Altra Industrial Motion Corp (AIMC) 2009 Q2 法說會逐字稿

Welcome to Altra Holdings' Q2 2009 quarterly results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. At this time I would like to turn the call over to your host for today's call, Carl Christenson. Mr. Christenson, you may begin.

Good morning and welcome to our conference call to discuss Altra's second quarter 2009 financial results. Joining me today will be Christian Storch, our CFO. To help you follow our discussion on this call, we have posted slides on our website that we will be referencing during the call. Hopefully, you have already had a chance to access them; but in case you haven't, I'll walk you through the steps.

Please go to our website, www.ourAltramotion.com, click on investor relations in the upper right-hand corner, click on the events and presentations on the left-hand side of the screen, click on second quarter 2009 results, and you will see our slides.

Now please go to page one, and I will pause for a moment to give you time to read the Safe Harbor statement which covers any forward-looking statements that may occur during this call. If you are not looking at the presentation, you may refer to our forward-looking statement in our press release or the documents we filed with the SEC.

I will make some opening comments and give you our view of Altra's current business environment. Christian will then review our second-quarter 2009 financial results in detail, and we will also discuss the actions we are taking in response to the global economic downturn, which started to impact our business in the fourth quarter of 2008, and then we will go to Q&A.

Now please go to page 2. While we are disappointed with the severe decline in our top line as a result of the broad-based global economic downturn, we are pleased with our second-quarter operating results and, in particular, the amount of cash that we were able to generate. Our operating cash flow for the quarter was an impressive $16.2 million compared with $2.7 million for the same quarter last year, and our cash position increased $11.5 million or 22.1% since year-end. The strong cash flow was due to solid execution by our operating units relative to cost and working capital reduction actions as well as reduced capital spending.

During the second quarter we generated $13.1 million of cash from working capital reductions, primarily from inventory reduction. Our total inventory reduction from the end of 2008 has been $19 million. We have been able to reduce inventories without sacrificing product availability or customer service. We have also been able to reduce our lead times. As a result of the strong cash and -- cash generation and our liquidity, we felt comfortable repurchasing the $5 million remaining balance of our 11.25% notes and $8.3 million worth of our 9% notes. On a recurring basis our operating income was $8 million in the second quarter compared with $22.1 million for the same period last year. Our factories were underutilized as a consequence of both lower demand and our focus on inventory reduction, resulting in lower fixed cost absorption, which had a negative impact on the operating profit. Christian will provide more detail during his discussion of the results.

Now please go to page 3. We accelerated our cost reduction efforts and are well ahead of the targets we established at the end of 2008. These cost-saving initiatives can be grouped into three categories -- payroll-related expenses, site consolidations and procurement and other cost reductions. During our fourth-quarter conference call we indicated we expected to achieve a $40 million of cost savings in 2009 with an annualized value of $50 million. And during the Q1 call we raised that estimate to approximately $50 million for the year with an annualized rate of about $60 million. As a result of accelerating the actions, we are now estimating that the cost reductions in 2009, not including the facility consolidation savings, will be $60 million with an annualized rate of $70 million.

Regarding payroll cost, the areas where we are achieving to savings have remained the same -- headcount and benefit reduction, suspension of the Company's 401(k) contribution, elimination of over time, shortened work weeks, salary furloughs, executive salary reductions and performance bonus reductions. As a result of the lower demand, we have been forced to reduce headcount further while making every effort to protect our developmental activities. By the end of the year we will have reduced the number of positions -- again, not including facility consolidations -- by approximately 22%, or 750 associates. After the facility consolidations are completed, the total number of positions eliminated will be approximately 25% or 850 positions.

Our facility consolidation plans are also on track. We have now announced the plans to all the facilities being impacted this year, and we have begun moving equipment from three locations. We anticipate having the bulk of the equipment moves completed by the end of the year for all but one of the locations and expect to substantially complete this phase of the consolidation within the next six to nine months.

In addition to the actions I just mentioned, we continue to expect annual savings from these six projects to be in the range of $6 million to $7 million and the cost to be approximately $10 million to $12 million.

Our procurement and other cost reductions are also ahead of plan. Material costs have had a favorable impact on our results, with both steel and copper prices significantly lower than their peak. However, both are now up from their lows and trending higher as the economy recovers. Where possible, we manage material costs through surcharges and by tying prices for custom products either to a firm material quote or an index. As a result of our SG&A cost reduction activities, our operating expenses are down approximately 25% for the second quarter when compared with the same quarter last year.

As business improves, we will have to add back the variable portion of the cost. Including the consolidations, however, we believe that we will have eliminated $10 million to $12 million of fixed costs that will not ever have to be added back.

Now please go to page 4. Sales for the quarter were $111.9 million compared with $167.9 million for the same quarter last year. This was a 33.4% decline, of which approximately 500 basis points can be attributed to exchange rate changes. Our gross profit was 26.3% compared with 30% for the same period last year, and our recurring operating income was 7.2% compared with 13.2% for the same quarter last year.

This translates to a delevering on the operating income line of about $0.25 per sales dollar. In general, we have been successful in maintaining our selling prices, and pricing had a favorable impact of approximately 80 basis points for the quarter when compared with the same quarter of last year. Nearly every market we serve has experienced significant retraction, with the only exceptions being our military business and our power generation business, where project wins are helping to maintain sales in those two end markets.

Incoming order rates were essentially flat from mid-December of 2008 until the end of May of 2009. In June we saw a further decline in incoming orders. However, incoming order rate has rebounded nicely in July. This was primarily due to project work. For example, were received an order from a leading manufacturer of farm equipment valued at $1.1 million for a newly designed, rugged duty clutch brake. We also secured a $1.5 million order for large drive shafts for a steel mill in China.

Of course, we are continuing our growth initiatives, and we are working on several significant new business opportunities.

While we were encouraged by the July orders, the repetitive distribution business level remains weak as our distributors continue to reduce their inventory. Therefore, we remain very cautious about future demand. However, since a substantial portion of our business is short cycle, once the destocking has concluded, we should quickly see an improvement in orders and shipments.

We continue to believe that the third quarter will be our weakest as a result of the normal seasonality that we typically experience in the third quarter, continued inventoried destocking and extended factory shutdowns. We also expect to realize a favorable impact on our earnings as a result of overachieving on our cost savings initiatives. Once business levels do improve, the portions of savings that is permanent will have a tremendous favorable impact on our operating results and we will experience better operating leverage.

The economic indicators that we track are predominately still negative. However, they do appear to be stabilizing and in some cases have shown improvement. The ISM PMI, while still indicating contraction, has improved for the last seven months. We also expect the inventory destocking will begin to abate some time during the third or fourth quarter, and by the end of the year we should be receiving orders based on true market demand and not at a level that reflects the destocking.

Now I will turn the call over to Christian.

Thank you, Carl, and good morning, everyone. Moving on to page 5 of our slides and our unaudited second quarter 2009 results, recurring EPS for the quarter was $0.01. As a result of our focus on generating cash, we aggressively reduced inventory for the second quarter, which had a negative effect on EPS of approximately $0.02. Earnings were also negatively impacted by foreign exchange losses resulting primarily from a significant appreciation of the British pound sterling during the quarter. The impact was $0.04 for the quarter. Half of that impact was related to the pound sterling-denominated notes which we repurchased during the quarter.

Net sales declined 33.4% when compared to the second quarter and the prior year. While favorable price added 80 basis points, currency had a negative effect of approximately 500 basis points on the top line.

Organic sales volume therefore declined by approximately 29%.

Our gross profit was 26.3% of net sales for the second quarter, which compares with 30% in the comparable prior-year period. Restructuring charges for the quarter totaled $2.5 million compared with $1.9 million in the first quarter as we accelerated our plant rationalization efforts. We continue to expect annualized savings of $6 million to $7 million from these efforts.

Operating income from the second quarter was $5.5 million. Excluding restructuring charges, operating income was $8 million or 7.2% of sales. Interest expense totaled $6.2 million for the quarter and $12.6 million for the first half of '09. We expect interest expense to decline in the second half as we have successfully lowered our debt levels.

Page 6 was a reconciliation that shows how we get from reported first-quarter net income to the non-GAAP recurring net income number. In this reconciliation we have removed raw material one-time costs to give you a feel of what our ongoing business looks like.

Turning to page 7, we are very pleased with the cash flow we generated in the current fiscal year. Operating cash flow for the second quarter was $16.2 million and now totals $27.8 million for the first half of the year. Free cash flow for the quarter was $14.2 million and $24 million for the first six months. This compares with negative free cash flow for the comparable prior-year periods. We are now projecting to significantly exceed our free cash flow goals as we are now expecting to generate free cash flows of $35 million to $40 million for the full year.

Please move to page 8. Our priority for free cash flow is to reduce debt during the balance of the year. As Carl mentioned, we reduced our debt by almost $15 million during the second quarter. From a working capital perspective at the end of the quarter, working capital, which we define as trade receivables plus inventory less trade payables, [showed as] $117.2 million, a decline of $13.1 million since the end of the first quarter. We made significant progress in reducing our inventory levels as inventory declined by $10 million or 11.6% since the end of the first quarter. We have not seen any significant collection issues in our accounts receivables, as DSO was essentially flat when compared to the sequential first quarter.

Although we have already exceeded our full-year working capital goal, we continue to see working capital as an opportunity to generate cash for the next two quarters.

Please turn to page [8]. Our net debt was down to $185.4 million at the end of the quarter, nearly $50 million below the year-ago level. Our revolver remains undrawn. We continued to limit our CapEx spend. CapEx during the second quarter was $2 million and was $3.8 million for the first six months of the year. We continue to project CapEx spend for the full year to be in the range of $6 million to $8 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.

With that I'll turn our discussion back to Carl.

Thank you, Christian. As a result of the continued weak demand, we are lowering our guidance for 2009. Based on the current incoming order rate we believe that revenues for the full year 2009 will be in the range of $435 million to $450 million, and recurring EPS will be $0.15 to $0.25, depreciation and amortization of $21.5 million to $22.5 million, and we will limit our capital expenditures to $6 million to $8 million. The Company is suspending providing effective tax rate guidance.

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

(Operator instructions) Torin Eastburn, CJS Securities.

How did the July order levels compare to what you saw in December through May?

They were about 15% below the level that we saw in May and June.

In July.

Oh, in July? I'm sorry. In July, we were up about 15%, back to the levels that we saw in April.

So roughly flat with what you saw in Q1?

Correct.

And then on your guidance and on the inventories, I know you sold many products to many customers, but Grainger just has one data point reported recently, and their inventories actually look like they are in better shape than probably any quarter since Q2 of last year. Is there any sense or any possibility that maybe Q2 was the worst of the destocking?

We don't think so, for our products, Torin. We do some business with Granger, but they are not one of our -- not one of our largest distributors. We have visibility into the big national chains that carry our products, and we still think there's some work to go there on destocking inventory. So we think it will be comparable in Q3. We think there was some acceleration in Q2 on destocking, but we think it will be comparable in Q3.

And in the quarter, what were the volume and price effects?

We had 500 basis points of currency, unfavorable; 80 basis points of price and 29% on volume.

Okay, and the last question -- do you have a goal for further inventory reductions for the second half?

Yes. We think that we can take out maybe as much as another $10 million over the balance of the year.

[Caroll Sannell], [Sannell] Capital.

A question for Christian. It's [Carlo Kinnell]. The $5 million of 11.75% senior notes -- those were repurchased; correct? That was not part of a scheduled repayment?

Those were repurchased, not part of the scheduled repayment. Correct.

Can you please tell us what price you paid and if there's still a Board authorization to repurchase more of these notes?

We took out all of the 11.75% notes, so there is no principal outstanding at this point. We've repurchased them above par, but below the February par premium, around 102 or 103. There were several transactions. On average it was 102 or 103.

And now the same question for the 9% senior secured notes.

9% notes, also several transactions, open market transactions. On average we repurchased those at around 95.

And is the Company still chipping away at these in the open market?

The Company plans to continue to repurchase in open market transactions for the balance of the year.

Mike Schneider, Robert Baird.

First, just on the comments about July orders being up 15%, back to the Q1 level, Christian, could you just give us a sense of is -- I realize that's in total. But you mentioned that it was driven by a couple large project orders. What are distributor orders, again, versus the Q1 level?

This is Carl, Mike. When we look at several of our distributors and their sales rate of our products, their sales rate of our products are down on the order of 20% to 25%, and their purchases are down probably in the 30% to 40% range, so their incoming order rate.

So there's significant destocking going on. And we haven't seen that let up yet. And based on stated goals, we think it's going to take a little bit before they do get to their stated goal.

And do you think that's a Q3 resolution or Q4?

We think it probably starts to abate in Q3. They're going to -- the A items obviously go faster. Then you get the B's and C's, that will take a little bit longer to work through. So we think it will start to abate in Q3 and hopefully be worked through by the end of the year.

Are there any particular end markets, whether it's mining, oil and gas or lawn and garden, that would explain why they're just now getting to it? Because, again, some of the other larger public distributors have been at this since Q4. Why now? What are they seeing or what end market is prompting this now?

I don't think it's any particular end market. I think you'd have to ask the distributors. But I think, when we look at the results for Q2 and where they ended up relative to where their goals were, I don't think they were able to achieve the inventory reduction that they wanted to. (multiple speakers) will probably raise their inventory reduction targets to some extent.

And then the guidance, you said, is based on the current order rate. Is that June or July?

It's a mix. So, in other words, we do think that the third quarter shipment sequentially will be below second-quarter shipments, and that therefore that guidance is based on a mix between June and July. So it's below the July level but above the June level.

And then, just geographically, could you give us a sense of what sales look like by major geography?

Yes. I think Asia was down the least, probably on the order of 10%-11%. And then if you correct for the currency, if you take out the currency impact, then Europe was down marginally more than North America was. So -- but not -- it wasn't 10% less; it was probably three or four points higher than North America, once you take the currency out.

And what are your assumptions about Europe for third quarter?

Mike, let me just make one more comment back on the inventory at distributors because I think it's important that we have a lot of different SKUs that distributors, and I think it really might vary by company that supplies them also on where they are with their inventory targets and what they're doing. So we look at our products and the sales of our products and what they had for inventories at the end of the year. And so I think it might vary by product and by manufacturer also.

And I'm sorry -- the question after the geographic breakdown?

Your assumptions about Europe for third quarter.

That it's going to be down probably more than North America, based on extended shutdowns in European manufacturing base. We typically see more vacations in Europe than we do in North America during the summer months. We think that's going to be even accelerated more this year.

Okay, and I'm sorry if I missed it, but raw materials in Q2 -- were they a headwind or a tailwind? And then also, same question for Q3, what you would expect.

If you look at Q2 of '09 compared to Q2 of '08, they were a tailwind. If you look at Q2 of '09 compared to Q1 of '09, it was a little bit of a headwind. And I think they probably hit their low points in Q1 some time, and then they been coming up steadily since then, and particularly copper -- steel less so, more so copper has come up.

And those are the spot rates. Is that what's running through your P&L as well?

For the most part. There may be a lag of three to four weeks, but we buy pretty much just in time.

And we don't hedge, so therefore (multiple speakers) --

Okay, thank you very much, guys.

[Shiraz Patel], Jefferies & Co.

I just wanted to kind of take a look at the sequential increase in SG&A. Was there something behind that, and how should we be thinking about it going forward?

In absolute dollars I think you saw a decline. As a percentage of net sales, we saw an increase, and that has to do with the reduced volume. I think Q2 volume was about 10% below Q1 first-quarter volume. And some of the cost inside of SG&A we are -- categories we are trying to protect. So for instance, we are not reducing our research and development expenses; that's a relatively fixed cost element. Inside of operating expenses you also have the amortization of intangibles, which is a fixed cost. We are also protecting our sales force, and therefore a significant piece, 40% of SG&A is fixed because of that.

We are really trying to protect the developmental activities we have out there.

So as you look forward, I think what we can expect for the balance of the year is that our operating expenses will be slightly -- in absolute dollars, slightly below our Q2 run rate. We don't expect a major decrease in SG&A as we go through the balance of the year, for the reasons that I've described.

And then, if we can look at the end markets, did you find one area or another that was particularly strong? And I know it's all relative to where the bases are, but was there an area that was better than others or worse than others?

Food has held in there pretty well. And as I mentioned in the dialogue, the aerospace and defense -- we had some very good project wins there. What we've seen -- we have a very small automotive business, but that has actually started to come back a little bit, which has surprised us a little bit. And then turf and garden, on the plus side, has come back a little bit quicker than we thought it might.

The ones that we are a little bit concerned about would probably be the longer-cycle markets like energy, metals, mining. Those are typically a longer-cycle time for us -- they have longer lead times on the products, and probably will take a little bit longer to recover out there.

[Jeff Arinchek], RCB Investments.

Good morning, gentlemen; that's close enough. Can you maybe talk about your competitive position, what's going on in some of your end markets with the other players, given the financial conditions and industry conditions? And what is your appetite or ability to participate in further consolidation and deal flow, etc.?

Our appetite for deals is pretty slim right now. In 2008 we did not make any acquisitions. I think we're pretty pleased with that right now. And then in 2009 we said what we are going to do is focus on cash generation and debt reduction. We have built the Company through acquisition, so ultimately we will get back on the acquisition trail. But we think right now we are better off trying to continue to get the debt down, or the net debt down.

From a competitive situation, we don't like to remark about any specific competitors. But in general, the industry has been fairly orderly. It's a mature industry and we have not seen any particular cases where we have had to do something crazy to defend the market share. But we will defend our market share, and we've defended it so far. I think, net-net, when we look at it, we think we've actually gained some market share based on some of the wins that we've had out there.

(Operator instructions) Steve Sanders, Stephens, Inc.

On the $60 million of savings expected this year, where do you stand through the first half, roughly, and what are your expectations for the second half?

I think that we've realized in the first half of about $45 million of the savings, and that there's another $15 million that will show up in the second half.

Okay, and then you talk about the $10 million to $12 million cost reductions being permanent, and I guess I'm assuming that that's based on maybe '08 sales levels. So under a little different scenario, if 2010 sales were relatively flat with 2009, I guess incrementally we would think about the $10 million, which is the 70 versus 60, plus the $6 million to $7 million for facilities or maybe a little less than that because you're going to get some in the back half. So just give us a sense of -- sales in 2010 were flat with '09, what your incremental cost reduction pickup would be.

So, $6 million to $7 million out of that $10 million to $12 million is related to the plant rationalization, and that's pretty much the removal of fixed cost. We are reducing the roof line and we are reducing fixed pieces of overhead. So that is not volume-sensitive, that $6 million to $7 million. And the balance of that, another $5 million to $6 million, I'd say half of that, about half of that is also, again, removing fixed cost, therefore not sensitive to volume, and the balance is somewhat [depending] on volume.

So if you add that together, that's -- two thirds is fixed and one third is volume dependent.

But if we did have a flat year in '010, we've stated that we would have about $70 million in cost savings over the actions that we've implemented. And, in addition to that, it would be $6 million to $7 million from the plant consolidations.

Okay, thanks. And then I know you're not providing tax rate guidance, but there's some range baked into your guidance. So can you just give us that range?

No; we don't want to -- the reason is that, from a taxable income perspective, we probably -- we don't know. There might be a loss, and if there's a loss, what that would do on the rate. And that is very difficult to project. So I don't want to give you a range.

And then, if current exchange rates hold, what will forex be in the third quarter?

I'd say about $200,000 to $300,000, unfavorable.

Jeff Hammond, KeyBanc Capital Markets.

My questions have been answered. Thanks.

Mike Schneider, Robert W. Baird.

Just to clarify again -- so savings in 2010, if revenue was flat you expect $70 million in annualized savings, $6 million to $7 million additional from the facility closures. One, is that correct? And how much do you anticipate being incremental in savings to 2010 versus 2009?

Well, the incremental piece is $10 million, right, because we said we would get -- of the $70 million we're going to see $60 million this year. And then the consolidations will be completed -- we have maybe $1 million of consolidation savings for this year, but most of that will be in '010.

And then just on the 29% volume decline, do you have that broken out by channel, Christian, just OEM versus projects? Or, I'm sorry, OEM versus distribution?

In general, Mike, though, they've been pretty close.

I'm sorry. So they have been pretty close this quarter? I thought you had mentioned, Carl, that the orders were running down 35%-plus at distributors. Was that true for the whole quarter?

(technical difficulty) because I'm looking at year-to-date. We'll get back to you, Mike, on that.

Okay, fair enough -- thanks again.

(Operator instructions). Gentlemen, at this time I have no further questions.

I would just like to thank everybody. Thank you, Erica, for hosting the call, and thank you for participating. I would also like to thank all of our associates for their very hard work during this very difficult economic period. And we look forward to speaking to everybody on next quarter's call. Thank you.

This concludes today's conference call. Thank you for attending, and have a great day.