Altra Industrial Motion Corp (AIMC) 2015 Q2 法說會逐字稿

Greetings and welcome to Altra Industrial Motion's second-quarter 2015 financial results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to Andrew Blazier with Sharon Merrill. Thank you. You may 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 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 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 operating working capital and non-GAAP free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading Discussion of Non-GAAP Financial Measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available on the financial tables of the Q2 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. Please turn to Slide 2. On today's call, I will go through brief overview of our performance during the quarter and the major drivers of that performance, and then I will walk you through the next steps of our business simplification plan as we announced in our press release this morning. Then Christian will do over the financial results and I will close with my usual review of our end markets and short summary of the quarter.

Altra delivered a solid performance during the second quarter, particularly given the challenging global industrial economic environment and ongoing weakness in several of our key end markets. We continue to navigate the strong US dollar, contraction in the price of oil, and global weakness that began in the second half last year.

Revenues declined 8.6% from the second quarter of 2014 to $196.6 million. As has been true since last fall, the decline in net sales was driven by the unfavorable impact of foreign exchange, global economic weakness, and lower demand in our oil and gas, agriculture, mining and metals end markets.

Although gross margin compressed slightly from a year ago, we saw some sequential improvement from the first quarter. Excluding the impact of foreign exchange, operating expenses declined from last year, primarily because of cost reduction initiatives as well as a decline in healthcare costs. However, operating income also declined from a year ago due to the lower topline. As a result, non-GAAP earnings declined 12% year-over-year to $11.5 million, or $0.43 per share.

During the quarter, we purchased the remaining 15% interest of Lamiflex in Brazil. We are in the process of installing capacity to assemble Svendborg Brakes in Brazil.

Now please turn to Slide 3. We said on our first-quarter call that we would be taking aggressive actions to reduce costs and align our operations according to current levels of demand. These actions are in addition to the headcount reductions and restructurings that are in process at Bauer and Svendborg. In keeping with that intent, today, we announced the next steps of our multi-year business simplification plan. The primary goals of this plan are to improve business effectiveness, reduce the number of facilities, streamline the Company's cost structure, increase margins and enhance shareholder value.

We built Altra through a series of acquisitions during the past 10 years, performing basic integrations with each new acquisition. However, we have a tremendous opportunity to streamline our cost structure and truly unify the Company.

The next step of the plan has two parts which we outlined in our earnings release this morning. The first part is a broader facility consolidation and reducing the number of legal entities. Altra currently has 34 manufacturing and assembly facilities around the world. We expect to reduce that number by at least 20% by the end of 2018. This includes three consolidations that were initiated during the second quarter in Illinois, France, and South Africa. We are now reviewing a number of facility candidates for further consolidation and we plan to announce and complete (technical difficulty) consolidations in stages in a disciplined, orderly manner. The intent of the consolidations is to streamline overhead costs, but not reduce capacity.

We intend to maintain capacity with fewer roof lines. We will also be able to tuck small acquisitions into floorspace in the existing facilities.

As a result of the consolidations, Altra will run fewer but larger facilities. This will enable the Company to attract skilled individuals and develop the management talent necessary to drive continuous improvement and develop more efficient operations.

The second part of the plan is to take advantage of economies of scale and optimize our supply chain to better leverage our global spend. This will enable us to centralize certain aspects of our supply chain and reduce the number of suppliers. As we execute this plan, we will benefit from the investments made in our global IT system.

In total, we expect these actions to be completed by the end of 2018. We expect to begin realizing savings from our actions during the second half of 2015 and to complete these actions by the end of 2018. We ultimately expect to achieve annual savings of approximately $15 million.

As many of you know, for the past several years, our top priorities have been focused on topline growth, both organic and acquisition, as well as margin improvement. The next steps in our business simplification efforts will take approximately 3.5 years to complete and will be a significant contributor towards achieving our 15% operating margin goal. That is a significant goal for our Company and it will require a unified effort across and at every level of our organization.

We'll still pursue growth through acquisitions. We're refining our acquisition process to improve the quality of the pipeline and develop standard work for the integration process.

Now I will turn the call over to Christian, then close with a discussion of our end markets and a brief summary. Christian?

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

Our second-quarter results reflect the continued weakness in some of our largest end markets as well as deteriorating sentiment within our distribution channel. For the second quarter of 2015, non-GAAP EPS was $0.43 versus $0.48 a share a year ago.

I am pleased with our Q4 performance. When compared to our first quarter of 2015, sales and gross profit margins were up slightly while operating expenses were down slightly.

Looking at the topline, foreign exchange rates had a negative impact of approximately 590 basis points driven by continued strength in the US dollar while price added 90 basis points. Volume declined 360 basis points as a result of the weakness in oil and gas, ag, mining and metals. Metal foreign exchange sales declined 2.7% year-over-year.

Geographically, excluding acquisitions and the effect of foreign exchange, North American revenues declined 7.9% year-over-year while European revenues increased by 2%. Sales to Asia-Pacific and our other geographies increased 2%.

Interest expense was essentially unchanged at $3 million. During the quarter, the average price of the Company's common stock did exceed the current per share conversion price of the Company's convertible notes by a small amount as a result, and those were only slightly dilutive to earnings.

We recorded a tax rate of 31.2% during the quarter compared with a tax rate of 31.7% in the second quarter of 2014.

Please turn to Slide 5 for a discussion of our segment performance. For the second quarter of 2015, net sales in clutches and breaks were $105.5 million compared with $111 million in the year-ago quarter. The decrease was primarily the result of declines in agriculture, oil and gas as well as mining. Segment operating income was $30.3 million versus $40.3 million a year ago.

Net sales in the gearing and power transmission components segment was $60.6 million compared with $70.1 million in the second quarter of 2014. As a reminder, Bauer is the primary driver in the segment and we've seen some nice results from our Bauer improvement efforts recently. The decline was primarily the result of unfavorable foreign exchange translation, which was partially offset by improved markets for our Bauer business segment. Segment operating income declined $1.4 million as a result of the aforementioned items.

Net sales in the coupling segment were $31.7 million compared with $35 million in the year-ago quarter. Segment operating income declined $800,000.

Slide 6 is a reconciliation of our non-GAAP measures.

Please turn to Slide 7. Book equity was $252 million and our cash balance was $42 million. During the quarter, we repurchased 123,000 shares of Altra stock for a total of $3.4 million under our $50 million stock buyback program that expires at the end of 2016. Since the program's inception last year, we have purchased approximately $25.6 million, or 839,000 shares. We are active in the market and will continue to repurchase Altra shares from time to time as market conditions warrant. We also increased our quarterly cash dividend by 25% during the quarter, boosting returns to our shareholders.

Slide 8 reviews our working capital performance. Our working capital improvement efforts contributed to the Company's operating and free cash flow. Year-to-date Altra generated free cash flow of $16.6 million. Capital investments during the quarter totaled $5.8 million and depreciation and amortization was $7.6 million.

Also during the quarter, we purchased the remaining 15% of our Lamiflex subsidiary in Brazil for $878,000. We now have 100% ownership of Lamiflex.

Please turn to Slide 9 and our guidance for 2015. Our guidance for the full year remains unchanged. We expect 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 savings from the restructuring actions taken to date. We expect continued weakness in agriculture, metals, mining, oil and gas. The Company expects 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 discussion back to Carl.

Thank you Christian. Please turn to Slide 10 for a review of our end markets. Let's begin with distribution, which is primarily made up of sales of aftermarket parts and original equipment parts for small OEMs.

In the second quarter, distribution revenues continued to weaken from the first quarter and were down year-over-year on further erosion of our oil and gas and metals markets. In addition to weakness in some specific end markets, we believe that the decline in distribution is an indication that the industrial economy is not healthy.

Turf and garden was again a bright spot for this quarter as sales were up strongly from a year ago. We already have a significant share of this market and we added to that in the second quarter on the strength of sales to both new and existing customers. We continue to expect this market to do well on a solid housing market and increased household disposable income in the US.

Agriculture continues to be down sharply this year as a result of low commodity prices and the negative impact of a strong dollar on US exports. Ag was actually up slightly from the second quarter of 2014 on an easier comp as we have now reached the anniversary of the beginning of the decline in this market.

Transportation was up modestly on strengthened sales to marine and rail. Automotive sales continued to be soft, but this was primarily related to timing issues at a major automotive customer.

In materials handling, sales were up slightly year-over-year. Demand in forklifts and elevators was essentially unchanged while conveyors were up modestly. Crane and hoist demand was down.

Turning to the energy market, energy overall was down significantly from a year ago. Our projection at the start of the year was that Altra's revenues from oil and gas would be down by 25% by 2015. In fact, oil and gas deteriorated in Q2 and is now off more than we expected year-to-date. Alternative energy, which has propped up the overall energy market thus far, declined modestly from the second quarter of 2014. The decline in demand and renewable energy market was driven by timing issues for our wind related products. Power generation revenue was similarly down from a year ago.

Demand in the metals market worsened during the quarter and was off substantially from a year ago. In addition to the sluggishness in oil and gas we've discussed previously, slower growth in China has had a twofold effect on metals. China represents half the world's steel consumption, so lower demand in China has a profound effect on this market. Moreover, with idle capacity at Chinese steel mills, China is exporting more steel, which is further eroding steel prices and consequently investment in European and North American operations.

Mining continued to be weak and was down year-over-year, but grew sequentially from Q1. The sequential increase in mining was largely due to two large shipments. We continue to receive a number of proposal requests in this market. However, the outlook for mining is for this market to continue to be challenging.

Finally, sales in aerospace and defense continues to be up strongly for the year, but declined slightly during the quarter. The increase year-to-date has been led by solid demand in commercial aerospace and some land-based defense projects. Overall, we expect this market to be up slightly in 2015.

In terms of geography, excluding the effect of foreign exchange, North America was down from a year ago while sales in Europe were up and Asia was up slightly. The outlook for global economy is mixed and we remain cautious.

We continue to make progress on our other strategic initiatives. Strategic pricing contributed to the Q2 results and we continue to roll it out to additional businesses. In addition, the Bauer business took further action to reduce cost and the performance of Bauer continues to improve.

In summary, while our end markets and the global economy continue to be sluggish, we continue to drive improvement and cost containment across our organization. Now is the time to elevate our efforts so that, when the economic and end market conditions eventually improve, Altra will be a much more efficient company generating profits at a substantially higher pace. We look forward to providing additional insight on our progress when we speak again on our third-quarter call.

Thank you for your continued support of Altra. We will now open the call to your questions. Operator?

(Operator Instructions). Matt Duncan, Stephens.

Good morning guys. So Carl, can you maybe talk a little bit about the order trends that you guys are seeing, especially from the oil and gas market? Rig count seems to hit bottom. Is that starting to show up in maybe a bottoming of the downtrend in sales to that market or are you still seeing things get worse sequentially?

I think we've seen a flattening out. We lived off of some of the backlog earlier in the year, and so we have eaten into the backlog. But there is certainly some replacement parts orders coming in and it seems to have flattened out.

Okay. So you said you originally thought it was going to be down 25% this year. How much is it actually down year-to-date so far?

It's down around 30%, and -- --

So not too far off.

-- around 30%. No, within the ballpark but worse than we expected.

Fair enough. On the business improvement actions, so it sounds like we're going to get $50 million in annual savings out of these once they are fully rolled out by the end of 2018. Christian, is there any help you can give us on how that $15 million phases in? Especially this year and next, how should we think about the cost savings benefit from those actions in 2015 versus 2014 and in 2016 versus 2015?

I can give you some help as it relates to this year. We plan on subsequent costs to provide some guidance as to how this will affect 2016, 2017. 2018, we expect that, by the time we exit 2018, we will have the full $15 million in our run rate.

So far this year, we have realized about $600,000 of savings with another $1.5 million to $2 million to go in the second half. And that relates to primarily to the actions that we have taken in terms of headcount reductions earlier in the year at Bauer, at Twin Fork, and some of the other European operations. On top of that, the three facilities that we are currently in the process of closing, they will yield an annual saving somewhere between $1.5 million and $2 million. We think we're going to complete those three by January or February of next year.

Okay. Very helpful, thanks. Then the last thing I've got, just on the strategic price initiative, for all it sounds like, you are still having some success with that. Is it still helping gross margin by the roughly 50 basis points that you thought it would? And as you go to customers with these strategic pricing actions right now, are you finding it any more difficult to get them to accept those? Is it getting a harder or are you still having the sort of same success rate you expected?

On the strategic pricing initiatives, we are still having the same effect that we expected, and it was about 50 basis points in the quarter. Where it is more difficult is on the general price increases, and certainly at the OEM side. So I would -- so I'm really happy that we are implementing the strategic pricing because we saw a nice improvement from pricing, and more of it this time was due to the strategic pricing than our general price increases.

Yes. It seems like it's definitely dampening what would be happening with gross margins right now if not for those actions. So well-timed.

Yes. And it's surgical, so it's something that we can do even in the bad times if there's good reasons to do it.

Sure. Okay, guys. Thanks for all the insights. I appreciate it.

Bhupender Bohra, Jefferies.

So first question around you talked about Bauer, and you mentioned about some improved markets for Bauer in the quarter. Actually if you can just expand on that, what particular end markets you saw, because Europe actually grew about like 2% in the quarter. So if you can give some color on that.

We saw strong sales at Bauer into Russia, into North America, and certain markets like Germany we did well. But the best performing markets I think were North America and Russia, surprisingly Russia, for Bauer.

Okay. How do you see the trend actually going into the second half? Any change from what you saw in the second quarter?

At Bauer, we get about a three-month visibility and the bookings rate over the last two months has been very good, and we would expect that topline trend to continue, at least into the third quarter, less visibility as it relates to the fourth quarter.

Okay. And the other geographic market I wanted to touch was China, which has been in the news recently. If you can just give us some color on that, what do you see and what are you hearing about the industrial economy over there, especially with where we see the steel consumptions? Like (inaudible) commodity, it's down, and some other commodities are down over there.

So certainly, in the steel industry, or even in our energy business there, it's been significantly weaker than we expected. The outlook there is not good, but we do have some segments that have done well. Our electric clutch business has done very well there this year. So there's been some pockets of success. But overall, I think the general sentiment for China is the industrial economy is not as expected.

Okay. And the last question on savings, I just wanted to clarify something. On your first quarter, you mentioned by the end of 2015, you will have savings of about $3 million. And the new saving -- the plan which you have right now until 2018, the $15 million, is that inclusive of the $3 million or would that be something?

That's inclusive of the $3 million, the $15 million.

Thank you.

John Franzreb, Sidoti and Company.

Just sticking with the restructuring program, how much of the actions that you're putting in place today were on the table, say, a year ago and you're just getting to them versus how much of it are you reacting to weaker than expected operating conditions?

I'll start and Christian can follow on. So, I don't know if you recall, but back when we did the restructuring in 2009 and 2010, we said that this is a step that we are taking. And we've known since we were making the acquisitions that we had too many facilities, that we need to do some consolidation work. And so this has been a plan that we've had for a long, long time. Some of it is -- it would've been executed regardless of economic conditions. Some of it is you're better off doing it when facilities are slow than you are doing it when they are really busy and trying to service customers. The biggest risk in doing something like this is that you disappoint a customer. And so doing it while the demand is down a little bit is certainly a motivator.

Anything to add Christian?

I think what Carl says is right. There's a couple of consolidations that relate to Svendborg and to the integration of Svendborg. That might be one -- there's two facilities that are under review. But for our other facilities, I think Carl is right on that we have been looking at this for the last six months. We think timing is right because you don't want to lose sales when you do this, and therefore doing this during a slower time I think is well-timed.

I'd also like to emphasize, John, that we have done facility consolidations before. We've got excellent plans laid out for the ones that are in progress. We are going to do this in a disciplined, sequential approach, not try to do it all at one time and have a tremendous amount of risk. We have taken one of our senior executives who is our best operating guy, and he is going to head up this plan for us. So it's -- we've put a lot of work over the last six months to a year in laying out this plan, and I'm very confident that it's absolutely the right thing to do for the Company and it's going to have a significant impact.

We've seen like when we did it 2008, 2009, that an ideal size for our factories is around $50 million in revenues, 200 to 250 employees, and that you can really achieve higher operating performance in facilities of that size. That's what we are striving for and that's what we're trying to do. We won't be able to do this in all cases. We still have smaller facilities in certain geographies, but ultimately that's where we are heading.

So relative to your long-term EBIT margin goals, would this be an incremental benefit to those goals if you achieved your original revenue targets that were associated with those goals, or is it just helping you get there in a step function?

I think as part of our (technical difficulty) get to 15%, you cannot add this. This is doubling down on getting to 15%, showing we are serious about getting to 15%. I think we all will be happy. We all will be happy when we get to 15% operating income, and that's a big step. That's 200 basis points in that direction if this works out as planned. And we're going to work hard on making it happen.

The reason we have some tremendous economic recovery, then we will see some very good operating leverage in the business. I can assure you of that.

I suspect so. And regarding the quarter, Christian, you pointed out that the SG&A was lower year-over-year due to the combination of restructuring actions and healthcare costs. Healthcare was such an issue last year. Can you just kind of bring us up-to-date on how much of the benefit was healthcare related, and what your expectations are for the balance of the year?

First quarter, you recall it was flattish year-over-year. We really saw the impact last year in the second quarter. We're about $650,000 below second quarter of last year, so a meaningful number. We've seen the severity of the large claims that we talked about decline significantly. The frequency is still about the same, but the severity has come down very significantly. So, we hope that this trend will continue into the third quarter and into the fourth quarter.

Okay. And one last question. What's baked into your guidance as far as currency right now?

$1.10 for the euro, and as it relates to the British pound, which also has a meaningful impact on us, $1.53.

Thank you very much. I'll get back into queue.

(Operator Instructions). James Picariello, KeyBanc Capital Markets.

Hey guys. So just to stick with the simplification plan, can you help bucket or just sort of break out the savings that will be generated from facility consolidations versus the supply chain IT efficiencies?

The facility consolidation is about $8 million. The balance would be on the supply chain/IT side.

And both should run at a fairly similar cadence, or is the supply chain more back-end loaded front-end? How should we think about that over the next three years?

You will see the supply chain is a little bit -- is more in 2017, starting in 2017 and 2018 as we set the organizational infrastructure for this, while the facility consolidations, those savings have started and we'll start to see that beginning in the second quarter.

Okay. Got it. And then regarding your outlook for the full year and maybe just what's implied on an organic basis by region, can you talk about how you're thinking about the second half by region?

I think we'll anticipate similar trends to what we've seen in the second quarter -- Europe slightly up and North America down year-over-year and Asia flattish, up a couple of points.

Got it. And you mentioned the share gains in lawn and garden. What is driving that? Is it something, is it a new go-to-market approach? What -- just some color there.

We are the market leader in that. We spend a lot of effort in product development. And I think the technology that we have developed is being well received in the marketplace, and we have taken some share as a result of that.

Then the other issue is really delivery and leadtime. So, we've done an outstanding job. The new plant we put together in Indiana, the leadtime and on-time delivery performance is unparalleled. So it's really customer satisfaction.

Got it. That's good color. Then just the last thing, I might've missed this at the beginning. You mentioned Svendborg and Brazil. What was the comment there?

So we are -- we bought the balance of the equity of the Lamiflex business in Brazil. And there's a new plant in Brazil, and we are moving -- in order to get local content, we are starting to assemble Svendborg Brakes in Brazil. So we've moved into a new plant. We are bringing new products. The intent when we bought that business was to bring additional Altra products into the Brazilian market by having local content. And this is one big step into that.

All right. Thank you. I'll get back in queue.

John Franzreb, Sidoti and Company.

Yes. Somebody asked earlier about what end markets were doing better in Europe. I didn't quite catch the answer of what sectors are doing better in Europe.

I think the one that really sticks out was Russia for us geographically. And in Russia, it was cranes and hoists that really did well.

Okay. Any other ones similar to cranes and hoists you would like to call out?

I think that was it.

That was it? Okay. Secondly, you mentioned that distribution had been relatively weak. I wonder if there's a change in mix as far as aftermarket versus OE sales that are helping you in any way.

I think the aftermarket for mining and for oil and gas has really stemmed some of the difficulties we've seen on the OE side there. And aftermarket is particularly profitable, so it's helped minimize the impact of those two markets being substantially down.

Typically, what happens is, in downturn in oil and gas, we do see a mix change where sales to OEM drop compared to aftermarket sales, and aftermarket sales are significantly more profitable, so that mitigates the topline decrease in those product lines.

And what's total aftermarket running as a percentage of sales right now, Christian?

We are looking at around 39%.

Okay. Perfect. Thank you very much guys.

There are no further questions at this time. At this point, I'd like to turn the call back over to Carl Christenson for closing remarks.

Thank you operator, and thank you to everyone for joining us this morning. We look forward to speaking with many of you at the Jefferies Industrial Conference in New York on August 12. Thank you.

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