Altra Industrial Motion Corp.

Ladies and gentlemen, good morning and thank you for attending today's ultra industrial motions first quarter 2022 earnings call. My name is Sam and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. It is now my pleasure to turn the conference over to your host, Ryan Flame from Sharon Merrill. Ryan, please proceed.

Thank you, Sam, and 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 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 report on Form 10-Q, an 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, Ultra Industrial Motion Corp does not intend to update or alter its forward-looking statement, 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 margins, 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 ULTRA's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 financial results press release on ULTRA's website. Please turn now to slide four. With me today are Chief Executive Officer Carl Christensen and Chief Financial Officer Todd Patriaca. I will now turn the call over to Carl. Carl?

Thank you, Ryan, and thank you for joining us today. We turned in a great quarter. We had record sales as our teams executed extremely well in spite of the continued supply chain challenges. Margins improved significantly when compared with the fourth quarter of 2021 as the pricing initiatives that we have been working on are now showing up in the P&L as we are working through the backlog of orders that had lower pricing. We closed a portion of the gap in the first quarter and expect to continue to close the gap through the balance of the year. We do expect to continue to experience high inflation due to commodity prices, logistics, and labor costs. We will take further pricing actions as necessary to offset inflation. Some of these cost increases are transitory, and once supply and demand balance out, we should experience additional margin improvement as commodity and logistics costs return to a more normal level. Of course, as the Fed raises interest rates to slow the overall economy, there is a risk that we could also experience a slowdown. However, our current incoming order rate certainly doesn't indicate any slowing. As we shared at our recent Investor Day, we believe there are vast opportunities ahead as we execute on our strategy to position Altra as a technology leader in power transmission and motion control solutions, and optimize our opportunities as a premier industrial company. Our first quarter performance validates the thesis that Altra is well positioned to deliver exceptional value for our shareholders in the quarters and years ahead. We have continued to demonstrate that by harnessing the Altra business system, we can drive growth, margin expansion, and strong cash flow through a range of market conditions. effectively deploy the cash we generate to accelerate new growth opportunities, retain a healthy balance sheet, and return capital to our shareholders, and build the team, culture, and systems necessary to repeat the process and create a perpetual flywheel for sustainable value creation. Turning now to slide five, I will start with a few highlights from the quarter. Todd will then get into more detail on the results along with an update on our guidance. Across the board, the Altra team once again did an incredible job of capitalizing on broad-based market demand and managing the business through a challenging environment. As a result, we delivered record-level quarterly sales of $512 million, up 8.4% from the prior year, and grew organic sales by nearly 8%. On a pro forma basis, excluding contributions from JVS, Q1 sales grew 13.6%, a strong indication of the underlying health of our transformed portfolio. At a macro level, while market headwinds continue to persist from several factors, including supply chain pressures, the war in the Ukraine, and lockdowns in China, we have observed a few positive developments worth noting. Our mitigation efforts for some supply chain issues are working, and labor staffing shortages, while still acute, are somewhat better. This has enabled us to improve shipments and on-time delivery performance. Our order rate in the quarter continued to be very strong, a testament to the power of Altra's portfolio of highly engineered and mission-critical solutions and the pent-up demand across the industrial markets. We ended the quarter with a book-to-bill ratio of 115%, and record backlogs across most of our businesses. This positions Altra to deliver a strong sales trajectory through the remainder of 2022 and beyond. The team also did an exceptional job leveraging ABS to mitigate the bottom line impact of market headwinds. In addition to capturing the Nook synergies, we have started to see the benefits from our pricing initiatives flow through during the quarter. These drove a 150 basis point sequential increase in adjusted EBITDA margin. As Todd will expand upon, we expect to continue to close the price-cost gap through the balance of the year. As we described during our investor day, we expect to be able to expand operating margins by 300 basis points by the end of 2024. The primary drivers of the margin improvement will be operating leverage on organic growth, pricing, supply chain cost reductions, both as demand and supply balance out generally, and through specific internal initiatives to reduce costs, such as PPV and VAVE. Continued synergy capture, productivity improvements by reducing waste in all aspects of the business through ABS, and by focusing on higher margin opportunities while deemphasizing opportunities with lower margins. We also delivered a strong earnings performance. Q1 net income was $44.8 million, or 69 cents per share, up 14 percent and 15 percent respectively from the prior year period. Non-GAAP net income grew to $59.6 million, or 91 cents per share, a new company record. This was up nearly 6% from the prior year. On a pro forma basis, excluding contributions from JVS from both periods, adjusted EPS of 78 cents was up more than 16% year over year. I would also like to highlight a few significant strategic milestones that we have achieved since the start of the year. We're making great progress actively managing the portfolio including tremendous progress integrating NUC Industries. The addition of NUC Industries has expanded our motion control and power transmission capabilities in the attractive aerospace and defense marketplace. In Q1, NUC was accretive to earnings and we remain on track to achieve our targeted cost synergies. NUC is an excellent example of how we are leveraging a refined approach to the three phases of the M&A cycle to be competitive in today's market while continuing to add shareholder value. One of the upside surprises regarding Nook was how great the Nook team is up and down the organization. We swiftly completed the sale of the Jacobs Vehicle System business, a significant milestone that has removed about $194 million of non-core cyclical business from our portfolio and improves our capital allocation optionality going forward. Leveraging the proceeds from JVS, we've paid down approximately $350 million of debt. Today, our net leverage stands at 2.3 times net debt to adjusted EBITDA, well within our target leverage range. Our capital allocation priorities have not changed, and returning capital to our shareholders remains one of our priorities. As announced earlier this week, we have raised our quarterly dividend from 8 cents to 9 cents and authorized a $300 million share repurchase program. We also remain committed to investing in profitable growth through high-return organic investments and by pursuing disciplined and accretive ultra-like M&A opportunities as they arise. On the organic growth side, We're leveraging our ABS tools to win in higher growth and markets and increase Altra's exposure to secular trends that will drive growth, like digitization and automation, the aging population, and sustainability. As an example, during the quarter, we landed our largest ever remote monitoring order from a large mine in China. Developing recurring revenue and integrating our technical expertise into the end user's problem solving is a key objective of our IoT initiative. On the M&A front, following the successful Nook Industries acquisition during the quarter, our businesses continue to actively build the funnel to find and nurture acquisition candidates that offer attractive market prospects and fit our defined ultra-light criteria. We will focus on businesses that design and manufacture highly engineered, mission-critical power transmission and motion control solutions, have high share positions in well-defined niches, and participate in markets with strong secular trends. During the quarter, we released our inaugural sustainability report. We have a long history of leveraging our core values in the ultra-business system to drive positive impact create business value across a range of ESG issues. I would like to thank ALTRA's ESG Task Force Board and the ALTRA team for contributing to deliver on this important milestone, our ESG journey. The materiality assessment that we completed last year was a key step forward as it helped us to identify the ESG issues that matter most for our business and our stakeholders. We leverage this effort to define Altra's new sustainability pillar framework, which includes delivering solutions through innovation, protecting the environment, reaching our full potential through teamwork, and operating with integrity. Going forward, we are focused on further enhancing our systems to collect and assess key ESG data and better quantify our impact. We are committed to being transparent about our progress and look forward to keeping our investors updated throughout the year. It is a great read, and I encourage everyone to visit our website and take a look at our corporate sustainability report. I'm extremely proud of all that we have accomplished so far this year. As Todd will expand upon shortly, today we are resetting our 2022 guidance to reflect the sale of JVS and the increase in working capital to support our ongoing efforts to manage market demand. We are also raising our 2022 guidance for our ongoing businesses to reflect very strong underlying demand. Notably, we expect to keep earnings consistent compared to the prior year despite a $194 million revenue reset related to the JVS divestiture. We expect Q2 to be similar to Q1 and have not substantially changed our view on the second half. Now turning to slide six for a review of the markets in more detail. Over the past several years, we have made tremendous progress transforming Altra's portfolio. Today, over 50% of our business is exposed to high growth markets with strong secular trends. On this morning's call, I will focus my market commentary on the six key end markets and our distribution business. Starting with factory automation and specialty machinery, which represents about 14% of our business and is driven by secular trends, including global digitization, industrial IoT, reducing the length of supply chains, and collaborative robots. In Q1, demand in robotics electronic assembly equipment, specialty machinery, and general factory automation machinery remained strong and sales were up high double digits compared to the prior year. We continue to expect 2022 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 represent approximately 10% of our business, is driven by trends like increased infrastructure spending and global population growth. Here, we continue to perform well in Q1, growing high double digits year over year with all three segments up sequentially. Our outlook remains very positive for these markets in 2022 as the fundamental growth drivers in these markets appear to be strong. Moving on to material handling, which represents about 8% of sales, and is well aligned with trends such as e-commerce, electrification, and warehousing efficiency improvements. In Q1, sales were up double digits, 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. Medical equipment, which was about 8% of our sales, is a very, very attractive long-term opportunity for Altra, driven by trends like the aging population and the growth of non-invasive and robotic surgeries. In Q1, sales were essentially flat year over year as medical capital equipment sales were strong, offsetting a decline in surgical solutions, which faced some pressure as a result of the COVID surges late in 2021 and the beginning of 2022. Surgical medical solution OEMs are adjusting inventory levels near term because of the drop in demand for elective surgeries due to the Delta and Omicron surges. We remain positive about the outlook for the medical market in 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 as we progress through the year. Moving on to aerospace and defense, which combined is about 5% of sales. Both markets were down low single digits, reflecting lumpiness and timing. Bookings, however, remain very strong, and we remain positive on the outlook for our A&D business, which is an important bottom line contributor with a very attractive margin profile, a strong competitive position, and high barriers to entry. Renewable energy. which represents about 4% of sales, was down double digits versus Q1 last year, primarily due to a decline in China. Looking ahead, we continue to expect COVID and supply chain headwinds to affect bookings into the first half of 2022, followed by a rebound as the year progresses. Longer term, given the global sustainability movement and increasing demand for zero-carbon energy solutions, We continue to believe the renewables represents a very exciting growth play for Altra. And finally, distribution, which represents approximately 25 percent of sales, was up low double digits from Q1 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, we're strong and we're anticipating a solid performance in this part of our business in 2022. Looking forward, we expect continued broad-based end market strength in 2022 with moderating growth as we go against tougher comps, the Fed raises interest rates, China expands shutdowns, and the war in Ukraine all stunt growth potential. As I said, we do not have much visibility into the second half, and therefore we have not changed our view on the second half in our improved guidance for the ongoing business. Now turning to slide seven. Looking ahead, we remain focused on executing on our strategy to optimize Altra's position as a premier industrial company and deliver strong and sustainable returns for shareholders. As we outlined at our investor day, This includes leveraging our technology differentiation and proven ultra-business system tools in strong secular markets to achieve 3% to 5% annual organic growth, actively managing the portfolio through disciplined M&A to drive further upside, delivering 300 basis points of margin expansion by 2024, and achieving consistent free cash flow conversion greater than 100%. Longer term, we have great conviction that we are setting Ultra up to be a true through-the-cycle compounder with the potential to achieve $3 billion in revenue by 2027. With that, I'll turn the call to Todd to take you through our financial performance details and guidance update.