Altra Industrial Motion Corp (AIMC) 2011 Q2 法說會逐字稿

Greetings and welcome to the Altra Holdings' second-quarter 2011 financial results conference call. 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, David Calusdian, Executive Vice President and Partner for Sharon Merrill Associates. Thank you, sir. You may begin.

Thank you, good morning. Welcome to the call. With me today is Chief Executive Officer Carl Christensen, 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 the 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 Report 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 Inc. does not intend to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thank you, David. Please turn to slide two.

We had a great quarter, and were cautiously optimistic for the remainder of the year, despite the mixed economic data and negative news in the recent press. The demand environment continued to be strong across our end markets, and we reported 18% year-over-year organic growth for the quarter.

We had about one month of revenue contribution from Bauer after successfully closing on the acquisition on May 29. Our overall sales growth for the quarter was 24%. This represented the sixth consecutive quarter of year-over-year revenue growth. And as I review our end markets in just a few minutes, you will see why we expect that trend to continue.

Our early cycle markets continue to be strong, although our year-over-year growth rates are moderating in areas that reported tremendous growth in 2010, such as turf and garden and ag. Our late cycle markets are not only contributing to our year-over-year growth but they are driving the growth in a significant way. We saw particularly strong performances in Q2 from energy and mining.

Geographically, organic sales were up across the board. Asia was our top performer at 40% year-over-year growth, followed by Europe at 30% and North America at 13%. We expect these growth trends to continue, albeit at a more moderate rate due to the tougher comparables.

As we have discussed previously, we have excellent leverage in our business model as a result of the productivity improvements and cost reductions we made in the past few years.

This quarter, our bottom line did not outpace our excellent topline performance as a result of a number of costs relating to the acquisition of Bauer. As Christian will discuss in the financial review, when you exclude those items, our ability to flow sales to the bottom line was very similar to the first quarter, which was a record for Altra in terms of EPS.

Going forward, we expect that our bottom line will benefit from price increases that we have recently implemented as well as accretion from the Bauer acquisition. Later in the call, we will be providing increased guidance on the top and bottom line as a result of what we're seeing in the demand environment as well as the contribution from Bauer.

With those as financial highlights, I will provide some insight into the topline growth drivers before turn the call over to Christian for the financial review. Please turn to slide three for a discussion of our end markets.

First, I will describe what we are seeing in the distribution channel and then discuss specific end markets. Our distribution channel is predominantly comprised of sales of aftermarket parts and original equipment parts to small OEMs.

We saw a slight dip in orders from distributors in June, but they have rebounded since then. Inventories are stable, so orders were from real end-user demand. We believe the demand environment continues to be strong.

Turning to turf and garden, we had an outstanding year in 2010 as we continue to expect that 2011 sales activity will be similar to last year. What is different this year than last is that the [build] season ended in May, which is more consistent with historical trends. Last year we saw an extended season.

The ag market also performed exceedingly well in 2010, and as another early-cycle market, we expect 2011 results to be essentially flat with that strong performance. Another early-cycle market that continues to perform well for us is transportation. During the quarter, we received a multimillion-dollar order for an existing product that will be used in an automobile seating system. The system will go into production in 2012 for the 2013 model year.

We also received a very nice order for precision gears for a transit rail application. These are two examples of how we are creating new opportunities through our product development efforts.

Turning to the material handling market, our products are primarily used in equipment such as conveyors, forklifts and elevators. All three areas continue to be quite strong, driven by the global industrial recovery as well as by new product designs for OEM customers.

Now, let's discuss our later cycle markets, starting with energy which, as I mentioned earlier, is very strong. Rig counts are up, particularly higher horsepower directional drilling rigs. As we've discussed before, this is the type of rig that most frequently uses our products. We expect that the energy market will be strong for the foreseeable future.

The power generation side of the energy market also continues to see excellent growth, driven by strong global capital spending for power generation equipment. In particular, we are seeing excellent demand for higher-performance products for gas compression and transportation.

Mining continued to be strong in Q2, driven by overall global activity. As material costs increase, mining companies are purchasing additional capital equipment to extract more minerals and benefit from the higher prices. And we are benefiting from this trend. For example, we recently received an order for a coal mining project in excess of $1 million.

We also continue to innovate our products in this area. Last year, we introduced the world's largest backstop, which is a product used in mining conveyor systems. We recently quoted this product for a number of large mining projects in China and other international locations.

Turning to aerospace and defense, overall this market is in relatively good shape right now. While there is some softness on the defense side of the equation, we believe we have an opportunity to grow in this market in 2011, due to some improvement in commercial aerospace and a few key projects that we are working on.

In the renewable energy market, we are on track to hit our targets for new business. You might remember that last year we received a significant order from one of the world's largest wind turbine manufacturers, and we continue to work on additional projects to expand our presence in the renewable energy sector.

With that, I'll turn the call over to Christian, and then, I will be back for a wrapup.

Thank you, Carl, and good morning, everyone. Moving on to slide four in our unaudited second quarter 2011 results, our second quarter was another good quarter, very similar to our record first quarter.

Here are the highlights. Net sales increased 24% year over year. This includes one month of Bauer sales. Excluding Bauer, our organic growth rate was 18%.

Compared to our first quarter, we had three fewer shipping days.

Foreign exchange rates favorably impacted the second-quarter topline by approximately 275 basis points when we compare that to the prior-year second quarter, while price was scalable by approximately 130 basis points. Net income increased 31%. Earnings per diluted share were $0.34, which was adversely impacted by $0.04 due to the Bauer-related one-time acquisition costs and $0.02 of interest expense for two months of the convert from the time period when we did not have the benefit of owning Bauer.

Gross profit margin for the second quarter was 29.6%. The step up of the Bauer inventory under purchase accounting diluted the gross profit margin by 35 basis points. Excluding the impact of Bauer, gross profit margin was 30.1%, 20 basis points above the sequential first quarter.

This trend was driven by the incremental benefit of price increases put in place in the first quarter. We reduced second-quarter SG&A and R&D expense year-over-year as a percentage of sales to 17.8% from 17.9% a year ago, even with the inclusion of $900,000 of acquisition-related costs. SG&A as a percentage of sales was 17% excluding acquisition-related costs and the impact of Bauer.

Income from operations increased 22% to $19.1 million. Second-quarter 2011 income from operations will be reduced by $1.5 million due to acquisition-related costs including the step up of inventory related to Bauer. Income from operations in the second quarter of 2010 was reduced by $600,000m due to restructuring charges.

Our tax rate for the quarter was 34%, which is higher than the sequential first quarter, which benefited from a $600,000 discrete tax item. We expect our tax rate for 2011 in the range of 30% to 32%.

Please turn to slide five. I'm very pleased to report that our book equity exceeded $200 million for the first time. Also our book equity as a percentage of total capital improved to 49.4%. A cash balance of $[90.5] million positions us well to continue to grow our business.

Slide six reviews our working capital performance. The sequential increase in working capital from the first quarter was primarily driven by the Bauer acquisition, which added $37.2 million of working capital to the business. We expect that Bauer's working capital will decrease significantly over the next few quarters. Working capital was also affected by higher exchange rates in 2011, driving up the value in US dollars.

Capital investments during the quarter totaled $[6.1] million. And depreciation and amortization was $5.9 million. We continued to make progress in our Companywide implementation of SAP. Earlier this month, our second and third manufacturing sites went live successfully on SAP after an only three months implementation cycle. We are planning to take two more manufacturing sites live in this calendar year.

Let's turn to our revised guidance for the full year 2011. See slide number seven.

As Carl mentioned, our guidance now includes the contribution from Bauer. As a result of the continued demand trends across our markets and the revenue and profit contribution we expect from Bauer, we are raising our guidance for revenues and earnings for the full year. We are now projecting 2011 sales in the range of $660 million to $680 million by adding $60 million to the midpoint of our previous guidance. We are now projecting diluted EPS in the range of $1.43 to $1.53 for the full year.

This guidance adds $0.07 per share to the midpoint of the previous guidance, and reflects the performance of Bauer for the balance of the year. Recall that our previous guidance did not include the cost of the convert, did not include the contribution of Bauer.

Our EPS guidance reflects the full impact of the convertible notes assurance of approximately $0.12 per share, of which we allocated $0.07 to the Bauer acquisition. However, the guidance excludes acquisition-related costs of approximately $0.06 per share.

We now expect depreciation and amortization in the range of $25 million to $26 million. We will continue to invest in our business and decided to raise our capital expenditures to $23 million to $25 million. The additional CapEx will be spent on certain expansion activities and projects providing significant opportunities to improve productivity. As I mentioned earlier, we expect the tax rate of 30% to 32%.

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

Thank you, Christian. Please turn to slide eight for our wrapup.

First, we are very pleased with our overall financial results this quarter. Our organic revenue growth reflects a strong demand environment, especially for our late cycle businesses.

Second, 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 US sales channels to cross sell Bauer's products, and broaden our product line with Bauer's well-recognized platform in gearing products.

The integration is proceeding smoothly and according to plan.

Third, we continue to actively pursue our acquisition strategy. Excluding the revolver, we have about $50 million in capacity in terms of available cash, and the ideal acquisition candidates for us are in the $25 million to $75 million range. We are seeking companies that are complementary to our product lines and will be accretive, excluding acquisition costs.

And fourth, we continue to invest in organic growth opportunities. The project that we announced last quarter to build our new facility in China is proceeding according to plan.

During my comments on the end markets, I mentioned several new products that had resulted in revenue for us. We will continue to focus on working with our customers to develop the right products to meet customer needs in our end markets.

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

(Operator Instructions). Jeff Hammond with KeyBanc Capital Markets.

You mentioned some of the softness in June. Can you just talk about trends into July along those same lines and then give us book to bill for the quarter?

So, late May, early June, it seemed like the early-cycle markets flattened out and slowed down a little bit, which was a little bit surprising. But then they bounced right back in July, and the trends have been pretty good since that.

But it has flattened out. We are not seeing the same growth rate. And it's mostly due to tougher comparables, but the business level is quite strong. And the book to bill ratio is above 1, has been above 1 for a while.

And then -- oh, go ahead?

Means all bookings exceed shipments.

Okay, great. And then for Bauer, if you take this seven months, do you expect to get any cost synergies in that first seven months what is built-in? And then can you just talk about some of -- what you see as some of the low-hanging fruit, some of the early actions you're going to take to kind of realize some cost synergies?

There's not a lot of cost synergies that would be realized this fiscal year, the majority of which will be recognized next year. Examples are, we are working with our sourcing office in China to move some of the sourcing efforts to low-cost countries, such as China, such as India. We have identified those opportunities, but it takes time to actually implement them. You've got to identify suppliers, you've got to qualify those suppliers in these countries. You've got to make samples and so forth.

That's why we are saying that we are working on those. We have identified those opportunities. But until we see the benefit, we are looking at the second year, which is next year.

And then there are some other specific things, so we have -- through the acquisition, we have a facility near stood Stuttgart, and then one in Slovakia. And we are relocating some production from Stuttgart to Slovakia, and then also consolidating the production in the Stuttgart operation.

So it takes a little while to get that done, Jeff. But those will be some very good savings once we get that worked out.

The top lines are much longer term. This will take two to three years before we really see a nice impact from those, but we will start to see some topline next year. But it always takes a while to get customers converted over and get the products lined up. We will see that over the next couple of years.

Mike Halloran with Robert W. Baird.

So when you look at the guidance range, could you try to parse that out a little bit by what your organic expectations are within that? And more maybe on the revenue side there, and then have your expectations changed from your last guidance range to this guidance range on an organic basis?

So essentially, our assumptions organically has not changed for the base business. All we did is added the power performance, which was not included in the previous guidance. We had anticipated a slowdown in the second half in our guidance that we released at the end of the first quarter. A modest slowdown, I would say. And we continue, based on what we see in our order book, to believe that holds true.

And what are the organic growth expectations? And I think they were in the mid teens last quarter. Is that about the same, then, on a go-forward basis from a revenue standpoint?

That's unchanged.

And then when you think about the sequentials through the quarter, obviously you saw some variability there. But are you expecting or does your guidance assume normal seasonal patterns for this point? Or, when you talk about the slower transit you assumed in the back half of the year, is that simply slower growth rates? Or is that actually slower than normal sequential revenue patterns through the rest of the year?

Slower growth rates. We anticipate that we see the same historical seasonality patterns, which typically points to the first half being stronger in terms of topline as compared to the second half. And that varies, you know, at 61 to 62 -- sorry, at about for 51% to 52% of sales on the first half versus the second half. (Multiple speakers) period.

-- be the turf and garden business, as I mentioned, started to slow down in May, which is more typical. So we're seeing a typical cyclicality there, and then one of the other big factors in the cyclicality is the European slowdown typically during the summer time as it is more vacation time there during the summer and certainly fewer number of days in the fourth quarter due to the holiday season. So I think we are -- things seem to be flowing in line with what we have expected to see.

Okay. And then one question on the profitability side -- Christian, could you maybe give me the incremental profitability you guys saw in the quarter if you back out some of these one-time-oriented things like the acquisitions and a few other items?

It's just shy of 25%.

And then one more question, just to clarify on the guidance -- the guidance range excludes the acquisition-related cost. I'm assuming that is only the acquisition-related costs from the second quarter?

That's correct.

Not those pointed out in the first-quarter?

That is correct.

Scott Graham with Jefferies & Company.

I want to try to understand the puts and takes on Bauer maybe a little bit better. So we are essentially saying here that this $0.04 a share is Bauer acquisition costs. Now, is that inclusive of the purchase accounting?

That is inclusive of the purchase accounting. And the two components -- the acquisition cost relative to financial due diligence, legal fees and so forth, and about $600,000 of inventory step up [direct] to the P&L in the second quarter.

Right. Now, how much step up are you expecting in the third quarter?

That's it, no more step up.

That's it? So you've turned, one turn. Okay, fine. Then you talked about gross profit on a quarter-to-date basis, per slide four. You adjusted that 29.3% number to a number that I didn't hear you say. Did you say 30.5%?

30.1%, which was 20 basis points higher than -- so Altra standalone was 30.1% compared to 29.9% in the first quarter..

Right, but down on a year-over-year basis, slightly?

Down on a year-over-year basis because Bauer is going to be slightly dilutive to that gross profit margin for the --

Okay, so I understand now. And if you were to adjust further this 30.1% to exclude the one month of Bauer, do you know what that gross profit would be?

Say that again? Okay, so the 30.1% includes the one-time -- the costs, the acquisition costs and the purchase accounting. I was just wondering, if you stripped out Bauer entirely, including that one month of sales, what the gross margin would look like.

The 30.1% excludes the $600,000 inventory step up and excludes Bauer completely.

Excludes -- right. So as I said, the gross margin is actually down on a year-over-year basis, right?

Yes.

Okay, so what were the components of that down? Is pricing still not catching up to the materials? What was that? Because you had a pretty good volume velocity.

So, as we mentioned on the previous call, our first-quarter call, it's that we have implemented price increases effective July 1 because we knew that the price increases that we've put in place in the beginning of the year have turned out not to be enough, given the commodity price inflation that we had seen in the first quarter. So there's still some catch-up that we are playing, still some headwinds that we had. And that's why we increased prices again July 1.

Understood. And I was wondering if we can just do a same, if quicker, version of that analysis on the SG&A line. If you stripped out Bauer completely, what would the 16.3% look like, percent of sales?

I don't have that number right here. I suggest you call me after and then, we'll walk you through that.

Great, I will. Two other questions -- one, if we were to look at your end markets sequentially yet on a year-over-year basis, would you be --? Are you saying here that you had a, let's say, a more significant slowdown in the early cycle markets in the second quarter than you did in the first quarter?

Yes, due to tougher comparables. So if you look at -- it wasn't a decline in the early cycle market's second quarter compared to first quarter. It was that it leveled off, but it's more like a leveling off on the early-cycle markets.

Right. So if we were to look at this sort of teens type of organic for the Company, is that the type of a number --? It looks like you are expecting it to come off a little bit further in the second half but not significantly further. Is that a fair characterization?

That's fair because the later cycle markets are offsetting some of the leveling off of the early cycle markets.

And last question, and this is an easy one. So I think I heard you say $0.06 a share of Bauer-related acquisition costs. You're assuming that $0.02 of those costs are in the second half of the year? Or did I misunderstand?

So it depends on how you look at it. There was -- in our mind, there was $0.06 in the second quarter which we are adding back. There's the $0.04 of acquisition/step up, and then there's $0.02 converting to us while we did not have the benefit of owning it. Those are the steps we're adding back, in our mind.

And then maybe one last comment -- if you look at sequentially the second quarter and the first quarter, you have three fewer shipping days in the second quarter. If you do the math, it shows up on the topline perspective I believe we had a -- just as a strong quarter in the second quarter than what we had in the first quarter, on an Altra standalone basis.

Torin Eastburn with CJS Securities.

Just to follow up on the SG&A questions, can you give a quarterly or annual run rate or just some sense going forward of what you think SG&A will look like?

We don't provide guidance what our SG&A is going to do, so I can't. But I would say that there's no reason why SG&A should increase. It fluctuates with revenues, and it's going to be similar to what we've seen in the first two quarters.

As a percentage of revenue?

I didn't say that. But our revenues in the -- it's a percentage of revenues. But I don't think there's going to be significant changes that we are planning to SG&A one way or the other. We don't give out guidance on SG&A.

Sure. And my only other question -- when you look at your order book, how much visibility do you feel like you have? How far out are you relatively booked for shipments?

Typically, it's a quarter. So, three to four months. So we feel really good about the third quarter, and then we've got a little bit of fill-in work to do for the fourth quarter, but no reason not to think that's going to happen.

(Operator Instructions). Steve Sanders with Stephens.

First question, on Bauer. Can you just remind us in terms of their run rate, the geographic mix and the end market mix and how that kind of impacts your overall late and early cycle mix?

Yes. So Bauer geographically is predominantly Europe. So post Bauer will be 60% North America, 40% -- the, I'm sorry, 30% Europe and 10% Asia and the rest of the world. The end market -- the end markets line up very well with us. The material handling, steel or metals will be two of the largest markets, general industrial.

Okay, and then within Europe what's the Bauer mix kind of Northern versus Southern or maybe Germany, specifically?

We haven't given out those numbers, but they are a German-based Company. So they are -- Germany is certainly their largest market. But the thing that we liked about the Company was their presence in some of the Eastern European countries also. So we think that gives us some -- we can leverage those sales off of it to help expand our sales -- the Altra sales there.

The main markets are -- they're not Spain or Portugal, they are Germany, they are the Eastern European countries, Russia --.

Yes, the UK. Scandinavia.

-- and Scandinavia and Benelux.

Okay, thank you. And then could you just revisit your price/cost comments, sort of where you stand year to date? And then the July 1 price increases -- did those include Bauer?

So Bauer is in the process of implementing price increases. We didn't on the business until the end of May/beginning of June. So the prices will be -- not all of them will be effective July 1. You have to give certain notification. So July 1. But there are in the process of increasing prices.

And from a price/cost standpoint we have -- historically, we always hoped to achieve with price increases more than offsetting our input costs. And we had not been able to do that in the last six to nine months. I think, with this last price increase, we will be back in that trend. Now, it takes probably three months before those are fully implemented, as we have to honor open orders and new prices go on new quotes. So it takes a little while before they are fully implemented.

(multiple speakers) advanced lines which were a surprise, the topline impact of price increases in the second quarter, [130].

And then I know you won't get real specific. But in terms of the second half gross margin trends, the late-cycle mix increasing, the prices flowing through, Bauer rolling in -- how do we think directionally about the gross margin in the second half versus second half of last year?

I think, actually, the Bauer gross profit margin will be dilutive this year to Altra as a whole. Their margins are slightly below our corporate average, and that would have an impact. The margins for the Altra business should continue to be in that -- excluding Bauer, should be -- we should expect to continue around 30%.

Mister Christensen, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you very much, and I'd like to thank everybody for joining us, for joining us this morning on our call. And we look forward to speaking to you again after the conclusion of the third quarter. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.