Altra Industrial Motion Corp (AIMC) 2013 Q4 法說會逐字稿

Greetings and welcome to Altra Industrial Motion's fourth-quarter 2013 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 of Sharon Merrill & Associates. Thank you. Mr. Calusdian, you may begin.

Thank you, Christine. Good morning, everyone, and welcome to the call. With me today are Chief Executive Officer, Carl Christenson, and Chief Financial Officer, Christian Storch. To help you follow management's discussion on this call there will be referencing slides that are posted to the AltraMotion.com website under Events & 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 Industrial Motion Corp. 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, net income free cash flow and non-GAAP operating working capital. 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.

A reconciliation of Altra's non-GAAP measures to the comparable GAAP measures is available on the financial tables of the Q4 2013 results press release on Altra's website. I will now turn the call over to Altra's CEO, Carl Christenson.

Thank you, David, and please turn to slide 2. We are pleased with the fourth-quarter results given the persistent challenges in our end markets and renewed uncertainty for the global economy.

During the fourth quarter GAAP revenues were up slightly from the same period a year ago. Excluding the impact of the Svendborg acquisition, net sales were $176.2 million, down less than 1%. Non-GAAP earnings grew 7% to $10.1 million, or $0.38 per share, despite relatively flat revenues and a tax rate that was significantly higher than in Q4 2012.

Even in this challenging environment we again delivered record earnings for the full year 2013. During the past several quarters we have been working to optimize our operations. In light of this objective, we are delighted with our operating working capital reduction efforts at the core Altra businesses.

We had operating working capital reductions of $18.6 million in the year, the majority of which occurred in the fourth quarter, which helped lead the Company to $27.4 million of operating cash flow in the quarter and operating and free cash flow of $89.6 million and $61.8 million respectively in 2013.

We've begun the integration of the Svendborg acquisition which closed in December. Svendborg is expected to be accretive in 2014 and I'm excited about the opportunity Svendborg presents for us.

The restructuring that the Bauer team has been executing in Europe has really begun to produce the desired results and we're seeing good growth out of that business in China and the US and indications that the business is beginning to improve in Europe.

Now please turn to slide 3 for a discussion of some of our specific end markets. Let's begin with our distribution channel which is predominantly comprised of sales of aftermarket parts and original equipment parts for small OEMs.

In the fourth quarter distribution sales were up modestly year over year, and we saw a slight improvement in this market throughout 2013 and we're cautiously optimistic that that trend will continue moving through 2014.

In Turf and Garden sales in Q4 increased slightly year-over-year and grew significantly from a strong sequential third quarter where we generated record sales in both August and September. This market has gotten off to a good start in 2014.

The Ag market continued to be one of our best-performing markets in Q4 finishing the year with double-digit quarterly growth. As expected, our new product programs delivered significant revenue contributions in the second half of the year. Because of these new programs we're optimistic about reporting strong results in Ag in 2014.

The transportation market also performed well in the fourth quarter driven by demand from automotive OEMs.

In the materials handling market our elevator and forklift programs maintained their strong performance; however, this was fully offset by underperformance in the conveyor and crane and hoist markets where demand for this equipment has continued to be soft. As a result, materials handling was off modestly year over year.

Turning to our late cycle markets, beginning with energy, we saw a slight improvement in this market during the fourth quarter and we believe we have now seen the bottoming of demand in energy. The cold-weather nationally caused a drawdown in natural gas reserves which led to increased orders and it appears that the inventory of fracking equipment components has been reduced. We continue to view this as a good longer-term market for us.

In contrast the power generation market dropped off in Q4. However, in alternative energy the wind turbine market picked up a bit building on the improvement we began to see in Q3.

The mining and metals markets again improved sequentially extending the slight growth we experienced in Q3, but they are still weak overall. We expect demand will flatten out in 2014 at a level significantly below where these markets were in 2012. However, we are seeing some indications that these markets are improving, particularly some segments of the mining market.

In aerospace and defense we said last quarter that some projects had been delayed as a result of the federal budget conflict and this was indeed the case. We expect this market to be slightly down throughout 2014.

From a geographic standpoint, the US was down slightly, Europe was flat and Asia was up. We expect the global economy to continue to improve; however, we do remain cautious due to the risks and uncertainties that remain.

That covers the majority of the markets we serve. With that I will hand the call over to Christian and I will close with a discussion on our strategic initiatives.

Thank you, Carl, and good afternoon or good morning, everyone. Please turn to slide 4. Fourth-quarter net sales were $180.5 million, up slightly from $177.2 million in Q4 of 2012. Foreign-exchange rates had a positive impact of approximately 70 basis points while price was scalable by 90 basis points.

Excluding the impact of the Svendborg acquisition sales declined 0.6% year-over-year to $176.2 million. Geographically North American revenues declined by 2.7% while European revenues were essentially flat. Sales in Asia-Pacific region were strong increasing by 19.7%.

During the quarter we continued to see margin improvement on our recent pricing initiatives which contributed 90 basis points to gross margin. However, this improvement was more than offset by the effect of an $800,000 inventory adjustment, acquisition-related inventory step-up costs and a $600,000 pretax charge for worker's compensation related claims due to a legislative change in France and unfavorable mix changes.

By successfully reducing inventory, we (inaudible) [into LIFO layers] causing the change to the P&L and the charge of $800,000. As a result gross margin was 28.7% compared to 30.4% in the fourth quarter of 2012. We expect to return to more normal levels of gross profit in 2014.

Non-GAAP operating income was 9.9% compared with 10.7% a year ago. Interest expense decreased $19.1 million or 87% to $2.8 million during the quarter primarily due to the refinancing in the fourth quarter of 2012 and lower average outstanding borrowings.

Fourth-quarter net income was $7.2 million or $0.27 per diluted share compared with a net loss of $5.4 million or $0.20 per share in the fourth quarter of 2012. Non-GAAP net income in Q4 of 2013 was $10.1 million or $0.38 per diluted share compared with $9.5 million or $0.36 per diluted share a year ago.

You will recall a tax rate of 34.1% in the quarter which compared with our tax rate of just 11.1% in the fourth quarter of 2012 which was artificially low due to a benefit we recorded from the interest expense related to the 2012 refinancing.

Slide 5 is a reconciliation of our non-GAAP measures.

Please turn to slide 6. Our book equity was $269.3 million compared with $232 million at year-end 2012. We reported record operating cash flows of $89.6 million in 2013 and a record free cash flow of $61.8 million. As a result we ended up with a strong cash balance of $63.6 million at the end of the year.

Slide 7 reviews our working capital performance and, as Carl mentioned, we achieved $18.6 million of operating working capital reductions during the year, the majority of which occurred in the fourth quarter, which contributed to an operating cash flow of $27.4 million in the fourth quarter.

Capital investments during the quarter totaled $13.4 million as we purchased a portion of the Bauer property in Esslingen in Germany. In 2014 we will invest in a new office building and an extension of the Bauer factory in Germany.

This investment will help us to streamline the operations as it will facilitate the consolidation of five buildings into two, enhancing material flow, reducing overhead costs and improving margins at Bauer. Depreciation and amortization were $7 million.

Regarding SAP, we have three more site implementations remaining with the next call out scheduled at the end of this first quarter. The final two sites will go live at the end of the second quarter. At that point we will have 80% of our revenues, and I exclude Svendborg on SAP.

We are starting to see the first benefit of SAP. Our shared service center is up and running allowing us better visibility into customer and vendors. That visibility contributed to the reduction in working capital in the fourth quarter.

Please turn to slide 8 and our guidance. We expect the first quarter to continue the steady progress we experienced in 2013 and to be ahead of the comparable period a year ago. We are initiating new full-year 2014 guidance for revenues in the range of $800 million to $825 million and non-GAAP diluted EPS in the range of $1.85 to $2 a share.

We expect our tax rate for 2014 to be in the range of 31% to 33% before discrete items. We expect capital expenditures in the range of $28 million to $30 million for the year and our depreciation and amortization is expected to be in the range of $34 million to $36 million. With that I will return the discussion back to Carl.

Thank you, Christian. let's briefly discuss the various strategic initiatives we are working on. As we begin 2014 the global economic environment is still uncertain and we believe it is prudent to remain cautious about global industrial growth prospects.

However, even in a very slow growth environment we expect to continue steady progress on our margin initiatives and operating working capital reductions. Both programs are beginning to have the intended effect increasing margins while reducing operating costs. And we anticipate additional positive momentum throughout the year.

As we integrate the operational excellence component of our strategy even further into our operations, I feel really good about the work we have already done.

As an example, we have recently returned from a kaizen event that reduced the cycle time of a value stream from 9.3 days down to just 2 hours. We're beginning to see the benefits of this work in lower operating working capital and we expect to see some improvements take effect in 2014.

The implementation of our new SAP system continues to be on track. As Christian mentioned, we have one more site scheduled to go live this quarter with the remaining two sites planned for Q2. This new system is enabling us to bring more work into our shared services model which we expect will result in increased cash flow going forward.

And as Christian mentioned, we have made good progress on our new pricing strategy, which, combined with our standard price increases, contributed 90 basis points to gross margin in the fourth quarter. We expect to see additional improvements from pricing through the bulk of 2014.

Looking at organic growth opportunities, our new product programs continue to perform well and we expect significant benefits in 2014. We will continue to work in collaboration with our customers to develop innovative products to satisfy their needs.

We're also driving organic growth by expanding into emerging geographies primarily in South America and Asia. Activities in both regions continue to be on schedule.

In terms of external growth, we are quite pleased with the Svendborg acquisition. With Svendborg we have added the leading brand of premium quality caliper brakes and we are excited about what this means for us both financially and strategically. Even immediately following the acquisition our balance sheet remains very strong and we continue to [stoke] potential strategic deals.

In summary, we are executing well on our strategy to drive both organic and acquisition growth and to improve our bottom line through a number of corporate initiatives. With that we will open it up to your questions.

(Operator Instructions). Matt Duncan, Stephens.

First question I have got just, Christian, looking a little bit more at the gross margin. If after you back at all the things that you view as sort of nonrecurring in nature, what would gross margin have been?

And then what are your expectations? You say you expect to return to a more normal level. Does that then take us back closer to what the gross margin level was I guess through -- I guess in the third quarter it was more in the mid-30.6 range. Could you get back to there going forward?

So I think I mentioned mix, what you heard was mining and energy in the fourth quarter. Mining, for instance, was down 23% year over year in the fourth quarter, actually slightly worse than in prior quarters. Three businesses in particular got hit by that and that caused probably a decline in the margin of 100 to 150 basis points on top of the items that I mentioned.

As we look at 2014 I think we will see a return to more normal margin levels. The other thing that would happen is that Svendborg will actually enhance our gross profit margin. So we should expect in the 31% range to creep up to about 31% while our SG&A as a percentage of sales will also increase as Svendborg carries a higher SG&A load than the rest of the business.

Okay, very helpful. Carl, looking at some of the end market data you gave us, it sounds like maybe you guys are seeing the energy market bottom and possibly turn in the fourth quarter. Has that continued here into 2014?

I think when we looked at quarter-to-quarter-to-quarter and the incoming bookings rate the comparisons were improving -- have been improving steadily. So we think that we did reach the bottom and that we are starting to see it turn.

Okay. In the first quarter there has obviously been quite a lot of winter weather that has hit especially the northeast part of the country. Is that impacting your business at all in any way that is measurable or do you feel like you are not seeing a whole lot of impact from that?

We have had to close some facilities based on the local weather situations. But we feel like we will be able to make up our production in the quarter. We will work weekends and, etc., to make sure that we make up the production and satisfy the customers.

I think incoming order rate certainly supports our guidance, but I think there's still a question mark whether there will be some slowdown from our customers and distributors on what they saw as a result of weather. Right now we haven't seen much; the incoming order rate looks very good and supports the guidance.

What level of growth are you seeing in that order rate, Carl?

I just said that it supports the guidance we have got out there.

Fair enough. And then last thing and I will hop back in the queue -- on the M&A pipeline, are you guys still staying pretty active there in the wake of Svendborg? Or are you trying to get that integrated before you do something else?

Well, I think Svendborg fits nicely into one of our platforms, so we remain active and actually things look like they are improving a little bit. I think that people are getting a little more comfortable with the outlooks and certainly the valuations are pretty good right now. So I think we are seeing a little more activity there.

Okay. Thanks, guys.

John Franzreb, Sidoti.

I just wondered if you could update us on the progress in the pricing initiatives, what milestones have you completed in 2013 and what do you expect to complete in 2014 certainly in the first early part of the year?

2013 really was the beginning for us in terms of that initiative. What we have seen in 2013 was really the benefit of running about $150 million of our revenues through the process. And the other $150 million started with the data analysis that was completed, so we are going to start increasing prices in Q1 for that second round of entities.

I think what we have seen for the first round was so far about 130 basis points on the affected revenues, and that number will increase as we go forward. So they are in line with what we expected. And I think we will stick with our guidance as to 50 basis points of margin improvement through this process in 2014.

Okay, great. Now I think I heard you say in your prepared remarks that some of the increased capital spending this year is reflecting a new facility and consolidation of five facilities into two. If that is the case is there going to be any restructuring charges or maybe redundancy costs during this process in 2014?

Regarding the property purchase in Esslingen, Germany -- we don't expect a meaningful restructuring charge. A lot of the things that had to move out of those buildings have already been moved, a portion of that went to Slovakia in 2013. There is going to be some moving expenses to get from one location to the other, but I don't think these are going to be significant.

Yes, and what it was was there was a very large campus that was owned by the seller and we leased the facilities where the business was spread out in that campus. And right from the beginning we wanted to acquire a part of that campus and we tried the newest building on it that we were utilizing and we wanted to then consolidate everything into that part of the campus.

So it is not like we are moving from a great distance, it is all within (technical difficulty) a large piece. And we just bought a portion of the property and we are constructing a building there.

Okay, I get it. Great, thanks. And one last question and then -- I guess maybe they kind of dovetail into each other. It sounds like that the impact from whether -- I guess in the fourth quarter it sounded like a net positive.

I'm wondering two things -- if that was a proper read from what you said in your prepared remarks? And also if the acquisition of Svendborg, I wonder if that has any seasonal changes to the revenue mix going forward that we should be cognizant of?

I don't think it was necessarily a net positive from the weather. I think that there was bad weather in the fourth quarter and so far in the first quarter and we think that may have had a negative impact on the overall business environment.

The good news about the bad weather is that people consumed a lot of energy. So that is the one positive that we might see some increase in business as a result of that. But we haven't seen it certainly yet.

And then regarding Svendborg, I think the revenues at Svendborg are fairly evenly distributed through the year. There is no meaningful seasonality to that business.

Yes. So I think it is more a -- they did use up a lot of parts out there and the activity level was up in those markets.

Okay. Thank you, guys, I will get back into queue.

Jeff Hammond, KeyBanc Capital Markets.

So just to go through the guidance change, rev is up $7.5 million, you guided up $0.05 on the EPS. Is that the organic business, an improving outlook there? Or are you raising the assumption for Svendborg?

There is a combination of both. On the top-line it is more the base Altra business. And then we also see a little bit more -- we feel really good about Svendborg and the performance in 2014. I think we own the business now for what, two months. During those two months as we get our arms around the business we feel really good about its prospects in 2014.

It also contributed (multiple speakers). We've got a good team working on the integration and the Svendborg team has really embraced it and are optimistic about some of the synergies we have got. So it has been really good so far.

So it is fair to say in that $0.10 to $0.15 accretion guidance you initially put out, you are probably towards the high end of that for Svendborg? And then what do we think for the revenue contribution for Svendborg within the revenue guidance?

You are right; we probably feel that the high end of that initial guidance on accretion was very achievable. Revenue for that business will be in the $85 million to $90 million range.

Okay, okay. And then -- so you mentioned Svendborg kind of exceeding expectations. I think initially you said $3 million to $5 million of savings and you didn't really count on any of that in 2014. So maybe just update us, do you start to get some savings right out of the gate in 2014, is that what has changed? And how do we feel about the $3 million to $5 million on a longer-term basis? Is there room to push that up now that you have the keys and you have looked inside?

We do expect to be in that same kind of range. And there was a little bit of savings at the beginning, we made a little bit of management change at the beginning that gives us some savings. The rest of the synergies are longer-term and we think sale synergies take a while, you have to -- we've got some great joint product development activities going on, they've got some control systems that we didn't have that we are excited about.

But to get that approved that customer has to go through the testing and developmental work that we have to do. That takes a little while. That is why we have said that we don't expect a tremendous amount of synergies in 2014. And then on the cost side, some of the things that we are working on will also -- maybe in the back half of 2014 but most of them we won't see until 2015, Jeff.

Okay, great. Thanks, guys.

Mike Halloran, Robert W Baird.

So could we just talk a little bit about how your thinking about the composition of earnings as we work through the year. In times past you have kind of given a weighting on the front half of the year versus the back half of the year. And obviously given some of your end market exposures front half typically a little greater than the back half.

But you've got a few moving pieces here when it comes to some of the margin lines and some of the initiatives that are working through or some of the costs that are going away, however you want to look at it. So could you just provide a little bit of color on how you think that earnings stream works through the year here, front half versus back?

Well, typically our revenues -- about 51% of the revenues of the first half, 49% in the second half, somewhere around that range. And therefore the first half of the year is typically more profitable than the second half.

We think earnings at Svendborg are probably -- or the (inaudible) of Svendborg is probably fairly even distributed through the year because there is not a significant amount of seasonality to that business. And so, we don't see how then that Svendborg is somewhat even in terms of accretion, no significant change in trends to prior years as to how our earnings are going to be distributed.

Okay. And then any -- I know in 2013 we had some selling days swings quarter to quarter. Anything unique about the selling days trends as we work through 2014? Quarter to quarter?

No, no meaningful swings.

Appreciate the time, guys.

Scott Graham, Jeffries.

I wanted to talk to guys a little bit about the dynamics of the gross margin. So how much of this, if we ex out the purchase accounting, I have about a 130 basis points decline in the gross margin. Christian, I am sure you can check my math on that.

You said that the mix issue with mining was 100 to 150 basis points. What were some of the other puts and takes to the gross margin this quarter, if you would? I mean you have price, you gave us that number, yes, but can you give us a little bit more around that number?

Really the earnings in terms of the inventory adjustment, particularly the LIFO reserve adjustment that we have of $800,000, I mentioned the worker's compensation claims in [France] that hit the gross margin line. And then the mix change was very severe relative to our mining and energy businesses. That really had a very meaningful impact in the fourth quarter, although we do think that that will go away as we go into Q1 and Q2.

Why will that go away?

Because we think we're starting to see some improvements in our income in order rates particularly in energy.

Okay, okay. You indicated then that for 2014 to expect a gross margin in the 31 plus or minus range. Is Svendborg higher gross margin than you or lower?

Significantly higher than we are.

Right. So how much of this, let's say, 100 basis point of improvement in gross margin would come from Svendborg?

I think 50 basis points.

Okay. On the pricing, someone asked a question earlier and I wanted to maybe ask a follow on to that about your strategic pricing initiatives. The 130 basis points on the affected items, what was the dollar amount of the sales of affected items in the fourth quarter.

Sorry, can you repeat that question?

So, you indicated that there was a 130 basis point improvement on the items that are in the program now that -- the affected items I think as you called it. I am just wondering what was the dollar of revenue, what was the revenue base of those items?

So $150 million of annual revenues went through the process. The affected sales, because there was only five months of revenues that really we were able to affect given when we started the project, were around $65 million. Is that your --?

Yes, that is exactly what it is. Thank you. And then we would just take that number and divide by four for the quarter, right?

Right.

So there is five months if you analyze the five months is $65 million, you get to about $150 million is what it was.

Yes.

Okay, so that impact -- I can do the math on that. So you are coming up with a 100 basis point gross margin improvement next year, half from Svendborg and half from the pricing, right?

Right. A little bit of volume.

Plus a little bit of volume. The only question I have is that since you guys have shown the ability to get pricing even before this initiative, shouldn't you still get pricing on the non-affected portions of the business?

Yes. So what we have said is that there's 50 basis points of incremental price next year related to this project on top of normal price increases.

On top of normal price, right, right, right. So then the 50 basis points that you are baking in for the strategic price and you are saying 31% gross margin then there would appear to be then some potential upside to that 31% gross margin?

You also have to consider that some of the price increase; the normal price increase offsets cost increases that we see. So we have wage increases, we have material cost increases going into effect, energy costs are going up, you know natural gas has gone up significantly. So we have to offset those cost increases with a normal price increase.

Got you, no, understood. There is always puts and takes, I get that. Last question is on the fourth quarter's SG&A. So you were -- when we ex out the items, right, we are coming up with a pretty nice decline in the SG&A rate. The question is, how did you affect that and is that also maybe a little bit of a vestige of the ERP? Is it sustainable?

So the charges where there was inventory, the worker's compensation claims, they actually hit cost of sales, so they did not impact SG&A and therefore I would not exclude them from SG&A. So when we ex out the Svendborg impact we looked at a fairly normal SG&A trend in Q4.

So essentially in the 18% level?

Or slightly higher than that.

All right. I thought -- okay. I get that. But then your comment before about Svendborg being a substantially higher gross margin and you are saying essentially that it also helped -- well, it didn't really -- I guess I am a little confused. How did Svendborg help SG&A this quarter because there was such little revenue, how did that really help you?

It didn't help. We owned it for two weeks, the SG&A percentage of sales is higher than the (inaudible) core business, so it actually hurt a little bit from a percentage standpoint.

Right. Maybe I will just ask this question off-line. I am still then wondering -- I still have a couple of other questions around that. But good quarter, thank you for your time. I appreciate it.

Thank you. Ladies and gentlemen, due to time constraints we have reached the end of the question-and-answer session. I will now turn the floor back over to Mr. Christenson for closing comments.

Yes, I would like to thank everybody for joining us this morning and we look forward to talking to you after the end of Q1. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.