Altra Industrial Motion Corp (AIMC) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Altra Holding Third Quarter 2012 Financial Results Conference Call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you, Dan. 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 does not intend to update or alter its forward-looking statements that are 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 income from operations, non-GAAP adjusted net income, and non-GAAP free cash flow.

These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures 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 Q3 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 two.

We are pleased with the results for the third quarter. We performed in line with our expectations on both the top and bottom lines.

Sales for the quarter were down 1.9% from the same quarter last year, primarily due to weakness in Europe and exchange rate changes, which were partially offset by growth in North America and Asia.

The operating results held up as a result of implementing a cost reduction and productivity improvement plan that we discussed on our last call.

On a 1.9% year-over-year decline in sales, we maintained our gross profit of 29.8% and operating income margin of 10.5%. Non-GAAP adjusted net income was $0.34 per diluted share.

I'm also very pleased with the strong free cash flow of $21.9 million for the quarter and that we're able to announce that the Board of Directors approved a 20% increase in our quarterly dividend payment of $0.06 per share for the fourth quarter.

These [rapid] trends, not surprisingly, were similar to last quarter, the softness in Europe offsetting growth in North America and Asia. Our near-term outlook for Europe is for the end markets we serve to continue to be relatively weak. As a result, we are initiating further cost-reduction initiatives that will include headcount reductions, reduction in working hours, relocating some manufacturing, and best-cost sourcing. The results of these initiatives have been excellent, and our managers are taking actions that are appropriate for the current level of business.

Before we turn to the review of our end markets, I'd like to note a couple accomplishments relative to our long-term growth strategy during the quarter.

During last quarter's conference call, we announced a new growth platform in South America with the purchase of 85% of privately held Lamiflex, a well-known supplier of high-quality coupling products to the Brazilian market.

Lamiflex performed better than expected in the quarter, and we continue to work on the integration. Lamiflex is an example of our strategy to expand our reach in emerging geographies, and it provides us with an excellent, important growth platform for several Altra businesses in Brazil.

In addition, Asia is another geographic region where we need to expand. The construction of our new facility in China is essentially complete, and equipment is beginning to arrive at the plant. This plant will manufacture products for domestic Chinese steel and power generation markets. The project is on schedule and on budget, and we continue to expect that we'll be in start-up production mode in the current fourth quarter.

Now, please go to slide three, and I'll talk about some of our specific end markets.

While the majority of end markets continued to perform well during the quarter, growth is flattening and a few end markets are declining.

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 are relatively strong and distributor inventories are stable. However, growth in the distribution channel has slowed somewhat as year-over-year comparisons are more difficult and the industrial economy in North America is flattening.

Turning to Turf and Garden, it looks like this market will be slightly stronger than it was in 2011, which was an excellent year. In fact, we expect 2012 to be our second-best year ever in this market. This was due to both the strong demand environment, as well as share gains as a result of our product development efforts.

Based on comments from the Outdoor Power Equipment Institute, as well as from our customers, we expect that 2013 will be similar to 2012.

Ag was also very strong in the third quarter, up dramatically over Q3 2011 as a result of new programs. We are significantly outpacing the market, which is up in the low single digits over last year. Looking at 2013 and beyond, we expect to build on our success in the strategic market for Altra a new program that should start making good contributions to revenue in the second quarter of 2013 and continues through 2014.

In Transportation, we had mixed results in Q3. The automotive platforms that Altra is on are not performing as well as the overall auto industry, so we experienced only modest growth in auto, but we're very excited about opportunities in the transit system sector. You may recall the success we've had with a major city transit system that contributed to strong sales in Q2. We're leveraging that success in this market and are bidding on projects in other cities that could result in good sales activity in 2013 and 2014.

As we mentioned last quarter, we have a significant European exposure in the materials handling market, and that continued to have a negative effect on sales. Our products are primarily used in equipment such as conveyors, forklifts, elevators, and cranes and hoists. The one bright spot was in cranes, where we saw improving sales activity versus the prior quarter.

Now, let's discuss our later cycle market. The energy market continues to be about flat with last year but at very good activity levels. Although rig counts are down overall, high horsepower rigs are still being built, which is a positive near-term sign for Altra.

Energy is a very good long-term market for us. The power generation segment of the energy market remains very strong. The end market demand is robust, driven by conversion to natural gas power generation, and we are taking share in this growth market. We expect these trends to continue for the foreseeable future and that the power generation market will be a long-term growth driver for Altra.

While the alternative energy market is expected to decline significantly in 2013 due to the exploration of the Federal Renewable Energy Production tax credit, it is not expected to have a significant impact on our results since it is a relatively small contributor to our sales.

We continue to work on specific projects, and we received a very nice order for a large (inaudible) installation during the quarter.

Turning to mining, weaker global demand for coal, lower commodity prices, and increasing regulations have had a negative impact on sales in this market. The minerals mining segment is faring better than the coal segment, but growth is also moderated in this area. Looking ahead, our customers are predicting that demand for their equipment will be lower in 2013.

Once again, sales in Aerospace and Defense were up significantly in the quarter, greatly outpacing market growth. Even with the current challenges in the defense industry, the projects we are quoting seem to be viable. In the third quarter, we received an order for delivery of a product for a ship gun system that we've discussed on prior calls. We're also seeing good sales activity on the aerospace side, but we won an order to provide cargo rollers for major air freight shipping companies.

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 four for our unaudited third quarter 2012 results.

Net sales declined 1.9% year over year. Notably, currency translations negatively impacted revenues by 340 basis points [and are] actually based on a weaker euro versus last year.

The Lamiflex acquisition, which we announced on July 12, added 80 basis points to the top line. Price was scalable by approximately 160 basis points.

North American revenues improved 4%, while European revenues declined 13% and Asia-Pacific sales increased by 6%. Even with the slight decline in sales, we were able to maintain a gross profit margin of 29.8% and an operating income margin of 10.5%, a slight higher year-over-year SAP implementation cost.

Third quarter net income was $8.5 million, or $0.32 per diluted share, and includes $32,000 in acquisition expenses, $122,000 of amortization of inventory per value adjustment, and $660,000 of expenses related to elimination of redeemed debt, partially offset by [$240,000] tax effect of those items.

Third quarter 2011 net income included $652,000 in acquisition costs, $535,000 in premium paid on redeemed debt, offset by $383,000 tax effect on those items and $3.6 million in discrete tax benefits. Excluding these items, non-GAAP adjusted net income in Q3 2012 was $0.34 per diluted share.

We recorded a tax rate of 25% in the third quarter. The lower rate was driven by discrete tax items, including the effect of lower tax rates in certain jurisdictions.

Slide five is a reconciliation of our non-GAAP measures.

Please turn to slide six.

Our book equity has grown to approximately [$230 million], and we reported a strong cash balance of $88.1 million at the end of the quarter. The cash balance at this (inaudible) currently $97 million. We are especially pleased with our cash balance given that we redeemed $21 million in bonds during the quarter.

Our operating cash flow for the quarter was exceptionally strong at over $30 million.

Slide seven reviews our working capital performance. Working capital decreased in the quarter sequentially by 3% to $177 million.

Capital investments during the quarter totaled $8.3 million, and depreciation and amortization was $6.8 million.

We continue to make progress in our company-wide implementation of SAP. Three more sites went live during the quarter, and the next two sites will go live in the next few weeks. That will bring the total up to 18 sites, with more than 1,000 users on the system. We are currently planning to implement the system at nine additional sites. In other words, we have completed two-thirds of the rollout.

Given that our 8-1/8 senior secured notes become callable this December subject to applicable call premium and the current strength in (inaudible) markets, we are currently evaluating refinancing alternatives. We expect to update our investors if and when we complete any refinancing transaction.

We have begun to take cost-reduction actions in Europe. These actions, which we expect (inaudible) during the next two quarters, include headcount reductions, limiting discretionary spending, moving certain (inaudible) [manufacturing] to low-cost countries, and also raising prices [strategically] in certain end markets.

Looking ahead, we believe that European end markets will remain weak and that the impact of currency translations will be modestly negative in the fourth quarter. We also believe that growth rates in North America will continue to slow.

We took these strengths into consideration when we advised our guidance at the end of the second quarter. We, therefore, continue to expect full-year sales in the range of $720 million to $734 million and non-GAAP adjusted EPS in the range of $1.35 to $1.45.

Our tax rate for the full year should be approximately 32% before this (inaudible).

We continue to expect that capital expenditures should be in the range of 30 to $35 million for the year, including $10 million for the investment into the China facility, and depreciation and amortization is expected to be in the range of 25 to $28 million.

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

Thank you, Christian, and please turn to our summary on slide nine.

First, we are very pleased that we were able to report a solid third quarter and expect the fourth quarter to be in line with our most recent guidance.

In addition, we had great cash flow for the quarter and also expect good (inaudible) cash flow in the fourth quarter.

Second, I am really excited about the potential financing alternatives we're evaluating. The right capital structure will help us achieve our long-term growth strategy, which includes investing in new business and new product opportunities to achieve organic growth and improve our operating margins, as well as investing in strategic acquisitions that fit well with our existing businesses.

With that said, there certainly is uncertainty about the macroeconomic environment. We believe that the upcoming election, the fiscal (inaudible), the slowing growth in China, and the continued downturn in Europe are all affecting our customers' confidence, and consequently, their orders.

The range of potential outcomes from those external factors is very broad, and we're prepared to manage the business accordingly. We are pleased to be performing well in this difficult environment. Our results are going to be driven by how well we execute on the new programs we are involved in and the profit improvement plans. As I mentioned before, we are especially focused on Europe.

With that, Christian and I are available to take your questions, and Dan, if you could go ahead and open up the line for questions.

Thank you. (Operator Instructions)

Mike Halloran, Robert W. Baird.

So it certainly makes sense that you guys are looking to adjust the cost profile to the revenue environment that you see in Europe. Maybe you could frame a little bit what sort of benefits you're expecting to see from that, as well as the timing of when some of that can start flowing through as an offset.

Well, we're currently putting the plans together. We don't think that will have an impact this year, but next year, we're looking at a potential cost savings in the neighborhood of 1.5 to $2 million.

Makes sense. And then clarification on one of the comments in the Turf and Garden segment. You said Turf and Garden's similar in '13 as '12. Were you talking about growth rates or just absolute revenue levels?

No, absolute revenue levels, Mike.

And if I kind of layer everything together from the commentary, it certainly sounds like as of now the 2013 expectations are flattish, maybe modestly positive on the revenue line. Is that about right? And what are the thoughts as it stands right now?

I think, as I said, the potential outcomes from all the external factors, it's a pretty broad range, but we give our guidance for next year on the next call, but I think if you add everything together that everybody else is saying out there, it's certainly not looking like a significant growth year for us.

Makes sense. And then, lastly, I don't remember off the top of my head what the number was, but what's the dollar amount of the debt that comes due in December?

We have an outstanding principal balance of $177 million. That debt does not become due in December; it is for the first time callable. That actually does not become due till 2016.

Yes, poor choice of words on my part. Fair enough. Appreciate the time.

Yes, thanks, Mike.

Brett Linzey, KeyBanc Capital Markets.

Just as it relates to these refinancing options on the senior secureds, could you give us a sense as to what some of the benchmark rates that you guys have identified and maybe how we should think about accretion from a redemption, and then any color around timing would be helpful, as well.

Unfortunately, we can't do that. We are looking at the alternatives, and the alternatives that we're looking at have different outcomes in terms of duration, in terms of interest rates, and all we can say is they become callable for the first time December 1st. We're looking at this and then we will update everybody as and if we do a re-fi.

Okay. I guess as you look through the quarter, could you just maybe touch on trends sequentially by market and what you're seeing into October?

I think relative to Europe, we saw that Europe sequentially as we went through the quarter worsened. Given some of the recent indicators we looked at, there might be an indication that, particularly Germany, maybe we have found a bottom there. We're not sure yet.

Relative to North America, I think relative to distribution, we saw a slight deceleration in bookings and shipments into that end market.

And then relative to the (inaudible) business, it's very mixed, too, depending on end markets.

And I think we saw the same thing in Asia, where as we went through the quarter, the outlook there got worse, and they also have a change in government coming up that's raised some concerns there, so I think lots of people are on a kind of wait-and-see mode right now.

Okay, no, that's helpful. And, last, on SAP, I mean could you talk about the conversion progress there? I know you have expectations for the 13 to $0.15 headwind for SAP in the China start-up. As we think about SAP impacts into '13, previously, you guys had stated that kind of 10 to $0.12. Has that changed? Has any of that been pulled into '12? I mean how should we think about that progression?

Well, that would stay the same. This year will be the same as the spend in 2013. There's no plans to either accelerate or decelerate the project.

Okay, great, guys. Thanks a lot.

Thanks.

Matt Duncan, Stephens.

Hey, guys. Good morning. This is [Stephen] in for Matt. Thanks for taking my questions.

I guess could you comment on the M&A pipeline and maybe some opportunities you're seeing out there?

Yes, I think the overall M&A [yield] has slowed down a little bit, but I think that the [build] that we're seeing is very similar to what it's been for the last 18 months, that there's still active -- some activity out there, and we don't have anything to announce today, but (inaudible) certainly working it.

Okay. And then, secondly, on your gross margin, I think a slight year-over-year. I guess just looking forward, how should we think about that progressing into the fourth quarter and then (inaudible)?

A couple of data points for the fourth quarter. So you'll have fewer shipping days. I get 60 shipping days versus 63 shipping days in the third quarter. That's one data point.

And the second is typically the fourth quarter -- and that will be the case this year -- is softer on the top line than the sequential third quarter, particularly given the trends that we see in our end markets, which then would typically (inaudible) lower gross profit margins and lower operating income margins based on that [data value].

Okay, thanks.

[Bhupender Bohra], Jefferies and Company.

Hi, good morning, guys. How are you? I'm sitting in for Scott Graham here.

Speaking about your cost-reduction plan, which will progress over the next two quarters, if you guys can give -- you did actually mention few buckets here like headcount reduction, relocation, and sourcing. Which are some of these big buckets you can talk about like in some details maybe on it?

Some of the -- the biggest bucket is going to be headcount reduction. We're not prepared to talk about that in detail. I think we'll update everybody as part of the fourth quarter call, but we are looking at significant headcount reductions (inaudible).

And the second bucket would be a -- the real gauge of some product -- production line to low-cost country. We now have facilities in Slovakia. We have facilities in China. So we're looking at [advantage] from an impact standpoint for the second bucket.

Then limiting discretionary spending in Europe, which includes limiting your travel expenses and other things, I think, is the third bucket.

Those can be executed fairly quickly, while things like changing suppliers [so] we have a longer lead time, those are also areas that we're working on.

And then I think an also very important bucket is that we are [strategically] increasing prices in Europe either for customers or for end markets where we think we can achieve a higher price. (Inaudible) are not broad based but based on analytic study I performed over the last couple or three months.

Okay. Now, these cost-reduction programs will be over the next two quarters, so what we are saying here is like we will see the benefits in the second half of next year, right?

Well, I think some of them are relatively quick. So temporary workers, as an example, we've already reduced some of the temporary work force to align production levels with sales levels, but when we start talking about some of the full-time workers moving production from Western Europe to Slovakia or to our plant in China, relocating sources, implementing price increases, those (inaudible) run through the year, but it should be phased in throughout the year.

Okay.

And the good news is when we get done with that and when the European economy recovers, we'll see some terrific operating leverage on those businesses. But when we look at it, we're (inaudible) excited to get this done and take advantage of that leverage when things come back.

Okay. Second question. Just wanted to get a sense of early cycle markets and late cycle markets like first few weeks of October. I don't know if you can comment on that, what you're seeing out there right now.

I think we'll reserve that until the end of the fourth quarter. Now, as I said, everybody's -- I think those external factors and some of these things they're coming up against very soon, people are taking a wait-and-see approach.

Okay. Thanks a lot.

Thank you.

Follow-up from Brett Linzey.

Yes, so I mean as you think about 2013, you talked about underlying growth perhaps being more muted. I mean how should we think about some of the program traction, new product wins? I know you had some call-outs in Turf and Garden and Ag this quarter. I might how should we think about outgrowth opportunities across some of your markets into '13?

Well, you know, I think we're going to outpace because of the activities worked on over the last few years. Now, some of those programs are starting -- will start to hit production volumes. So I feel really good about some of those programs. I've mentioned some of them on the calls before and on today's call that will have a significant impact.

And so in my mind, our performance is partly dependent on the external environment, but a very significant portion of it is how well we execute on those programs. And I'm really pleased with how our businesses have been executing to date on those, through the pre-production stages, through the developmental stages, and it's going quite well. So I'm excited about next year from a new product/new business development standpoint.

Okay, great. And then the last one here, I mean as it relates to some of these right-sizing actions across the business that you're going to announce, I mean as we think about the Bauer acquisition, is that included, or is this more the legacy Altra footprint that we're talking about? And then maybe just how that's tracking versus expectations, the Bauer deal.

Yes, so Bauer is definitely included, and I think soon after making the acquisition, we said that they had a relatively high SG&A expense for the side business and we wanted to try to lever that. And we said if that did not pan out, then we would right-size it. And so we're in the process of doing that.

The reason it didn't pan out wasn't because of execution; it was really because of the external environment there and the economic downturn. So that's an unfortunate reality that we have to do that, but suddenly from somehow it's integrating, the product expectations that we had, the market development expectations, those are all going according to plan, and when we look at the profitability of that business where it is today relative to when we bought it and where we think we can take it, I think we're right on track with the execution of that acquisition. The unfortunate thing was the European economy turned down. So (inaudible).

Great. Thanks a lot, guys.

The Altra legacy [businesses] are also affected and impacted by these cost-reduction efforts.

Okay, great. Thanks a lot.

(Operator Instructions)

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Okay, thank you, Dan, and thank you for joining us this morning, and we look forward to speaking with you again on our year-end call. Bye bye.

Thank you for participating in today's teleconference. You may now disconnect your lines at this time.