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AMETEK Inc (New) (NYSE:AME)
Q1 2020 Earnings Call
May 5, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the First Quarter 2020 AMETEK, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

It is now my pleasure to introduce, Vice President of Investor Relations, Kevin Coleman.

Kevin Coleman -- Vice President, Investor Relations

Thank you, Andrew. Good morning, and thank you for joining us for AMETEK's first quarter 2020 earnings conference call. With me today are Dave Zapico, Chairman and Chief Executive Officer; and Bill Burke, Executive Vice President and Chief Financial Officer.

AMETEK's first quarter results were released earlier this morning and are available on market systems in the Investor section of our website. This conference 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.

During the course of today's call, we will make forward-looking statements, which are subject to change based on various risk factors and uncertainties that may cause actual results to differ significantly from expectations. A detailed discussion of the risks and uncertainties that may affect our future results is contained in AMETEK's filings with the SEC. AMETEK disclaims any intention or obligation to update or revise any forward-looking statements.

Any references made on this call to 2019 or 2020 results will be on an adjusted basis, excluding after-tax acquisition-related intangible amortization and excluding the pre-tax $141 million or $0.47 per diluted share gain from the sale of Reading Alloys in the first quarter and also a pre-tax $44 million or $0.15 per diluted share realignment charge taken in the first quarter.

Reconciliations between GAAP and adjusted measures can be found in our press release and on the Investor section of our website. We'll begin today's call with prepared remarks by Dave and Bill and then open it up for questions.

I'll now turn the meeting over to Dave.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you Kevin, and good morning everyone. Despite a challenging and highly uncertain economic environment due to the COVID-19 global pandemic, AMETEK delivered solid first quarter results highlighted by excellent operating performance with earnings in line with our guidance range. I will provide more details on the first quarter results shortly, but first I wanted to extend my thanks to all my AMETEK colleagues and recognize them for their amazing dedication and commitment through these difficult times. The courage and resilience I witness has been truly impressive.

As AMETEK has been deemed an essential or life-sustaining business, at all our operating facilities our employees continue to provide critical solutions and services to customers across many industries including healthcare, defense, food and beverage, and laboratory Research. The health, safety and well-being of our employees as they support these essential customers is our highest priority.

We've implemented numerous safety measures aimed at providing a safe work environment. Our pandemic response plan provides a framework for our businesses to manage their facilities and workforce during this pandemic. Among other thing is the plan establishes personal and workplace hygiene practices, global communications network of site and country pandemic coordinators and a supply chain logistics and operations team to provide solutions to help mitigate the impact of the pandemic on our business.

Daily communication with local pandemic coordinators and senior management ensures we are complying with the Center for Disease Control and local government regulations. As part of the plan, we also implemented various safety measures including work from home requirements for those whose job allow, social distancing on our facilities and on our factory floors, daily temperature monitoring of employees reporting to work, use of personal protective equipment, and staggered work shifts. We remain vigilant as we return to a higher level of operating activity.

Now let me return to the first quarter results. First quarter sales were $1.2 billion, down 6.6% from the same quarter in 2019. Recent acquisitions contributed 4%, the divestiture of Reading Alloys was a two point headwind, foreign currency was a one point headwind and organic sales were down 8% in the quarter.

The measures we took during the quarter led to strong operating performance. Our operating income decreased 3% year-over-year to $276 million, operating margins expanded an excellent 100 basis points to 23%. Excluding the dilutive impact of acquisitions, operating income margins expanded, 110 basis points over the prior year period. Decremental margins in the quarter were approximately 10%, showed our operating capability, reflecting our ability to reduce our cost structure as well as the strength and flexibility of our operating model.

Adjusted EBITDA in the quarter was $342 million, up 2% over the prior year, with record adjusted EBITDA margins of 28.5%. The operating performance will add to earnings of $1.02 per diluted share, up 2% versus the comparable basis in the first quarter of 2019 and in line with our guidance range of $1.01 to $1.04.

The $44 million restructuring charge we took in the quarter is expected to generate approximately $85 million in annualized structural savings. We also generated strong cash flow in the first quarter, with operating cash flow up 38% to $271 million. Free cash flow conversion was also strong at 148% of adjusted net income, excluding the Reading Alloys gain.

Next, I will provide additional details of the operating group level. Sales for our Electronic Instruments Group were $774.2 million, down 4% over last year's first quarter. The acquisitions of Gatan and IntelliPower contributed 6%. Foreign currency was a modest headwind and organic sales were down 9%. EIG's operating income in the first quarter was $194.1 million, down 4% versus the prior year. EIG operating margins were 25.1% in the quarter. Excluding the dilutive impact of acquisitions, operating margins expanded 20 basis points over the prior year period.

The Electromechanical Group also delivered strong operating performance in the quarter, despite top line weakness as a result of the coronavirus. EMG's first quarter sales were $28 million, down 11% versus the prior year. The acquisition of PDT added 3%, the divestiture of Reading Alloys was a six point headwind, foreign currency was a one point headwind and organic sales were down 7%. EMG's proactive cost mitigation actions led to impressive margin expansion, were operating income was down slightly to $97.5 million in the quarter, operating margins excluding acquisitions, expanded 220 basis points to a record 22.8%.

During the first quarter, we also completed the acquisition of IntelliPower, a leading provider of high reliability, ruggedized, uninterruptible power systems for mission-critical defense and industrial applications. Their products and solutions nicely complement our power systems and instruments businesses and they deepen our expertise in high reliability power protection applications. Annual sales for IntelliPower are approximately $40 million, and we deployed $115 million on the acquisition.

We also completed the divestiture Reading Alloys to Kymera for $250 million. The closing of the transaction, which occurred near the end of the first quarter was a positive outcome for all parties as Kymera is an outstanding strategic partner for Reading Alloys. For AMETEK, proceeds from the sales will deployed on our acquisition strategy, which remains our priority for capital deployment.

While we are pleased with the first quarter results, the global economic environment is obviously changed since the start of first quarter. In January, global demand was solid; in February, an extended Lunar New Year holiday due to the coronavirus resulted in disruptions in China based activity for customers and suppliers. Later in the month as China slowly reopened for business, Europe and the US, and other parts of Asia, started to feel the impact of the virus. At that time, we started to limit discretionary spend and non-essential travel. In addition, each of our business has developed detailed contingency plans to prepare for a potential slowdown. In March, the impact of COVID-19 on the global economy was broadening. Many countries, states, and counties started to impose travel restrictions, stay at home orders, and social distancing measures were all, but essential employees. Supply chain delays started to emerge and customers turned cautious given the building [Phonetic] uncertainty.

Although our facilities were operational throughout the first quarter given our essential business designation, we did see a direct impact on sales in the first quarter due to the virus. Worldwide travel restrictions limited our ability to provide support and installation services. This impacted our EIG process and power businesses, most significantly in the quarter and a broad set of customer delayed shipments.

Now a few comments on the demand environment in April. Demand in April was meaningfully weaker than we experienced in March. Travel restrictions and social distancing mandates, shutdown all but essential activities as customers and suppliers temporary closed or implemented furloughs for all or parts of April. This has inevitably led to significant disruptions and impacts on demand. Restrictions across many, excuse me, restrictions across many geographies are slowly being loosened. However, we remain cautious on the pace of recovery.

Now let me provide some comments on what we are seeing in select end markets. Although we are seeing challenging conditions across most end markets, we're seeing solid demand continue across our healthcare, medical, and defense markets, which account for approximately 20% of our sales. Our most challenged markets are commercial aerospace, and oil and gas, which combined account for approximately 16% [Phonetic] of AMETEK sales. We expect meaningful weakness across these markets throughout all of 2020. In the balance of our markets, including power, industrial, semiconductor, research, metals and automations, we expect weak conditions in the second quarter with sequential improvements during the second half of the year.

Shifting now to the actions we are taking to proactively manage our business while ensuring we are supplying and supporting our key customers. As the spread of the virus expanded and restrictions wind in March, our business began to execute on contingency plans and implemented cost reduction actions. These contingency plans focused on maximizing cash flow, ensuring critical sources of supply and protecting key investments. All while ensuring appropriate safety measures were in place. The cost reduction actions we are taking include structural actions such as reduction in force and facility consolidations as well as temporary reductions such as discretionary spend reductions, furloughs, temporary facility shutdowns, short time work weeks and temporary pay reductions.

Given the reduction in demand we are experiencing, we made the difficult decision to reduce our workforce. The total reduction in force is approximately 10% of our employee base across direct, indirect, and SG&A functions. In addition, in the second quarter, many of our businesses are implementing furloughs or temporary facility shutdowns. These furloughs generally range in length from one week to three weeks, depending on the operating location and their customer market dynamics. The decision to furlough operations was made to help mitigate the spread of the virus to better align our cost structure with demand and to position us to quickly respond when demand returns.

The temporary pay reductions we implemented generally range between 15% and 20% for salaried employees including all AMETEK officers, with a similar reduction of fees paid to our Board of Directors. As a result of these actions, we expect total cost savings in the second quarter of approximately $80 million, with approximately $50 million of these savings from temporary actions and $30 million from structural actions.

As we proceed into the second half of the year, we expect to benefit from our structural cost actions ramp up with full year structural savings started at approximately $125 million. We will flex our temporary cost savings, either up or down in the third quarter and fourth quarter based on volume levels. In addition to these cost savings initiatives, we also reduced our capital expenditures by over 25% from our initial plans in the year. Full capex -- full year capex now expected to be roughly $75 million.

Before I provide commentary on our outlook for the quarter, I wanted to highlight the work AMETEK is doing where we operate to assist in the fight against COVID-19. Through the AMETEK foundation, we have made more than $1.5 million in contributions to charitable organizations, many of whom are providing food and essential items to those in need, along with personal protective equipment to the men and women on the front lines of this pandemic. We are proud to partner with numerous organizations around the world where we have an operating presence to support the immense humanitarian crisis caused by the pandemic.

I also wanted to highlight a few of AMETEK's businesses are involved in the fight against COVID-19. AMETEK Rauland, a leading provider of mission critical communication and workflow solutions used in hospitals and at healthcare facilities, has developed Rauland rapid response kit. This solution allows nurses and healthcare providers to quickly triage patients, gather necessary supplies, and determine the appropriate clinical response, all while keeping a safe distance to minimize repetitive staff to patient contact. They are being deployed for use in temporary medical facilities and new patient care facilities within hospitals to meet the surge of additional patients.

AMETEK Land is another great example. Land is a leading manufacturer of monitors and analyzers for industrial infrared non-contact temperature measurement. In March, they released their vIRalert solution, a temperature screening thermal imaging system designed for highly accurate human body temperature measurement. This technology can be utilized for screening at point of entry into key facilities such as offices, factories, schools, government buildings, and transportation hubs. They are seeing strong initial interest for the solution as temperature screening at this scale will play a fundamental role in helping to contain the spread of the COVID-19 and allowing return to our normal daily lives.

AMETEK's Powervar [Phonetic] business is providing customized uninterruptible power systems to a number of leading medical device diagnostic equipment providers used for coronavirus testing. These UPS systems are being deployed worldwide. And lastly, AMETEK advanced motion solutions is providing critical solutions to manufacturers of ventilators and laboratory diagnostic equipment used in the COVID-19 response. These are just a few of the examples of the critical roles our businesses are playing in combating this global crisis. We are proud to be part of the solution and committed to supporting our customers in these efforts.

As we previously announced, due to the uncertainties presented by the COVID-19 global pandemic, we have withdrawn our full year guidance and will not be issuing quarterly guidance at this time. We will issue guidance has condition stabilizes and visibility improves. However, I did want to provide some level of comments about the second quarter and the balance of the year given what we know now. First, we expect that the quarter will be the low point in sales and earnings this year given broad based uncertainty and the impact on global demand from stay at home orders and travel restrictions. Second, we expect sequential improvements in sales and earnings in the third quarter and fourth quarter as the economy slowly reopens. And third, we expect to manage full year decremental margins in the 25% to 30% range, where the second quarter decrementals being between 30% and 35%.

To summarize, AMETEK delivered solid results in the first quarter on strong execution through unprecedented market dynamics. Bill will speak to this in a moment, but the actions we took in the first quarter, strengthened our already strong balance sheet and liquidity and we are poised to emerge from this economic crisis in a strong financial position, which will allow us to continue to deploy capital and acquisitions and invest in our growth initiatives.

We are confident in the future of AMETEK, as our world-class talent and the adaptability of the AMETEK growth model will continue to drive long-term sustainable success for our stakeholders. The message, we've given to our employees is simply, well these are truly unprecedented times, AMETEK has faced challenging and uncertain environment before. And each time the collective strength and talents of all AMETEK colleagues has allowed us to emerge stronger and better positioned. Together, we're working to make sure AMETEK again emerge stronger and better positioned for the next chapter of our growth.

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?

William J. Burke -- Executive Vice President and Chief Financial Officer

Thank you, Dave. I would also like to thank our colleagues around the world for their tremendous efforts over the past few months. We have asked a lot of our colleagues as we manage the impact of COVID-19 on our business. And as always, they have risen to the challenge. The actions our businesses took in the first quarter helped us deliver strong operating performance and improved our already strong balance sheet and liquidity position.

Let me provide some financial highlights for the quarter. First quarter, general and administrative expenses were down $3 million compared to the same period in 2019 due largely to lower compensation costs. General and administrative expenses were 1.3% of sales versus last year's level of 1.4% of sales. The adjusted effective tax rate in the quarter was 19.4%, down from last year's first quarter tax rate of 20.5% with this lower rate in the quarter being due to this tax planning initiatives. For 2020, we expect our effective tax rate to be between 20% and 21%. And as we've stated in the past, actual quarterly tax rates can differ dramatically either positively or negatively from this full year estimated rate.

Operating working capital in the quarter was 18.9% versus 18.2% in the first quarter of 2019. Capital expenditures were $17 million for the first quarter. As Dave indicated, we now expect full year capital expenditures to be approximately $75 million, down from our initial expectations of $100 million. Depreciation and amortization expense in the quarter was $66 million. For the full year, we continue to expect depreciation and amortization to be approximately $255 million, which includes after tax, acquisition-related intangible amortization of approximately $120 million or $0.52 per diluted share.

Operating cash flow in the quarter was outstanding at $271 million, up 38% over 2019's first quarter. Free cash flow was $254 million, up 45% over the prior year period and free cash flow conversion adjusted for the Reading gain was excellent at 148%.

Total debt at the end of the quarter was $3.25 billion, up from $2.77 billion at the end of 2019. During the first quarter we drew down $500 million from our revolver to bolster our liquidity position. We also deployed approximately $115 million on the acquisition of IntelliPower during the quarter. Offsetting this debt is cash and cash equivalents of $1.25 billion, which includes the proceeds from the sale of Reading Alloys and the drawdown on the revolver.

Our gross debt to EBITDA ratio at the end of the first quarter was 2.2 times, as we are intentionally holding higher than normal cash balances. This ratio was comfortably below our debt covenants of 3.5 times. Our net debt to EBITDA ratio was 1.4 times at the end of the quarter.

AMETEK is extremely well positioned to manage this economic downturn, we have more than $1.8 billion in liquidity to support our operations and growth initiatives, including $550 million in available revolver capacity. We have a robust balance sheet with no material debt maturities due until 2023.

To conclude, our business has delivered a solid quarter, despite extraordinary challenges due to COVID-19. Our world class workforce, the strong cash generation of our niche businesses, and our balance sheet strength, position us well to manage this downturn and will position us well to invest in our growth strategies over the long-term. Kevin?

Kevin Coleman -- Vice President, Investor Relations

Thank you, Bill. Andrew, could we please open the lines for questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] And our first question comes from the line of Josh Pokrzywinski with Morgan Stanley.

Joshua C. Pokrzywinski -- Morgan Stanley -- Analyst

Hi, good morning everyone. Hope you're well.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, good morning, Josh.

Joshua C. Pokrzywinski -- Morgan Stanley -- Analyst

If you wouldn't mind just talking a little bit about April or maybe March exit rates, just give us a sense for what you're seeing out there. I appreciate all the color on decrementals and certainly how margins held up in the first quarter, but maybe give us a sense for demand cadence. I know a few weeks maybe isn't the trend at this point, but just too kind of calibrate where we're at on that, first.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Sure, Josh. There will be a substantial revenue drop in April. We were down about 25% in April. And as we look ahead to the quarter, we can be down about 25% or a bit more or a bit less because we have limited availability, but I'd point to that 25% that we actually were down in April.

Joshua C. Pokrzywinski -- Morgan Stanley -- Analyst

Got it. That's really helpful, I appreciate. And then I guess on the other side of this, understanding that some of these -- these countermeasures on the cost side end up being temporary, some are a little bit more permanent in nature. Anything that would prevent kind of a normal incremental margin on the other side, i.e. are you pulling on the temporary levers, such that you do need to kind of reflate the cost base or compensation metrics etc. when we do finally recover it? It doesn't look like the case, but I just want to make sure that the way you're thinking about it.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, that's a good question and that's why there is a balance of structural and temporary cost reductions. I mean when we -- historically when AMETEK recover out of these downturns, we've been had very high contribution margins and I would expect the same thing to occur this time, but we're using our best judgment and our experience for these businesses to balance the structural cost reductions with the temporary. So we have -- we're going to have $80 million in cost savings in Q2, about $30 million of that is structural and about $50 million of that is temporary. And then as we go through the course, we'll increase or decrease that temporary cost reductions based on demand. And if it looks like demand is not materializing, it doesn't do any good to leave around excess and unutilized resources. So we have the capability to do more, but we have a good feel for these businesses and we want to get through this thing with our businesses intact, at the same time focus on the decrementals as we get through that and I would expect that we would have very good incrementals as -- when we ultimately get through the crisis and we recover.

Joshua C. Pokrzywinski -- Morgan Stanley -- Analyst

Great. Appreciate it. Best of luck guys.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you, Josh.

Operator

Thank you. And our next question comes from the line of Deane Dray with RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Hey, just to clarify, the down 25% in April, was that an organic revenue growth and how did orders shake out?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Orders and sales were about the same. Orders were about that 25 point level, sales were just a bit more than that -- that's really on the total orders and sales.

Deane Dray -- RBC Capital Markets -- Analyst

Good. And Dave, can you talk about visibility, I mean part of the AMETEK business model is you've got healthy recurring revenues around 30%. So how do you think those hold-up? And just kind of connect us what we're seeing in terms of customer behavior, pushouts, cancellations and so forth?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, sure. That's a good question Deane. I mean when I think about Q1, the end of Q1, we left probably $40 million or $50 million, four points or five points of organic growth, we could not ship because our customers weren't available to take delivery or we cannot travel to the site to do the installation, and commissioning work. So that was a big deal for us and we have to get to places in China and around the world and in the US, especially in our process and power businesses and do that commissioning and get that recurring revenue. So part of the -- the customer behavior part for your question is that the delayed shipments and we weren't able to access them and part of the recurring revenue is it's driven by the ability to service them. So I think the recurring revenues will hold up relatively well maybe except in the aerospace business, but we have to be able to travel and get to our customers and as it return to some normalcy there for that to happen.

Deane Dray -- RBC Capital Markets -- Analyst

That's real helpful. And I appreciate all the color on the decrementals because that's absolutely within the band that we'd expect based upon the cost-outs that you've taken. So I kind of feel like we can ask a more forward-looking question regarding when and how can you pivot to playing offense. You've got just an exceptionally strong balance sheet. We know M&A markets need to settle down, but what's expectation in terms of line of sight on potential acquisitions at this stage or is it just too early?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

I think it's a great question, Deane, because we feel we're going to emerge from this crisis with an excellent M&A opportunity. It kind of remain our first priority for capital allocation. Bill already went through the strong balance sheet, the cash flow generating capability of the companies and we had a very strong pipeline going into this crisis. We closed on IntelliPower in Q1. We were very close on another deal, very nice business, we had just felt we could not finalize our diligence and integrate it with the restrictions caused by the virus. Certainly it's a potential to continue with that deal post-crisis because we really like it. And we have a good relationship with the sellers. And we're going to keep developing our pipeline, we have multiple tangible opportunities post-crisis. I mean a great pipeline going into this and we're going to use our business development team to maintain those relationships. In terms of the current environment buyers and sellers are focused imminently with challenges they have in the business, new set of buyer, there is a new set of buyer price expectations that need to get aligned with. Seller expectations, you don't have the ability to perform face to face diligence to negotiate, to integrate it. So I think it's going to be late 2020 maybe the fourth quarter of 2020 before the market begins returning to normal, but I think we're well positioned to really capitalize on the opportunity there. And that's the way we're thinking about this thing. We are going to preserve our balance sheet now and make sure it's strong and we're going to see a big opportunity and when we go out of this.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. And best of luck to everyone.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you, Deane.

Operator

Thank you. And our next question comes from the line of Ivana Delevska with Gordon Haskett.

Ivana Delevska -- Gordon Haskett Research Advisors -- Analyst

Good morning.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning Ivana.

Ivana Delevska -- Gordon Haskett Research Advisors -- Analyst

So just wanted to ask as we emerge from this, what percent of your businesses do you think could kind of more quickly come back versus what could take longer time to get back to normal?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, that's a good question Ivana. And it's really, it's really -- it is both end market and the time and the type of business that we're talking about. As I mentioned earlier, we serve a range of different end markets and some of these markets are seeing solid demand. These include medical, healthcare, defense businesses and some markets are very challenged, and oil and gas and aerospace. So I think the oil and gas and aerospace businesses are going to be the last to pick-up positively, probably oil and gas will pick up well before aerospace, but the aerospace downturn, we could have a couple of -- two years or three years but the majority of our businesses I think you're going to recover quite well from this and we have higher incremental margins and we're managing the decrementals on the way down. So I'm pretty optimistic that we'll be able to, we were able to expand, the last three years to 2019 we grew organically 5% a year, greater than industrial production and we got great margin expansion. In the environment that we're going to have in the second half of the year and into 2021, you may be in an environment where we are growing a little bit faster than that. So I would expect our businesses to respond and our businesses to have better margins on the way out and with the exception that aerospace and oil and gas could be down for a while.

Ivana Delevska -- Gordon Haskett Research Advisors -- Analyst

And in terms of mix, in terms of margin impact of those businesses kind of underperforming, will it be a positive for margins?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think it will be a positive for margins on the way down, our aerospace is a pretty profitable business, it's a couple of points more profitable than the base business and our oil and gas is about at the base business profitability. We had 20% EBITDA in the first quarter. So, but I think if you go back and look at the prior downturns and AMETEK's recovery from them, we always had healthy contribution margins on the way out. Because we're such a profitable business.

Ivana Delevska -- Gordon Haskett Research Advisors -- Analyst

Thank you.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Scott Graham with Rosenblatt Securities.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Hey, good morning, Dave, Bill, Kevin.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Hello Scott.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Hey, so I'm hoping you can help me with a couple of questions on the cost saves. So we came into the through the year with about $90 million from sort of base productivity as I call it. And I think I heard you say that the restructuring charges are going to give us $85 million in savings. Do we add those numbers together?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

No. Well, yes, you do on an annualized basis. $85 million on an annualized basis. So when I think about the second half of the year, we talked about $30 million, maybe $30 million in structural savings in Q3. Combined with about $50 million of variable when we get to the second half of the year, Q3 and Q4, we will have about $75 million of structural savings split across those two quarters. So the structural savings will ramp up and if it plays out like we think the temporary savings will ramp down and we'll exit 2021 with a pretty healthy level of cost reductions on a run rate basis going into 2021.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Right. So the 2021 carryover on structural, what would that be?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

It's going to depend on some things, but I think it will be about $40 million, excuse me 40.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Got it. And if you could just maybe help us understand the cadence of sales in aerospace, commercial aerospace and oil and gas. Certainly, we understand that they are worse, perhaps a lot worse than the April sales number, but is there any kind of parameters you can throw around those numbers to help us understand what the real deltas are?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I'll give you an idea with aerospace and again there is a caveat because we don't have good visibility, but our commercial aerospace business is about 10% of the company. That includes our OE and aftermarket that could be down 50% and our aftermarket part of it can be down more, the OE part of it down a little less. So that market is going to drop, it is going to be pretty significant and we're seeing that happen. So that's just a fact for a considerable amount of time.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Yeah. And the oil and gas.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Oil and gas is going to have a tough time. I think the recovery is going to be faster because there's going to be more based on our commodity price and it's not going to be long-term, it's going to be people start driving the cars again, it's going to be definitely less than 50% for the year, but I put in the 25% range or something like that, more so in the upstream than the downstream.

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Yeah. Hey, thank you.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you Scott.

Operator

Thank you. And our next question comes from the line of Nigel Coe with Wolfe Research.

Nigel Coe -- Wolfe Research -- Analyst

Thanks, good morning guys. So just going back to the decremental margins, obviously very impressive management of those, so before the discretionary cost savings, what kind of growth, decremental margin are we looking at here, is it sort of 45% type numbers. And are you confident that there is enough discretionary costs, you can go after to manage decremental into those ranges within a reasonable revenue range?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, it's an excellent question, Nigel. And if you think about this kind of environment you're going to end up with the decremental margins of -- if we did nothing, we'd be in that 50%, 55%, some business at 60% range. So what we're doing is we're mitigating that to greater than 50% decremental margin, in this kind of environment, and we have a higher margin business and the costs that we're taking out are getting us to the 25% to 30% decrementals for the year.

Nigel Coe -- Wolfe Research -- Analyst

Okay, but we're saying is there is enough discretionary cost in the short term to company management in that range. There is no break point that you see right now.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I don't see there -- it's going to be difficult, and we -- didn't give guidance, but we're pretty good at managing the decrementals and that's our focus right now, we're going month to month, and our operating operations are making adjustments on the level of capacity, the level of customer demands and I think that we can manage to that 25% to 30% level for the year.

Nigel Coe -- Wolfe Research -- Analyst

Great. And then my follow-up question is one of the keys to success for AMETEK in the past has been that the right incentives at the divisional level, some of those for growth, some for margin, cash flow, etc. given the lack of visibility right now, have you changed the incentive structure for your divisional managers?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

We haven't changed them as of yet. They are still based on the original targets that were set for the year and we are managing through this thing and I personally, everybody is going to feel some pain for this process and resetting targets to the existing level of our business isn't fair for everyone, including our shareholders so. So it's going to be a tough year and there is going to be less variable compensation, that opportunity is still there, but it's not going to materialize and that's just the way it is and I'll talk to my comp committee about the appropriate things in these areas, but in general, there is going to be a lower variable payments from our internal systems this year.

Nigel Coe -- Wolfe Research -- Analyst

Okay, thank you for the details David. Good luck.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Brett Linzey with Vertical Research.

Brett Linzey -- Vertical Research Partners -- Analyst

Hey, good morning guys.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning, Brett.

Brett Linzey -- Vertical Research Partners -- Analyst

Hey, just wanted to come back to the comments on the medical healthcare and defense bucket at 20%. Where you were you suggesting in April that was actually a positive in terms of sales and orders? And then how are you thinking about that for the year?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think the defense, the medical, the healthcare are going to -- are going to be positive for the year and in April they didn't decline as much. So that's how we're thinking about it. That piece of our business at this point seems to feel pretty solid. Well, the thing that we -- was very encouraging in Q1 and we bought Gatan. We have a couple of quarters of Gatan, it's still above acquisition model. So they're doing a great job for us. And some of our recent acquisitions like our Rauland in the healthcare space, Mocon in the food space and Telular in the IoT space, those are three pretty sizable deals we did over the last couple of years, all three of those businesses in Q1 at double digit quarter's growth. So, we're expecting those kind of businesses followed up pretty well. We're not sure if it's going to be plus or minus, but it's certainly not going to be the -- the -- they did not see that kind of the decline in the quarter. They're not going to see that decline in the quarter.

Brett Linzey -- Vertical Research Partners -- Analyst

Okay, great. And then just shifting to free cash flow. Very solid start to the year, what is the expectation as we go forward here. I mean, should we assume that the working capital should get a lift as the business cycles down? And maybe just a little bit of a framework on conversion or maybe range you're thinking about for the year?

William J. Burke -- Executive Vice President and Chief Financial Officer

Yeah, I think in the second quarter you'd expect a working capital lift as we have impact of the lower sales level. But then, some of that will get added back given the sequential increases in sales that impact we are expecting. I think overall, a good place to be, would be north of 120% of free cash flow conversion to net income.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

For the year.

William J. Burke -- Executive Vice President and Chief Financial Officer

For the year.

Brett Linzey -- Vertical Research Partners -- Analyst

Got it, got it. Okay. I appreciate it. Thanks a lot.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Robert McCarthy with Stephens.

Rob McCarthy -- Stephens -- Analyst

Good morning, everyone.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning, Rob.

Rob McCarthy -- Stephens -- Analyst

Thank you for taking my questions. Now, I guess the first question is a little bit to amplify your comments around the realignment charges you took. I mean, I guess this is consistent with kind of your practice periodically. I think the last time you did this was kind of in the '16 timeframe with the oil and gas retrenchment. You talked about a payback I think of 2 times or something along those lines, but could you talk about that in terms of what you're expecting for the run rate savings again? And then just in that context, where are you -- where are you taking out the most capacity? Is it presumably aerospace, is it presumably these businesses that seem to be a little more longer cycle and structurally challenged and obviously are in the news, because you see a lot of -- a lot of capacity being taken out across the complex?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Right. That's a great question, Rob. I mean we attempt to balance these permanent cost reductions, in area where demand has been more impacted. So as an example and in the commercial aerospace market we had about a 20% headcount reduction, and we had a little bit more than the average in our oil and gas business. And then we use a temporary approach in other areas to be positioned to respond quickly when demand recovers. And when you think about the structural savings that was about $30 million in Q2 and that will increase sequentially as we go through the year and then we'll exit the year with as question I answered earlier with about a $40 million benefit to 2021, but we'll see increased structural savings in Q3 than in Q4. And we'll take our temporary savings and adjust that based on volume, but we felt it was necessary for the permanent reductions. It is very difficult decision, but where demand is most impacted not short-term, but more long-term, we took those actions.

Rob McCarthy -- Stephens -- Analyst

Yeah. And just for pedagogical purposes, presumably, that's all baked into the decrementals you already --.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

That's all baked into the decrementals correct.

Rob McCarthy -- Stephens -- Analyst

Yeah, OK. Of course, right. So, and then the second question is obviously, I think you answered Deane's question very well about M&A in the opportunity set, but you are sitting on a lot of cash. It is a very difficult environment for potential share repurchase. Yes, you have done share repurchase in the past, I think, notably in the four quarter of '18 you thought it was a particularly prudent given the intrinsic value of your company, if memory serves, but how do you think about share repurchase in this environment or perhaps, you don't have as much visibility and then obviously you have the whole populism problem with share repurchase as a whole. In terms of use of capital allocation, how do you think about it because you do have a sizable cash balance and even despite what we're going to see right now, still a strong prospect for continued cash generation here?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, the first point is our priority is M&A. So we want to be able to execute on those M&A opportunities as we clear the crisis. And we've been opportunistic for buybacks and we have the capacity to do buybacks. So that's something we'll consider. And our third priority, we will maintain consistent dividend that we paid, but right now with the situation being so uncertain we built some extra cash, we have liquidity and we're going to make sure our balance sheet is strong as we get through this crisis. And if there is opportunity to do buybacks it is something we'll consider, but clearly capital allocations number one priority is acquisitions and right now we're just making sure we get through this thing with a healthy strong balance sheet and a strong company.

Rob McCarthy -- Stephens -- Analyst

Thanks for your time.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you, Rob.

Operator

Thank you. And our next question comes from the line of Eastman Richard with Baird.

Richard Eastman -- Robert Baird -- Analyst

Yes, good morning.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning Richard.

Richard Eastman -- Robert Baird -- Analyst

Dave, could you just speak to, I'm curious a little bit here as we move forward into the, through the second quarter and into the back half of the year, when I look at EIG and that segment of the business, it does -- I think oil and gas shows up in there. Could you just talk a little bit more about some of the process industries how they're -- to the process instruments, how they're holding together? And then also the large commercial business I think falls largely in EIG. So does that suggest that EIG is weaker than EMG as we track through the balance of the year?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

No, the way -- if you think about first our aerospace businesses, it's predominantly in EMG. So that's going to be a headwind to EMG, but on the EMG side, I think our automation businesses been through a lot of -- it was the first business that went in and we're already starting to see some improvements out of China for our automation business. So our automation business could be the first part of the business that does well or recovers, it could be.

When you think about EIG, your question about process is a good one because process serves a wide range of end markets, which are experiencing different dynamics -- different end market dynamics. On the positive side, we're seeing solid demand in our medical, healthcare and high-end research businesses within that segment and that segment includes Rauland and Mocon and Telular and demand, and I've already commented on those businesses and their growth drivers. Conversely, it is the part of our business that has our oil and gas, which will count overall to about 6% of AMETEK sales and we're going to be challenged in that part of it until the oil prices recover because there's a fine demand imbalance. And while we expect process sales to improve sequentially in the second half of the year, we expect the oil and gas component of it to remain challenged because of sizable cuts of the capital budgets and the supply and demand imbalances.

Richard Eastman -- Robert Baird -- Analyst

Okay. Okay and then just a quick question, just a couple of thoughts that if you will, about geographies here in the in the quarter and maybe do we see the same type of cadence out of Asia, China, did we see some recovery late in March, modest recovery just maybe the cadence around the geographies here as we exited the first quarter and into the second?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Sure, Rick. I mean the headline on the geography story is that there are broad based weaknesses in all geographies with Europe and Asia, most challenged and when you think about it Asia was down high teens, and it was -- China was down first, it was driven by travel restrictions and ability to install and commission our products. It was China, Japan, Korea. And then we look at China specifically as you got to the end of the quarter, it started to recover and is recovering and improving, but it's not completely back. Our facilities over there are operating with pretty much full capacity now. We got our supply base up and running, but we very recently started traveling to most customer sites. We're allowed to travel when doing installation and doing service work. I'll give an example in the research end markets. There are some universities that still have an open back up yet. And we have some equipment waiting to be installed there so. So in China, I would say it's improving, but it's definitely not the whole way back.

And then when you think about Europe and it was, it was down low-double digits and driven same kind of drivers, the biggest impacts were our Dunkermotoren business and our process businesses in Europe and then when we got to the US, the US in the first quarter was down about 3% and due to the same customer delays and delays in inability to commission product. So it feels like we're kind of coming out of it in the opposite way that it has surfaced. So Asia feels like China is recovering a bit and it seems like the US maybe still had a in bit in Europe might be at the bottom right now. So it was a broad based weakness, Europe and Asia where most challenged.

Richard Eastman -- Robert Baird -- Analyst

Yeah, understood. And this is going to be the last question from me, sorry, but is the -- when you look at the overall business and the type of downturns here that we're seeing in demand that has historically not had much impact on your pricing, is that correct?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, it's a great question. I mean this environment is different. So we're going to have to see, but I expect that we're going to be able to achieve the same level of price, I mean we did in Q1, Q1 '20 pricing was good. We got 1.5% of price across our entire business. Total inflation and the impact of tariffs was about 1%. So we had a 50 basis point positive spread, adding to our margin expansion and I expect that's going to continue for the year, but we're in environment now where you really don't know about the fluctuating demand patterns.

Richard Eastman -- Robert Baird -- Analyst

Okay. All right, very good. Thank you. Good luck.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thanks Rick.

Operator

Thank you. And our next question comes from the line of Andrew Obin with Bank of America.

Andrew Obin -- Bank of America -- Analyst

Yes, good morning.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning, Andrew.

Andrew Obin -- Bank of America -- Analyst

Just couple of questions. Thank you for providing more information and great execution. Just in terms of your supply chain in Asia and just globally how has it -- how is that holding up with all the shutdowns in places like India, Malaysia, I'm not sure what's happening in Indonesia and how are you rethinking your supply chain for the post COVID-19 world?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, good question. I mean our philosophy is to always supply in the region where the demand is and we were moving to that even before the tariff started and even now with COVID, we think that makes sense. So we want to build, where the demand is. So that will give us a regional thought process around there. You mentioned Malaysia, Malaysia was one of the areas where we had some difficulty in the first quarter. I mean the government came in and told us we couldn't operate and we could not. That was the only place in the world that happened and we couldn't operate for a period of time. And then we got the authorization to operate at 25% and then authorization to go to 50% and eventually right now we're at about 100%. So it's but the different governments around the world responded differently and we have a really good supply chain team and they're out battling with all these problems and getting them solved and they did a good job of solving that one.

So what we see across the world is, I'll give Mexico, as an example, we have suppliers in Mexico and Mexico is a little bit later to recognize the coronavirus threat and the government jumped in and started to do all the same things that were done around the rest of the world, but they seem to implement it with the local authorities having different levels of judgment and what was essentially and what was not a central. So we spend a lot of time and our supply chain team done a great job during the quarter. Getting suppliers turned on in Mexico when the local authorities had tell them to shut them down and that then involved us going to the authorities telling them why they were essentially as a supplier and we got those are looking. So it's been, it really, really difficult time for a supply base and our people have done just a fantastic job of managing it and, and we expect to continue to have big problems like that during the second quarter and as we go through this thing and we have localized problems and outbreaks that we have to deal with and we've got good management and they know how to deal with these things and or dealing with them, but at the same time, it creates enough of a visibility issue that why we went through our guidance.

Andrew Obin -- Bank of America -- Analyst

And just another question on China. You did sort of -- say that China is getting better. What kind of lessons because I think people are trying to figure out what lessons does China holds for the shape of recovery in Europe and the US, but referred from some companies I think Parker or Honeywell sort of seem to have said that march toward this big spurt of demand coming back, but then April is a little bit slower, because the economy is not back to normal. So no, maybe it's not all the way straight up, could you just give more color on what's happening in China, April versus March relative and absolute terms. And as I said, more importantly, what lessons, do you think this recovery holds for Europe and the US? Thank you very much.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think the lessons for Europe and the US is you have to, you have to follow the social distancing mandates that the governments are putting through. And you will recover and when you recover. It's not going to be, across China it was a choppy recovery with different regions having different requirements on travel and I think we're going to have the same things here. So in terms of China specifically and as I said before it is recovering, but it's not completely back. So our plans are now operating near 100% of capacity because what's causing us a bit of a difficulty now is being able to travel to the customer sites and do service work and do install work and just recently that started to open up, just very recently, I think in the last week, we could start traveling in places like Beijing and things to do service work.

So I think you learn from that. I mean we learn from China. We -- it was interesting to watch within the company, our operating people, we did a fantastic job in China managing through this -- the COVID-19 problem and we have a essential customers in China and we were probably one of the few plants that we're still operating there serving the medical customers in China, but they kind of set a work plan for us of using temperature monitoring and PPE and thinking about how to relay our production lines and how to relay out factory floors and talking about the flows of people within the buildings and how you quarantine someone within the building and we learn from that as a company. So we learn from that, we help in developing in China and we saw how it worked and what didn't work and now that's informing our decisions in Europe and the US. So -- So it's -- and we learn something new every day and something changes every day. So, --.

Andrew Obin -- Bank of America -- Analyst

Just a follow-up, is China up sequentially in April versus March? And thank you so much for answering my questions.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I -- China is up in April, but March it was very diminished and it just picked up at the end.

Andrew Obin -- Bank of America -- Analyst

Thank you.

Operator

Thank you. And our next question comes from the line of Andrew Buscaglia with Berenberg.

Andrew Buscaglia -- Berenberg -- Analyst

Hi guys. I wanted to dig into aerospace just a little bit more. So obviously the outlooks weak for that area, long-term -- longer term, but can you talk about that business, how do you guys think -- think about it and where there's exposure? And I'm talking about where are you exposed to production versus miles flown? And what do you need to see to come back within your businesses the most for that market to recover?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Right. That's an excellent question, Andrew. And as a reminder AMETEK has a balanced exposure across our aerospace and defense market. So our total exposure is about 15% of sales, 15% of AMETEK is in aerospace with roughly 5% to defense. So we're seeing that defense still strong and we expect that to continue for the balance of the year. 5% of the 15% is in commercial and business jet OEM and 5% in the aftermarket. So that 5% in commercial and business jet OEM and the 5% of the aftermarket. That's a roughly 10% exposure to commercial OEM and aftermarket that we think it's going to be very challenged. So when I was talking about the, the potential to be down 50% and the potential that the aftermarket is down more on the OEs maybe 50 or a little less. That's really what I was talking about.

And in terms of our exposures. We have broad exposures across essentially all key aerospace and defense platforms and we have a great business. I mean we have leadership positions and aerospace power generation, we kind of revolutionized the way power is distributed around an aircraft. We're winning a lots of business there. We have an excellent business in advanced sensors, airframes and engines and all parts of aircraft. And we have an excellent thermal management business that handles heating and cooling of aircraft on very difficult applications. So, so the fundamental businesses that we have in that space are just great businesses and they're going to go through a tough time and the aerospace market is going to look different, but we have really good management there and as I said, we're adjusting to it now.

Andrew Buscaglia -- Berenberg -- Analyst

Yeah, it's -- I mean it sounds like you're generally still positive on that business over the long term and that -- my next question was going to be is what's going on discourage you from acquiring in that space and building that business more or not, it seems like the latter?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think the way that we think about it as we want balanced end-market exposure and right now we're dealing with a lot in that business as we -- as we decreased, but we really like the business. We have really sustainable businesses there with wide moats around the business, there are good businesses, there are essential and those businesses are going to be fine. So there is going to be an adjustment in volume where you reset the cost structure, but when those businesses start growing they're going to grow with healthy incremental margin. So we still feel good about it.

Andrew Buscaglia -- Berenberg -- Analyst

Okay, thank you.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, thank you.

Operator

Thank you. And our next question comes from the line of Joe Giordano with Cowen.

Joseph Giordano -- Cowen & Co. -- Analyst

Hey guys, good morning.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Good morning, Joe.

Joseph Giordano -- Cowen & Co. -- Analyst

Yeah, I think so you touched most of the operational already so. Dave, I just wanted to like a bigger picture, I mean when you stepped into the role, it was like maybe the worst possible situation in terms of timing. So what can you kind of -- what did you learn from managing that initially through an energy crisis and how you're businesses were impacted? I mean I know that's all smaller as a percentage of sales and you just sold Reading, so it is a different portfolio, but like what were some of the critical lessons you learn then and how you are applying that now?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

That's a great question. And I just come back to the seasoned management team that we have in AMETEK. I mean all of my executive office, they've been through many downturns and they know what to do, we know what to do and a big part of our -- because we have such a good culture and we have such long term employees they realized we're going to get through this and the new people in our business sort of learn from them and we're getting through this and Bill and I, we've changed our management cadence. In March, we had operating meetings with every one of our business units and we're going to do that again probably -- I think it starts next week when we get through our [Technical Issues] it is changing the cadence and through those meetings we have [Technical Issues] with the business. We make sure we're focused on cash flow, we make recurring things for our customer base and people learn from that. So -- and we understand what's going on in the business, but I think the biggest thing, when you step back and you and you think about this thing long term, we're very well positioned. We have proven management capability to manage through this downturn. Our businesses are well positioned with leadership positions, high barriers to entry, strong technology positions, the quintessential business and we're executing very well, generating excellent cash flow, as evidenced by the first quarter, as evidenced by the past few years. We've got the question earlier, we have a proven capability to get price and offset inflation with price. We have that capital deployment strategy, world-class acquisition products. So there is no doubt in my mind, we're going to get through this, and going to be stronger for it, but it all comes back to the people and we have the experience to get it done.

Operator

Thank you. And our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Hey, good morning guys. This is Ken Newman on for Steve. Thanks for taking my question.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Hello Ken.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Good morning. Hope you guys are healthy. I want to circle back to your -- thank you very much. Just want to circle back on your comments around aero, obviously I know the environment is very challenging right now, but just trying to think about your 2Q trough comments and maybe any color that you've been having on the conversations that you've been having with your customers there in terms of the cadence for volumes in the back half as some of these facilities, especially for Boeing are starting to start back up. Curious if you would expect to feel the pull from the facilities, as soon as they start up or do you think they have enough inventory to start initially and then they would come back to you once that normalizes?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think it's a mix Ken because there is going to be, you think about the production line there is going to be some things I need right away and there's going to be some excess inventory, so. So it's a mix of things. And as I said before, what we're seeing in -- and what we saw in April that business is challenged substantially challenged. So that it is going to take a while for that business to adapt to those customer basis to the new demand and the fact that we are balancing our aerospace business and we have a 5% of it in defense of the 15% it really helps us because we -- we have some solid demand there. We will definitely recover as the business recovers, but it's going to take some time. And quite honestly, all those customers haven't even decided what the new bill rates are going to be. So they're just deciding that now and those conversations are going on.

Ken Newman -- KeyBanc Capital Markets -- Analyst

Got it. No, that's helpful. And then just one more from me, bigger picture. I'm just curious about your conversations with customers around the automation solutions that you guys provide. Do you think customers may be looking more toward automation after how the deal was first tariffs, and now the pandemic, just how are you thinking about that market as we kind of progress through this down cycle and maybe looking toward the other side?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I mean the automation business has an excellent opportunity, because if you want to eliminate -- in the area of social distancing that's going to drive demand for automation. So it's a demand driver on the exit of this that wasn't there before we went in and again in our automation business that was weaker in 2019. We started to see that the business normalized run rate. Later in the first quarter, particularly in China. So, pretty positive on our automation business and we think -- we were always positive on it because long-term demand drivers. And right now our automation business is spending time a lot with the medical -- in the medical world with providing automation systems for some of these testing devices for coronavirus where, they have to test multiple samples. So they're using our automation equipment to do that. So we're positive on it and that business is going to do well going forward.

Ken Newman -- KeyBanc Capital Markets -- Analyst

And just one quick follow-up to that is, do those automation markets typically have -- are those considered margin accretive to the base business?

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Yeah, I think it's margin accretive to EMG for sure.

Ken Newman -- KeyBanc Capital Markets -- Analyst

It's very helpful, thank you.

David A. Zapico -- Chairman of the Board and Chief Executive Officer

Thank you, Ken.

Operator

Thank you. And I'm showing no further questions at this time. So with that I will turn the call back over to Vice President of Investor Relations, Kevin Coleman for closing remarks.

Kevin Coleman -- Vice President, Investor Relations

Great, thank you Andrew. And thank you everyone for joining our call today. And as a reminder, a replay of the webcast can be accessed on the -- on our website in the Investor section. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Kevin Coleman -- Vice President, Investor Relations

David A. Zapico -- Chairman of the Board and Chief Executive Officer

William J. Burke -- Executive Vice President and Chief Financial Officer

Joshua C. Pokrzywinski -- Morgan Stanley -- Analyst

Deane Dray -- RBC Capital Markets -- Analyst

Ivana Delevska -- Gordon Haskett Research Advisors -- Analyst

Scott Graham -- Rosenblatt Securities, Inc. -- Analyst

Nigel Coe -- Wolfe Research -- Analyst

Brett Linzey -- Vertical Research Partners -- Analyst

Rob McCarthy -- Stephens -- Analyst

Richard Eastman -- Robert Baird -- Analyst

Andrew Obin -- Bank of America -- Analyst

Andrew Buscaglia -- Berenberg -- Analyst

Joseph Giordano -- Cowen & Co. -- Analyst

Ken Newman -- KeyBanc Capital Markets -- Analyst

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