Altra Industrial Motion Corp (AIMC) 2009 Q4 法說會逐字稿

Welcome to Altra's 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. Christianson, you may begin.

Thank you, Erica. Good morning. Welcome to our conference call to discuss Altra's fourth 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've already had a chance to access them. But in case you haven't, I'll walk you through the steps to access this presentation.

Please go to our web site, www.altramotion.com. Click on Investor Relation in the upper right-hand corner. Click on Events and Presentations on the left-hand side of the screen. Click on Fourth Quarter 2009 Results, and you'll see our slides.

Now, please go to slide one. I'll pause for a moment to give you time to read the Safe Harbor statement that covers any forward-looking statements that may occur during this call. And if you're 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.

Please go to slide two. We are very pleased with the fourth quarter results. The cost savings that were implemented throughout the year are now evident in the results. We report sequential growth in net sales for the fourth quarter, and we achieved non-GAAP recurring diluted earnings per share of $0.14 for the fourth quarter compared with $0.06 in the third quarter. In addition, free cash flow continued to be strong as a result of the operating performance, working capital management and minimal capital expenditures.

One particularly important accomplishment in the fourth quarter was that we refinanced our long-term debt. This recapitalization extends the maturities of the bonds to 2016, reduces our interest expense and positions us to execute our strategy. We're extremely pleased to have this behind us, and Christian will provide you with more detail regarding the recapitalization in a few minutes.

The top line has begun to improve as inventories of our products in the channel have been reduced to levels that are more appropriate for current business conditions. The majority of our channel partners are anticipating a modest improvement in their markets this year. And most are projecting sales of our products to increase in the low to mid single digits in 2010 when compared to 2009. However, the majority of our channel partners do not anticipate increasing the inventory levels.

In addition, we are experiencing some improvement in our early cycle OEM end markets, such as food processing, general industrial machinery, turf and garden, automotive and material handling. We expect that the later cycle markets, which comprise approximately 30% of our revenues, to continue to be relatively weak for at least a couple more quarters. We expect energy, mining and aerospace and defense to be essentially flat, while commercial construction and AG are expected to decline further. The IFM PMI is a very good general indicator of our business. And the most recently reported number of 56.5 for February is encouraging. February was the seventh consecutive month where the PMI was above 50.

The incoming order rate has continued to improve. We had a positive book to bill ratio in the fourth quarter. And in January and February, bookings have remained relatively strong. On a percentage basis, Asia has experienced the most significant improvement. Orders in North America are much stronger than they were a year ago. And in Europe we're seeing some improvement, but our European business is lagging Asia and North America.

Please go to slide three. We achieved our annualized cost savings objectives for 2009 of over $70 million. Once we have completed the facility consolidations, we will have achieved $10 million to $12 million of permanent annual savings, which corresponds to approximately a 200 basis-point improvement in the operating income line. We continue to make excellent progress on our facility consolidation efforts.

Last year, we announced that we would rationalize up to six facilities. To date, we have completed four projects, and the remaining two projects are essentially on schedule. We still expect to have the consolidation efforts substantially completed by the end of the second quarter this year. With the improved business conditions, we ended the temporary voluntary salary reductions and have reinstated a portion of the 401K matching contribution.

We expected to add these costs back, and this does not affect the $10 million to $12 million of permanent savings. We remain very cautious about the prospects for 2010, and will continue to manage costs and cash conservatively. While we still had a high level of attention on developmental activities, the majority of our initiatives we worked on in 2009 were what I call defensive in nature. Cost reductions, right-sizing facility consolidations, working capital reduction, refinancing the debt, et cetera.

In 2010, we're back on the offense, and the vast majority of the initiatives can be related to growing the business. New account development, new product development, geographical expansion and acquisitions. The goal we established to retain resources involved in the developmental activities has really paid off. For the full year of 2009, we developed over $80 million worth of new business. And over 12% of our revenues came from products which we define as products developed within the last three years. This is within our goal of 10% to 15%.

In 2010, we will continue to invest in new products and have some very exciting programs we're working on. For example, we recently received a preliminary order for a custom engineered piston and D10 assembly that will be used in the six-speed drive dual clutch transmission for Fiat. This technology is receiving high praise in the press and is anticipated to begin being installed in the Chrysler platforms within 12 to 18 months. We recently delivered prototypes to one of the world's leading wind turbine manufacturers for a coupling project and were awarded a production order for electric brakes by another wind turbine manufacturer. This is a significant milestone in Altra's initiative to break into the wind energy industry. And we are excited about the long-term prospects of this rapidly growing global market. We like the end markets that we participate in and believe that most of the markets we serve will grow long term as a result of the world's population, demanding improved living standards, better nutrition, environmental consciousness, and regulation, more efficient and cleaner energy, improved transportation and infrastructure.

Long-term growth rates in the markets we serve are expected to be higher in underdeveloped regions such as South America, China and India than in developed regions. Accordingly, we are beginning to increase our selling and technical resources in these regions to participate in this future growth.

For the full year 2009, we reduced our inventory by approximately $27 million, and we believe current inventory levels are appropriate. As a result, production levels in our factories are increasing, even with modest improvements in sales providing favorable operating leverage in 2010. The environment for acquisitions has not been robust and we took a two year hiatis to integrate the acquisitions that we have made and to reduce our leverage. The environment for acquisitions seems to be improving somewhat. We will not make acquisitions just to get bigger.

We want to acquire companies where we know and understand the products and end markets, where the product lines would be strategic extensions to our existing product lines and where we can improve profitability by providing scale, access to markets or management expertise. Now I'll turn the call over to Christian to discuss our financial results.

Thank you, Carl, and good morning, everyone. Moving on to slide our in our unaudited fourth quarter 2009 results. As we reported in our press release, net sales were $111.7 million, down about 22.9% from the prior year fourth quarter, when sales were $144.8 million. I should note that the 22.9% decline in Q4 was less than the 34.3% decline that we saw in the third quarter.

Foreign exchange rates impacted the top line favorably by 220 basis points during the fourth quarter. And price was favorable by approximately 100 basis points. We were very pleased with our gross profit margin of 29.4%, which came in 30 basis points higher than the fourth quarter of 2008, with significantly lower volumes. The gross margin was also 210 basis points higher than in the sequential third quarter of 2009. This is the result of our cost reductions and our productivity efforts.

Income from operations, excluding $1.9 million of restructuring charges, was 9.8% of sales in the fourth quarter. We reported a loss of $0.10 per diluted share. Adjusted for restructuring charges, the refinancing cost of our debt and a tax benefit primarily related to the amendment of prior year tax returns, non-GAAP diluted earnings per share were $0.14. Prior-year non-GAAP diluted earnings per share which excludes these items are listed -- the items listed on slide five were $0.34.

Slide five is a reconciliation that shows how we get from reported net loss from continuing operations to the non-GAAP net income number. In this reconciliation, we have removed all material items to give you a feel what our ongoing business will look like.

Moving on to slide six in the full-year results. For the full year we reported net sales of $452.8 million compared with $635.3 million in the prior year. We reported a net loss of $0.09 per diluted share. These results were impacted by the items shown on slide seven. Excluding these items, non-GAAP diluted earnings per share were $0.33 compared with $1.45 in the prior year.

Slide seven is a reconciliation that shows how we get from reported net loss in 2009 to the non-GAAP net income number.

Please turn to slide eight. Our cash balance of $51.5 million at the end of the year was essentially flat when compared to the prior year despite the fact that we reduced our debt by $43.3 million, as we previously announced we refinanced our debt during the quarter. We replaced the 9% notes with the new 8 and one-eight senior secured notes. That also extended our maturities to late 2016.

At the same time, we entered into a new ABL facility providing additional liquidity. The size of the new facility is $50 million, an increase from our previous $30 million facility. As a result of the debt reductions that we achieved in 2009, combined with low interest rates on our long-term debt, we expect a significant decrease in interest expense in 2010.

On slide nine, you can see the progress we made reducing working capital. We are very pleased to report that the emphasis we placed on reducing working capital and generating cash paid off. We reduced working capital by another $7.7 million during the fourth quarter, despite a sequentially higher sales volume. Operating working capital decreased by more than $39 million during 2009.

On a separate note, we are very excited to have started the Companywide implementation of SAP. We are doing this with the assistance of our implementation partner, Cap Gemini. We currently have a significant number of legacy systems and decided last year to consolidate our worldwide operations onto one system. The projected benefits of this undertaking are significant. We expect to bring the first business to life at the end of the second quarter and plan to complete the transformation over the next 2 to 2.5 years. While we expect material prices to be somewhat volatile in 2010, we believe that the impact will not be significant to us.

In early 2010, we announced a price increase in select product groups. Free cash flow for the year was $50.2 million. Capital investments during the quarter totaled $4.1 million and $9.2 million for the full year. Depreciation and amortization was $22.1 million for the full year.

As we outlined in our news release, we are providing the following guidance for 2010, which is also included on slide number ten. While we anticipate a modest revenue growth for 2010, we are projecting a significant increase in non-GAAP EPS. The increase is mainly the result of the full-year effect of cost reductions implemented in 2009, lower interest expense, which are partially offset by the implementation cost of SAP. We are forecasting 2010 sales in the range of $450 million to $465 million, and non-GAAP EPS of $0.55 to $0.60 for the full year. Free cash flow is projected from $20 million to $25 million. For 2010, we will invest capital in some exciting new product development activities and in the SAP implementation.

As a result we are forecasting higher capital expenditures for 2010. Capital expenditures are projected to be approximately $12 million. Depreciation and amortization is forecasted to be in the range of $22 million to $23 million, and we projecting a tax rate of approximately 35%. Now, I'll turn our discussion back to Carl.

Thank you, Christian. While 2009 was a difficult year from a financial perspective, we took actions that we believe will benefit Altra for the long term. In 2010, we will be working on growth initiatives. However we will continue to focus on what is in our control such as driving cash flow, executing on plant consolidations and maintaining a reduced cost base. To drive operating performance and market share gains, we will invest in innovation and new products.

Inventory levels at our customers and channel partners are now in line with current demand. And order rates for most of our businesses continue to exceed shipments. While we believe most of our key end markets have stabilized and we anticipate modest growth in early cycle markets in 2010, the later cycle portions of our businesses likely remain challenging for the next couple quarters. We expect the net effect of all the factors influencing the top line to lead to a modest improvement in sales in 2010 when compared to 2009. And with, that we'll move it to Q&A.

Ladies and gentlemen, at this time, we will take questions from the audience. (Operator Instructions) Our first question comes from Torren Eastburn from CGS Securities. Please state your question.

Good morning.

Good morning, Torren.

My first question is on the revenue guidance. Do you have currency or price effects assumed in that, and did you put in a price increase this quarter?

On the currency, we assume a fairly consistent currency compared to the current situation.

And on price increases, Torren, we have announced some selective price increases on selected product lines. And so as we see material costs changing, we will be implementing price increases.

Okay. And then, looking at the EPS guidance in relation to the revenue guidance, it looks like you're assuming the gross margins in 2010 won't be comparable necessarily to what you got this quarter. Am I understanding that right?

For the full year we expect gross profit margins slightly below the fourth quarter, which has to do with seasonality that we typically experience in the second half of the year.

Okay. And then last question. I know this is a hard one to answer, but do you have any anecdotal insights into your inventory levels? Not at your distributor customers, but at the distributor customers, the real end customers?

Anecdotally, the inventories are down significantly, and what I think occurred in the marketplace was you take a factory that had some inventory on parts, they used the part first. Then they went to the distributors. The distributors used up their inventory, and then the distributors came to us. So we were kind of like the tail at the end of the dog. But we think that the inventories throughout the channel are in pretty good, are reduced significantly and in line with current demand.

Okay. Thank you.

Brian, are you on the line with us?

Erica?

Yes. Brian Mayer, please ask your next. Go ahead.

Hey, guys.

Hey, Brian.

A few quick ones here. Getting back to this topic of margins and sustainability, I guess was there anything unusual this quarter whether it be raw material savings or anything else that makes it unusual at this volume level? Where or is the 9.8% roughly sustainable?

9.8% operating income margin is a sustainable net range plus or minus 10 or 20 basis points. But in that range, but we believe that is sustainable.

Yes I mean, the cost savings that we put in place took a while to start to have an impact, but they're now impacting the margins. And we think they're sustainable.

Great. Okay. And then, on a sequential basis, you guys did about a 46% incremental margin, which was pretty impressive. I guess going forward, is it fair to assume that any incremental volumes growth that you do get from here, that those volumes flow through to the operating line at 40% to 45% kind of incremental margin?

I think historically we've typically said, in the 34% to 40% range.

Okay.

So, I think you'll still see, now you start to see in the fourth quarter some of the effects of our plant closures that took place in the third quarter and late in the second quarter. I think we're starting to see the benefits flow through. So I think that was maybe a little bit unusual about the fourth quarter in the leverage that will not continue at that pace.

Yes.

And mix has an impact on it. With spare parts, where the OEM business comes back, that's a little bit lower margin, incremental margin than the spare parts business.

Okay. And then, one last one. Just on the cost savings here, I guess, by my numbers, I guess there should be $8 million to $9 million incremental in 2010 versus 2009 given the timing of cost savings in 2009. First of all, is that about right? Secondly, are there any other incremental costs that may come back in 2010 that we should be netting against that amount?

I think, relative to cost savings, they all have been included in our Q4 run rate with the exception of two planned consolidations that are either in progress or have been announced recently. Those benefits will start to probably come in in the second half of the year. And those benefits will be partially offset by the fact that we're reintroducing 401K, that we're going to reintroduce a modest salary and and wage increase at some point in 2010. So what we've always said is that net-net, you should see operating income in as a result of all these activities, increase by $10 million to $12 million.

Got it. Thanks a lot, guys.

Thank you.

Our next question comes from Gordon Holland from Jefferies and Company. Please state your question.

Hey, guys, just a question on the working capital front. Your sales guidance is modestly up this year. Can you still generate some savings from working capital in 2010?

We think our working capital levels are in good shape. I don't think there is a great opportunity for any significant further reductions. We do believe that as sales volumes increase sequentially, that that would require about $0.20 on an incremental sales dollar in terms of working capital support.

Okay. Great. That's helpful, guys. Thanks.

(Operator Instructions) Gentlemen, at this time at this time we have no questions.

Thank you, Erica. I'd like to thank everybody for attending the conference call and for your interest in Altra. Again, I would like to thank our associates for their hard work in 2009. It was a very difficult year, and I think we've performed quite well through that and we're really looking forward to 2010. And we look forward to talking to you next quarter. Thank you.

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