Ametek Inc (AME) — Q4 2018 Earnings Call Transcript

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 Zapico, 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 Investors 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 revise any forward-looking statements. Please also note that our fourth quarter reported results include an after-tax gain of $11.8 million or $0.05 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 cost, and other charges. Please refer to the Investors 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 will 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 us 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%, while foreign currency posed a 1% headwind. Orders also remained very solid, as overall orders were up 11% over the prior year, with organic orders also 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. EBITDA in the quarter was a record $332 million, up 22% over the prior year period, with EBITDA margins a 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 margin of 22.2%, 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. Diluted 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%, and 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, operating margins for 2018 were up an impressive 110 basis points over 2017. Full-year diluted 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 our aerospace and engineered 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, AMETEK delivered tremendous performance in the fourth quarter and throughout the year. Each of our businesses continued to deliver exceptional results through the execution of AMETEK's 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 AMETEK's stakeholders. I would like to thank all AMETEK 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 AMETEK. I will 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 for these acquisitions and acquired approximately $350 million in annual sales. In the fourth quarter alone, we completed three acquisitions: Forza and Telular, which I highlighted during our last earnings call, and Spectro Scientific, which we acquired in late November. Spectro Scientific 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 productive maintenance in a broad and growing set of end-markets. Spectro Scientific provides both lab-based and onsite instrumentation, including consumables, and cloud-based software analytics to help customers determine the condition of lubricants and fluids in mission-critical equipment. They're based in Chelmsford, Massachusetts, and have approximately $50 million in annual sales. Spectro Scientific, along with the other businesses acquired in 2018, are integrating very nicely into AMETEK, 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 in our businesses to support growth initiatives. In 2018, we invested approximately $75 million in incremental growth opportunities. These investments were focused across our sales and marketing, research, development, and engineering content. 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 market speaks to the success of our research, development, and engineering efforts. We also remain focused on expanding our footprint across the globe and to new adjacent markets. In October, we celebrated the opening of our newest technology solutions center in Bangalore, India. The center showcases the latest products and technologies of many of AMETEK'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 market. 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 operating performance, as 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 AMETEK'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 an excellent job managing each of the work streams we have put in place to help address the effects of tariffs. Our 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-light business model. AMETEK'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 to offset the impact of known tariffs through our various initiatives. Now I will 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-GAAP 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 peers. With that said, we expect 2019 adjusted earnings per diluted share to be in the range of $3.95 to $4.05, an increase of 8% to 11% over the comparable results 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, with adjusted earnings expected to be in the range of $0.95 to $0.97 per diluted share, representing 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 AMETEK growth model. I will now turn it over to Bill Burke, who will cover some of the financial details of the quarter and then we'll be glad to take your questions.

Thank you, Dave. As Dave highlighted, AMETEK 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 Cuts and Jobs Act, AMETEK recognized a net gain in the fourth quarter of 2017 related to the re-measurement of our deferred tax liabilities and the deemed repatriation of foreign earnings. This gain was considered provisional and was subject to further adjustments during the measurement period. The $11.8 million or $0.05 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 and administrative expenses in the fourth quarter were down slightly over the prior year, and were 1.5% of sales in the quarter, down from 1.6% of sales in last year's fourth quarter. 2019 general and administrative expenses are expected to be roughly in line with 2018 levels. The adjusted effective tax rate in the fourth quarter was 22.8% and in line with our expectations. This compares to last year's adjusted rate of 25.7%. The year-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 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 16.9% 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 or 1.9% of sales, reflecting our asset-light 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, with 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 and 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 3.93% 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.

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

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 orders, organic orders have been running at 5% or better for quite some time. You had a pretty good fourth quarter; I'm just wondering if there's something relative to the orders where maybe that'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, and 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 straight quarters with a positive book-to-bill. We ended the year with a record backlog. Overall, we feel very good about the environment where we're operating in, and we feel good about what we're hearing from our businesses and our customers, and we continue to see solid underlying demand, and 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. And then 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 could maybe specifically parse that out: global procurement versus the other areas, and what you're expecting on that for each in 2019 as well?

Sure, sure, Scott. And as you know, we started the year in 2018 with an $80 million guide for cost savings, and 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, largely driven by our sourcing initiatives. So we ended up at $90 million, as you mentioned, about $70 million of that was from sourcing and about $20 million was from other operational excellence initiatives. And 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 operational excellence initiatives. Does that answer your question?

Thanks a lot. Yes.

Okay. Thanks, Scott.

Yes, I want to get away from the ops for a second and just talk about the share repurchases in Q4. I mean, you're not known for being a heavy repurchase company. So is that a reflection of the M&A options on the table here that the backlog or is it more a reflection of your share price that's in the November/December and supporting your stock at those levels? But 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. So for 2019, we have a very strong pipeline. Over time, we have an opportunistic view of share purchases, and we see the market adjust like it did in the fourth quarter. Given our 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 AMETEK shareholders when we made that decision. When you think about our balance sheet, Nigel, we entered 2018 with a debt-to-EBITDA ratio of about 1.95%. We end 2018 at the same level, 1.96%. So we deployed over $1.5 billion on acquisitions and M&A and we still have the same debt-to-EBITDA. It really reflects the strong balance sheet and the strong cash flow generation capability of the company and the fact that we can control our own destiny to a certain degree.

Great. And then one question, two parts: what have you seen in China? You’ve got a recently large exposure to China in terms of the sales, what do you see in there by major business? And then on tariffs, you talked about how you're accompanying couple of tariffs, do you have list 3 at 25% priced right now or do you have to go out and re-price if we do get that step up in March?

Right, great question. The list 3 is built into our guidance, so we assumed that on March 1st the tariff would go to 25%, and that's incorporated into our guide. As I said in the prepared remarks, we feel comfortable that we will be able to offset the impact of tariffs completely. Regarding China, it is an important market for us. It represents about 9% of our sales, and China grew nicely in the quarter, driving overall Asia growth of 12%, which was a bit higher than the overall Asia growth. Certainly, the trade situation with China has a 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 the Chinese market needs to upgrade their manufacturing capability and to monitor nuclear power plants, and assist in cleaning up their environment. We are expecting growth to moderate in 2019, more in line with AMETEK's overall growth, but we feel good about that level of growth in China for 2019.

Can you first talk about how much price you guys actually realized in 2018, and based upon the comments you just made, Dave, how much price do you anticipate realizing for 2019?

Sure, Matt. As you will recall, during the year we increased our pricing as we got ahead of tariffs and inflation, and Q4 was isolated from Q3. In Q4, 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 on total inflation, about 1.5 points. So the results speak to the highly differentiated nature of our AMETEK portfolio and our leadership position in niche markets, as well as our focus and determination to ensure we stay in front of the global changing environment. So we're feeling good about pricing going into 2019.

And then, David, can you comment when you look into 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 on what you're seeing with respect to the robotics and automation market specifically? Thank you.

Yes, robotics and automation was a driver of the EMG growth, but it was more broad-based than that. We had really solid growth in the military aerospace business and we also saw solid growth on our EMED business. So pretty much all components of the EMG were performing well in the fourth quarter.

Could you give us a little bit more color on growth investments in 2019? I know, obviously, new product development is one area, 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. These investments will be across incremental sales opportunities, incremental marketing opportunities, and incremental engineering opportunities, and then they will be distributed among three main areas that are probably about equally spread across those categories.

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

We had excellent operating income margins for 2018, with about 110 basis points of expansion excluding acquisitions, and the core incrementals were about 35%. For 2019, we're looking at 30 to 40 basis points of operating income margin expansion, and the incrementals will be around 30% to 35%. There isn’t anything outside the norm driving that; we'll just have to see how the year begins, but we feel good about the company’s performance and the margin performance.

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

I don't think it does, Chris. It is kind of in our D&A. We evaluate each of our businesses and look for cost reductions as an element of our core operating environment, and there are always new acquisitions that come into the fold that provide some new opportunities. So I think we're solid for 2019. And looking long-term, I think as long as we keep executing our strategy, these initiatives will remain evergreen.

Thanks for that. And in the outlook, I'm just curious if you're seeing any acceleration in aerospace. Clearly, some peers are seeing that within that vertical, and overall, if there are other areas that are accelerating where it's notably stable or potentially seeing some rollover?

Yes, I think our aerospace and defense businesses had 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 driven by very strong organic growth. Our organic growth for aerospace was at 10% in the fourth quarter, and we had similar results for the first three quarters of the year. We continue to see solid and balanced growth across aerospace markets, with notable strength in both commercial and military businesses, and we're feeling confident about our aerospace business.

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

Yes, great question, Brett. Q4 played out like a typical fourth quarter. We strengthened in 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. Regarding January, we recently completed our orders which were right on plan. So we feel real good about January orders, and across the board, they came in as expected, giving us confidence in our growth.

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.

Yes, our interest expense is going to be up a bit for 2019, probably close to 10%. Most of our debt is fixed, with some balance on the revolver. Given the new private placement in December and heavy acquisition as well as share repurchase activity in the fourth quarter, you’ll see an increase in interest expense year-over-year. Deleveraging depends on our pace of acquisition activity during the year. Our full expectation is that we’ll continue to be very active on deals, so deleveraging is not a primary focus.

Hey, I would like to start first by congratulating you on the move to cash EPS but we all acknowledge it doesn't change the fundamentals, but it certainly puts you on a level playing field with your acquisition line of competitors. What I also like seeing is that you guys are willing to adapt and be flexible. So maybe you can share with us a bit about the deliberation process internally. Obviously, at the beginning of the year 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, and we have strong and consistent cash flows. This is just another lens into our financials that will allow our shareholders to better understand the strength of those cash-generating capabilities, and as you mentioned, it aligns more comparably with our acquisitive peers. However, it doesn't change how we're operating the business or how we evaluate deals since we already value deals based on cash flow. Essentially, it provides additional information and a different view into the business for our investors.

Great. For the record, we're big fans of the move, so we applaud that. And then the second question is on CapEx. So $100 million, you did $82 million 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 it's the first look we're seeing that’s closer to flat, so that speaks to your growth ambitions and confidence. Can you share with us the thinking behind investing CapEx here at this rate and how committed are you to spend all of it and kind of what returns are you expecting?

We're an asset-light business, and we tend to spend less than 2% of sales historically on CapEx, and the $100 million ends up being about 1.9% of sales. These are good projects across our businesses, and it makes sense to fund them as they all show excellent returns. I believe we are committed to maximizing these investments, and we have good plans across our businesses.

Do you look at those returns in comparison to the same thresholds for acquisitions; what’s the algorithm there?

Yes, typically the returns on internal CapEx are much higher. However, there is a process with similar metrics on returns that's developed at the ground level within our businesses. We evaluate these during the budgeting process, leading us to this year's allocation.

Good morning everyone. Can you hear me?

Yes, great.

Great to be back, and I must say, Brett had asked very, very direct good questions. We're getting to the end of the bingo card here, but nevertheless just a couple of things. I mean, 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 orders trends?

Sure, Rob, and we are glad to have you back. I'll go around the horn. I mentioned aerospace a bit, so I will start with our process businesses. We finished the year with an excellent fourth quarter. Overall sales orders were up mid-teens driven by contributions from the acquisitions of SoundCom, Forza, Telular, and Spectro Scientific. Organic sales were up mid-single-digits in the quarter, especially strong growth across our materials analysis business. For 2019, we expect solid mid-single-digit growth for process businesses. Our automation and engineered solutions business closed out the year with another excellent quarter, experiencing organic sales growth of high-single-digits in the fourth quarter. Dunkermotoren continues to deliver great results with exciting new applications in precision motion control. In 2019, we expect mid-single-digit organic growth across our automation and engineered solutions business. Moving on to power and industrial, overall sales 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 challenging prior year comparison for our power instrumentation business. For 2019, we expect low-to-mid-single-digit growth with balanced growth across power and industrial. So if you look at our different market segments, we are expecting mid-single for process, mid-single for aerospace, low-to-mid for power and industrial, and mid-single for automation and engineered solutions.

In that context, how do you think about your oil and gas, especially metals exposure for the quarter, and then expectations for next year? Just break down the sense of that for us.

In the fourth quarter, our oil and gas was up mid-single-digits. Our upstream was up mid-teens, while the mid and downstream were flat. There was a precipitous decline followed by a significant increase in the quarter, and it really didn't impact business conditions much for us. For all of 2019, we expect our oil and gas business to grow mid-single-digits, with upstream up high-single-digits and mid and downstream up low-to-mid-single-digits. So we’re moderating growth but still solid for our oil and gas businesses.

And in specialty metals, I didn't note that.

Yes, the metals business was up a bit higher than EMG. So EMG had solid growth and specialty metals had a good quarter. For 2019, we expect it to be in line with AMETEK growth, and the end markets there are aerospace, medical, and specialized industrial, so that business is doing well, and we're expecting momentum to continue in 2019 at a moderating basis.

If you could wrap up one follow-up, a different question: looking at your apparent competitors in the public markets, real acquisition stories have a narrative about how they acquire companies and enhance them. If you were to clearly explain your process for acquiring companies and improving them, what would be your focus? Would it be on R&D enhancement, international expansion, or global excellence in procurement? How would you describe to someone your strategy for taking a business and enhancing it regarding SG&A, gross margin, and working capital? What is your unique approach to capital deployment and fundamentally selecting and improving these businesses?

It really comes down to being in near adjacency, meaning our existing presence, and we look for product differentiation and service differentiation, which are the number one attributes. In terms of how we add value to deals, we have a long track record of taking businesses that operate at 10% to 15% EBITDA margins and doubling the margins over a period of three to five years through several methods. The playbook we develop is based on improving organic growth by exploiting global opportunities, enhancing gross margins through global sourcing, reducing G&A, and more. That's an overarching approach to how we improve the businesses we acquire. We have a very well-defined process that results in custom playbooks for each business. Our operators are seasoned, with significant experience in M&A and improving businesses, as evidenced by the excellent businesses added to AMETEK in 2018. We’re looking forward to enhancing those in 2019, and we also have a robust pipeline of forthcoming opportunities. We feel great about the M&A opportunities ahead for AMETEK.

Just a couple of questions from me. I was really surprised by your China growth number, very different from a lot of your competitors. Can you give us some more color on what end markets are driving this strong performance?

Yes, I think the biggest markets driving strong performance are our process analytics instrumentation businesses, as their primary products allow customers to enhance their manufacturing capabilities. As China moves up the value chain and wants to do more sophisticated manufacturing, our process businesses provide that capability through their instrumentation. That's the primary reason we've been doing well in China. We think the growth is going to moderate, but we still feel good about the market.

Just a question on M&A; and by the way, just to confirm, when we say process, that’s manufacturing process not oil and gas process?

Yes, that's correct.

Okay. And just a question on M&A: have you changed how you source the deals? A lot of companies seem to complain about the pricing availability, but you guys still seem to execute very well in the M&A pipeline. If you could give us some color on sourcing of your deals and the evolution of your sourcing over the past couple of years? Thank you and a great quarter, by the way.

Deal sourcing is actually a competitive advantage for AMETEK. We dedicate resources to developing a pipeline of deals. Some of our deals come through the typical auction process, but many are privately sourced by businesses that see how we operate in our niche markets. We have about 10 M&A professionals who coordinate closely with our businesses to identify strategic acquisitions. This is an ongoing process rather than an event, allowing us to build intangible assets over years. We believe it positions us as preferred buyers, so we're seeing a strong pipeline indicative of the opportunities we had last year, which led to a record year.

Yes, just a follow-up on some of the earlier questions that have been asked. 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 who had brought up kind of the 2016, 2017 timeframe and some of the volatility you saw in those businesses back then. Just as a bit of a sanity check, can you remind us how far off trough or how far away from prior peak some of those businesses are to give us some sensitivity around if we were to enter a more difficult macro scenario, maybe the downside would not be as pronounced as it was back in that timeframe?

Yes, sure, Josh. If we go back, our oil and gas exposure was at a peak of about $400 million. Currently, our total exposure is about $290 million, which is about 6% of the company. Currently, the $290 million is split between about one-third in the U.S. and two-thirds internationally, with 25% in the upstream and 75% in mid and downstream. What we're observing in the markets follows the typical oil and gas expansion cycles: the upstream markets strengthen first, followed by mid and downstream, and we have a larger mid and downstream presence, positioning us well to capitalize. We're expecting good growth there next year.

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, who are in the same category as being near compounders and have also moved to cash EPS, have also tried to establish a bit more of a recurring revenue profile. I would think you probably deal with more data than many of your peers or competitors out there. Is there an ambition to increase the recurring revenue side of your business through any software initiatives? Is this something you've considered strategically?

It’s a great question. If you look at the past two acquisitions we did with Telular and Spectro Scientific, there’s a recurring theme in both of those businesses related to software. I think with Telular we have about 65% recurring revenue, and with Spectro about 25% recurring revenue. Both are dealing with information and algorithms and are designed to create solutions to customer problems. It’s indeed a focus for us. We have a tremendous and growing software capability; we've been investing in over many years, and we have approximately 150 engineers in India developing software for us in Bangalore. So, yes, we have a good internal capability, and with our acquisition profile, it's certainly something we are actively pursuing. The recurring nature is a key strategy for growth in AMETEK.

Hey, thanks for fitting me in. This is actually Ken Newman on 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. Just curious if there are any embedded expectations for the impact on foreign exchange to sales or margin within the guide?

Yes, for the full-year 2018, foreign exchange was a benefit of about a point in terms of sales. However, for 2019, the full year is modeled as a negative 1% impact due to FX changes. When it comes to the bottom line, as discussed in the past, we are largely naturally hedged at the profit line considering our overall balance of revenues and costs across currencies. Therefore, you won’t see a significant impact either way on our profitable results from FX movements. This has been consistent with our historical performance.

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

Yes, we had a good 2018 and a good fourth quarter. Our incrementals were solid at 40%, with our EIG business around 50% and our EMG business around 30%. For 2019, we are expecting good solid incrementals but more toward the 30% to 35% range.

Dave, just kind of reading the body language here through your 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. Is that largely how you're feeling about the business right now, given the backlog and orders? Is this 3% to 5% really kind of the comp issue more so than the tone of business in any of those segments?

Yes, I think that is an accurate representation of how we are feeling, Ric.

Yes. And like Dunkermotoren; I mean you commented on how strong it was in the fourth quarter, but I would think of that business as being maybe an early or cyclical kind of indicator. Oil and gas, maybe the same, but no break in trend in those businesses looking out to 2019?

When you think about Dunkermotoren and automation, the global macro trends around automation represent a secular trend. Dunkermotoren has a strong backlog and is performing exceptionally well. Regarding oil and gas, we're now positioned with a larger mid and downstream presence, giving us the confidence about performance.

Okay. Yes, and geographically, the 3% to 5% is spread pretty much across the three major regions in terms of your expectation for 2019?

Yes, that's pretty much the case. Maybe a little bit better growth in the U.S., but overall, all geographies are expected to fall within that 3% to 5% range.

Okay. And then just last question this might be a little bit difficult, but when you look at AMETEK’s mix of business on a next 12 months basis, could you take a swing at what revenue is coming from maybe the medical and food exposure that we now have? I mean, it must be north of $0.5 billion, I would presume.

Yes, our medical exposure is about 13% to 14% of sales. You will need to check with Kevin on the food exposure. I'm not an expert on that. So that would be a combination of our process businesses, and it also shows up a bit in our automation businesses. We're witnessing solid performance in that area, and medical sales are performing well.

Okay. And just last question. In aerospace, you may have provided this, but in terms of 2019, what’s the growth expectation for all of aerospace? Do we still lead with commercial and military, or is BizJet piece of the business as a backlog built up? How do we look at the four segments there against the 2019 forecast?

We are expecting growth in all four segments, with guidance on positive mid-single-digit growth. We're still seeing strong business in military and commercial sectors, while the business jet segment is solid but is expected to have relatively less strength compared to both the military and commercial segments.

Thank you, Jimmy. Thanks everyone for joining our conference call today. As a reminder, a replay of today's webcast may be accessed in the Investor Section of ametek.com. Have a great day.