Altra Industrial Motion Corp (AIMC) 2012 Q4 法說會逐字稿

Greetings and welcome to the Altra industrial motion 4th Quarter 2012 financial results. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow with formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Calusdian. You may begin.

Thank you, Diego. Good morning and welcome to the call. With me is Chief Executive Officer, Carl Christianson, and Chief Financial Officer Christian Storch. To help you follow management's discussion on this call we will be referencing slides that are posted to the altramotion.com website under events and presentation in the Investor Relations section.

Please turn to Slide 1. During the call, management will be making forward-looking statements as defined in a 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 expectation.

Please refer to the risks, uncertainties and other factors described in quarterly report on form 10-Q, and annual report on form 10-K and then the 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 whether as a result of new information (inaudible) events, future events or otherwise.

On today's call, management will refer to non-GAAP diluted earning per share, non-GAAP income from operations, non-GAAP 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 a comparable GAAP measures are available on the financial tables of the Q4 2012 financial results press release on Altra's website. I will now turn the call over to CEO, Carl Christianson.

Thank you, David. Please turn to Slide 2. We reported a record year for the Company, generating 8.5% growth in revenues to $732 million in non-GAAP earnings per diluted share of $1.52.

Our previous record for annual earnings is $1.45 in 2008 just prior to the recession. Gross profit improved 80 basis points during the year, and we concluded 2012 with a 29.9% gross profit.

We ended the year with a solid fourth quarter reporting 3.2% increase in revenues to $177.2 million, and non-GAAP earnings per diluted share of $0.36. Throughout the year we have been driving operational improvements and cost reductions, all while positioning the Company for further revenue and profitability growth in 2013.

As we discussed in our third quarter call, we have been focusing on improving our operational performance in Europe. We have essentially completed the European restructuring action that we outlined in October. We reduced head count, limited discretionary spending and used certain product line manufacturing to lower cost countries.

We expect annualized cost-savings in the range of $3.5 million to $4 million from these actions. We did realize some of the savings in 2012.

As a result, even with flat sales we expect our European business could grow operating income in the range of 200 to 300 basis points in 2013. Before I review our end markets, I would like to highlight some of our recent accomplishments relative to our long-term growth strategy.

One important element of our strategy is to expand Altra's presence in emerging geographies. The inflection of Lamiflex in Brazil is proceeding well, and we are already benefiting from our presence there. For example, an existing customer with operations in Brazil wanted local support if that geography.

We are now able to provide that valuable support. We are also using our local feet on the ground and domestic knowledge and experience to help customers with the importation of our U.S. products into Brazil.

We continue to see Lamiflex as an important growth platform for several Altra businesses in South America. Asia is another geographic region where we have targeted a (inaudible). We've completed the construction of our new facility in China, and we began start up production in the fourth quarter on schedule.

While we expect the manufactured couplings for the steam-powered generation market in China as planned with a significant downturn in the wind-power market, or mitigating the cost of the China plant by insourcing components. We were previously buying these components from subcontractors for products not only in China, but in Europe and North America. The cost for the China operation will still be a bit higher than expected at about $1.5 million this year.

Operational excellence is another key component of our strategy. As I mentioned at the outset, we made great strides in 2012. Of course, central to operational excellence at Altra is our lean culture. This year we have began to increased the pace of our lean journey, and more aggressively ingrain lean into our corporate culture.

This will not only contribute to enhanced productivities and efficiencies, but will drive ongoing growth through the use of speed and quality as a competitive advantage. We made excellent progress on our company-wide implementation of SAP. Two more sites went live during the fourth quarter bringing the total to 18 sites and more than a thousand users on the system. We've now completed two-thirds of the rollout.

We are starting to see the elimination of some legacy costs at SAP system that it's replacing, but we will really start to see the benefits of the full implementation in 2014. We now expect to complete the conversion of the final site SAP in the first half of 2014. We expect significant benefits from SAP.

First, a new CRM system will enable us to take a closer look at a single customer master file to better manage opportunities and close deals. We will be able to look at our customer base more analytically including reviewing trends and areas of greatest profitability.

Second, SAP will enhance our electronic interfaces and improve the speed and accuracy of all interactions with our customers. Third, it enabled shared services and productivity improvement in our back-office.

Fourth, we will have consistent and global engineering and procurement information that will enable cost reduction and improve our inventory management. And finally, it will provide us with critical information for other profit improvement initiatives. During 2013 we are implementing a new strategic pricing initiative with the assistance of an outside consultant.

With the large number of customers we sell to, and a huge variety of skews that we offer, we believe that there is significant opportunity to improve margins by systematically analyzing our established pricing. Please go to Slide 3, and I will talk about some of our specific end markets. I will start with our distribution channel, which is predominantly comprised of sales and aftermarket parts and original equipment parts for small OEMs.

Distribution sales were down year-over-year for the quarter, which was the result of a difficult comparison with Q4 2011. The full year was very similar to 2011, and we expect only modest growth in the distribution channel as the industrial economy in North America is flattening. Returning to Turf and Gardening, we completed a record year with another strong quarter of growth.

Share gains from our product development efforts coupled with strong end market demand is driving our success in this market. Looking at 2013, the outdoor power equipment institute has upwardly revised its growth expectations for the year to be in the low single digits.

Some of the demand is coming from the rebound in the housing market. Sales momentum in Ag continued in the fourth quarter, as we reported very strong top line growth. Demand was driven by strength of their OEMs by successful new product development.

We expect to build on our success in this strategic market with new programs that should make significant contributions for revenues for the remainder of 2013 and through 2014. I would like to note that we are now seeing customers buying products from additional Altra brands after we've worked cooperatively with them to develop new products.

We had a good quarter in the transportation market with contributions from automotive OEMs, as well as from major city transit assisting customer. After a delay in the automotive programs that we are on, we are beginning to see them ramp up.

We expect good bookings in 2013, and we generate sales from the dual (inaudible) product and the seating system that we discussed on prior calls. After being down for a few quarters, we started the materials-handling market rebound in the fourth quarter. Our products are primarily used in equipment such as conveyors, fork-lifts, elevators and cranes and hoists.

The growth is primarily coming from the elevator market where new programs that were in the initial launch phase earlier in the year are now in full production. Cranes and fork-lifts are still weak, but we expect to see some sequential growth next quarter.

Now let's discuss our latest cycle markets beginning with energy. The oil and gas segment of the energy market have slowed with lower rig counts now affecting sales. We still see this as a very good long-term market segment for us.

The alternative energy market fell off considerably as a result of purchasing in advance of the expected expiration of the federal renewable energy production tax credit,but with the extension of the PTC through 2013 this end market may pick up in the back half of the year. On the positive side of the energy market, power generation is still strong although growth has flattened a bit.

End market demand continues to be driven by conversion to natural gas-powered generation. We expect the positive trends in power generation will continue for the foreseeable future, and we are taking share in this growth market. Mining continued to be soft, not unexpectedly.

And our customers believe that 2013 demand will be lower than 2012, overall. Aerospace and defense sales were very strong again driven by activity on the aerospace side of the business. Demand is coming primarily from commercial aircraft and helicopter applications. 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 4 of our (inaudible) 4th Quarter 2012 results. A great year for Altra has come to a close as we record record sales and non-GAAP EPS for the full year.

We also exit the year with the strongest balance sheet we have ever had as our book equity as grown to $232 million and we have achieved the lowest leverage ratio since the formation of the Company. We initiated a quality dividend, which recently was increased by 33% to $0.08 cents for the first quarter of 2013.

For the fourth quarter, we reported an increase net sales of 3.2% despite what many industrial companies called the a tough quarter. The growth was comprised of a 100 basis points from volume,[85] basis points from the Lamiflex acquisition, 150 basis points from price, which was partially offset by 60 basis points from the negative affect of foreign exchange.

North American revenues increased 6%, while European revenues declined 1% due to foreign exchange. Asia Pacific sales decreased 8%. We were particularly pleased with all those margin performance for the quarter, as we reported a 290 basis point increase to 30.4% in the quarter.

Non-GAAP operating margins increased 190 basis points to 10.7%. The fourth quarter net loss was $5.4 million or $0.20 cents a share, and includes $3.2 million in restructuring costs, and $114,000 of acquisition-related expenses, and $17.5 million related to the refinancing efforts.

This was partially offset by $5.9 million tax effect of those items. 4th Quarter 2011 net income or $5.9 million or $0.22 cents per share included $328,000 in acquisition-related expenses, and $222,000 related to premium and deferred financing expense in original issue discount eliminated on the redeemed debt, which was partially offset by $176,000 tax affect of those items.

Excluding items from both periods, non-GAAP net income climbed 51% to $9.5 million or $0.36 cents per diluted share, and $6.3 million or $0.24 per diluted in the 4th Quarter of 2011. We recorded a tax rate benefit of 11.1% in the quarter, primarily as a result of the loss created by the refinancing.

Our normalized tax rate for the quarter was 28.4% and 28.6% for the full year. Slide 5 is a reconciliation of our non-GAAP measures.

Please turn to Slide 6. Our book equity has grown to approximately $232 million from $208 million at the end of 2011, and we have reported a strong cash balance of $85.2 million at the end of the fourth quarter.

Slide 7 reviews our working capital performance, working capital decrease in the quarter sequentially by 2% to $173.7 million. Capital investments during the quarter totaled $6.2 million and depreciation and amortization was $7.3 million.

During the quarter, we announced and completed a $300 million refinancing and fully -- and a full redemption of all [8 and 1/8] senior secured notes. Our new five-year credit agreement consists of a $100 million term loan and a $200 million revolving facility of which currently $70 million are drawn.

Based on the current interest rate environment, we expect this will have this (inaudible) potential to provide us with a reduction of our annual interest expense of approximately $10 million to $11 million. We tend to swap a portion of our variable rate debt to a fixed rate debt in the near term.

Looking ahead, while we do not expect essential end market growth, we plan to significantly enhance our bottom line performance as a result of a number of actions we have taken. Some of these actions the re -- the restructuring, which is saving $3 million, $3.5 million to $4 million per year,on debt refinancing, as well as savings, through additional operational improvements.

At the same time we are investing in the business by (inaudible) are assets in (inaudible) 2013, by increasing our resources dedicated to lean at the Altra business system and by launching a strategic pricing initiative. We are also expecting a higher tax rate in 2013 as a result of higher USincome due to the lower interest expense.

Please turn to Slide 8. For 2013 we expect full year sales in the range of $740 million to $750 million and non-GAAP EPS in the range of $1.75 to $1.85.

We expect first quarter sales to be below 2012 levels due to the fact that we will have 5% fewer shipping days in 2013. Our expected tax rate for 2013 should be approximately 32% to 34% before discrete items. We will reduce our capital expenditures in 2013 when compared to 2012, as we have completed the construction on our second facility in China.

We therefore expect capital expenditures in the range of $22 million to $25 million in 2013. Capital expenditures will also be below our depreciation and amortization, which is expected to be in the range of $29 million to $31 million. We expect to generate a very strong free cash flow of approximately $50 million in 2013. With that I will turn the discussion back to Carl.

Thank you, Christian. Please turn to our summary on the Slide 9. We reported a solid quarter to end a record year of financial results.

Our margins have significantly improved due to aggressive operational improvements we have made during the past year. Looking ahead, even though we do not expect overall market demand to be robust, we expect that our sales in 2013 will benefit from the new products and programs that we have been working on. In addition, our balance sheet is strong, and we are ready to execute on our acquisition strategy.

We are also very excited by the prospects for bottom line growth in 2013. As Christian mentioned, our European restructuring and improvements at several underperforming businesses, as well as our debt refinancing, will have a positive affect on our profitability. Furthermore, we expect an accelerating lean, and our strategic pricing initiatives will begin to make a positive impact in the second half of the year.

Finally, we believe that these initiatives and the completion of our SAP implementation will contribute to excellent earnings growth in 2014. We look forward to reporting our progress in the year ahead. With that, Christian and I are available to take your questions.

Thank you. Ladies and gentlemen, at this time we will open up for the question-and-answer session. (Operator Instructions). Our first question comes from Matt Duncun from Stephens. Please state your question.

Good morning, guys and congrats on a great quarter in a tough environment.

Thank you, Matt.

The first question I've got on that point, I suspect you were probably pleasantly surprised by the revenue number you had in the quarter given continued softness in Europe and fiscal cliff here, domestically. Can you talk a little bit about maybe where the upside came from relative to sort of what you guys thought the quarter might look like?

Sure, I think there was a couple of end markets that were particularly good. Our transportation business was strong. The Ag and Turf and Garden business was very strong. And then our Aerospace and Defense business was very good. And I think that those in particular were the highlights , and then I think another surprise was the aftermarket business in some of the latter cycle markets, like mining, was better than we had expected. We knew the OEM business was going to be very soft and it was, but there was some demand in the aftermarket (inaudible). But --

Okay. And so it sounds like, I guess, especially on the Ag and Turf and Garden side, things are continuing to look pretty good there here early in 2013. Is that correct?

Yes, I think there was a lot of information in the press about the income and the farming industry. It looks like it is going to be a pretty good year.

Okay. And then looking at the guidance for a minute, it looks like your revenue guidance implies kind of 1% to 2.5% top line growth. Can you talk a bit maybe about sort of what economic expectations are behind that both domestically and in Europe? It sounds like you are expecting fairly flattish end markets with the growth coming from things you guys are doing. But just kind of give us a little more detail on the backdrop of that guidance.

Our assumption is that Europe is going to be flattish in 2013, and we are going to see some very modest growth in North America, primarily driven by some of these projects we have been working on in 2012 that now start to ramp up. Carl reference the projects in the elevator and in the ag markets. Those have fairly significant volumes attached to them, so we will start to benefit from those. And then for Asia, you know, we are expecting a recovery in Asia, and I would say mid-single digits (inaudible) in Asia.

Okay.

That's a very small piece for us.

Okay. And then the last thing I've got and I'll hop back in queue is you made mention in the press release your balance sheet is in a good spot. You've got dry powder for, you know, maybe some M&A. Can you talk a bit about what your priorities are on the M&A front, and sort of timeline it when we might see you guys start announcing deals?

As I have said before, our key strategic businesses (inaudible) and breaks, couplings and [bearings], are the areas that we are really focused on. I think that with Bower -- you know, the restructured plant in [Alban] executed the what we are seeing so far. And the numbers coming out of Bower are very good. We feel like we've got the direction there going very, very well. We just -- this week just we structured the sales team over there, so it's -- I thinkwe've now have the management bandwidth to do an acquisition where last year, I think, we said we probably -- if we had our way we would wait until we got Bower a little more in the right direction before we do another acquisition. I think we are there.

[We are] ready. We've got the balance sheet, now that we've refinanced, in really good shape to do it. Now we just need the right company. We are going to do an acquisition just to do an acquisition. As we said before, we want it to be the right company and the right product and market set. The environment is probably not as good as it was a year and a half ago when people were maybe looking at doing something before the tax law changes , but we hope that things pick up a little bit, and we are going to be proactive about it.

Carl, do you have much in the funnel or given the focus on getting a Bower right through 2012 that maybe you need to get back out and fill the funnel back up again?

There is always things in the funnel that we are looking at and trying to be proactive. Obviously, I can't talk about any specifics there.

Sure. Okay. Thanks. Appreciate the color.

Thanks, Matt.

Our next question comes from Jeff Hammond with KeyBanc Capital. Please state your question.

Hi. Good morning, guys. This is Brett Lyndsey in for Jeff. Just wanted to on the new pricing initiative. Could you just talk about how successful you think that program can be, and then as we look at 2013 and your guidance, have you embedded in the benefit from pricing as we move through the year?

We always have some assumptions on pricing and work hard to make sure that pricing more than offsets the material and labor cost increases. There's always some assumption on that. I think the initiative we are launching if you are familiar with what Parker Hannifin -- it was a good article, I think it was back in 2007. What they did from a strategic pricing it was -- and they even talked about results in there they were able to achieve. What we would like to see is somewhere around 100 basis points improvement over the next two to three years. It is not something you can do overnight. There is a lot of analytical work to be done and then implementation takes awhile. So we think that is possible. There may be offsets there, but that would be [proving] that we would be targeting the [funnel].

Just as it relates to the SAP implementation, is that more a function of the first half of 2014? It seems like there is a bigger drag. I mean isthat more to being prolonged or are you seeing increased costs associated with that program?

We don't see increased costs associated with the program. What's happening is we brought nine sites live this year in 2012. We are taking seven sites live in 2013. We are slowing, currently, for two to three months we are slowing the train down a little bit to really prepare for the future sites and to have the support side catch up. I know we have over 1000 users on the system. We're continuing managing the risk of such a large implementation. That is a big focus on what we do, and we felt from the risk mitigation, it's better to slow down from 9 to 7 then to accelerate and to 12.

Okay. So the original $0.10 to $0.12 that you had initially anticipated in 2013 as a head wind , you know, maybe that is more 7 to 9 in the balance in the front half of 2014? Is that a good way to think about it?

There or thereabouts. The cost will be a little less in 2012. In 2013, sorry. As we slow down because we are doing two fewer implementations than we planned or three.

Okay. Great. Thanks a lot, guys.

Our next comes from Anna Kaminskaya with Bank of America. Please state your question.

Good morning, guys. My first question is regarding maybe you could flesh out just big margin drivers of 2012 to 2013, maybe if we assume even flat volumes, maybe how much we can get in cost-savings in Bower, maybe absence of China's startup costs, ARP system. Just seems like there are so many moving pieces, so I wouldappreciate if we could get some big buckets of what is in 2013 guidance.

We are hoping for operating margins improvement in the 25 to 50 basis points for next year. And That's the balance of these restructuring teams are very substantial. But we are also reinvesting a very substantial amount into these lean and ABS efforts in terms head counts. We are also have engaged in a Japanese consulting firm to help us accelerate our lean efforts and we're going to engage the strategic pricing consulting firm, and that will add cost. So on balance, we are hoping for 25 to 50 basis points.

And is that why SG&A cost went up in the fourth quarter? I was just surprised that as a percentage of revenue it was still pretty substantial. And what should I expect for 2013?

I think the sequential change in SG&A , we had one bad debt that was plausible and I think that caused -- that was the main driver.

Okay. So we should not expect too much of leverage on the SG&A side in 2013 versus 2012?

We should not because these consulting (inaudible) will run through (inaudible).

Okay.

That improvement will come from -- the operating margins, that improvement will come from gross margin side.

Okay. And then just going back to maybe fourth quarter performance, I was very surprised by Europe. Arguably, you outperformed many of your competitors. Maybe talk about what you see in terms of order rates through January and February and into the first quarter. How sustainable do you think it is? And any visibility you could provide on regional book to bill.

I think in the fourth quarter, I think there was a lot of hesitancy due to the fiscal cliff and all of the political turmoil that was going on. Then it picked up a little bit going into January. We feel the order rate supports the guidance we have provided. But it is still choppy and I think there is still a lot of uncertainty out there considering what the economic situation is going to be going forward. But the order book certainly wasn't as choppy as it was in the fourth quarter, but it is still -- we still get a couple (inaudible).

And did you see order improvement only in North America or did you see it in Europe, as well?

No, I think in Europe what we have seen is it got progressively worse through the year last year, and then toward the end of the year it flattened out. I think we have seen it stay at that flat level. So lower than last year, but not getting worse. I think in North America we have seen the growth slow down, but we are still seeing probably very, very modest growth in North America. And then in China or in Asia it's probably a little better than what people were talking about three or four months ago. It seems like the [sentiment] there is getting a little better.

Great. Thank you very much. Great quarter.

Thank you.

(Operator Instructions). Our next question comes from (inaudible) with Jefferies. Please state your question.

Hi. It's [Concha] in for Scott. I wanted to know if you could possibly discuss the monthly order trend in the quarter for short cycle, midcycle and long cycle and market?

We don't typically talk about orders in the order trends , and I think I just mentioned that it was very choppy in the fourth quarter and continuing to be choppy at the beginning of this year, but probably a little better than it was in the fourth quarter.

Could you provide an update on some of product introductions you are expecting for 2013?

Yes, sure. So one of our -- one of the ways or our strategic initiatives is to focus on key end markets and strategic end markets. Right now, one of them would be Ag, and some of the best new products we have coming out this year are in that area. We have talked about a feeder program we are working on that is going into production. We got our first production order after going through a year and a half of developmental work. We now have our first production order that should start to ship in the second quarter, and then also a big irrigation product that we worked on. We developed a new product for an irrigation system that is going to turn out to be a great program for us for 2015 and 2014.

And then one thing that we talked about last year was a new traction drive system that one of our customers was working on for elevators. That program is now in production and is ramped up to full production or really through the learning curve there. That's an exciting new product for 2013. And when you go through several markets that there is a lot of really good activity on new products. We know we are not going to get help from the economy. We feel our destiny is in our own hands, and that thatproduct development activity is key to our success, as well as the lead initiatives we are working on from the operation side, and then, as Christian mentioned, the strategic pricing initiative.

Got. And then one follow-up on the SAP. What was the total cost of the SAP in 4Q?

We spent a little over $3 million with the P&L, and then third quarter we spent roughly a fourth of that. It gives a fairly even spread.

That's all I had. Congratulations.

That would be, roughly, $750,000.

Got it. That's all I have. Thanks so much.

Thank you.

Thank you.

Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to Carl Christenson. Thank you.

Okay. I would like to thank you for joining us this morning, and we look forward to speaking with you again on our first quarter call. Thank you, bye-bye.

This concludes today's conference. All parties may disconnect. Have a great day.