Altra Industrial Motion Corp (AIMC) 2016 Q1 法說會逐字稿

Greetings, and welcome to Altra Industrial Motion First Quarter 2016 Financial Results. (Operator instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. David Caludsian. 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 gross margin, 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 Q1 2016 Financial Results Press Release on Altra's website.

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

Thank you, David. Please turn to slide 2.

Our first quarter results were in line with our expectations, and provide us with confidence in our full-year top and bottom line guidance. We executed well on our business simplification initiative, and operations excellence contributed favorably to our results.

While these initiatives are benefiting the bottom line, they were mostly offset by the effect of the lower sales volume and unfavorable product mix in the first quarter, resulting in modest improvements in gross profit and operating income margins.

Gross margin percentage increased 10 basis points to 30.3%, and revenues decreased by 6.7%. We are very pleased that gross margin percentage increased, even though revenues declined.

Income from operations was 8.3%, and non-GAAP income from operations was 9.2%. Cash flow from operations enabled us to maintain our balanced capital allocation as we repurchased 91,000 shares of Altra stock.

Looking at the big picture, the progress we've made is very exciting and right in line with our expectations. Our team is doing a great job in controlling what we can control and making Altra a stronger company. We continue to face a soft economic environment for several of our end markets, and we expect to see strong operating leverage when these out-of-favor end markets return. Now, please turn to slide 3 as we discuss the condition in our end markets.

We'll begin our market discussion with distribution, which is predominantly made up of sales of aftermarket parts and original equipment parts for small OEMs. Distribution was down single digits year-over-year, but was up by single digits sequentially. We believe that the underlying demand is down from last year and will continue to be relatively weak in the channel.

In turf and garden, after turning in two straight record years, we are off to another strong start in 2016. Sales were up single digits year-over-year as a result of our execution and the continued strength of the domestic housing market. The turf and garden industry is expecting modest growth in 2016, and we're on track to have a similar year to the one we had in 2015.

Conversely, the agriculture market remains very weak, and our sales were down significantly for the quarter from a year ago. Low commodity prices and fewer incentives are resulting in soft ag equipment purchases. We did see a sequential increase in sales from the fourth quarter, although it is far too early to determine if this is the start of a positive trend. At this point, we expect continued softness in 2016.

Transportation was up for the quarter, both year-over-year and sequentially, driven by automotive program demand. Our sales tend to be lumpy in this area as a result of order timing.

Materials handling was down both year-over-year and sequentially, driven by weakness in elevators and conveyors. This was primarily due to the negative impact of foreign exchange, which we expect to continue to affect sales in these markets as a result of the strong dollar. Soft elevator and conveyor sales were partially offset by continued strength in forklift trucks.

Turning to energy, energy overall was down from a year ago and on a sequential basis, driven by the continued and significant decline in the oil and gas sector. We expect that oil and gas will remain weak for at least the remainder of the year. Renewables, on the other hand, continue to be strong on a constant-currency basis, and were up slightly both sequentially and year-over-year even when you include the FX effect. We're seeing strong sales in Europe, China, South Africa and the US, and expect global demand trends to continue through 2016.

We plan to capitalize on that trend with aggressive new product development efforts out of our Svendborg business. In addition during the quarter, we shipped our first wind turbine brakes out of our facility in Brazil.

Power generation was down slightly in the quarter from a year ago, but was up slightly from Q4. We continue to expect this market to be relatively flat.

The metals market weakened further during the quarter, with sales down double digits year-over-year and sequentially. Over capacity in China and global pricing continue to affect this market. We do expect demand for aftermarket parts to continue to be relatively stable.

After two consecutive sequential increases, mining sales declined significantly in Q1 on both a sequential and year-over-year basis. The mines continue to dramatically cut capital spending, which is having a negative impact on our OEM mining equipment customers, and we continue to expect that mining will be worse in 2016 than in 2015 as a result of the economic slowdown in China and the emphasis on reducing coal consumption.

Finally, aerospace and defense is off to a slow start in 2016, with sales down year-over-year for the first quarter. This is timing-related, however, and we expect aerospace and defense to be relatively strong in 2016. Demand will come from the commercial aerospace side with the defense business continuing to be under pressure.

And now, I'll turn the call over to Christian and close with a discussion of our strategic initiatives. Christian?

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

We are pleased with Altra's start to 2016. In a challenging end market environment, the Company delivered an overall improvement in gross profit margin and realized positive price. Two of our three segments showed a meaningful improvement in segment operating margins, driven by our consolidation and procurement efforts. Consistent with our strategy, we continue to execute the steps necessary to position the Company to deliver margin expansion when the end markets recover.

For the first quarter of 2016, non-GAAP diluted EPS was $0.38 a share versus $0.42 a year ago. Looking at the top line, foreign exchange rates had a negative impact of approximately 180 basis points, driven by continued strength in the US Dollar.

Volume declined 5.8% while our strategic pricing initiative added 90 basis points. Net of foreign exchange, sales declined 4.9% year-over-year.

Geographically, excluding the effect of foreign exchange, North American revenues declined 8.2% year-over-year. European revenues were down 1.9%, and sales to Asia-Pacific and other geographies were up 7.8%.

During the quarter, the average price of the Company's common stock did not exceed the current per share conversion price of our convertible notes. As a result, the notes were not dilutive to earnings.

We recorded a tax rate of 28.7% during the quarter, which was down from 30.6% a year ago.

Please turn to slide 5 for a discussion of our segment performance. Please note that segment results are not adjusted for one-time items. As a reminder, beginning with the third quarter of last year, we reorganized our three segments as part of our business simplification efforts. The new structure is better-aligned across Altra's end markets and better facilitates the Company's strategic initiatives for both procurement and facility consolidation.

For the first quarter of 2016, net sales in couplings, clutches and brakes were $75.6 million, down 15.2% when compared with $89.1 million in the year-ago quarter. This segment has Altra's highest exposure to oil and gas, metals, and mining. Segment operating income was $6.3 million down from $10 million a year ago.

Net sales in the electromagnetic clutches and brake segment were $57.3 million, essentially flat when compared with the first quarter of 2015. Despite a weak agricultural market, this segment performed well as a result of continued strength in turf and garden, as well as its low exposure to the oil and gas and mining end markets.

In addition, the segment is starting to benefit from Altra's facility consolidation and procurement efforts. As a result, segment operating income increased 21% to $6.5 million, or 11.3% of segment sales.

Finally, net sales in the gearing segment were $48.9 million compared with $49.2 million in the year-ago quarter. Despite the flat sales, segment operating income was up 21% to $5.8 million as a result of our margin improvement initiatives, primarily at Bauer. That business is now approaching 8% operating margins, and drove the segment operating income margins to almost 12%.

Please turn to slide 6. Our balance sheet remains strong. Book equity was $251 million, and our cash balance was $44.8 million at the end of the quarter. During the quarter, we repurchased 91,000 shares of Altra stock for a total of about $2.2 million under our $50 million stock buyback program that will expire at the end of 2016. Since the program's inception, we have purchased approximately $37.1 million, or about 1.3 million shares. We're active in the market, and will continue to repurchase Altra shares from time to time as market conditions warrant.

Capital investments total $5.7 million for the quarter, well below our depreciation and amortization for the quarter of $7.2 million.

Please turn to slide 7 and our guidance for 2016. We continue to expect sales in the range of $700 million to $720 million, and further expect non-GAAP diluted EPS in the range of $1.40 to $1.50 for 2016. We expect our tax rate for the full year to be approximately 29% to 31% before discrete items, and we also expect capital expenditures in the range of $20 million to $24 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, and please turn to slide 8.

I'd like to provide you with an update on our business simplification plan. The first component of our plan is a facility consolidation initiative. On our last call, we discussed three consolidations that have already been completed, and we expected an additional closure in Q1. We are essentially on schedule, and have closed five facilities so far. We will complete the closure of a sixth facility early in the third quarter, and will announce the closure of a seventh facility before the end of the third quarter.

Additional consolidations beyond these will require that we expand a receiving facility. Therefore, these consolidations will not be initiated until late 2017. In total, we anticipate consolidating eight to ten facilities with a savings of approximately $7 million. As I mentioned last quarter, we have successfully eliminated approximately 130,000 square feet of floor space thus far without losing any capacity.

A second key to the business simplification plan is our supply chain initiative, where we continue to make good progress in developing a world-class procurement organization. We are now completing the training and reorganization of our purchasing group. At the same time, we are aggressively looking for opportunities to reduce cost. As we execute this plan, we will benefit from the investments we have made in our global IT system. The Company-wide implementation of our SAP system will help the team to be data-driven and highly analytical throughout the supply chain. Even in this extremely challenging pricing environment, we continue to identify anomalies and opportunities utilizing our strategic pricing tools.

Finally, we are very pleased with the cultural changes that are occurring in our operations, which is evidenced by our continuous improvement activities that are helping drive margin enhancement at all of our businesses.

Regarding our European restructuring and cost reduction efforts, we are seeing excellent results out of Bauer. That business is now reaching operating margins approaching 8% as a result of our profit improvement plan.

We remain cautious for the remainder of 2016, although some sources indicate that we may see a slight recovery in the second half of the year.

We are now past the anniversary when several of our end markets begin to weaken. Therefore, we will have easier comparisons as we approach the second half of the year, and we expect that year-over-year shipment and order declines will begin to moderate.

When our most out-of-favor markets do return, we have the potential for significant margin appreciation as a result of our aggressive performance improvement actions. We have been executing to plan, and expect further progress as we proceed through 2016.

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

(Operator instructions) Our first question comes from Matt Duncan with Stephens, Inc., please proceed with your question.

Hey, good morning guys, and nice job this quarter.

Thanks, Matt.

So, the first question I've got, just Carl, following up on the comments you just made about some sources pointing to potential improvement and demand in the back half, can you talk about what you're seeing there? And in your conversations with your customers, is that showing up as well?

Yes, I think it's more industry publications and industry groups that are talking about the potential, and we are not -- we haven't seen enough evidence yet to buy into it. But, they -- recovery in oil pricing, although our take on it is that it's going to be a while before people start drilling holes again, there's enough holes out there for a while. So, we still remain very cautious, Matt, even though some of the general industrial publications are talking about an improvement in the second half.

Okay, that's helpful. And then, maybe just taking this a step further, what are you seeing in your order book right now and what are sales trends looking like month-to-month?

Yes, it's relatively flat. We looked at, through the quarter, when we look at last -- the fourth quarter of last year, and we saw kind of a drop-off in orders at the end of the year. We think that was primarily inventory adjustments. And then, we saw it pick up at the beginning of the year, and then since then it's been relatively flat.

Okay. So, is it too early to say that that maybe is a sign of a bottoming process starting here, or what do you think that means?

I'm not calling a bottom. I've called the bottom in mining seven times now, and I'm not going to do it again.

(laughter) Yes, I get that, that's clearly a tough market. Okay. And then one more thing for me and I'll hop back in queue here -- just on the cost savings, remind us what the annual run rate is that you're at right now out of the $7 million? How much of that is in place, at this point?

We think by -- we will exit this calendar year with a run rate of around $3.5 million to $4 million of which we currently have in place -- we have seen in the first quarter maybe a million dollars of that, and the rest will gradually grow as we go through the quarter.

Okay. Thanks, Christian, I appreciate that.

One caveat is that you know, as we close facilities at the receiving ends, often in the beginning you see some productivity losses at the receiving end as they go up the learning curve. And so, that's a little bit the wild card in this with these numbers.

Okay, all right. Thanks, guys.

Thanks, Matt.

Our next question is from Bhupender Bohra with Jefferies, please proceed with your question.

Hey, good morning Carl and Christian.

Morning.

Morning.

So, on the previous question here we spoke about destocking, which I remember Christian you had been talking since October last year, and we saw some that happened in the fourth quarter. Are we behind for most of the destocking, or you know, you mention about always being kind of flattish now. Can you give us any color, like the stocking (inaudible)?

Yes, it depends on the market. Certainly, some markets, and we think our distributors' inventory in general, is in pretty good shape. But if you look at oil and gas industry, there's still substantial destocking that will occur there in my opinion. And there's you know, there's also, we'll be scavenging off of existing equipment, which is kind of pseudo-inventory. So, there's still significant destocking to go in that industry, and I think similar to other downturns in that market and prior downturns we saw that for quite a while.

Mining, we think that the destocking has -- they're probably in pretty good shape on inventory as we've seen some nice orders from some of the mines for aftermarket parts, and then in the ag industry we think that that has affected our sales to some effect, some degree, as there are still large inventories of equipment out there and so that will probably continue.

In the general industrial side, it's probably in fairly good shape.

Our distribution, I think, as we go through the quarter, we saw stronger bookings in March and the prior two months. We saw, I think we saw some destocking in the fourth quarter. So, it appears from when we look at bookings, that that destocking that occurred at the end of the year, that might be over.

Okay. Just a follow-on -- the turf and garden, that was pretty strong in the first quarter, and we have heard some companies talking about good weather kind of pulling forward some sales from the second quarter. I don't know if you saw that, or that pretty normalized sales?

Yes, it's -- that market, what we tend to see is in the fourth quarter and the first quarter is when they're really building, and then if the sales do flow through they're building for position for what they're going to sell through, in the spring and in the summer. And if we have favorable weather conditions and the housing industry is strong, we typically see that that build cycle goes further out into the year. And we're just entering that point in time right now, where we don't know yet what the actual demand on their equipment will be, to know how far that build cycle will go. But it's been very good so far, and we expect to have a year this year similar to what we had last year, which was an outstanding year.

Okay, and just the last question on China, basically, Asia-Pac here, it was up pretty strong. Question if you want to give some color on that, like you know, what (inaudible) that sends?

Yes, so China, what helps us in China is our wind business there. Wind sales in China are strong, and the wind turbines. I think our elevator business over there also did very well. Our brake business, electromagnetic brakes in China, have done well in the quarter. Those are the top two markets that we serve in China, and so they make a big difference for us if they do well.

Okay, thanks a lot, guys.

Thank you.

Thank you.

Our next question is from Scott Graham with BMO Capital Markets, please proceed with your question.

Hey, good morning, nice quarter.

Thank you.

Thanks, Scott.

So, your thinking on pricing, I think, was a little positive but a little guarded on a go-forward basis in the last call, yet it looks like you did about 90 basis points, which I think is a little higher than what we've seen in the last couple of quarters. Could you talk about that dynamic a bit?

I'll start, and then Christian can follow up. I think what we're seeing is that the general pricing environment is extremely challenging, and where we're really getting it is on the strategic pricing where there are some areas that -- very targeted areas that we can achieve some price increase. So, it is extremely challenging, and as we -- even on the strategic pricing side it's getting more difficult. That's why we're being cautious. I don't know if you want to add anything, Christian?

Yes, okay.

Well the other thing, I had a feeling it was strategic pricing but would it be fair to say that if we kind of disaggregated these, that would pricing outside of what you're doing on strategic pricing be sort of slightly down, and strategic pricing is maybe up more than 100 basis points? Is that maybe a way to look at it?

I think if you look at the data, about 70% of that 90 basis points, 70% of that is strategic pricing, and 30% is our general price increases. So, we do get -- still get some general price increases, mainly in distribution, very little of that on the OEM side.

That's very helpful, thank you. The end market that's obviously the largest one that you guys talk about, distribution, just down mid-single and that's where you have your aftermarket which would at least to me suggest that your OE was maybe down, sort of upper single, and aftermarket sort of closer to the -- to flattish, or something like that. What part of distribution -- and I know you call it distribution because you can't necessarily tell -- but to the best of your ability could you tell us kind of what markets you think these small OEs are weak in?

Yes, I really think that distribution is being impacted by some of the same end markets that our large OE customers are. So, they serve the mining industry, they serve oil and gas industry, and I think if you looked at their breakout by market you'd see some very significant declines in those markets, that's kind of offsetting what they're seeing in some of their other markets like food and some other areas.

Yes, okay, makes sense. Last question, you have risen your Bauer margins to a nice level in the 8% vicinity and I know that that was not a factor for why you -- that doesn't affect future M&A but it does look like with that and Svendborg, you kind of have a -- you've got a little secret sauce in there. I was just wondering what the M&A pipeline looked like going forward? Looks like you have the capacity. Could you comment on that?

Yes, I think you know, the M&A market environment for us has been challenging over the last couple years. I think we've talked about that on prior calls. I'm hopeful that if things do start to improve a little bit, that it will get better, that people will say, this is starting to get to be a better time to sell some of the good companies that are in our space. So, I'm hopeful that we'll start to see it recover and get a little bit better for us.

But you know, we want to make acquisitions, if I can add, that's part of our MO, that's part of our goal. We are just not prepared to pay ten times plus, and we've seen very few assets actually come to market. And those that did, sold for north of ten times. Although we're hopeful that that is changing, and a lot of companies are not putting their businesses up for sale because they don't want to sell at the bottom, they don't want to look back two years and say, why did we sell at the bottom? So, that's another issue I think that we're facing. But, we'll continue to actively knock on doors, and we're confident that eventually we'll be able to make that next deal.

Thank you, that's all I had.

Okay, thanks, Scott.

Our next question is from Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Hey guys, this is James Picariello. Congratulations on another strong margin quarter. If I just take a look, you guys have strung together four quarters now, really, with decrementals in the 15% to 20% range. To get to even the high end of your guidance, it does bake in some pretty high decrementals in the back half. So, I'm just wondering, is there any embedded spend? You did mention Svendborg, that you guys have some pretty aggressive new launches there. So, just color around how we should think about margins would be helpful? Thank you.

Yes, I don't think there's any incremental spend. There's two relief factors embedded in there. One is, we only have limited visibility with our business, about three months out. So, the second half is a big unknown for us, and whether we're going to start to see some slow recovery or whether things are going to continue to deteriorate in mining, and oil and gas. The others, we do have, and these are not significant numbers but we do have some start-up costs. At Bauer, we are insourcing our [newer] production there, we're starting to make the first parts right now. We have hired about 20 people, and so that will incur some costs relative to that startup. But, eventually it was going to save us EUR 1 million a year, as we insource that piece. And the other as we mentioned earlier on the call, as we shut down facilities, we may see some productivity declines at the receiving ends. And historically, those have been somewhere between three and six months before they are able to ramp up and produce at the same productivity levels as the sending end.

So, those are some of the unknowns, and therefore we just remain cautious as we provide our guidance for the balance of the year.

So those are some risks, and we're going to manage those as best we can. We just didn't think it was prudent to go revise guidance at this point, with the lack of --

That's fair. That's helpful. And then, in terms of visibility, you guys did mention a pick-up, a slight pick-up in aerospace OE and alternative energy, the renewables side still continues to be strong. To what extent do you guys have visibility beyond six months or so for those businesses? And, how are you thinking about those particular end markets the rest of the year?

Aerospace is really very small for us, and doesn't really move the needle. So, it's not really --

It's more project-driven for us, you know. I wouldn't take a read for defense and aerospace in general out of our comments. This is very particular to certain projects that we win.

And we've won a few very good projects, so we're really pleased with it. It's worth talking about it, but it's not going to move the needle significantly.

And then the wind business, we've got a new product that we're bringing in, that we've been approved on, and towards the second half of the year beginning in 2017 we'll be ramping up on production on that, and we're really pleased with that. And we -- but we also don't get a tremendous amount of visibility from our customers there. We have very good cycle times, and we're on essentially weekly-monthly releases from them. So, we don't get -- we get a forecast from them, but we don't get a tremendous build-out in the order book.

Got it, and for that, for the Svendborg new product, is that specific to a region, or is that a product that could be applied globally?

That's a product that could be applied globally, and it's one particular customer now that we've developed this product with, and we hope to extend it to other customers over the next few years.

Got it. I'll get back in queue. Thanks, guys.

Okay, thank you.

Our next question is from Mike Halloran with Robert W. Baird. Please proceed with your question.

Hey, good morning, guys. So, just on the FX side, any thought as to how that's going to track to the year for you guys at this point?

So, we just essentially --

For the assumptions underlying guidance, how about that?

Yes, the assumption is that FX remains where it was in the first quarter, so we use typically the end of the quarter spot rates to kind of embed those rates into our guidance.

So, as at this point, are we looking at a neutral impact in the back half of the year?

Yes.

Okay, right, that's all I had, guys. The rest of it was asked and answered. Appreciate it.

Thank you, Mike.

Thank you.

Our next question is from Bhupender Bohra with Jefferies, please proceed with your question.

Yes, just a follow-up for Carl here, on the -- I remember like, Carl you talked about the last kind of trade violation related to some of the shipments or imports from China and Canada. I just wanted to see if you have any updates on that? Thanks.

Yes, actually, the preliminary duties have been published and there's some public information out there, and so far, things have gone very much in our favor and we should get final duties by the end of the year. So, they assigned preliminary duties, and then they start -- the people in the industry have to start assuming those duties are going to be there, and then they'll assess the final duties at the end of the year. So, it's gone very favorable for us, and we are starting to ramp up some capacity here domestically to -- in that product range.

So, at the most this will be kind of a 2017 eventuality, if anything happens, basically?

Yes. There may be a little impact at the end of the year, but primarily it'll impact 2017.

Okay, got it. Thank you.

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

Okay, and I would just like to thank everybody for attending the call, and we look forward to talking to you on the next call. Thank you.

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