Altra Industrial Motion Corp.

Good day and thank you for standing by. Welcome to the Ultra Industrial Motion Q1 2021 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'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, David Colusian. Please go ahead.

Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they'll 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 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 in the company's other filings with the U.S. Securities 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 operating working capital, non-GAAP net debt, 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. These reconciliations of ALTRA's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 2021 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 for joining us today to review our Q1 2020 results. And please turn to slide five. 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 Ultra 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. Now, please turn to slide six. for an overview of Q1 performance highlights. Q1 revenue of $472.1 million was up 8.7% from the prior year as we capitalized on strong demand across most of our end markets, led by heavy duty trucks, factory automation, and specialty machinery. Our strong top line performance also reflects our ability to manage the supply chain in these very difficult times and leverage our competitive strengths to outperform the competition. We've been able to leverage our proven excellence in supply chain management to minimize production disruptions and maintain reasonable on-time delivery performance. Maintaining strong lead time performance and product availability can be a competitive differentiator and enable share gains, particularly in times like this when demand exceeds supply. We expect this competitive strength will support further share gains for Ultra as supply constraints continue to impact select markets. We also drove excellent operating performance in the first quarter by carefully managing costs and through our focus on applying Ultra's world-class business system to drive performance. We further expect that it will be essential to continue to leverage our pricing power to offset material and wage inflation. As a result, we grew non-GAAP adjusted EBITDA margin by 170 basis points, achieved earnings growth that exceeded our expectations, and delivered another strong quarter of cash flow. More specifically, Q1 2021 net income was $39.2 million, or 60 cents per diluted share. Q1 non-GAAP diluted EPS was 86 cents, up 32% from the first quarter of 2020, and up 7.5% from the first quarter of 2019. We generated nearly $27 million in non-GAAP free cash flow in Q1, which allowed us to pay down $20 million of debt and continue to make excellent progress de-levering our balance sheet. We exited the quarter with net debt to non-GAAP adjusted EBITDA leverage of three times, advancing us towards our goal of reaching historic leverage levels of 2X to 3X this year. Now turning to slide seven for an update on the strategic initiatives that we have prioritized to drive sustainable shareholder value and realize our promise as a premier industrial company. This includes leveraging our world-class business system to create sustainable competitive advantages by developing industry-leading business practices across all aspects of our business. Even during the pandemic, our teams were committed to driving business improvements, eliminating waste, and improving the flow of value to our customers. I am looking forward to when our teams can fully engage again in face-to-face improvement activities. As demonstrated by our results, we have made tremendous progress with our second and third priorities of expediently delevering and managing costs to improve the balance sheet and drive margin enhancement. We also remain committed to directing resources to drive top-line growth via cross-selling, technology sharing to accelerate innovation, and infusing capital to address emerging growth opportunities. As an example, we invested in a new generation of servo motors and drives that were introduced last year and are beginning to gain traction in the market. There were several success stories during the quarter that demonstrate our ability to leverage our market position and innovative technologies to take share, add new customers, and expand geographically. For example, based upon our leading position in engineered brakes for the wind turbine industry, we secured a number of large orders for both onshore and offshore turbines. This included both repeat business and new customer winds where we took share from a competitor. We also closed our first serial production order with a new customer in India for wind turbine breaks. As another example, we won an order for a linear system for medical blood agitation application. And with this win, we gained share because of our custom engineered design and proven product performance. And as we expanded upon At length on the last earnings call, we are also committed to advancing our ESG priorities that have long been ingrained in the ultra-business system and the way we conduct our business. This includes systematically identifying and eliminating waste and reducing emissions across our footprint while providing innovative solutions to help our customers do the same, ensuring we are fostering a safe, diverse, and inclusive work environment, that stimulates and fully develops the capabilities of our people, and ensuring we have best-in-class governance to remain fully aligned with our shareholders' interests. The robust set of tools and processes inherent in the Altra business system continue to serve as our compass as we advance forward on our ESG journey. Now turning to slide eight for a market review. Starting this quarter, we are simplifying our market discussions to focus on the core markets and trends that we believe are most relevant to Altris performance and growth prospects. As a result, we are no longer providing an exhaustive review of all end markets as we have in the past. For additional context, we are providing an approximation of the percentage of Altris sales represented by each end market on a trailing 12-month basis. Transportation. which represents approximately 16% of our business, was up high single digits in the quarter, with Class 8 truck demand in China stronger than anticipated. On balance, we continue to expect the market to be flat to slightly up in 2021 as demand in China returns to more normal levels and demand in North America improves. Longer term, as the number one global supplier, we expect Altra's transportation business to benefit from new technology initiatives supporting future global safety and emission mandates. Factory automation and specialty machinery, which represents about 11% of our business, was up high single digits as we benefited from strong tailwinds in specialty machinery categories like food and beverage and packaging, robotics, AGV, and general factory automation. Overall, we continue to expect an improved performance in 2021 with particular strength in technology markets and sustainable higher growth rates supported by global digitization and industrial IoT, as well as macro trends in collaborative robots. Turf and garden ag and construction, which combined represents approximately 9% of our business, also had a strong quarter, up low double digits. We continue to expect the turf and garden market will slow in 2021 due in part to tough comps and that ag and construction will continue to improve. We remain positive on long-term growth prospects supported by ultra strong market position and secular tailwinds, such as increased infrastructure spending. Medical equipment, which is about 8% of our sales, was up double digits year over year, but down sequentially as the decline in COVID-related sales was only partially offset by a rebound in elective surgeries and hospital capital expenditures. This remains an exciting long-term growth market for us, supported by secular trends like aging population demographics and growth on noninvasive and robotic surgeries. Material handling, which represents about 7% of sales, was up low single digits with AGVs, forklifts, and vertical lifting systems, all realizing nice improvements. Although this is a cyclical market, there are several tailwinds that excite us, including strong growth in warehousing driven by growth in e-commerce, as well as advanced technology to improve warehousing efficiency. In addition, we have had some early traction with IoT installation projects in the large crane industry. Renewable energy, which represents about 6% of sales, was up low single digits year over year due to continued strong investment in renewable energy around the globe. We continue to expect 2021 to be flat barring any new administration policies. Longer term, renewables is an exciting growth play for Altra as global demand for increased usage of renewable energy favors our strong position in both onshore and higher growth offshore wind. And finally, aerospace and defense, which combined is about 6% of our sales, was down single digits due to, in large part, challenging comps and project timing. Despite near-term headwinds, we're excited about this market for a few reasons. Altra's A&D business has a very attractive margin profile with a strong competitive position and high barriers to entry. We also continue to expect this market will rebound at some point in 2022 as the commercial aero business resurges coming out of the pandemic and the geopolitical environment supports continued investment in land-based and defense aero. With that, I will turn the call to Christian to provide a detailed review of the quarter and our 2021 guidance. Thank you, Carl, and good morning, everyone.