Altra Industrial Motion Corp.

Good morning. My name is Lisa and I will be your conference operator today. At this time, I would like to welcome everyone to the Altra Industrial Motion Q3 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. David Colusian from Sherwin Merrill. Please go ahead, sir.

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. 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, 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 adjusted EBITDA, non-GAAP operating income net 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 our specialties 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 compatible 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, Chief Financial Officer, Christian Storch, and Vice President of Finance, Corporate Controller and Treasurer, Todd Patriaca. I'll now turn the call over to Carl.

Thank you, David, and thank you all for joining us today. I would like to start by saying that in spite of the challenges we face in the current environment, the Altra team delivered a great quarter. Like many companies in the industrial economy, Q3 was really a tale of two quarters. On one hand, we experienced exceptional broad-based demand due to our suite of innovative products and diversified growth markets, as well as strong secular tailwinds. On the other hand, we faced supply chain and inflationary dynamics that tempered both top-line growth and margin improvement. The Ultra team has done an exceptional job executing on the factors that we can control in face of the challenges impacting the global economy. As a result, we were able to grow sales 7% year-over-year to $469 million, which also outperformed the pre-COVID levels in the third quarter of 2019 by 6%. GAAP EPS of 54 cents and non-GAAP EPS of 80 cents were lower than last year's 59 cents and 87 cents, respectively. That said, our non-GAAP EPS of 80 cents was 11 cents higher than the Q3 2019 non-GAAP EPS of 69 cents. The comparison with Q3 2019 is meaningful because Q3 2020 was favorably impacted by the pandemic-related cost reduction efforts and extremely strong shipments of motors and pumps for ventilators and respirators. In addition, we saw a significant reduction in the transportation market in China in Q3 when compared with the same quarter last year. When compared with the pre-pandemic third quarter of 2019, our operating margin has increased 220 basis points to 13.2%, and gross margin has increased 80 basis points to 36.2%. Therefore, I feel really good about the operating performance of our business and the effectivity of the price increases we have been implementing to offset cost increases. Finally, our incoming order rate has continued to be robust, Our book-to-bill ratio was 120, and our backlog is very strong, approximately 150% of typical levels. In my opinion, there are several factors impacting our bookings rate. First, there are very strong underlying dynamics due to years of uncertainty and the resulting pent-up demand, pandemic-related investments, and favorable secular trends. Second, extended lead times Price increases, unpredictable logistics, and fear of shortages have caused customers to increase orders in an attempt to preempt the supply chain challenges or further price increases. The extremely strong demand has not let up. Our assumption is that we will eventually see a decrease in demand as the supply chain issues get resolved, but we believe the underlying economic strength will continue for at least the next several quarters. unless there is some external event or action that creates renewed disruption or uncertainty. Turning aside six, I would like to emphasize a few key takeaways from the quarter. First, the fundamentals of our business remain strong. The combination of a broad-based industrial demand strength and Altra's diverse portfolio of high-value, market-leading solutions led to an all-time backlog for Altra, and a book-to-bill ratio of 120%. Second, although we executed very well on the factors in our control, the global supply chain and labor shortages impacted our top and bottom line performance. On the top line, we were not able to ship the amount we could have in a normal supply chain environment, and this is primarily responsible for the delta between our top line expectations and our results. On the bottom line, our pricing initiative benefits from earlier in the year began to flow through in Q3 as expected, and we were able to maintain good cost control, resulting in solid operating margin performance. We continue to believe that as we work through the open orders, we will see increased benefits from our pricing actions by the end of the year. We will continue to stay focused and execute on the factors that we can control in this unpredictable environment. Third, we are excited to be able to accelerate ultra-business system activities. This was made possible by the return of limited business travel and in-person events during the quarter. One notable area where we have made excellent progress recently has been with cross-selling activities. We secured cross-selling orders for well over $1 million in the third quarter and are currently working on opportunities in diverse applications, such as meat packaging, defense-related antennas, material handling, construction robotics, and surgical robotics. Fourth, we have continued to make exceptional progress advancing our strategic priority to pay down debt and de-lever a balance sheet. We paid down an additional $70 million of debt in Q3 for a total of $120 million so far in 2021, which puts us well ahead of the plan on our full-year goal of $150 million. And finally, we continue to make excellent progress advancing our strategic initiatives across several fronts. This includes collaborating with our customers across our business to create innovative solutions, and this positioned us very well as the strong demand environment continues in 2022. Additionally, we continue to diligently and patiently explore potential bolt-on M&A opportunities that will strengthen our market position and expand our exposure to attractive markets. Before we take a look at the end market dynamics this quarter, I would like to note two announcements made this week. First, we're thrilled to have shared that Lavonda Williams, has been appointed to the Board of Directors effective October 19th, 2021. LaVonda brings tremendous financial acumen, deep equity market knowledge, and a very strong technical background to our board. And I'm looking forward to working closely with LaVonda. And as announced this morning, on February 1st, Christian will be retiring, and Todd Patriaca, our VP Finance Corporate Controller and Treasurer, will be taking over as CFO. Since this will be Christian's last quarterly call, I'd like to offer a word of thanks to Christian for his many years of service to the company. He has been an extremely valuable partner and leader at Altra and has been instrumental in growing the business to where we are today. Altra is a much stronger company now than when Christian started 14 years ago. Please join me in wishing Christian all the best in his well-deserved retirement. I know many of you already know Todd as he is also an Ultra Finance veteran. Todd has been with the company and has been a tremendous contributor essentially since we formed Ultra. We have a robust succession planning process at Ultra, and I have the utmost confidence that the transition will be virtually seamless and our finance organization will thrive under Todd's leadership. I'm very much looking forward to working closer with Todd. Now turning to slide seven and a review of the markets in more detail. Starting with transportation, which represents approximately 15% of our business on a last 12 months basis, was down double digits as the deceleration we began to see in China Class 8 heavy duty trucks last quarter continued in Q3. The semiconductor chip shortage had a material impact as well, and we expect that to continue to be a headwind. Longer term, as the world's leading engine-breaking supplier, we expect Altra's transportation business to benefit from new technology initiatives that support future global safety and emissions mandates. Factory automation and specialty machinery, which represents about 12% of our business, was up over 25% as we continue to see strong demand in robotics, electronic assembly equipment, specialty machinery, and general factory automation machinery. We remain bullish about this market given the strong long-term macro trends driving growth. Turf and Garden Ag and Construction, which combined represents approximately 10% of our business, had another very strong quarter, up mid-double digits. We continue to see strength across all three segments. We expect a strong end of the year and remain very positive on our long-term growth prospects. Medical equipment, which is about 8% of our sales, was down double digits year over year due largely to a difficult comp with Q3 2020 when we shipped about half of all COVID-related respirator and ventilator sales for the entire year. This was partially offset by strong medical capital equipment and portable equipment sales, which we expect to continue. This remains a very exciting long-term growth market for us, supported by several secular tailwinds. Material handling, which represents 7% of sales, was up double digits due to strength across all key segments, including conveyors, forklifts, and vertical lifting systems. We have yet to see any disruption from the supply chain in this market and remain excited about the market's long-term growth prospects, driven by trends such as e-commerce and warehousing efficiency improvements. Turning now to aerospace and defense, which combined is about 6% of sales. On a very encouraging note, commercial aerospace was up double digits for the quarter, resulting in the first positive year-to-date performance in quite some time. The positive commercial performance was offset by a single digit decline on the defense side due to project timing, resulting in A&D being down slightly overall in the low single digits. Despite this, our A&D business remains an important bottom line contributor with a very attractive margin profile, strong competitive position, and high barriers to entry. And finally, renewable energy, which represents about 5% of sales, was down mid double digits in the quarter due to the hangover from China's policy-induced production surge last year as their version of the PTC expired in December 2020. In addition, many of our customers are experiencing logistics challenges as product is being held up at ports due to global shipping delays. While bookings remain quite strong, we now expect 2021 to be down high single digits unless we see a positive change in the shipping and supply chain issues. Longer term, renewables remains a very exciting growth play for Altra. Our sales funnel continues to be strong, and we have had good success taking share in certain key areas. For example, during the quarter, we had a nice win for four megawatt onshore turbines with a South Korean customer. Looking at our markets overall, although we face some pockets of headwinds, bookings remain strong across the board. As a result, our demand runway remains very strong, and we expect this strength to continue throughout 2022. This further affirms that the underlying fundamental of Altra's business remain intact with strong long-term growth prospects. Now, please turn to slide eight. As we close out 2021, we're not only extraordinarily proud of the entire Altra team, but we are increasingly confident about Altra's ability to thrive as a premier industrial company over the long run. Before I turn the call to Christian, I would like to reiterate Altra's priorities and prospects going forward. Looking forward, our focus remains on advancing our strategic priorities to deliver sustainable value over the long term. These include leveraging our world-class business system to create sustainable competitive advantages and enable long-term success, de-levering our balance sheet, driving margin improvements, positioning Altra to drive top-line growth, and advancing our ESG initiatives. And with that, I'll turn the call over to Christian and Todd.