Altra Industrial Motion Corp.

Good morning and welcome to today's ultra-industrial motion fourth quarter 2021 earnings conference call. My name is Candice and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for question and answer at the end. If you would like to ask a question, it is start followed by one on your telephone keypad. I would now like to pass the conference call over to our host, David Kostadian. of Sharon Murrow.

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. Those refer to the risks, uncertainties, and other factors described in the company's quarterly reports on Form 10-Q and any 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 it's 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 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 in the financial tables of the Q4 2021 financial results press release on ALTRA's website. Please turn to slide four. With me today are Chief Executive Officer Carl Christensen and Chief Financial Officer Todd Patriaca. I'll now turn the call over to Carl.

Thank you, David, and thank you for joining us today. I'd like to start this morning by recognizing the Altra team for an exceptional effort in 2021 in managing through the supply chain, inflation, and pandemic-related challenges and delivering strong financial results for the year. all while advancing our strategy to optimize Altra's position as a premier industrial company. Thanks to your contributions, we were able to continue collaborating with our customers, supporting one another, and executing strategically during this unprecedented time. I extend my sincere appreciation to all of you. And now please turn to slide five. As a result of the team's resilience, we were able to leverage positive broad-based demand trends and Altra's market position to deliver strong results in both the quarter and full year. I will start with a few highlights from the year, and Todd will get into more detail on the quarter later in the call. Our 2021 results demonstrate the resilience of Altra's diverse portfolio of highly engineered products. On a full year basis, we grew sales by 10% to $1.9 billion, which was the high end of our guidance range. We ended the year with a very strong book-to-bill ratio of 1.11 and record-level backlog of more than $800 million. This reflects both the strong underlying demand dynamics and Altra's strong market position. As a result, we're beginning 2022 with good top-line visibility, affirming as in past quarters that the underlying fundamentals of Altra's business remain intact with strong long-term growth prospects. Top line performance may be constrained by supply chain, logistics, and labor challenges. We've remained diligent in managing the factors within our control to mitigate external risks, such as availability of materials, logistics challenges, and inflation, to deliver a solid year on the bottom line. Throughout 2021, we continued to deploy Altra's world-class business system to drive improvements in many aspects of our business, including productivity, supply chain and logistics, product innovation, and organic growth. Inflation was greater than we had anticipated through the year, resulting in a cost price lag. Inflation for certain integrated circuits was particularly impactful. We implemented price increases throughout the year and will continue to implement price increases in Q1 and Q2 of 2022. We expect that the pricing actions we have taken and have announced will get us back towards our typical historical margins in Q2, provided we don't see significant additional inflation. Full year net income was $27.7 million, or 42 cents per diluted share, compared with a loss of $25.5 million, or 39 cents per share, in 2020. Non-GAAP diluted EPS for 2021 increased from $2.88 last year to a new company record of $3.22. We continue to demonstrate the strength of Altra's cash generative business model, generating $176 million in non-GAAP free cash flow in 2021. This cash generation allowed us to make continued progress delivering our balance sheet by paying down a total of $155 million of debt in 2021. We exited the year with net debt to non-GAAP adjusted EBITDA leverage ratio under 3.0 times. Now that we have reached our target leverage range, we are putting more emphasis on actively managing the portfolio to accelerate top line growth and deliver margin expansion while maintaining a strong and flexible balance sheet. On that note, please turn to slide six. I would like to highlight two recent announcements that demonstrate our progress executing on our strategy to position Altra as a premier industrial company with a focus on highly engineered products in the motion control and power transmission markets. The first is the acquisition of Nook Industries, which we closed on December 31st. With Nook, Altra is positioned to benefit from cross-selling opportunities that leverage our expanded and complementary linear motion control product offerings while also gaining strong customer relationships in strategic end markets such as medical, factory automation, and defense. We also have the opportunity to utilize Altra's scale to leverage fixed costs while capitalizing on NUC's production capacity to better satisfy increasing customer demand. We estimate Nook generated approximately $42 million in revenue in 2021, and the transaction is anticipated to be cash accretive to Ultra's earnings in 2022, excluding any one-time or acquisition-related costs. Nook is a great fit with Ultra, one that brings us not only significant potential for cost and sales synergies, but an outstanding portfolio and great group of employees. we're pleased to welcome the Nook Associates to the Altra team. And as we announced last week, we've entered into an agreement to sell our Jacob Vehicle Systems business to Cummins Incorporated for $325 million. Selling JVS aligns with our strategy to focus Altra's portfolio on highly engineered products in the motion control and power transmission markets. Upon closing the transaction, Upon closing, the transaction will substantially reduce our net debt. I'd like to take this opportunity to express my appreciation to the JVS team for their dedication and support. We believe that operating as part of Cummins will give them an opportunity to thrive with more strategically aligned ownership, and I wish them all the best. Now turning to slide seven in a review of the markets in more detail. Starting with transportation, which represented approximately 14% of our business in 2021, primarily related to JBS, Q4 sales were down double digits compared with Q4 last year, reflecting the ongoing slowdown in China for Class 8 heavy duty trucks, as well as the semiconductor chip shortage industry-wide. Moving to factory automation and specialty machinery, which represents about 12% of our business, demand in robotics, electronic assembly equipment, specialty machinery, and general factory automation machinery remained strong. Q4 sales were up high double digits compared to the prior year and down low single digits sequentially, primarily due to the typical seasonality. 2022 is shaping up to be another strong year in this market, given the positive long-term macro trends driving growth. Turf and garden, ag, and construction, which combined represents approximately 10% of our business, continue to perform well in Q4, growing high double digits year over year, with all three segments up sequentially. The fundamental growth drivers in these markets appear to be strong as we begin fiscal 2022 and our outlook remains very positive. Material handling, which represents about 8% of sales, was up double digits in Q4, driven by continuing strength across all key segments, including conveyors, forklifts, and vertical lifting systems. Long term, we remain positive about our growth prospects in material handling, driven by trends such as e-commerce, electrification, and warehousing efficiency improvements. Medical equipment, which is about 7% of our sales, was down double digits year over year. As we saw in Q3, this was in part due to a difficult comp with the prior year quarter's exceptionally strong COVID-related respirator and ventilator sales. In addition, our Q4 results reflected slowdowns in discretionary spending and CapEx as Omicron began spreading across the country. We're positive about the outlook for 2022, given the anticipated easing of COVID restrictions and return to more normal levels of spending and investment, as well as favorable prior year comps. Longer term, medical equipment remains an exciting growth market for us and is supported by several secular tailwinds. Moving into aerospace and defense, which combined is about 5% of sales, commercial aerospace was down single digits from Q4 last year, but up slightly on a sequential basis. Reflecting ongoing project timing headwinds, the defense side of the business was down double digits year over year. Our aerospace and defense business remains an important bottom line contributor with a very attractive margin profile, a strong competitive position, and high barriers to entry. A&D bookings in Q4 were strong, setting the stage for improved results in 2022. In addition, acquiring Nook Industries expands our motion control and power transmission capabilities in the A&D marketplace. Renewable energy, which represents about 4% of sales, was down double digits versus Q4 last year and sequentially. Bookings were lower both year over year and sequentially, reflecting supply chain delays and COVID-related labor market disruptions. As we saw last quarter, many of our customers are facing logistics challenges as product is being held up at ports due to global shipping delays. Looking ahead, we're expecting these headwinds to continue affecting bookings into the first half of 2022, followed by a rebound as the year progresses. Longer term, given the growth in demand for zero carbon energy solutions We continue to believe that renewables represents a very exciting growth play for Altra. And finally, distribution, which represents about 25% of sales, was up double digits from Q4 last year and up single digits sequentially. Our sales in the distribution market continue to track in line with the general industrial economy. Our bookings and book to bill for the quarter were strong, and we're anticipating a solid performance in this part of our business in 2022. Looking forward, we expect underlying economic strength and growth to continue driving strong based and market demand in 2022. Now please turn to slide eight. We begin 2022 not only extraordinarily proud of the entire Altra team, but increasingly confident that we can achieve our strategic ambition to position Altra as a premier industrial company with sustainable competitive advantages and long-term success. I'd like to conclude with a few key points. First, the resilience of Altra's diverse portfolio of highly engineered products continues to prove out as evidenced by our 2021 results that were highlighted by a 10% top-line growth, strong order rates, and record year-ending backlog. We have consistently and effectively managed the factors that we can control, like strategic pricing initiatives, supply chain management efforts, and cost controls, to deliver strong operating performance in this uncertain environment. We expect to continue to benefit from these actions as we move through 2022. Now that we have reached our targeted leverage ratio, we are positioned with greater capital deployment optionality. We will continue to actively manage the portfolio to accelerate top-line growth and deliver margin expansion while maintaining a strong and flexible balance sheet. The NUC and JVS transactions provide us with great momentum as we start the year and transition Altra into the next phase of transformative growth. And finally, we're hosting an investor day on Tuesday, March 8th, to share more on Altra's strategic roadmap. We hope that many of you can join us either virtually or in person in New York City. And with that, I'll now turn the call over to our longtime team member, recently named CFO, Todd Patriaca.