Altra Industrial Motion Corp (AIMC) 2008 Q2 法說會逐字稿

Good day. Welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our Q&A session. Please note, this call may be recorded.

I would now like to turn the call over to Michael Hurt. Mr. Hurt, please go ahead, sir.

Okay. Thank you, Sarah. Good morning, and welcome to our conference call to discuss Altra's second quarter and first half 2008 financial results. Joining me today will be Carl Christenson, our President and Chief Operating Officer, and Christian Storch, our CFO.

As has been our past practice, to help you better follow our discussion on this call, we have posted on our website some slides that we'll be referring to during the call. Hopefully you've had a chance to go access them. I'll now walk you through how to access them, if you're not already there.

Go to our website, www.altramotion.com, click on Investor Relations in the upper right-hand corner, click on Events and Presentations on the left side of the screen, click on the Second Quarter 2008 Results, and you should see our slides, which we'll be using in this presentation.

First, I ask you to go to page one, which has the Safe Harbor statement. I'll pause and give you a chance to look at that. I'm not going to read that page. So this will cover our forward-looking statements that may happen during this call, so I'll take a second and let you look at that forward-looking statement.

Okay, we'll go forward with the call. On this call, I'll give you our view of our current business environment. Then I'll highlight our record 2008 -- second quarter 2008 results. Next, Christian, our CFO, will follow with our second quarter and first half 2008 financial results in detail. And then Carl will follow up with some details on the initiatives and activities which drove our outstanding margin improvement and EPS growth. And in my closing comments at the end of our presentation, I'll discuss our current outlook for the second half of 2008, and give you an update on our guidance for 2008. And then we'll go to a Q&A session.

Our second quarter 2008 was another record financial performance. We continued to deliver strong top line growth and improved operating margins, which resulted in a significant increase in earnings per share.

In the second quarter 2008, the late cycle markets which use Altra products -- that is, mining, energy, metal, etc., -- continued to contribute to our top line growth. And with a multiyear global infrastructure build out, we are continuing to see solid bookings from these markets. Our international and motion control product bookings were also major contributors.

In aggregate, revenues from our target markets were up in the second quarter and for the first half -- 13% in the second quarter, and 9% for the first half, compared to a year ago. Also, the Altra team continues to execute on product development, including the expansion of our motor control platform.

Total bookings for all of Altra continued to be very solid in the second quarter. Bookings were up 8.7% over the second quarter last year, and first half bookings were up 8.1%. Additionally, in every month this year except January, our bookings have exceeded our shipments.

Now, if you will move to page two on the website presentation, I'll give you some highlights of our record second quarter results. And these are compared to the second quarter of last year.

Net sales increased 9.4%. Operating income improved 23.6%. Recurring net income increased from $6.9 million to $10.3 million -- that's up 49.3%. Recurring earnings per share increased from $0.29 to $0.39 -- that's an increase of 34.5%. Adjusted EBITDA grew 15.4%, and we moved the number up to 16.9% as a percent of sales.

We improved our leverage ratio to 2.35 times adjusted EBITDA. We retired $15 million of our 9% senior secured notes. And we've raised our 2008 outlook.

Now, I'll let Christian give you some more details of our record results for the quarter and the first half. Christian?

Thank you, Mike, and good morning, everyone. This afternoon, we will be filing our 10-Q, which will provide you with additional information on our results for the second quarter and the first half of the year.

Let me walk you through some of the other financial highlights, moving on to page three.

Our gross profit, as a percentage of net sales, reached 30% for the first time in the Company's history. This is an increase of 190 basis points, when we compare that to the year ago quarter.

Increases in raw material costs sustained during the past year have been more than offset through proactive price management, the continued benefit of our low-cost country sourcing initiatives, proactivity savings from our ABS system, and capex projects. SG&A was 15.7% of sales.

Operating income for the second quarter of '08 increased 23.6%, to $22 million, and came in at 13.1% of sales, up an impressive 150 basis points from the prior year quarter. The increase was driven by sales leverage and the proactive efforts to improve the bottom line that I just mentioned.

The second quarter tax rate from continuing operations was 34.8%, down from 37.3% in the prior year quarter. For the full year, we now forecast a 35% tax rate, as compared with 37.9% in the prior year. This decrease is due to a proportional decline of foreign tax expense, driven by higher taxable income in the US.

Second quarter recurring net income was $10.3 million, or 6.1% of sales, an increase of 160 basis points from the year ago quarter. Our recurring diluted earnings per share for the second quarter were $0.39, compared with $0.29 in Q1 of '07. EPS, therefore, increased 30.5%, despite an increase in share count of over 12%.

Adjusted EBITDA for the second quarter was $28.4 million, or 16.9% of sales, compared with 16% of sales in the prior year quarter, an increase of 90 basis points.

Page four of our slides is a reconciliation table that shows you how we get from reported second quarter net income from continued operations, to the recurring net income number. In this reconciliation, we have removed all material one-time costs to give you a feel for what our ongoing business looks like.

In this schedule, we have removed the tax effective cost of the premium and deferred financing expenses related to our redemption of debt, restructuring charges, OPEB curtailment gain, and a one-time settlement gain.

On page five, we take a look at our unaudited results for the first half of 2008. Our gross profit, as a percentage of net sales, was 29.7%. Our SG&A expense, as a percentage of sales, was 15.5%. Operating income was $42.6 million, an increase of almost 30% from the prior year.

Recurring net income from continuing operations increased by almost 50%, to $19.9 million, despite an increase in share count of more than 13%.

Adjusted EBITDA increased 19.5% to $55.8 million in the first half of '08. Adjusted EBITDA was 16.9% of sales, or 60 basis points higher than in the prior year.

Our recurring diluted earnings per share from continuing operations increased to $0.76 a share, up from $0.58 in the first half of '07.

Page six is a reconciliation that shows how we get from reported net income from continuing operations to the recurring net income number for the first six months.

Now I'll cover some balance sheet highlights as of June 28th. Taking a look at page seven, our cash at the end of June was $43.2 million. That cash balance decreased since the end of the first quarter, as we retired $15 million of the 9% senior secured notes during the second quarter.

During the second quarter, we continued to improve our leverage, which on a net debt basis, was 2.35 times adjusted EBITDA. The last 12 months, EBITDA, using this calculation, is $99.8 million. Our debt balance has declined by $46.9 million during the last 12 months. Our net debt to total capital ratio was 58.3% at the end of Q2.

Our $30 million revolving credit line remained undrawn at the end of the quarter. Interest expense totaled $7.7 million for the quarter, excluding deferred financing expenses. On the second quarter debt reduction, interest expense totaled $7.1 million.

We continue to benefit from low average borrowing costs, partially offset by the effect of lower market rates on our in investable cash balance.

Capex shown in the second quarter was $3.1 million, and $7.6 million for the first six months. As capex is usually back-half loaded, we expect our capex spend for the full year to be in the range of $17 million to $19 million.

Depreciation and amortization was $5.4 million for the quarter, and $10.9 million for the first six months. This indicates an annual run rate of approximately $22 million.

Now I'll turn our discussion over to Carl Christenson.

Thank you, Christian, and I'll be referring to page eight of the presentation.

As Mike stated, we had another record quarter. Sales increased 9.4%. Net of acquisition, the increase was 7.3%. We achieved 30% gross profit for the first time in the Company's history. We also improved our operating profit, excluding restructuring charges, to 13.2% of sales, and EBITDA was nearly 17%.

The record results can be attributed to our organic growth initiatives, strength in several of our end markets, pricing actions to offset material cost increases, productivity improvements from the Altra Business System, low-cost country sourcing initiatives, and synergies from our acquisitions.

While we were experiencing softness in a few of our markets, many of our end markets remained quite strong. In addition, our target market initiatives, our new market expansion effort, and our new product programs have continued to enable us to take market share.

Our incoming order rate increased 8.7% quarter over quarter, led by strength in motion control, energy, mining, and material handling markets.

While the general economic forecast for Europe and Asia are moderating, our business in both regions has remained quite strong, and we continue to develop new opportunities.

In Europe, we continue to see strong growth in energy and material handling. In Asia, we received a prototype order for a product we began manufacturing in our facility in China this year. When we receive the production orders, we expect sales of this product to this customer to exceed [$1 million](corrected by company after the call) per year.

Sales in new products developed within the last three years are on track to reach our goal, with $78 million for the full year. One success we had in Q2 was delivery of a $500,000 order for a new clutch design that operates inside gearboxes on offshore drilling platforms. We have a patent pending on this product, and we expect to be able to double the volume in the next couple of years.

Our operating income, net of restructuring charges, improved to 13.2% for the second quarter 2008, an improvement of 150 basis points when compared with the same quarter last year. The improvement was the result of operating leverage, synergies from acquisitions, price increases to offset material 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.

As everyone is aware, commodity prices continue to increase, 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 the most significant impact on our cost of sales. In addition, freight expense has increased, primarily as a result of fuel surcharges.

Our management teams have minimized these cost increases, and offset the cost increases with price increases and productivity improvements. Our financial results reflect that they have been very successful thus far.

We are still ahead of plan, with regards to the integration of the acquisitions we have made. We are realizing the cost saving synergies, and we are gaining new business by leveraging the respective long-standing customer relationships. One of our largest long-term customers recently awarded us business worth over $1 million per year, for a product that is manufactured by a company we recently acquired. We have also earned additional sales opportunities for acquired products as a result of our very good relationships with our distributors, and the Company's reputation for providing outstanding products and services.

We continue to yield excellent results by implementing lean manufacturing techniques to the Altra Business System. Machine setup time is one of the most critical factors in our quest to reduce lead time. One of our electric clutch brake plants was able to reduce the setup time in a component machining cell from one hour to less than five minutes. This will ultimately enable them to improve customer service via response time, and reduce inventory. Our low-cost country sourcing efforts are also on track to achieve the plan for the year.

Finally, we recently renegotiated one of our union contracts. One of the results of the negotiation was that effective September 1st, 2008, the union will move from a unique, location-specific medical plan, and will be covered under the Altra medical plan. In addition, effective December 31st, 2008, the Company will no longer be responsible for post-retirement medical expenses, and we will remove the liability from our balance sheet. The Company will realize a one-time benefit that we will exclude from recurring income when it is reported.

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

Thanks, Carl. As we head into the second half of the year, we're very optimistic about our performance for the remainder of 2008, even in this softer US economic environment and a potentially slowing global economy. Currently, we continue to see solid bookings, and our sales and marketing teams continue to successfully close new opportunities.

Since February, and including this July, our bookings have outpaced our shipments each month. We expect demand across our diversified end markets, which include metals, mining, power generation, aerospace and defense, material handling, and others, to help maintain our momentum in the second half of the year.

In addition, we continue to raise prices and reduce our operating expenses, in order to offset labor and material cost increases. At the same time, we continue to focus on meeting the needed of our customer, margin enhancement, debt reduction, and EPS expansion.

Based on our excellent performance in the first half, the strength and consistency of our bookings, new business and opportunities in our ABS (inaudible), we are raising our guidance in 2008. For sales, we expect $640 million to $650 million, EBITDA to be between $102 million and $106 million, diluted earnings per share to be in the range of $1.28 to $1.37. Capex will be between $17 million and $19 million. Depreciation and amortization will be between $21 million and $23 million. The effective tax rate we're projecting is 35%.

Now we'll turn it back over to the moderator and go to some Q&A. Sarah?

(Operator instructions). And we'll take our first question from the site of Arnie Ursaner. Your line is open -- please go ahead.

Oh, hi, good morning. This is [Tory Eastman] for Arnie.

Good morning, [Arnie].

My first question is, what percent of growth was attributable to FX rates?

About 225 basis points in the second quarter. For the first half, 200 basis points.

Okay, great, thank you. And, in your end markets, are you seeing anything, especially compared to last quarter, that's better or worse than you expected?

We've seen really no notable acceleration or deceleration, and it's been just nice and steady incoming order rates. You know, the markets that we've talked about, that have shown some weakness as a result of the economic situation here in North America, continue that, and the ones that have been strong continue to be strong.

Have you seen any change in the strength of the OEM and distribution channels?

We continue to drive growth by going after OEM business, and we've had some very, very good successes in the projects that we've worked on, and we'll continue to drive that.

I'd say, in the distribution side, where we've seen the weakness, the distributors and the distributor branches that are in the areas that we see the strength, they just seem to be doing very well, and the distributor branches, or individual distributors that are tied to either automotive plants, or plants manufacturing products that go into the construction markets, they've seen a little bit of softness.

Okay. And in terms of your bonds, they're trading pretty well below the call premium right now. Have you guys been buying back any during the quarter, or do you plan to continue to buy back more?

During the quarter, second quarter, we bought $15 million of the 9% bonds at [102]. And we take a look at that from time to time, and we may like to continue to buy back bonds. At this point, we haven't made that decision.

Okay, and then just lastly, do you have any planned price increases, going forward?

We announced a price increase for selected products in the industrial distribution channel, effective August 1st, so that, we'll some of in the third quarter. And then we'll reevaluate consistent -- or, constantly, as we -- as material costs change. And then we're also with our OEMs. As new contracts come due, we'll be repricing those.

Okay, and what was the rate on the August 1st increase, or what was the range?

It was in the 5% to 6% range, depending on the product.

Okay, thank you. That's all I have. I look forward to seeing you guys at our conference.

Thank you.

Okay, thank you, Arnie.

Thank you. And the next question comes from the site of Steve Sanders. Your line is open -- please go ahead.

Good morning.

Good morning, Steve.

Good morning.

Just a follow-up on the distributor pricing. Was the 5% to 6% across the channel? It sounded like it was somewhat selective.

It was. It was on selected products. Those were -- that we did not increase earlier in April, and where we saw some material increases that we needed to go push through the channel. So we were selective, and then we'll review that again, periodically.

Okay, and so overall, how do we think about the incremental price, going into the back half of the year, just across the business? A couple points? What's a reasonable way to think about that?

Yeah, I think -- well, go ahead, Christian.

I think when we look back at the first quarter, we had price of about 100 basis points. That increased to just over 250 basis points in the second quarter. And we expect similar effect in Q3 and Q4 -- somewhere around the 200 to 250 basis points.

Okay. And then, on the international side, what are international sales as a percent of total, and what was the overall growth for your international business in the quarter, or year to date, whatever's available?

Our international sales are about 30% of revenues. And we've seen our strongest growth and sales in Asia, and that's been in the 30%, 35% range, as we've made some significant efforts to expand that.

Next would be Europe -- Europe remains strong. And then third, from a growth standpoint, would be North America, but still, it's extremely important, and the growth there has been very important for us.

Okay, and of the 30%, is that about 20% Europe, 10% Asia? Is that a good way to think about it?

Yes. Yes, about 20% Europe and 10% Asia and the rest of the world.

Okay. Specific to the motion control segment, I know that's an area you guys have been talking a lot about for the past year or so. How do we think about that as a percent of your overall business, as you guys define it? And if you could, provide a little more color on some of the new programs, customers, etc., that you have rolling out in that segment.

Yes, sure. We've -- as we said before, it's around $25 million in revenues for motion control products, and we don't break that down by product group. But two of the products that we've seen some very good success with, and that we're really focusing on, our servo motor brakes, that are either used in conjunction with a servo motor or inside a servo motor. We've seen some very good growth in that product. And then also, the linear actuators. We've seen very good growth in those products.

Okay, and just generally, the margin profile there, versus the rest of the business?

It's not radically dissimilar to the rest, but it's a little bit higher. I mean, a couple of points higher than the rest of the business.

Okay, and the -- I know you don't have a significant amount of consumer related businesses, but turf and garden, I think, is an area where you took some share last year, and that enabled you to put up pretty good results in what was a pretty tough market. What are you seeing in that market thus far in 2008? And what's your thinking there?

You know, we had similar results this year. We -- while the market was down significantly, we were about flat through the -- through, oh, maybe May. The difference this year and last year was, the OEMs continued to build probably into July last year. And then this year, it probably ended late May, early June.

But since then, we've seen some -- they're starting to lay out their schedules for this fall and next year, and the schedules they're laying out are pretty aggressive, and we've also had a couple more significant wins.

So, we've held our own in that market, and gained share -- held our own from a revenue standpoint, and gained share. So we've seen more of the same performance. Business has done very well for us.

Okay. Okay, thanks, and just a final question, Christian. Did you give operating cash flow for the first half? I think I may have missed that.

No, I did not give operating cash flow. It will be included in the 10-Q that we will be filing this afternoon.

Okay. Okay, thanks very much.

Thank you. (Operator instructions). Our next question comes from the site of Jeff Hammond. Your line is open. Please go ahead.

Hi, good morning, guys.

Good morning, Jeff.

Good morning, Jeff.

Just a finer point question on SG&A. It looks like it was up on a percentage of sales basis both year on year and sequentially. Can you just speak to maybe some of the moving pieces there?

Yes, in the second quarter, we took some unusually high severance hits, for severance payments and some other personnel-related expenses. If we exclude this here internally, it had an effect of about 30 basis points.

Okay, that's helpful. And then, Carl, you mentioned softness in some of your end markets. Can you just speak to, specifically, where you're seeing areas of weakness?

Yes, I think it's the same ones, Jeff, that we've seen the weakness in, and we have a very small piece of automotive business in that market. Obviously, the news has been around, it's still soft. And then, a small piece that's related to housing and construction.

Okay. And then, as you reach out to your distributors, what are they telling you on a forward look basis, and what kind of tack are they taking with regard to just inventory levels in general?

When we did an industry report on inventory level, and the sales to inventory ratio was the metric that they use, and that's been flat, and it's actually probably improved a little bit since the fourth quarter of last year.

So, I think -- and that's consistent with what we've heard from our distributors. I think they've spent a lot of money, and put a significant investment in improving their IT systems to help them manage the inventories. And I think as we've improved our manufacturing operations and reduced our lead time, we've helped them manage their inventories.

So I'm not overly concerned about inventory positions at this point, and I think they've become a little more cautious, maybe, on their outlook for the future. And I look forward to seeing -- I think, a couple of them will be reporting over the next several weeks, so we'll see. But I think it could become a little bit more cautious, but still -- maybe decelerating growth would be the term to use.

Okay, and then just final question. Can you just update us on what you're seeing from acquisition pipeline standpoint, valuations, etc.?

I'll take that. We continue to look at acquisitions based on our target list. We've started to see additional things becoming available, with some tempering of the multiples that we were seeing 18 to 24 months ago. But having said that, we haven't seen multiples tumble.

Okay, and just in terms of people coming to the table, willingness to sell, availability of properties -- has that changed, materially?

In the last six months, there's been -- we've seen several things come to the table. But the financing environment for acquisitions right now, in one words, stinks, and we're continuing to build our cash reserves and look at them. But they've got to be very strategic, in this financial environment, for us to move forward.

But we're not giving up on acquisitions, by any means.

Okay. Thanks, guys.

Thanks, Jeff.

Thank you. (Operator instructions). Our next question comes the site of Mike Schneider. Your line is open. Please go ahead.

Thank you, and good morning, guys.

Good morning.

Good morning, Mike.

Good morning.

Maybe first, we can just start with the nuance of selling days. We talked last quarter about how it was a 4.5 point hit to the organic growth. Was there a benefit this quarter from selling days, and how much was it?

There was a small benefit this quarter. As I mentioned at the last call, this quarter, we had in North America two more selling days than in the year ago quarter. So if we adjust for that, our growth rate, organic growth rate, was probably in the 6.5% range.

Okay, and then, Christian, backlog as well. I think you reported backlog was up 20% last quarter. What's the year-over-year increase right now?

We've -- Mike, we've started not giving out backlog numbers, based on some of these guys come in with MRP, and how you get definitive on that. I think the best way to describe our position is that we've built backlogs and orders coming in every month, from February through July. So I would say, from a macro point of view, our backlog is stable and has increased a little bit.

But based on some of the volatility of MRP systems, etc., we've decided to quit quoting numbers.

Fair enough. And then, just on -- to get a sense of the underlying strength of these markets, especially domestically. Do you have any visibility into unit growth, and the ability to just see trends as the year has unfolded now? If unit growth is actually stable to stronger?

This is Carl, Mike. We -- because some of our work is project-based, and some of the units we sell are over $100,000 apiece, and some of them are $10.00 or $20.00 apiece, we really don't, on a macro base, look at unit sales. We try to segment it out by how much was price, how much was the various factors, and not so much look at unit growth.

Some of the individual businesses will look at unit sales as the -- as it's the -- for the lower dollar units. But we only look at it from a macro basis.

Okay. And then, on raw materials, just to circle back. So, do you believe that you're actually whole right now, or neutral, on the price/cost relationship? Or are you behind a bit, and the August increase actually brings you back to whole?

Well, I think we look at it with all the factors, everything that we've put in place, with the productivity improvements, we've gotten the material cost improvements, and the pricing initiatives, all to offset those -- you know, the material costs. Then, wage increases and other things. And you know, we had achieved 30% gross profit for the first time in the Company's history, so I'm -- I've been impressed with the business units, and the management team's abilities to go make those improvements and drive price up, in a difficult environment, and to get those margins up.

I think it's been a very, very, very good performance from the business managers.

Okay, and on the OEMs -- because you are driving disproportionate growth, I guess, in that segment. Have you seen project cancellations now, as some of these OEMs, I guess, in your top -- call it, 20 list, have run into their own business challenges? Or is it a case where you're just growing from a small base within these OEMs?

We can -- to my knowledge, we haven't seen any project cancellations, and we've got some very good ones we're working on now. So, not yet. we have not seen any project cancellations.

Okay. And then, on the integration, I think you had stated recently, the facility moves to Green Bay and Texas were going to be 80% and 50% complete, respectively, by the end of this quarter -- or, by the end of June, I should say. Can you give us an update on where you stand?

Yes. They are -- the equipment's all in place in Texas, for -- we're where we're supposed to be on our timeline right now, and so we're right on schedule.

Okay, and then just finally, on the new products, you mentioned you're on track to hit the $78 million goal. What percent of sales did that actually constitute in the quarter?

Fourteen percent.

Yes, it was right around 14%, 13%, 14%.

Okay. I appreciate it. Thanks again.

Okay, thanks.

Thank you. And it does appear that we have no further questions in the queue at this time.

Okay, thank you, Sarah. Our thanks go out to everyone that called in. We look forward to talking to you next quarter, and reporting some good results. So thank you.

This does conclude today's teleconference. Thank you for your participation. You may disconnect at any time, and have a wonderful day.