AIMC (2021 - Q1)

Good day, and thank you for standing by. Welcome to the Altra Industrial Motion Q1 2021 Earnings Call. I would now like to hand the conference over to your speaker for today, David Calusdian. Please go ahead. David Ca

Thank you. Good morning, everyone, and welcome to the call. To help you follow management’s discussion on this call, we’ll be referencing slides that are posted to the altramotion.com website under Events & Presentations in the Investor Relations section. Please turn to Slide 3. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements are highly and 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 the company’s other filings with the U.S.

Thank you, David, and thank you for joining us today to review our Q1 2020 results. And please turn to Slide 5. We delivered strong first quarter results that exceeded our expectations and approached pre-pandemic levels. This is a clear and positive indicator that a broad-based economic recovery is underway. With our highly competitive, diverse portfolio and strong business operations, Altra is in an incredible position to capitalize in the near term on secular tailwinds in markets like electronics assembly equipment, general factory automation and robotics. As the economy continues to recover, Altra will benefit from mid- and later-cycle markets such as mining, metals, ag and heavy machinery, to name a few. The economic recovery is spreading across more and more segments of our business. Incoming orders and bookings momentum has continued to accelerate across our early-cycle markets, and we have begun to receive orders for products that are sold into later-cycle markets. This gives us confidence to raise our 2021 guidance today and further validates our belief that Altra in the industrial world will be in for a very strong run in 2022 and beyond. I’m extremely proud of the Altra team’s ability to continue to deliver exceptional results, provide top-notch customer service and advance our strategic priorities while continuing to ensure one another’s safety, effectively work remotely and strengthen our culture.

Thank you, Carl, and good morning, everyone. Please turn to Slide 9. Our strong first quarter results were once again highlighted by Altra’s careful cost management, strong cash flow generation and significant progress in delevering the balance sheet. In addition, we once again demonstrated the resilience of our balanced portfolio of opcos and a strong market position that has allowed us to capitalize on the economic recovery emerging across many of our businesses. Turning now to a review of our top line performance in the first quarter. Sales were up 8.7% compared with the prior year period driven by a very strong performance in March. Organic sales grew 5.4% with price contributing 70 basis points. Foreign exchange rates had a positive effect of 330 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were down 1.8%. Bookings momentum has been strong across our PTT businesses, which we believe will support further improvements with PTT as we move through the year. Excluding the impact of foreign exchange, net sales for the A&S segment were up 12.4% compared with the same quarter last year, driven by strong top line performance across several end markets, including medical, transportation and factory automation and specialty machinery. In addition, this segment saw strong growth in China. In these markets, we benefited from both demand improvement and some likely inventory rebuild in the channel. Taking a closer look at our performance by geography. In Asia and the rest of the world, revenues without the impact of foreign exchange were up 34%, primarily driven by strong sales in the class 8 truck market in China. In Europe, sales were down 2.2%, without the impact of foreign exchange, as Europe’s vaccination efforts lagged behind the U.S.

All right. Thank you, Christian. We’re extremely pleased with our strong start to the year. We are growing increasingly confident that we are at the beginning of a broad-based market recovery and that Altra is in a great position to capitalize on improving secular tailwinds as we move through the year. Our focus remains on executing across our strategic priorities to ensure we are optimizing our opportunities as a premier industrial company. This includes leveraging our efficient cash-generative business model and the Altra Business System to maximize cost and sales synergies, delever the balance sheet, expand our margins and accelerate our top line growth opportunities. We are in an excellent position to deliver on our new 2021 guidance and continue to thrive as the industrial world economic recovery accelerates in 2022 and beyond. I would like to once again thank the Altra team for their hard work and incredible performance. We look forward to keeping our shareholders updated on our progress. And with that, we’ll now open up the call for questions.

You have a question from the line of Bryan Blair with Oppenheimer.

If you’re willing to provide a directional guide, what is the order book momentum you have to suggest for second quarter growth? And similarly, how should we think about margin progression, either annualized or, I guess, even better on a sequential basis, given some of the unique variables at play year-on-year?

Yes. So if we look at the second quarter, we like to compare 2021 to 2019, the last full year prior to the pandemic. And we think when we compare that to 2019, we think that revenues will be coming in somewhere between 2019 and the first quarter of this year, somewhere in that range, while EPS is probably going to be up 10%, 15% from 2019. SG&A, we see sequentially increasing from the first quarter $3 million to $4 million. We think gross profit margins will hold despite supply chain challenges and cost pressures from the supply chain. We think that we are able to offset that through price increases that we have taken and will continue to take as we go through the year. And then as we look at the second half of the year, we need to take into consideration that the China truck -- class truck market will see a significant decline, while North American and European demand will continue to increase. And so we’ll go back to some sort of seasonality where the second half will be, I don’t know, somewhere around $900 million, $910 million, something like that, in revenues.

Okay. Helpful detail there. And you mentioned the trend of class 8 headwind that you called out last quarter, that dynamic makes sense. I apologize if I missed the updated outlook on medical shipments. We’ve been expecting somewhat of an air pocket with the wind-down of respirator shipments and the pause in electric procedure demand with the reopening in -- at least early-stage reset of elective procedure-related CapEx. Is your outlook for the back half in medical improved from what it was a quarter ago?

Yes. It has, Bryan. It’s improved somewhat. The incoming order rate is better than we thought it would be, and I think the investments in the elective surgical part of the business are a little bit better than what we had expected.

Okay. Good to hear. And great to see continued progress on your balance sheet. Looks like you’ll be pretty comfortably within target leverage range over the very near term. We know your team has been focused on portfolio analysis and prioritizing targets for when you are ready to get back to the inorganic lever of your growth strategy. I guess my simple question is, are you ready now? If the right bolt-ons came along, are you comfortable with your cash flow outlook and the ability to move on a deal or 2 as we go into the back half?

Yes. I don’t think you would see us do anything significant, a big acquisition. But a smaller bolt-on, I think we’re very comfortable that we’ve got a pretty good runway here in the industrial world and that we’ve got line of sight on the cash flow to get us well within our range by the end of the year. So we’ll be -- so if the right deal came along and it was not too big, I think you would see us do something.

You have a question from the line of John Franzreb with Sidoti.

Curious about your later cycle order recovery. Is that limited to material handling? Or are you seeing a recovery in the mining and the oil and gas business?

So I think oil and gas, not yet. I think when I look at the end markets, the myriad of end markets we look at, the 2 that are still red -- I mean, it was a real great pleasure to look at the market analysis of the -- during the first quarter because almost everything is green now, except for aero and oil and gas, really, commercial aero and oil and gas. So those 2 are still declining. In the mining, we’ve actually seen some improvement, and we’re starting to see a few CapEx projects. And I think some of that’s related to electrification, right? So lithium and copper demand is going to be way up with this acceleration in electrification. So I’m optimistic about mining. That’s the 10th time I’m calling the bottom in mining now.

I wasn’t going to remind you. The next question, regarding the $40 million of cost expected to come back. I think I missed what you said for the first question. Could you repeat what that is? And what’s the cadence of the balance, how that comes for the balance of the year?

Yes. So some good news embedded in that. First quarter was $3.7 million that came back. That leaves $36 million to go. It will be heavy in Q2 and Q3 and then start to decline into the fourth quarter. But we’ve been able -- and the margins in the first quarter demonstrate that we’ve been able to, through our cost management, to mitigate a meaningful portion of that. But it will still show up in SG&A, as SG&A will increase sequentially as we go through the year. I think the increase will not be as significant as we initially see it when we initiated guidance for the year.

Okay. And I guess just one question, if I could squeeze it in. A sequential improvement in the factory automation and specialty machinery Q1 versus Q4. Was there anything significant in that? Any color that drove that improvement?

You’re breaking up a little bit. In the factory automation space?

There was sequential improvement.

Sequential improvement.

Was there anything that sticks out?

Yes. There are a few things. I think the AGV business did really well. Robotics did well. Electronic assembly equipment did well. Semicon was off, but that was primarily due to, I think, to comps. So yes, we had some really nice growth in some of the segments in the factory automation space. And then in food processing, food and beverage and packaging equipment were solid, too. So it’s broad with some really nice trends in that part of the space -- in that part of the business.

You have a question from the line of Mike Halloran with Baird.

So a couple of clarification questions here. First, just, Carl, where does the confidence come in from your perspective on the 2022 plus optimism? And what are you seeing that makes you particularly excited both from a market perspective as well as maybe what you’re doing to add to whatever that market growth looks like?

Well, I believe that we’re seeing the early cycle markets doing well right now, and there’s -- activity in the later-cycle markets is starting to accelerate. And those big CapEx projects are not -- and those big CapEx industries typically run for a few years. So I feel really good that we’re just getting into the mid- and late-cycle part of the business. So barring any government action or some ramp-up of the pandemic, the momentum is there to carry through for a good period of time. And I think there’s pent-up demand. I mean, I look back on the last recovery and how slow and monotonous it was and with a couple of fits and starts that it felt like 2019, prior to the pandemic, we were starting to get into a phase where some of that pent-up demand was going to get realized and satisfied. So I think that got pushed out a year. I think we’re back at that phase. And in my mind, we’re -- there’s the pent-up demand, and there’s some really good acceleration there where we -- and when I look at the cycles, you look at mining and ag and some of the longer-cycle markets, it’s been -- they’re due for a nice recovery.

So when you think about the backdrop from a supply chain, price/cost, obviously, you said -- at least in the prepared comments, you intimated that you’re doing very well, all else equal. And you think it’s a differentiator versus your competitors how you’re managing through everything. But maybe some thoughts on pricing environment, how the supply chain is managing and how inflation is hitting you and maybe how that rolls through the P&L this year?

Yes. The supply chain is really tough right now, right? We’ve got suppliers that are trying to increase prices, and we’ve been pretty successful in pushing back. We’ll probably see some cost increases in Q2, as we can’t push back anymore. And so that’s a challenge. And it’s like the whack-a-mole game, where one region or one commodity, you start to have issues with, and you just got to work them down as they pop up. Right now, with the awful situation relative to COVID, that’s an area of concern. The logistics and freight, the container ships, we’ve seen lead times push out 4, 6 weeks, just as a result of the container backlog and the shipping issues. So we just have to keep working. And I think the second quarter is probably going to be a little bit worse for us. I think our guidance reflects that a little bit for cost/price. And then -- but we are pushing through the price increases. And the price environment is fairly receptive. I think the whole world is going after price increases. And because we do have pricing power and the nature of our business, I think we have a little bit better chance to get the price increases pushed through than maybe some other industries and some other spaces. So I’m confident we’ll get the price to offset the cost increases, both wages and material costs, maybe a little lag, as I’ve said before, but we’ll get it. And I do expect that Q2 will probably be the worst Q from a supply chain standpoint. And we’re working it really, really hard to make sure that the impact is minimal.

And Mike, if I can add, the guide assumes that we can hold gross profit margins, as Carl said, that we can offset price increases on the commodity side, component side, through price increases. And at the high end of the range, it even assumes a modest margin expansion as we go through the year.

You have a question from the line of Jeff Hammond with KeyBanc Capital Markets.

I jumped on late. So if I ask something that’s already been addressed, we can follow up. Just talk about what you’re seeing in terms of restocking on distribution. I’ve had a couple of companies kind of say, people are buying ahead of these follow-on price increases. And then just maybe more broadly, why do you think PT is lagging in terms of recovery versus what’s been more robust in the A&S side?

Okay. So I think with the strong demand and strong bookings we’ve had, we do know that some of that is because the supply chains have extended lead times and that people are buying ahead to make sure that they have what they need. We don’t know the exact impact of that, but that’s -- there’s certainly some of that. Underlying that, though, is really strong demand. I mean, it’s not -- that’s not the predominant factor in the demand increase, at least in my opinion. I think we have seen a little bit of restocking in the channel. Those comments were across both the OEM and the distribution part of our business. I think in the distribution side, we’ve seen some restocking, but most of it’s been book-to-bill. We get the sell-through data. And so we have not seen, at least on our products, a significant desire to restock and build up inventories. I think our ability to deliver so far has also been pretty good, and they don’t have the need to restock. Now your comment about the price increase, we have seen a few orders that have been trying to get ahead of the price increase. And that happens -- that always happens when you announce a price increase. Typically, you give 60 to 90 days, and people will ramp up their orders to try to beat that price increase. But we can sort some of that out. So I feel really comfortable, Jeff, that the underlying demand is very solid. And then the PTT business lagging, I think there is higher dependence on later -- mid- and later-cycle markets in the PTT businesses than in the A&S businesses. So it’s just natural that we would see that lag a little bit. And that’s one reason that I feel that we’ve still got some pretty good runway in this recovery that the PTT businesses are just starting to see some of those big projects and some of the things come through. And we’re actually starting to get some orders now for some of that later-cycle work that’ll turn into shipments later on. There are also longer lead time in some of the PTT businesses as they’re bigger, heavier-duty products.

What are some of the mid-, late-cycle markets where you are seeing some of that order activity leak in?

Yes. So I think mining is one where we’re seeing some of the order activity. Marine was pretty good. That’s the heavy lifting equipment, port cranes and other things. We’re starting to see some orders in there. So it’s -- as I said earlier, it’s a very broad-based. I think there’s a couple of markets lagging, oil and gas and maybe power gen and then the aerospace business. But other than that, we’re seeing nice improvements and activity building up in some of those mid- and later-cycle markets. Even the metals business, with some steel demand and commodity prices going up, we’re seeing activity there.

Are you -- do I hear you calling the turn in mining again, Carl?

Yes. That was my 10th time.

Okay. Just back on supply -- Just on these supply chain issues. Like you say it’s getting worse, and you expect it to get worse in 2Q. But kind of help me understand, like are you seeing any areas where you’re starting to see relief and it gets better? And how have you put these kind of growing supply chain issues into the guide as you look into the second half?

Yes. So I think the biggest concern for us right now is India. We have a number of suppliers in India. And right now, they’re all up and running, but that is a concern. And so we, in some cases, are now cross-sourcing our components here domestically at a higher price. Logistics continues to be a challenge managing through that. And then I would think on the automotive side, the chip shortage on the automotive side and how it’s going to impact like Daimler or Cummins, those are probably the pockets of biggest concerns.

Yes. Resins is another one as a result of the -- surprising how long the bad weather in Texas has impacted the resins. But.

And so the challenges are not just for us in actually getting the components in but, in a lot of cases, is at our customer level that can get other components and, therefore, are taking production down. And that combination is still creating some uncertainty in regards to the outlook. So far, we’ve managed through this very well. We had very minimal disruption, whether it’s at the customer level or at our level. But we don’t see signs that it’s going to get much better in the near term. Actually, it’s going to get a little worse probably in Q2. And then hopefully, after that, we’ll start seeing things smooth out a little bit.

I think the peak in the Port of L.A. was 60 container ships backlog anchored off port, and they’re down to 30 now. Their capacity has ramped up significantly. So it looks like some of the logistics issues -- as they load them, they free up containers. So one issue was trying to get containers to put stuff onto to put stuff in because they’re all on ship somewhere. So that’s starting to ease a little bit.

There are no additional questions at this time. I will turn it back over to management for closing remarks.

Okay. Thank you, operator, and I want to thank everyone for joining us on the call today. And we look forward to engaging with you in the next -- in the months ahead. And thank you for your time.

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.