Altra Industrial Motion Corp (AIMC) 2007 Q1 法說會逐字稿

Good day and welcome to today's teleconference. (OPERATOR INSTRUCTIONS)

I'll now turn the program over to Mr. Michael Hurt, Chairman and CEO. Please go ahead, sir.

Thank you. Welcome to our first quarter conference came. Joining me today will be David Wall, our CFO; and Carl Christenson, our President and Chief Operating Officer. To help you better follow our discussion on this conference call, we have posted on our website some PowerPoint slides that we will be referring to during the call. Hopefully you've had a chance to look at them. Before I get started, I'll read our Safe Harbor statement.

Any forward-looking statements represent the Company's expectations or beliefs concerning future events. Actual results may materially differ. Any forward-looking statements made by or on behalf of the Company may involve certain risks and uncertainties including risk of cyclical and seasonal demands, consolidating customer base, leverage, consumer credit conditions, competition, continued innovation, product liabilities, availability and cost of product components, and other risks, additional risks are described in the Company's Securities and Exchange Commission reports and other filings including but not limited the risks described in the Company's annual report on Form 10-K. Undue reliance should not be placed on any forward-looking statements made by or on behalf of the Company. The Company undertakes no obligations to publicly update or revise any forward-looking statements.

Now, on this mornings call, I will first give you highlights of our record first quarter 2007 results. Then I'll update you on how we view the current economic environment is impacting Altra's business. Next, David will give you a review of our first quarter record financials in detail, and Carl will discuss our 2007 initiatives that are creating our revenue and EBITDA growth. Then I will give you an update on the TB Wood's acquisition we just closed this month and follow with some closing remarks. After that we'll open it up to a full Q&A session.

If you're looking at Phase II on the PowerPoint that we sent out, and you had a chance to read our press release, as you would imagine, we're extremely pleased with our first quarter results and are very excited about the TB Wood's acquisition. Compared to the first quarter 2006, revenues increased 15.6% , 8.1% organically. Operating income improved 26.9%. Reoccurring net income was up 34%. Debt was reduced by $19.5 million. Pension and OPEB funding requirements were reduced $16.7 million and adjusted EBITDA grew 19.2%, and we completed the TB. Wood's acquisition in a short merger on April the 5th, 2007.

Having reflected on our strong first quarter results, we continue to believe that we are around the midpoint of the current industrial expansion. An analysis of our bookings and backlog showed that the late cycle markets which use Altra products like energy, mining, and metals continue to be strong. Having lived in our markets in the decade of the '90s, this midcycle looks and feels exactly the same as it did then, and I believe that our current economic expansion will continue replicating what we saw in the late '90s.

We continue to monitor the macroeconomic indicators that I've referred to in past conference calls. Industrial production growth, CapEx spending, the ISM index, and manufacturing capacity utilization. We're fully aware that these economic indicators show a moderation in the growth of the U.S. economy compared to the first quarter a year ago. However, offsetting this moderation are some very positive factors for Altra. Our markets in Europe and the Asia Pacific continue to show strength. Another strong plus is our key North American power transmission distributors have reported solid first quarter results, and we believe their inventories are under control going forward for the rest of the year, and with over 40% of our business being after market plus the addition of TB Wood's business which is 54% after market, we remain confident that we'll have another successful business year here at Altra. I'll now turn it over to David Wall who will give you some detailed financial numbers. David?

Thank you, Mike. Moving on to Page 3 in our unaudited first quarter 2007 results, we had net sales of $132.7 million compared to $114.8 million in the first quarter of last year, an increase of 17.9 million or 15.6% or 8.1% organically. Nearly all the business units contributed to this increase with the most significant contributions coming from those business units that serve the petrochemical, mining, material handling, and defense markets. Our gross profit as a percentage to net sales increased 90 basis points from 27.8% in the first quarter of last year to 28.7% in the first quarter of '07. Our SG&A expenses as a percentage to sale decreased from 17.4% in the first quarter of last year to 16.7% of net sales in the first quarter of '07. Almost all of of the 2.2 million absolute increase in the SG&A is because we had 13 weeks of Hay Hall related SG&A expenses reported in Q1 of '07 versus only six weeks in Q1 of '06.

Our operating income for the first quarter of '07 increased 26.9% from $11.9 million in the first quarter of '06 to $15.1 million in the first quarter of '07. Without the $800,000 worth of restructuring charges we incurred in the first quarter of '07, our operating income would have increased by 33.6%. Recurring net income increased 34% from $5 million in Q1 of '06 to $6.7 million in Q1 of '07. Adjusted EBITDA increased 19.2% from $17.2 million in Q1 of '06 to $20.5 million in Q1 of '07. Our recurring diluted earnings per share increased 11.5% from $0.26 a share in Q1 of '06 to $0.29 a share in Q1 of '07. The 18.2% increase in diluted weighted average common shares outstanding is almost entirely attributable to to the 3.3 million shares that the Company sold in our IPO in December of '06.

If you look at Page 4, we show a reconciliation of how we got from reported net income to recurring net income number that I spoke about on the previous page. In this reconciliation, we have removed all material one-time costs to give you a feel for what our ongoing business will look like. In this schedule, we moved the tax effected costs of restructuring, redemption of debt and associated interest expense, private equity advisory fees that no longer apply to us, and non-cash inventory step up costs.

Now, I'll cover some balance sheet highlights for the first quarter of '07. Taking a look at Page 5, our net debt to LTM adjusted EBITDA decreased from 4.9 times in Q1 '06 to 3.1 times in Q1 '07. After the TB Wood's acquisition, it will increase to 4.1 times. For the quarter, our CapEx was $1 million. Average Day Sales Outstanding decreased by 1.7 days to 47.8 days. Average days payable outstanding decreased by 1.8 days to 39.1 days, and inventory turns increased 0.9 turns from 4.5 turns at the end of the year to 5.4 turns in Q1. Our revolver remained undrawn upon at the end of the quarter. Now I'll turn our discussion over to Carl Christenson, our President and COO who will review our major growth initiatives for 2007.

Thank you, David and if you'd please refer to Page 6 of the presentation. First, we'll continue to drive our organic growth with a very focused effort. One of the key elements of our organic growth is new Product Development. In the first quarter of 2007, we exceeded our plan and approximately 15% of our revenues were derived from new products while in 2006, approximately 10% of our revenues were derived from new products. We're also having very good success with our target market initiatives. In the food and beverage industry, we began selling our Clap Capper clutch to Pepsico last year and in the first quarter of this year we were approved Coca-Cola. Coca-Cola specified our product for exclusive use in their North American bottling facilities and this is a great win for us. In the forklift industry we developed new business which has resulted in over 15% growth of revenues into this market and as a result of initiatives targeted at the elevator industry, revenues in this market have also experienced double digit growth.

In addition, we continue to develop our motion control platform. Sales of products in this platform are up approximately 32% compared with the same quarter last year. As a result of the Hay Hall acquisition and the recent acquisition of TB Wood's we've extended our product offering enabling us to leverage our global salesforce to win business at existing customers and to gain shelf space and support from our outstanding distribution network. Our low cost country sourcing initiatives have gotten off to a very good start this year and we are ahead of plan to achieve over $5 million in savings this year. In addition, we are adding staff to our Shanghai office to handle low cost country sourcing initiatives associated with the TB Wood's acquisition.

We utilized the ultra business system in all aspects of our business to drive continuous improvement and ensure execution. In the first quarter, we held over 70 Kaizen events companywide ranging from three day local events to week long global events. One of the global events was held in our [Brekin], Scotland facility where we transformed an assembly operation resulting in 55% reduction in required floor space and an 80% productivity improvement. TB Wood's began implementing their business system a few years ago and fortunately they utilize many of the same tools that we use which is going to help make the transition seamless.

We are increasing our sales and manufacturing presence in the Asia Pacific region. We doubled production capacity in China in 2006 and our plan for 2007 is to be manufacturing at a rate by the end of the year that is double what it was at the end of 2006. We have also added sales resources, primarily in China to support our top line growth plan. Last year, we began implementation of the procedures, policies, and controls necessary to comply with Sarbanes-Oxley and we are on target to be compliant by the end of this year.

Finally, we are executing our plans to realize the synergies from the Hay Hall and TB Wood's acquisitions and we are on target to achieve our objectives. As we have stated before, we plan to achieve approximately $7 million of synergies from the Hay Hall acquisition and 6 to $8 million from the TB Wood's acquisition in a two to three year time frame. Now I'll turn it back over to Mike Hurt our Chairman and CEO who will update you on the most recent acquisition, TB Wood's and then he will follow-up with some closing remarks.

Thank you, Carl. Well, if you have our PowerPoint sheets, you can look at Page 7, which will help you follow my discussion. We completed the TB Wood's acquisition April the 5th, and members of the senior management team spent the following two weeks at TB Wood's introducing the Wood's employees to Altra and meeting with Wood's management to kick off our 100 day plan. Our actions to date at TB Wood's include elimination of duplicate management structure, consolidation of salesforces and completion of initial cross-training, reorganization of TB Wood's businesses into product platforms, integrating completing the integration of financial reporting, elimination of public cost, and on an annualized basis we estimated that these actions will create synergy savings of $2.9 million. Also during the first year, we will be working on warehouse consolidation, implementing low cost country sourcing using our Altra Shanghai office, using the combined salesforce to initiate cross selling and driving distribution growth, using our scale to leverage purchases, and begin to implement our manufacturing rationalization plan.

In closing, based on our outstanding first quarter results and the addition of the powerful TB Wood brands to the Altra product portfolio, our entire management team is very excited about the opportunity to significantly grow long term shareholder value. This value will be created through the execution of our business strategy using the initiatives Carl discussed. On the revenue side, growth will be driven by new products, target market opportunities, motion control portfolio growth and leveraging the the Altra and TB Wood's brands using our global salesforce. Operational improvements will be achieved using our Altra business system, low cost country sourcing and manufacturing and continuing to get the gains out of our Hay Hall acquisition and TB Wood's.

Finally, in closing, we believe that we will achieve our 2007 business plan. In fiscal 2007, with the TB Wood's acquisition included for the remainder of the year, we're expecting top line revenues to come in between 585 million and $600 million, and EBITDA to range between 85 million and $88 million. I will now turn the call over to the moderator and start our Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) We will take our first question from the site of [Richard Starling] from Canyon Capital.

Good afternoon. I wondered on the guidance, if I you could just talk me through, if I added the full year effect of TB Wood's and then the full acquisition synergies from Hay Hall and from TB Wood's, what sort of EBITDA number would I get to in total?

I think I gave that in the presentation, and -- oh, you want full year, not the remaining of TB Wood's this year ?

I guess you gave 85 to 88 as kind of the actual guidance and I wanted to know what, if you add the first quarter of TB Wood's into that what's the pro forma effect of that plus how much of the synergies are not Incorporated in that number.

The first quarter of TB Wood's results, first quarter TB Wood's they had about $29 million in revenues, and if you normalize their EBITDA and we think it would be about 3 to $3.5 million.

Okay, and then I guess the second part was within the 85 to 88, how much of the Hay Hall and TB Wood's synergies are you assuming and how much is still to come in 2008?

Well, in the 88, you want to answer that, David?

2008, we should have, 2007 excuse me, we should have about $3 million in the 12 month period for the TB Wood's synergies and then we've got another 4 to $4.5 million for Hay Hall going forward after that. So on the total, we'll have $5 million still to be achieved on the TB Wood's side and another 4 million on the Hay Hall side.

Right. Thank you.

And our next question comes from the site of Mike Schneider from Robert W. Baird. Please go ahead.

Good morning, guys.

Good morning.

Maybe first we can just start on the core business. During the quarter can you give us a sense of what distribution grew and the OEM business grew organically versus the 8% average?

Distribution versus OEM and the 8% organic growth?

Right. Just qualitatively, if you have got it, otherwise?

We experienced a larger growth in the OE side than the distribution side. I don't have a percentage breakdown on that but we know OE business grew faster than the distribution side.

And that's due to some of the food and beverage, forklift and elevator contracts coming through?

Right. Forklift and Elevator were very strong for us in the first quarter and also some of the energy related products that we developed last year were strong, the ones in the OEM market.

Okay, so when I listen to your commentary about the strongest markets, they sound like what I would call late cycle markets, energy, metals, mining, et cetera. Where are you seeing the weakness? Because this morning we've got 1% GDP on the tape for the first quarter. People are talking at least in headlines about the slowdown. We're seeing it across most industrial companies, yet you guys are outperforming by a wide margin. I'm just curious, where are the soft spots and I guess is it a case where yours is just to come?

Two markets that are particularly soft, the ones that are noted in the news most often are automotive and housing, and we don't have a lot of exposure to those markets. We have a small piece of automotive business in our Kilian operation and that's certainly been affected and then the other one is turf and garden is the market that's down, but we've been able to -- that business is about flat for us this year as we've been able to gain some market share with some new products into that market, so that's about flat, and the small piece of automotive we have is down some.

Okay, and when you look at the synergy numbers you just ran through, did I hear you correctly that basically 2007 you're looking for about $7.5 million, 7 to $7.5 million in savings and in '08 you're looking for $9 million incremental?

Incremental from base year?

Incremental over 2007.

Yes, from--.

No. On an annualized basis, we would expect to achieve a little over 3 million from the TB Wood's acquisition synergies, and from the Hay Hall acquisition from base year, it will be about, it was about 2.6 last year and will get about another 2 this year, 2 to 2.5.

Okay.

Does that give you the--?

Yes. Okay, so then -- and then looking forward now in '08 in terms of incremental over 2007, you would expect TB Wood's to contribute what and Hay Hall to contribute what?

Yes, over the next year, well, let's see, TB Wood's we have annualized 3 of the first 12 months and then while Carl is looking at the numbers, we said we would get 6 to 8 total, so you got 3 the first year and take the mid point of that, 4 more million from TB Wood's which is probably split over '08 and '09 and then Hay Hall, Carl are you looking at those numbers?

Yes. If you combine them, you're of probably in the 4, 4.5 million range for the incremental in '08.

Okay, great. And then if I look at the EBITDA guidance again and adding in again the incremental amount from TB Wood's nine months of EBITDA there it basically gets you to the high end of the range this 87, 88 million. I'm curious what would drag you to to the 85 million? What are you worried about in that scenario?

Well, you mentioned the economy and et cetera and was ours yet to come, so that kind of leads us to the lower side of the discussion. We still have good bookings in backlog and those late cycle markets and we look forward to getting further penetration in the distribution network with the combination of the TB Wood's and Altra sales, TB Wood's salesforce so we'll get a real boost from the combination, but I guess the bottom side of that in a quick answer is conservative based on the economy that we hear.

Okay, fair enough. And then looking forward forward now can you give us an update on pricing? What's already been put in as of the first of the year, maybe through distribution or presumably but OEM as well and then maybe what you need or what you intend to get as the year unfolds?

Yes. We typically do a price increase on an annual basis through the distribution channel, and that went into effect in October of last year, and then on the OE side, where we have contracts, we will adjust pricing as we can when we renegotiate contracts, and then there's also a significant amount of work, probably a lot more than we have on contract that we do on a quote basis, and so as we quote them, we will adjust prices, as we quote new projects and just get as much as we can, and then so that price, the distribution price increase went into effect in October last year and if something changes on our cost basis, we'll look at doing it in a shorter time frame. That price increase ranged from 4 to 6%.

What do you think you've netted now if you looked at this quarter's results?

2.2 points of the organic growth was price.

And just a final question, on the acquisition of Dodge, it is a at least a secondary competitor of yours. Have you seen any benefits from that or any change in strategy on your part?

It's early to tell, but a lot of the TB Wood's products compete with Dodge and our custom products compete with Dodge. We are hearing the initial discussion from some customers about asking us to see if we can improve delivery on some products based on that transition going through, and we also think in the TB Wood's business, there could be some opportunities in the AC drives business as Baldor sorts out, the reliance drives in relationship to what they had with Rockwell Automation, the previous owner. So we are seeing opportunities and on spot basis, based on the acquisition there and we have been able to pick up some business direction, on the delivery situation.

Okay, and final question, on restructuring expenses this quarter, the $800,000 was run through, anything or I guess what should we expect in Q2 and for the year would be great.

We do expect some restructuring charges as we integrate the businesses but we have not, we're not prepared to talk about them on this call. And we've got our own plans laid out but we will update you after Q2.

Okay. Thanks, guys. Nice quarter.

Thank you.

Thank you. Our next question comes from the site of [Bob Shanesky] from Jefferies & Company.

Good morning.

Good morning, Bob.

I had to jump off for a second so I have got a couple, I hope they aren't redundant. The first one was in terms of new product growth that you mentioned, the 15%, is that a number we should think about being consistent for the year or is that a number you anticipate would continue to expand?

I think it will be consistent through the year. We're ahead of plan for the year, but everything looks like our new product programs are right on target.

And then is there, with the TB Wood's acquisition, is there anything that we need to be cognizant of in terms of any variance in the cash or book tax rate?

In the first year, the tax rate will come down a little bit, probably closer to in the 36% range due to purchase accounting issues, our cash tax rate will drop significantly too, so that will probably be in the mid 20s.

Is that a fair number to use for '08 in terms of cash taxes as well?

No. Cash taxes will go back up into the low 30s in '08.

And within the revenue forecast of the 585 to 600, this is what I may have missed. Did you mention what component of that will be TB Wood's?

We didn't, but I can give you that. In the 600, about 92 to 95 is in there.

And then finally, you mentioned the sourcing a couple of times in your commentary. And I'm just wondering where at the end of '07 with the cost savings that you discussed, where do you think you are in that process?

In the low cost country sourcing, we've still got some significant room to go because we acquired Hay Hall last year and TB Wood's this year, and neither one of those companies were fully engaged in low cost country sourcing so they bring us a significant amount of opportunity. David, we had some numbers.

Yes. As a percentage of material purchases, we feel we've got about 58% still to go as an opportunity cost of sourcing our material through low cost country sourcing.

Can you give us a sense of what that -- and that would include TB nd Hay Hall?

That would include -- yes.

Okay, can you give us a sense in what that means in terms of dollar amounts?

Just a second. Well, we got [6 to -- 5.5] in the plan this year with 12 to 14 in total--.

We probably got about mid 40s with TB Wood's in there, material that we can purchase through low cost country sourcing.

He's talking about the high cost country cost--.

To the low cost country--.

$40 million worth of high cost country purchases that we can can take to the low cost country.

Yes, mid 40s.

Right and we see 30 to 40% savings on that, so in the 12 to 15 million range.

And then finally if I could, you had mentioned previously that you were looking for a organic growth rate this year of about 6% a quarter, but based upon the first quarter results, would we expect that number to come up?

If we can continue to have the success we're having, we're hoping to see the high side of that estimate that I gave at the 600 revenue number.

That's a big help. I appreciate it. Congratulations on a great quarter.

Well, thank you.

Thank you. We'll take our next question from the site of Keith Hogan from Pioneer Investments.

Good morning. How are you doing?

Good.

I've been following you guys for over two years now I guess as a bond holder and I've never seen a lot of seasonality in the business, so from a simplistic perspective I'm looking at the 20 million in the first quarter EBITDA and kind of annualized and say that gets you to 80 million. That doesn't include TB Wood yet, and on the call today you talked about additional Hay Hall synergies TB Wood synergies, low cost country sourcing, price increases, the contribution the rest of the year from TB Wood. I guess all of those things together you just need to get another 5 to 8 million to get to your guidance for the year. I know historically you've done a good job of under promising and over delivering, but it just seems like it doesn't add up. It seems like there's more opportunity there. Am I oversimplifying annualizing that first quarter number?

Yes. The first two quarters are our strongest quarters. We dropped significantly in the third quarter due to the turf and garden business slows down as it goes into the summer hiatus and then we also have the European effect. You may not have seen that last year in the third quarter due to the one-time gain we had on the OPEB curtailment gain in the third quarter and then we'll bounce back up in the fourth quarter over the third quarter but not as strong as the first two primarily due to the number of working days in the fourth quarter compared to the first two quarters. So you really can't seasonalize or annualize that with the first quarter.

We had previously given guidance in the 73, 75 range for Altra alone.

Right.

Prior to TB Wood's.

Okay. Thank you. That's all I had.

Okay.

Thanks.

Thank you. Our next question comes from the site of [Helen Chutrump] from Merrill Lynch.

Hi.

Good morning.

Hi. I just had a quick question. On your adjusted EBITDA calculations, just curious as to what the noncash inventory step up costs are.

That relates to our acquisition of Hay Hall, when we purchase a Company, you take their actual cost of inventory, of finished goods and step them up to their net salable value. You have to revalue them, and then they go through the P&L at basically the sale price. So any finished goods you purchase, you sell at zero margin, rather than normalized margin. It's part of purchase accounting. And that amounted to 984,000.

Okay, great. That's the only question I had. Thanks.

Yes.

Thank you. Our next question comes from the site of [Justine Ho] from [Post Advisory].

Hi. I just wanted to get a little clarification on the '07 guidance. When I look at the previous guidance of 73 to 75 million for Altra, and then let's say I use the midpoint, 74, and I add on 15 million for TB Wood's, that's like 89 million which is close to where you are guiding for '07, so I just wanted to get clarification on whether that, I believe you said earlier that that 88 to 89 million guidance for '07 includes synergies, so -- but if I were to just simply take the 74 million plus 15, that excludes synergies so if you can bridge me on that?

Well, I think we said 73 to 76 prior to the acquisition of TB Wood's, and the guidance that I gave was from April going forward to the end of the year and so that's how we got to the 88 on the top side.

If I took 88 plus the 3 million of TB Wood's in Q1, that would be about 91 million.

Correct.

For pro forma full year.

Correct. Yes, that's pretty good.

Versus if I took the previous guidance of 74 plus the 15 on TB Wood's, that's 89, so the difference is roughly 2 million. Would that 2 million -- but I think that seems a little low on I think, well, actually that sounds right. The 2 million would be the synergies from TB Wood's that you mentioned?

Correct.

Yes. On an annualized basis we said it was 2.9 so you're in the ballpark with the 2.

And the 73 to 76 million previous guidance already has the Hay Hall synergies assumed in there?

Correct.

Great. Thank you.

Yes.

Thank you. (OPERATOR INSTRUCTIONS) And it appears we have no further questions at this time.

Okay, well I'll just close it then. Well, we thank you very much for being on our conference call. If there's any numbers that are not totally clear to you or other information that you would like to ask us about, we have an open door policy. You can get to David, Carl, or I, and we thank you for listening to our call and we'll be back online next quarter. Thank you.

Once again this does conclude today's teleconference. Thank you for your participation and you may disconnect at any time.