Ametek Inc (AME) — Q2 2024 Earnings Call Transcript

Thank you, Meg. Good morning, and thank you for joining us for AMETEK's second quarter 2024 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Dalip Puri, Executive Vice President and Chief Financial Officer. During the course of today's call, we will be making forward-looking statements, which are subject to change based on various risk factors and uncertainties and that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements. Any references made on this call to 2023 or 2024 or 2024 results guidance will be on an adjusted basis, excluding after tax, acquisition-related intangible amortization, and excluding a pretax $29.2 million or $0.10 diluted share charge in the first quarter for integration costs related to the Paragon Medical acquisition. Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investors section of our website. We'll begin today's call with prepared remarks, and then we'll open it up for questions. I'll now turn the meeting over to Dave.

Thank you, Kevin, and good morning, everyone. AMETEK delivered solid results with a strong operating performance in the second quarter against the backdrop of a more subdued global growth environment. In the quarter, we experienced continued headwinds from inventory destocking across our OEM customer base, leading to lower-than-expected sales volumes. Additionally, we are seeing signs of customers turning more cautious leading to some temporary delays in project spending. Despite these headwinds, our businesses delivered strong operating performance in the quarter, we saw growth in cash flow and earnings and robust core margin expansion reflecting the strength and flexibility of the AMETEK operating model. We expect the inventory destocking and more cautious customer behavior to continue in the back half of the year. As a result, we are adjusting our outlook for the remainder of the year. We remain confident in our ability to successfully navigate these near-term headwinds. As we've done in the past, we will expand our focus on operational efficiencies and continue to invest back in our businesses, utilize our strong balance sheet to deploy capital on strategic acquisitions and ensure we position AMETEK for continued long-term growth. Now let me turn to our second quarter financial results. Sales in the quarter were $1.73 billion, up 5% from the same period in 2023. Organic sales were down 2%. Acquisitions added 8 points in the quarter and foreign currency was a slight headwind. AMETEK's operational performance in the quarter was excellent with robust margin expansion. Operating income in the quarter was a record $448 million, a 7% increase over the second quarter of 2023. Operating margins were 25.8% in the quarter, up 40 basis points from the prior year. Excluding the dilutive impact from acquisitions, core margins were up a sizable 180 basis points in the quarter. EBITDA in the quarter was a record $545 million, up 10% over the prior year with EBITDA margins in an impressive 31.4%. Cash flow in the quarter was excellent, reflecting our operating capability and asset-light business model. Operating cash flow in the quarter was up 14% to $381 million with free cash flow up 17% and free cash flow conversion of 107%. This operating performance led to earnings of $1.66 per diluted share, up 6% versus the second quarter of 2023 and above our guidance range of $1.63 to $1.65 per share. Now let me provide some additional details at the operating group level. First, the Electronic Instruments Group. EIG delivered strong operating performance with outstanding margin expansion. EIG sales were $1.15 billion, a 2% increase from the second quarter of last year. Organic sales were flat and acquisitions contributed two points. Growth was strongest within our aerospace and defense and CAMECA businesses in the quarter. EIG operating income was $350 million, up 14% versus the prior year and operating margins were at 30.3%, up 320 basis points from the prior year. Our EIG businesses are operating at a very high level with excellent operating margins. They remain well positioned to benefit from a number of important long-term secular growth drivers, given their increasing exposures to attractive markets across process, aerospace, power, and energy markets. The electric mechanical group continues to navigate the impacts of inventory normalization across our automation and engineered solutions businesses. In the quarter, EMG sales were a record $81 million, a 14% increase compared to the prior year, driven by contributions from the acquisition of Paragon Medical. Organic sales declined 6% due to weakness in our automation and engineered solutions businesses, more than offsetting solid growth across our EMG, aerospace, and defense businesses. Acquisitions contributed 20% in the quarter. Operating income for the second quarter was $123 million with operating margins at 21.2%, while core operating income margins were 25%. As we have noted for a number of quarters, OEM customers across a wide range of markets are reducing excess inventory built up during the supply chain crisis. While we had expected to see conditions improve in the second half of the year, we now believe demand within this OEM customer base will remain subdued at current levels through the end of 2024. This inventory normalization is also impacting our medical OEM businesses, including Paragon Medical, leading to near-term delays in orders and shipments. Paragon remains very well positioned for strong growth once the inventory correction is complete, given their leadership position across a number of high-growth MedTech market segments. Additionally, Paragon has won new programs that we're currently investing in, which will drive incremental growth in 2025 and beyond. As we noted last quarter, we are leveraging our proven integration capabilities to drive meaningful operational improvements to best position Paragon for long-term success. As the volumes return following destocking, we believe the business will be leveraged to deliver outstanding sales growth and profitability. In summary, we are operating our businesses very well with 7% growth in operating income and 180 basis points of core margin expansion in the quarter. We continue to generate strong cash flow with 17% free cash flow growth in the quarter. And for the full year, we expect free cash flow to net income conversion to be between 110% and 120%. The strength of AMETEK's operational excellence strategy is evident in our operating results. We continue to drive efficiency improvements across our businesses by leveraging our global infrastructure and OpEx initiatives. And this year, we now expect to generate $140 million in savings. We also remain committed to investing back into our businesses. And this year, we expect to invest an incremental $90 million in growth, largely focused on research, development and engineering, and sales and marketing. The effectiveness of these investments is reflected in our vitality index, which was a strong 24% in the quarter. Additionally, our strong free cash flow and flexible balance sheet provide us with ample financial capacity for strategic acquisitions. Our pipeline of acquisition opportunities remains strong. AMETEK is very well positioned to continue to expand our portfolio of highly differentiated businesses that both our organic growth investments and our acquisition strategy. Now, turning to the outlook for the remainder of the year. With destocking expected to continue through the balance of the year and some customers turning more cautious on project spending, we are adjusting our sales and earnings guidance for the full year. Overall, sales are now expected to be up 5% to 7% versus the prior year, with organic sales expected to be flat to down low single digits. Diluted earnings per share for the year are now expected to be in the range of $6.70 to $6.80, up 5% to 7% compared to last year's results. This is less than a 1% reduction from our prior earnings guidance range of $6.74 to $6.86, as our proactive productivity actions, along with a lower expected fourth quarter tax rate helped offset the impact of the reduced sales forecast. This guidance reflects second half sales and operating earnings, essentially in line with our first half results. For the third quarter, we anticipate overall sales to be up mid-single digits, with earnings in the range of $1.60 to $1.62 per share, down 1% to 2% versus the prior year. In summary, we are pleased with our business's strong operating performance in the second quarter. We have a proven operating model and an experienced management team, and we remain confident in our ability to navigate the sluggish demand environment and deliver exceptional long-term results. I will now turn it over to Dalip Puri, who will cover some of the financial details of the quarter, then we will be glad to take your questions.

Thank you, Dave, and good morning, everyone. As Dave noted, AMETEK had a solid second quarter with excellent operating performance leading to outstanding margin expansion and strong cash flows. Now let me provide some additional financial highlights for the second quarter. Second quarter general and administrative expenses were $25 million or 1.5% of sales, in line with last year's second quarter. For fiscal year 2024, general and administrative expenses are expected to be approximately 1.5% of sales. Second quarter interest expense was $31 million, up $12 million from the second quarter of 2023 due to higher debt balances following the acquisition of Paragon Medical in December. Second quarter other expense was down approximately $4 million versus the prior period, due largely to higher pension income and higher investment income in the quarter. The effective tax rate was 19%, up from 18.2% in the second quarter of 2023. For 2024, we now expect our effective tax rate to be between 17% and 18%, driven by a lower fourth quarter tax rate due to statute expirations. As we have stated in the past, actual quarterly tax rates can differ dramatically, either positively or negatively from the full year estimated rate. Capital expenditures in the second quarter were $21 million, and we expect capital expenditures to be approximately $150 million for the full year, or about 2% of sales. Depreciation and amortization expense in the quarter was $99 million. In 2024, we expect depreciation and amortization to be approximately $400 million. This includes after-tax acquisition-related intangible amortization of approximately $190 million or $0.82 per diluted share. Operating working capital in the second quarter was 18.6% of sales. Operating cash flow was $381 million, up 14% versus the second quarter of 2023. While free cash flow was $360 million, up 17% over the prior year. For the quarter, free cash flow conversion was a strong 107% of net income. For the full year, we continue to expect strong free cash flow conversion in the range of 110% and 120% of net income. Total debt at June 30 was $2.65 billion, down from $3.3 billion at the end of 2023. Offsetting this debt is cash and cash equivalents of $397 million. At the end of the second quarter, our gross debt to EBITDA ratio was 1.2 times, and our net debt-to-EBITDA was 1 time. We have significant financial capacity and flexibility with $2.2 billion of cash and available credit facilities to support our growth initiatives and deploy on strategic acquisitions. In summary, AMETEK had a solid second quarter of 2024, delivering strong results with robust margin expansion and excellent free cash flows. Our leading positions across attractive market segments combined with our strong balance sheet and outstanding operating capabilities leave us very well positioned to navigate the current environment and to deliver on our growth strategies.

Great. Thank you, Dalip. Can we please open the lines for questions?

Thanks. Good morning. A couple of questions. First, Dave, you seemed pretty convinced a quarter ago that the destocking phenomenon would wrap itself up by mid-year. So I guess relative to 90 days ago, can you maybe talk a little bit about what's changed? What gives you confidence that we're only in for another six months of this? And then maybe touch on what end markets and businesses are starting to be impacted by some of the project delays you referenced? And then I have a follow-up. Thank you.

Yes. Our outlook for the year has changed. And as we noted in my prepared remarks, we now expect the improvements in the second half of the year are not going to happen as originally anticipated, and we talked about that earlier in the year. We now expect our sales and operating performance in the second half will be similar to the growth that we experienced in the first half. So we're not going to see the increases that we had anticipated. And this change results in about a four-point reduction in our sales outlook. And to your question, where is it coming from? Roughly three points of this reduction is in our automation and engineered solutions subset, which is the business that we talked about being exposed to the OEM destocking. Within that area, we have two points of reduction tied to our automation business and one point from the Paragon destock. So that makes up about three to four-point reduction in our outlook. Across our EIG businesses, we expect about one point of lower sales due to short-term project delays. There, we're seeing customers are being just a bit more cautious given the cumulative impact of a wide range of economic, political, and geopolitical factors. But we feel these are temporary delays. Our new funnel pipelines remain very solid, and projects are not being canceled; they're being delayed. Given the expected lower sales, we reduced our earnings guidance by about $0.05 at the midpoint. Another couple of points; I mean, we've really done a good job running the company. It reflects when you take that sales decrease; it reflects about a 20% decremental margin on the expected lower sales. As Dalip mentioned, the tax rate will be lower in Q4. So I'm pleased with how the team is managing through these temporary demand changes. I'm confident that we're positioned to see accelerated profit growth when the economic conditions change. I think to your point, we missed the timing of the recovery, and the inventory corrections will take a bit longer. As AMETEK does, we're adapting to the current situation, and we're going to manage our business appropriately. As I said, I'm really pleased with how the team responded with a 20% decremental impact to the volume change.

Thanks, David. I would definitely agree on the decremental comment. Can you also - I think it's probably good from a timing standpoint in the call. Can you kind of go ahead and do the - around the horn you typically do across the businesses and how expectations have kind of changed in some of the segments?

Sure, Matt. I'll start with our largest subsegment, the process. Sales for our process businesses were up low single digits with solid growth across our energy businesses and our CAMECA business in the quarter. As noted in my prepared remarks, we've seen customers, as we just talked about, turn more cautious. We expect this to continue in the second half as we discussed, and we expect our process businesses to be flat to up low single digits versus the prior year. Now I'll move to aerospace and defense; that business was up mid-single digits in the quarter. Growth was strongest across our commercial aerospace businesses, while defense experienced some shipment delays in the quarter. For the full year, we continue to expect strong high single-digit organic sales growth for our A&D business with similar growth across both our commercial and defense businesses. Next, I'll move to our Power & Industrial businesses. Overall, sales for our Power & Industrial businesses were up mid-single digits in the second quarter, with contributions from recent acquisitions being offset by a low single-digit decrease in organic sales. Similar to our process businesses, our Power and Industrial are seeing the same kind of customers delaying some projects due to the broader macro uncertainties. And for all of '24, we now expect organic sales for our Power and Industrial businesses to be flat compared to 2023. Finally, for our Automation & Engineered Solutions business, sales were up high teens on a percentage basis in the quarter due to the contributions from the acquisition of Paragon Medical. Organic sales in the quarter were down approximately 10%, due to the continued normalization of inventory levels across our OEM customer base. We expected to see improvements and a return to growth as we talked about in the second half of the year. And as we just mentioned, that's not going to happen. Inventory normalization is going to continue through the end of the year. As a result, we expect organic sales for our Automation & Engineered Solutions businesses to be down mid-single digits for the full year. So that's a picture around the board.

Great. Thank you.

Thank you. Good morning everyone.

Good morning, Deane.

Dave, would like to pick up where you left off with Matt. And just some more color on the customers' kind of sentiment here and the delayed project spending. What kind of reasons are they giving you? Is it macro? Are they having trouble getting financing? Is it election worries? Any kind of way that you could characterize and frame for us about this degree of cautiousness?

Yes. I think what we see from our customer base is they're just taking longer to approve projects. They're going further up the sign-off chain to get approval. These are typically not even large projects, but you see those resulting in delays. I think it's a combination of the elections in the U.S.; I think two-thirds of the world's countries have elections this year. So there are elections around the world, and it's also some financing related to the higher interest rates and inflation. So just a lot of factors are combining to affect people's decisions, and they're just delaying a bit. The thing that's different than in some other downturns is we still have very strong pipelines of new activity. So thinking about past downturns, we've been through a bunch of these, I don't think there's been any where we have a strong new activity pipeline from our customers. So the projects are not being canceled; there may be some delays in phasing some new products in and maybe it's taking longer to get the financing, although that's not the primary feedback we're getting. I think it’s this broader macro issue that's honestly a bit of a smaller issue for us. The bigger issue is the OEM destock. We had the pandemic, and then we had the supply chain crisis. We're selling differentiated components and subsystems to people that typically have smaller dollar value amounts in the entire system. When people bought inventory, because we're very specialized and they wanted to keep shipping the products, now we're just dealing with a destocking process that's taking a little longer than we thought.

Yes, David, that's really helpful. I love the way you characterized it because in a slowing environment, the first thing you see customers do is delay spending and seek more approvals. That's pretty familiar. Do you have any sense that it's snowballing from here? Does it get worse as the quarter progressed? And any kind of monthly cadence would be helpful.

Yes. I think the monthly cadence in both sales and orders was our typical monthly cadence. So, we typically step through a quarter with the first month being the lowest and the second month being a little bit higher, and the third month being the highest month of the quarter. That same process occurred. But definitely, as the quarter went on, we saw some incremental weakness mainly in the project area.

Got it. All right. Just last question on the destocking. When we look back on this period, that's been the biggest surprise - how long it has persisted. You're not, by far, the only one. We've seen this everywhere; anyone having anything to do with medical or life sciences supplies chains has just taken more than 2x longer than anyone thought. The question is for Paragon, what's their visibility like? You said there was a percent point from their destock. What's their visibility versus your comparison of the rest of AMETEK businesses, where do they fit on that scale?

Yes, because Paragon is mainly in one end market and they're talking to their customers daily. I think there's better visibility. You can also talk to customers and get market information. So the talk that we're seeing is really happening everywhere. To refresh everybody's memory, Paragon manufactures single-use and consumable surgical instruments and implantable devices, as well as drug delivery systems, very attractive markets. At the same time, this is going on, we're working on substantial efficiency improvements in the businesses. We talked about that last quarter, and this process is proceeding very well. This combination of the market growth that follows the destock, along with the new program wins and an efficient cost structure is really going to provide substantial sales and profit growth for Paragon in the years ahead. We have a similar business in a similar market in another part of AMETEK, and it's experiencing the same kind of destock. Paragon has won a tremendous number of new programs. So we're still investing and driving those things in the market. When you take a step back, this is going to be a tremendous generator for our long-term shareholders, and we're very optimistic about the business. It's unfortunate about the destock process, but we're in this for the long run, and we're doing all the right things for the business and we've got a new management team with some really talented people from AMETEK that are working with people from Paragon, and they have a great plan to take the business forward. We're optimistic about how that business is going to perform for us in the long term.

David, thanks for all that color. Really helpful.

Thank you, Deane.

Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead.

Hi. Good morning.

Good morning.

Nice quarter considering the environment. I guess just my first question, can you talk to what price cost was in the quarter by segment and what your expectation is in an environment where organic growth is going to be flat to down single digit? And then my follow-up question, it also struck me about the quarter over the past couple of quarters is the margins in EIG above 30% with mediocre growth. Is there anything unusual driving the operating margins there? What's structural? What's the risk that some of this goes away if pricing gets more difficult? I'm just trying to understand the performance in EIG margins, the good performance, given a tough macro. Thank you.

Good questions, Jamie, and I'll try to answer them both. The first thing is you talked about pricing in the quarter. Our pricing in Q2 was about 3.5 points price, and our inflation was about 2.5 points. So we had a positive benefit from that. So the pricing environment is moderating a bit and the inflation is moderating a bit, but we're really pleased with that performance. It was across our portfolio and maybe a little bit more in EMG, just a bit than EIG, but it was pretty much consistent across the portfolio at a pretty consistent performance, driven by our differentiated portfolio and the heavy investments we're putting into new products. We talked about a vitality index of 24%. We've got newer products, fresh products in the market, and our customers are buying them. This has resulted in some good pricing. As I said, inflation is moderating. We think that general environment of inflation moderation, along with our ability to continue leveraging our investments, are going to continue throughout the year. So, no change there; very consistent performance from the AMETEK portfolio, which is very differentiated and has performed very well. In terms of the margins in EIG, if you think about it, we had a similar performance in the first quarter and an excellent operating quarter. We had 320 basis points up driven by high leverage, excellent price-cost dynamics, strong performing acquisitions, and a really good product mix. That was consistent from Q2 to Q3, and we see that continuing for the rest of the year. I mean, we do have a comp in Q3 margins that is a difficult one, because that was a high-margin quarter for us if you look back on past few years. But in general, EIG margins are good and they're going to stay there; that business is very well positioned. In our process, Power and Industrial, and Aerospace businesses, we've got excellent market positions. Then just talking about the EMG part of the business, they had core margins of over 25%. They experienced dilution from acquisitions and destocking in our automation and medical businesses. But when we look at our businesses, they're running very well, generating excellent margins. I think EIG has historically a bit of a higher margin entitlement because they mainly sell to end users, getting aftermarket revenue streams, whereas EMG sells more to an OEM customer base with slightly lower margins. I see that trend continuing.

Yes. Very helpful. Thank you so much.

Hi. Thank you. Good morning everyone.

Good morning, Jeff.

Good morning. Hope all is going well, Dave. Hi, just on Paragon, I want to just make sure I have things dialed right here. I think your comment about a point of headwind is on a total AMETEK basis.

Yes.

So that implies $40 million or $50 million. So we're sort of talking about the business being down kind of 8%, 9%, 10% for the year. Is that basically where we're at?

Yes. I'd say you'd be between 10% and 15% for Paragon. You're right on.

Okay. And then just thinking about EMG, right? The comps are getting fairly easy on a year-over-year basis, but really, the commentary is we should kind of think sequentially, revenues are quite similar to Q2? Or do you actually see a little bit of a step up there?

That's a good question. When we step back and look at this, first, I'll go to orders. Our orders for the past couple of quarters have had small sequential improvements. If you go back to Q4 of last year, you had Q1 of this year and now the recently completed quarter, the orders sequentially were up low single digits each quarter. I feel like the orders have stabilized. We had a minus 10% organic in Q1. The orders in Q2 organically were minus 4%. We think in the second half of the year, we're going to have a modest improvement versus the first half. It feels like the business has stabilized. When you go to sales, we wanted to derisk the year because it looks flat—even though you have a little bit of movement from quarter to quarter. Typical seasonality is evident, and as Dalip mentioned, we have the benefit of the tax rate in Q4. Essentially, we derisked the year to reflect the current environment, we think it's going to stay that way through the balance of the year.

And then maybe we could just touch on that tax rate. Assuming 19% again in Q3, you would imply, I don't know, 14 or 15 in Q4. But the bigger question is just jumping off into 2025. Do we stay at that 17% to 18% range? Or do we move back up into the 19% to 20% range in 2025?

Yes. You'll see it right; we expect to move back up in 2025 to our typical tax rate. We haven't done our planning for 2025, but based on where we're sitting, that's what we would expect.

Yes. Hi. Good morning. Thanks for taking my question.

Hi, Scott. Good to hear from you.

Likewise. So I want to understand, so the reduction in sales guidance for the year, you indicated that it was essentially three points in EMG, one point in EIG. You talked about project delays there. My question is, is there any vulnerability to project delays spreading into the process because you didn't cite anything there?

Yes. If I didn't cite it, I should have said the process and power segments are experiencing similar activities. In the power segment, we have some power testing and measurement businesses that sell to multiple markets, including government customers, and there's a little delay there in projects, but we're very well positioned; those are just delayed—not canceled. The process is a bit larger, but it's the same scenario. That was only the change in sales from all of EIG, which is both process and power.

Okay. Thank you. I want to maybe shift to defense because that's a pretty high-margin business for you guys. Is that sort of push out of shipments? Is that something that you'll see in the third quarter or the fourth quarter? Is there anything more to discuss there?

No, I think regarding the defense side, we kept the guidance for the year the same, like plus high single digits. What we saw in the second quarter was very strong commercial activity, with some defense delays. For the full year, we expect both defense and commercial to grow in high single digits; everything is performing well there with good margins.

If I could just squeeze this last one in, Dave. The net leverage of 1x is pretty low for you guys. Just kind of wondering the pump, I assume, is pretty primed at this point. How does the pipeline look, or how are the sizes of the deals out there? Maybe you can give us a little color.

Yes. The pipeline looks really good. The sizes of the deals vary throughout the whole spectrum. There are smaller deals, mid-sized, and larger deals. As we've talked about before, we'll probably buy a big business for us with deployment of greater than $1 billion in capital every couple of years. That's just because we're generating so much cash flow. I think we have the opportunity to differentiate our performance in this period. There's a significant number of PE-owned sponsor businesses that are long in the tooth. They're at the end of their ownership cycle, and they're struggling because they have to refinance their businesses at higher rates while also trying to sell in a slowing environment. We're having discussions and there's a strong pipeline of opportunities that fit our business model. I'm optimistic that the pipeline is strong and the discussions we're having are good ones. As you remember, our capital allocation strategy is clear—our first priority is to deploy our free cash flow on strategic acquisitions, which remains a priority. The second is opportunistic stock buybacks. As demonstrated in the past, if we see a dislocation in valuation, we're poised to act. The third priority is a consistently modestly increasing dividend. With a net leverage of one, we're ideally positioned right now, and there is a lot of activity going on.

It answers everything fully. Thank you.

Thank you, Scott.

Thanks. Good morning, everybody.

Good morning, Rob.

I understand that the kinds of delays here and there that you're talking about aren't the biggest driver in the quarter. But I'm still a little bit curious. Is the project delay often one where you're a small piece of the total project cost?

Yes. In terms of project costs, you're right—we're typically a small portion of the project, and with good technology, we're a small part of a bigger project. It's a nice position to be in. In terms of pricing, we have very differentiated technology and we're conscious of the value that we're adding. What you’ll typically see in downturns is they may mix down; they may buy our project, buy our product, but with fewer features since we're well-positioned in a niche portfolio. We're not seeing that now; we're not seeing changes in the activity pipeline. So I think right now the delays are more related to the broader macro issues we talked about earlier.

Hi. Good morning. This is talking about the Paragon charges you took last quarter. Now that you’re another quarter in, do you expect any additional charges? I know there were just one-time charges, but just any update on that? When you might start seeing any impact from those charges?

Yes. We don't anticipate another charge; that doesn't mean we won't change our mind, but we do not anticipate any further charges. That activity is ongoing, and we are working on improving that business to run as efficiently as AMETEK does. We have a mixed team of Paragon and AMETEK people, along with operational excellence talent across the business working on the project, and the response has been solid. So I think that will continue through this year, and you'll start to see the benefits next year. The project will take two or three years to fully realize improvements. There is an ongoing process; expect sizeable improvement next year as we recover volumes from destock combined with OpEx work and new product introductions where we are heavily investing in phased programs. So it is unfortunate that we have this destock downturn now, but we couldn't be happier with the business.

Thank you for that. Another question I had was on the Q4 ramp. I understand the normal cyclicality; there's usually a Q4 ramp. It does look like the implied guide suggests that the ramp is more than usual historically. Especially considering that you guys are not anticipating any easement in destocking for the latter half; could you comment on what's driving that?

Yes. I kind of disagree with your conclusion. There's a tax benefit in Q4, and when you factor that in, we have a pretty typical ramp similar to what it was last year. We have derisked Q3. The operating performance in the first half of the year is very similar to the operating performance in the second half. When you add a tax benefit in Q4, I think it's pretty typical based on what we've done in the past.

Yes. Good morning.

Good morning, Andrew.

Just going back to inventory, how to think about it. Are your OEM customers bringing inventory levels back to pre-COVID levels or below pre-COVID levels? I'm trying to better understand how to think about the destocking impact versus history? Where do you think inventories will be on a going-forward basis relative to pre-COVID levels?

Yes. It's different because there are many customers across various market segments. Generally speaking, I believe they are trying to get back to pre-COVID levels, though some may be slightly higher due to geopolitical factors and changes in supply chains becoming more regional and less dependent on Asia. I think the general statement across the customer base is they are trying to revert inventory to pre-COVID levels, though it might be elevated due to geopolitical issues.

Thanks. Good morning.

Good morning, Steve.

Dave, we're hearing a lot of optimism about the semiconductor cycle having a strong 2025, led by AI-related devices, but also some leading-edge node transitions later next year. What are you seeing in that business? Are you more leveraged to node transitions or unit volume increases?

Yes. I think right now, we're leveraged to both. Our semiconductor business was up in the second quarter due to strong growth in our CAMECA business. They're doing next-generation defect detection, and you’ll want one of these CAMECA systems in just about every new fab. We also have strong benefits from our Zygo business, and there we're among the few that can operate with technology in the EUV of the extreme EUV, which relates to the transitions to smaller nodes. R&D activity is incredibly busy, focusing on node transitions and detecting defects at these smaller nodes. So we're doing very well there, thanks to the uniqueness of our product portfolio. When the market picks up, we also have a substantial part of our business tied to the production rates.

Got it. Activity over the past year for mature nodes in domestic Chinese manufacturers has been stronger than expected. Do you have exposure there? What’s your outlook for that market in the back half and next year?

We sell into the Chinese market; it’s typically lower technology products and has been healthy this year.

Good morning. Hi, David, hi, Dalip and Kevin. Thanks for the question. Just a few more details. I know you got a lot of ground here, but on Paragon, I just want to make sure I've got it right for FY '23. I've got about $450 million, $460 million of revenues for FY '23. Is that about right?

A little bit higher for '23.

A bit higher for '23%. Okay. That's helpful. So down 10% to 20% this year, what sort of cost measures are you taking? I know the charge you took in 1Q has a longer tail, but what measures are you taking to preserve the earnings there? Where do we stand right now on the accretion for FY '24?

Yes. We're doing extensive work on the cost structure. We also have excess capacity in the plants; that work is ongoing. We took the charges related to some non-accruable expenses and are heavily investing in new product introductions that place Paragon in a solid position. The accretion for this year is a couple of pennies and it's in the fourth quarter.

A couple of pennies in the fourth quarter. Yes. Okay. That's helpful. Thanks, David. One last question on orders; I think you said 4% organic decline, which is better than 8% in the first quarter. I'm calculating $1.6 billion of orders this quarter. Is that in the right zone?

Yes. Overall, orders were up 1.5% in the quarter. Organic orders were down 4%, which was an improvement from Q1—where we were down organically by 10%. We saw a sequential improvement in orders in Q2. June was our strongest month.

Got it. Thank you very much.

Yes. If you think about our projected tax rate play out, for Q3, as we presented, we're projecting our typical expected tax rate. In Q4, we're now projecting a lower expected tax rate in the range of 10% to 15%. The lower effective tax rate in Q4 is primarily due to statute expirations. This brings our expected tax rate for the full year to 17% to 18%, which is expected to provide an earnings benefit in the range of $0.10 to $0.15 per share in Q4.

Since there are no more questions, I will now turn the conference back over to Mr. Kevin Coleman for closing remarks. Please go ahead. Thank you, Meg. And thanks, everyone, for joining our call today. As a reminder, a replay of the webcast can be accessed in the Investors section of ametek.com. Have a great day.