Altra Industrial Motion Corp (AIMC) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Altra Holdings Third Quarter 2011 Financial Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, Inc. Thank you, Mr. Calusdian. You may begin.

Thank you, Robin. Good morning and 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, management with 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.

On today's call management will refer to non-GAAP adjusted earnings per share, non-GAAP adjusted net income. These metrics exclude any acquisition costs and other items that management believes should be excluded when reviewing continuing operations.

The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available on the financial tables of the Q3 2011 financial results press release on Altra's website and on slide 5. I'll now turn the call over the Altra's CEO, Carl Christenson.

Thank you, David. Please turn to slide 2. We reported another great quarter in Q3, reporting excellent top and bottom-line growth. Sales were up 38% year-over-year, and excluding Bauer, we experienced growth of 14%.

This was our 7th consecutive quarter of year-over-year sales growth. The sales increase this quarter was driven, again, by very robust market growth in energy and mining and solid demand in nearly all other end markets.

Geographically, sales were up across the board. Asia was our top performer with 31% year-over-year growth followed by Europe at 17% and North America at 12%. There's certainly a lot of talk in the media about China and what a slowdown could mean for business, going forward. For Altra, as a relatively new entrant in several strategic markets in China, we expect our growth curve to continue relatively unabated regardless of the macroeconomic conditions there.

Our Bauer acquisition was also a significant factor in our year-over-year growth, reporting sales and performance in line with the high side of our expectations. This was the first full quarter of revenue contribution from Bauer.

While the European economic environment might be soft overall, we are selling into some specific areas that have excellent potential for growth. We were particularly pleased with Bauer's performance in developing regions like Russia where, for example, demand is strong for products used in large crane applications. The integration of Bauer is proceeding right on track, and we are very pleased with this acquisition thus far.

Today we are thrilled to announce the simultaneous launch of the Bauer product range to the Altra North American sales team as well as an innovative new gearing product line partially based on Bauer technology. These product lines include both custom engineered products for OEMs, which are Bauer's value proposition, as well as gear drives that will be drop-in replacements for industry standards with some outstanding new features.

Looking closer at Altra's bottom line for the quarter, we've leveraged out top-line performance into a 37% year-over-year increase in income from operations, and a 35% increase in non-GAAP adjusted net income.

For [both those] financial highlights, I'll provide some insight into the top-line growth drivers before turning the call over to Christian for the financial review. Please turn to slide 3 for discussion of our end markets.

First, I'll 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 components and original equipment parts to small OEMs.

Distribution continues to be strong, and inventories are being maintained at levels necessary to support the business. Our ability to flow product quickly out of our factories to meet current demand has enabled our distributors to better manage their inventories and for us to gain market share.

Turning to Turf & Garden, we continue to expect that 2011 sales activity will approximate the excellent year we had in 2010. Looking further ahead, the industry expects low single-digit growth in 2012, and we would expect to outperform the market.

We'll continue to work collaboratively with our Turf & Garden OEM customers to develop products that will help them grow their businesses. For example, we've been working on new linear actuator prototypes that we believe will be incorporated into the 2012 model year equipment.

Farm and agricultural equipment had a similar year in 2010 -- a similar great year in 2010 -- and we expect to report another great year overall in 2011. Strength in the ag market is primarily being driven by emerging countries where increasing populations are requiring more food and subsequently greater investment in farm equipment. In addition, we continue to develop new products that further penetrate the market.

The transportation market also continues to perform well. We recently won a new contract with a major city transit system for Deering. This win is an example of how our CapEx spend is really improving our productivity and enabling us to win in competitive situations.

We purchased equipment this year that enabled us to beat out the competition for this order in terms of quality, delivery, and cost.

The material handling market continues to be strong. Our products are primarily used in equipment such as conveyors, forklifts and elevators. Recent growth is being driven by strong shipments to the global forklift and North American conveyor industries.

Orders also continue to come in for elevator applications, and we are proud to have recently received an order for elevator drives for the freedom power project in New York City.

Another example of an innovative new product is a device that actuates swimming pool lifts by remote control. Such lifts are required in public pools under the Americans With Disabilities Act, and we have just started to receive production orders.

Now let's discuss our late-cycle markets starting with energy, which, as I mentioned earlier, is very strong. The price of oil and natural gas are still generating a high level of investment in drilling and extraction equipment. As we've discussed before, natural gas drilling with high-powered directional and horizontal drilling rates is our sweet spot, and investment in this type of rig remained high.

Another area of the energy market that is performing very well for us is hydraulic fracturing, which is used to extract natural gas from shale deposits. While not a huge contributor to our sales today, it continues to grow quite nicely.

We recently won a significant order from a large energy company in Brazil. The win in Brazil is an example of our focus on developing new business in under-penetrated geographic markets. The growth in the power generation side of the energy market hasn't been quite as strong as oil and gas drilling, but it's still performing very well. Demand in this area is being driven by strong global capital spending for power generation equipment. In addition, high-performance products for gas compression and transportation also continue to perform well.

Mining, as I mentioned earlier in my remarks, was a key growth driver this quarter. Growth in this market continues to be driven by global mining activity but particularly in emerging markets.

As a long-term forecast for raw material demand continues to rise, mining companies are investing in equipment to extract more minerals, and mining OEMs are building equipment for their customers. In turn, our backlog for major mining OEMs is stronger than ever.

Aerospace and defense is a small part of our business, but has been quite strong. And since it is small and very project-based, we continue to experience strong activity, particularly on the defense side of the business. For example, we recently received multimillion-dollar orders for products for destroyer, aircraft carrier, and military helicopter projects.

In the renewable energy market, we are still on track to hit our target for new business. This is a new area for us, and we are making great progress. Growth is coming from wind power as a result of the capital investments we made last year. We are now in full production, and shipments are running 100% on time. We continue to work on projects to expand our presence in the renewable energy sector.

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

Thank you, Carl, and good morning, everyone. Please turn to slide 4 and our unaudited third quarter 2011 results. As Carl mentioned, we reported another excellent quarter. Here are the financial highlights.

We reported solid revenue growth across all geographies. Foreign exchange rates favorably impacted the third quarter by approximately 200 basis points when compared with the prior year third quarter, while price was scalable by approximately 180 basis points.

Net income increased 84% to $12.1 million, or $0.46 per diluted share. Third quarter 2011 net income includes expenses of $1.2 million related to the repurchase of $8.2 million of our senior secured notes and acquisition-related costs. This was more than offset by $3.6 million in discrete tax benefits.

Third quarter 2010 net income included $0.5 million in restructuring charges. Excluding these items, non-GAAP adjusted net income increased 35% to $9.3 million or $0.35 per diluted share.

The gross margin for the third quarter was 29.8% compared with 30% in the third quarter of 2010, and 29.3% in the second quarter of 2011. When you exclude the diluted effect of power, our gross margin was up 10 basis points on a year-over-year basis. The margin was up 80 basis points on a sequential basis despite sequentially lower sales volume due to our seasonality in the third and fourth quarter. This shows that we are making progress in our efforts to offset the effects of material cost inflation to price increases and productivity improvements.

Q3 operating expenses as a percentage of sales were 19.3% versus 19% a year ago. The increase was due to the final expense related to the acquisition of Bauer totaling $700,000.

Income from operations increased 37% to $18.7 million.

Our tax rate for the quarter was a benefit of 3.4%. This was the result of three discrete tax items. First, using precedent from a recent favorable New Jersey Supreme Court ruling regarding another company, we were able to reduce tax reserves. Second, the rate was also favorably impacted by the UK lowering its corporate income tax rate from 28% to 25%. And, third -- the third item relates to reduction in valuation allowances due to some tax planning that we introduced. We expect our tax rate for 2011 to be in the range of 31% to 33% excluding discrete items.

Slide 5 is a reconciliation that shows how we get from reported net income to the non-GAAP adjusted net income number, and how we get from reported income from operations to non-GAAP adjusted income from operations. Please turn to slide 6.

We continue to place an emphasis on maintaining a solid balance sheet. For that reason, we repurchased $8.2 million of our 8 1/8 senior secured notes during the third quarter. We repurchased an additional $3.7 million in the current fourth quarter.

Our book equity is at $210 million, and we have reported a strong cash balance of $90.3 million at the end of the quarter as a result of generating an incremental $22 million in cash from operations in the third quarter.

Slide 7 reviews our working capital performance. Working capital declined slightly in the quarter to $176.6 million. This level is still much higher than the first quarter prior to the acquisition of Bauer. 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 to adding up the value in US dollars.

Interest expense for the quarter was $6.7 million and $4.8 million for the prior year.

Capital investments during the quarter totaled $5 million, and depreciation and amortization for the quarter was $6.5 million.

We continue to make progress on our companywide implementation of SAP, and we took two more manufacturing sites live during the third quarter.

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

As a result of the demand trends that were seen across our markets, we are narrowing our revenue guidance towards the high end of the range. We are now forecasting sales in the range of $670 million to $680 million. We are maintaining our earnings guidance and projecting non-GAAP adjusted EPS of $1.43 to $1.53 with a midpoint of $1.48.

We expect depreciation and amortization in the range of $24 million to $25 million; capital expenditures in the range of $20 million to $22 million. We have lowered our range for capital expenditures as certain investments have been pushed into early next year.

As I mentioned earlier, we expect a tax rate of 31% to 33% before discrete items.

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

Thank you, Christian. Please turn to slide 9 for our wrapup. We reported another great quarter with excellent growth of 14%, excluding Bauer, and overall growth of 38%. Our continuing solid performance demonstrates that our growth strategy is working and that our investments in the business are paying off handsomely. We invested in the right infrastructure, capital equipment, and people to win orders based on quality, costs and delivery. We made these investments early on in order to support future demand, and we are seeing very positive results.

In the market overview, I mentioned the number of new orders and new applications, new geographies and for new customers, and those orders are the direct result of the investments we've made in organic growth.

We also continue to be very optimistic about the Bauer acquisition. They turned in excellent sales performance, and they are right on track in terms of our expectations for integration. We are excited by the gearing product launch in North America that we announced today and are even more confident in the excellent potential for this acquisition.

As an aside, we are proud to have been named one of the top 100 small companies in the most recent issue of Forbes magazine.

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

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

On Bauer -- one, was it accretive in the quarter? If so, how much? How should we be thinking about accretion into 2012? And if you could maybe just talk about integration activities and some of the major actions you are taking to drive higher margins there?

Yes, I think, Jeff, we said that we thought it might be neutral to maybe a penny accretive for the year. And third quarter came right in line with where we expected it to hit that objective. We haven't given any guidance for next year -- what we expect for next year yet, but we'll do that on the next call. Was there another part to the question?

Okay, yes. Can you just talk about some of your early integration activities? What some of the major actions you're taking to kind of improve the margins? And maybe just while we're at it, this gearing launch. You know, what do you think the penetration or the order of magnitude of that intro could provide?

Yes, so that's one of the integration activities was to sell the Bauer product range to the Altra North American sales team, and that started today with that product launch. We're really excited about the product range and the new product that was developed -- it was under development under Altra, but we brought in the Bauer people to help redo that design and bring some of their technology into that product range.

So that was one of the integration activities. We think that if that's successful, in three or four years, we'll have $5 million to $10 million in revenue coming from that product line. And that, I would like to think, is kind of a conservative estimate.

The other activities that we're working on currently are moving out of some of the facilities that are in the Esslingen, Germany, location, which is a large Danfoss complex that we're consolidating from five facilities and eventually into two facilities.

So during the quarter we notified Danfoss that we will be terminating one of the leases for one of those facilities in May, and that's right on track, probably even a little bit ahead of schedule, on our move out of those facilities, and reducing the lease expense.

We are moving some of the production from Esslingen to the Slovakian facility. That's one of the integration activities, and that's right on track. That also makes a lot of sense for another activity, which is developing assembly capabilities in China, which is right on track to begin in the first quarter assembling product in China, and they will be supplying some components for the Slovakian operation to the Chinese operation.

We have people this week -- we have three of our sales managers in Russia on another one of the integration activities, which use the Bauer sales offices to sell Altra products. And so we have three sales managers in Russia, which is really doing quite well for Bauer right now in trying to train those people and develop and identify the opportunities for additional offered products in that marketplace. We are also evaluating the opportunity to manufacture and assemble other Altra products in the Slovakian operation.

A final one that's really kind of a key is the low-cost country source initiatives, and that's right on track with two teams -- sourcing teams from Altra and from Bauer are looking diligently on those low-cost country sourcing activities that we think are possible.

Steve Sanders, Stephens, Inc.

Hey, good morning, guys. Good quarter.

Good morning.

Maybe first just talk a little bit about the guidance, the implied range for the fourth quarter is pretty wide. I just kind of wanted to see what your thoughts were on the low end versus the high end there?

The reason we left the ranges untouched is that we continue to believe in the midpoint of that range and, therefore, we didn't see a need to change it.

Okay. And then maybe you could talk -- I know you gave some color on the fact that your European business had a good quarter. You're levered to Northern Europe, I think, and Eastern Europe. Can you talk a little bit about how orders progressed through the quarter and into October? Are you seeing any slowdown in your markets or does it still feel pretty strong?

It still feels very strong, Steve, and it's really kind of frustrating that the underlying strength of manufacturing in the industrial economy is completely overshadowed by the activities in, I think, it's affectionately called the "PIGS" in the Portugal, Italy, Greece, and Spain. So it's really kind of frustrating that there's very good strength, and our order books and book-to-bill ratios are still very good, and we haven't seen any decline in the income and order rates to date.

Steve, we follow -- there's an association in Germany about German machinery and equipment manufacturers. The last day is on incoming order trends for that industry was for the month of August. It indicated that the industry in Germany was experiencing year-over-year increase in incoming order rates of 20%, and 9% was the increase for domestic customers. The rest of the Eurozone was flat year-over-year. And so they continue to see strength out of the rest of the world, one euro -- European countries as well as Asia Pacific and in North America. We don't have September data yet, but all of it still looked encouraging.

Okay, good. And, Christian, maybe just a quick follow-up. I know you had good price realization in the quarter. It was a bit of a headwind earlier in the year. Are we pretty neutral on that now?

I think there's a little bit more to go as the July price increase will finally take full effect in the fourth quarter. But, you're right, the biggest chunk of that we've seen in the third quarter (inaudible) in Q4.

Okay. And then last question, just kind of big picture, Carl -- if we do get into sort of a messy double-dip type scenario, you've got the Bauer acquisition, and you outlined quite a few things that you're doing there to integrate the companies. But how do we think about just kind of generally the leverage you have to pull if things do get a little bit tough as we roll through 2012?

Yes, I think we've certainly talked about the various potential outcomes for 2012. We think it's still going to be a good growth environment next year. But as we talked about what if -- some of the levers that we pulled the last time would be the same levers that we'd be able to pull. We've had good success in short work weeks. We have some temporary labor that we could reduce our labor cost. Some of the benefits that we had to reduce last time, we could do that again.

But one difference, I think, this time, Steve, is the facility consolidation effort that we went through last time. We don't -- we would not be able to consolidate five or six facilities again and make one or two but not five or six. That would be -- I think that would -- being that the P&L would probably be a little bit better in this downturn to go out of expense through the P&L if we close those facilities. But many of the same activities that we were successful helped us manage through it last time.

Scott Graham, Jefferies.

A couple of questions for you. The European sales number -- you indicated at the top that was about plus 17. What was that without Bauer?

That number is without Bauer. Bauer is 16% year-over-year on a pro forma basis and 16% year-over-year increase. But we [fear] there's a lot of currency in there. So on a volume basis, Europe was up 10%, 11%, and then the balance was currency effects.

Okay. Can you -- when you guys are taking about your end markets, it almost sounded as if everything was up. But I assume that there were a couple that were flat or maybe even modestly down. Could you identify those specifically?

You know, it was -- and I've not gone through an economist that we use -- the manufacturing and industrial economies are all doing very, very well, Scott. It's really a shame that it doesn't get the press that it deserves.

So the only one that really is flat to maybe down a little bit is the North American pulp and paper, which just has, you know, I guess, issues and has for many years as some of that business moves to other areas, like Brazil. So it's been very, very strong across the board.

Now, with this consolidation, or I should say this -- the launching, I should say, of this sort of joint product line. What end markets does that specifically help you penetrate?

So there's several end markets that we're attacking would be -- steel is one of the markets that Bauer has had very good success with. Material handling, which is cranes, conveyer systems, and then food processing would be another market we'd be going after. Material handling reaches into a lot of our other end markets, too -- so mining would be an example where there's lots of conveyer systems that need very robust gear drive systems.

Okay. Two other questions -- could you talk a little bit about your acquisition pipeline -- where we go from here?

Sure. So the pipeline has been very strong. I think, as we've said before, that we made the Bauer acquisition. That was a complicated transaction, and if we had our "druthers" we'd fully integrate that deal before we did another sizable acquisition. We can't really control when sellers want to sell. So we are still very active in making sure that if the right companies come along that we can participate in that. And, you know, the pipeline is actually still very, very good. So ideally those would be probably smaller than the Bauer acquisition and something that would be a less complicated transaction and integration.

Got you, okay. Last question -- could you tell us what the operating margin would have looked like excluding all things Bauer?

I could tell you, for the gross profit line, what the margin is. On the operating income line, I will have to get back to you. On the gross profit line it would have been 30.1%.

Okay. Would you mind getting back to me on that operating margin?

Yes.

Anna Kaminskaya, Bank of America.

I just wanted to follow-up on commodity prices. It sounds like for fourth quarter pricing versus material costs would be neutral to gross margin. But how should we be thinking about 2012? Should it be a positive tailwind given some of the recent weakness in material costs? I would appreciate some of the guidance.

Yes, sure. So we -- certainly, some of the commodities, copper, in particular, have come back well off of [ties]. You know, and oil has helped even in freight costs and other things. The one -- steel has not come back as much as we would have hoped with what's going on on commodities.

So -- but we will -- we should see a tailwind there and particularly in copper and things that are affected by [oil rubber] components and freight. And we're hopeful that steel will also come down a little bit more in the quarter.

And also following up on your CapEx Altra provision -- are we just being cautious about spending more money given that we have maybe limited visibility on growth in the next year. What caused the downward revision? I would appreciate more color, too.

The main reason is that some of the equipment we purchased will now be delivered in the first quarter due to lead times, and that the setup of our Chinese facility is moving slightly to the right by a couple of months so that that CapEx is delayed by one quarter.

Okay, so you're still [pursuing] with the same project? It's just the delivery of equipment? Okay.

There's no change in (inaudible).

Okay. And, finally, how many just -- I probably have it in my notes, but on the SAP implementation, how many plants, how many facilities, do you already have on line?

We currently have three companies, three manufacturing sites on line. By the end of the year, there will be five. And we have five other company quotes like Altra Holdings, Altra Industrial Motion, five other [GLs], live on SAP.

Plus we have with power now about 400 SAP users on top of those three sites that I mentioned. That would include two manufacturing sites with Bauer, so that makes it five manufacturing sites plus the sales office infrastructure for Bauer and SAP and the operation for UK, Finland, and some of the operations in the UK from the US are on SAP.

And you haven't encountered any issues, so far?

What?

Have you encountered any issues, so far, or has it been going as planned?

No, I think 2010 was a big learning curve, and now in 2011, we've gotten much better at implementing this. If you look at the recent two go-lives, we took two sides live at the same time after a three-month implementation cycle. The next two companies will go live after a formal implementation cycle due to a more difficult technical track with EDI and also those operations. So three to four months is what it takes right now to -- once we start and show up at the facility to go live.

(Operator Instructions) Torin Eastburn, CJS Securities.

Christian, do you have the consolidated growth from pricing volume and foreign exchange?

Yes. If you look at, like Carl said, 200 basis points in the third quarter of the top-line growth was FX-related -- 180 basis points was price.

And, Carl, you mentioned $5 million to $10 million of sales from -- I think it was the new gear product line. Can you -- first, is that correct? And, second, can you talk about what you think the sales possibilities are for the Bauer products in North America specifically? Thank you.

Yes, I think that is -- when we look at the new product range, we would consider that the Bauer product range. So when -- and I think if we can achieve, you know, $5 million to $10 million of revenues in three years, I think that would be a good success for us.

I think the way Bauer differentiates itself from the competitors is that Bauer sells custom names to us, which means there is a longer sales cycle. You're going to get engineered into that product. Those are the competitors offering more catalog-type of products. And with our launch we can address both. We have the catalog type products, there's drop-in replacements for the competition, as well as the customized solutions that Bauer offers.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay, thank you, Robin. And thank you all for joining us this morning, and we look forward to speaking with you again on our next call after the new year. Thank you.

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