Altra Industrial Motion Corp (AIMC) 2012 Q1 法說會逐字稿

Greetings, and welcome to the Altra Holdings first quarter 2012 financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Calusdian, Executive Vice President and Partner for Sharon Merrill Associates Incorporated. Thank you. Mr. Calusdian, you may begin.

Thank you, Rob. 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 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 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 diluted earnings per share and non-GAAP adjusted net income. These metrics exclude any restructuring charges, acquisition related costs and any 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 Q1 2012 financial results press release on Altra's website.

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

Thank you, David, and please turn to slide 2. We began the year on very solid footing, beating our guidance ranges for both the top and bottom lines. Our Q1 sales increased 20% to $192.4 million, a 4% growth excluding acquisitions. We exceeded our revenue guidance of $180 million to $190 million for the quarter.

On the bottom line, non-GAAP diluted earnings per share were $0.40. A $0.40 in earnings were achieved for the quarter was based -- was above our guidance range of $0.35 to $0.39 due to the higher sales.

From a geographic perspective, organic growth was driven by strong demand in North America and Asia. This was partially offset by weaker demand in Europe.

With those as the financial highlights for the quarter, I'll provide some insight into the topline growth drivers and what we're seeing in our end markets. Please turn to slide 3 for a discussion of our end markets.

I'll start with our distribution channel, which is predominantly comprised of sales of aftermarket parts and original equipment parts to small OEMs.

Overall, distribution sales remain at a relatively strong level, although growth has moderated from 2011. Distributor inventories are stable as a result of our ability to flow product quickly out of our factories to meet their demand.

Turning to turf and garden, last year was an extremely good year for turf and garden. We expect that 2012 will be nearly as good a year as 2011, however, the timing of shipments will be different. Shipments in Q1 were down significantly from first quarter of last year. We believe that after reducing inventory in Q1, our customers will be building at the same rate as their sale for the remainder of the year.

Orders in April were up significantly, which tells us that the inventory adjustments may be behind us. We expect to continue to take share and outperform the market in 2012.

While sales into the ag market were also down in Q1, we've been working on some excellent opportunities in this market.

Shipments for these new programs will ramp up through the year. Overall, we expect sales in this market to be essentially flat in 2012. We will also -- we also expect that these new programs, when they go into production -- into full production, they will provide a meaningful contribution in 2013 and 2014.

As an example, on prior calls, we've discussed the new [Cedar] application we are commercializing. That program is progressing on schedule and we expect to start ramping up to production volumes at the end of this year.

As we expected, the automotive segment of the transportation market was weak for Altra in the first quarter. On the positive side, we were able to quickly expand capacity and win a contract in major city transit system and the volume of that program has now been doubled. We expect that this and other new projects will help to offset the inventory adjustments that impacted our sales into the automotive segment.

Turning to material handling market, which was also down in Q1, our products are primarily used in equipment such as conveyors, forklifts, elevators, cranes and hoists. The elevator business is flat, now as construction in many parts of the world has slowed.

In addition, some of our customers are transitioning to new traction drive systems that they have been developing for some time. We see this as a good growth driver for us going forward.

As in the fourth quarter, forklifts were down in the first quarter as a result of the soft European economy. Sales to customers that manufacture conveyors, crane and hoists were also down slightly as a result of the soft European economy.

Now let's discuss our later cycle market, which remain very strong. The energy market continues to be solid. We are benefiting from the tremendous drilling activity for oil and natural gas in shale deposits. Demand from the offshore segment has also been very good. We expect that oil and gas side of the energy markets remain strong. The power generation segment of the energy market is very healthy and we expect good demand from this market for the foreseeable future. It appears that natural gas is emerging as a relatively abundant and safe energy source and we anticipate that capital spending for power generation equipment, gas compression and gas transportation equipment to outperform in the near and long-term.

One geography we're seeing particularly good opportunity is in Japan, as they move from nuclear power to natural gas fuel power generation. Our investment in this market during the past few years has enabled us to keep up with demand, take share and capitalize on present and future growth.

In wind power, demand is coming from both North America and China, and our business continues to be strong, up approximately 50% from the same period last year. Based on the new projects we are working on, we expect to fully utilize our capacity, even if the federal renewable energy production tax credit is not renewed or extended for 2013.

We continue to work on projects to expand our presence in the renewable energy sector. The overall mining market also continues to be strong, although we saw some inventory adjustments from one major customer that dampened growth in the quarter and will impact sales into this market in Q2. We expect that mining will continue to be a strong growth driver for us going forward and we're seeing major capital projects being released. Growth in this market continues to be driven by global mining activity, particularly in emerging markets.

Aerospace and defense is a small part of our business but continues to be solid. We have significant project work in the defense space that will continue through 2012, such as our multi-million dollar product -- prototype orders for destroyer, aircraft carrier, and the military helicopter.

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. Please turn to slide 4 in our unaudited first quarter 2012 results. We reported record first quarter sales, as net sales increased 20% year-over-year. Net of acquisitions, our growth rate was 4%. Foreign exchange rates had a negative impact of approximately 80 basis points on the first quarter top line, when we compare that to the prior year first quarter. Price was scalable by approximately 150 basis points.

First quarter net income was $10.5 million, or $0.39 per diluted share and included $200,000 in acquisition related costs. First quarter 2011 net income included $1.1 million in acquisition related costs and $600,000 in discrete tax items. Excluding these items, non-GAAP adjusted net income was $10.6 million, or $0.40 per diluted share.

As Carl mentioned in his introduction, our non-GAAP adjusted earnings per share was above our first quarter guidance. Gross profit margin for the first quarter was 29.5% compared with 29.9% in the first quarter of 2011. The decline on higher revenue was due to the diluted effect of Bauer acquisition.

First quarter operating expenses as a percentage of sales was 18.2% versus 17.5% a year ago. The increase was also driven by the effect of the Bauer acquisition. Income from operations increased 8% to $21.6 million. Our tax rate for the quarter was 32.8%. We expect our tax rate for the full year to be approximately 31% to 33%.

Slide 5 is a reconciliation that shows how we get from a reported net income to the non-GAAP adjusted net income number, and how we get from a 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. During the first quarter, we repurchased $3 million in debt related to our San Marcos, Texas facility and almost a variable rate revenue bonds. Our book equity is approximately $225 million and we reported a strong cash balance of almost $80 million at the end of the quarter.

Slide 7 reviews our working capital performance. Working capital increased in the quarter sequentially by nearly 15% to $190 million, as sales increased 12% sequentially. Receivables were up during the quarter due to higher sales levels and the timing of collections, as we received significant cash payments after the close of the first quarter. Inventory was up less than 1% since year-end. We expect that working capital would decrease over the next few quarters. Capital investments during the quarter totaled $8.2 million, and depreciation and amortization was $6.6 million.

We continue to make progress in our company-wide implementation of SAP, and have now over 700 users on the system. We completed the transition of Bauer's SAP system from its former parent [through Altra] during the quarter. Next month, we've planned to go live with two locations in the United Kingdom. And this fall, we expect to go live on SAP at additional sites in North America.

And let's turn now to our guidance, see slide number 8. On our fourth quarter conference call, we had expected that our second quarter would be the strongest of the year. However, based on our outperformance in Q1 and what we're seeing in our end markets currently, we now expect that Q2 results to be similar to those in the first quarter. We're also maintaining our guidance for the full-year.

We continue to expect 2012 to be a record year for both sales and non-GAAP adjusted EPS. We anticipate full-year sales in the range of $740 million to $760 million, and non-GAAP adjusted EPS in the range of $1.50 to $1.60. As I mentioned, our tax rate for the full year should be approximately 31% to 33% before discrete items.

As we discussed previously, our adjusted EPS for the year includes a few accelerated investments. These include an additional cost for the implementation of SAP, which would account -- which will amount to $2.5 million to $5 million for the year and non-capitalized start-up costs for our new China facility of $1 million.

Capital expenditures should be in the range of $30 million to $35 million for the year, including $10 million for investments into the China facility. 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 9, and I'll leave you with a few key thoughts. First, we're very pleased with our performance this quarter, as we exceeded both the top and bottom lines of our guidance. Based on what we're seeing in our markets, we expect Q2 results to be very similar to our performance in Q1 and we are maintaining our guidance for the full year.

Second, we continue to make progress on our organic growth strategy. We're winning contracts for new programs across our end markets. We believe that we are taking market share. Our product development efforts are focused on targeting key markets and are in direct alignment with our customers' needs. The success that we're beginning to see in this area is the direct result of the investments we made in 2010 and 2011.

An important component of our organic growth strategy is to expand our penetration into emerging economies.

During the quarter, we [broke ground] on our new China facility that will serve the domestic Chinese steel and wind power markets. We are on track to ship the initial products from that plant by the end of the year.

Third, we see significant opportunities to complement our organic growth with strategic complementary acquisitions. We have a robust pipeline and a solid balance sheet to support our acquisition strategy.

Fourth, we continue to be very pleased with the Bauer acquisition. In April, we completed the transition of Bauer's SAP system from its prior parent, which concluded the integration activity. And we have now switched our focus to the profit improvement plan and sales synergies.

Customer response has been very enthusiastic to the launch of the new gear drive product line from our Boston Gear subsidiary and Bauer in North America, available through the sales forces of both companies.

The sale synergies that we anticipated when we purchased Bauer are benefiting Altra and we continue to expect that Bauer's bottom line performance will improve throughout the year.

And finally, we plan to continue to enhance our operational performance, driven by model value streams at every location. We are maintaining a sharp focus on cost management to [maintain] the most leverage out of every incremental sales dollar.

We look forward to continuing to execute on our growth strategy as we proceed through 2012, and we expect to turn in a record financial results for this year.

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

Thank you. (Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

Hey, good morning, guys.

Good morning, Jeff.

Just on -- you mentioned weakness in Europe. Can you just talk about Bauer? Can you hit your kind of margin targets, cost savings targets on Bauer, and kind of this more mixed European environment or do you have this -- does that step back? And just talk about kind of the cadence of some of those realignment savings or acquisition integration savings coming in through the year?

Yes, sure. We saw probably a weaker than expected economy across Europe, and Germany is probably still the strongest country. UK and France are probably little bit weaker than we expected. And that was for all of our businesses. And Bauer, probably bucked the trend a little bit. I think their business might have been a little more stable as some of their sales are for export and in Russia and China and in the US.

I think there are a couple of industries, the textile and printing business that will particularly reach for Bauer, but some of their other industries that they serve were pretty good. Steel, that was pretty solid.

From a profit standpoint. And what we said is we believe that Bauer would be in the order of 7% by the end of this year on a operating income line, and then we will get it up to our Company average of around 12% operating income by the end of 2014. And they're right on track with that. I'm really excited to have the integration activities completed with now getting off of the prior parent SAP system and completely independent there, and that team now is completely focused on the profit improvement and growth strategies that we're putting in place.

Okay. So the margins kind of build through the year though in Bauer towards (multiple speakers)?

Yes.

Okay. And then also can you give me a sense of on SAP, what the -- is spend kind of spread throughout the year or more front-half loaded or --?

The spend is fairly even through the year. But changes for the quarter is how much of that spend we actually are able to capitalize, how much of that run through the P&L. There can be some variations quarter-to-quarter. They are not significant, but could swing $400,000 one way or the other quarter-by-quarter.

Okay. And then you mentioned energy and mining has been strong. I mean, are you seeing any signs in the order book or otherwise of softening there just around as we transition from gas to oil in North America, drilling -- land drilling and with some of the weaker coal markets?

Surprising on the drilling side, we expected when the gas reserves are getting [fuller than the] switching [of the oil] that we would see some decline, but it's remained very robust. And on the mining side, I think the one place that I mentioned in the discussion was that one particular customer is consolidating inventory from some of their repair facilities and trying to better utilize their inventory. So we're going to see -- we saw some in the first quarter and we'll see some in the second quarter, little bit demand lag from them, but their business is still extremely strong.

Okay, great. And then just to clarify. Your comment about 1Q -- or 2Q is more a function of 1Q being better, or do you have spots where you're seeing maybe weaker trends than you would have thought?

Yes, I think Q1 was a little bit better than we thought, we beat our guidance, and based on what's going on in Europe and on some of the other end markets, we just don't see the reason to be overly optimistic for Q2. And our order book right now supports what we are -- very similar quarter in Q2 compared to Q1.

Okay. Thanks guys.

Yes. Thanks, Jeff.

Thank you. Andrew Obin, Bank of America-Merrill Lynch.

Hi, guys. How are you?

Good (multiple speakers).

I'm calling on behalf of on Anna, she's out of the office today.

Yes. Good to talk to you.

Good to talk to you guys. Just can you give us a little bit more detail, Jeff did a very good job asking a lot of questions. But can you give us a little bit more detail on book-to-bill by region, if I missed that?

We don't typically give that kind of granularity on book-to-bill. And what we can say is that first quarter growth rate in North America was about 7%. The core Altra business saw year-over-year decline in Europe of about 4%, and the bookings trends are very similar to that first quarter performance.

And just to follow-up on Jeff's questions regarding second quarter. I mean, if I look at the model, most of the year's second quarter is a little bit stronger than Q1. So just to make sure, you talked about SAP expensing some of the cost. Is any of sort of the flat quarter -- flat sequential EPS, any of that related to [some period] costs if you're going to take that are sort of very company specific, or as I said, is it just sort of your conservatism?

Well I think first quarter and second quarter topline performance can vary. Second quarter can be stronger than the first quarter, but we've also had years, I believe where it was the other way around. [Just very close].

Absolutely.

They're very close to each other and that would indicate no reason to see a change from the third quarter performance, because of very similar topline performance.

But it's not -- but it's not like you guys have been, I'm just trying to understand if there are sort of company-specific decisions about expensing that will impact second quarter disproportion for this year relative to other years?

No, no.

Thank you very much. (multiple speakers).

The asset quality is, I mean we pointed out that we're -- our expenses through the P&L for the SAP implementation this year will be higher than last year, since we opened a second implementation track in Europe. So [recall the] implementing in parallel in US and in Europe, and that that caused an incremental increase over last year. And then we also pointed out the start-up cost for our China facility and there will be an incremental increase as well for the full year [about $750,000]. Last year we spent about $250,000 -- $300,000 and this year we're expecting to incur a start-up costs of about $1 million.

Okay, terrific. Thank you (multiple speakers).

Yes. Thanks, Andrew.

Thank you. Zach Larkin, Stephens Inc.

Good morning, gentlemen. Congrats on the quarter, and thanks for taking my call. First of, I wondered if you could talk through -- you mentioned in the prepared remarks about market share gains and your expectations that you're able to continue doing that. Could you maybe give a little bit more color on where you think the opportunities might be the strongest to come in, and in penetrating -- and continue to take market share as we move through 2012?

Yes, it's really pretty broad, I mean, it's a key strategic initiative for all of our businesses. But in our flexible couplings business has seen some really nice growth this year. And we -- in our electric clutch brake business, we've had some very good programs that are the result of some market share gains, but also some changeovers of models from our end customers.

I mentioned the elevator business and the new traction drive that some of our elevator customers have been developing. So it's kind of a mix of both. New product development at our customer side and then also market share gains where we're trying to kind of come up with an enhanced product that displaces our competitor.

Thank you very much for that. Then wondered if we could talk maybe a little bit more about China in your commentary on that market. Obviously, there's some concern in the industrial markets over there and how broad they will be. You mentioned energy, renewables and some of the others. But could you give us maybe a little bit more color on what you're seeing over there specifically and how you're thinking about China and in particular in Asia, as we move through 2012?

Yes, I mean what we've seen is that it slowed a little bit, but the growth rate there is still -- it's still in the mid single digits, which is still significantly higher than many other regions in the world. So even though it's not as good as it was, it's still pretty darn good.

I think when you look at it and when we're making our investments, we're looking at the long-term growth opportunities there and not just necessarily the next one or two years. And I think that the markets we're going after in mining and energy are some markets that will long-term be very good [plays] there.

Okay. Thank you very much. Congrats, again, on the quarter.

Okay, thanks.

Thank you. Bhupender Bohra, Jefferies & Company.

Hey, good morning, guys. How are you?

Thanks, good morning.

The first question on the similar on China facility, I just wanted to -- if you guys can update us on what's the capacity for that facility and the revenue potential over the long-term?

Yes. So the facility, we should get it up and running by the end of this year, and we think in the next three to four years, we should be doing in the order of $20 million to $25 million in revenues out of that facility. And we also have an option to lease property. So we're leasing the property to about a 50 year lease, so it's a long-term lease (inaudible).

And then we have an option to lease property right next door to the facility we're currently building, so we can expand if we need to. And then our -- the facility we have now and we -- when we reach that facility, we filled up less than half of it and over a two to three year period we filled it up. So we are confident that that we will be able to expand into the facility we're currently building and are very hopeful that we can grow the business [specifically] to take on that other lease property.

(inaudible) there's three opportunities that we see in China for us. The first one is to grow the Bauer Gear Motor business in China, and can grow that substantially. Bauer now has an assembly capability in China. We hope to add in the future to the assembly capabilities. And the second is, we will follow a large customer of us in the wind energy industry and support them in their needs in China. And our third opportunity that we see is related to the steel industry and selling couplings into that market.

Okay. Thanks. And the second question would be on, you guys actually maintained your guidance, so I just wanted to get a sense of how Europe is playing in your guidance for the rest of the year? Thanks.

Our guidance assumes that for the remainder of the year we see similar trends in Europe. As Carl described [then] very mixed by geography and very mixed by end market also. So we're expecting Europe to be slightly down year-over-year, but we're also (inaudible) continued strength in North America.

Any particular end markets over there like which are fairing worst than your internal expectation?

Yes, I think I mentioned that the textile industry and the printing industry, the two in particular that have performed worse than we had expected when we look at it (inaudible) last summer.

All right. Thanks a lot guys.

Thank you.

Thank you.

Thank you. (Operator Instructions). Mike Halloran, Robert W. Baird.

Hi, guys. So on the margin line, could you just give me a sense for what margins would have looked like, if you strip out some of the acquisition impact and --?

Yes, gross profit would have been, on the core Altra business, 30%. I think our operating income would have been in the 13% -- just slightly higher than 13% range. Yes.

Okay. And so then if I think about pressures versus last year outside of acquisitions, are those centered mostly on the ERP side, or is there anything else there that you would point to?

And yes, the one thing want to point to is that in the first quarter, we incurred expenses at Bauer, so the final step [would be SAP carve out]. The deal we struck with the seller was that the first two phases of the carve out we're paid by seller, which were the most expensive pieces of this carve out, but the last phase is to actually take our SAP instance out of their hosting environment and bringing into our owner and hosting environment and putting it on our (inaudible). And so we incurred one-time expenses really through that in the first quarter.

And then just on the balance sheet capacity side. Where would you guys put the balance sheet capacity at now? And then talk a little bit about valuations from an M&A perspective?

So as of last slide that we had almost $90 million in cash. As you know, we have a revolving credit facility of $65 million, probably $50 million available under that line. That makes up our capacity. We always have the ability to go out and look for [next door financing] as well. So we are -- and are on the -- on valuation, we see everything from six to I'd say nine times in terms of EBITDA multiple. I think valuations have moderated a little bit from like a year ago. Yes, I'd agree with that. I think that we had some -- and I think it depends on the deal size. [A lot there seem to be] garnering up a higher multiple than some of the smaller deals.

Appreciate the time.

Thank you.

Thanks, Mike.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Mr. Christenson for closing comments.

Okay. And I would just like to thank everybody for joining us this morning and we look forward to speaking you -- speaking to you again on our second quarter call. Thank you, and have a good weekend.

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