Altra Industrial Motion Corp (AIMC) 2011 Q1 法說會逐字稿

Greetings and welcome to the Altra Industrial Motion's First Quarter 2011 Financial Results. (Operator Instructions.) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Calusdian, Executive Vice President and Partner for Sharon Merrill Associates. Thank you. Mr. Calusdian you may begin.

Thank you, Jackie. Good morning. Welcome to the call. With me today is Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Christian Storch. To help you follow Management's discussion on this call they will be referencing slides that are posted to the Altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to Slide 1.

During the call, Mmanagement 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 expectation. Please refer to the risks, uncertainties and other factors described in the Company's quarterly reports on Form 10-Q, and the annual report on Form 10-K, and in the Company's other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Holdings Inc. does not intend to update or alter its forward-looking statements whether as a result of new information, future events, or otherwise. I'll now turn the call over to Altra's CEO, Carl Christenson.

Thank you, David. Please turn to Slide 2 as we review our financial high/lows for the quarter. We started 2011 off on a very strong footing and we reported excellent top and bottom line results for the first quarter of the year. Q1 represented the fifth consecutive quarter of year-over-year revenue growth, so we've now lapped the first quarter of our turnaround, and we did it in a commanding fashion with sales up 25%. On our Q4 call in February, we reported that most of our late cycle markets were now contributing to our growth and that continued to be the case in Q1. Most of our early cycle markets are also showing strong demand. So in Q1 we experienced strong growth across nearly all of our end markets with exceptionally strong performances from Energy and Mining, two of our later cycle markets.

With the excellent leverage in our business model our bottom line performance outpaced our strong top line results. Operating income grew 180 basis points to 12.5% of sales and we reported diluted earnings per share of $0.40 for the quarter, compared with $0.22 last year. And keep in mind that in last year's first quarter we still had some temporary cost reductions that not—that had not yet been added back.

In addition these results were achieved despite pressure from material cost increases and some continued learning curve inefficiencies at receiving facilities as we completed the final stages of our plant consolidations. Going forward we expect our bottom line to benefit from the price increases we implemented in Q1, as well as increasing productivity at our newly consolidated plants.

With those as financial highlights, I'll provide some insight into the growth drivers of our top line before turning the call over to Christian for the financial review. Please turn to Slide 3 for a discussion of our end markets.

First, I'll describe what we're seeing the in distribution channel and then discuss specific end markets. Our distribution channel is predominantly comprised of sales of after-market parts and original equipment parts to small OEMs. Our distributors seem to be increasingly more confident in the demand environment and we believe that some of our distributors are starting to incrementally build inventory. We expect that this had only a slight effect on our Q1 sales from the distribution channel and that the lion's share of the orders were from real end-user demand.

Turning to Turf and Garden, we had an outstanding year in 2010 and our results in Q1 support our projection that 2011 sales activity will be similar to last year.

The Ag market is performing exceedingly well and above our expectations. We've mentioned on prior calls that our sales growth had been partially driven by demand for combine machinery in advance of interim Tier Four Emission Rules that went into effect in January. We were uncertain as to what effect that would have on North American demand in 2011. However, thus far, we're seeing no slow down, and what's more, international activity is increasing as we had expected. So we're quite bullish about the Ag market for both the short and long term. The Transportation market continues to be strong for us as well. Though automotive build rate forecasts have been ratcheted down as a result of the triple disaster in Japan, we do not expect this to have a significant impact on our sales as the auto platforms we are on are with Korean and U.S. OEMs. We also continue to create new opportunities through our product development efforts.

Our products for the Material Handling market are primarily used in equipment such as conveyers, forklifts and elevators. All three areas are quite--or continue to be quite strong. The demand in this market is driven by the global industrial recovery, as well as by new designs we are working on for our OEM customers. We're working on several nice forklift and elevator projects in Asia with customers we've never worked with before.

Now let's discuss our later cycle markets starting with Energy, which is--as I mentioned earlier, is very strong. Drilling activity is strong and there are a number of projects around the world that require our products, particularly for higher horsepower drilling rigs used for horizontal drilling. We still expect that the Energy market will remain strong throughout 2011, evidenced by the fact we are now receiving strong orders for new rig builds.

The Power Generation side of the energy market was strong last year and continued at a similar robust level in Q1. We expect the demand trend for high performance products for gas compression and transportation will continue. Mining was also especially strong in Q1 and we expect this trend to continue, driven primarily by activity in tar sands with oil over $100 a barrel and continued strength in coal and metals mining due to demand from China and other developing countries.

Turning to Aerospace and Defense, while there is definitely uncertainty in this area we believe we have an opportunity to grow in this market in 2011 due to a few key projects that we are working on. And finally we're seeing some recovery in the commercial construction market. Although it is still well below peak levels, the quarter-over-quarter growth has been impressive.

That summarizes what we're experiencing in the major markets we serve. With that I'll turn the call over to Christian and then I'll be back for a wrap-up.

Thank you Carl and good morning, everyone. Moving on to Slide 4 in our unaudited first quarter 2011 results, as Carl mentioned our net sales increased 25% year-over-year to 159.8 million and we were up 22% on the sequential fourth quarter.

Foreign exchange rates favorably impacted the first quarter top line by approximately 50 basis points. When we compare to the prior year first quarter, the price was scalable by approximately 140 basis points. Gross profit margin for the first quarter was up 60 basis points year-over-year and up 90 basis points from the sequential fourth quarter to 29.9%. We achieved this despite continued commodity price headwinds as we continue to benefit from the cost reductions and pro-activity initiatives that we put in place during the recession. For example, in the first quarter of 2008, when we reported $163.2 million in revenues, our gross margin was 60 basis points lower at 29.3%. We reduced Q1 SG&A and R&D expenses year-over-year as a percentage of sales to 17.4% from 17% a year ago. And compared with last year, we have completely added back certain temporarily suspended costs.

On a real dollar basis, operating expenses increased 22%, in line with the volume increase. Our tax rate for the quarter was 29.1%, which included a favorable discrete item of $600,000. Income from operations climbed 47% to $20 million, or 180 basis points, to 12.5% of sales.

During the quarter we incurred $1.1 million in acquisition related expenses, while the prior year first quarter included $1 million in restructuring charges.

Net income increased to a record $10.7 million, or a record $0.40 per share--per diluted share, compared with 5.7 million, or $0.22 per diluted share, in the prior year first quarter. Our net income per diluted share includes approximately $200,000, or about $0.005 of interest expense related to our convertible notes issued related to the Bauer Acquisition.

As you may recall, during the first quarter we issued senior convertible notes in the principal amount of $85 million with a final maturity of March 1, 2031. Upon conversion they can be settled in cash, stock or a combination thereof.

On Slide 5, we have provided a table of our interest expense to enable you to determine how the notes will affect our earnings through March 1, 2018, the first put date, at which time the notes become freely callable. We will also have this table available in the investor relation section of our website.

Please turn to Slide 6. Our cash balance of $15.5 million is up approximately $73 million from year end. The increase is primarily driven by the proceeds from the issuance of the convertible notes.

Slide 7 reviews our working capital performance. The year-over-year increase is 32.5% and was primarily driven by an increase in accounts receivables as a result of very strong sales in March of 2011. Capital investments during the quarter totaled $2.8 million and depreciation and amortization was $5.4 million, both in line with our expectations.

During the quarter, we continued to make progress in our company-wide implementation of SAP. We're now ready to enter the second phase of the project, which is to begin implementation--the implementationat eight additional sites. We expect the next manufacturing location to go live in the second half of the year.

Let's turn to our revised guidance for the full year 2011. Please see Slide Number 8.

As a result of our strong Q1 results and demand trends in our early cycle and late cycle markets, we are raising our guidance for revenue and earnings for the full year. We are now projecting 2011 sales in the range of $600 million to $620 million and diluted EPS in the range of $1.36 to $1.46 for the full year. Our EPS guidance reflects the full impact of the convertible notes issuance of approximately $0.12 per diluted share.

We continue to expect depreciation and amortization in the range of $21 million to $20 million--$22 million and a tax rate of 30 to 33%. This guidance excludes any financial impact that the acquisition of Bauer may have on our year 2011. We continue to expect the acquisition to close in the second quarter and expect to revise our guidance accordingly during our second quarter conference call, assuming the closing occurs as planned. With that I will turn our discussion back to Carl.

Thanks Christian. Please turn to Slide 9 for our wrap-up as I leave you with four key thoughts. First, we continue to be very enthusiastic about the Bauer transaction. This acquisition provides us with the ability to greatly increase our presence in Europe, leverage our U.S. sales channels across our Bauer products, and broaden our product line with their well-recognized platform and gearing products.

We recently exhibited at the world's largest power transmission trade fair in Hanover, Germany, and invited Bauer to exhibit at our booth. We had very positive feedback at the show from our customers and distributors after meeting with our colleagues from Bauer. Customers were very excited about the Bauer product line as an extension of Altra's.

We're working diligently right now with a team from Danfoss to get the transaction closed as planned during the second quarter. Going forward, the M&A environment is still very good, so we continue to actively pursue our acquisition strategy.

Second, we have been talking for some time about taking actions to accelerate our growth and today we have an announcement regarding an exciting initiative in that regard. One aspect of our growth strategy is to target key under-penetrated geographic regions like China. This year, we are beginning to invest in a new manufacturing facility in China to serve the domestic steel and energy markets. We plan to build an 8,000 square meter facility in [Changzhou] and have already hired a country manager to oversee the project and manage the facility when it becomes operational. We expect this be a $14 million investment over the next three years, including $5 million in 2011.

As a result we're revising our expectation for capital expenditures for 2011 to a range of $20 to $22 million. We're very excited by the growth prospects we see for Altra in China.

A third point relates to another element of our strategy, investing in organic growth opportunities. Our organic growth has been very good and we continue to focus on working with our customers to develop the right products to meet customer needs in our end markets. I'll also note that as our organic sales have ramped dramatically, the production side of our business has done a fantastic job in meeting customer demand with superb on-time delivery rates. We believe that this is no small reason why we have done such a great job taking market share in the past year as the economy has improved.

Finally, we remain bullish about the end market environment for the remainder of 2011. Demand is very robust at both our early cycle and late cycle end markets and the leverage in our business model should lead to continued strong profitability going forward.

With that, Christian and I are available to take your questions.

Thank you. We will now be conducting a question and answer session. (Operator Instructions.) Thank you. Our first question is coming from Mike Halloran of Robert W. Baird.

Morning. On the margin side of things and the cost side of things in the last quarter and earlier in your prepared remarks you eluded to some of the plant inefficiencies associated with the consolidation. Are those mostly going to be behind you now? And I think on the last call the thought was exiting 1Q those should be basically behind you. Is that the case heading into Q2?

During the first quarter we made significant progress at the receiving locations. The performance has improved significantly when we compare that to the fourth quarter. I think there's a little bit more to go in the second quarter, but I'd say it's largely behind us.

Okay, that makes sense. And then, a comparable question on the price cost curve and the commodity exposure. You guys put the price increases in the first quarter. How close are you guys to getting back to an equilibrium when it comes to the commodity inflation side of things?

I think we're still a little bit behind in the first quarter. But those price increases are now becoming fully effective, and it takes a little bit of time to work through the open orders. And then, we also announced some additional price increases which will go into effect, some in July, some sooner than that. So I think in the second quarter we'll probably be about level with price increases offsetting the cost increases we've seen on the commodity side.

And so, when I take those together, and you guys in the past have talked about 30% core incremental margins as the target. Obviously some pressures in the 1Q outside of your control, some with the consolidation side. Is 2Q the quarter where we start seeing maybe some of that level of pull through, or are there still going to be enough headwinds that maybe it's a little bit farther out?

I'd say we certainly expect to make progress in that regard in the second quarter. There's a little bit more headwind, as Carl explained. It takes some time for those price increases to take affect and really show up to 100% in the P&L. We have some additional price increases that we've put in place in the second quarter and as of July 1. So we think we should be fully there by the beginning of the third quarter, but with significant progress in that regard in the second quarter. The other thing that's happening is I think commodity prices have stabilized recently. That should also help us with our performance as we go through the rest of the year.

And then, last one for me. When you think about balance sheet capacity, let's assume Bauer gets closed here in 2Q consistent with your expectations. How much capacity on the balance sheet there--do you think there is for you to go out and do further deals, and what type of scale and opportunities are you guys looking at?

We are always looking for acquisitions and we have a very good pipeline at this point. We think our capacity is around $50 million that we have in terms of cash. Otherwise we would have to raise additional funds if the acquisition would be larger than that. I think right now our primary focus is on integrating Bauer, but we are always looking and who knows what will happen.

I think, like the--we've always said that the ideal candidates for us are in that $25 to $75 million range. I think Bauer was right in that sweet spot for us, on the higher side of that sweet spot, but bigger. And so, that's kind of the range that we're looking in. Obviously if it's the right product line extension, something smaller than that would make sense. And if there was something larger that really made good industrial sense, then we'd have to take a hard look at it.

Great. Well, I appreciate the time gentlemen.

Thank you. Our next question is coming from Scott Graham of Jefferies.

Hi. Good morning. I do have a couple of questions here for you. First of all, regarding your price increases, I mean is there--have you--is there--can you tell us what the number is, or don't you normally do that?

We've talked to it in the past. The numbers in January had a range from 3% to 9%. But the effectivity on that, I think we mentioned, was probably in the 1.5% range. So obviously you don't get it through all at one time, nor do you get everything you try to get. And I think in--the July increases would be right in the middle of that same range.

Okay, that's helpful. Thank you. When you go to market now, and I am assuming that you've started to talk to the trade about the July increase, --are you getting--I mean, obviously, with your likely being below the range there's push back. But are you seeing more push back on the July or are people just maybe a little bit more accepting with where commodity prices are right now?

We always see push-back, particularly from large original equipment manufacturers. And so we see that. We--but I think they understand the need, with the commodity cost increases that everybody's experienced, we're not the only ones asking for a price increase. Sso we'll always have to push back, but we're going to fight hard to make sure we get what we need to get to protect the margins. And then on the distribution side, you know historically that channel--it's been a little less push back to get the price increases pushed through.

Right, of course. Okay, two other questions for you. Now Christian addressed the accounts receivable number as being a function of heavier sales in March. Is there any way you can tell us maybe where the A/R number is where we sit today? I mean was there a lot of collections in the month of April?

What I can tell you is that our DSO at the end of the first quarter were the same as in the prior year, so that the increase in the accounts receivable balance was entirely driven from the very strong sales in the last month of the quarter.

You say your DSO was the same as the prior year?

Yes. So DSO stayed flat, and then, if you do the math, it kind of shows you how strong the sales were.

Right, right. I guess maybe on a discrete basis in the quarter. But on a--if you look at these things on a trailing basis, which that's my preference, but you can have yours, obviously the DSOs were up a lot on a year-over-year basis. I guess my simple question is, with 87 million of A/R on the balance sheet is that number a lot lower today?

No. We think that it's all driven by--DSO even sequentially from the fourth quarter is not significantly off.

Okay.

There is some--you know receivables are sometimes impacted by the timing of payments made by our large distribution partners. Sso that can have an impact. Sometimes they pay the last day of the quarter, sometimes they pay the first day in the new quarter, and these are typically large payments that may throw things off a little bit.

Okay. All right. That's fine. I think I can work my way through that. My last question is about--similar to a previous question about the M&A pipeline. Aand you indicated that you kind of have $50 of--$50 million of balance sheet capacity. Define--are you defining that as cash-on-hand plus revolver or--because it seems to me as if you have a lot more borrowing capacity than that, even with the closing of this convertible. It seems as if your ability to borrow money is far in excess of $50 million.

Right. So I define that as that's the amount of cash-on-hand that we would be willing to make available for an acquisition. We look at the revolving credit facility as a safety net, not necessarily to finance acquisitions. We're investing in China and that will require some cash. Beyond that, we would have to go back to the debt markets.

Okay, understood. Thanks very much.

And that, if it helps, we've always stated that we feel comfortable with a leverage profile on a net debt basis of around three times.

That would be your max.

That would be our max.

Very good. Thank you.

Thank you. Our next question is coming from Jeffery Hammond of KeyBanc.

I know you're waiting on the Bauer deal to close to add in expectations around that, but just roughly, relative to the convert,--which you did a good job of describing in talking about dilution. I mean, should we think of on net between the convert and the Bauer deal that we're kind of net neutral in '11 and then net positive in '12? Is that maybe a simple way to think about it?

I think on the call for the fourth quarter what we said was that the Bauer acquisition will be slightly accretive in the first year. We talked about a penny or two, assuming that approximately $50 million of the convert are allocated to the purchase of Bauer. Jeffrey Hammond. Okay, and that's still--.

--That's still the case. Sso there's a component of that $85 million that we raised that was designed for other needs, China being an example.

Okay, so if you isolate the convert that you're using to pay for the deal, then it's slightly accretive, but some additional dilution for the additional capacity on the convert?

Correct.

Okay, that's helpful. And then I noticed you pulled your free cash flow guidance. I think you were saying 25 to 30 and I understand the China CapEx may be working capital's moving around and then certainly some nuance around the capital structure. Can you just give us an update on how you're thinking about free cash flow for the year?

We decided, as you may have noticed in the release, no longer to refer to non-GAAP metrics as we've done in the past. In April, we pulled our free cash flow guidance because it's a non-GAAP number. What I can tell you is that our cash flow expectations, operating cash flow expectations, have changed in the sense that our growth has been significantly higher than we anticipated. Therefore, supporting our working capital requirements will be a use of funds more than we expected.

Okay, and then--yes, and then DNA more neutral with CapEx?

DNA more neutral with CapEx.

Okay, perfect. Thanks, guys.

Thanks, Jeff.

Thank you. Our next question is coming from Torin Eastburn of CJS Securities.

Hello, Christian and Carl.

Hey, Torin.

Christian, what was the volume price in FX for the quarter?

It was 50 basis points of FX and 140 basis points of price.

Okay. Looking at your revenue guidance, if I take the Q1 revenue number and apply what has been your historic seasonality, I get to a number much--for the full year, much higher than the top end of your guidance. And if I look at the PMI, for instance, it's still very strong. Publicly traded distributors are showing low inventories, at least relative to forecasted revenues. All that put together makes it seem like your guidance is conservative from a revenue standpoint. Is that the case or was there something unusual in Q1 or something that I'm missing?

What I can tell you is that there's nothing that was unusual in the first quarter.

Okay. What are you seeing or hearing anecdotally as far as the affect of the weakened dollar on your business?

Let me take that one. I think our business growth in--when we look at it geographically, was strongest in Asia, and then North America was second and Europe was third in the first quarter. But it was not significantly different. So I think that some of our customers--and we don't see a tremendous difference because of exchange rates, but I think some of our customers do. So I think that demand for their product in North America has been a little bit higher. I wouldn't say significantly, but somewhat higher because of favorable exchange rates.

Okay, that's all I have. Thank you.

Thank you. Our next question is coming from Steve Sanders at Stevens Incorporated.

Hey, good morning, guys. Good quarter.

Good morning, Steve.

First a question on China. How long will it take to be actually producing out of that facility and then how should we think about the potential revenue impact there in maybe 2012 and 13? And then, when you mention energy are you talking traditional or more the alternative energy, like wind?

So we just kicked off this project. It will be the third quarter of 2012 before we're producing product in that facility and shipping into customers. We'll probably start limited production before that, so third quarter 2012. We expect that in a three to five-year timeframe out that we would see $15 to $20 million in annual revenues. We currently have--we just received our first order in the first quarter for an alternative energy component that will be produced in that plant. We're now producing it in a domestic plant to satisfy the demand until we--we already have some business that we will move there and that is for a wind energy application.

Okay. And then Christian, just to make sure that I'm clear on this. Going forward, you are eliminating the non-GAAP presentation, so you will include the non-cash interest expense on the convert in your reported results?

Yes, we're eliminating the non-GAAP reference and we've supplied as one of the slides how interest expense will affect our P&L and how it affects us from a cash standpoint--in the investor presentation. Iit also will be included in our general investor relations of our website.

Right. Okay, and then as you see the later cycle businesses accelerate relative to the, I guess, the distributors in the early cycle, is there a meaningful margin impact from that mix shift?

No, not really. I think we've consistently said that our businesses have very similar margins across the businesses and across the various end markets that we serve. It's really probably more OEM versus distribution affects the growth profit more than the specific market we serve.

Okay, and then last question. I think you just mentioned the relative growth rates by region. Can you give us the actual growth rates or the percent of sales by region?

It's Europe with 22%, U.S. was 26%, and Asian was 30%.

That was the growth rate.

Right, right. Okay, thanks very much.

Thank you. (Operator Instructions.) Our next question is from Anna Kaminskaya of Bank of America Merrill Lynch.

Most of my questions have been answered, but I just wanted to go back to your margin target that you set about three years ago. I believe it was 18 EBITDA on 600 million in revenue, and we're pretty much back to the previous peak level. But your I guess EPS guidance implies a more modest margin. Maybe you could just walk us through kind of negative headwinds or is that target still intact? Or what am I missing? Maybe you could quantify the impact of material costs versus pricing and maybe productivity inefficiencies on the full year margin. I would appreciate some of the color.

Yes. So I think we did not expect to get back to that revenue as quickly as we did, so there's still some improvement activities that we're working on. And I think when you talk about headwinds, we're still seeing the commodity cost headwinds. bBut we're working price increases to try to offset that commodity cost. And then, productivity improvements in the facilities. Still some low-cost country sourcing initiatives we're working on, the facility consolidations getting the full benefits from those. So we're still confident that we can achieve that high-teens EBITDA margin on revenues in this range, maybe a little bit north of this, but in this range. It's just going to--it will take a little while to get those improvement initiatives worked through.

Should we expect that maybe sometime by the second half of the year? Or I know seasonality probably doesn't warrant for a good comparison, but would we be able to see some sort of similar run rates of high teens by the end of the year?

I'd probably say give us more like a year.

Okay. Thank you very much.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Management for any closing comments.

I'd just like to thank everybody for joining us on the call this morning, and we look forward to speaking with you again on our second quarter call this summer. Thank you.

This concludes today's teleconference.