Altra Industrial Motion Corp.

Ladies and gentlemen, thank you for standing by and welcome to the Ultra Industrial Motion Q3 2020 earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, David Kalustyan from Sharon Merrill Associates. Thank you. Please go ahead.

Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they will be referencing slides that are posted to the ultramotion.com website under events and presentations in the investor relations section. Please turn to slide three. During the call, management will be making forward-looking statements as defined in the Private Security Subrogation 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 U.S. Securities and Exchange Commission. Except as required by applicable law, Alter 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 adjusted EBITDA, non-GAAP operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow, and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in the press release under the discussion of non-GAAP financial measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of ALTRA's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q3 2020 financial results press release on ALTRA's website. Please turn to slide four. With me today, our Chief Executive Officer, Carl Christensen, and Chief Financial Officer, Christian Storch. I'll now turn the call over to Carl.

Thank you, David, and thank you all for joining us today. And please turn to slide five. We turned in another excellent quarter, exceeding expectations for revenue, profitability, and cash generation as we capitalized on greater than expected demand strength, leveraged our market leadership to outperform in several businesses, and drove significant improvements to the bottom line. Since the onset of the pandemic, our focus has remained on prioritizing the safety of the Altra team, managing operations to minimize customer disruption and ensuring continuity of supply, taking actions to manage costs, maintain a strong balance sheet and manage our leverage, and finally, playing offense to position Altra to emerge a stronger company. I remain amazed by the resilience and dedication of the Altra team to remain highly productive, consistently deliver innovative solutions to our customers, often on expedited schedules and in modified environments due to the pandemic, and achieve excellent results despite the world we are all operating in. Christian will cover the results for the quarter in more detail in a few moments, but I'd like to note a few highlights. In Q3, we exceeded our expectations on the top line with sales of $437.8 million, just shy of Q3 2019 revenue we reported a year ago. This excellent performance was due to strong outperformance in certain end markets, like Class 8 trucks and renewable energy, and better overall demand in many of our other end markets. We also continued to execute on aggressive actions to reduce costs, and this resulted in excellent bottom-line performance. As a result, we achieved net income of $38.3 million, or 59 cents per diluted share, and grew non-GAAP earnings per share by 26% to 87 cents. Non-GAAP adjusted EBITDA margin was up 320 basis points to 23.3%. And finally, we once again had tremendous cash flow generation, which allowed us to continue to pay down debt and exit the quarter at three and a half times leverage on a total net debt basis. Turning now to slide six, we have continued to deliver strong results through the downturn and feel extremely positive about the long-term opportunity for Ultra. Last quarter, we discussed four reasons for this optimism, and these factors once again proved out in Q3. First, our efficient cash-generative business model continues to be highly resilient. In fact, our cash generation this year has been phenomenal, with $172 million of free cash generated in the first three quarters of the year, a 20% improvement when compared to last year. Second, the combination of our legacy PTT businesses with four of Florida's automation and specialty A&S businesses is proving out to be an exceptional strategic move as we recently passed the two-year anniversary of the merger we are delighted by the success of our integration from both a cultural and a business standpoint by expanding our exposure to several less cyclical end markets with attractive secular trends we've been able to largely mitigate the financial impact of the economic environment this year in recent months We have also accelerated our focus on leveraging the power of the new Ultra to drive organic growth. Despite pandemic-related travel restrictions that we've placed upon our sales force, we've had great momentum and have doubled the size of the opportunities in our cross-selling funnel. In addition, we're well positioned with a number of excellent organic growth opportunities as we collaborate closely with customers to develop innovative solutions that capitalize on secular growth trends in the markets we serve. Third, we're benefiting from stronger than expected demand across several of our diverse end markets. This includes our exposure to medical markets benefiting from COVID related demand growth and other short cycle markets like factory automation. And fourth, Altra's value proposition continues to resonate deeply with our customer base. As a result, we are outperforming the competition in several key verticals. For example, we recently secured orders for engineered servo motors from two different defense OEMs for munitions-related systems valued at over $15 million. These orders will ship over the course of the next couple of years. Now turning to slide seven and a review of the markets in more detail, starting with those that performed well in the quarter. Renewable energy was up low single digits in Q3 as we continue to see strength in wind. The Q4 growth rate may not be as strong as a result of tough comps and some possible industry supply chain issues unrelated to ultra that began to emerge early in the year that could constrain customer build rates. Factory automation and specialty machinery was up high single digits year over year and low single digits sequentially. The semiconductor market was particularly active in the quarter, and we expect to see continued positive momentum as the COVID-19 situation accelerates the need for automation. Defense was up low single digits as we continue to see strong performance with many of our OEM customers. Exacerbated by the struggles facing the airline industry, Commercial aerospace, which is the smallest piece of our overall A&D business, continues to struggle. We expect both trends to continue into 2021. Transportation was up single digits year over year. This reflects excellent demand for Class 8 trucks in China, combined with an improving environment for Class 8 trucks in North America and some pent-up auto demand. We expect continued strength in this market in Q4 as the Chinese market benefits from a government-sponsored program to reduce pollution by incentivizing heavy-duty truck operators to replace their existing high-emission trucks with new lower-emission vehicles. Turf and Garden was a pleasant surprise with sales up low double digits after a difficult beginning to the year. This was driven by customers accelerating purchasing in Q3 after delaying builds earlier in the year. Medical equipment was up low double digits year over year and was even stronger sequentially after a weak Q2. Demand has been very strong for COVID related medical equipment, such as ventilators and respirators. The remaining markets we serve faced headwinds in Q3. Distribution was down mid single digits for the quarter, However, it was up slightly sequentially. We expect the distribution markets to track in line with the general industrial economy. Metals was down double digits, driven primarily by weakness in the oil and gas and construction industries. We're seeing some improvements in capacity utilization at the mills from the trough in May, but there is still a long way to go before demand comes back and customers start buying new equipment. In mining, demand was down high single digits for the quarter as a result of low commodity prices, and we expect this will be a tough market for the near term. Oil and gas was down double digits for the quarter, and we don't see any positive near-term signs given the significant decline in rig counts from last year. Keep in mind that oil and gas is now a very small component of our business at less than 5% of overall sales for the last 12 months. The ag market was down high single digits for the quarter with uneven demand across the businesses. Net farm income this year is on track to surpass 2019, and we're hopeful this will translate into increased equipment spending in the coming year. And with that, I'll turn the call over to Christian.