Altra Industrial Motion Corp (AIMC) 2013 Q1 法說會逐字稿

Greetings and welcome to the Alta Industrial Motion's first-quarter 2013 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, Inc. Thank you, Mr. Calusdian; you may begin.

Thank you, LaTanya. 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 ultramotion.com website under Events and Presentations in the Investor Relations section.

Please turn to slide 1. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ 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 diluted earnings 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 believe 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 2013 financial results press release on Altra's website.

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

Thank you, David. Please turn to slide 2. Our first-quarter performance was essentially in line with our expectations, with generally stagnant end markets and 5% fewer shipping days in the quarter compared with last year. While revenues were down by 3.7%, we did increase gross margin by 50 basis points year-over-year to 30% and grew non-GAAP net income by 13.6% to $12.1 million as a result of lower interest expense from the refinancing, our restructuring in Europe, and our profit-improvement actions.

Beginning in the second half of 2012, we focused on improving our operational performance in Europe and in select underperforming businesses in the US. Our key actions in these areas included reducing headcount, limiting discretionary spending, and moving certain product line manufacturing to lower-cost countries. We are very encouraged by the results we have achieved thus far and look to ongoing improvement in these businesses in the quarters ahead.

We continue to expect annualized cost savings in the range of $3.5 million to $4 million from these actions. And we look forward to capitalizing on increased operating leverage as some of our softer end markets improve.

We're also pleased with our free cash flow generation during the quarter. We paid down more than $21 million of our credit facility and increased our quarterly dividend by 25% to $0.10 per share.

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 of aftermarket parts and original equipment parts for small OEMs.

Distribution sales were down year-over-year for the quarter. While the market itself was flat to slightly down, some distributors are reducing inventory. We don't believe that this is a response to market conditions, but rather is a result of our focus on better inventory management.

Our product lead times continue to improve, so our distributor customers are able to carry less inventory. We still expect some modest growth in the distribution channel in the second half, as the industrial economy in North America slowly improves.

Turning to turf and garden, demand in Q1 was very good, and sales were up year-over-year. However, demand has been tempered in Q2 thus far, due to the cold and wet beginning to the spring.

For the year, we still expect this market to be up in single digits, based on forecasts from the Outdoor Power Equipment Institute. Share gains from our product development efforts, coupled with end market demand due in part from the recent housing turnaround is driving our success in this market.

We also performed very well in the Ag market in the first quarter. We are making good progress on the production of new programs for OEMs.

One major program we have been discussing on past calls is now in full production, while another is ramping up. We expect that these programs and other new product development efforts will make significant revenue contributions this year and throughout 2014.

We also had a good order and shipping quarter in the transportation market as a result of demand from automotive OEMs. After significant OEM production delays, we are benefiting from the ramp-up of the automotive programs that we are on and expect good bookings in 2013. We are generating sales from the small clutch products and the seating system components that we have discussed on prior calls.

I will next discuss the materials handling market, where our products are primarily used in equipment such as conveyors, forklifts, elevators, and cranes and hoists. In the forklift market we are doing well in a steady market. Our sales to the elevator market are steady overall, with the full production of new brake designs offsetting end market weakness.

Finally, the conveyor systems market is flat. Overall, the material handling market is relatively stable.

Now let's discuss our late-cycle markets, beginning with energy. The upstream component of the oil and gas segment of the energy market continues to be slow, in line with lower rig counts, lower new rig builds, and excess pressure pumping capacity.

The aftermarket component of that market is still doing well, since the average number of drilling feet of wells using high-performance equipment has held up, and the downstream component is also still performing well. We still see this as a very good long-term market segment for us.

Power generation continues to be a great long-term opportunity for us, and the market was relatively strong for the quarter.

Alternative energy continues to be a small portion of our total sales. This market is off considerably, as a result of purchasing in advance of the expected expiration of the federal Renewable Energy Production Tax Credit at the end of 2012. Orders have been proved somewhat since the PTC was extended through 2013.

Mining, which had been soft in the past few quarters, weakened further in Q1. We are seeing some activity in replacement parts, but indications from the OEMs are that the new equipment demand will be soft for quite some time, with 2013 demand lower than 2012.

Aerospace and defense sales continue to be relatively strong again, driven by activity on the aerospace side of the business. Demand is primarily coming from commercial aircraft and helicopter applications.

With that, I will turn the call over to Christian; and then I will be back to discuss our progress with our strategic initiatives.

Thank you, Carl, and good morning, everyone. Please turn to slide 4.

First-quarter net sales were $182.5 million, compared with $192.4 million, a 3.7% decline in what was a choppy quarter. Compared with the prior year, we had approximately 5% fewer shipping days, which had a significant impact particularly on our sales into the distribution channel. Excluding the Lamiflex acquisition, revenues would have declined by $8.6 million or 4.5%.

Foreign exchange rates had a negative impact of approximately 20 basis points, while price was scalable by 110 basis points. North American revenues declined by 3.5%, and European revenues declined 5.6%. Asia Pacific sales also decreased 9.5%.

While sales were down, we were particularly pleased with our gross margin performance for the quarter, as we reported a 50 basis point year-over-year increase to 30%. Non-GAAP operating margins declined 50 basis points to 10.9% due to the incremental startup cost of our China plant, consulting fees in respect to our strategic pricing and Lean initiatives.

First-quarter net income was $11.9 million or $0.44 per diluted share, compared with net income of $10.5 million or $0.39 per diluted share in the first quarter of 2012. Non-GAAP income in Q1 was $12.1 million or $0.45 per diluted share, compared with $10.6 million or $0.40 per diluted share a year ago.

We recorded a slightly lower tax rate of 31.2% in the quarter, when compared with 32.8% a year ago. Slide 5 is a reconciliation of our non-GAAP measures.

Please turn to slide 6. Our book equity was $235.7 million, compared with $232 million at year-end of 2012. Cash and cash equivalents were $66.2 million at the end of the quarter, compared with $85.2 million at the end of 2012. During the quarter, we paid down on our revolving credit and term loan facilities in a total amount of more than $21 million.

In April, we entered into an interest rate swap on a portion of our variable-rate term loan facility to fix the interest expense through 2016, reducing our risk. This was done at a rate of 63 basis points. The underlying notional amount of the swap matches the term loan portion of the facility and the related amortization schedule.

Slide 7 reviews our working capital performance. Working capital increased 3.3% in the quarter sequentially to $179.4 million due to higher sequential sales of approximately 4.5%. Capital investments during the quarter totaled $4.5 million, and depreciation and amortization was $6.8 million.

In April, three more sites went live on SAP, bringing the total to 21 sites. We have three more implementation waves left, with the next rollouts scheduled for the fall.

Looking ahead, while we do not expect end market growth, we plan to enhance our bottom-line performance as a result of a number of actions we have described on this call. Please turn to slide 8 and our guidance.

For 2013 we continue to 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 the second-quarter financial performance to be similar to that of the first quarter.

Our expected tax rate for 2013 should be approximately 32% to 34% before discrete items. We 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 $28 million to $30 million.

We expect to generate very strong free cash flow of approximately $50 million in 2013. With that, I will turn the discussion back to Carl.

Thank you, Christian. I would like provide you with an update on the strategic initiatives that I outlined in our fourth-quarter conference call. Please turn to slide 9.

One important element of our strategy is to expand Altra's presence in emerging geographies, and I briefly mentioned the success we've had thus far with our Lamiflex acquisition in Brazil. We have worked through the planning process to take additional products into South America, and we are beginning to execute that plan. The integration of Lamiflex continues to proceed quite well and the team there is optimistic about our prospects to penetrate the South American market.

Asia is another geographic region we have targeted, and our new plant in China is a critical part of our efforts. We are now in full startup mode in China and are continuing to increase production.

Operational excellence is another key component of our strategy. On our last call we discussed our plan to increase the pace of our Lean journey and to more aggressively Lean into our corporate culture.

We are working with a well-known Japanese Lean consulting firm on this effort, and we held our first event with them in the first quarter. It was highly successful, and we have another five events planned with them for this year.

I should note that while we were accelerating our Lean initiatives in 2013, we are getting good traction from our previous Lean efforts and are seeing very good results. Lead times and delivery times are both down, and customers are taking notice.

The implementation of our new SAP system is another important component of our operational improvement initiative, and we continue to make good progress in Q1. We took three more sites live in the quarter and expect to take the next two live in the fall.

We achieved a couple technical milestones in taking the three sites live. They included the implementation of a Variant Configurator for customized products and host-to-host capabilities. The balance of our sites will go live in the first half of 2014.

Growing sales through product development is another element of our growth strategy. As you heard in the end markets discussion, we are seeing the results of these efforts in our sales. We are hitting all of our product development milestones and expect further success in coming quarters.

In addition to product development we are implementing a new strategic pricing initiative with the assistance of an outside consultant. Based on the initial analysis we are enthusiastic that this new initiative will deliver the results that we had hoped for.

We plan to implement the first phase of the pricing initiative with four business units in July. We expect to begin to see the initial benefits later in the second half of the year.

In addition to our organic growth initiatives, we continue to pursue opportunities to grow through strategic acquisitions. We have a strong balance sheet and are ready to execute on the strategy.

Before we go to questions I will summarize by saying that we are continuing to execute on our operational improvement initiatives and our organic and acquisition growth strategies. While we do not expect significant end market growth to help drive our results this year, we expect product development initiatives as well as other organic growth efforts to result in increased year-over-year sales in 2013.

Looking at the bottom line, our European restructuring and improvements at several underperforming businesses as well as our debt refinancing will have a positive effect on our profitability. We also expect that the acceleration of our Lean efforts and our strategic pricing initiatives will have a positive effect on our results in the second half of the year.

With that we will go to your questions.

(Operator Instructions) Jeff Hammond, KeyBanc Capital.

Hey, guys. Good morning. Can you just talk about the trend you saw through the quarter, particularly with your distribution customers and how they are thinking about destocking?

And then just as you look into 2Q, it sounds similar to 1Q. But is organic growth still down into 2Q year-over-year, or do we start to go positive?

So first of all, Q1 of 2012 was our best quarter and was very strong. We had a tough comparable.

In the distribution channel, our discussions with our distributor partners, the end markets appear to be fairly stable, and I think because of our delivery performance there has been some of our distributors -- not all of them, some of them have taken the opportunity to reduce inventories a little bit. We see that as a very good thing because it means that our performance is better and helping them manage their working capital.

I think as we look into the second quarter and even more so into the second half, the comparables get a little bit easier. And in our discussions with our customers, the order trends that we saw last year and then going into this year, it appears that the industrial economy is improving slowly, but improving a little bit. So we expect that there will be some much better comparison performance when we look at the second quarter and next year.

Jeff, sequentially I think we are expecting slightly higher sales in the second quarter, which would mean flat to slightly ahead of last year.

Okay, okay, great. Then I think you mentioned this performance improvement plan providing $3.5 million to $4 million of savings. So I guess a couple questions within that.

One, what do you think the cost savings is into '13? Do you get some of that in the back half? What is the incremental savings into '14?

And then, the strategic pricing initiative, is that within that number? Or is that additive?

The strategic price initiative is additive. We have tried to quantify that by saying that we are expecting next year and subsequent years about a 50 to 60 basis points improvement just out of this pricing strategy for the next two to three years as we roll this program out Company-wide.

The $3 million to $4 million benefits in restructuring, they are partially offset by the cost of these initiatives and they are partially offset by negative revenue trends in Europe and the choppy environment in Europe.

Right. And I think, Jeff, we are working the plans now for the improvements in 2014, and there are some -- so we will have some improvement in '14 over '13, also.

So this $3 million to $4 million, is all in '13?

Yes, that is '13.

(multiple speakers) '13, but partially offset by the cost of these initiatives, the consulting fees that we talked about, and partially offset right now at least by negative revenue trends in Europe.

Okay, and then you think there is more runway on this performance improvement plan for incremental savings into '14?

Yes. Strategic pricing approximately 60 basis points is all current assumption.

And then Bauer has another --

And then Bauer, we are targeting another 200 basis points improvement in their operating performance in '14 over '13.

Okay. Thanks, guys.

Matt Duncan, Stephens Incorporated.

Good morning, guys. First question I have got, just on the various geographic end markets. The rate of decline that you have seen in Europe is slowing down. You are not dropping as fast as you had been.

Are you guys sensing any kind of bottoming occurring there? Are things still getting worse? Just give us an update on what you are seeing in that geography especially.

I think in Europe we still see a slight deterioration, nothing dramatic. But we certainly don't see things improving at this point.

We are right now assuming that we're going to start to see -- to form a bottom probably over the next quarter or so. The numbers coming out of Germany are still trending negatively, slightly negatively. So I don't think we have seen the bottom yet.

Okay.

I think the biggest thing is it is just so uncertain there. Every week the story changes, so there is just a tremendous amount of uncertainty.

Then, Carl, maybe in the Americas it sounds like turf and garden, Ag, and aerospace, especially commercial, are doing well. But obviously you had a revenue decline here.

So what markets really stood out as being the weakest that maybe caused that drop, as I look at it year-over-year?

Yes, one thing in North America we had three fewer days, so don't forget that when you are doing the math. But certainly, energy. The energy market in the drilling rig count is down; pressure pumping capacity is very high and excess capacity. We are seeing some decline there.

The metals market, we are not seeing the CapEx projects in the metals market. And mining, there has been a lot of information in the press about the situation in mining.

Okay. Christian, is there any way to quantify the impact of three fewer days in North America? You were down, what, I guess 3.5% or so.

Yes, we said 5%. And keep in mind it is particularly important regarding our distribution sales. Distribution talks about daily sales rates; and so that impacts us if we have 5% fewer shipping days into that market, which is big, a big channel for us.

Okay. The last thing for me, just any updates you can give us on the outlook for M&A. Obviously your balance sheet continues to improve. It sounds like you have now locked in a chunk of this refi with this interest rate swap.

So clearly you guys are still looking at M&A. Just what is the update on how the pipeline is coming together and what we might expect to see from you guys there over the next six to 12 months?

Yes, we are being very proactive. We've got the balance sheet in great shape. We now have the integration done with Bauer and Lamiflex, so we are ready to do it from a management bandwidth standpoint.

But we've got to have the right company and we want to make sure that it is a very good strategic fit. So we are out on the pavement and looking hard. We are well positioned to do it. So we don't have anything to tell you about what is going to happen the next six to 12 months; but when we do, we will get on the phone.

All right. Thanks, guys.

Mike Halloran, Robert W. Baird.

Morning, guys. First, just when do you guys recapture the selling days this year? Is it all in 2Q, or is that spaced out through the year?

Second quarter we are going to have one more shipping day compared to the prior year. Third quarter will be one less shipping day. And then in the fourth quarter it's going to be two more shipping days than in the prior year.

We lost one day due to the leap year last year. So be one fewer day this year than last year.

Makes sense. Then looking at the comment you made in the prepared remarks, Christian, about how 2Q is going to be similar to 1Q, putting that in the context of the answer to Jeff's question where you're talking about slight year-over-year growth, which would imply $5 million up sequentially give or take. Why wouldn't there be some sequential improvement from the first quarter to the second quarter in light of that? Are there any other puts and takes? Or does the comp --

That is our expectation, that there's going to be a slight improvement, but nothing dramatic. That is, I think, the message we want to send.

Okay. No, that's fair, then. I got the implication you were thinking comparable.

Then there is some risk, too, some uncertainty in markets like turf and garden. So if the housing is certainly a positive factor for that market, but if the weather doesn't turn, then that market might not improve or might not turn out like we expect it to.

No, that's fair. I was just trying to put all the comments together.

Then one last one for me. The run rate on interest expense, the first quarter here is the right run rate?

The swap will add cost to that. It is about maybe $100,000 higher per quarter.

Okay. Thank you for the time, guys.

(Operator Instructions) Scott Graham, Jefferies.

Hey, good morning. Two questions for you, really. What occurred in the distribution business with essentially the distributors and you working together to lower their inventory? How long will that occur? Is that running into the second quarter as well?

Yes, I think it is going to start to taper off, but we will probably still see some further decline in the second quarter.

Is there an upside to that for you that is visible right now? Other than the subjective -- hey, we are doing better for our customers; but how are they going to do better by you for that?

So absolutely not just with the distributors, but with our OEM customers also. So our -- I think the average on-time delivery performance -- and don't forget that distributors lots of times order it today and want it shipped tomorrow.

But the average for manufacturers is in the mid 70%s. Our on-time delivery performance now is better than 90%. So we have seen, when an opportunity comes up and we can deliver it, we get the order if there is more than one potential supplier there.

Right. So they are opening up some opportunities for you based on that, I think is what (multiple speakers) saying.

Absolutely. We see this as the Lean implementation, the on-time delivery performance is a significant competitive advantage for us and a very important part of the strategy going forward.

If you look at some of these distributors, they look at a return on invested inventory dollars. Our performance on that metric is off the charts. We are one of the top performers, which improves the relationship and hopefully down the road will give us an opportunity to gain shelf space given that performance.

Understood.

On the OEM side, we have one OEM customer where a few years ago our lead time was 35 weeks. We are now at a point where they have taken all the inventory out of their factory, completely dependent upon our manufacturing delivery performance, and we now ship to them next week what they order this week. It has just built a tremendous relationship with that customer.

Yes, thank you for that. My other question is back to the ERP where we are moving to the final innings of the implementation. I am just wondering if the two of you, where you sit with obviously better information at your fingertips now. What are some of the things that you have changed, let's say, in the last three to six months operationally?

You have talked about some of the acceleration of Lean and identification of specific organic opportunities. Are those factors a function of the ERP? Or is it more to come on that and you have just only begun to identify how it can help you?

I think Lean is separate. Those benefits are separate from the SAP project.

But what we are starting to see is now how powerful data can be. For the first time, we have visibility about supplier payment terms, for instance, across right now maybe 80% of the portfolio. We see how many different payment terms we have in the system, and that now allows us to act and consider changes.

We now for the first time have complete visibility about pricing into -- across 80% of the portfolio. That allows us to really support this strategic pricing initiative with good and high-quality data. And we are going to see the benefits of that 60 basis points probably starting late in the fourth quarter and into next year.

So the power of data and having that visibility is starting to [come] up. The other benefits in there, and they are not quantifiable yet, is that we now have customer service capabilities where a customer service person in on South Beloit, where we have a shared service center, for the first time has visibility to inventory levels at business units that they never had before. While these are not big numbers yet, but the cross-selling opportunity -- we start to see how powerful this tool can be down the road.

Very good. Thank you.

Anna Kaminskaya, Bank of America.

Good morning. Most of my questions have been answered, but just thinking long term, you have outlined Lean initiative, SAP implementation. Do you have any specific margin or return targets that you have for the Company in the next couple of years? Is this something that you would be willing to share at your Analyst Day in May?

Yes, we are prepared to share that with you at the Analyst Day. We have repeatedly said our first-half goal is to get to an 18% EBITDA, and we think with the combination of the strategic pricing over the next two years, with the benefits of Lean, with the drop-off of the SAP implementation costs in the second half of next year, and some of the other things, the restructuring we have done, we believe we are on a path to achieving that goal.

Will you outline timing for that 18% margin goal?

Yes, we will.

Okay. Okay. Thank you very much.

Anna, our director of Lean is going to be at the Analyst Day and have a short presentation to talk about what we are doing there. (multiple speakers) talk to him (multiple speakers)

(multiple speakers) quarter. Thank you, guys. I will see you in May. Bye.

Jeff Hammond, KeyBanc.

Hey, guys, what is the SAP cost again this year? And what does it go down to in the next year?

It is about $2 million. It is running through the P&L this year. We believe that will be cut in half next year.

And then into '15, down to nothing?

Down to nothing (inaudible).

Okay. Then you have been ratcheting in the dividend quite a bit here. Is that -- do we rest here for a while? Or is that something you continue to address on a shorter-term basis?

Jeff, we discuss that at every Board meeting, and it is a decision that the Board takes. So I don't think we are in a position to speculate what the Board will decide in the future.

Okay. Good to see you move on that.

Yes, the January increase I think the motivation was we have good performance, we have very strong free cash flow performance this year and probably take that to continue, and that the shareholders should participate.

Great. Thanks, guys.

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

Okay. Thank you for joining us this morning and we look forward to seeing many of you at our first Investor Day on May 16 in New York. During the day we will be providing more information about our organic growth strategy including how we target new strategic markets, cultivate new customer relationships, and work collaboratively with our customers to develop new products.

You will be hearing from a broad group of senior management including all of our business unit leaders. For an invitation, professional investors are encouraged to e-mail aimc@investorrelations.com, or call 617-542-5300. That is 617-542-5300. Thank you.

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