Altra Industrial Motion Corp (AIMC) 2008 Q1 法說會逐字稿

Good day. All sites are now on the conference line in a listen-only mode. I'd like to turn the program over to your host, Mr. Michael Hurt.

Thank you Leo. Good morning and welcome to our conference call to discuss Altra's first quarter 2008 financial results. Joining me today will be Carl Christenson, our President and COO and Christian Storch, our CFO.

As has been our practice in the past, to help you follow our discussion on this call, we've posted on our website some slides that we'll be referring to during the call. Hopefully you've had a chance to access them. I'll walk you through the steps to get to those slides. If you go to our website www.altramotion.com, click on Investor Relations in the upper right-hand corner then click on Events and Presentations on the left-side of the screen. Click on First Quarter 2008 Results. You should be looking at our slides.

First I'll go to the slide with for Safe Harbor statement. Rather than read our Safe Harbor statement as we have on past calls, I'll pause a moment and ask you to read Page Number 1 of the web pages, which covers any forward-looking statements we may make on this call today.

Continuing, first I'll give you our view of our current business environment then I'll highlight our first quarter results. Next Christian will review our first quarter financial results in detail. And Carl will follow up with some details on the initiatives and activities which drove our outstanding margin improvement and EPS growth. In my closing comments at the end of our presentation, I'll reaffirm our guidance for 2008 and then we'll open up the call to a full Q&A session.

A detailed look at our bookings and backlog showed that our late cycle markets which use Altra products that is energy, mining, and metals continued to perform. In the first quarter of '08 compared to last year, bookings were up 7.5% and our backlog at the end of March compared to a year ago was up 20%. Our April bookings and backlog compared to last year were also up a solid 6.7% with a backlog of 17.7% respectively. Our international business and motion control product bookings were major contributors to these strong bookings.

Now if you'll go to Page 2 on the website, I'll give you some highlights of our first quarter 2008 record results. All of these are compared to our first quarter 2007. Our first quarter 2008 results was another record quarter. We continued to deliver strong top line growth and improved operating margins which resulted in significant increase in earnings per share. Net sales increased 23%, 4.8% net of acquisitions. Operating income improved 36.4%. Reoccurring net income increased from $6.7 million to $9.7 million, an increase of 44.8%. Reoccurring earnings per share increased from $0.29 to $0.37, up 27.6%. Adjusted EBITDA grew 33.7%. We improved our leverage ratio to 2.4 times net debt to adjusted EBITDA and we reduced debt by another $3 million.

Now I'll turn it over to Christian and he'll go forward with some more details on the financials.

Thank you Mike and good morning everyone. Moving on to Page 3 in our unaudited first quarter 2008 results. Mike discussed some of our top line performance. When analyzing our top line performance, please take into consideration that we had three fewer shipping days in the quarter in North America when compared to the first quarter of 2007. This represents 4.6% fewer shipping days on our North American sales relative to this quarter versus the prior year quarter.

Let me now walk you through some of the other financial highlights. Our gross profit margin as a percentage of net sales increased 60 basis points to 29.3% in the first quarter when we compare that to the prior year quarter. This increase was spurred by price increases, our low-cost country sourcing initiatives, productivity savings from our ABS system, and Cap Ex projects. We also saw a decline in SG&A expenses as a percentage to net sales when we compare that to the prior year quarter by 50 basis points as we continue to take advantage of the scale of Altra.

Operating income for the first quarter of 2008 increased 36.4% to $20.6 million and came in at 12.6% of sales, up 120 basis points from the prior year quarter. The first quarter tax rate from continuing operations was 35.1%. For the full year, we continue to forecast a 36% tax rate.

First quarter recurring net income was $9.7 million or 5.9% of sales, an increase of 90 basis points from the year ago quarter. Our recurring diluted earnings per share for the first quarter was $0.37, compared with $0.29 in the Q1 of '07. EPS therefore increased 27.6% despite an increase in share count of almost 14%.

Adjusted EBITDA for the first quarter increased almost 34% to $27.4 million. EBITDA as a percentage of sales was 16.8% compared with 15.4% in the prior year quarter. This represents an increase of 140 basis points.

Page 4 is a reconciliation that shows how we get from reported first quarter net income from continuing operations to the referring net income net. In this reconciliation, we have removed our material one-time costs to give you a feel for what our ongoing business looks like. In the schedule, we have removed the tax affected costs of restructuring and the premium and deferred financing expenses related to our redemption of debt.

Now I'll cover some balance sheet highlights as of March 29th. Taking a look at Page 5, our cash at the end of March was $59 million. That cash balance has grown since the end of the year primarily due to the proceeds totaling $17 million received from a previously discussed divestiture of the adjustable speeds drives business. Cash as of last Friday was $65 million as a number of our distributors paid their invoices on the last day of the calendar month.

During the first quarter, we continued to improve our leverage, we continued to reduce the 11¼ notes by returning $1.3 million. We also reduced the TB Woods Credit Facility by $1.7 million. Our net debt to adjusted EBITDA ratio was 2.4 at the end of the quarter. You may recall that that ratio was 2.8 as of December 31st, 2007. Our net debt to total capital ratio was 59.4% at the end of Q1, down from 63.2% at the end of December. Our $30 million revolver remained undrawn upon at the end of the quarter.

Interest expense totaled $7.4 million for the quarter. Excluding the deferred financing expenses on the debt that we reduced in Q1, interest expenses totaled $7.1 million.

Cap Ex during the first quarter was $4.5 million. Depreciation and amortization was $5.5 million for the quarter.

I'll turn over discussion to Carl Christenson.

Thank you Christian. I'll be referring to Page 6 of the presentation. As Mike stated, we had another record quarter with sales of $163.2 million. Our operating profit, excluding restructuring charges, was 13.1% of sales. And our sales growth, net of acquisitions, was 4.8%. Many of our end markets remained quite strong and our target market initiatives, our new market expansion effort and our new product programs enabled us to take market share. As a result, our incoming order rate increased 7.5% quarter over quarter led by strength in-- (inaudible-technical difficulties)

Mr. Hurt, continue your presentation. You went on mute there.

Nobody touched it here. Okay, okay. Carl--

Where would you like me to back up to? What was the last-- okay well many of our end markets remained quite strong and our target market initiatives, our new market expansion effort and our new product programs enabled us to take market share. As a result, our incoming order rate increased 7.5% quarter over quarter led by strength in motion control, energy, agriculture, forklift and elevator markets.

We've had excellent success cross-selling Altra products to customers of the companies that we have acquired and selling the acquired company's products to Altra's core customers and distributors. A great example is where our heavy duty clutch brake business has been working on getting products specified at a large mining equipment manufacturer. We were able to get a commitment from this customer to be their primary supplier of brakes made by both our Wichita and Twiflex businesses. Twiflex is one of the businesses we added as part of the Hay Hall acquisition. Prior to the acquisition, Hay Hall was not able to win this business.

There are several other significant awards that we have won as a result of acquisition synergies and there are many opportunities we're pursuing. We expect to continue to take market share of the OEM programs that we've been working develop.

In addition to our sales and marketing initiatives, we believe that we will continue to develop new business and outperform while leveraging our engineering expertise and our ability to flow products through our factories. Geographically our international business was strong and exceeded 30% of total revenues. Sales in new products developed within the last three years are on track to reach our goal of $78 million for the full year. Of one example of success we had in Q1 is a prototype order we received for a new brake for a wind turbine application. We received this order from one of the world's major manufacturers of wind turbines and expect this to help us expand into this fast-growing market.

Our operating income, net of restructuring charges, improved to 13.1% for the first quarter of 2008, an improvement of 110 basis points when compared with the same quarter last year. The improvement was a result of synergies from acquisitions, price increases to offset material and other cost increases, improved productivity from implementing the Altra Business System and low-cost country sourcing. Going forward, we will continue to execute on these initiatives.

Commodity prices have made a lot of headlines lately and we are doing everything we can to minimize the impact of global commodity inflation. For our company, steel, iron and copper are the raw materials that have experienced the most volatile pricing. We negotiate hard with our suppliers and manage pricing to the best of our ability. There are several ways that we minimize the impact of material cost increases. We implemented a price increase for our industrial distribution channel effective April 1st of this year. We adopted surcharges several years ago for many of our OEM contracts. We carefully reviewed product costing when entering into contracts. And for custom engineered products, we tie our quote expiration date to supplier quotes to minimize exposure to raw material price changes.

All of our businesses are aware that this will be one our major challenges over the next few quarters and are committed to managing it to the best of their ability. We are still ahead of plan with regards to the integration of acquisitions. We're realizing the cost synergies and as I mentioned earlier, we're gaining new business by leveraging the respective long-standing customer relationships. We also continue to yield excellent results by implementing lean manufacturing techniques through the Altra Business System. As an example, our Huco flexible couplings business in the UK implemented a manufacturing cellularization project for one of their core product lines that resulted in hard savings of $50,000. But just as importantly, they reduced the overall lead time from 27 days to 7 days, which improves customer service and reduces working capital requirements.

And finally, our low-cost country sourcing and manufacturing are on track to achieve our targeted savings.

And now I'll turn it back over to Mike for some closing comments.

Thank you Carl. Considering our excellent first quarter results and the current strength of our bookings and backlog, we're optimistic about [2007] even in the softer U.S. economic environment. Our international business as well as a number of our end markets remains strong. In addition, we continue to raise price and reduce our operating expenses in order to offset labor and material costs. Throughout the year, our focus will continue to be on meeting the needs of our customers, margin expansion, debt reduction and EPS expansion.

Based on our excellent performance in the first quarter and our current view of Altra's markets, we are reaffirming our guidance for 2008 that we gave you last quarter. If you look at page 7, I'll go through those numbers.

We're forecasting sales to be $630 to $645 million; EBITDA to be between $98 and $105 million; earnings per share in the range of $1.20 to $1.35; Cap Ex $16 to $19 million; depreciation and amortization $21 to $23 million; and an effective tax rate of around 36%.

We will now turn it back over to the moderator and we'll open the call up for Q&A.

Very good. (OPERATOR INSTRUCTIONS) We'll take our first question from the site of Mike Schneider of Robert W. Baird.

Good morning guys and congratulations on a nice quarter.

Thank you Mike.

Thanks Mike.

Maybe first we can start with just the organic growth rate for the quarter. The 4.8% adjusted for acquisitions, has that been adjusted by the 4.6% hit from the fewer days? And then also what amount of currency is included in there?

It has not been adjusted for three fewer shipping days in North America. There's about 200 basis points of FX gain in that number.

Okay and then the order rates, last we talked in February, the orders had been running in January and February up about 8 to 9%. You mentioned they were up 7.5% for the quarter. Can you give us a sense, does it imply that March was a softer month? And what is the trajectory into April? And then also what distortions have been felt at least the best you can discern from the pricing increases that are going on and by that I mean any hit or benefit from pre-buying or post-buying, etc.?

The bookings rate in April is about 7.2% over last year and for the full quarter of the first full quarter 7.5%. I think that was just a variation in the way the orders came in after the holiday period though Mike. And what was the other part of the question about--?

Just what impact has there been-- I know there's been a series of price increases that have been implemented. You mentioned one on April 1st, but I think there were also some in March. Did you experience any pre-buying in the distribution channel or the OEMs? And I guess to what extent does that impact the second quarter?

We didn't see much at all pre-buying from the distribution channel. As a matter of fact, we would expect a little strengthening in our distribution business in the second and third quarter based on a conference that our senior sales and marketing executives were at with our major distributors. So we did not see a lot of pre-buying.

Okay and then just final question on the guidance, you maintain the 5% to 7%, which is at least twice what the sector is growing right now. Can you just give us some color on the reality or reasonableness of expecting growth to accelerate from here? If you did 4.8% this quarter, what gives you confidence that for the year you're actually going to accelerate modestly in what seems to be a tougher economy each week?

Well our top end of our guidance was 645 for the year. Carl and I were looking at bookings internationally and we've got very strong bookings internationally, especially from the Hay Hall businesses we purchased and their markets. And we see some solidness in turf and garden, but that's only $10 million a quarter. So, that's a wild card in the second quarter. And we do expect some strengthening in distribution and going forward based on the last comments we heard. So that's kind of where our head is. And our Kilian business has new business this year that it didn't have last year that goes into the crossover vehicles. So that should be pretty good going forward for that business. And our bookings out at Wichita Falls were weak, a little weaker in November and December of last year, but that backlog is very strong now. So that's some of our-- color on our thinking Mike.

Okay. Thank you again.

We'll move next to the site of Arnie Ursaner of CJS Securities.

Hi, good morning. Congratulations on the quarter. Can you comment a little bit about the TB Woods acquisition and your integration efforts and perhaps give us a feel for potential additional leverage or cost savings you might be able to get or synergies you might accomplish on the purchasing side for TB Woods?

Carl, you want to take that?

Sure. Morning Arnie. We did no TB Woods in the first quarter of last year and we had about probably $2 million of incremental acquisition synergies for the first quarter. So we're right on track with where we talked about we were going to be. And we feel good about that continuing. The other pieces that we're going to get are from some manufacturing rationalization, which is a little bit longer term project and we don't expect to see the results of some of that effort until the first quarter of '09. Now that takes a longer time to implement and the results will be a little bit longer out. And then some of the sales synergies we're experiencing, we'll see those start to continue in the other three quarters of this year.

And we continue to add additional castings from our sister companies that were outsourced to in-source into Woods foundry and we pretty much doubled that effort on new patterns to get that product out the door so there's some savings there.

The second question relates to your cash build up. You obviously generate quite a bit of cash and given the negative arbitrage of cash today versus your cost of debt, could you comment a little bit about how you're viewing your capital structure and logic would conclude you either, at some point, hope to pay down debt or use these proceeds for potential acquisitions. How do you view your cash build up and potential uses?

Arnie, this is Christian. We currently have about $65 million in cash, domestically about $45 million of that. We have an interest payment coming up in June, about $12 million that will bring that cash balance down. We want to maintain a cash balance for just as an insurance policy so to speak. And we currently continue to evaluate what we're going to do with our excess cash. There's a couple of options that we have, acquisitions. Another option is to potentially buy back some of the 9% bonds. But we have not made a decision at this point as to how we're going to use our cash.

Thank you very much.

(OPERATOR INSTRUCTIONS) We'll move next to the site of Mr. Jeff Hammond of Keybanc Capital. Go ahead please.

Hi, good morning guys.

Morning Jeff.

Morning Jeff.

Just wanted to come back to the commodity inflation discussion. Can you just talk about where you were at for price versus cost parity in the first quarter? And as you work through these price increases, surcharges, where does that price/cost parity go going forward?

Yes I guess between the pricing actions, the low-cost country sourcing, and the productivity improvements that we had, we more than offset our cost increases both labor and material. And we recognize that there's some headwind there on the material costs, so we've got everybody keenly focused on it just to make sure that we don't slip anywhere.

So you think that's sustainable as you kind of readdress price versus some of the inflationary pressures?

Yes we're going to push as hard as we can on it. And so at this point in time, we'd say we believe we can sustain it.

Can you help me understand the OEM surcharges? How that works? Is there a point where you actually put through price increases through OEM versus surcharges?

Yes and it seems like every OEM is a little bit different. Some of them like to have surcharges and not get locked into a particular material cost. And some of them, when material goes up, would just assume have a price increase so that they don't have to manage the surcharge part of the equation. And then we have different-- when we do have surcharges, we negotiate a different agreement with each-- with various OEMs. And our activity is around-- on copper which is where have most success in getting the surcharges because of the high volatility in that commodity over the last couple years. We believe we've got about 75 to 80% pass through. And there's probably a little bit of lag time cause you wait for the-- we base it on an index on the COMEX index. And so there's a little bit of a lag between when we get the data and when it changes to price. But then there is on the other side also. So net-net it evens out.

Is the steel inflation work through surcharges as well or would you have to put through OEM increases to offset that?

Yes we have some surcharges on steel but not to the extent that we do for copper. And so we've been putting through permanent price increases and also a large portion of the business is custom engineered. So when we quote a job, we determine what our material cost is going to be so we have a quote from our supplier that has a life to it where they've fixed a price. And so we make sure that our quotes to our customer lines up with a quote from our supplier so that we have confidence that we're going to be able to get that material for that price. Does that make sense to you?

Yes, no that's clear. And then just back to the distribution commentary, I mean what's giving you-- is it just commentary from them that you expect to pick up or have their inventories gotten too low or what's driving that comment?

Well my comment on distribution was based on face-to-face discussions with our Vice President of Sales and Vice President of Marketing with the senior big distribution guys. So that's kind of the best thing that we can get. We think that we've got large-- let me restate that. We think we got good orders coming in the second and the third quarter based on where their inventories situations are. So we feel pretty good about that right now Jeff.

Okay perfect. And then I guess final question, you got one strong quarter under your belt, very good follow through in terms of order trends through the first four months of the year, what does it take from your perspective to kind of revisit the full year guidance?

We're-- first of all, we're not going to get trapped into quarterly guidance. Having said that, we'd like to see another quarter or so. We said last quarter that we expect we could be towards the high end of the guidance based on what we saw. And I think we sustained that and did a little better if you look at the quarter. We'd like to see what happens going through the second quarter as we get more clarity on one or two markets and then the third quarter as we see what happens with normal plant shutdowns in the U.S. and then what happens over in Europe. But we don't see any red flags as we look at our bookings right now.

Okay great. Thanks guys.

Thank you. And we have a follow-up question from Mike Schneider of Robert W. Baird.

Guys maybe we can spend a minute just on splitting out the growth again. The 4.8%, do you have a sense of what that was or what that benefited from price? And then you had mentioned it's two points of currency, so I expect the balance is just unit growth.

Yes the 1.8% I guess you would, in your world you'd call it real growth. But I'd remind you that we had a difference in the number of shipping days in the quarter of three shipping days. I mean what, probably about 14%?

And if I-- Mike's question, if I take the 4.8 organic growth, there was about 200 basis points of FX in there. The price action, there's a little bit of price action but the main price action will affect our second quarter as we put the distribution price increase in effect of April 1st. If I do the math and I take three fewer shipping days on 70% of our business, which is North America, if I add the two that gets me to in the 8% range of organic growth. And that--

Then you've got to take out FX.

Then you take out the FX about 200 basis points. You take out probably about 100 basis points of price and the balance would be volume.

Okay. That's perfect. And in terms of pricing, you've put through the distribution price increases April 1, but are there additional increases necessary given as to what's occurred even just in the last 30 days? Cause I presume you gave your distribution channel another 60-day notice?

Yes and we review pricing from time to time. And we, particularly for some of the OEM business, when contracts come up, we review that. And the-- we do not have to go on an annual basis for distribution pricing. So we can do that as necessary if the cost changes significantly.

In the pricing contribution from here, I would say it's approximately 1 point this quarter, is it headed towards 3 to 4 points in total as we through the second quarter then?

No our balance with the OEM I think you ought to look at probably somewhere in 200 to 250 basis points of price going forward.

Okay. And on the selling days Christian, the extra three selling days now do those fall evenly through the balance of the year or are they made up right away in Q2?

Q2 we're going to get back two of those three days.

Okay. And finally on the other income line, it was fairly sizable this quarter. What's running through that and I guess how should we model that going forward?

The other income line there was about $350,000 of favorable FX. That probably will not continue at that rate. We had about $200,000 of income from the transition service agreement that was recorded in other income. And the balance was about $100,000 of just four items. I think $400,000 is probably a more normal run rate for us.

Okay. Thank you again and congratulations again.

Thank you.

Thanks Mike.

(OPERATOR INSTRUCTIONS) And we do have a follow-up from Mike Schneider of Robert W. Baird.

I was wondering if you give me the floor, I'll take it. The wind turbine orders, can you give us a sense of-- I don't believe yet they're doing much in that marketplace to date. What's the potential size of that business for you and I guess are you able or are you exclusive with the OEM that you signed this quarter or can you go more broadly?

If you, as you stated, we-- this is a relatively new market for us. We've done some business in it in some of the past. But we're not a significant player there. So this is something we've been looking at and evaluating and we're getting into. And we, based on the products that we offer that can go on wind turbines, we'll be in the $40,000 to $50,000 per turbine range when you look at 2, 3 megawatt turbine. So you can do the math and multiply out what the market is out there. And this particular piece of business it was a prototype order and we're confident it'll be successful-- could be about $1 million a year for us in this first piece that we're getting.

Just with the OEM and this particular design?

With that particular OEM that particular product, yes.

Okay. And then can you just give us your-- I guess your economic sense of business both domestically and internationally? Have you seen things slow down? And if you can maybe even break the growth rates out geographically for us to get a sense of the underlying at least geographic trends?

For us Asia and Asia has been the strongest; Europe next strongest. And Asia has been growing for us in the 25, 30% range. And then North America has been the slowest growth market for us. But obviously it's our biggest market. So on a real dollar value, it's still very, very significant.

Right.

And I guess the-- from a market standpoint, the energy market as we mentioned last year in a couple calls had slowed a little bit with some of the drilling rig manufacturers but that's rebounded. We've had some very good orders in the first quarter from our energy customers. Turf and garden has been a surprise for us. There's been doom and gloom forecast for that market. But we're actually up high single digits in that market this year, year over year as we've taken share. We're being pretty cautious with what we think is going to happen in the balance of the year based on how the selling season goes which is really just beginning. So that's been a good market for us. The military and defense market has been and aerospace has been very strong for us and we've got some very good programs that are coming up through the year for that market. That's-- and we've mentioned before we don't have a big exposure to construction or auto, which are-- yes or housing, which is down. The other market we're seeing some very good orders in I guess is agriculture.

Okay and I guess just finally on that automotive theme, so Kilian was mentioned as being a nice area of growth. Is that principally because of the new platform growth or are you seeing something else within the auto market that others aren't seeing?

It's basically the strength of their new platform as they're under tight GM crossovers, the Buick Enclave and the GM Arcadia. And then we're being told that's also going on a Chevy platform which will pretty much double it. So that's happened to their business up there and that's a long-term deal.

Okay and then just final question on the dollar, can you determine how much you actually are benefiting from an export perspective on the weak dollar?

This question really not because distribution in North America that's all probably domestic sales. As it relates to the OEMs, we don't know whether those buy our products are sold domestically or international. It would be a wide, wide guess for us.

Okay.

Certainly some of our big customers are benefiting from it, right.

Right, right. Okay thank you again gentlemen.

Okay.

Thank you Mike.

And it appears that we have no further questions at this time.

Okay. I think we're done then. I would just like to close and thank everyone for attending the conference. We're really excited about the first quarter and the prospects for the year. And we'll be back with you next quarter hopefully with some good results. So thank you for dialing in.

This concludes our conference call for today. You may now disconnect your lines and everyone have a great day.