AMETEK, Inc.

Good day ladies and gentlemen and welcome to the Q4 2018 Ametek Inc. earnings call. At this time all participants are in the listen only mode. Later we will conduct a question and answer session and instructions for how to participate will follow at that time. During the conference if anyone should require assistance please press star then the number zero on your touchtone telephone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference Mr. Kevin Coleman, Vice President of Investor Relations. Sir you may begin.

Thank you Jimmy. Good morning and thank you for joining us for Ametek's fourth quarter 2018 earnings conference call. With me this morning are Dave Zepico, Chairman and Chief Executive Officer and Bill Burke, Executive Vice President and Chief Financial Officer. Ametek's fourth quarter and full year results were released earlier this morning and are available electronically on Market Systems and on our website in the Investor section of Ametek.com. This call is also being webcasted and can be accessed on our website. The webcast will be archived and made available on our site later today. Before we get started I want to 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 risk and uncertainties that may affect our future results is contained in Ametek's filings with the SEC. Ametek disclaims any intention or obligation to update or advise any forward looking statements. Please also note that our fourth quarter reported results include an after tax gain of $11.8 million or five cents per diluted share related to the finalization of the impact of the 2017 Tax Cuts and Jobs Act. Any references made on this call to 2017 or 2018 financial results will be on an adjusted basis excluding this fourth quarter 2018 gain and excluding the fourth quarter 2017 net gain related to the Tax Cuts and Jobs Act, realignment costs and other charges. Please refer to the Investor section of Ametek.com for a reconciliation of any non-GAAP financial measures used during this call. We'll begin today with prepared remarks by Dave and Bill and then we'll open it up for your questions. I'll now turn the meeting over to Dave.

Thank you Kevin and good morning everyone. Ametek had an excellent fourth quarter to complete another outstanding year. For the full year we established records for essentially all key financial metrics. We delivered 7% organic sales growth and 26% growth in diluted earnings per share. We generated record cash flows which we successfully deployed on strategic acquisitions and we continued to invest in our businesses to position them for long term success. In addition to the impressive result for the full year we also had a fantastic fourth quarter with record results. Sales were up low double digits driven by strong acquisition contributions and continued solid organic growth. Orders also grew at a strong pace and we ended the year with a record backlog. Operating profit growth and operating margin expansion in the quarter were excellent, leading to a high quality of earnings that exceeded expectations. We remained very active investing our strong cash flows, deploying over $750 million on three acquisitions and $364 million on opportunistic share repurchases in the quarter. We also bolstered the strength and flexibility of our balance sheet with an expanded revolving credit line and completed a private placement debt offering providing a significant capacity to pursue future growth opportunities. Now for the fourth quarter results. Fourth quarter sales were a record $1.3 billion, up 11% compared to the fourth quarter of 2017. Organic sales growth was solid at 5% with acquisitions contributing 7% and foreign currency a 1% headwind. Orders also remained very solid. Overall orders were up 11% over the prior year with organic orders up 5%. Another positive book to bill quarter resulted in a record backlog of more than $1.6 billion, providing us with solid visibility as we enter 2019. EVDA in the quarter was a record $332 million, up 22% over the prior year period, with EVDA margins of very strong 26.1%. Operating income in the quarter was a record $282 million, up 14% over the same quarter last year, with reported operating margins of .2% up 50 basis points over the prior year period. Excluding the dilutive impact of acquisitions, operating margins increased an impressive 130 basis points over last year's fourth quarter. Dilutive earnings per share were a record $0.86 in the quarter, representing an outstanding 23% increase over the prior year's fourth quarter earnings. Now for the full year 2018 results. Ametek delivered annual records essentially on all key financial metrics in 2018. Overall sales were up 13% to $4.8 billion. Organic sales grew an impressive 7%. Acquisitions contributed 5%. Foreign currency was a one point benefit. Overall orders were up 11%, and organic orders were also up 7% in 2018. Full year operating income was $1.1 billion, and operating margins were up 70 basis points to 22.2%. Excluding the dilutive impact from acquisitions, 2018 operating margins were up an impressive 110 basis points over 2017. Full year dilutive earnings per share were $3.29, up 26% over the prior year. Now turning to the fourth quarter results of the individual operating groups. First, the Electronic Instruments Group. Fourth quarter sales for EIG were up 11% to a record $826 million. Recent acquisitions contributed 8%. Organic sales grew 4%, and foreign currency was a one point headwind. We continue to see strong growth across our process businesses, with particular strength in our materials analysis businesses. EIG's operating income in the quarter was a record $214.6 million, up 11% over the fourth quarter of 2017. Reported operating margins were 26%. Excluding the dilutive impact of acquisitions, EIG margins were up a robust 130 basis points versus the prior year. The Electromechanical Group had another excellent quarter, with strong sales growth and outstanding operating performance. EMG sales in the fourth quarter were $445.3 million, up 11% over the fourth quarter of 2017. Organic sales growth was very strong at 9%, while the acquisition of FMH Aerospace contributed 3%, and foreign currency was a one point headwind. Sales grew nicely across all EMG businesses in the quarter, with particular strength across aerospace and engineer materials businesses. EMG's operating performance in the quarter was outstanding, with operating income increasing 18% to $85.8 million, and operating margins expanding 110 basis points to 19.3%. So to summarize, Amatek delivered tremendous performance in the fourth quarter and throughout the year. Each of our businesses continue to deliver exceptional results through the execution of the Amatek Growth Model, which combines our four growth strategies with a disciplined focus on cash generation and capital deployment to create long-term value for all of Amatek's I would like to thank all Amatek colleagues for their exceptional work and success in 2018. Before I discuss our outlook for 2019, I wanted to highlight some of the efforts our businesses are taking to drive the future of Amatek. I'll start with acquisitions. 2018 was an exciting year on the acquisition front, having deployed a record level of capital to acquire six outstanding businesses. We deployed over $1.1 billion on capital on these acquisitions and acquired approximately $350 million in annual sales. In the fourth quarter alone, we completed three acquisitions. Forza and Tellur, which I highlighted during our last earnings call, and SpectroScientific, which we acquired in late November. SpectroScientific is a leading provider of machine condition monitoring solutions for critical assets and high value industrial applications. They offer differentiated solutions that serve the increasing need for predictive maintenance in a broad and growing set of end markets. SpectroScientific provides both lab-based and on-site instrumentation, including consumables and cloud-based software analytics to help customers determine and monitor the condition of lubricants and fluids in mission and critical equipment. They're based in Chelmsford, Mass., and have approximately $50 million in annual sales. SpectroScientific, along with the other businesses acquired in 2018, are integrating very nicely with Amatek, and we expect them to add tremendous value going forward. In addition to deploying a record level of capital on acquisitions, we also deployed $364 million on share repurchases during the quarter, bringing the total capital deployed in 2018 to nearly $1.5 billion. Acquisitions clearly remain the number one priority for capital deployment. As we have done in the past, we will continue to repurchase our shares opportunistically and will continue to pay a modest dividend to our shareholders. Despite the record level of capital deployment, we have significant capacity available to continue our acquisition strategy, and Bill will touch on this further in a moment. We remain focused on investing back on our businesses to support their growth initiatives. In 2018, we invested approximately $75 million in incremental growth opportunities. These investments were focused across our sales and marketing and research, development, and engineering functions. We're seeing excellent results from these initiatives as we continue to drive strong organic sales growth. One important driver of this organic sales growth is new product development. In the fourth quarter, our Vitality Index, which measures the level of sales generated for new products and solutions introduced within the last three years, was excellent at 25%. The traction that our new products are gaining in the respective markets speak to the success of our research, development, and engineering efforts. We also remain focused on expanding our footprint across the globe and into new adjacent markets. In October, we celebrated the opening of our newest Technology Solutions Center in Bangalore, India. This center showcases the latest products and technologies of many of Amatek's businesses and is designed to assist customers in selecting the right equipment and enhance our service platforms within the region. This facility greatly enhances our ability to expand our position in India's attractive growth markets. We will continue to expand our global sales channels, develop additional service capabilities, and add to our manufacturing flexibility to better serve our customers and support global growth. Lastly, our operational excellence initiatives continue to drive strong improvements in the operating performance, as was seen in our margin expansion in the fourth quarter and full year results. In 2018, we generated approximately $90 million in savings from our operational excellence initiatives, largely driven by our global sourcing and strategic procurement efforts. We also remain focused on driving top-line growth through our expanded Commercial Excellence Toolkit, which continues to drive additional market share gains across our businesses. These key strategies make up the cornerstone of Amatek's growth model and will remain a strong focus as we move into 2019. Now let me provide some brief comments on tariffs. Our businesses continue to do a tremendous job managing each of the work streams we have put in place to help address the effects of tariffs. While the situation remains fluid, we remain very confident in our ability to mitigate the headwinds from the announced tariffs, given our ability to capture incremental pricing due to the highly differentiated nature of our business, the strength and flexibility of our global supply chain, and our ability to ship production given our asset-late business model. Amatek's proven operational excellence capability, which captures each of these elements, positions us extremely well to offset the impacts from tariffs. In the fourth quarter, we were able to fully offset the direct impact from tariffs, and for all of 2019, we also expect we will be able to offset the impact of known tariffs through our various initiatives. Now I'll move to our outlook for the year. As we noted in our press release, going forward we will report EPS results and guidance on an adjusted basis that adds back non-cash after-tax acquisition-related intangible amortization. We believe providing this non-gap measure allows our shareholders to better understand the strength of our cash-flow generation and core operating results, and aligns more comparably to our acquisitive pairs. With that said, we expect 2019 adjusted earnings for diluted share to be in the range of $3.95 to $4.05, an increase of 8% to 11% over the comparable result in 2018. We expect overall sales in 2019 to be up high single digits. Organic sales are expected to be up 3% to 5%, with a similar level of organic growth across each reportable segment. For the first quarter, we anticipate sales will be up high single digits. Adjusted earnings are expected to be in the range of $0.95 to $0.97 per diluted share, a 9% to 11% increase over the prior year. To conclude, our teams performed exceptionally well in the fourth quarter and delivered outstanding results in 2018. We are firmly positioned to achieve another year of solid growth and sustainable long-term success through the execution of the Amatek Growth Model. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter. Then we'll be glad to take your questions.

Bill? Thank you, Dave. As Dave highlighted, Amatek finished the year with a strong performance and a high quality of earnings in the fourth quarter. I will provide some additional financial details, but first a brief comment on the fourth quarter tax-related gain. As part of the 2017 Tax Cut and Jobs Act, Amatek recognized a net gain in the fourth quarter of 2017 related to the remeasurement of our deferred tax liabilities and the deemed repatriation of foreign earnings. This gain was considered provisional and was subject to further adjustment during the measurement period. The $11.8 million or five-cent gain we recognized in the fourth quarter of 2018 was the finalization of the provisional adjustments from tax reform. Now on to the additional financial highlights. Core selling expense was up in line with core sales in the quarter. General administrative expenses in the fourth quarter were down slightly over the prior and were .5% of sales in the quarter down from .6% of sales in last year's fourth quarter. 2019 general administrative expenses are expected to be roughly in line with 2018 levels. The adjusted effective tax rate in the fourth quarter was .8% and in line with our expectations. This compares to last year's adjusted rate of 25.7%. The -over-year reduction in our effective tax rate was due to the benefits of tax reform. In 2019, we expect our effective tax rate to be approximately 22%. As we've stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively, from this full-year estimated rate. Working capital in the quarter was very solid at .9% of sales, essentially in line with last year's fourth quarter. Capital expenditures were $35 million for the quarter and $82 million for the full year. We expect capital expenditures in 2019 to be approximately $100 million for .9% of sales, reflecting our asset-like business model. Depreciation and amortization expense was $54 million in the fourth quarter and $200 million for the full year. In 2019, we expect depreciation and amortization to be approximately $235 million, including acquisition-related intangible amortization of approximately $130 million, or $0.43 per diluted share. As Dave mentioned, our businesses continue to generate excellent levels of cash flow. Fourth quarter operating cash flow and free cash flow were both records at $296 million and $262 million respectively, with both up 17% over the prior year. Free cash flow conversion for the quarter was outstanding at 131% of adjusted net income. Our full-year cash flow was also very strong. Operating cash flow for 2018 was $926 million and free cash flow was $843 million, both of these metrics up 11% over the prior year. We remain focused on deploying our strong free cash flow on strategic acquisitions, and as Dave mentioned, Ametek had an outstanding year on this front. In all of 2018, we deployed more than $1.1 billion on six acquisitions, with approximately $750 million deployed on three acquisitions in the fourth quarter alone. In addition, we deployed $368 million on share repurchases in 2018, with $364 million of the repurchases occurring in the fourth quarter. Total debt at December 31st was $2.63 billion, up from $2.17 billion at the end of 2017. Offsetting this debt is cash and cash equivalents of $354 million. Following our record level of capital deployment in 2018, we still have significant capacity to support our growth initiatives, with more than $1.5 billion of cash in existing credit facilities. These amounts reflect the incremental financing capacity provided through the amended and upsized revolving credit facility we announced in November, in which I discussed during our last call, as well as the private placement offering we announced in mid-December. The private placement offering consisted of $660 million of senior notes, with a weighted average interest rate of .93% and a weighted average maturity of 8.2 years. The proceeds were used to pay outstanding borrowings on our revolver, as well as a maturing $100 million senior note in December. To summarize, our businesses delivered outstanding performance in the fourth quarter to complete an exceptional year. Looking ahead to 2019, our outlook is positive, as we are well positioned to support our growth initiatives with our strong balance sheet and excellent cash flows. Kevin?

Thanks, Bill. Simi, could we please open the lines for questions?

Certainly. Ladies and gentlemen, if you'd like to ask a question, please hit star, then the number one key on your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please mute your line once you've asked your question to prevent any background noise from coming through. Again, that is star, then one, to queue up for a question. Our first question comes from Scott Graham with BMO Capital Markets. Your line is now open. Hi, good morning, all. Good

morning, Fowden.

So, I have two questions, one on organic and one on the savings, which is easy. The 3% to 5% organic guidance, I'm just wondering two things on this. Your organic orders have been running at 5% or better for quite some time. You had a pretty good fourth quarter. I'm just wondering, is there something relative to the orders where maybe it's a little bit longer term that would be keeping the guidance to 3% to 5% and then secondly, what gets you to the 5

%? Right. I appreciate the question. We're expecting solid growth in 2019, but we do expect the growth to moderate compared to 2018. The growth is moderating a bit because of the global uncertainties and the trade tensions, but we expect to continue to grow nicely. Certainly, the comparisons will make it more difficult. We just completed eight quarters with average organic growth of 6% and six trade quarters with a positive book to bill. We end the year with a record backlog. Overall, we feel very good about the environment we're operating in. We feel good what we're hearing from our businesses and our customers and we continue to see solid underlying demand. We're positioned to perform very well in this environment and we're executing very well, but there is a little bit of global uncertainty and our guidance takes that into account.

Got it. Thank you. Secondly, on the savings, I know you mentioned that most of the $90 million in savings this year was from global procurement. I was wondering if you can kind of maybe specifically parse that out, global procurement versus the other areas and what you're expecting on that from each for 2019 as well. Sure,

Scott. As you know, we started the year in 2018 with an $80 million guide for cost savings. Those are cost savings that actually work their way through the P&L. Where we ended up, we did a little bit better than that and it was largely driven by our sourcing initiatives. We ended up at $90 million as you mentioned. About $70 million of that was from sourcing and about $20 million was from other OPEC initiatives. For 2019, we're starting the guide at $80 million. About $60 million of that will come from sourcing initiatives and strategic procurement initiatives and about $20 million from other OPEC initiatives. Does that answer your question? Thanks a lot. Okay,

thanks Scott. Thank you. Our next question comes from Nigel Koh with Wolf Research. Your line is now open.

Thanks. Good morning.

Good morning, Nigel.

Yes, I want to get away from the office for a second and just talk about the share repos in 4Q. I mean, you're not known for being a heavy repurchase company. Is that a reflection of the M&A options on the table here, the backlog, or is it more a reflection of your share price in November, December and supporting your stock at those levels? The real question is how does the M&A backlog look from here?

Yes, the M&A backlog looks great. We just completed a record year and I think the pipeline looks equivalent to what it looked like as we entered 2018. For 2019, we have a very strong pipeline. Over time, we had an opportunistic view of share purchases and we see the market adjust like it did in the fourth quarter and we have a strong balance sheet. We thought it was a good time to buy back some shares. In the past, that has been a good investment for M&T Tech shareholders when we made that decision. I agree with

that. When you

think about our balance sheet, Nigel, we entered 2018 with a debt diva of about 1.95. We end 2018 at the same level, 1.96. We deployed over $1.5 billion on acquisitions in M&A and we still have the same debt diva It's really the strong balance sheet, the strong cash flow generating capability of the company and the fact that we can control our own destiny to a certain degree.

One question, two parts. What do you see in China? You've got a recently large exposure to China, about 10% of sales. What do you see in there by major business? On tariffs, you talk about how your company can cover tariffs. Do you have list three 25% priced right now or would you have to go out and reprice if we do get that step up in March?

Great questions. The list three is built into our guidance. We assumed in March 1st that the tariffs would go to 25%. That's built into our guide. As I said in the prepared remarks, we feel comfortable that we'll be able to offset the impact of tariffs completely. Regarding to China, China is an important marker for us. It's about 9% of our sales and China grew nicely in the quarter. It drove overall Asia growth of 12% and it was a bit higher than the overall Asia growth. Certainly the trade situation with China adds to the complexity that we're watching very closely. So far we continue to grow nicely but we're going to continue to monitor that. As I've said before, the reality is that we produce products that China market needs to upgrade their manufacturing capability to monitor their nuclear power plants and to help clean up their environment. We are expecting growth to moderate in 2019. More in line with AMITEX overall growth but we feel good about that level of growth in China for 2019.

Great.

Thanks David.

Thank you.

Thank you. And the next question comes from Matt Tummerbell with DA Davidson. Your line is now open.

Thank you. Good morning. Good morning Matt. Can you first talk about how much price you guys actually realized in 2018 and based upon the comments you just made, David, how much price you anticipate realizing for 2019?

Sure, Matt. As you'll recall, during the year we increased our pricing as we got ahead of tariffs and inflation and Q4 was much like Q3. Q4 we had an excellent quarter. We achieved a bit more than 2% of price across our entire portfolio. Total inflation was about 1.5%. So we're very pleased with these results and we think we're well positioned to continue the trend in 2019. Specifically for 2019 we're expecting about two points of price and about the same level of total inflation, about 1.5 points. So the results speak to the highly differentiated nature of our AMITEX portfolio and our leadership position in niche markets and our focus and determination to make sure we stay in front of a global changing environment. So we're feeling good about pricing going into 2019.

And then David, can you comment when you look in the fourth quarter specifically with EMG, what drove the year over year acceleration in organic performance against a double digit comparison? And then specifically can you also comment at what you're seeing with respect to the robotics and automation market specifically? Thank you.

Yeah, robotics and automation was a driver of the EMG growth, but it was more broad-based than that. I mean we had really solid growth in the military aerospace business and we also saw solid growth on our EMIT business. So pretty much all components of EMG were firing in all cylinders in the fourth quarter.

Thank you.

Sure,

Matt. Thank you. Our next question comes to Alison Poliniak with Wells Fargo. Your line is now open.

Hi guys, good morning.

Good morning, Alison.

Could you maybe give us a little bit more color on growth investments in 2019? I know obviously new product developments there, but where else are you focusing your growth investment dollars for 2019 at this point?

Right, our growth investments, incremental growth investments for 2019 are up about 7% versus 2018 and we're going to invest incrementally about $80 million in growth investments. They're going to be across incremental sales opportunities, incremental marketing opportunities and incremental engineering opportunities. They're in three buckets and they're probably about equally spread across those buckets.

That's helpful. And then incremental operating leverage for 2019, anything we should be mindful of there that could maybe drive it outside of the normal for you?

For 2018, we had excellent operating income margins. We had about 110 basis points of expansion, ex-acquisitions and the core incrementals were about 35%. And we think about 2019, we're back to about 30 to 40 basis points of operating income margin expansion and we're back to about the incrementals of 30 to 35%. There's really nothing driving that except we want to see how the year gets started, but we feel good about the way the company's performing and the margin performance of the company.

Great, thanks so much.

Thank you, Allison.

Thank you. Our next question comes from Christopher Glam with Oppenheimer. Your line is now open.

Thank you. Good morning.

Good morning, Chris.

Hey, Dave, wondering about the $80 million in savings forecast similar to executed in 2019. You've been delivering that range as long as I've been covering you. Just wanted to ask about the evergreen aspects of that. Does that get more challenging at some point?

I don't think it does, Chris. It's kind of in our DNA. We go around to each of our businesses and we look at cost reductions as an element of our core operating environment and there's always new acquisitions that come into the fold that provide some new opportunities. I think we're solid for 2019 and when I look long term, I think as long as we keep executing our strategy, they will remain evergreen opportunities.

Thanks for that. In the outlook, I'm just curious if you're seeing any acceleration in aerospace. Clearly, some peers are seeing that into that vertical. Overall, if there are other areas that are accelerating versus notably stable or potentially some rollover.

Yeah, I think our aerospace and defense businesses have an outstanding fourth quarter. A lot of it is what you see across other businesses. Our sales were up high teens on a percentage basis in the quarter and the growth was driven by very strong organic growth. Organic growth was 10% in our aerospace business in the fourth quarter. We had similar to the first three quarters of the year, we continue to see solid and balanced growth across aerospace markets with notable strength across both commercial and military businesses. We're feeling good about our aerospace business.

Great, thank you.

Thanks, Bruce.

Thank you. Our next question comes from Brett Lindsay with Vertical Research. Your line is now open.

Hi, good morning all.

Good morning,

Brett.

Just wanted to talk about the pace or pattern of activity through Q4. Any major fluctuations between October and December and then how did January orders perform for the total company?

Great question, Brett. Q4 played out like a typical Q4. We strengthened into Q4 and December was our strongest month in terms of orders and sales. That's pretty typical for us and we had a very strong December as we anticipated. When you look at January recently completed, our orders were right on plan. We felt real good about January orders. Across the board, across all business, they came in on plan. We feel good about that too.

Okay, and then just more housekeeping. What are you assuming for interest expense in 2019 given the heavy deal load in Q4? Are you assuming any deleveraging within that assumption? Thanks.

Our interest expense is going to be up a bit in 2019. Up a little bit. What was the second question, Brett?

If you look at our debt profile, most of it is fixed debt. We have some balance on the revolver. Given the new private placement in December and the heavy acquisition and share repurchase activity in the fourth quarter, you'll see an increase probably upwards of close to 10% in interest expense year over year. Given that most everything of our debt is fixed, you'll see modest deleveraging as we pay down our revolver. Again, that's really going to depend on the pace of acquisition activity as we go through the year. Our full expectation is we'll continue to be very active on the deal front and deleveraging won't be a factor.

Got it. Great. Thanks, guys.

Thanks. Thank you. Our next question comes from Dean Dre with RBC Capital Markets. Your line is now open.

Thank you. Good morning, everyone.

Good morning, Dean.

I'd like to start first with a congratulations on the move to cash EPS. We all acknowledge it doesn't change the fundamentals, but it certainly puts you on a level playing field with your acquisition-minded competitors. What I also like seeing is that you guys are willing to adapt and be flexible. Maybe you can share with us a bit about the deliberation process internally. Obviously, we're at the beginning of the year, it would be the time to do it, but any insight into the focus internally on this?

Yes, it all comes down to our cash flow. We have strong cash flows or consistent cash flows. It's just another window into our financials that will allow our shareholders to better understand the strength of those cash generating capabilities. As you said, it aligns more comparably with our acquisitive peers, but it doesn't change how we're operating the business. It doesn't change how we're valuing deals. We always value deals on a cash basis anyhow. Really, it's additional information, a different window into the business that will provide our investors with that view. Most people that we talked to wanted to go to cash EPS. Some, a minority, were not fans of it. Net net the aggregate, it was a good decision for us because we didn't want to disadvantage everyone versus our peers.

Great. For the record, we're big fans of the move, so we applaud that. Then, second question is on CapEx. 100 million, you did 82 in 2018. That's a nice, healthy 20% plus boost. If we look around the multi-industry sector, that's probably going to be one of the higher, if not the highest, percentage increases. I think the first look we're seeing is closer to flat. That speaks to your growth ambitions and confidence. Can you share with us the thought about investing in CapEx here at this rate? How committed are you to spend all of it? What kind of returns are you expecting?

We're an asset-like business. We spend less than 2% of sales, historically, on CapEx. The $100 million ends up being about .9% of sales. They're really good projects across our businesses. It made sense to fund them. They all have excellent returns. I think there's a commitment to do that, and our businesses have good plans. We're a bigger business. We acquire some businesses. There are some investments that are needed to be made, but it's still within the context of being an asset-like business and spending less than 2% of sales on capital.

Do you look at those returns in comparison to the same thresholds on acquisitions? What's the algorithm there?

Usually the returns on internal CapEx are much higher, but there is a process that uses similar metrics on returns. They come bottom-up from our businesses, and we evaluate them during the budget process. That's where we ended up this year.

Terrific. Thank you.

Thank you, Dean. Thank you. Our next question comes from Robert McCarthy with Stevens. Your line is now open.

Good morning, everyone. Can you hear me?

Yeah, great.

Well, good to be back. I must say, my brethren have asked a lot of very, very direct good questions, so we're getting to the end of the bingo card here. Nevertheless, just a couple of things. I guess, number one, I know I've been out of it for a while, but can you do the typical around the horn on organic growth across the segments and order trends?

Sure, Robin. We're glad to have you back, and I will go around the horn. I talked about aerospace a little bit, and so I'll start with our process businesses. We finished the year with an excellent fourth quarter. The overall sales were up mid-teens, driven by contributions from the acquisitions of Sancom, Forza, Tellur, and Spectra Scientific. Organic sales were up mid-single digits in the quarter, with particularly strong growth across our materials analysis businesses. And for 2019, we expect another solid year for our process businesses, with organic sales expected to be up mid-single digits. Our automation and engineer solutions businesses closed out the year with another excellent quarter, with organic sales up high single digits in the fourth quarter. Dunker Motor, in continuous deliver, excellent results, as their growth funnel is driving exciting new applications in precision motion control. Additionally, as I mentioned before, our engineer solution businesses are seeing continued solid demand across their key markets. And in 2019, we expect a solid mid-single digit organic growth across our automation and engineer solutions business. And that brings me to power and industrial. Overall sales were for power and industrial were up mid-single digits, driven by contributions from recent acquisitions of Arizona Instrument and MoTeC. Organic sales were down low single digits in the quarter against a difficult prior year comparison for our power instrumentation business. And for 2019, we expect low to mid-single digit of growth, with balanced growth across power and industrial. So if you look at our different market segments, we're expecting mid-single for process, mid-single for aerospace, low to mid for power and industrial, and mid-single for automation and engineer solutions.

And just in that context, in the context of this question, how do you think about your oil and gas, especially metals exposure, for the quarter and then expectation for next year? Just bring sense of that for us.

Yeah, sure, Rob. In the fourth quarter, our oil and gas was up mid-single digits. Our upstream was up mid-teens, and our mid and downstream was flat. There was a precipitous decline, and then a significant increase in the quarter. It really didn't affect business conditions much for us. For all of 2019, we expect our oil and gas business to grow mid-single digits, and we expect the upstream to be up high single digits and the mid and downstream to be up low to mid-single digits. So, so, moderate growth, but still solid for our oil and gas businesses.

And especially metals? I mean, I didn't know if you had...

Yeah, sure. The metals business was up a bit higher than EMG. So, EMG, we had solid growth, especially metals had a good quarter. And for 2019, we expected to be in line with Ametek growth. So, we're seeing strong markets. The end markets there are aerospace, medical, specialized, industrial. So, that's...the business is doing well, and we're expecting it to continue in 2019 at a somewhat moderating basis.

If you'll involve me in one follow-up, a different question. You know, looking at some of your ostensible comps in the public markets, real acquisition stories, they definitely have a narrative around how they buy companies. And I think, you know, there's a narrative, you of all, not formally articulated, but if you were to formally articulate how you go about buying companies and improving them, what would you focus on? Would you focus on...besides arbing public and private multiples? I mean, would you focus on R&D enhancement? Would you focus on international expansion, global excellence, procurement? How would you explain to someone how you're going to take a business and make it better on the SG&A gross margin front, working capital front? And, you know, what is kind of your secret sauce for capital deployment and fundamentally making these businesses...selecting these businesses, but then fundamentally making them better?

Right, Rob. In terms of selection, it really comes down to being in a near adjacency of an existing presence. And we look for product differentiation. We look for service differentiation. That's the number one attribute. And in terms of how we add value to deals, we have a long track record of taking businesses that are 10 to 15% EBDA and then doubling the margins over the course of three to five years. And really, it's all of the above in terms of how we do it. We have seasoned operators that are very experienced in M&A and very experienced in improving the businesses. And the playbook that we develop can be based on improving organic growth in terms of exploiting global opportunities. It can be based on improving growth margins by global sourcing. It can be based on reducing G&A. There's a whole playbook. And certainly, pricing is one thing that we think we have some insight into these markets and know what price can be paid and what the customers are willing to pay. So we do. We have a very well-defined process. It results in the custom playbook for each business. We have excellent process capability. It's a process capability across deal sourcing, across deal modeling, diligence, and integration. And I think our secret sauce is our very strong business operators that are well-engrained in the M&A business system. And they provide ownership for delivery of the financial metrics for each individual deal. And none of that's changed. And we have a great class of businesses that joined M&A in 2018. And we're looking forward to improving them in 2019. And we also have a strong pipeline that we're looking at bringing into the company. So we feel very good about the M&A opportunities for M&A.

Thanks. I'll leave it there.

Thank you. Thanks,

Ron. Thank you. Our next question comes from Andrew Oben with Bank of America Merrill Lynch. Your line is now open.

Hey, guys. Hillary. Good morning.

Good morning, Andrew.

Just a couple of questions for me. Was really surprised by your China growth number. Very different, I think, from a lot of your competitors. Can you just give us some more color as to what end markets are driving the strong performance?

Yeah, I think the biggest market that's driving the strong performance are our process and analytical instrumentation businesses. And it's chiefly because their primary products allow customers to enhance their manufacturing capability. So as China moves up the value chain and wants to do more sophisticated manufacturing, our process businesses provide that capability through their instrumentation. So that's the primary reason that we've been doing so well in China. And as I said, we think the growth is going to moderate, but we still feel good about the market.

Sure thing. And then the follow-up question on M&A. And by the way, just to consider, when you say process, that's manufacturing process, not oil and gas process. And just a question on M&A. Have you guys changed how you guys source the deals? Because a lot of companies sort of complain about the pricing availability. You guys still seem to be able to execute very well in the M&A pipeline. If you could give us some color on sourcing of your deals and evolution of your sourcing over the past couple of years. Thank you. And great quarter, by the way.

Thank you, Andrew. Thank you. Yeah, deal sourcing is a competitive advantage for M&T. In our niche presences, we dedicate resources to developing a pipeline of deals. So some of our deals come through the typical auction process, but some of our deals are privately sourced by businesses that see how we operate in the niche markets that we're in. And we have a dedicated, we have about nine or ten M&A professionals, or ten actually, ten M&A professionals who work closely with our businesses and they identify strategic acquisitions. And we have people dedicated to the field. So it's a business process.

It's

not just an event. And that process allows us to build up an intangible asset of these pipeline of deals that we follow over years. So when we're looking to acquire them, they see how we operate and we're preferred buyers. So it's really a long-term commitment to the markets that we're operating in and good knowledge about the targets. And the pipeline, as I said, looks as strong now as it did entering last year, and last year we had a record year.

Congratulations. Thanks a lot.

Thank

you, Andrew. Thank you. Our next question comes from Josh Perkwiswinski with Morgan Stanley. Your line is now open. Hi, good morning, guys. Good morning, Josh.

Just to follow up on some of the other questions that have been asked, I guess first on some of the actions that we saw in the fourth quarter, particularly the oil price dislocation, I think for a lot of folks it brought up kind of the 16-17 timeframe and some of the volatility you saw in the businesses back then. Just as a bit of a sanity check, can you remind us kind of how far off trough or maybe still how far away from Pire Peak some of those businesses are to give us some sensitivity around if we were to come into a more difficult macro scenario, maybe there's not as much downside as there was back in that timeframe.

Yeah, sure, Josh. If we go back, our oil and gas exposure was peak at about $400 million. And right now, total exposure is about $290 million. So it's about 6% of the company and about 2.90. So we're still well off our peak. And of our presence, about one-third of that is U.S. and two-third of it is international and about 25% of it is upstream and 75% is mid and downstream. And what we're seeing in the market is pretty typical of oil and gas expansion. The upstream starts as you come out of a cycle and then it transitions to mid and downstream. And we have a bigger mid and downstream presence. So we're expecting the mid and downstream to pick up a little bit this year. So we're feeling pretty good about our oil and gas presence right now. And we think we're well positioned.

Got it. That's helpful. And then a lot of questions on M&A during the call. Maybe one more from me. A lot of your peers that are kind of in the same category as being compounders and who have also moved to cash EPS, I think have also tried to develop a bit more of a recurring revenue profile. I think in EIG, you probably touch more data than a lot of your peers or competitors out there. Is there an ambition to maybe step up the recurring revenue side of that through something in the software space? Is that something that you looked at in the pipeline, something that you've kind of considered strategically? Just curious what your thoughts on those are,

Dave. That was a great question. If you look at the last two acquisitions we did with Tellular and Spectro Scientific, there is both a recurring theme in both of those businesses that's tied to the software, that's tied to the data. And I think with Tellular, we have about 65% recurring revenue, and with Spectro, about 25% recurring revenue. In both cases, they're dealing with information, they're dealing with algorithms, they're dealing with making the information and solving customer problems. So it's definitely a focus for us. And we have a tremendous growing software capability. We've been investigating over many years. We have about 150 engineers in India developing software for us in Bangalore. So we have a good internal capability, and with our acquisition profile, it's certainly something that we're looking at. And the recurring nature is something that is key for us to grow in Ametek.

Great.

Thanks for the

call. I'll leave it there. Thank you, Josh. Thank you. Our next question comes from Steve Barger with KeyBank

Capital Market. Your line is now open. Hey, thanks for fitting me in. This is actually Ken Numinon for Steve. I just had a quick modeling question, and I'm not sure if this has been covered already, but you had really good flexibility to hedge some changes in FX this quarter. I'm just curious, is there any embedded expectations for the impact on foreign exchange to sales or margin within the guide?

Yeah, for the full year 2018 on the top line, FX was a benefit of about a point. But for 2019, the full year FX is a negative 1%. And then we moved to the bottom line. As we've communicated in the past, we're largely naturally hedged at the profit line, given the general balance of revenues and costs across currencies. So you won't see a meaningful impact either way on our profit results from the FX movement. So that's how we modeled the year, and that's been the history of how the business has resulted in operations.

Got it. And then last one for me, you saw a pretty decent acceleration in the incremental margin for EMG. I think someone else touched on this a little bit before. Is there any reason to believe that that could kind of revert back to the same type of incremental as you saw in the first half of 2018? Or is this kind of run rate for incremental margin pretty solid for 2019?

Yeah, we had a good year in 2018, and we had a good year in Q4. Our incrementals were solid at 40%, with our EIG business around 50 and our EMG business around 30. And for 2019, we're expecting good solid incrementals, but more in the 30 or 35% range.

Perfect. Thanks for telling.

Thank you.

Thank you. And our next question comes from Richard Eastman with Baird. Your line is now open.

Dave, just kind of reading the body language here through your body language here through all the responses and questions. As we guide the 3% to 5% core for 2019, I'm curious. I mean, the tone here is such that the businesses generally stay steady and strong, but run up against the comps. And so is that largely kind of how you're feeling about the business right now, given the backlog, the orders? Is this, you know, is the 3% to 5% really kind of a comp issue more so than the tone of business in any of the segments?

Yeah, I think that's an accurate representation of how we're feeling right

now. Yeah. And in like, Dunker Motor, I mean, you commented how strong it was in the fourth quarter, but I would think of that business as being maybe an earlier cyclical kind of indicator. Your oil and gas may be the same, but no break in trend in those businesses at all when you look out to 19?

When you think about Dunker Motor and think automation and the global macro trends and automation is really a secular trend. So Dunker Motor is a really strong backlog and it's performing exceptionally well. And as I said with oil and gas, we're positioned now with a larger mid and downstream presence to do quite well in that business and performing very well and we're quite away from our peak. So

feeling

pretty good about that.

And geographically, the 3% to 5% pretty much spread across the three major regions in terms of an expectation for 19?

Yeah, that's pretty much maybe a little bit better growth in the US, but pretty much all geographies will grow in that 3% to 5% range.

Okay. And then just maybe the last question, this might be a little bit more difficult, but when you look at Amatek's mix of business on a next 12-month basis, could you take a swing at what revenue is coming from, call it maybe the medical and food exposure that we now have? I mean it must be north of a half a billion I would presume?

Yeah, our medical exposure is about -14% of sales. And you have to work with Kevin on the food exposure. I'm not as... So that's combined in our process businesses and actually shows up a little bit in our automation businesses also. But it's a growing presence, but the medical, the healthcare business is about -14% of sales and it's performing well for us.

Okay, okay. And just last question, the aerospace, you maybe provided this, but in terms of 19, what's the growth expectation for all of aerospace and do we still lead with commercial and military, or has the BizJet piece of the business as a backlog there built, or how do we look at the four segments there against a 19 forecast?

Yeah, we're expecting growth in all four segments and our guide is positive -single-digit growth, and we're still seeing strong business in the military and commercial side. So BizJet's going to have a solid year, but we think we're going to have more strength in commercial and military.

Gotcha. Okay, great. Thank you.

Thanks, Rick. Thank you, and I'm showing no further questions in the queue at this time. I'd like to turn the call back over to Kevin Coleman for any closing remarks. Thank you, Jimmy.

Thanks, everyone, for joining our conference call today. And as a reminder, a replay of today's webcast may be accessed in the Investors section of Ametek.com. Have a great day.

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