Altra Industrial Motion Corp (AIMC) 2010 Q1 法說會逐字稿

Greetings and welcome to the Altra Holdings Q1 2010 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Calusdian, of Sharon Merrill Associates.

Thank you, Josie. Good morning. Welcome to Altra's first-quarter conference call. On the call today is CEO, Carl Christenson, and CFO, Christian Storch. To help you follow management's discussion on this call, they will be referring to a accompanying slides that are posted to the altramotion.com website under events and presentations in the investor relations section.

Please turn to slide one. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties, and other factors described in the Company's quarterly reports on Form 10-Q and annual reports on Form 10-K and in the Company's other filings with the US Securities and Exchange Commission.

Except as required by applicable law, Altra Holdings does not intend to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise.

On today's call, management will refer to non-GAAP recurring earnings per diluted share, non-GAAP income from operations, and non-GAAP free cash flow. These metrics exclude any restructuring charges and other extraordinary items. The reconciliation of Altra's non-GAAP recurring earnings per diluted share, non-GAAP income from operations, and non-GAAP free cash flow to the comparable GAAP measures are available in the financial tables of the Q1 2010 financial results press release on Altra's website.

I will now turn the call over to Altra's CEO, Carl Christenson.

Thank you, David. Please turn to slide two. We began the year with solid execution and achieved strong financial results for the first quarter of 2010. We reported our second consecutive quarter of sequential revenue growth, with sales increasing 14% over the fourth quarter 2009. We also grew sales on a year-over-year basis for the first time in six quarters as revenues were up 3% compared with Q1 of 2009.

We were very pleased with our bottom-line performance in the quarter. Volume leverage coupled with the aggressive cost savings we implemented throughout 2009 and our ongoing productivity improvements resulted in a 100% year-over-year improvement in non-GAAP recurring earnings per share to $0.24. This represented a 71% increase from the sequential fourth quarter of 2009.

The demand momentum we experienced in the fourth quarter from several of our end markets continued throughout the first quarter of 2010. Our early cycle OEM end markets such as food processing, general industrial machinery, turf and garden, transportation, and material handling have been strengthening and demand from our distributor partners is up as they significantly reduced their destocking activities. This has offset continued weakness that most of our late cycle end markets such as energy, mining, and commercial construction, which comprise about 30% of our sales.

Now I will give you some insight into what is driving our topline growth. First, I will describe what we are seeing in the distribution channel. Then I will describe what we're seeing in specific end markets.

We have seen the distribution channel, which is predominately comprised of sales of aftermarket parts, continue to improve. In addition to their destocking activities tapering off, our distributor sales -- the distributor sales of our products are improving as a result of their end market demand improving.

Distributor sales are typically a leading integrator as end users purchase replacement parts before committing to purchase new equipment. Our distributor sales hit bottom in mid-Q2 last year and we did not begin to see a recovery until late in Q3. We were pleased to see this market growth sequentially from Q3 to Q4 and then again from Q4 to Q1.

Now turning to a discussion of our end markets, our turf and garden segment was the top performer of the quarter, reporting very strong double-digit increase in sales. In fact, our turf and garden business was better in the first quarter than it has been for several years. Although some of this growth was probably due to equipment manufacturers replacing inventory in their channel, we believe that the majority of the increase was from real growth in demand after consumers delayed purchases during the depth of the recession last spring. We continue to be encouraged by our prospects in this market.

We also saw strong demand from our food processing market, which grew by double digits as a result of resurgence in replacement business through distribution as well as solid sales of our wash down duty gearing products and [capping] clutches for the beverage industry.

In the transportation market, we had a very strong first quarter as a result of shipments associated with the extremely successful crossover vehicles. We are seeing continued sales activity in this market and expect further growth.

The material handling market was very strong year-over-year, although we had an easy comparison with the weak first quarter in 2009. Our products are primarily used in equipment such as conveyors, forklifts, and elevators. We are seeing strong -- we are seeing strength in elevators and forklifts, but sales for conveyors, while improving, are still weak. We expect these trends to continue.

I will now discuss our late cycle market starting with energy. We had expected the energy market to be significantly down in 2010 compared with 2009, but thankfully we have not seen that pessimistic prediction come to fruition. We have seen the market improve recently as rig counts are beginning to increase and we expect to grow sales in this area when drilling rigs begin to be built in earnest.

The metals and mining market continues to be weak, but again not nearly as weak as we had expected. Sequentially bookings are improving and we expect the turnaround in this market to be more rapid than in past downturns. Assuming we see a continuation of the macroeconomic rebound, we believe we could begin seeing real improvement in orders later this year with double-digit growth in shipments in 2011.

The commercial construction market is still very soft, but we see some pockets of good opportunity for alter Altra in this area. For example, we recently won our first bridge project as a result of our focused effort to penetrate this market. We began targeting this market as the need to rebuild a significant portion of the nation's bridges became apparent.

The one late cycle market that was strong in Q1 was ag. Although the ag market has not been healthy, it is improving and we've been able to win some projects in this area and drive revenue growth.

During the past year, we have been largely focused on cost reduction and other initiatives that I'd largely called defensive in nature. Of course we continue to focus on controlling costs and our facility consolidations are still on track. 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 operating income.

Now with most of our defensive measures behind us, we are sharply focused on initiatives that will drive profitable growth for the Company.

Before I turn the call over to Christian, I would like to review our progress in five elements of our growth strategy for 2010.

Please turn to slide three. The first element is to drive organic growth through product development and new projects with existing and new customers. We have very collaborative relationships with our customers and our engineering teams are currently working with them on a healthy number of projects. We expect that an increasing number of these projects will begin to be converted to orders and sales growth as the economy continues to pick up.

In addition to organic growth, we are also seeking to build Altra through strategic acquisitions. We plan to acquire companies that strengthen our product portfolio, are accretive to earnings, leverage our existing fixed costs, expand our global footprint, and sell complementary products.

Right now the global marketplace for electromechanical power transmission products is very fragmented. In fact, the top five North American players in the $35 billion market account for less than 20% of sales. So you can see there is ample opportunity for us to be a consolidator. We are beginning to build our pipeline again after spending the past couple of years integrating prior acquisitions.

Another component of our growth strategy is to expand our coverage of underpenetrated geographies with technical and sales resources. Our target areas right now are China and other Asia-Pacific nations, India, and South America. Recently we added new distributors in South America and Korea and expanded our relationship with an existing distributor in Japan to add new markets.

Additionally, we are in the process of hiring Altra personnel in China and added a new distributor there as well. These distributors of sales resources are currently laying the groundwork in their respective regions to develop relationships for long-term sales success.

The fourth element of our strategy is to expand our presence in new high-growth markets including renewable energy, aerospace and defense, and automotive. In renewable energy, we see the most compelling growth prospects in wind power. But we are also pushing opportunities in the title and solar markets. As I mentioned on our last call, we have already delivered prototypes to one of the world's leading wind turbine manufacturers for a coupling product and we were awarded a production order for electric brakes by another turbine manufacturer.

The fifth element of our strategy is to continue to focus on improving the efficiency and productivity of our organization through the Altra Business System and the continuous development of our people and processes. We have made significant progress in this area but still have much work to do.

With that, I will turn the call over to Christian for a financial review and then I will be back to wrap up.

Thank you, Carl. Good morning, everyone. Moving on to slide four in our unaudited first-quarter 2010 results, as Carl mentioned, our net sales increased 3% year-over-year to $127.7 million and rose 14% sequentially. Foreign exchange rates affected the top line favorably by approximately 230 basis points during the first quarter. And price was favorable by approximately 30 basis points.

We were very pleased with our gross profit margin of 29.3%, which came in 165 basis points higher than the first quarter of 2009 after adjusting 2009 for a one-time inventory charge. Keep in mind that we were taking costs out of the business in the first quarter of '09 but we started to bring some of these temporary cost reductions back in Q1 of '10. For that reason, gross profit declined 10 basis points from the sequential fourth quarter of 2009.

We expect volume leverage to improve when our late cycle markets begin to rebound as they typically carry higher margins. As Carl mentioned earlier, some of these markets were still declining in the first quarter of 2010.

Operating expenses declined as a percentage of sales to 18.3% versus 18.7% a year ago and 19.6% in the sequential fourth quarter. Sequentially, OpEx on a real dollar basis increased only slightly in Q1 as volume increased, showing the continued effort of our cost reduction.

Income from operations increased 60% year-over-year to $13.6 million or 10.6% of sales in the first quarter of '10, compared with 6.8% of sales in the year-earlier quarter. Excluding $1 million of restructuring charges, non-GAAP income from operations increased 32% to $14.6 million or 11.4% of sales, which compares with 8.9% of sales in the first quarter of 2001.

We reported net income of $0.22 per debited share compared with $0.05 in the year earlier quarter. Adjusted for restructuring charges, non-GAAP recurring diluted earnings per share were $0.24. Prior year non-GAAP recurring diluted earnings per share, which excludes restructuring charges, the benefit of eliminating postretirement benefits, and an inventory charge were $0.12 a share.

Slide five is a reconciliation that shows how we get from reported net income to the non-GAAP net income numbers.

Please turn to slide six. Our cash balance of $53.6 million is up by $2.1 million compared with year-end. Cash is up sequentially as a result of positive free cash flow in the quarter. As you may remember, we refinanced our debt during the fourth quarter as a result of the debt reductions that we achieved in the prior year. Combined with lower interest rates on our long-term debt, we expect a significant decrease in interest expenses in 2010. In fact, interest expense was down 22.1% in the first quarter.

On slide seven, you can see the modest increase in working capital during the quarter as we continue to focus on generating cash. We were also pleased with the small 1.3% increase in inventory during the quarter on a 14% increase in sales.

Capital investments during the quarter totaled $3.9 million and depreciation and amortization was $5.5 million, both in line with our expectations. As we outlined in our news release, we are providing the following guidance for 2010, which is also included on slide number eight.

We are very pleased that our performance in the first quarter and our outlook for our early cycle markets enables us to raise our guidance for the year for Altra's top and bottom line. We now expect 2010 sales in the range of $470 million to $485 million and non-GAAP EPS of $0.70 to $0.80 for the full year. Free cash flow is projected in the range of $20 million to $25 million. We now expect capital expenditures for 2010 of approximately $13 million. The $1 million increase in our guidance is due to the investment we are making in targeting renewable energy markets.

If we are successful in winning significant new business in this area, CapEx could increase by a further $2 million. We also continue to anticipate depreciation and amortization in the range of $22 million to $23 million and are now projecting a tax rate of approximately 33% to 35%. At the midpoint, this is slightly lower than 35% we had been anticipating due to some discrete items.

Let me give you a quick update on our companywide implementation on SAP which we are doing with the assistance of our implementation partner, Capgemini. The project is on target and we continue to expect to bring the first business online at the end of the second quarter and plan to complete the transformation during the next three years.

With that, I will turn our discussion back to Carl.

Thank you, Christian. Before we go to questions, I would like to leave you with a few key thoughts.

First, we got 2010 off to a great start with solid financial results for the first quarter, reporting both sequential and year-over-year sales growth. We also leveraged our increased sales volume and cost reduction initiatives into a nice bottom-line performance as well, achieving $0.24 in recurring diluted earnings per share.

Second, we made good progress on our strategic growth initiative, which include investing in organic growth, seeking strategic acquisitions, targeting key underpenetrated geographic regions, entering high-growth markets, including renewable energy, and lastly, enhancing our efficiency and productivity through the Altra business system and focusing on the development of our people and processes.

Third, as a result of our optimism about the remainder of the year, we have raised our top and bottom line guidance for 2010. Our key early cycle end markets are beginning to grow and are more than offsetting the weakness we are seeing -- we're still seeing in some of our late cycle markets.

Our overall order rates for most of the businesses continue to exceed shipments and inventory levels at our customers and channel partners are now in line with current demand. While some of our sales increases this past quarter was due to some of our customers restocking their channels, we see real growth in demand across most of our early cycle businesses.

We also see some early positive signs out of our late cycle markets and are encouraged that we may see an increase in orders from those markets later this year and good sales growth in 2011.

With that, we will go to questions.

(Operator Instructions) James Bank, Sidoti & Company. We have a question coming from Torin Eastburn, CJS Securities.

Good morning. My first question is about the second quarter. You typically see at least a little bit of a pick up sequentially in revenue from Q1 to Q2. Given how strong Q1 was this year, do you still expect that?

I think what we're seeing in the order rate, Torin, is that between the end of the fourth quarter and the beginning of the first quarter we had a nice ramp up and I think that had a lot to do with the inventory, the end of the inventory burn in the channel. But since the middle of the fourth quarter, its been certainly very strong, but not increasing at that same rate.

So I think the second quarter we would expect to be -- we don't give quarterly guidance, but not a tremendous increase over the first quarter.

Okay, and second, some of the companies that we cover are starting to see pretty serious increases in their raw material costs, particularly steel. Is that something you are seeing? If so, what plans do you have to combat that?

So in some of our businesses, we buy raw steel. In most of our businesses, the purchased steel that we -- or what buy that is steel components, it's usually been converted by machined castings, by machine forgings, and machine parts. In those businesses we are not seeing a significant increase at this point in time. We know eventually those costs will have to get passed on.

And where we do see, where we do buy raw steel, we are seeing some increases in steel cost and we're passing them on through price increases. There may be a little bit of lag, but for the most part we feel like we will be able to pass those costs on and cover them with price increases.

Okay. Thank you, Carl.

James Bank, Sidoti & Company. Our next question is coming from Yvonne Varano, Jefferies & Co.

Thanks, just a little follow-up on what you just said in terms of the raw material costs in the pricing. So is the thinking here that we should be able to continue to hold our gross margins or are we going to see any compression there?

I think you see compression due to seasonality. The second half of the year typically has a lower gross profit margin than the first half of the year. But other than that accounting for seasonality, we think while commodity prices are somewhat a tailwind that we will be able to offset them through price increases.

Okay, and then I know you talked about the later cycle markets and I think you indicated they were still down in 1Q versus a year ago. I was wondering if you could put a percentage on that?

We look at some of the later cycle markets when we still had strong backlog in Q1 of '09. And so when we look at the shipments, they are down relatively speaking still, but the order rate has come back nicely. And when we look at the shipments in those markets relative to -- this year relative to last year, they're probably down in the order of 15%, 20%.

Okay, great. I know you mentioned that there is more to do on the Altra business systems side there. Any other big projects that we can point to other than some of the facility consolidations you have talked about in the SAP?

Those are really the big ones we have going on right now is the SAP, completing the facility consolidations. What were the other two? We've really accelerated some of the new product and new business development activities. But not any really specific projects there.

Okay, then maybe just lastly talk about what you are seeing on the acquisition arena there, more opportunities coming out or being presented to you at this point?

Yes, so when we look at the general M&A data out there, the whole M&A businesses, they are back in business. Things are picking up and then in our space, we are definitely seeing more activity. Sellers are receiving calls and starting to want to talk. I still think it's going to be six, 18 months before the activity turns to transactions. But we're definitely seeing a higher level of activity.

Is your thinking still I think at one point we were going to pace down some more debt before becoming more acquisitive. Is that the mindset here or do you think we're getting closer to seeing some more M&A activity for yourselves?

I think we have said that we would like to continue to deleverage by adding cash to our balance sheet, not by paying down debt. And that we think we will complete that process by the end of this calendar year. With the free cash flow of $20 million, $25 million, we feel we would have built up enough cash to make an acquisition.

So when we refinanced, we made the decision to -- we wanted to buy back as much debt as we could before we refinanced and then once we refinanced, we said let's take the cash and use that for growth activities.

Okay, perfect. Thank you very much.

Steve Sanders, Stephens Inc.

Good morning, guys. Congratulations on a good quarter. I know you don't typically provide a lot of detail on this but I wanted to see if you could give us some color on how the sales and order patterns progressed over the past four months, sort of January to April? Then I thought in one of your answers to a question you indicated that things had moderated a bit recently. But I wasn't sure.

Well, let me answer the first part first because I think that will answer the second part. So over the last four months, orders bottomed out I think in the -- I hope we can go back a little further than four months. Orders bottomed out probably at the end of the second quarter and then in the third quarter of last year and our revenues bottomed out in the third quarter. And then we started to see orders start to come back slowly from there and then pretty -- then they started to accelerate really in the fourth quarter. And then through midpoint of the first quarter, they continued that really nice ramp up.

From there we have seen it stay at that high level and depending on how you look at the data, you could say it's continued to ramp up at a low, more moderate pace or it has kind of flattened out a little bit, but at a much higher level. So we feel very good about the order, the incoming order rate right now.

Okay, and is it fair to say that the order rate is tracking significantly ahead of the sales rate?

Yes.

Okay. And then Christian, in terms of the restructuring outlook for the rest of the year, how should we be thinking about additional charges?

There's two more things that we have to complete, the North American, the last piece on the North American consolidation effort where we are in really in a startup mode at the receiving location and then our UK consolidation. So we do expect somewhere between $1.5 million and $2 million of additional restructuring charges as we go through the year on a quarterly basis probably less than what we've seen in the first quarter so that $1.5 million to $2 million will be spread out over the remainder of the year declining over time quarter-to-quarter.

Okay, and then Carl, the bridge product that you talked about, can you just expand your comments on that a little bit? Is that something that could be fairly significant next year? How should we think about that?

Again, I think for us we are very project oriented and we hit a lot of singles and doubles, and there aren't a lot of home runs. So I'd put this in a single to double category where it could be a few million dollars for us. But where we are is we are on drawbridges and lift bridges where they need some power transmission equipment to move the bridge up out of the way as big vessels come underneath them. And some of those bridges have been -- are being rebuilt because they have been deemed as unsafe. And primarily -- the primary product or the highest dollar value product that we are in is large gearboxes for those applications.

Okay, and then can you expand a little bit more on your China strategy? It sounds like you are going to put some additional people on the ground there, but what's kind of the short to intermediate term focus in terms of product or end markets? Are you essentially leveraging some of your existing customer relationships, just maybe a little bit more color on that expansion?

Yes, so our belief is that for us to be successful in China, we need to stay very focused on end markets, that there is a lot of ways you can do business there, but not make a lot of money at it. So we're trying to stay focused on markets where we think we could make some money. The resources that we are hiring and putting in there and the partnership relations we are developing are very market specific and very market focused.

Historically the markets that we have gone after there have been steal elevators, energy, and some of the markets where they want our technology in order to improve the process that they have there. So they are willing to buy a more highly engineered product than they could get from a domestic manufacturer.

Then the second part of the strategy is to develop manufacturing there to make those products in country so that we can have the right lead times, the right engineering support, etc.

Okay, thanks very much.

Josh Pokrzywinski, KeyBanc.

Good morning, guys. Just to dig a little bit here on a comment earlier on 2Q, if you assume that 2Q kind of trends in line with 1Q maybe up a little bit, your guidance seems to imply that the back half is at the midpoint flat with last year.

Just in a climate where book to bill is above one and there's some interest picking up on some of your later cycle businesses, what gives you to pause for the second half? Is it just the lack of visibility or is there something else I am missing?

I think, yes, we typically have about a quarter's worth of visibility, so we feel very good about Q2. One day I will wake up and hear news reports that are very optimistic about what's happening. The next day I get up and news reports like we read yesterday and China's putting the clamps on, they want to reduce the amount of growth they have, get everybody panicking about the financial situation in Europe, to get a little more pessimistic about the prospects and the time frame where we don't have visibility.

So we just felt it was better to assume that there would be some headwind in the second half and would be optimistic about the second quarter. So that is what we based our guidance on.

That's fair. Just separately, how sustainable should we view 1Q margins? Are there any -- I understand turf season for the first half. Obviously not the highest mix product in the portfolio, but is there any reason why margins retreat from here?

Typically there is a relation between margins and volume and as we go into the second half, volume will decline. We do have seasonality and especially given the fact that our turf and garden season this year is exceptionally strong even compared to last few years. There may be even a little bit higher seasonality than we have historically had that may be offset by late cycle markets returning to growth mode earlier than we currently anticipate.

So margins will be in the second half below Q1 and on balance for the year that if you look at historical balance like 2008 for instance, I think that will give you some indications on how margins behave sequentially as we go through the year.

Got you, and then just one last question. A lot of conversation about M&A. You guys seem more constructive there. What would you characterize your internal capacity as at this point?

So normally we have about $50 million, $53 million, $55 million of cash on hand by the end of the year that will be $75 million. So there is that capacity and there is capacity for us to go out and borrow more money, for instance. As long as we stay within our leverage profile that we want to maintain, there is by the end of the year additional borrowing capacity.

Okay, that's helpful. Thanks, guys.

(Operator Instructions) James Bank, Sidoti & Company.

Carl, Christian, hello. Sorry for the technical difficulty in the beginning there. Christian, in your comments you mentioned that some prior cost reductions returned in the first quarter. Could you elaborate on what those were and how that could probably play out for the rest of the year?

So the things that will come back as we go through the year are we reintroduced a portion of our 401(k) contribution. We will provide wage and salary increases at some point this calendar year. We no longer have anybody on salary furloughs which we used as a mechanism last year. And we don't have anybody working on a 40 work week anymore, which was another that we employed last year. So these personnel-related costs will come back as we go through the year. And as volume comes back.

Right, so maybe the way to think about it as volume comes back hopefully you would get it net to neutral or you would swing something we just saw in the first quarter that you mentioned 10 basis points in the gross margin or would there be a larger swing do you think at one of the quarters in the year?

No, it's in that 10 to 20 basis points. It's affecting both SG&A and it's affecting (inaudible) profit margin.

We have the consolidation costs.

Then as you go into the second half of the year, we will have another -- on an annualized basis $1 million, $1.5 million of additional cost savings due to the completion of the last two consolidation projects. They were partially offset some of those cost increases. And then year-over-year hopefully, we will have higher volume levels as well that support us.

Okay, great. So outside of the seasonality, for the most part these margins are sustainable?

Yes.

Interest expense, a little bit higher than I would've thought. Could you tell me what rate you are paying on that variable revenue bond?

The coupon is 8 1/8, but then from a P&L standpoint, it's more around the year around 9% as we amortize the cost of acquiring the debt, so to speak. So we use around (multiple speakers)

Were you asking, James, about that small industrial revenue bond we have, because that's -- ?

Right.

That's $3 million or, so -- 5.7%?

Yes, and that is on the bonds and then the other pieces there's industrial revenue bonds and there is mortgage in Germany and that's around 5%, 5.5%.

Okay, great. Could you break down for me the regional segment sales performance?

We would ask you to wait for the Q. There's geographic sales in it and we will be filing that shortly.

Okay, great. Thank you. That's all I have.

There appear to be no further questions at this time. I would now like to turn the floor over to Carl Christenson for closing remarks.

I would like to thank you for attending the call and I would also like to thank all of the Altra associates for their hard work that enabled us to achieve the results that we were able to achieve this quarter. And we look forward to talking to you at the end of our second quarter. Thank you and goodbye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.