Altra Industrial Motion Corp (AIMC) 2012 Q2 法說會逐字稿

Greetings and welcome to the Altra Industrial Motion second-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, Mr. David Calusdian of Sharon Merrill Associates. Thank you, Mr. Calusdian, you may begin.

Thank you, Jesse. 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 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.

On today's call management will refer to non-GAAP adjusted diluted earnings per share and non-GAAP adjusted net income. These metrics exclude acquisition-related costs, discrete tax items, amortization of inventory, fair value adjustments, premium to be paid on the redemption of debt, 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 Q2 2012 financial results press release and on slide five, both posted on Altra's website.

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

Thank you, David. Please turn to slide two.

We performed very well in the second quarter from a top- and bottom-line perspective and we achieved a number of milestones that are helping to build value in Altra. We grew revenue by 14% this quarter to $187.9 million. Sales, excluding acquisitions, increased by 3% as we had Bauer in our results for about a month in Q2 a year ago.

Solid demand trends in most of our end markets helped to drive the increase in sales. From a geographic perspective, Europe was softer than we had expected it would be and partially offset the growth that we saw in North America and Asia.

To help offset the weakness and uncertainty in Europe we are accelerating our cost reduction and productivity improvement plan at Bauer and some of our other European operations. These actions include reducing overhead, reorganizing the sales force, consolidating production, and reducing purchase component costs.

We have already completed some of these actions and we started to see the initial benefits in June. Some of the initiatives are longer term in nature and will continue into the beginning of next year. I would like to reiterate that we see good things coming out of Bauer and we are making sure that we will get optimum performance from the unit for the years to come.

Looking closer at the bottom line, we increased operating income for the quarter by 11% and reported $0.42 in non-GAAP adjusted earnings per share. Although sales were down 2.3% sequentially, we still grew gross profit by 30 basis points. Before we turn to review our markets, I would like to note a few other accomplishments for the quarter.

First, we initiated a quarterly dividend of $0.05 per share for the second quarter 2012. This reflects our strong financial performance, as well as the confidence we have in our ability to return value to shareholders while continuing to invest in organic and acquisition growth. Earlier this week our Board of Directors declared a dividend of $0.05 per share for the third quarter of 2012, our second consecutive quarterly dividend.

We also took steps to improve the balance sheet in Q2 when we announced our intention to redeem a portion of our remaining outstanding 8 1/8% senior secured notes on July 31, 2012, with an aggregate principal amount of $21 million. Christian will provide more detail on our balance sheet later in the call, but it remains strong and we plan to use it to support our long-term organic and acquisition growth strategies.

Finally, we acquired a new growth platform in South America with the purchase of 85% of privately held Lamiflex do Brasil Equipamentos Industriais. Lamiflex is a well-known supplier of high-quality coupling products to the Brazilian markets. Expanding our reach in emerging geographies is a key component of our strategic plan and the acquisition of Lamiflex provides us with an important growth platform for several Altra businesses in Brazil.

At the same time, we can help accelerate Lamiflex's growth initiatives by contributing Altra's resources. With those as the highlights for the quarter, I will provide some insight into the top-line growth drivers and what we are seeing in our end markets.

Please turn to slide three for a discussion of our end markets. I will start with our distribution channel, which is predominately comprised of sales of aftermarket parts and original equipment parts to small OEMs.

Overall distribution sales remain at a relatively strong level and distributor inventories are stable. We are watching carefully to see if weakness in the overall industrial economy is affecting demand in the distributor channel.

Turning to turf and garden, we continue to expect that this market will be nearly as strong as it was in 2011, which was an extremely good year. As we expected, Q2 sales this year were up over sales last year after a much softer Q1. We believe that after reducing inventory in Q1 customers are now building at the same rate as our sales.

We expect to continue to take share and outperform the market in 2012. Ag also rebounded in Q2 with a soft Q1 as a few very successful programs lead to greater demand.

Based on our performance in the first half of the year, we now expect that sales in this market will be up modestly over last year. We have been working on some excellent opportunities in this market and shipments for these new programs will ramp up through the year. We will then see meaningful contribution from these programs in 2013 and 2014.

We also recorded a good quarter in the transportation market after a weak Q1. On our last call we had mentioned that we expanded capacity to fulfill orders from a major city transit system, and that contributed to our strong sales this quarter. Automotive order rates also picked up compared with soft demand in Q4 and Q1 after customer-completed inventory adjustments.

The materials handling market was soft in Q2, primarily due to weak European economy. Our products are primarily used in equipment such as conveyors, forklifts, elevators, cranes, and hoists, and are mostly sold to European OEMs.

Now let's discuss our later cycle markets. The energy market is still relatively strong and we expect that sales will approximate those in 2011. While rig counts continue to remain strong, we expect that with the current price of oil and gas drilling activity will slow.

We are working on several new products in order to take share in the energy market. Long term this will be a very good market for us.

The power generation segment of the energy market remains very strong and we expect that trend to continue. The price of natural gas and the focus on it as a relatively abundant and safe energy source is driving the upgrade of coal-driven power stations to natural gas plants. With the world's population continuing to grow we expect that demand in the power generation market will be robust for quite some time.

We are also working on growing our presence in the tidal, wind, and solar segments of the market. During the quarter we received a follow-on order for a Bauer product that is going to be used in a solar concentrator.

Turning to mining, activity is down from the peak but is still strong and we expect this market to remain strong for the foreseeable future. While sales are up year over year driven by very good activity in processing equipment, one of our major mining customers continued to have some inventory adjustments that dampened growth in the quarter. We expect this destocking to have a similar offsetting effect on mining sales in the second half of the year.

Aerospace and defense was up considerably in the quarter, although this is a small part of our business. Both aerospace and land-based defense vehicles drove the growth this quarter.

With that I will turn the call over to Christian and then I will be back for a wrap-up.

Thank you, Carl, and good morning, everyone. Please turn to slide four of our unaudited second-quarter 2012 results.

Net sales increased 14% year over year. Net of acquisitions our growth rate was 3% overall with North American growing 8%, Europe declining 14%, and the rest of the world up 10%. Foreign exchange rates had a negative impact of approximately 200 basis points on the second-quarter top line when we compare that to the prior-year second quarter. Price was scalable by approximately 215 basis points.

We were pleased that our gross profit margin for the second quarter was 29.8% compared with 29.3% in the second quarter of 2011. Second-quarter operating expenses as a percentage of sales was 18.5% versus 17.7% a year ago, driven by the effect of the Bauer acquisition. Second-quarter income from operations increased 11% to $21.2 million.

Second-quarter net income was $10.6 million, or $0.40 per diluted share, and includes $200,000 in acquisition-related costs and $630,000 of expenses related to the announced redemption of debt which was partially offset by the $300,000 tax effect on those items. Second-quarter 2011 net income included $900,000 in acquisition costs and $600,000 for the amortization of inventory fair value adjustments, partially offset by the $500,000 tax effect of those items.

Excluding these items, non-GAAP adjusted net income in Q2 2012 increased 11.9% to $11.2 million, or $0.42 per diluted share.

We recorded a lower tax rate of 21.2%, primarily due to the settlement of a matter with the state of New York in which the Company was fully indemnified. Upon completion of the settlement the Company released its reserve for tax, interest, and penalties related to this unrecognized tax benefit. This tax benefit was entirely offset by the expense associated with the write-off of the indemnification receivable which was recorded as other non-operating expenses in our income statement.

If you net these two items, our tax rate would have been 30.5%. We expect our tax rate for the full year to be approximately 32% before discrete items.

Slide five is a reconciliation that shows how we get from the 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 six. We continue to place an impetus on maintaining a solid balance sheet and, as Carl mentioned, we have announced our intention to redeem a portion of our outstanding 8 1/8% notes on July 31, 2012, in an aggregate principal amount of $21 million [at 103]. This will reduce the outstanding principle amount to $177 million and will reduce our interest expense by approximately $1.6 million annually, or $0.04 a share, and $700,000 for the remainder of 2012.

Our book equity is approximately $226 million. At the end of the quarter we reported a strong cash balance of $95.2 million at the end of the quarter, which was the result of our efforts to reduce working capital which helped us to achieve an impressive $24.3 million in operating cash flow for the year-to-date period.

Slide seven reviews our working capital performance. Working capital decreased in the quarter sequentially by nearly 6% to just under $180 million and sales decreased 2.3% sequentially. Receivables were down during the quarter due to the slightly lower sequential sales number and inventory was down by about 5% since the end of the first quarter as a result of an improvement in our inventory turns.

Capital investments during the quarter totaled $8.7 million and depreciation and amortization was $6.6 million. We continue to make progress in our company-wide implementation of SAP as two European businesses went live during the quarter and we now have more than 700 users on the system. We (inaudible) with our CRM module during the third quarter and we will be completing the first phase of our business intelligence system.

Let's now turn to our guidance. Please see slide number eight.

As Carl mentioned, we are seeing strength across many of our end markets and continue to take market share. However, due to the growing uncertainty of the economic outlook around the globe, especially in Europe, and the expected negative effect of foreign currency, we are revising our guidance for the remainder of the year. We now anticipate full-year sales in the range of $720 million to $735 million and non-GAAP adjusted EPS in the range of $1.35 to $1.45.

As I mentioned, our tax rate for the full year will be approximately 32% before discrete items.

As we've previously discussed with you, our adjusted EPS for the year includes a few accelerated investments. These include additional costs for the implementation of SAP, which will amount to $4.5 million to $5 million for the year, and non-capitalizable start up costs for our new China facility of approximately $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. Depreciation and amortization expected to be in the range of $25 million to $28 million.

With that I will turn the discussion back to Carl.

Thank you, Christian. Please turn to slide nine for our summary.

First, we reported a very solid quarter achieving 14% growth in sales, 3% excluding acquisitions, while increasing our operating income by 11%. We also initiated our first-ever dividend and declared our second dividend and announced our intention to redeem a portion of our remaining 8 1/8% notes.

Second, we also continue to make progress on our organic growth strategy. We performed very well in most of our end markets and that was the result, not only of demand trends, but of our successful product development efforts focused on targeting key markets and in direct alignment with our customers' needs.

Third, acquisitions remain an important component of our growth strategy. During the quarter we acquired a new growth platform in South America with the purchase of 85% of Lamiflex. Fourth, we are accelerating our European profit improvement plan because of the lower economic activity in that region. Our enthusiasm for our long-term prospects in Europe for Bauer and Altra remained unabated.

Finally, we look forward to continuing to execute on our growth strategy as we proceed through 2012.

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

(Operator Instructions) Zach Larkin, Stephens Inc.

Good morning, gentlemen. First off, Carl, I wondered if you could maybe talk about order patterns. Are you seeing with the changes in the economic outlook, particularly in Europe, any changes in order patterns versus what you have seen in prior times when we have had similar types of macroeconomic malaise?

Yes, I am not sure we had experienced what we are seeing in Europe right now before. But the order patterns -- the incoming order rates are supporting our sales level and support the number that we gave for our guidance. It's a little bit lumpy, so one week we will have very good orders and another week they will be softer, so I sleep a little bit less at night.

But it has certainly been pretty solid here in North America. Asia has been pretty good and Europe, as I have mentioned before, has been a little bit weaker than we expected. And I think the economic outlook there is certainly uncertain, if not a little bit worse than it was.

Okay, thanks. Then also you have talked about wind, solar, some of these new renewable opportunities. Have you been looking at kind of the potential for additional design-ins or do you have any commentary on what the potential might be in that market to get designed into additional platforms?

We look at some of that very opportunistically and we really look at it on a project-by-project basis. With the PTC expiring at the end of the year a lot of question marks about how much, what the activity will be there next year. But we really look at it very opportunistically and project-by-project basis.

We also look at it long term. So tidal energy we think is going to be -- has some very good long-term prospects and it is really just in its infancy. So we have got to make an investment in that market and try to get designed into some projects early on so we are in there early.

Okay, thanks very much.

Jeff Hammond, KeyBanc Capital Markets.

This is actually [Chris Hakora] filling in for a Jeff Hammond. Thanks for taking my questions.

No problem.

So first I was hoping we could just talk about M&A and then kind of the acquisition pipeline and appetite for another deal, given the recent announcement around Lamiflex.

Yes, Lamiflex was a relatively small transaction. We really like it; we are very excited about the growth opportunities in Brazil. And we think it is not just for our couplings business, but a couple of our other businesses we can use that product family [over there].

In general I think the M&A activity, from what we are seeing, has slowed significantly and the numbers of transactions have been reduced. We are still seeing some opportunities. Our appetite for acquisitions is -- and we still have cash and so a bolt-on acquisition we would still be willing to do.

But, as always, it has got to be the right company in the right markets. We would still have an appetite to do a deal now, although with the economic uncertainty probably a little bit less than it was nine, 12 months ago.

Okay, great. Then just kind of jumping over to Bauer. Does any of the weakness seen in Europe kind of change how you are thinking about the margin progression in that business?

Yes, definitely. We had a plan laid out that didn't have the assumption that the economy there was going to do what it did in the last 12 months. So that is certainly delayed, but we are extremely pleased and optimistic about the activities that they are taking and the profit improvement plan.

We are very pleased with that business. We think it is going to be a great platform for us in the future, just we are not going to get the operating leverage on the sales growth that we had hoped. But we are still going to get the cost improvements from consolidating some manufacturing given the purchase component cost reductions, the restructuring that we are doing now. We are still very, very optimistic on reaching our targets ultimately.

Okay, great. Thanks, guys.

Thank you.

Mike Halloran, Robert W. Baird & Co.

So on the guidance range could you just parse out the buckets of what drove the downside? It certainly seems much more top-line driven than anything, but how much of that is FX, how much of that is Europe slow down? Are there any other factors, any slowing in other regions you are seeing that are impacting that range?

(inaudible) primarily driven by the trends we see in Europe and by the FX impact. As I mentioned, Europe was down 14% in top line in the second quarter, half of that was currently, so about 7% down just based on currency and 7% down on volume, so to speak. That is worse than what we had expected while North America actually has done slightly better than we expected and Asia was right where we thought it was going to be.

As we look forward, we don't see a short-term improvement in the euro exchange rate. We see that the situation in Germany seems to be getting slightly worse, and with the [PMI being below 50] and business confidence slipping and continues to slip. So it is a combination of FX as well as I think [it's more the] deterioration in Europe that is driving the (inaudible) down for Europe.

For North America we are still very optimistic that we can maintain overall the growth rates that we have seen in the first half of the year. And we don't, given our small base in China and Asia Pacific, expect a slow down there to have a major impact on us.

So when you think about it it certainly sounds like the guidance range for North America and Asia assumes more or less stability from here from what the current run rate looks like. Is that the same on the Europe side, or are you guys still expecting a little bit more deterioration from where things stand now?

We are expecting a slight further deterioration in Europe as countries like Germany and France and the UK; [I think that is your] larger impact.

The third-party economic reports that we get, Mike, for Europe indicate that there is going to be continued, a little bit more decline there before it starts to get better.

It is just good to know that is built in to a certain extent. Then if you strip out the ERP expenses in the quarter and some of the other one-time stuff that might be in there, what kind of incrementals are you guys looking at on the core business right now?

So we exclude Bauer and we actually did extremely well in the quarter. I think incremental sales were around $3 million and our operating income for the quarter actually was up [$2 million]. So the leverage this quarter particularly has been extremely good for us, and that is mainly due to some [nice] improvements that we see (inaudible) last year and then we started to come back this year.

And our cost discipline. I think Carl has been pushing that throughout the organization with this great uncertainty to be very disciplined about discretionary spend at this point.

Makes sense. That is promising. Then on a couple of one-time costs that you guys are seeing this year that you laid out on that outlook side, the $4.5 million to $5 million on SAP costs, I am assuming that the expectations for this point is that for 2013 the costs are relatively the same.

Yes, should be flat. We don't see an acceleration or a deceleration in that as we have -- two (inaudible) in international and will just continued through the end of 2013 and then we should be done.

Okay, that is what I thought. Then on the startup costs associated with the China facility, any thoughts on how you think those cost trend on a year over year once we hit 2013?

We are planning to produce the first parts towards the end of this year, so typically you will see negative operating performance for the first six to nine months. But I think the number should go down slightly maybe, I can give you a number. You will probably see $0.5 million of negative impact next year, which will be -- yes, instead of $1 million probably at $0.5 million at the beginning.

Okay, makes sense. Appreciate the time.

(Operator Instructions) Bhupender Bohra, Jefferies & Company.

Good morning, guys. The first question I just wanted to -- if you can run down for us and the SAP implementation, like just an update on how many went live this quarter and how many remain.

We took (inaudible) in the UK this quarter. We are planning to take another five sites live in this fall, and that would leave then for 2013 eight or nine sites. So we are, at this point, a little bit more than half way through it. By the end of the year we will be down about two-thirds.

Okay. The next question, just moving on to your business, if you can just give us how you think about in the second half your early cycle business and your late cycle business. We have heard early cycle businesses are showing some slowdown here, especially in Europe. I just wanted to hear your thoughts on both the businesses.

For think what we are seeing is maybe a moderation in the growth in the early cycle businesses. And so our industrial distribution business we saw very good growth last year and the early part of this year. I think part of it is due to tougher comparables; we expect to see slightly lower growth there.

And then the later cycle businesses I think it is very choppy. So when we look at the energy business, as an example, some customers seem to be doing very well and projecting good things for the rest of the year and some a little different attitude or outlook. I think it is the same thing in mining, which the big mining OEMs in terms of the installations out there I think again it is choppy.

So there is just a lot of uncertainty right now as to where things are going and that is why we are being cautious with our guidance.

Okay. Now in the North American business you said it was above your expectation. Can you just give us some more color on that, like what actually drove what end markets or anything we should be thinking about?

In the last quarter our aerospace and agricultural businesses were very, very strong, transportation was strong. Those were the ones that were particularly strong, but mining and metals were also pretty good.

And last question, on Lamiflex you said it was a new growth platform. Should we think about -- how should we think about this as, like, two years down the line do you plan to grow this platform, especially in Brazil or beyond Brazil?

So certainly in Brazil then our first (inaudible) couplings fits into our flexible couplings platform and the first year we are going to be focused on expanding the coupling range that we sell into Brazil. Then later in that first 12 months and into the second year we plan to bring some additional product range into the heavy-duty clutch brakes; good mining activity and energy. But we plan to bring some other product ranges into there in the Brazilian market.

We are also hopeful that with some of the trade agreements that Brazil has with some other South American companies that we can use it as a platform to grow in some other countries.

Okay. Thanks a lot, guys.

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

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

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