Altra Industrial Motion Corp (AIMC) 2015 Q1 法說會逐字稿

(Operator Instructions). I would now like to turn the conference over to your host, Andrew Blazier with Sharon Merrill Associates. Thank you. Mr. Blazier, you may now begin.

Thank you, Rob. 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, they will be referencing slides that are posted to the AltraIndustrial.com website under events and preparations in the Investor Relations section. Please turn to slide one.

During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management's expectations.

Please refer to the risks, uncertainties and other factors described in the Company's quarterly reports on Form 10-Q, 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, 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 on the financial tables of the Q1 2015 financial results press release on Altra's website. I will now turn the call over to Altra's CEO, Carl Christenson.

Thank you, Andrew. And please turn to slide two. On today's call I will go through an overview of our performance during the quarter and the major drivers of that performance and then provide an update on the actions we are taking to address these conditions. I will also provide my usual review of our end market. And then Christian will go over the financial results and the I will close with a summary of the quarter. Our first quarter performance reflects the global economic environment and end market sluggishness that we projected at the beginning of this year.

We said on our Q4 call that 2015 would pose significant challenges for us. And that is, indeed, the case thus far. We continue to face unfavorable conditions in our oil and gas, agriculture and mining end markets as well as head winds from foreign currency translation. Oil and gas has performed about as we had expected while both AG and mining are down more than we had anticipated. In addition, Christian will discuss how the dollar strengthened in the quarter compared to the $1.12 rate we discussed two months ago and how this negatively impacted the top line.

On our last call we also cited the deteriorating conditions in Europe and Russia in our guidance but these have been less severe than we expected. Primarily as a result of these conditions, revenues declined 7.9% from the first quarter of 2014 to $193.4 million. Net of acquisitions, net sales were $191 million. Gross margin was positively impacted by our strategic pricing initiative which added about 50 basis points year-over-year. However, operating income declined from the prior year quarter primarily because of a decrease in sales and the impact of foreign exchange.

In turn, non-GAAP earnings declined 15% year-over-year to $11.1 million or $0.42 per share. While we continue to face end market and currency head winds, we are taking actions to reduce costs and align our operations according to current levels of demand. We are also working with our suppliers to ensure we are realizing price reductions commensurate with commodity cost reductions and we are managing labor costs through reduced working hours.

In addition, we have completed the previously announced actions to reduce costs through headcount reductions primarily at the Bauer and Svendborg operations. This month we will complete the announced facility consolidation at Bauer in Germany which over the last few years has resulted in combining six facilities into one manufacturing complex in one office building. In total, restructuring costs were $1.8 million during the first quarter.

As I mentioned last quarter, we are undertaking actions including discretionary cost reduction to reduce SG&A expense. We are also looking to implement additional initiatives to help us achieve our long-term operating margin objective. Please turn to slide three for a review of our end markets.

Let's begin with distribution which is predominantly made up of sales of after market parts and original equipment parts for small OEMs. In the first quarter, distribution revenues were down slightly on declines primarily related to distributors with exposure to oil and gas, mining and steel. In turf and garden, where we have a significant share of the market, sales were up against a strong first quarter a year ago. This market performed very well in our seasonally strongest quarter as manufacturers gear up for the spring selling season. Turf and garden is expected to do well this year on improved housing starts and increased housing disposable income in the US. The first quarter demonstrated this strength.

As I mentioned at the start of the call, AG under performed against our already reduced expectations as demand in this market deteriorated considerably in the first quarter. We began is several new AG projects last year but demand for these programs have been significantly reduced. Transportation was unchanged this quarter as increased sales in marine and rail were offset by lower sales on the automotive programs we participate in.

Overall, we continue to expect transportation to be up slightly in 2015. The materials handling market was down from a year ago. Sales for conveyors, fork lifts and elevators declined primarily as a result of the growing strength of the US dollar. Crane and hoist demand was up modestly.

Turning to the energy market, energy overall was not down as much as we expected. Our projection at the start of the year was that Altra's revenues from oil and gas would be down 25% in 2015. Oil and gas performed better than that this quarter but continued to weigh significantly on our performance. Alternative energy was up modestly, driven by demand in the wind market in Europe and Asia. We still expect alternative energy will perform well in 2015, particularly in China. Power generation revenue was down from the first quarter of 2014. In metals, sales are down from a year ago, as we said last quarter some demand for our products in this market is tied to pipes used in oilfields and it appears continued sluggishness in oil and gas has had an indirect negative effect on the demand for steel. Mining continued to be weak and was down both year-over-year and sequentially.

We have seen an increase in the number of proposal requests in this market during the past several quarters but this has not translated into an increase in orders. Sales in aerospace and defense were up strongly in the first quarter following a solid fourth quarter. Overall, we still expect this market to be largely unchanged in 2015. In terms of geography, excluding the effect of recent acquisitions and foreign exchange, North America and Europe were down from a year ago, sales in Asia were up slightly.

The outlook for the global economy has improved slightly, although we remain cautious on both Europe and Russia and the outlook for the US has softened recently. With that, I will hand the call over to Christian and then close with a brief discussion of our other initiatives. Christian?

Thank you, Carl, and good morning, everyone. Please turn to slide four. As Carl said and as we expected, our performance during the quarter reflects the challenges from the global economy in some of our largest end markets. For the first quarter of 2015, non-GAAP EPS was $0.42 versus $0.48 per share a year ago.

I would note that the higher medical costs we discussed in this previous quarters receded during the first quarter, although it is unclear whether medical costs will continue to follow that downward trajectory in coming quarters. Looking at the top line, foreign exchange rates had a negative impact of approximately 560 basis points driven by continued strength in the US dollar while price added 60 basis points.

Volume declined 410 basis points as a result of the slowdowns in oil and gas, AG and mining. Net of acquisitions, sales declined 9.1% year-over-year. Geographically excluding acquisitions and the effect of foreign exchange, North American revenues declined 4.6% year-over-year while European revenues decreased 2.9%. Sales to Asia Pacific and all other geographies increased 1.6%.

Restructuring charges for the quarter totaled $1.8 million and we should start to see the benefits of the resulting lower head count later in the year. However, those reductions have been factored into our guidance. We expect to pursue our cost reduction activities as we progress throughout year. Interest expense was $3 million, essentially unchanged from the prior year. We reported a tax rate of 30.6% during the quarter compared with a tax rate of 29.4% in the first quarter of 2014. Please turn to slide five for a discussion of our segment performance.

For the first quarter of 2015, net sales in clutches and brakes were $101.6 million compared with $113 million in the year-ago quarter. The decrease was primarily the result of declines in the agriculture, oil and gas and mining markets. Segment operating income was $11.7 million versus $12.9 million a year ago.

Net sales in the gearing and power transmission component segment were $61.5 million, compared with $67.3 million in the first quarter of 2014. The decline was primarily the result of unfavorable foreign exchange translation. As a result, segment operating income declined $100 thousand.

Net sales in the coupling segment were $31.9 million, an increase of 2.9% from the year-ago quarter. The increase was primarily the result of growth from the Guardian acquisition which is partially offset by economic weakness and foreign exchange. The segment operating income declined $600,000 largely as a result of margin pressure from the strengthening of the British pound versus the Euro. Slide six is a reconciliation of the non-GAAP measures. Please turn to slide seven.

During the quarter, the average price of the Company's common stock approximated the conversion price of the Company's convertible notes and therefore the notes were not dilutive for the quarter. During the quarter we repurchased 170,000 shares of Altra stock for a total of $4.6 million under our $50 million stock buyback program that expires a the end of 2016. Since the program's inception last year we have purchased approximately $22 million or 716,000 shares under the program. We will continue to repurchase Altra shares from time to time as market conditions warrant it.

Slide eight reviews our working capital performance, our working capital improvement efforts contributed to the Company's operating free cash flow for the quarter. Altra generated free cash flow of $5 million. Please keep in mind that our free cash flow is generally higher during the second half of the year. Capital investments during the quarter totaled $7.7 million as we are completing the construction project at Bauer in Germany. Depreciation and amortization was $7.5 million in line with our expectations. Please turn to slide nine in our guidance for 2015. Altra is currently forecasting sales in the range of $760 million to $780 million and non-GAAP diluted EPS in the range of $1.60 to $1.75.

This guidance includes the expected savings from the restructuring actions taken in the first quarter. The guidance now reflects a stronger dollar and larger than expected weakness in the end markets discussed today. The Company continues to expect its tax rate for the full year to be approximately 30% to 32% before discrete tax items. Altra also expects capital expenditures in the range of $24 million to $26 million and depreciation and amortization in the range of $30 million to $32 million. With that, I will turn the call back to Carl.

Thank you, Christian. And please turn to slide 10. We continue to make progress on our strategic initiatives during the quarter. As I said, strategic pricing added about 50 basis points to gross margin while the Bauer consolidation is on schedule and should be completed this month. As Christian mentioned, we continued to return capital to shareholders buying back $4.6 million of Altra shares during the quarter under our stock repurchase program. In terms of M&A, our balance sheet is solid and market for potential acquisitions is relatively open.

Although as I mentioned last quarter, valuations are fairly steep so we are being selective as we look at potential deals. Overall, the year is shaping up largely as we expected. Some markets are performing below our expectations while others are exceeding our initial projections. We believe we are being aggressive with our approach to profitability and we believe this is an appropriate time to right size our operations. We look forward to providing additional insight on our progress when we speak again on our second quarter call. Thanks for your continued support of Altra. We will now open up the call for your questions, Rob.

(Operator Instructions). The first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hi, guys. This is James [Pickerel] filling in for Jeff.

Good morning, James.

Good morning. So can you provide additional color around the restructuring actions you took in the quarter and maybe just what you expect to do the remainder of the year? And within that, maybe the expected cost and time frame of the savings you can generate?

Yeah, we reduced our headcount globally by about 120 heads which is slightly below 3% of our global headcount. A lot of the action related to Europe headcount reductions at Bauer and at Svendborg. And then the remainder was also in North America as well as in other parts of the Europe. That was the main goal of the restructuring so far is to reduce headcount. We anticipate further headcount reductions as we go through the year and we will update you on future calls relative to those activities.

Okay. And then just on FX, obviously the environment from a translational top line perspective is challenging, can you just maybe speak to the transactional side are there inherent benefits given your position in Europe? Any color there would be helpful.

In most cases we sell in the jurisdiction that we manufacture. We have some challenges in the UK where we sell to European customers in Euros and as those currencies have changed there is some margin pressure on a couple of our businesses in the UK. Other than that, we don't have a lot of transactional exposure. The Canadian dollar and the weakness in the Canadian dollar I think has hurt us slightly as some of our competitors are importing from Canada and that has had a slightly negative impact but nothing significant.

Got it. All right, I will get back in queue. Thanks.

Thank you. The next question comes from the line of Ryan [O'Donnell] with Robert W. Baird. Please proceed with your questions.

Good morning, guys. Thanks for taking my questions.

Good morning.

Good morning.

Can you guys just kind of walk through the progression month by month through the quarter and within that maybe the key end markets, AG, mining, oil and gas, how they trended?

Through the quarter the incoming order rate picked up. So we saw a little bit of acceleration. Not significantly, but it was noticeable. Oil and gas, the, what we expected to see was that the large OEs that we service would want to push out orders and cancel orders as you know as the price cratered at the end of the last year, beginning of this year. And we didn't see that. They actually, the backlog stayed about what it was. We saw some pushouts but not as many as we expected. So through the quarter we had, you know, the backlog to work off of and the shipments into the oil and gas industry were better than we had anticipated.

However, the incoming order rate was not. It was what we expected down in that 25% range that we had stated. So we expect the second half of the year as we work through the backlog will be worse than the first half of the year in oil and gas. Those are probably the two noticeable trends that would have happened in the quarter. Other than that, I think things were reasonable where close to what we anticipated and reasonably stable.

Okay. That makes sense. And then you guys mentioned stabilization in Europe and Russia, kind of relative to your expectations. Maybe just what you are seeing in those markets and how they will kind of play out through the year as you see it today.

Well, I think it is just the weakness in the Euro has given that economy a little bit of a boost there so it started to improve a little bit and certainly stabilize. And then in Russia, we have seen that demand stabilize also I think as things have settled down a little bit there. It gets hot and cold but certainly the demand for some of the products we sell there has stabilized at a much lower level than it was two years ago, three years ago, but it is not continuing to deteriorate.

Thanks a lot, guys.

Our next question comes from the line of Matt Duncan with Stephens. Please proceed with your question.

Hi, good morning, guys. This is Will on the call for Matt.

Good morning, Will.

Just as a follow on to the previous question with the quarterly friends I'm kind of wondering how April shaped up. Did you see a slight pickup from the March levels or how are you seeing things now currently?

You know, it is not significant change. I think that the levels are about what we saw in March. So certainly not enough of a difference to call a big upturn. And we don't expect that for the year. We are just anticipating this is going to be a year to focus internally and not expect demand to drive our results.

Okay. That helps. And I'm curious on the research and development line. The expenses jumped about $1 million in the quarter from where we have been trending recently. Wondering if that was something one time in nature or if we should expect it to stay around the $4.8 million range throughout the year.

You should expect that to stay around the $4 million range. It is impacted by the comparability due to the Svendborg acquisition. We brought the Svendborg reporting in line with the rest of the Altra organization. On a true apples to apples basis, I think there was only a slight increase in R&D expenses. So assuming the $4 million what you are seeing I think for the right balance of the year is the right thing.

Okay, great. Thanks, guys.

Okay.

Thank you. Our next question comes from the line of John Franzreb of Sidoti & Company. Please go ahead with your question.

Good morning, guys.

Good morning.

Could you just provide an update on the healthcare costs? From what I recall the January number is down roughly $100,000. What is the current run rate as far as down year-over-year?

In the first quarter we were down $200,000 from the prior year which is around a 5% decrease. We did get hit in the second and third quarter of last year, the first quarter last year was actually a fairly normal quarter for us. So the big impact was in the second and third quarter so we are hoping that this trend continues but we can't be sure. We did see a reduction in the number of large claims but we a high deductible healthcare plan so in the early part of the year people are still eating through their deductibles before we get, you know, fully hit. So it as little bit too early to make predictions.

Okay. Thanks for that color. And, Carl, from what I recall in the last quarter you kind of mentioned as part of your restructuring actions the possibility of reducing the number of product offerings. Is that something you are still doing? I didn't quite hear that in today's dialogue.

I mean we are always looking at that as we try to reduce the number of end items. I think we wouldn't reduce the product offering necessarily but reduce the number of end items and certainly the number of components we manufacture so that activity is constantly going on, yes.

Okay. And then moving to some of the top line it is -- can you just talk about your distributor base when their inventory looks like? Any color there would be helpful.

It is relatively stable. It might have tweaked up a little bit, so but I think it is relatively stable on some of our larger distributors have increased the inventory on some of our items a little bit but not enough to have driven demand and made a huge change in our top line.

One last question. Given the tougher environments are you getting pushbacks on your pricing strategy?

I think in the quarter we had about 60 basis points and last quarter about 80 basis points. So it is becoming a little more challenging but we are still seeing very positive results.

Okay. Thank you for taking my questions, guys.

Thanks, John.

Thank you. (Operator Instructions). Our next question is coming from the line of Scott Graham with Jefferies. Please proceed with your questions.

Hey. Good morning, guys.

Good morning.

The question, a couple of questions that I have relate to the restructuring. Someone asked the question earlier and I was kind of hoping that you would be able to answer, Christian, on the savings that you expect from the headcount reductions? And also if you wouldn't mind adding to that what the savings you expect will be derived from the Bauer consolidation? Maybe those two things in two separate buckets.

So Bauer this last step where we are exiting the last two buildings will save about half a million dollars a year. Overall since we started this program and moved from six to now finally two facilities it is about $1.3 million savings. This last phase is about $500,000, incremental to last year. The restructuring itself relative to the headcount reduction, that savings is about in total if you include on an annualized basis around $3 million.

Got you.

Now, that will not all be available next quarter. In Europe you have termination periods so you will still have for a couple or three months you will have a continued payroll for some of these individuals. But I think starting the second half we should start to see more and more of that benefit rolling in. We are also, as Carl mentioned, very aggressively negotiating with our suppliers. So far we have addressed about $90 million of our spent and with some nice favorable outcomes and we hope that these savings will help to offset the mix changes as oil and gas and mining are very profitable sections of our business turf and garden, for example, is less profitable so we have a mix change that is impacting our perform. That we can use that to off set that impact or mitigate that impact.

Okay. Thank you. The last two questions are is there any way to if we were to look at pricing this total and strip out the 50 basis points from strategic pricing, was pricing stable or has it begun to decline for you elsewhere?

I think if you strip out the strategic pricing, pricing is stable. We have had price increases. We have gone out with price increases on certain products but the general price increases they are harder to get right now in this environment.

Understood. Well, it looks to me like the mid point of your guidance suggests only a slight decline in earnings per share for the year, so I would consider that a victory in this environment. So thanks for taking the time.

Thank you.

Thanks, Scott.

Our next question is a follow-up from the line of John Franzreb with Sidoti. Please proceed with your question.

Just one question about the margins in the coupling segment. Is that business still being hurt by startup costs in China or is there a mix issue going on there?

Two things. Still being hurt by startup costs in China, yes, they are about flat compared to last year so no change year-over-year there but it is still a drag on the business. And them the second, the biggest issue is that we have a couplings business in the UK which is selling a large portion of its products in Euros and with the strengthening of the British pound against the Euro they have come under margin pressure because a lot of their competitors are Euro-based. And that has dragged down the performance of that.

So when do those issues go away there?

I think the China issues are probably going to be with us for most of this year. And then the margin issues hard to predict how the British pound and Euro will behave over the next, over the balance of the year.

What we are doing there, John, is we are going to manufacture some of the opponents not in the UK where we get, where we will have a better cost base. And that is going to take awhile to transition those. But that will happen over the next six to nine months.

Carl, will you have redundancy costs associated with running multiple lines that mask some things and we will see a pop when that transition is finished?

No, you should not see, I hate to say no, you won't, but we don't expect to see a redundancy cost there with multiple line or redundant capital expenditures. We shouldn't see that.

Great. Thanks for the color, guys.

Thank you.

Thanks, John.

Our next question is a follow-up from the line of Scott Graham with Jefferies. Please go ahead with your question.

Hi, I just had one other. What is your assumption contemplated in the guidance for FX for the year?

We are using $1.09 for the Euro. Using the end of the first quarter spot rate which was about $1.09.

Okay.

The first quarter we had $1.12 that ran, but the P&L to the head winds in particular in the first month of the second quarter is going to be some head wind compared to the first quarter. If the currency stays where it is right now, about $11, $12, there should be some slight upside compared to the guidance for the remaining two months.

Right. Forgive me for asking you to do the full math here, Christian, is the rest of year guidance contemplating the same level, I'm sorry a little bit more on the negative FX than what we saw in the first quarter?

Yes.

Right, okay. Very good. Thanks.

And when you look at the bottom end of the guidance, we took the bottom end down and 90% of that is FX.

Understood. Thank you.

Thank you. At this time, I will turn the floor back to Mr. Carl Christenson for closing comments.

Thank you, Rob. And thank you to everyone for joining us this morning. We look forward to speaking with many of you at the KeyBanc Industrial Conference in Boston on May 28. Thank you and have a great weekend.

This concludes today's teleconference. You may now disconnect your lines that the time. Thank you for your participation.