Altra Industrial Motion Corp (AIMC) 2014 Q1 法說會逐字稿

Greetings and welcome to the Altra Industrial Motion first quarter 2014 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the final presentation. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Andrew Blazier.

Thank you, Brenda. Good morning, everyone, and welcome to the call. With me today are Chief Executive Officer Carl Christianson, and Chief Financial Officer Christian Storch. To help you follow management's discussion on this call, they will be referencing slide said that are posted to the AltraMotion.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 Industrial Motion 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, non-GAAP 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. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of that Q1 2014 financial results press release on Altra's website. I will now turn the call over to Altra's CEO, Carl Christianson.

Thank you, Andrew. And please turn to slide to 2. We are very pleased with our first quarter performance, as we achieved record revenue and non-GAAP earnings despite the difficult winter weather challenges in North America. We are right on track to achieve annual goals we established for the Company.

During the first quarter, revenues were up 13.4% from the same period a year ago. The incoming order rate accelerated toward the end of the quarter, which helped drive topline growth along with full quarter's contribution from our Svendborg acquisition.

Net of acquisitions, net sales were $190.1 million, up nearly 3%. Non-GAAP earnings grew 8.5% to $13.1 million or $0.48 per share. Our profit improvement efforts contributed nicely to the bottom line and our working capital efforts helped to more than double both our operating and free cash flow from a year ago.

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 made up of sales of aftermarket parts and original equipment parts for small OEMs.

In the first quarter, distribution sales were up moderately year-over-year. Distribution continues to trend up slightly and, based on indicators like the ISM and industrial production, we would expect this trend to continue.

In turf and garden, where we have leading market share, sales kept pace with the overall market and we were essentially unchanged -- and were essentially unchanged from our very strong performance a year ago.

The ag market had a tremendous quarter, accelerating its already solid performance from the past several quarters with growth well into the double digits. This robust growth is almost entirely as a result of our new product development and program wins. We continue to be optimistic about this market for the balance of this year.

In transportation, sales were down slightly from a year ago primarily because of lower sales to one large customer. In the materials handling market, forklift and elevator sales were very strong compared with the first quarter a year ago, due to projects in Europe. Meanwhile, the conveyor, crane, and hoist markets continue to be soft year-over-year, largely because of weakness in Russia.

Looking at our late cycle markets, beginning with energy, we have seen a nice rebound, driven by increased demand in oil and gas. Drilling rig counts are up and permitting for future drilling has risen considerably.

Power generation revenue was essentially flat from a year ago, while renewable energy was buoyed by stronger demand in wind in both China and the US. China experienced significant wind turbine overbuild in 2012 and 2013, and we are only recently beginning to see an increase in this market. Some of the increase we have experienced in the US can be attributed to wind turbines for Brazil.

In the metals market, sales were down slightly year-over-year, but increased sequentially from the fourth quarter. Metals demand appears to be reaching a bottom, although it is unclear how far we are from true rebound in this market.

Mining continues to be quite weak with sales down both from a year ago and sequentially. In aerospace and defense, sales were down year-over-year. We are continuing to see some projects delayed or reduced as a result of the federal budget sequestration, which has caused significant cuts in various defense programs. However, we do continue to work on some significant programs that we believe have a high probability of success.

In terms of geography, North America and Europe were both up slightly, while Asia sales increased by double digits. With considerable uncertainty in the global economy, we remain cautiously optimistic about international sales.

With that, I will hand the call over to Christian, then close with a discussion of our strategic initiatives.

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

We had a good quarter coming in at $0.48 a share on a non-GAAP basis, which is 7% higher than last year. The dilutive effect of the convert reduced earnings by $0.01 and, therefore, earnings were up 8.5% on a net income basis.

We saw continued expansion of our gross profit margin when we exclude the Svendborg-related inventory step-up cost, which negatively impacted the margin by 100 basis points. Svendborg was accretive to the quarter, in line with our expectations. We are very pleased with the cash generation in the first quarter with both operating and free cash flows more than doubling when compared to last year's comparable period.

Looking at the top line, foreign-exchange rates had a positive impact of approximately 60 basis points and price also added 60 basis points. Net of acquisitions, sales increased a solid 2.7% year-over-year to $190.1 million, despite continued weakness in several of our end markets.

Geographically, North American revenues increased 60 basis points, while European revenues increased 5%. Sales in Asia Pacific were strong also, increasing 14.6%.

Interest expense was $3 million, up about $400,000 from the prior year, due to the financing costs related to the Svendborg acquisition.

During the quarter, the average price of the Company's common stock exceeded the current conversion price of the Company's convertible note of $27.02. This resulted in 660,000 additional shares being included in the diluted earnings per share calculation.

We reported a tax rate of 29.4% during the quarter compared with a tax rate of 31.2% in the first quarter of 2013. Slide 5 was a reconciliation of our non-GAAP measures.

Please turn to slide 6. Our balance sheet remains strong with our book equity approaching $300 million, and a cash balance of over $60 million.

Slide 7 reviews our working capital performance. Our working capital efforts contributed significantly to the strong operating cash flow performance during the quarter. Capital investments during the quarter totaled $5.6 million and depreciation and amortization was [$8.1 million].

Please turn to slide 8 and our guidance. We believe that Svendborg's contribution to our bottom line will increase as we go through the year. We have seen improvements in Europe and our SAP rollout will come to an end in the third quarter.

We also see profit improvement in power and continued expansion of our gross profit margin, due to our strategic pricing initiative. For these reasons, we maintain our guidance, despite the fact that we assume that the current dilutive effect of the convert will remain for the balance of the year.

The Company is forecasting sales in the range of $800 million to $825 million and non-GAAP diluted EPS of $1.85 to $2.00 share. We expect our tax rate to be in the range of 31% to 33% before discrete items. We also expect capital expenditures in the range of $28 million to $30 million for the year, and our depreciation and amortization is still expected to be in the range of $34 million to $36 million.

And, with that, I will turn the discussion back to Carl.

Thank you, Christian. Please turn to slide 9. We ended the quarter with accelerating momentum in the majority of our end markets and we have seen industrial demand continue to strengthen early in the second quarter.

We believe we are well-positioned to capitalize on this improving environment. We are increasingly optimistic about the opportunities ahead of us for the balance of the year and expect to be able to achieve the goals we have established for the Company.

Now, let's talk briefly about the various strategic initiatives we are working on. As you know, we have been integrating the operational excellence component of our strategy even further into our operations. Our most recent action item is the consolidation of three locations in Columbia City, Indiana into a newly leased facility that will primarily serve our ag and turf and garden markets. When we complete this facility, it will be one of our most advanced lean plants. The result of this effort will be industry-leading lead times and on-time delivery performance as well as lower inventory. We are excited about this latest project, which builds on our previous lean efforts in Colombia City.

The implementation of our new SAP system continues to be on track. One site went live in Q1 and the final two remaining sites are planned for this quarter. SAP is bringing more work into our shared services model, and that is already considering contributing to the increased cash flow.

We also continue to make steady progress on our profit improvement initiatives. Pricing contributed about 60 basis points to gross margin during the quarter, and this initiative should continue to contribute positively to our performance going forward.

The efforts of the team at our power business are really starting to pay off. Gross margin at Bauer increased significantly from a year ago, and we are pleased to see topline growth at Bauer as well.

In addition, the Svendborg acquisition integration is proceeding well. Svendborg was immediately accretive to our results and we expect it to make an increased contribution to the bottom line as we progress through the year.

As I mentioned in the discussion of the ag market, new product programs are performing very well, delivering significant benefit early on in 2014. We are continually seeking additional opportunities to collaborate with our customers to produce new revenue-generating products in nearly all the end markets we serve.

Regarding emerging geographies, our new plant in China and our business in Brazil are progressing according to plan. In Brazil, we are beginning to achieve some very nice topline growth by selling Altra products through the business we acquired there in 2012.

In summary, we feel very good about our strategy to drive growth through each of our initiatives and we are excited about the potential opportunities we see throughout this year. We are on very strong footing and gaining momentum, which we believe positions us well to achieve our goals for the balance of 2014.

With that, we will open up the call for your questions.

(Operator Instructions) Scott Graham, Jefferies.

I wanted to ask you about the strategic pricing initiatives and, Christian, you mentioned that pricing was a plus-60-point basis point benefit. Can you talk about how much of that was strategic pricing versus other pricing that you would normally extract from the other businesses, and whether the strategic pricing was on plan, below, or otherwise?

We estimate that about half of that 60 basis points came from the strategic pricing initiative. While we are generally on track in terms of the results that we are seeing coming out of that, we have had a couple of instances where it is taking us a little bit longer than planned to actually complete the analytic side of the number crunching. But, as it relates to results, in terms of the contribution to the top line and the price increases, we are tracking right to our plan -- our projections.

Understood. And, would you say at this point that, based on the pricing that you have implemented, that there has been a reasonable reaction from customers, or adverse, or otherwise? Could you give us a little color on what the customers are saying?

While it is never easy to increase prices, to the best of our ability, we have not seen that we lost a customer at this point. I would say, in general, the pushback was limited. There have been occasions where, of course, we got pushback, but we got through the negotiations and we are sticking to our guns and holding firm on price increases.

So, you lost no customers, but did you lose any sales per customer?

As of now, we don't think so.

Great. Thank you. By the way, I appreciate you going through that detail. The other question I had was about the ERP system, which looks like, by the Lord's mercy, it's finally coming to an end for you guys with this third quarter.

But that also suggests, obviously, that you have got a lot of these things up and running. And maybe, Christian, you can give us the count on that right now or overall. But some of these things are up and running in 2013. I was just kind of wondering how you guys were benefiting from those systems now.

Yes. So the count is somewhere between 20, 25 and -- I don't have the exact member, but I think it is around 22, 23 locations are up and running on SAP. We just took one live at the beginning of this month, our location in New Hartford in Connecticut. And then there is two more, as Carl mentioned, that will go live later this quarter -- our Boston and our French operations still are to go live.

And where we have seen the benefits so far, the biggest bang for our buck so far has been coming out of our shared service operation in terms of reviewing and analyzing our supplier terms. We have seen a significant increase in accounts payable, for instance, in the last few quarters. We have also started to see some inventory reduction, I think in the last two quarters.

Working capital was a significant contributor to the strong cash flow performance of the first quarter, which, by the way, is typically our weakest cash flow performing quarter. So that is what we have seen the working capital side, in inventory, receivables. We clearly now have much better data, since we have one global customer and vendor master file so we can better analyze whole payment terms, the payment terms we grant to our customers. We are now monitoring that -- our shared services. That is where I think the biggest bang has come for our buck.

And then the second area over we are working on hardest to improve the electronic communications with our vendors and that is also in motion. More EDI, more what we call host to host, and that is also in progress.

We also completed the first phase of our global data warehouse where we now have, on a global basis, visibility into on-time delivery performance and things of that nature. And we will work on phase 2 of that warehouse.

And that is really the phase we are entering now, Scott, is going from implementing the system at the businesses to creating -- getting information out of the system rather than data and creating the tools for people to use. So that will be over the next couple of years doing that. And when we are done in June, we will have about 80% of the Company's revenues on SAP.

Understood. My last question is about SG&A. So I understand that with Svendborg that there might be a tendency for that to drift up a bit, but since sales kind of slowed in the middle of 2012, for you and for everyone else, the SG&A number has continued to elevate. And I was just kind of wondering what you guys are thinking on that number. Is it simply operating leverage that needs to reduce that percent of sales? Or are you physically doing something there to maybe cause that down a little bit?

I think with the Svendborg acquisition, I think you have seen that percentage increase slightly somewhat because European operations and same happened with power. European operations tend to operate with higher SG&A compared to North American operations. So that has affected us.

We don't, other than we continue to work on implementing more shared services more than finance. But also on the customer service side, we don't see that there is going to be a step change down in the near term on the SG&A. Volume is going to be what we need to leverage that, and that has been significantly impacted by the negative trends in mining and energy where we clearly lost volume given the end market conditions.

Right. And we have made some changes in the first quarter and will continue to manage the cost side of it, but we don't intend to have a restructuring in that side of the business at this point in time.

Mike Halloran, Robert W. Baird.

Could you just go over what drove strength in China, specifically, or Asia-Pacific region? Excuse me.

What drove the strength there?

Yes.

So I think the most significant improvement there was in wind energy, and that was 2012 and 2013 there was a significant slowdown. And they really started to ramp up this year. The second-biggest contributor there was probably the Bauer business. They have really done a nice job at growing their business in China for us.

And, more broadly, it sounds like you are seeing some nice inflection in the underlying demand environment after probably a slower start to the year here. Any way you could try to give some color on how much of this inflection do you think is just pent up demand from maybe the slower trends in the January, February time period than the underlying demand would suggest, versus core improvement in the underlying markets that you are starting to sell into?

I think our take is that it truly is the underlying markets are starting to improve. What happened in the early part of the quarter with the bad weather, we managed to make the shipments, and if you look at the top line, we hit the top line. We did that at some additional cost because we shut down some of our facilities due to weather. Some of them were shut down five days during the quarter at the beginning of the quarter. But then we worked Saturday, Sunday at significantly higher expense.

Yes.

So we are able to make the shipments number and satisfy the customer demand. But we truly did see an improvement, both in shipments and in the incoming order rate at the end of the quarter. And that has continued into April. And it is pretty broad. Europe is doing well. Most of the end markets we serve are starting to improve.

I think the one kind of enigma is why the industrial distribution channel hasn't seen a more significant improvement -- for us, anyways, it hasn't. And I think, typically, when industrial production starts to pick up, you can see that -- we would see that channel improve more than I have seen it. So it is a little bit -- it makes me a little bit uncomfortable, but most of the end markets we serve, it is pretty broad-based.

Okay. Thanks for the color there. Last one, probably more for Christian; what is the interest expense guidance as we go forward here? It ticked up little bit the last two quarters in a row. I know you guys paid down some debt in the quarter and maybe that caused a temporary slight inflation on interest expense line, but curious how to think about that going forward from here.

Yes. So we are thinking that for the full year we will be coming in at about $500,000 above the prior year. I don't have the prior year number in front of me, but if you add $500,000 to that, you get to the full year number. So that is a mix of the additional financing cost of Svendborg and then partially offset by the ability to pay down debt as we go through the year, given the strong cash flow performance that we expect to have this year.

Jeffrey Hammond, KeyBanc.

Wondering if you could just give us a better sense, it looks like your organic growth was just under 3%. Can you give us a better sense of what that accelerated to into March and into April? And maybe just talk about how March and April lined up with your comments on the different geographies.

Yes. I think probably the average was just under 3% -- probably more like 3.5% towards the end of the quarter when we look at the incoming order rate.

And, by geography, I think that was the second part of your question, Europe we saw a nice improvement and it continues. We got an economic indicator report this morning from one of our European businesses and it shows it has ticked up even a little bit more. So I think that has been good.

We saw some very good results in Brazil. It is not because of the Brazilian economy. It is more a result of some initiatives that we have had down there.

China, we were just over there and it seems like they are talking about 7% to 7.5% economic growth. And there is obviously some concern, but they are kind of holding to their guns there at that number. And that, we've turned out to have very good growth there.

On the North America, it has probably been one surprise that it hasn't picked up a little bit faster here. Some end markets are doing very well, like energy has picked up very nicely with the cold winter. Even coal we have seen some nice business in the coal fields for replacement parts. So we have seen some areas where it has picked up, but that general industrial piece just hasn't been there.

And so your comment on things picking up in the March and April, that did not take place for the distribution side in North America.

It has been kind of flat in the distribution side.

Okay. And then just (multiple speakers). Go ahead.

(multiple speakers) not for their -- that is for us into their business. So they obviously sell a whole lot of stuff other than what we do. But just for the components that we sell there, we didn't see it pick up significantly or at all. It was basically flat.

Okay. And then just on the cost saving side, because I think you talk about some strategic pricing momentum, can you talk about Svendborg's impact on your op margins? Because it seems like op margins were down a little bit on some core growth. And I am just wondering why we are not seeing maybe a little more progress from the cost initiatives kind of drop through.

Svendborg was dilutive to the operating income margin, and that has to do with two things -- two reasons. One is, the first quarter is going to be -- is their weakest for the year. Previously, we had assumed that this was about even, but when we look at their budget it shows that the first quarter is the weakest and it has a lot to do with weather. Very few people erect new windmills in January and February.

So there -- the big quarters are second and third quarter. The EBITDA margin was around 14% for the quarter and the operating income margin around 9%. So when you do the math, you would exclude Svendborg, the core Altra business actually saw some margin expansion from the prior year about 30 or 40 basis points, which kind of ties back to our message that we are making progress in improving margins.

So we think the margins should expand as we go through the year at the core Altra business as well as Svendborg. I think, if I exclude the Svendborg from the first quarter, our operating income margin was around 11.3%. That is up from around 10.9% or something like that in prior year.

Okay. I know energy and mining has been a mixed drag. How would you have characterized mix in the quarter and maybe how you see it going forward?

Energy and mining continue to be a drag in the first quarter on the margins.

But energy, prospectively, is getting better.

Yes. Energy -- so that is from an incoming order standpoint. So that is getting better, but mining still is -- I can't think of a good term for it.

Okay. So then, if we think about seasonality, maybe pre-Svendborg, your first half was stronger than your second half. But with Svendborg, that is a little bit of a drag in 1Q. And 2Q, Q3 are their stronger periods, so maybe a little more balance seasonally.

So typically, also for Altra, I think the second and third quarter have been the strongest historically; second and third. And the first and the fourth are weaker. So I think that pattern will continue, but it will be a little bit exaggerated by Svendborg, because Svendborg has the same pattern, but a little bit stronger than the Altra business.

Okay. Great. Then just final question; Svendborg, how would you characterize the top line and order trends relative to your expectations?

Relative to our expectations, on the top line, we are right in line where we thought we were going to be for the quarter. I think relative to our income, we were probably just shy of our expectations. We took about a $300,000 inventory charge, a lower-cost of market charge on some (inaudible) magnets. And I think that is the [missed number] that we had relative to our own expectations.

Okay. And then just visibility in orders for Svendborg.

Their outlook is very good. I think the wind energy market is improving. And so their outlook is very good, so we think we are going to hit the numbers that we put out there for Svendborg.

(Operator Instructions) Matt Duncan, Stephens.

This is Will on the call for Matt. Most of my questions have been answered, but I just have a couple more. You mentioned -- we have been talking about how the winter weather has really hurt sales in the quarter, but have you been able to quantify or give us an idea of how much it really did hurt the top line?

I think for us it would be more how it impacted our customers, because we were able to work overtime, work Saturdays, Sundays, and make the shipments for the orders that we had and perform on time. At the top line, we hit the number that we expected to hit.

And I think the impact was really on the operating margin. And we did not try to quantify it. It is what it is, and we did not try to go back and analyze and quantify how much of an impact that was.

Okay. Great. Next, can you give a little update on your M&A pipeline and if you are seeing any good opportunities out there and any color on that?

So the environment is not real good. The money is really cheap. They there are not a lot of assets relative to the number of buyers out there. The things seem to be going at very, very high prices. And so -- and just the number of assets we are looking at probably is a little less than average and just the competition is very high. So we are going to be very disciplined and make sure that we get the right assets, but not overpay for them.

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

Okay. Thank you, everyone, for joining us this morning and we look forward to speaking with some of you at the KeyBanc conference on May 28.

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