low-cost locales.

We're going to do some more plant consolidations, and obviously our divisions are continually making operational excellence improvements in their business.

So when you sum this organic growth and the margins, obviously there's inflation cost estimate on the other side of the ledger -- but, you know, we're saying conservatively, we can increase margins by 50 basis points.

And just as a -- some history here, I think when we started last year, we said it was going to be about 100 basis points improvement and we ended at 210 basis points for the year.

So, again, this could be conservative, but that's what we have rolling through our budgets right now

Excellent.

Thank you.

You bet, Allison.

We'll take a question from Mark Douglass at Longbow Research.

Good morning, everyone

Hello, Mark.

Nice -- nice quarter.

Thank you

Nice results.

Can you go through some of the various businesses, what happened in the quarter, what your expectations are going forward in 2011?

Sure -- I'll roll through the company as I typically do.

Why don't I start with EIG?

As I mentioned our aerospace businesses are doing well and they're on an improvement trend.

We have very strong fourth quarter results in our aerospace businesses.

As you may be aware, Boeing raised their shipment forecast for 2011, 2012 and 2013 which is really a clear sign that market conditions are improving for commercial aerospace.

And in Q4, our overall aerospace sales were up high single digits -- this is what we estimated a quarter ago -- and in fact it was realized.

And we saw strength in third party MRO commercial and military.

So now looking to 2011, we expect to see growth for our total aerospace business in 2011.

So that's definitely an improvement trend in the business.

Our commercial business will be up high single digits.

Our third party MRO business will be up high single digits.

Military will be up low single digits, and third party -- excuse me -- and business jets are expected to be roughly flat.

So when you add all of that up, we're expecting aerospace to be up about mid single digits in 2011, and obviously this business has a good contribution margin.

So it will help the margins, as I mentioned, to Allison's question.

Moving to the process businesses, they really performed well in the fourth quarter, with strong growth across most of the businesses.

Our oil and gas business continued to show sizeable improvement, while our material analysis, ultra precision technology and measurement calibration technology divisions were also very strong.

Sales were up 28% organically in the quarter, 35% overall.

In 2011, we expect this business to grow mid teens overall with organic growth of high single digits.

In particular, we expect strong performance from our later cycle oil and gas business.

Power and industrial, the last part of EMG, Q4 sales were up more than 40% organically with excellent growth across both the power and industrial parts of the business.

Actually, this subsegment was our strongest growth area in 2010, and in particular our programmable power division had a really, really fine year.

So what we're expecting for 2011 is sales of power and industrial should be up high single digits organically, and that's going to be driven by strength in the later cycle power business.

Thus, for all of EIG, we expect 2011 overall sales to be up low double digits and organic growth to be up high single digits.

Moving to the other side of the company for EMG, our differentiated EMG businesses had overall sales up about 35% in Q4, organic sales were very strong in the mid teens in this business.

The improvement was driven by our technical motors, EMIP and aerospace third party businesses, and for 2011 we expect this business to be up mid teens overall with organic growth of high single digits.

Our cross driven motor business returned to what I would call a more normal trend in Q4 after rapid acceleration of a very low basis at the beginning of the year.

Q4 organic sales were flat with Q4 of last year, while for all of 2010, sales were up low double digits.

For 2011, we expect this business to be up low single digits.

And given the sizeable cost improvements expected in this business, we're anticipating a double-digit increase in profitability.

So if you sum up EMG, we're expecting low double-digit growth in 2011 with organic growth of mid single digits.

If you take the EIG results and the EMG results that I just talked to and sum them for all of Ametek, that's where we get the expected low double-digit sales growth with organic growth in this mid to high single digit level.

So I hope that's helpful.

It is helpful.

You've given a lot of your end markets continue to be spending a lot on equipment and instrumentation.

Yes.

You know, in the later cycle business is starting to pick up.

I mean are you getting -- do you think you're being pretty conservative on the organic growth prospects partly because your visibility is maybe three to six months or can you -- what would have to happen in order to have a nice -- to have an up side to -- your core or growth rates?

You hit on the key point.

We're going to have very strong organic growth in the first two quarters of the year.

And we have the backlog, obviously, in place.

And we can fairly accurately estimate that.

The key question is is that going to continue into the latter part of the year?

And if it does, then there's no question that the organic growth and the estimates we're giving you could end up being conservative.

It's -- since we actually put the presentation together, the orders in January so far are just extremely strong.

There's no other way to say it.

So, you know, we're off to a great start.

And the key question is going to be the second half of the year.

If the economy keeps humming the way it is and our growth initiatives work, your point is well taken, and we could very well be conservative.

Thanks.

That's helpful.

You bet.

And final question, again on the margins, you talked about the puts and takes on investments and sourcing.

How much are you kind of taking in -- you took in a lot of acquisitions in 2010.

How much benefit do you think you will get from further integration or is that more 2012 before you really start to see improvements from integration start to roll through?

Yes.

No.

They're going to start to roll through.

Acquisitions are doing great.

And we've roughly included about $0.10 of earnings from the acquisition -- acquisitions.

And that does include the synergies, which are taking effect.

Okay.

Thank you.

You bet, Mark.

Now we'll take our next question from Jim Lucas at Janney Montgomery Scott.

Thanks.

Good morning, guys.

Hello, Jim.

A couple housekeeping questions first.

John, accounts payable number?

Sure, Jim.

$237 million.

All right.

And Frank, you highlighted that international 50% of the company with all the BRIC investments.

Just curious, BRIC to date, what percent of total revenues does that represent?

That's about 11% of our total revenues, Jim.

And that's why we see this as an opportunity.

We think we can increase that percentage.

And the one offset it, as you do acquisitions, you may not get as much volume in those locations.

So it will be harder to move that 11%.

But from an organic growth viewpoint, this is where there's tremendous opportunity and we're going to capitalize on it -- are capitalizing on it.

Okay.

And you gave us some good color on the aerospace side of the equation, but oil and gas, given that, you know, it's -- you touch so many different facets with a bunch of different businesses in the portfolio.

Could you just give a little more color of where exactly you're seeing the strength in oil and gas and what -- where you expect that to continue this year?

Yes, sure.

I think if you characterize the strength in terms of whether it's upstream, midstream or downstream, the strength right now is coming from the upstream area.

We're seeing the -- the downhole drilling part of the business just doing extremely well -- both from a sale viewpoint and then the order intake has also been excellent.

It's been excellent, as I mentioned, so far through -- through January.

So I would say that is -- midstream is doing fine and the downstream is not anywhere near as strong, but still okay.

The other factor in this business is that there is a significant international concentration in this business, about 70% of our oil and gas business is outside the US.

So we're enjoying the international growth aspects of the business, as well, which, as we mentioned, that's where we're fueling some of our incremental sales investments, as well as our R&D investments.

So I think those are the two key drivers.

Just a statistic, and I know you track some of this data, Jim, the -- if you look at worldwide rig counts right now, they're running at about 3,250.

And that's up about 33% off of 2009, the end of 2009.

The 3,250 is almost a peak level.

The peak level is about 3500.

So you take that, and you couple it with the price of oil, which is I think it's about in the mid 80s right now, this market is just rebounding and it's -- it just speaks to the portfolio that we have where we're going to have another leg to this expansion because of our long cycle businesses.

Okay.

That's helpful.

And then final question, you know, last year was a very good year on the M&A front.

Could we just get a little color of what you're seeing in the pipeline these days in terms of not just valuation, but the various sizes of the deals given that last year, you know, we saw pretty much small, medium, and large from your perspective?

Right.

Well, we're hoping for a very similar mix.

We've got a very, very good backlog of deals.

I was actually talking last night to one of our group presidents, Dave Zapico, who was out on the road.

He told me he visited seven companies on that trip.

And they were all varying sizes.

Some were smaller, more technology types of acquisitions and others were much larger deals, even larger than the ones we did last year.

So I would say there's a good mix in the backlog.

You know, obviously it's a competitive environment for deals, a lot of companies have cash right now.

And we're very disciplined in terms of what we pay.

So we will parse these deals based on what reasonable multiples are.

But I'm hoping for a very, very good year this year.

As John said, the balance sheet is in great shape and we've got a team that's ready to go and hopefully you'll start hearing from us about deals being consummated.

Okay.

Great.

Thanks a lot.

I think, as Frank said, our balance sheet is in great shape and we could easily spend another $400 million or $500 million on acquisitions so that's -- that's what we would like to see happen, Jim.

That's a good problem to have.

Thanks.

You bet, Jim.

Next question is from Matt Summerville at KeyBanc.

Good morning.

A couple questions.

On the P&L, it looked like your corporate expense picked up pretty meaningfully on the fourth quarter I assume some of that is transaction costs associated with Atlas.

But can you talk about that and then why as we move through the year we've also seen an uptick in other expense on the P&L as well?

Just kind of what are the driving factors there?

Sure.

I'll be glad to answer those questions.

On the G&A, we did see an uptick, and that is basically driven by two things.

It's driven by compensation-related expenses because, in essence, the bonus levels in the company in 2009 were substantially lower than what they are in 2010.

The second thing that occurred there is some consulting expenses.

John and his team have done some great work in the tax area, and we, in essence, have gone to some outside people to help us with that work, specifically in the international arena.

So those were the things that drove it.

The good news on the G&A is that as we move into 2011, we expect the G&A to actually be down, and our present budgets are calling for about a 10% to 12% reduction in G&A in 2011 over 2010.

The point you made on acquisitions is right on, but that's what's driving the other income line is, because in essence, there's acquisition-related cost in that other income line that are driving those expenses.

So from my viewpoint, that's good news because it means we're doing deals and, obviously, we're being focused in that area.

Frank, you mentioned either during prepared remarks or in response to a question you thought the military or defense side of 2011 versus 2010.

Can you talk about what you're seeing in that business given the overall defense environment that makes you comfortable with that outlook and maybe talk, if you can, about some of the specific programs that are really going to benefit you next -- or this year, I should say.

Right.

The key in our military business is that we can and have outgrown the basic growth of the defense spending.

And if you look at the numbers even with Gates's more recent change, the overall defense budget is going to be roughly flat, maybe up a little bit overall.

But it's going to be roughly flat going into 2011, and also 2012.

What we have been able to do is focus in two key areas.

We focused on cooling systems in electronic applications.

So anything that is electronic in content, and obviously the amount that is going into electronics now in the military is substantially increasing.

We're providing cooling for those systems, and, therefore, that business is going to grow faster than that sort of flat DOD budget.

Similarly -- and that's on the EMG side of the business -- on the EIG side of the business we invested very heavily in helicopters.

This was a decision that we made a large number of years ago, and that's paying off for us because in essence, again the helicopter portion of the DOD budget is increasing at a more rapid rate than the base.

In terms of programs one of the good things about our business is we're not as program specific.

You can almost feel that from the two areas I talked about in that electronics is broad based.

And helicopters is the area that, in essence, is just very strong irrespective of which helicopter.

So it's not a major -- a major factor.

And, for instance, I'll give you a data point that in Gates's recent announcement had he said the F-35, the vertical takeoff version of the F-35, was going to be substantially delayed, I went to our people in aerospace and said what's the impact on us?

And they came back and said in 2011, it's about $1 million, which is within the noise level.

So that's why we believe that, in essence, with these two areas, that we can outgrow it.

I may even be conservative with the low single digits on military.

That's very helpful, thanks, Frank.

And then just one final follow-up.

On the oil and gas side of the business, do you have any sort of figure, Frank, how much your business would you characterize as upstream versus down -- down and midstream?

I would say it's about a third.

Great.

Thanks a lot.

Okay.

Moving on we'll take Wendy Caplan from SunTrust.

Good morning.

You know, you talk about strength in your end markets and some acquisitions.

But you didn't talk about pricing and mix.

Can you give us some sense in 2010 what we saw relative to pricing and some sense of what you expect for pricing and additionally mix going into 2011?

Yes.

Pricing is higher than I would like.

I think it's been sort of a strange situation, and I'm talking really the M&A market in general and the kinds of businesses that we're involved in.

In 2009, the multiple did not go down as much as you would have expected as the recession went down.

So from -- oh, you're talking about product pricing, Bill just sent me a note.

Is that what you're talking about?

You have acquisitions on your mind, Frank.

I do, Wendy.

I was referring to the product mix and price.

Yes?

I'm sorry.

I'm sorry.

Okay.

We'll go there.

That's okay.

I do have acquisitions on my mind.

You're right, Wendy.

That's funny.

In terms of product pricing, what we have done is put -- in our budgets, we are pushing our divisions for about a 2% pricing increase in 2011.

What we have rolling through the numbers is about 1% just to be on the conservative side because we don't know what we'll realize.

To give you some numbers on 2010, in the fourth quarter, we actually did realize just under 2%.

For the full year 2010, we were up a little bit over, I think it was 1.3% if I remember the numbers correctly.

So that's the level we're talking about in terms of 1% to 2%.

In terms of the mix, our businesses are really varied in terms of the types of products.

And what's been happening in the sort of the very low end of our product portfolio, the cost-driven businesses, is that the mix during the recession obviously turned negative on us and it's starting to turn more positive now as the economy comes back.

So that's a good thing, although, as you know, our profit margins aren't quite as high in that part of the business.

On the high end of the business, as more dollars are available and the economy gets better, mix tends to move in the positive direction.

So you couple that with the R&D investments, we're putting in, so overall I would say mix is going to be okay.

Okay.

And I guess related to that, can you characterize the -- the unfilled orders and your backlog, specifically the profit level given that I assume there's some of the higher profit later cycle kinds of businesses, projects in that or products in that, versus what was shipped in 4Q?

I think so.

We don't track profits in our backlog in the aggregate.

I would say the mix in the backlog in profits is probably reflective of what we're seeing that's coming across the plans in our forecast.

On the bottoms up, when we forecast our profits, we're looking at the backlog, Wendy.

But I can't tell you specifically what the margins in the backlog are, but they are reflected in our forecast for the next couple quarters, specifically, and that's when they roll out predominantly.

Okay.

Okay.

Thank you.

And one last question.

The movement of revenue production to low-cost locales, how much was that in 2010 and what are you expecting in 2011?

Exactly the same number.

We moved about $50 million in 2010 versus 2009.

The absolute level was $330 million.

So it was up from, you know, roughly $270 million, and we're expecting to move another $50 million and that that number will be about $380 million in 2011.

And -- okay.

Great.

Thank you very much.

You bet, Wendy.

Next we will take Jamie Sullivan at RBC Capital Markets.

Hi.

It's Mike Salinsky filling in for Jamie this morning.

How are you.

Good, Mike.

We're fine.

Thank you.

Most of my questions were answered I only have two or three more left.

First of all, talking about your investment in the BRIC countries, I know you talked about a shift going toward India in the last two months.

I wanted to make sure if that's still the case or if that's changed going forward.

No.

You're right we've made sizeable investments in India and we are going to continue to do that.

We've got well over 100 people now on the ground in India, and we're going to continue to expand it.

John and I are going to go there in another -- I guess another month or so, and we see it as a great opportunity.

It's an area that we had not put as much focus on until the last year or two.

We had been very focused on China and even in Russia because of the oil and gas business in that part of the world and now we have really turned our attention to India.

And also Brazil -- we set up a team that has started on a strategy for Brazil.

And we're going to continue and ramp up the investments that go into that part of the world, as well.

So you're exactly right with your comment about India.

Interesting.

Thank you.

Thank you.

And then this didn't get mentioned much, but some pretty deep increases in the prices of certain metals and raw materials in the last few months.

It looks like some of those increases may continue going forward.

Are there any potential impact you think you will see in 2011 on the raw materials side?

Yes.

I think if you look back at Ametek's history, and it's going to be true in 2011, as well, we have done a very good job of having our bottom line profitability essentially impervious to raw material increases on the input side.

And the reason for it is in many of our businesses we simply have escalators as part of the contract with our customers so as the prices of the commodities go up the prices change accordingly and in step.

In our parts of our business, we will basically look at when we quote a job what the spot rate is on those commodities, and then when the order is placed, we will basically buy forward.

We're not speculating.

We're just locking in the profit on that business so that, in essence, the profitability stays the same.

Now, there could be a little bit of an impact on margins, even though the overall profitability goes up.

You know, you could have -- even though you've got that solid profit, there could be a slight impact on margins, but it's not appreciable.

And if you just look at our history, when raw materials were going up back a few years ago, you never heard us talk about any problems on the bottom line.

And conversely, when they go down, you're not going to see as much benefit in our business so you sort of can't have it both ways.

But, in essence, there's going to be no major impact on this commodity increase that is occurring, or essentially all the raw materials that drive us.

Perfect.

Great.

Thank you great quarter.

You bet.

Thank you.

(Operator Instructions).

We will take our next question from Richard Eastman at Robert Baird.

Good morning.

I don't know if anybody else is having a problem I'm having a hard time hearing the moderator, actually.

But I can hear you just fine.

Okay.

Just a question, Frank.

Could we just circle back to the geographic mix in the -- for the year.

And as we look into calendar 2011, maybe towards your core guidance, your growth guidance, mid to high single digit, how do you see the three primary geographies kind of playing into that number?

Obviously, the BRIC countries will show much quicker growth.

But, you know, how do you think of Europe and U.S.

as a whole versus, you know, your business in Asia?

That's a great question, Richard.

If we look at what happened in 2010 and then I think it's going to be very similar in 2011, I can characterize and give you some numbers.

The organic growth of the company, I'll take Q4, was 20%.

And if you look at that by geography, Europe was about 20%.

Asia was about 28%, and the rest of the world was about 35%.

So total international growth was about 24%, rough numbers.

And for the US, it was about 17%.

That's how you get to that sort of 20% organic growth overall.

So, in essence, when you look at these various parts of the world, I think we're going to see a similar pattern.

And you might expect that Europe wouldn't be as strong.

But we do roll out the Middle East in Europe.

That's the way we keep our books.

And, therefore, we're getting good growth there.

So Europe might be stronger than what the GDPs of those countries, in essence, sort of western Europe -- I should say.

So you're going to see Asia very strong here.

There's no question.

Asia's done very well.

They've done well during the downturn.

I'm talking mid to high single digit organic growth.

You know, you would expect Asia to be in the double-digit area and that's where it's going to be.

Right.

Okay.

and then also, just when you think through the EIG business, international waiting and the EMG international waiting, you know, given the process exposure, I guess some of the aerospace industrial exposure -- but the EIG business my guess is weighted internationally toward the BRIC countries.

Should we get maybe an extra point or two of growth out of EIG just given the product mix and the geographic weighting versus EMG?

Absolutely.

Absolutely, Richard.

The numbers -- I have them in my head from the fourth quarter.

For that 50% of Ametek that's outside the US, EIG was about 56%, and EMG was about 43% internationally.

So there's a 7 point sort of swing from the 50% norm of the company and it's driven by the oil and gas business that I mentioned before which is largely outside the US, as well as some of the process business which are physically located outside the US, some divisions in Europe, et cetera.

So I think we will benefit from that mix.

And, you know, obviously if you look at the organic growth in the company, the process business did 28% in -- in the fourth quarter.

And clearly international was a major factor in that.

Okay.

And that should continue.

And then just one additional question, when you -- I think John gave the CapEx spend forecast for 2011 --are there any major projects in that CapEx budget, and what might those be?

Or are they primarily again investments in the BRIC countries or -- are there one or two things you can circle up on the CapEx side?

Not really, Richard.

There isn't any major investment that we have to make.

Our businesses, as we've changed the portfolio, they're much more asset-like kind of businesses, and, you know, I think the biggest number I can remember, John, correct me if I'm wrong, is under $2 million for any one project.

We are going to do some facility expansion in China.

I think that was, what, $1.5 million?

$1.5 million, maybe a little higher.

But you're right, Frank, there's nothing dramatically higher than that handful of system implementations in the $1 million, $1.5 million range a couple of those.

But nothing -- nothing dramatic.

Okay.

Very good.

And then just maybe just one last question.

I just want to recycle to the -- to the raw material question that was asked earlier.

But what would be the major materials for you?

I mean is copper in there with the motors -- motors exposure?

I'm just curious what might be the one or two major materials that you would be exposed to or that you do have to manage.

Yes.

There are three materials, I would say, that are the most significant for Ametek, and I'll give you a rough idea as to their magnitude.

Copper, we use about 8 million pounds of copper, and that is predominantly in the instrument -- or excuse me -- in the motor side of the business.

Another one is nickel.

We use that in our materials business and we use about $2.5 million -- excuse me -- there's 2.5 million pounds -- I said that wrong.

It's $2.5 million of -- right?

No.

It's pounds.

I'm sorry.

It's pounds.

And the last one is steel.

And steel, it's about 29 million pounds.

And that also is not exclusively, but it is used in our motor businesses.

So those are really the three raw materials that are escalating in price.

You look at the prices today.

Copper, I looked this morning, is about $4.25.

Nickel is running about $11 a pound.

And steel, the last time I looked, was about $900 per ton, in essence.

And those are up.

They're all up.

There's no question about it.

But again, it's not going to have a material impact on our bottom line.

That's fair.

So when you talk to price, we hope to get two -- we budget for 1%.

Should that pretty much be in that number then to the margin?

No.

That's a great question.

Okay.

Okay.

Whenever -- whenever I talk about pricing, we exclude that.

Because that's just going to vary.

And it will give you data that's hard to correlate to.

Okay.

Okay.

So that's kind of a gross price target.

That's exactly right.

I see.

Okay.

Very good.

Thank you, and really a fantastic finish to the year.

Thank you, Richard.

We do have one more question.

That is a follow-up from Matt Summerville of KeyBanc.

I just wanted to ask a follow-up question on EMG.

If I go back and look for the last four or five years, the band width and margins has been right around 17.5% for the full year now.

In the back half of 2010 we really started to see a breakout in that business.

Now, I would suppose the mix is getting better with cost driven not growing, at least as fast as the other businesses and being flat in the fourth quarter and also, then, some benefits maybe from Haydon.

But can you kind of walk through, you know, how you're thinking about the margin potential of the EMG segment not only in 2011, but even longer term relative to EIG?

Sure.

Part of your comments are right on, Matt, in that our strategy here has been and will continue to be to change the mix of the EMG businesses both through organic growth and through acquisitions.

And as you know, the growth profile is more focused on the differentiated side of EMG versus the cost-driven side.

So naturally as that mix changes, margins are going to improve and that's what you saw in the fourth quarter with EMG margins getting up to 19.6%, which we felt very, very good about.

And, you know, the acquisitions of Haydon Kirk and TSE that went into that differentiated segment were part of the shift that is happening.

And as I mentioned, the core growth and for care for the fourth quarter was basically flat.

So as you see the growth and as you bring in the acquisitions, in essence, that margin can really only go one way, and that's up.

And others, there's no reason over time, to answer your question sort of beyond 2011, that as that portfolio continues to change and we continue to put more high-end businesses into EMG, that the margins could clearly approach EIG.

And it might not quite get there, but there's definitely legs on the margin.

And if you look at our forecast for 2011, we're looking at more margin growth in EMG than in EIG.

Great.

Thanks a lot for that additional color.

You bet.

We have no additional questions at this time I'd like to turn it back to our speaker for closing remarks.

I would like to thank you everyone for joining our call.

As a reminder a replay can be heard by calling 888-203-1112 and entering the confirmation code 1207835, and obviously the call will also be archived on ametek.com and streetevents.com.

Thanks for joining our call.

That concludes today's conference.

We thank everyone for their participation.