Altra Industrial Motion Corp (AIMC) 2011 Q4 法說會逐字稿

Greetings, and welcome to the Altra Industrial Motion fourth quarter and full year 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's now my pleasure to introduce your host, Mr. David Calusdian, Executive Vice President and Partner for Sharon Merrill Associates Incorporated. Thank you. Mr. Calusdian, you may begin.

Thank you. 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, 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 materially 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 diluted earnings per share, non-GAAP adjusted net income, non-GAAP adjusted income from operations and non-GAAP free cash flow. These metrics exclude any restructuring charges, acquisition related (inaudible) 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 Q4 2011 financial results press release on Altra's website. I will now turn the call over to Altra's CEO, Carl Christenson.

Please turn to slide 1. I will start with a quick look at 2011 and move into the quarter and a review of our markets. 2011 was a great year for Altra. From a financial perspective we leveraged 30% sales growth into a 36% increase in non-GAAP net income. Our sales growth was 17% net of acquisitions, which not only reflected strength across nearly all of our markets, but also our ability to introduce innovative new products and build market share.

In addition to our financial achievements, the highlight of the year was the acquisition of Bauer, which is a great strategic fit with Altra. We believe Bauer will be a real home run for us in the long term. We also made excellent progress implementing SAP and we are now up and running at 11 sites. Finally, we made significant inroads in taking share at our end user markets. This was the result of the investments we've made in new product development, as well as superior customer service. All that we have accomplished in 2011 sets us up nicely for top and bottom line growth in 2012.

For the fourth quarter, our sales were right in line with our guidance, up 32% year-over-year. Excluding the Bauer acquisition, sales are up 11% driven by continued strength in energy and mining with solid demand in most other end markets. I should note that the integration of Bauer is proceeding right on track and we continue to be very pleased with the acquisition. On last quarter's call we announced the launch of a new gear drive product line from our Boston Gear subsidiary and Bauer in North America, both available through the sales force of both companies. Thus far customer response to this line has been very enthusiastic. The North American Bauer business was up nearly 50% in 2011 and we have recently received several new prototype orders in that geography for Bauer products.

Bauer is also doing well in Russia where sales are up 60% year-over-year. We are now beginning to leverage the Bauer sales office in Russia to sell other Altra brands. In addition, the Bauer assembly operation that we are setting up in Shenzhen facility is nearly complete and we are having a grand opening on March 7. For the sales synergies that we discussed when we purchased Bauer are starting to come to fruition. In fact, we expect Bauer sales growth to be in the mid to high single digits in 2012. A lot of work to do and many opportunities to capitalize on. From a financial perspective, Bauer had operating income of approximately 5% in 2011 and we expect this to grow to 7% in 2012, right in line with our projections.

Turning to our Q4 bottom line, income from operations was up 20% in the quarter, however, the $0.24 per share non-GAAP adjusted diluted EPS we reported was below our guidance for a number of factors, most of which we believe are non-repeatable. These include unfavorable foreign currency adjustments, unusually high medical costs, expenses related to plant blackout resulting from an October snowstorm in the northeast US, a plant shut down due to reduced demand as a result of automotive customer inventory adjustment, and extended holiday shut down in Europe, and we shipped some particularly large orders in the fourth quarter resulting in a relatively high percentage of high volume, low margin business.

With those as financial highlights for the quarter and year, I will provide some insight into the top line growth drivers and what we are seeing in our end user markets. Please turn to slide 3 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 after market parts and original equipment parts to small OEMs. Distribution continues to be very strong and inventories are stable. Our ability to flow product quickly out of our factories to meet demand allows our distributors to maintain lower inventory levels. Essentially, we receive an order when they receive an order.

Turning to turf and garden, we saw a slight sales decline in this segment compared with the strong Q4 we reported a year ago. We believe that the market was slow in Q4 as a result of OEMs pulling back on production due to excess inventory. At this point, we believe the market will be flat in 2012 because of the inventory in the channel after a very strong 2010-2011, as a result of pent up demand. We do expect to continue to take share and outperform the market.

Ag continued to be strong in Q4 and we are excited by the opportunities in this space. Strength in the ag market is primarily being driven by emerging countries where increasing populations are requiring more food and consequently greater investment in farm equipment, such as combines and seeders. We expect to commercialize a new seeder application that we've discussed in prior calls late in 2012. This could be a very big opportunity for us in 2013 and 2014.

The transportation market was a weak area for Altra in the fourth quarter as customers lowered inventory and our content was reduced on one platform. As a result, we shut down a plant for a week in November. We expect Q1 to be soft as well. On the positive side during the quarter, we won a new multi-million dollar contract for refrigeration trucks, as well as a contract related to AC units on buses. During last quarter's call, we mentioned a new contract to produce gearing for a major city transit system. We invested in new gear grinding equipment to produce these products and this new equipment is now up and running ahead of schedule.

The material handling market continued to be strong for Altra in the quarter. Our products are primarily used in equipment such as conveyors, forklifts and elevators. Conveyor sales were especially strong in the quarter with elevators also doing very well. There are some good elevator programs kicking off in 2012 that should help to offset an anticipated decline in some regions. Forklifts were down in the quarter, most likely as a result of inventory management during a weakened European economy. Overall, the material handling market is expected to grow in the low to mid single digits this year. We expect to outperform in this market as well.

Now let's discuss our latest cycle markets starting with energy. While the overall market was up in low single digits this year, we turned in a solid double digit performance in Q4. Our results continue to be driven by heavy duty clutch brakes for high horsepower horizontal drilling where products are being used to extract natural gas and oil from shale deposits. The oil and gas segment of the market is expected to grow in the mid single digits, but again, we will outperform that. The power generation side of the energy market was about flat for 2010, but we were up for the year in the quarter. Demand in this area is being driven by a strong global capital spending for power generation equipment, such as high performance products for gas compression and transportation.

Renewable energy is a new area for us. We are making great progress. In wind power, demand is coming from North America and China, and our business continues to grow. We expect this market to stay strong throughout 2012 while the federal renewable energy production tax credit is still in effect. The capacity we installed last year is 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 and we recently were awarded business for Bauer gear motor to be used in a solar energy array.

Mining was also a key growth driver for us in the quarter. Growth in this market continues to be driven by global mining activity, but particularly in emerging markets and China is especially strong. Our backlog for this market is very strong, although overall market growth should moderate somewhat in 2012.

Aerospace and defense is a small part of our business but continues to be solid. We are working on some excellent opportunities. Year-over-year, we experienced a decline in Q4 on the defense side due to a program discontinuation. That said, we still have significant project work in the defense space that will continue through 2012. For example, as we mentioned last quarter, we've received multi-million dollar prototype orders for products for a destroyer, an aircraft carrier and military helicopters. With that, I will turn the call over to Christian and then I will be back for a wrap up.

Thank you, Carl. Good morning, everyone. Please turn to slide 4 in our unaudited fourth quarter 2011 results. Net sales for the quarter increased 32% year-over-year. Net of acquisitions, our growth rate was an impressive 11%. Foreign exchange rates had no significant effect on the fourth quarter top line when compared with the prior year fourth quarter, but price was scalable by approximately 115 basis points. Fourth quarter net income increased 10% to $5.9 million, or $0.22 per diluted share, and includes $600,000 in acquisition related costs and costs related to repurchase of $3.7 million of our 8.125% senior secured notes. Fourth quarter 2010 net income included a total of $1.3 million in acquisition-related costs and restructuring charges.

Excluding these items, non-GAAP adjusted net income in both periods was $6.3 million, or $0.24 per diluted share. As Carl mentioned in his comments, non-GAAP adjusted earnings per share was below our guidance due to a range of factors. These include $800,000 in unfavorable foreign currency adjustments. The quarter also was negatively impacted by unusually high medical costs and by lower absorption related to a plant blackout in October due to a snowstorm in the northeast. The shut down, due to reduced demand as a result of automotive customer inventory adjustments, longer than expected holiday shut down in Europe and more high volume, lower margin business than in the prior year. See slide 5 for the impact of these items on earnings per share. Again, we believe the majority of these factors are non-repeatable.

Gross profit margin for the quarter was 27.4%, compared with 29% in the fourth quarter of 2010, again as a result of these factors. Fourth quarter SG&A and R&D expense as a percentage of sales was 18.9% versus 19.2% a year ago. Income from operations increased 20% to $14.7 million. Our tax rate for the quarter was 26.8%. We expect our tax rate for 2012 to be in the range of 31% to 33%. Slide 6 is a reconciliation at how we arrived at our non-GAAP measures.

Please turn to slide 7. We continue to place an emphasis on maintaining a solid balance sheet. For that reason, we repurchased $3.7 million of our 8.125% senior secured notes during the fourth quarter. We plan to repurchase another $3 million in debt in the current first quarter related to our San Marcos, Texas variable rate revenue bonds. Our book equity is $208.4 million and we reported a strong cash balance of $92.5 million at the end of the quarter.

Slide 8, we use our working capital performance. Working capital increased in the quarter to $165.1 million. We built inventory during the year to support Bauer's rapid growth in Russia and China, and to support our growth in the renewable energy markets. We also believe that this helped us to enhance customer service levels and take market share. We believe that working capital is slightly elevated and we expect turns to improve in 2012. Capital investments during the quarter totalled $8.4 million, and depreciation and amortization was $6.9 million.

We continue to make progress in our company-wide implementation of SAP. We now have implemented SAP at 11 manufacturing sites and plan to accelerate our investment in SAP by implementing the system at 8 sites in 2012. We also started the implementation of a new CRM system that we expect to go live in April. Let's turn now to our guidance for 2012. See slide number 9.

We are providing first quarter and full year guidance as we foresee a slight shift in our seasonality in 2012. As usual, we will be updating our annual guidance as we proceed through the year. From a seasonality perspective, we expect that the second quarter of 2012 will be the strongest of the year. First quarter was our strongest in 2011. In the first quarter of this year, we expect headwinds from foreign exchange and continued inventory adjustments from European and automotive customers to somewhat offset growth from the Bauer acquisition and strong demand in many of our end markets. For the first quarter, we expect sales in the range of $180 million to $190 million. Considering the anticipated negative year-over-year effect of foreign exchange and accelerated costs relating to SAP, we expect normally adjusted earnings per share in the first quarter to range between $0.35 and $0.39.

Turning to the year, we expect 2012 to be a record year for both sales and non-GAAP EPS. We anticipate full year sales in the range of $740 million to $760 million. This represents an organic growth rate of 4% at the midpoint. While we expect North American growth rates to be in the mid to high single digits, we expect headwinds in Europe to continue. We are projecting non-GAAP adjusted EPS in the range of $1.50 to $1.60. We expect that Bauer will make a meaningful contribution to our bottom line in 2012. As I mentioned before, our tax rate for the full year should be in the range of 31% to 33% before discrete items.

Our adjusted EPS for the year includes a few accelerated investments. We anticipate spending about $4.5 million to $5 million in 2012 to implement SAP. Or, about $2 million, or $0.05 per share, more than we spent in 2011. We also just broke ground on our new China facility and anticipate completion of that facility in 2012. We estimate that the non-capitalizable start-up costs for that plant is going to be around $1 million in 2012. The costs of SAP in China are approximately $0.13 to $0.15 per share in 2012. Capital expenditures should be in the range of $30 million to $35 million, including $10 million investment for the new facility in China and depreciation and amortization is expected to be in the range of $27 million to $30 million. With that I will turn our discussion back to Carl.

Thank you, Christian. Please turn to slide 10 for our wrap up. I'm going to conclude by briefly outlining our objectives for 2012. First, as Christian just mentioned, we recently broke ground on our new China facility, and we expect to ship the initial products from that plant by the end of the year. As we've discussed before, one aspect of our growth strategy is to target key under penetrated geographic regions like China. The new 85,000 square foot manufacturing facility in Changzhou will serve the domestic Chinese [stale] and wind power markets. I should note that we have now filled to capacity our Shenzhen, China plant with a Bauer production assembly operation.

Second, we expect to implement SAP at eight new sites, as we discussed earlier. Third, we plan to continue to enhance our operational performance driven by model value streams at every location. Fourth, we will continue to maintain a sharp focus on cost management to gain the most leverage out of every incremental sales dollar with specific attention to the Bauer profit improvement plan. Fifth, we will maintain strong new product development activity focused on key markets and in direct alignment with our customer needs. We believe that our efforts in this area in 2010 and 2011 will really start to bear fruit this year and in 2013. Finally, we plan to compliment our organic growth with strategic acquisitions. We would expect our acquisition activity in 2012 to include small bolt on acquisitions.

We expect to turn in a record year in 2012 as a result of the investments we have made in our infrastructure, new product development and acquisitions. With the achievement of the areas I just outlined, we will be well positioned for record results in the years to come. With that, Christian and I will be available to take your questions.

(Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

Hi, good morning, guys. Can you just talk about trends overall through the quarter and what your book to bill looked like through the quarter and maybe the trend into January?

Yes. The trend has been very strong and stable in almost every market. I think the 11% growth rate net of acquisitions was particularly good. We are very pleased with that. And with the guidance that we've put out for next year, the incoming order rate supports that very well. We are really pleased with what we are seeing for incoming orders. I think our projection includes flat performance in Europe, mid single-digit strength in North America, mid to high single-digit growth in Asia, and the economic reports we are getting from those regions all support that projection that we laid out.

Then this D stock issue, it sounds like you are building some of that into the first quarter. Are you starting to see -- as we move through the first quarter, are you starting to see that issue abate?

Yes, I think so. When we look at Europe and the end of the third quarter, fourth quarter, when things were very uncertain there, our customers slowed down their purchases to make sure they didn't get stuck with a bunch of inventory. As things -- as clarity becomes more normal there, more than norm there, then we are starting to see things pick up a little bit. We think people are getting a little more comfortable. The end of the first quarter we expect it to have some impact, but then things get more normal after we get into the first quarter.

Okay, great. Then Bauer, I think in one of your investor presentations, you had built a bridge for margin improvement there. Would you say your guidance for 2012 reflects that ramp?

Yes, the Bauer acquisition, we are really pleased. The top line synergies are going ahead of plan. We have some great prototypes out there. If those turn into production orders, we are going to be really pleased with the results of that. We had 50% growth in North America and 60% growth in Russia. That was terrific.

New assembly lines coming online in China. We have a great sales team there. We are really enthusiastic about that. And the profit improvement plan is being executed. The team over there is enthusiastic about it. They are optimistic to get that done. When we accomplish that, the results that we projected in 2012 do reflect those things happening.

Steve Sanders, Stephens Inc.

Hi, good morning, guys. Maybe just a clarification. On the $0.04, it was related to the absorption at the plants, can you break out what was specific to the northeast snowstorm versus some of the other issues in auto?

Yes. There was a total of four plants impacted. First plant we shut down -- we were out of power for almost ten days, and the plant in Connecticut we were up and running after three or four days, but on a generator that we had rented. That certainly cost us productivity also for the remainder of those ten days. That's about a $0.01, I would say. We had a shut down in November, a plant that makes bearings and other components for automotive. That cost us probably another $0.01. Then we had three extended holiday shops down at two of our locations in Europe, each of it cost, I would say, about $0.01 a share.

Okay, thanks for that. And then on the new facility in China, what is the revenue potential and what kind of visibility do you have in terms of loading that new plant?

What we are following partially one of our large OEM customers, we are already serving that customer for the Chinese market out of our -- one of our US facilities. We will be able to [hourly gauge] a load of significant portion of that facility. And we are working on -- working with customers in the steel sector to start loading the rest of that facility. We estimate that has the potential to be north of $20 million business within a few years.

Okay, thanks for that. And then you mentioned the strong growth at Bauer in North America and Russia, I think I caught that right. What is the base in those two geographies relative to the rest of Bauer?

So North America, they did not have a significant presence. They had some business, I think most of it was following European equipment that came over here. We are fortunate. It was less than $5 million to start. And in Russia, they had a better presence. They have done a couple of markets that are very strong for them, steel and cranes and hoist. About $8 million in Russia is what we started with. Now we are well above $10 million with very good growth projections for 2012.

Okay. And can you give us a little bit more color on the gross margin outlook for 2012? I know you have some puts and takes there, but how should we think about it for the year relative to what you did in 2011? And then I'm assuming seasonality first half versus second half is going to be fairly comparable.

Bauer continue to be dilutive to our gross profit margin. If you look at the core Altra businesses, you are probably looking at gross profit margins in the 29% to 30% range. In the case of Bauer, it's about 400 to 500 basis points below that. In balance, we think we should be in the 28% to 29%. That depends, of course, the first half is typically higher margin of the year compared to the second half due to higher volume.

And, Carl, it sounds like the M&A pipeline is fairly active for tuck in deals. Can you provide a little bit more color in terms of the reasons of the world and the end markets that you are focused on?

Yes. I think a couple of years ago we launched an initiative to try to get a presence in India and Brazil, Russia and expand our presence in China. And I think with the Bauer acquisition, that helped us certainly in Russia. We now have a very good office there and we are building a team out there. And then in China, with the new plant and then the Bauer products, we feel really good about what is going on there. That leaves India and Brazil where we have been doing some work and obviously can't announce anything, but be hopeful that, at some point in the future, we would have something to announce that we are expanding in those two geographic regions.

I think our balance sheet is in good shape. If you go back and look at the transactions that have occurred over the last couple -- 18, 12-18 months in the space, most of the transactions have been completed by strategic. It's been a pretty good environment for us to participate in.

(Operator Instructions). Scott Graham, Jefferies & Company.

Hi, good morning. In the past, we have seen the Company do a great job in driving productivity, excellent job, in fact. And I guess what I'm wondering here is that we've got four items that were unanticipated that I guess maybe I would have thought that productivity would have offset at least some of this rather than leave us with a flat quarter year-over-year. And since the productivity and certainly a couple of the plants shut downs, extended shut downs from customers, that kind of thing. I get all that. You are going to lose some productivity there. But would you say you were a net generator of productivity in the quarter or did these plant issues really completely offset that this quarter?

When you lose one week of production at a facility, what that typically means is that you actually lose money at that facility for the entire month. That typically is very difficult to overcome then for the quarter for those business units. If you take those out, those four shut downs, I think we did continue to see productivity improvements in our other facilities. We have, what Carl referred to -- maybe Carl, you want to comment on the model value stream?

Scott, I'm really excited about what we have done with our lean manufacturing program and we are now calling it operation excellence. We have gone from trying to be very broad with lean and implement a lot of different tools across an entire facility to identifying a specific area in a plant and going very deep and getting the people at the facility to really get a deep understanding of lean and how it can improve. In the facilities where we have got good model value streams running, the benefits have been tremendous. Lead times have come down, working capital improvements, it's just been really a tremendous change for us. I think over the next few years as we roll out these model value streams and then replicate those throughout each facility, we are going to continue to see good productivity improvements.

The fact that we were able to take out 6 facilities out of 28, back during the recession, which is 20% of the sales, not necessarily 20% of square footage, without having to expand any of the receiving facilities shows that these model value streams, these ABS activities do work. They free up more space and allow us to utilize that floor space better. We have a number of facilities that have doubled their production over the last three to four years without expanding their facility.

Okay, that's helpful. Let me go to the SAP. Can you give us an idea of where you are right now with the implementation of SAP, number of sites. I think you gave a number for 2012 in terms of the number of additional sites and how many more are left to go after that? I think you also said it is going to be $0.05 a share more this year than last year and maybe comment on those, but importantly also, as we pull all this together, will SAP enable you to maybe more readily identify some of these items that were not anticipated this quarter? Is that going to help us there? The fourth quarter was far short of what the low end of the guidance was?

Yes. Let me -- we currently have 11 sites up and running. We have 18 sites more to go. We are about one third of the way. To implement it, eight sites is our intention next year. That leaves 10 sites for 2013, then we hope to have that implementation completed. We also have started the implementation of CRM, which we will pull out this year in April.

The accelerated limitation efforts, as we open up a second track, we have currently implemented in the US and in Canada. We will now open a second track in Europe, starting to implement in Europe as well and that second track accounts for the incremental costs. Rather than having one consulting team assists us and one implementation team here from the Altra side, we are now going to have two implementation teams. The benefits down the road, we believe, are -- the biggest one is going to be, we will have much better information relative to pricing, sourcing, being able to leverage scale. We currently have nine legacy systems and, therefore, it's extremely cumbersome and labor intensive to aggregate data throughout the corporation, whether that's sales data, data for customers, pricing and sourcing.

We are also in the process of moving our accounting function into a shared service center in South Beloit, Illinois. We have completed that in terms of collections and cash applications and we are two thirds of the way in consolidating (Inaudible) before we then move onto some of the general accounting functions. We also believe that it will result in improved customer service experience, whereby we can provide better sub service capabilities to our customers where they can look up components, configure components, look up availability of these products and lead times for these products.

Would that have helped us? I don't think it would have made a big difference because, it wouldn't have helped us to predict a snowstorm. If we did foresee a weakening -- some weakening in the automotive side but not that abrupt, all of a sudden incoming -- fell off a cliff. I don't think it would have helped us much. We were surprised and otherwise we would have provided different guidance.

Mike, Halloran, Robert W. Baird.

Good morning, guys. So the SAP side, could you talk a little bit about now the costs layer in through 2012? Are they pretty measured, pretty straightforward from that standpoint on a quarter-to-quarter basis or is it loaded --

Given the fact that we are implementing CRM with a go live date of April, I think the SAP itself is pretty flat lined through the year but then you have a layer on top of that CRM in the first quarter and a little bit in the second quarter.

Was that $4 million to $5 million, $4.5 million to $5 million you referenced, did that include the CRM expense or not?

It includes the CRM expense. The CRM is about $1 million of that.

Okay, that makes sense. I know it's early days, but when you think about 2013 and the SAP implementation as you move out, how much do you have left -- I know this probably still some work to do, any sense for how the costs start layering out once you get past this year?

We should expect, in 2012, the cost to -- 2013 to be similar to 2012. The main reason is we have one implementation team that has a monthly run rate, so to speak, and now we added a second implementation team for our European or international track. That has a certain run rate. That run rate is fairly stable month-to-month. The difference might be that a particular location has a higher technical implementation requirement, EDI connections, RF connections, different forms, things of that nature. That can make a small difference month-to-month or quarter-to-quarter, but nothing major. It's fairly -- the run rate is the run rate so to speak.

No, that makes sense. You are really looking at something about $1 million lower because you are not going to have the CRM that is going in place next year? On an overall basis, more like $3.5 million to $4 million impact?

That's correct.

The FX side, any context to what the negative impact is on your guidance range from FX for 2012?

We think 2012 on the top line currency will be a headwind of about 100 basis points. That is particularly the case in second quarter and the tail end of the first quarter. (Multiple speakers) [The Euro] was very strong last year, late first, early second quarter and actually gained momentum during that period before then, started to drop sharply.

Then the -- what is the organic growth rate that underlines the guidance range you guys put out?

The midpoint is 4%. That is volume wise net of FX. Excluding FX, around 500 basis points.

There are no more questions at this time. I would like to hand the call back over to Carl Christenson for closing comments.

I would like to thank you for joining us this morning. We look forward to speaking to you again on our first quarter call. Thank you.

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