阿美特克 (AME) 2014 Q1 法說會逐字稿

Welcome to the AMETEK first quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Tuesday, May 6, 2014.

I would now like to turn the conference over to Mr. Kevin Coleman, Vice President of Investor Relations.

Please go ahead, sir.

Great, thank you, Sylvana.

Good morning, and welcome to AMETEK's first-quarter 2014 earnings conference call.

Joining me this morning are Frank Hermance, Chairman and CEO; and Bob Mandos, Executive Vice President and Chief Financial Officer.

AMETEK's first-quarter results were released earlier this morning.

These results are available electronically on market systems and on our website at the investor section of AMETEK.com.

A tape of today's call may be accessed until May 20 by calling 800-633-8284 and entering the confirmation code number 21713620.

This call is also webcasted; it can be accessed at AMETEK.com and streetevents.com.

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

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 investor section of AMETEK.com for a reconciliation of any non-GAAP financial measures used during this conference call.

We'll begin today with prepared remarks, and then we will open it up for questions.

I will now turn the meeting over to Frank.

Thank you, Kevin, and good morning.

AMETEK had a really fine first quarter.

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

We also remain very active on the acquisition front, acquiring Teseq and VTI Instruments in the first quarter.

And on April 11, we announced the definitive merger agreement to acquire the outstanding shares of Zygo Corporation.

I will touch on our continued strong acquisition performance in more detail later, but let me first provide the financial highlights for the quarter.

Sales in the quarter were up 10% to $975.3 million.

Organic sales increased 3%, while acquisitions added 7% and currency added less than 1%.

Operating income for the first quarter increased 12% to $221.6 million from $197.2 million last year, reflecting the impact of the higher sales and our operational excellence activities.

Operating income margin in the quarter was 22.7%, a 40-basis-point improvement over the first quarter of 2013.

Net income was up 12% to $140.6 million, and diluted earnings per share of $0.57 were up 12% over last year's first quarter, and at the top end of our guidance range.

Orders in the quarter were a record $998 million, up 14% overall from the prior year, driven by solid organic growth and contributions from the recent acquisitions.

The book-to-bill ratio in the quarter was 1.02.

Operating working capital was 17.9% of sales.

Turning our attention to the individual operating groups: the electronic instruments group had a very strong first quarter.

Sales were up 18% to a record $572.4 million, on strength in our longer-cycle aerospace and process businesses, as well as strong growth in our heavy truck business.

Overall growth was also driven by the contributions from the acquisition of Controls Southeast, Creaform, Powervar, Teseq and VTI.

Organic sales were very solid, up 5%, while currency was flat.

EIG's operating income increased 14% to $150.3 million, and operating margins were 26.3%.

Excluding the dilutive impact on operating margins of recent acquisitions, EIG's operating margins would have been 27.6%, up 40 basis points from last year's quarter.

The electromechanical group also had a good quarter, with strong operating performance.

Sales were up 1% to a record $402.9 million, organic sales were flat, and foreign currency was a 1% tailwind.

Strength in our precision motion control and thermal management systems businesses was offset by softness in our third-party aerospace MRO business as a result of a very difficult prior-year comparison.

EMG's operating income increased 8% to a record $83.9 million, and operating margins were superb at 20.8%, up 120 basis points from last year's first quarter.

Now turning our attention to our four growth strategies of operational excellence, global and market expansion, new product development, and strategic acquisitions.

The solid execution of these growth strategies by our employees is the principal reason for our ongoing success.

Each of these strategies will continue to play a key role in driving our growth.

First, I will touch on operational excellence.

Operational excellence is our cornerstone strategy; we continue to see tremendous results from our various operational excellence initiatives.

Operational excellence activities include lean manufacturing, Six Sigma in our factories and back office operations, design for Six Sigma in our new product development efforts, global sourcing and strategic procurement initiatives, movement of production to low-cost locales, and value engineering.

In the first quarter, our global sourcing office and strategic procurement initiatives recognized approximately $17 million in savings, exceeding our target for the quarter.

We continue to expect approximately $90 million in total cost savings in 2014 through our operational excellence initiatives, including $60 million in savings through our global sourcing office and strategic procurement initiatives.

Now turning to global and market expansion, our second strategy.

Global and market expansion continues to be an important contributor to our growth, as we are increasingly expanding our presence in attractive higher-growth market segments and geographic regions.

In the first quarter of 2014, international sales represented 56% of our total sales.

This was up from 55% of sales in the first quarter of 2013.

The increase in international sales percentage was driven by very strong organic growth in Asia, as well as the contributions from recent acquisitions.

Organic sales in Asia were up mid-teens on a percentage basis in the first quarter, with notable strength across our process and differentiated EMG businesses.

This strong growth reflects the benefits of our continued focus on expanding our sales, service and distribution capabilities in this region.

We will continue to make investments to develop and expand our global sales channels, service capabilities, and manufacturing footprint in order to position our businesses to capitalize on the attractive global growth opportunities.

Now turning to new product development: New product development is a key internal growth driver, and critical to our long-term health and growth.

We have consistently grown our investment in RD&E to ensure we are developing the right products to serve our customers and markets.

In 2014, we expect to spend approximately $205 million, a 15% increase over 2013.

We are excited about some recent new product introductions within our aerospace and defense businesses.

First, AMETEK Rotron has developed a heat exchanger for pod-mounted optical and electronic systems aboard various aircraft, including helicopters and drones.

The Discus thermal management system offers greater cooling capabilities and lower weight than other systems; its novel design separates external cooling air from compartment air, which is a key advantage for protecting sensitive optical and electronic equipment from possible contaminants.

We are seeing very strong interest in this new product.

Secondly, AMETEK Sensors and Fluid Management Systems has introduced the first digital humidity sensor for aircraft environmental control systems.

The sensor is the smartest and most attractive humidity sensor available, and is intended for airducting that carries humidified air into aircraft passenger compartments.

The sensor utilizes advanced capacitance technology and signal processing to quickly and accurately measure humidity levels.

Also, AMETEK EDAX has developed an entirely new technique for users of scanning electron microscopes that provides them with unprecedented flexibility in conducting microstructure analysis.

The technique, which is known as pattern region of interest analysis, or PRIAS, represents a breakthrough in advanced material analysis by combining fast imaging capabilities with powerful image manipulation and analysis tools for use in scanning electron microscopes.

From an overall perspective, revenue from products introduced over the last three years was 20% of sales in the first quarter.

Now turning our attention to acquisitions, we have had a very active start to 2014.

In the first quarter, we completed two acquisitions: Teseq, which we acquired in January, and VTI Instruments, which we acquired in February.

Combined, we deployed approximately $165 million on these two acquisitions, and acquired approximately $90 million in sales.

Subsequent to the end of the first quarter, we announced that we had signed a merger agreement to acquire the outstanding shares of Zygo Corporation.

This strong acquisition performance in 2014 follows the strong activity we saw in the second half of 2013, where we acquired three businesses.

If the Zygo transaction closes as expected by the end of the second quarter, we will have acquired six businesses, deployed approximately $850 million in capital, and acquired $425 million in annual revenue over the prior 12 months.

Now let me provide some more detail on the VTI Instruments acquisition and the Zygo announcements.

VTI Instruments is a leading producer of highly engineered test and measurement instrumentation.

Their products include signal conditioning solutions and data acquisition systems for use in structural, fatigue, temperature, noise, vibration, and harshness testing.

VTI is a leader in the high-end niche for data acquisition systems for use in demanding testing environments requiring high measurement accuracy, such as the aerospace and defense markets.

The acquisition of VTI Instruments nicely expands our test and measurement capabilities within this attractive market segment.

They are headquartered in Irvine, California, and they have annual sales of approximately $40 million.

On April 11, we announced the definitive merger agreement to acquire all of the outstanding shares of common stock of Zygo Corporation at a purchase price of $19.25 per share.

The aggregate enterprise value of the transaction is approximately $280 million, taking into account Zygo's outstanding equity awards and net cash, which we will acquire.

Zygo Corporation is a leading provider of non-contact metrology solutions, high precision optics, and optical assemblies for use in semiconductor, medical, life science, industrial, and aerospace and defense end markets.

They are really a great fit with AMETEK.

They have a high-value, differentiated technology capability and strong brands within the optical and metrology markets.

Also, Zygo's leading position in non-contact optical metrology nicely complements our strength in contact metrology.

Zygo has annual sales of approximately $165 million, and they are headquartered in Middlefield, Connecticut.

The closing of the transaction is subject to customary closing conditions, including the approval of Zygo stockholders and applicable regulatory approvals.

We expect to close the transaction towards the end of the second quarter.

Acquisitions will continue to be a focus for us in the remainder of 2014, as we see this strategy as a key driver to the creation of shareholder value.

Our pipeline of acquisition opportunity remains very strong, and we have the financial and managerial capacity and disciplined approach to continue to support this acquisitions focus.

Turning now to the outlook for the remainder of 2014: We expect our businesses overall to continue to show solid growth during 2014, with balanced organic growth across both operating groups.

We anticipate 2014 revenue to be up high-single digits on a percentage basis from 2013.

Organic growth is expected to be up 2% to 4% for all of AMETEK and for both operating groups.

Earnings for 2014 are expected to be in the range of $2.32 to $2.37 per diluted share, up 10% to 13% over 2013, reflecting the leveraged impact of core growth, our operational excellence initiatives, and the benefit of contributions from recent acquisitions.

This is an increase from our previous guidance of $2.30 to $2.35 per diluted share, and does not include the impact of the announced Zygo acquisition.

Second-quarter 2014 sales are expected to be up approximately 10% from last year's second quarter, with organic growth up low-single digits.

We estimate our earnings to be approximately $0.57 to $0.59 per diluted share, up 10% to 13% over last year's second quarter.

In summary, we delivered excellent results in the quarter, and are well positioned for the remainder of 2014.

We have a strong balance sheet, and generate significant cash flow that will provide us with plenty of liquidity to operate the Business and pursue our acquisition strategy.

Our excellent backlog, strong portfolio of businesses, proven operational excellence capabilities, and a successful focus on strategic acquisitions should enable us to perform well for the remainder of 2014.

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

Thank you, Frank.

As Frank noted, we had a great first quarter, with very strong overall results.

I will provide some further details.

Core growth in selling expenses was in line with core growth in sales in the quarter.

General and administrative expenses were roughly flat versus last year.

On a percentage basis, G&A was 1.3% of sales, down slightly from last year's first-quarter level of 1.4% of sales.

The effective tax rate for the quarter was 29.3% versus last year's first-quarter rate of 29.1%.

For 2014, we expect our tax rate to be between 28% and 29%.

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 17.9% of sales in the first quarter, up slightly from last year's first quarter.

Strong working capital management will remain a key priority.

Capital expenditures were $14 million for the quarter.

Full-year 2014 capital expenditures are expected to be $70 million.

Depreciation and amortization was $33 million for the quarter.

2014 depreciation and amortization is expected to be approximately $137 million.

Operating cash flow was $161 million, up 3% over last year's first quarter.

Free cash flow was $147 million for the quarter, representing 104% of net income.

For the full year, we expect free cash flow to be approximately 110% of net income.

Total debt was $1.41 billion at March 31, essentially unchanged from the 2013 year end.

Offsetting this debt is cash and cash equivalents of $265 million, resulting in a net-debt-to-capital ratio at March 31 of 25.9%, down slightly from 26.3% at the end of 2013.

At March 31, we had approximately $865 million of cash and existing credit facilities to fund our growth initiatives.

During the quarter, we acquired Teseq and VTI Instruments.

Total capital deployed on these acquisitions was approximately $165 million.

On April 11, we announced a definitive merger agreement to acquire the outstanding shares of Zygo Corporation.

Total capital to be deployed on this acquisition will be approximately $280 million, taking into account net cash to be acquired.

Our highest priority for capital deployment remains acquisitions.

In summary, we had a very strong first quarter, establishing record levels of orders, sales, operating income, net income, and diluted earnings per share.

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

Great, thank you, Bob.

Sylvana, we will now open it up for questions.

(Operator Instructions)

Matt Summerville, KeyBanc.

Frank, if you could just do the deeper dive that you typically do on the call with respect to the operating groups, what you saw during the quarter and what your expectations are for the year.

Sure, Matt.

We will start with EIG.

Our EIG Aerospace business had a strong quarter on continued strength in commercial aerospace.

Sales were up approximately 10% organically in the quarter, and orders were also very strong, up high single digits.

And as we look to the remainder of 2014, we expect continued strength in our EIG Aerospace business.

Trends in OEM build rates support really good commercial sales, while the continued ramp up of key business and regional jet platforms also will provide solid growth.

As a side note, if you look at Boeing and Airbus, their production this year -- the sum of the two -- is expected to be up about 6%.

With Boeing actually up about 12% and Airbus up about 1%.

Very good, solid performance here in terms of the aerospace market itself.

For all of 2014, we are estimating EIG Aerospace would be up mid-single digits and we may very well be conservative on that outlook.

Moving to our Process businesses, the overall performance of our Process businesses was superb.

Sales were up mid-teens on a percentage basis, with organic sales up high single digits.

Organic growth was broad-based across our Process businesses, with strength in our Micro-Poise UPT technology, measurement and calibration technology, and our material analysis operation.

This is a bit of a change where if you look at the beginning of last year, this business was being driven by oil and gas.

Oil and gas is still fine, but now we are really seeing broad-based recovery in the process businesses.

The overall growth was also driven by the contributions from the Controls Southeast, Creaform, and VTI acquisitions.

So for the full year, we expect our Process businesses to grow high single digits overall, with organic growth up low to mid-single digits.

The last part of EIG is Power and Industrial.

Sales for Power and Industrial were up about 30% in the first quarter, really driven by the contribution from the recent acquisitions of Powervar and Teseq.

Organically, sales for Power and Industrial were flat.

And as a result of these recent acquisitions in the Power segment, we expect overall sales for Power and Industrial to be up approximately 30% in 2014, with organic growth up low to mid single digits.

Matt, if you take those three parts of EIG and sum them for all of EIG, we are expecting overall 2014 sales to be up mid-teens on a percentage basis, with organic growth up low to mid single digits.

Moving to the other half of the Company, overall sales for our differentiated businesses were up low single digits on a percentage basis in the quarter.

We saw very solid growth in our Precision Motion Control and Thermal Systems business, but it was offset by weakness in our third-party MRO business.

And that was driven really as a result of a very difficult last-year comparison in that MRO business.

For 2014, we expect our differentiated EMG businesses to be up low to mid single digits on an organic basis.

The last part the Company, which is Floorcare and Specialty Motors, sales in our Floorcare and Specialty Motors businesses were up low single digits in the quarter.

And for all of 2014, we expect sales for this business to be up low single digits.

If you sum those pieces of EMG, for all of EMG for 2014, we are expecting overall growth of low to mid single digits.

And if you take the results I just went over and take EIG and EMG together, as I mentioned in my opening remarks, for AMETEK as a whole we expect high single digit sales growth, with organic growth up 2% to 4%.

Matt, that is a summary.

Thank you so much.

One quick follow up -- organic bookings in the quarter and then where your backlog ended, Frank?

Backlog ended at $1.2 billion.

It was up from $1.1 billion as I mentioned.

The orders were up about 14% overall, to $998 million, and organically that was up about in line with sales.

It was 2.5% organically.

Great, thank you.

You bet.

Allison Poliniak, Wells Fargo.

On acquisitions, I know, Frank, you touched on managerial capacity.

And you have done a number of acquisitions here.

Are there any management constraints that are causing you to maybe refocus near term on what you're thinking of acquiring?

Not at all, Allison.

One of the advantages of the way we have evolved the Company is we have a number of what I would call sub-legs in the company where we can put deals in.

As we look at our deals, we surely want multiple deals being driven by the same management team.

But because we have these other legs, we can continue to do this.

And one of the really positive things here is a number of our divisions now have risen in their capability where in essence, they can handle the deals.

Where if you go back in time, they were more handled by us at the corporate level.

So we can continue to do this; we continue to roll them up.

Obviously, we are not doing the mega-deals, which then this strategy wouldn't work.

But by buying these companies that are in the $50 million, $100 million, $200 million in sales region, we can continue this; and we really don't have any significant management constraints.

That's great.

Going on to the sourcing area, you talked about you're a bit ahead in your goals; but you kept the total year the same.

Did you move programs up?

Is it acquisitions?

How should we be thinking about that number?

I think what you are probably going to see is that we will raise that number as we go through the rest of the year.

Actually, Bob, I think when we rolled it up I think it was really $92 million.

Was that the number?

Yes, yes.

It was actually $92 million, but we decided not to put that extra $2 million in.

I would expect as we go forward, the team is doing a really superb job here; so I would expect that number to increment up as we go through the year, Allison.

Great, thank you.

Mark Douglass, Longbow Research.

Hello.

Good morning, gentlemen.

Quickly, payables?

$370 million.

$370 million.

Thank you.

Frank, looking at the slight increase in your EPS guidance for 2014, you're keeping organic growth expectations the same,.

So is this with the slightly-improved margins a little bit better performance on the cost takeouts or the operational excellence?

Is that how to read that?

Yes, I think that is an accurate way of talking about it.

And also if you look at the trend of organic growth in the Company, the trend is definitely in a positive direction looking over the last, say, three quarters or four quarters.

We have been probably a bit conservative on our sales outlook.

And if that organic growth does continue to creep up more towards the higher end of our guidance range, that also is going to obviously provide some more earnings.

So we are actually feeling pretty good right now that although this recovery is a bit slow and painful, we definitely can feel it and see it in the numbers that there is improvement as you go quarter to quarter.

It is not monumental but it is still there.

So the trend is in the right direction.

So we felt pretty confident in raising the estimates that $0.02.

And camping out in the organic growth then, I'm a little surprised given how 1Q performed that you are still expecting 2% to 4% for each segment.

1Q was actually an easier comp, I think for both; 4Q becomes a pretty tough comp for both, but you had 5% organic in EIG and flat organic in EMG.

Can you talk about how -- with the strong start in EIG I'm surprised you kept that at 2% of 4% and with the slower start EMG that it is still 2% to 4%.

One of the areas of weakness that you heard me talk about was Power and Industrial.

And that is the one large segment in our business where the organic growth just is not as strong as we had hoped.

Even though Aerospace is doing great and our Process businesses themselves are doing very, very well, Power and Industrial is a bit of a drag.

But what we are hoping is we're going to see incremental improvement in that as we go forward.

But we haven't put that in our forecast.

And that is probably the reason that we've held that guidance a bit low on the EIG side.

On EMG side, we were flat in the first quarter.

But we are predicting that we are going to be in that low to mid single digits.

So we do expect that to definitely improve.

And that is why, hopefully, we're going to end up at the higher end of our overall guidance for the Company of 2% of 4% kind of number.

Were the orders in EMG better than the sales?

No, orders were not as strong in EMG.

Organically, they were down a bit; and they were up about 6%, if I remember correctly, in EIG.

You have to be careful when you look at orders for our businesses because we've got many long-cycle businesses.

And basically, you can have ups and downs in any quarter.

So I wouldn't focus too much on the order intake in a given quarter.

I do think you're going to see EMG organic growth improve.

And we may be conservative on EIG organic growth, is probably the best way I can answer your question.

Okay, that is helpful.

Thank you.

Matt McConnell, Citi Research.

Could you talk about the EMG margin a little bit?

You had a pretty nice increase on virtually no revenue growth.

So is that were you saw the upside from the cost savings, or is there something else in there that is worth calling out?

No, it is exactly what you said.

And we have been saying for a long time when we look at overall margin growth for the Company that EMG will be a key driver.

Because if you look at the absolute levels of the margin between EIG and EMG, EIG was the 26.3%, I think it was, and EMG at around 20.8%.

So there are two drivers for that.

There are definitely the cost reductions.

And some of the improvements that we have put through the business have definitely been in EMG.

There's also a natural effect that as the portion of EMG moves more to the differentiated businesses, versus the Floorcare and Specialty Motors or cost driven side of that business, there'll be a natural positive movement in those margins.

PAs you know, we are not buying companies or investing heavily in the Floorcare and Specialty Motors business, where we are in the differentiated EMG businesses.

So you will continue to see that basic change in the portfolio, which will also be a positive for margins.

Okay, great, thanks.

That is helpful.

If I could touch on the M&A pipeline.

It seems from your prepared remarks that clearly there's some activity there.

If you could highlight any particular areas where you are seeing a lot of activity and maybe deal size.

I know Zygo, at $280 million, is a little bit bigger than the range that you mentioned in response to an earlier question.

So do you think that is within your sweet spot now?

Or maybe give us an update on what you think the sweet spot for deal sizes is for AMETEK now.

Yes, I mean obviously the deal sizes are going to increase a bit as our overall size increases.

But it is not monumental.

And we have really been looking in this $50 million-$200 million in sales arena.

Zygo is in the $165 million arena.

So I consider that in the sweet spot.

But if you look at the two other deals we did this quarter, the first one, Teseq, was I think $50 million; VTI was $40 million.

So that is the range that we are looking in.

In terms of the backlog, yes, I am delighted with the backlog right now.

Our team, both in Corporate and M&A people that we have put in our businesses, have done just an excellent job of getting deals up on the table.

And some of these deals are proprietary in nature, where we have gone out and talked with these companies, sometimes for many, many years.

And then when they are ready to sell, they will come to us; and in some cases not even go through an investment banking kind of process.

We have a really, I would say, solid backlog,.

I can tell you I'm working on a deal just as we speak.

I don't know whether we're going to get the deal or not.

But in terms of capital deployed, that particular deal would be larger than Zygo -- but not again monumentally larger, but it would be a larger deal.

If I said something in my opening remarks that implied a major change, that I don't think is the case.

It is really, I would say, an incremental sort of change to be looking at a little bit bigger deals, but nothing fundamental in terms of looking, for instance, for a merger of equals.

That is not even in our paradigm because you are unable to get the synergies and unable to get the returns that you enjoy.

Great, sounds good, thanks very much.

Scott Graham, Jefferies.

Good morning, all.

I wanted to ask about the progression of orders in the quarter.

Were you weather-affected in any way?

Was March stronger?

Can you lay that out a little bit?

I would say incrementally we improved during the quarter.

March was very, very good.

We can't assign a major factor to weather.

I know a lot of companies have come out and said January and February were weaker because of weather.

I really can't say that there was any substantial change due to that factor, Scott.

What I'm seeing and what I'm just feeling in the business, to my comments before, is we are just seeing a gradual improvement in the business.

And we definitely saw that, I would say, through the quarter, with a pretty strong March.

So the March reference that you are making here, Frank, that is on a year-over-year basis - that is not seasonal, right?

Well, I was actually talking sequentially through the quarter.

I wasn't talking quarter over quarter when I was making my remarks, Scott.

That is actually what I was referring to because obviously I think everybody -- we all get stronger as the quarter progresses, you know, what have you.

I was just wondering on the year-over-year basis.

I'm sorry,.

I misinterpreted your question, Scott.

On a year-over-year basis, yes, it is better.

There is no question.

As I said, we were up just about 3 points organically in the quarter on our orders.

And you look at the order progression and the sales progression, and the organic growth is getting stronger.

It's not monumental, but you can feel it getting stronger.

Got it, thank you.

My follow up question is simple.

There is $90 million, $92 million, and potentially heading higher.

Obviously, EMG is seeing a lot of that.

But where are you finding this type of a number?

Where are the heaviest concentrations of productivity right now?

I would say it is probably more on the global sourcing side, Scott.

And it is pretty broad-based across the Company.

We keep looking for new opportunities.

We are expanding our footprint not just in China, but we move in other low-cost regions.

Our teams work very effectively together; and we see those opportunities, and we push pretty hard, as you can imagine.

We are getting leverage on just the pure procurement side, but we are also getting the value add and value engineering.

And that is a key part of how we are growing these savings; as we've acquired companies with higher loads of technology, there is more opportunity there.

If I could just augment what Bob said, that we find when we acquire companies, there is significant leverage in just procuring parts from international.

So that a good part of the leverage comes from the companies that we've recently acquired.

If we look at more of our mature businesses, where they are already procuring a large amount of their material from low-cost regions, that is where the value analysis and value engineering that Bob mentioned comes into play.

We have really put across the Company the training that is necessary to do value analysis and value engineering.

And these are very short-term projects that basically you can improve the cost of the product -- largely through materials, but not solely through materials.

That is more of the value analysis piece.

And then the value engineering piece is more in the sense of making some changes in the product so that you can get incremental sales.

We are now allocating a portion of our engineering talent to this VA-VE activity so that we can keep this number rolling.

It is just a super strategy, and it is working extremely well for us.

Well, okay, thanks a lot.

John Baliotti, Janney Capital Markets.

Frank, you talked about the margin impact from acquisitions in EIG, which obviously is typical of new deals.

But you also point out that EMG had very impressive margins.

I think if I went back to my model, I don't think they were ever this high in the first quarter, going back 15 or 20 years.

I am wondering, it seems like that bodes very well for the things that you have been talking about of global sourcing, just integrating the cost structure of the businesses, not to mention the revenue leverage on future EIG margins.

I think that is right.

I think your analysis is correct.

And I think as we do deals, you're going to continue to see some dilutive impact on our margins because we purposely want to buy companies where their margins are below ours so that we can, over time, improve those businesses.

If you look historically, we have been very good.

We've always been able to outgrow that dilutive impact.

So even with the dilutive impact that you've talked about, even though we talked about it just in EIG, if you look at it at the Company level, it was about 50 basis points.

We showed 40 basis points of improvement.

And if you add that dilutive impact, our overall Company margins would have been up 90 basis points instead of 40 basis points.

Your question, or your discussion, and what Scott just talked about and asked a question on are really the core of AMETEK.

We're just really good at basically managing our businesses effectively.

And if our businesses come in with a budget that doesn't show a sizable cost improvement, we have a long discussion about that because we feel you have got to be continually improving your business and continually improving your margins.

And, yes, think you're going to see more improvement in EIG than EMG just because of the level of absolute margins in the EMG side of the business.

Does that help you out?

Yes, you talked about obviously that you expect a lot more improvement out of EMG given the delta between the two.

But it seems like you're probably going to keep raising the bar on EIG given the near-term headwinds that it faces as you do more of the M&A off of that segment.

Yes, that could be.

But remember, the Zygo acquisition, if we close it, is going to come in; and it is going to go in EIG.

All of that information is public; and therefore there's going to be a dilutive impact.

But we look at that positively because we're going to get a super return on invested capital on a deal like that.

I guess the conclusion was that you clearly haven't peaked on the profitability of EMG on a core basis.

Absolutely.

That's absolutely right; we have not peaked.

And that is absolutely right.

Great, thank you.

(Operator Instructions)

Jamie Sullivan, RBC Capital Markets.

Frank, on the geographical look, I know you talked about mid-teens organic growth in Asia.

Can you maybe talk about what you're seeing in other geographies, and maybe how you see some of the regional patterns playing out for the year?

Sure, I be glad to do that, Jamie.

If you look at the organic growth by region for the first quarter, the organic growth largely came out of Asia.

It was up about 17% actually in Asia.

The US was flat, but that's actually an improving trend if you look at this by sequential quarter.

The US is continuing to improve, and we think that will continue as we go through the year.

Europe was organically up about 1%, and that's a lower number than what we have been talking about.

But there was an abnormality in Europe in that, as I mentioned in my remarks, the MRO business, which is largely European-based, basically had a very tough comparison.

So if you actually extract that from the Europe organic growth, it would be similar to what we've seen in the last few quarters -- up in that mid-single digit region and improving.

Again, you can feel some improvement in Europe.

It is not monumental, but the improvement is there.

And then Asia -- up very, very strong.

And this was across Asia that we saw this.

And I think I can say it is a key result of the investments that we have been putting into Asia.

A large portion of our, I'll call it incremental growth capital or growth expense, has gone into that region.

And we saw a broad-based performance, with very strong performance in Japan, for instance; very strong performance in Singapore; strong performance in China.

Korea, Bob just mentioned, which is absolutely right -- we saw strong performance there.

And the markets are not great; but on the other hand, the GDP's in those countries are still higher than they are in other parts of the world.

And you couple that with our lower share and investment levels, and it is doing just fine for us.

So we were very pleased.

I think the expectations are incremental improvement in the US.

Europe will, I think, pop back a bit just because of that tough comparison.

And Asia is going to be good.

Is it going to be 17% growth for the next few quarters on a quarter-over-quarter basis?

Probably not quite that strong, but it is going to be good.

That's helpful.

Maybe just a quick one on EIG margins.

You broke out the 130-basis-point impact from acquisitions.

Will the impact be a little bit heavier in 2Q, given the activity with Zygo?

Well, it obviously depends on when Zygo closes.

We are estimating that is going to close at the end of the quarter.

So if that happens then, it is not going to have a major impact on Q2; you would see it more in Q3 then Q2.

But there is a possibility it could close.

I think probably the soonest would be the second week in June.

That probably won't happen, but that is the soonest.

So as I'm thinking about your question, there probably is not going to be any major impact even if it closes a bit earlier in the second quarter; but you can expect to see it in the third quarter.

Okay.

Thanks very much.

Sure, Jamie.

There are no further questions at this time.

Please continue with your closing remarks.

Thank you, everyone, for joining the conference call today.

As a reminder a replay of the call may be accessed at AMETEK.com and Streetevents.com.

As always I'm available for further questions today at 610-889-5247.

Thank you.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.

[ End of Transcript ]