Altra Industrial Motion Corp (AIMC) 2007 Q2 法說會逐字稿

Welcome to today's teleconference entitled Q2 Conference Call for ALTRA HOLDINGS.

(OPERATOR INSTRUCTIONS).

I will now turn the program over to Mr. Hurt; Mr. Hurt you may now begin.

Thank you Michelle. Good morning and welcome to our second quarter 2007 conference call. 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, www.altramotion.com some slides that we will be referencing during the call. Hopefully you have had a chance to access them.

I'll now let David just talk to you a second about how to get to those slides if you have not been able to.

If you go to our website, altramotion.com, and under the Investor Relations section, and under the Events and Presentations tab, you'll see a tab for Second Quarter 2007 Results. Just click on that and that'll pull up the slides that we'll reference during this call.

Okay and that's in the Presentations in that area.

Right.

Okay, thank you David.

Before I get started, I'll have to read our Safe Harbor statement.

Any forward-looking statements represent the Company's expectations or beliefs concerning future events. Actual results may materially differ. A forward-looking statement 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 registration statement on Form F-1 filed June 4 of this year.

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 moving to our conference call; on this call, I will first give you an update on our view of the current business environment, then I'll give you some highlights of our record second quarter results and fill you in on our very successful follow-on stock offering.

Next, David Wall will review our second quarter financials and first half financials for you in detail, then Carl Christenson will discuss our 2007 (inaudible) issues driven by the six elements of our business strategy that are creating our revenue and our earnings per share growth. We will then open up the call for full Q&A.

Considering the strength of our second quarter results, we continue to be bullish about our business. We are especially pleased with the continued successful integration of our TB Wood's and Hay Hall acquisitions, plus the strength of our late-cycle markets, our military business, and our growth in international business. I am now starting to hear from executives in the mining, energy, and infrastructure markets of the developing countries that have business in the development countries, developing countries compare this expansion to the '50s and '60s when Japan and Europe were being rebuilt after World War II.

An analysis of our bookings and backlog show that the late-cycle markets, which use ALTRA's products, continue to be strong, and our sales through our distribution channels here in North America remain very solid.

We continue to monitor the following macro economic indicators; industrial production growth, CapEx spending, ISM Index, and manufacturing capacity utilization. And the improvement in these indicators in the second quarter compared to last quarter reinforces our positive outlook as we look forward.

Now if you've have a chance to read our press release, as you can imagine, we are extremely pleased about our second quarter results. Now I'll refer you to Page 2 on the slide if you have them or are looking at them. This compares our second quarter results for '07 compared to the second quarter of '06. Revenues increased 36.1%; organic growth was 9.6%; operating income was up 37%; recurring net income was up 46.9%; adjusted EBITDA grew 46.8%; recurring EPS increased 24%; and we purchased $11.3 million of our 11.25% bonds in the second quarter.

On June 19, we completed the following stock offerings; we sold 12.65 million shares, of which 3.18 million were primary, which gives us an outstanding share count of 26.27 when we get through the moving averages of the outstanding shares this year. This offering was very positively received, and to help meet strong demand, the offering was upsized in the Green Shoe exercise.

As a result of the offering, our private equity partner, Gemstar Capital, sold all of their remaining shares, and at our Board of Directors meeting on July 20, all of the Gemstar Executives have resigned from our Board of Directors.

Carl Christenson, our President and Chief Operating Officer was appointed to the ALTRA Board. With these changes, we are fully compliant with all NASDAQ and SEC requirements going forward. The offering essentially doubled our float, increased the liquidity of ALTRA's stock, and increased our cash by $49.6 million, and it obviously helped to lower our net debt to EBITDA ratio.

Now I'll turn the call over to David and he can give you some more details on our financial quarter in the first half.

Thank you Mike.

Moving on to Page 3 in our unaudited second quarter 2007 results, we had net sales of $163.1 million compared to $119.8 million in the second quarter of last year. That's an increase of $43.3 million or 36.1%, 9.6% organic growth. Nearly all the business units contributed to this increase, with the most significant contributions coming from those business units that serve the defense, petrochemical, mining, and material handling markets.

Our gross profit percentage as a percent to net sales, adjusted for non-cash inventory step-up costs in both quarters, increased 60 basis points from 28% in the second quarter of last year to 28.6% in the second quarter of 2007.

Our SG&A expenses as a percent to sale decreased from 17% in the second quarter of last year to 16.7% of net sales in the second quarter of '07.

Our operating income for the second quarter of '07 increased 37% from $11.9 million in the second quarter of 2006 to $16.3 million in the second quarter of 2007; $3.1 million of this increase was spurred by our core business units. Recurring net income increased 46.9% from $4.9 million in Q2 of '06 to $7.2 million in Q2 '07. Adjusted EBITDA increased 46.8% from $17.1 million in Q2 of '06 to $25.1 million in Q2 of '07.

Our recurring diluted earnings per share increased 24% from $0.25 a share in the second quarter of '06 to $0.31 a share in the second quarter of '07.

Page 4 shows a reconciliation of how we get from reported net income to recurring net income 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 have moved the tax-affected costs of restructuring, redemption of the debt associated with interest expense related to the retirement, some of our high-cost debt, bridge loan fees associated with the TB Wood's acquisition, private equity advisory fees that no longer apply to us, accelerated vesting of stock compensation for an ex-Director of the Company, and non-cash inventory step up costs related to both the TB Wood's and Hay Hall acquisitions.

After taking into consideration these one-time costs, our recurring net income increased 46.9% in the quarter.

Moving on to Page 5, our unaudited first-half 2007 results, we had net sales of $295.8 million compared to $234.6 million in the first half of last year, an increase of $61.2 million, or 26.1%, 8.5% organic growth rate.

Our gross profit percentage as a percent to net sales adjusted for non-cash inventory step-up costs in both halves increased 30 basis points from 28.3% in the first half of last year to 28.6% in the first half of 2007.

Our SG&A expenses as a percent to sales decreased from 17.2% in the first half of last year to 16.7% of net sales in the first half of '07. Our operating income for the first half of '07 increased 31.9% from $23.8 million in the first half of '06 to $31.4 million in the first half of '07; $6.4 million of this increase was spurred by our core business units. Recurring net income increased 40.4% from 9.9 million in the first half of '06 to $13.9 million in the first half of '07. Adjusted EBITDA increased 32.7% from $34.3 million in the first half of '06 to $45.6 million in the first half of '07.

Our recurring diluted earnings per share increased 17.6% from $0.51 a share in the first half of '06 to $0.60 a share in the first half of '07.

Now I'll cover some balance sheet highlights for the second quarter of '07. Taking a look at Page 6, our net debt to LTM adjusted EBITDA including 12 months of TB Wood's results, decreased from 4.2 times in Q2 '06 to 3.3 times in Q2 '07. For the quarter, our CapEx was $3.3 million. Our recurring cash provided by operating activities was over $7 million despite some very strong sales in June.

Now I'll turn the discussion over to Carl Christenson, our President and COO who will review our major growth initiatives for 2007.

Thank you, David.

On Page 7 under six key elements of our strategy for profitable growth; I'll review each of these elements and give you some examples of accomplishments in the second quarter.

Leveraging our global sales and distribution network has been very effective. We are getting excellent support from our distributors for the new products we obtained from our recent acquisitions. In addition, our global sales team is aggressively leveraging their relationships to gain market share with the acquired products. For example, we were able to displace a competitor at an existing Warner Electric customer in the forklift market with a product we added as part of the Hay Hall acquisition. The expected revenues of this product will be approximately $650,000 per year.

We are also getting great results by focusing our resources on strategic markets. Compared with last year, sales to the elevator market are up over 30%, and sales into the mining market are up over 40%. While the turf and garden market has been down, our sales to this market have increased as a result of our focused efforts in share gain.

Our new product initiative continues to yield excellent results. Sales from new products in the second quarter were 14% compared to 10% last year. A great example is the success we are experiencing selling a custom-designed overrunning clutch to the auxiliary power unit manufacturers in Europe. Expanding into new markets is also paying off. Sales in motion-control products are up 30% this year, and our sales in China are up over 20%. We received an order in Q2 for a heavy-duty brake that will be used in a hydroelectric project in China for a ship lift.

We believe continuous improvement is essential and our continuous improvement initiatives are on track to achieve our goals.

A set-up reduction Kaizen event in one of gear manufacturing operations resulted in a 30% improvement in set-up time and 50% reduction in lead time. This will result in an inventory reduction of over $120,000. This is an example where we are realizing productivity improvements utilizing the ALTRA Business System. Our low-cost country sourcing goal is to achieve over 5.75 million this year and we're ahead of the plan through the first half.

After making the Hay Hall, Bear, and TB Wood's acquisitions, our primary goal is to improve our net debt to EBITDA ratio. When we do make additional acquisitions, we will follow a disciplined approach and only make acquisitions that meet our strict criteria.

Please refer to Page 8, and I will update you on the progress we're making integrating the Hay Hall and TB Wood's acquisitions. Regarding the Hay Hall acquisition, we identified $6 million of synergies that could be achieved by the end of 2008. Actions that have been completed this year combined with the results from 2006 will yield $5.6 million of improvement on an annualized basis. We expect to be able to achieve the balance of the identified synergies in 2008.

Regarding the TB Wood's acquisition, we identified $6 million to $8 million of synergies that could be achieved by the end of 2009. Actions we have implemented to date will yield $5.4 million of annualized savings, and we're confident that we will reach the targeted synergies by the end of 2009.

Actions that we have taken already include elimination of redundancy in management and public company costs; restructuring and training of the salesforce; leveraging the purchasing organizations; and in-sourcing casting to the TB Wood's foundry.

Now I'll turn it back over to Mike Hurt, our Chairman and CEO who will make some closing remarks before we go to Q&A.

Thank you, Carl.

In summary, based on our outstanding second quarter results and the addition of the powerful TB Wood's brand and with the ALTRA product portfolio, we continue to be very excited about the opportunity to significantly grow long-term shareholder value. This value will be created through the continued 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 leverage the ALGRA and TB Wood's brand using our global sales force. Operation improvements will be achieved through our [ABA] business system, low-cost country sourcing and manufacturing, and acquisition synergy gains.

Finally, in closing I'll refer you to Page 9. We believe that we will achieve our '07 business plan. In fiscal year '07 with TB Wood's acquisition included in the remainder of the year, we're maintaining the guidance that we gave you in the first quarter. We're expecting our revenues to be between $585 million and $600 million, and our EBITDA to be between $85 million and $88 million.

Just some other metrics that you might be interested in; we're on track for our CapEx according to our plan. We expect to spend less than $15 million on CapEx. After the TB Wood's acquisition, we are currently projecting the 37% effective tax rate, and we maintain that our best estimate of the cash flow from recurring operations continues to be about 115% to 120% of net income.

I will now turn it over to the moderator so that we can start with Q&A.

(OPERATOR INSTRUCTIONS).

Andrew DeAngelis, Keybanc Capital Markets.

Good morning gentlemen; my first question kind of tries to get at the guidance. I'm trying to think about how we should think about incremental integration savings, kind of half-over-half, kind of looking at the second half versus the first half.

Well first of all, I think that the first, you need to understand that our first two quarters in this business are the strongest quarters of the year. Our third quarter has seasonality related to factory shut-downs and maintenance and a lot of the factors in North America, and then the European effect where there's less working days in Europe.

And then our fourth quarter is a relatively strong quarter, but we don't have the number of producing shipping days that we have in the first and the second quarters. So that's why we're maintaining our guidance where it is after our first quarter being a little bit better than expected.

But you should be getting some sizeable incremental savings from the integration right, half-over-half?

Yes, and regarding the Hay Hall acquisition, it's about the same, so with TB Wood's, we have one quarter of savings where in the second half, we'll have two quarters of savings. And let's say -- so it would be twice the first savings in the second -- and then there's also probably another $0.5 million we'll get.

Okay.

Does that answer your question?

Yes it does; I mean I'm just looking at the guidance and your EBITDA and revenue guidance kind of imply flat revenues in the second half and down let's call it 5% on an EBITDA basis, and I certainly appreciate the seasonality, but given the contribution of TB Wood's and the incremental savings from the integrations, I would just think that you would be able to increase the guidance.

Well, if we get 6% to 7% growth in the second half, then we'll be up at the top end of the guidance.

So that contemplates 6% to 7% organic growth?

Yes correct. And we do not want to over-promise based on two quarters into being a new public Company.

Absolutely, I understand.

Okay, thanks.

And just one last question; the net interest expense on a run-rate basis, I mean there's been kind of some moving pieces there. What are you kind of running at right now on a net interest cost?

Just a second; about $8 million a quarter versus the 10.7 in the second quarter.

I'm done with my questions; thank you.

You got the answer on the going-forward interest?

Yes, I apologize.

Oh okay, okay, all right, sorry for the hiccup here. Go ahead Michelle.

[Andrea Ward], Robert Baird.

Good morning guys; just a little bit more on TB Wood's and just looking at the synergy savings goal that you have set out, $6 million to $8 million by the end of 2009 is your goal, but you're clearly very close to at least hitting the low end of that range. I was just wondering if you could talk a little bit about the timing of when the incremental savings are expected to come going forward. I guess what are the key initiatives that you have in place, and is it more just a matter of they don't start rolling through or you don't start taking the actions until 2008 or 2009 that high end of the range I guess is still not until an '09 even.

Right and the balance will probably come about half in '08 and half in '09. And the actions that we have left are a little bit longer term to implement, like rationalizing some of the manufacturing operations and moving products into line in the factories, that takes substantially more time to do than some of the actions that I mentioned during the discussion.

Okay and then just again, on the organic growth; I understand it looks like your guidance is assuming about 6% to 7% organic growth. Obviously, this quarter was great organic growth, almost 10%, and it sounds like it was better than you had expected. Is there really anything fundamentally in your markets that would allow you to think that growth will be slower in the second half, or is this just merely conservatism?

Part of it's conservatism and going back to some things and see now in the third quarter and the fourth quarter amount of working days there, and what goes on during the holiday periods as it affects business.

But there really aren't markets that you see going forward that are expected to really materially flow from here?

We don't see those signals in our backlog and our bookings. We continue to see, have good backlog and bookings in the long-cycle markets and the other markets -- I remind you that almost half of our business is at the market so there's good stability there in the business.

Okay, and then you mentioned turf and garden sounds like it's kind of may be lagging; are there any other markets that are particularly lagging the overall growth rates?

Well, we have a piece of transportation business that's made up of $20 million-worth of automotive business at Killian Manufacturing, and that's all the automotive business the Company has. And that business was soft in the first quarter based on transition of new business, I mean soft the second quarter due to transitions of business, and we have some things coming on in the third and fourth quarters, new business.

And then last year, we had strong, more sales in a project that we had for the mass transit system in New York City, and that business has now turned into after-market business. So that's the only places where we're softer.

So is that essentially that business should then start to improve a little bit when you get into the second half of the year, your expectation on the transportation side?

I think the Killian business, those numbers will come back towards historical in the second half, but the Mitsubishi, the project for the mass transit system, which was gearing that went through a partnership with Mitsubishi, those numbers are going to be lower because we're now into an after-market repair mode basis versus supplying products for the new trains.

We're working on a project in '09 that looks reasonably good, but it won't be in '07 and probably wouldn't start until '09 generating revenues. You agree with that Carl?

Yes.

Great, thanks guys, good quarter.

Okay, thank you.

[Jordan Hollander], Jefferies & Company.

How are you; just had a couple of questions on the debt level you guys talked about reducing debt to EBITDA. Is there a target level you guys have in mind that you want to bet down to that you'll be comfortable with?

We would like to get that down in the 2.5 to 3 range, net debt to EBITDA range.

Okay, and then I guess you guys can generate a good bit of cash flow here for the remainder of the year, and looking forward. Is that just targeted at debt reduction or is a combination reduction and some bolt-on acquisitions? Is that sort of the strategy?

What we told the Street in the follow-on of stock offering was we're all focused on the integration of the two businesses that we've acquired and our top priority is to continue to improve that net debt to EBITDA ratio. The only thing that would change this would be a very compelling strategic acquisition at the right price, and that's opportunistic and we're not focusing on that. So we're focusing on that ratio I quoted.

Okay so it's a first priority and then if anything real strategic comes along, head that route. As far as the multiples right now on some of, any of your targets, is it pretty high environment, something you're just trying to wait out, or is there anything popping up that you guys have been real interested in, or what's the atmosphere and climate out there for that?

You talking about acquisitions?

Yes on the acquisition front.

Multiples are higher than we would like, and we maintain, as a part of our business, we maintain a list of potential acquisition candidates and monitor those. But there's nothing that I can talk about as far as a future acquisition right now.

Okay; guys great quarter. Thanks a lot.

Okay, thank you.

(OPERATOR INSTRUCTIONS).

[Bob Shenotsky] Jefferies & Company.

Thank you, good morning. Just I'm trying to clarify an earlier question on the TB Wood's acquisition and you've already implemented $5.4 million. Your estimate is $6 million to $8 million. I imagine that other $600,000 has pretty good clarity, so what's the variance between that 6 and 8 number?

The difference between the 6 and 8 number?

Yes where you're talking about a synergy estimate for Wood's from $6 million to $8 million.

Right, there's two things Bob; one would be the sales synergies and the leverage we can get on the sales, and then the other one is the rationalization of the manufacturing operations. Obviously, when doing due diligence you have to make a lot of assumptions about those two categories, and but we're optimistic we're doing very well on those and I'm optimistic that we'll continue to do well on them.

Okay so pretty good probability that this could end up being at the higher end of that range then?

Yes.

Great, that's what I needed, I just needed a clarification; thank you.

No problem.

It appears we have no further questions at this time. I will now turn the program back over to Mr. Hurt.

Okay, well thanks for everyone calling in. Obviously we're excited about another record quarter. We're going to work hard to continue to grow our business, so we'll be talking to you again after the third quarter.

Have a good holiday for some of you and we'll talk to you next quarter.

This does conclude today's teleconference. Thank you for your participation; you may disconnect at any time. Have a great day.