Q2 2022 Altra Industrial Motion Corp Earnings Call
Altra into a premier industrial company, and technology leader and Powertrains mission and motion control solutions.
We delivered double digit sales and earnings per share growth on a pro forma basis, which excludes the contributions of the <unk> business that we divested on April eight.
Order rates remained strong across the markets, we serve with a very strong book to bill ratio.
And this resulted in a record level backlog for the fifth consecutive quarter.
Pricing and surcharge initiatives offset the effects of inflation in the quarter.
We have implemented additional pricing actions to continue to protect margins and we will take further action if necessary.
We believe in face inflation is moderating and that we will experience margin expansion when commodity costs and the associated surcharges, we charge our customers return to more normal levels.
Todd will explain how surcharges affected the margins in the quarter.
During the quarter, we made great progress with the integration of our <unk> acquisition, which added to our portfolio of highly engineered products.
We are on track to achieve targeted synergies and are thrilled with the caliber of the people systems and technology that came with the acquisition.
This is a testament to our ability to implement our M&A playbook to effectively identify execute and integrate high value M&A opportunities.
We closed on the Jbs sale early in the quarter and used proceeds to pay down debt and further reduce our leverage.
We ended the quarter with net leverage of two three times net debt to adjusted EBITDA at the end at the low end of our target targeted leverage range.
We remain committed to maintaining a strong balance sheet and allocating our capital in a balanced and thoughtful manner that optimizes value for our shareholders our.
Our capital allocation priorities are unchanged and include investing in organic growth opportunities.
Pursuing altra like M&A, retaining a healthy balance sheet.
And returning capital to our shareholders do.
Due to our confidence and our ability to generate cash earlier in the year, we increased our dividend and our board of directors approved a $300 million share buyback program.
Now turning to slide six for a review of the markets in more detail.
Starting with factory automation and specialty machinery, which represents about 15% of our business.
Sales were very strong in Q2 up double digits, both year over year and sequentially.
We're seeing excellent demand in this market and expect continued strength in the second half of the fiscal year.
We remain very optimistic about the long term prospects of this market, which is driven by very attractive secular trends.
Global Digitization industrial Iot supply chain management, and collaborative robotics and.
In turf and Garden AG and construction, which combined represents approximately 11% of our business Q2 sales were up single digits year over year.
Led by strength in farm and AG with modest growth in construction in turf and garden.
We're expecting turf and garden to start to slow in the second half of the year with continued strength from farm and AG.
Longer term this remains an attractive marketplace for us driven by trends like increased infrastructure spending and global population growth.
Moving on to material handling, which represents about 8% of sales.
And continued to perform well across all segments of the market, including conveyors forklifts and vertical lifting systems.
Sales were up single digits year over year.
We're very positive about our growth prospects in material handling as we leveraged strong secular trends such as e-commerce electrification and warehousing efficiency improvements.
Medical equipment, which is about 8% of our sales is a very attractive long term opportunity for ultra driven by trends like aging population and the growth of noninvasive and robotic surgeries.
Sales were down mid single digits year over year, and slightly lower sequentially as Oems continue to rationalize inventory due to COVID-19 COVID-19 surge as this year.
We remain positive about the outlook for this market in 2022, given the anticipated easing of Covid restrictions and a return to more normal levels of spending and investment.
We also will have more favorable prior year comps as we progress through the year.
Moving on to aerospace and defense, which combined is about 5% of sales.
Sales were down slightly overall with commercial aero up low double digits.
This strength was more than offset by lower defense sales improve.
The improvement in commercial Aero is encouraging and the defense outlook is positive as we head into Q3 with a strong backlog.
Our A&D business 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 in Q2, primarily due to the continuation of Lockdowns in China.
This was slightly slightly offset by a double digit increase in sales to the oil and gas market.
And finally distribution, which represented approximately 28% of our sales in the quarter.
Was up double digits year over year as strong bookings momentum continues our sales in the distribution market track in line with the general industrial economy, and we anticipate a solid performance in this segment in the second half of the fiscal year.
Turning to slide seven.
As we manage through the day to day business activities, we remain focused on advancing our long term strategy to optimize ultra's position as a premier industrial company.
I'd like to note a few strategic updates.
On the organic on the organic growth side, we continue to leverage our altra business system tools to win in high growth markets and align altra with secular trends like the proliferation of Digitization and automation.
<unk> of the aging populations and the increasing importance of sustainability.
And today's macro environment, we are seeing several of these trends take on growing prominence at unprecedented rates and we are confident that ultra is in an enviable position to ride the wave as these take hold.
As an example during the quarter, we saw strong activity in the medical market with a multimillion dollar order for a new customer in the home health care industry and also secured several prototype orders and the surgical hand tool and medical infusion systems segments, which will generate approximately $5 million in future.
Revenues at full funnel full run production rates.
On the M&A front, we remain focused on building the funnel to identify potential acquisition candidates that offer attractive market prospects and fit are defined and disciplined ultra light criteria.
And finally, a key foundational enabler of our business strategy is ESG.
As noted on our last call earlier in the year, we published our first sustainability report to provide more visibility on our ESG priorities and the progress we've been making.
Top priority is to reduce the impact our business has on the environment.
As a global industrial leader, we are committed to introducing innovative products that help our customers improve the sustainability of their equipment and processes. While also implementing global energy management reduction strategies across the organization to help reduce our overall impact.
We are in the early stages of establishing more robust data collection and reporting capabilities. So that we can compile and assess critical greenhouse gases.
And energy consumption data across our global footprint.
As you can appreciate for a global manufacturer like Ultra this is a complex process, but it is one that we are committed to seeing through so that we can improve our transparency around this very important issue.
We look forward to keeping you updated as we progress.
That I will turn the call to Todd to take you through our financial performance details and guidance update.
Thank you Carl and good morning, everyone. As we did last quarter, we are presenting our financials on a reported and pro forma basis, which excludes the impact of the GBS business that we divested on April 8th please.
Please turn to slide eight.
I will start with a closer look at our top line performance.
Total Q2 sales were up one 9% compared to the prior year on a pro forma basis sales grew 12, 7% year over year.
In Q2, 2022 overall organic sales growth was three 1% compared with the second quarter of last year.
Excluding the impact of Jbs organic sales were up 13, 8% on a pro forma basis price contributed 390 basis points for the quarter and FX had a negative effect of 400 basis points, both on a pro forma basis. Additionally, surcharges had a significant impact on.
<unk> for the quarter totaling approximately $25 million.
These pass through costs, However had no impact on operating income.
Orders remained strong during the quarter and we exited the quarter with record backlog approaching nearly $950 million.
Turning to our organic sales performance by geography pro forma organic sales were up 20% in Europe eight 2% in North America, and up 19, 6% in Asia and the rest of the world.
Turning to our segments, excluding the impact of FX. The PTT segment's organic sales were up 10, 6% year over year non.
non-GAAP operating income for the segment was up 10, 3% compared to Q2 2021. The non-GAAP operating income margin for PTT was 15, 6% an increase of 50 basis points compared to Q2 2021 the increase.
<unk> continues to demonstrate the resilience of our balanced portfolio of operating companies as well as the success of our ongoing pricing efforts within the segment.
D&S segments organic sales were down three 8% year over year.
On a pro forma basis.
Second quarter sales for <unk> increased 17, 8% organically.
Pro forma non-GAAP operating income increased 11, 9% compared to Q2 2021 as the segment continues to implement both pricing actions and surcharges to offset inflationary pressures.
The non-GAAP operating income margin for <unk> was 19, 9% or 22%, excluding the impact of surcharges, which was an increase of 60 basis points compared to Q2 2021.
Moving on to the overall company's operating performance pro forma non-GAAP gross profit was 35, 3% compared to 37, 1% in Q2 2021.
This decline is primarily due to surge charge initiatives used to offset inflationary pressures primarily around electronics and copper.
Excluding the surcharge revenue of approximately $25 million gross profit was 37, 2% an improvement of 10 basis points compared to Q2 2021.
Pro forma non-GAAP operating income grew to $81 2 million compared to $73 3 million a year ago.
Pro forma non-GAAP operating income margins are behind 30 basis points when compared to Q2 last year due to the zero margin surcharge initiatives, excluding the impact of surcharges margins were 17, 4% an increase of 60 basis points as a result of the continued pricing actions and strong.
<unk> operating execution.
Our interest expense was down 28, 5% due to lower debt levels and more favorable pricing as a result of our November 2021 refinancing.
Please turn to slide nine for a closer look at our balance sheet improvements in cash flow and liquidity.
non-GAAP adjusted free cash flow for the quarter was $34 3 million compared with $56 million in the year ago quarter due to the continued albeit lower than Q1 investments in inventory to support our strong underlying demand.
Even though we saw a decrease in non-GAAP adjusted free cash flow compared to the prior year. We were pleased to see a stabilization in operating working capital as compared to the end of Q1 2022.
Capital expenditures during the quarter totaled $12 8 million up 62% from the prior year quarter as we continued to invest in growth opportunities.
We finished the quarter with $192 $9 million of cash.
Please turn to slide 10.
We ended the quarter with leverage of two three times on a net debt basis without the LTM EBITDA from Jbs leverage would be two five times, we expect our leverage to fluctuate as jbs continues to rollout of our LTM EBITDA, along with our future debt Paydowns.
Looking ahead based on our current plans for debt Paydowns and continued support of the dividend, we expect to exit 2022 with leverage of approximately two to two five.
<unk> on a net debt basis, well within the low end of our target range.
Please turn to slide 11 for an update on our outlook for 2022.
With a record setting first half of fiscal 2022 now behind US we are excited to build off this progress as we work towards our full year financial targets.
Although we removed approximately $194 million of annual revenue from our business with the Jbs divestiture.
Our team's performance has ultra positioned to deliver full year sales equivalent to or higher than what we reported in 2021.
That demonstrates excellent execution strong demand and the improved fundamentals of our transformed portfolio.
While the macroeconomic environment remains uncertain our results this quarter again demonstrate our ability to navigate that uncertainty by controlling what we can control as.
As we look to the balance of the year, we will continue to proactively address pricing work to stay ahead of supply chain delays and strive to leverage our strong customer relationships to outperform our competitors.
All while leaning into trends like factory automation and robotics to help our industry navigate through the challenging landscape. We are all facing.
With that as background, our updated guidance for the full year 2022 is as follows.
<unk> the Jbs contribution in 2022, we expect annual sales in the range of $1 93, 2 billion to $1 97 2 billion.
GAAP diluted EPS in the range of $2 33 to $2 42.
non-GAAP adjusted EPS in the range of $3 35 to $3 50 and.
And non-GAAP adjusted EBITDA in the range of $388 5 million to $403 5 million.
Excluding the <unk> contribution in 2022, we expect annual sales in the range of $1 88 billion to $1 92 billion GAAP diluted EPS in the range of 2.2 dollars 31 to $2 40.
non-GAAP adjusted EPS in the range of $3 22 to $3 37.
And non-GAAP adjusted EBITDA in the range of $378 7 million to $393 7 million.
Notably as I mentioned, we expect earnings to be equal or higher compared to the prior year. Despite the $194 million revenue reset related to the jbs divestiture.
For both guidance scenarios, our depreciation and amortization guidance remains in the range of $95 million to $100 million and despite the economic backdrop, we do not expect to slow our capex investment and therefore, our capital expenditure expectations remain in the range of $50 to $55 million, we are adjusting our normal.
<unk> tax rate for the full year to be in the range of 22% to 24% and we are lowering our adjusted non-GAAP free cash flow range to $100 million to $125 million to reflect our investment to support the strong demand, we are experiencing and support growth activities.
I would also like to note that due to the difficulty in predicting we have not included surcharge revenues or the related costs in the second half of the year and our updated guidance since pass through costs and the related recovery would have no impact on operating income.
Please turn to slide 12 to.
To help everyone better understand the ongoing business. We have provided a comparison of the 2022 pro forma guidance versus the pro forma 2020 results as you can see we expect to deliver double digit adjusted EPS and adjusted EBITDA growth in 2022, while growing the top top line at low double digits.
This again is a strong demonstration of the underlying strength of our transformed portfolio and the power of the altra business system.
Now please turn to slide 13, similar to last quarter. We have included a 2021 pro forma results table by quarter and full year to assist you in your ongoing analysis of ultra.
With that I'll now turn the call back to Karl before we take your questions. Thank you Todd and please turn to slide 14.
Looking ahead as we continue to manage near term business dynamics, we remain guided by our strategy to optimize ultra's position as a premier industrial company and deliver strong and sustainable returns for shareholders.
I'm as confident as ever that we have the right team the right technology and the right strategy to navigate through the business realities in front of us as we position altra for future opportunities.
As I noted at the outset of the call the fundamentals of our business and the markets. We serve are very healthy and despite the general concerns about the economic environment. We remain committed to our long term goals of 3% to 5% annual organic growth 300 basis points of margin expansion.
<unk> and free cash flow conversion greater than 100%.
We appreciate your continued support and with that we would like to turn open the call up to questions Sean.
Sean.
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Okay.
Our first question comes from Michael Halloran with Baird.
Hey, good morning, everyone.
Alright, so so.
So the guidance side of things moving higher on the sales side.
Todd your comments surcharges not part of that move.
How much that uptick is price how much is underlying demand or where maybe just the ability to get backlog out the door and maybe a little more quickly than you were thinking the quarter a quarter ago or so.
Yes, so in the updated guidance first.
Taken it up for the year to date impact on the top line related to the surcharges and the actual results.
For pricing, we will continue to get pricing in the same level that we've been seeing through the first part of the year I think another important thing to note is FX is playing a significant headwind on the on the guidance.
And just when you compare the guidance from where we were a quarter ago.
It's shifted $15 million to $20 million just due to the changes in exchange rates. So we've been able to more than offset that headwind.
As a result of the demand on a year to date basis Mike.
Volume demand the true unit demand is just over 500 basis points on a year to date basis.
And we expect that to continue at a similar pace through the remainder of the year based on our backlog.
So I guess, maybe the ACO, where like this is there any change to how youre thinking about the back half of the year today versus last quarter, excluding the FX piece and excluding the surcharge piece.
Yes, I think the one thing is that we are seeing some stabilization.
On the costs. So we utilized surcharges more this quarter than we had previously because.
Because we believe that the areas that were impacted the most electronics and then copper was the second area. We believe will moderate and are more transitory in nature.
We will continue to take permanent pricing actions, where we believe.
Cost impact is more permanent in nature.
That said if you layer in another $25 million of surcharges in the back half of the year.
Then you would see similar growth as we've seen in the first half of the year around that 12%, 13% range on an overall basis. If you back out the 500 basis points of volume the rest of it is going to be pricing surcharges offset by FX.
Makes sense.
Or maybe just more color. Carl then from your perspective on why Youre. So confident in the underlying trends right. Now obviously, you highlighted some areas, where you're seeing the capex coming through the investments coming through but what do you think underpins that and maybe just some thoughts on the confidence level right now.
Sure.
First thing is the backlog, we have we've got $950 million worth of backlog.
Yes.
Nearly six months worth of backlog than typically we have about one quarter of backlog.
And then.
The later cycle markets mining.
We're seeing good incoming order rates and project work in oil and gas and steel. So some of those later cycle markets.
Historically once once those investments in the Capex.
Those industries starts it usually runs for a little while.
And then the other thing it let's say anecdotally is just.
In industry discussions.
<unk>.
I think there is most of the companies I've talked to have said that they do not plan to reduce their capex, even if there is a.
General economic.
Stabilization or declined.
That it's going to be relatively short lived and that they don't plan to reduce their capex spending.
And then on top of that you've put the.
The automation activity were seeing as a result of the labor shortages people trying to bring things back from overseas and not being able to find labor. There is a tremendous investment in automation and robotics.
We are going to drive our business.
Just good signs that.
That we will see that.
Even if there is a general economic.
Decline.
Yes.
Our part of the industrial World could weather that storm pretty well.
And then finally, we have a third party economists that we utilize in into some customized work for us on the markets that we serve and what's going on and.
<unk> forecast that we get.
From the data.
On the analytics that we do.
Indicate that.
Even if it is if there is a decline it would be short lived.
Relatively minor.
So several data points coming together pointing to the same conclusion.
Great really appreciate Karl Thanks, Paul.
I don't know if its worth Mike if you get the surcharge impact, but I think Todd year to date, its about $30 million, yes year to date. It is about $30 million for the quarter. It had.
At a 200 basis point impact on gross profit.
And about 100 basis point impact on Ob <unk>.
EBITDA margins as we just pass those costs through to our customers at zero margin.
And I'm really confident that one.
When the when the commodity cost start to moderate and they have already are starting to see it now that we should see really nice margin expansion as those surcharges no longer have an impact on our margin and cost reductions combined with the price increases that we've put into effect.
So.
I've got confidence in the margins and the cash flow also.
Great great.
Thanks for the added color I appreciate it guys.
Alright, Thanks, Mike.
Our next question comes from Jeff Hammond with Keybanc your.
Your line is now open.
Hey, guys.
Just back on the surcharge die.
<unk>.
I'm just a little confused like are you seeing input costs come down and those surcharges are rolling off or we just don't know yet.
No so on the on the electronic side.
We made the decision to invest in the inventory, albeit at a much higher cost.
We've put a combination of permanent pricing actions in place as well as surcharge utilization now.
To offset those costs and our expectation as Carl said as.
Capacity comes online in the electronic space and we start getting more normalized cost the permanent price increases we've put in place.
More than offset.
Any general increases they may have had when they returned to more normalized production.
So.
We've gotten to a point, where we felt that we could not pushed that permanent pricing.
Even further and felt that the surcharges were the right way to go due to this sort of transitory nature that we believe we're going to see on these electronics.
And the guidance, Jeff we don't have the surcharges built into Iraq offline or the cost side, that's right because it will just be a flow through it's just going to be a flow through.
We do not know what they will be so commodity costs. If you look at the at the copper prices as an example, which they are substantial surcharges in there for copper.
They are starting to come down and.
And we just pass them through my guess is that we had $30 million in the first half my guess is the surcharges that we'll see in the back half will be in the $15 million to $20 million range, but that's that's a wild guess.
If that's a technical term.
Yes.
Okay.
So.
Is this unique to certain businesses as it lean more to some of the Ams businesses, because it seems to be a little more.
I wanted to ask there bill.
Okay.
So the variability and margin <unk>.
So that again sorry.
When I say the biggest surcharges are related to chip chips, and so we made a decision to to buy chips on the open market and in conjunction with our customers.
To make sure that they could get product we made the decision to buy ships at.
Exorbitant prices on the open market and then pass that onto the customers.
And <unk>.
We're more than willing to do it so that they could get electronic drives and controls and even in some of our actuator business.
Chips were short and that helped us.
We believe we gained some share there and we're able to supply customers. When other companies, we aren't going to pay those exorbitant prices for chips, we went out on the open market and bottom.
So we're passing that on so that's the biggest wildcard right. We just don't know what those costs might be and the appetite that the customers will have to take that so it may slow like Carl mentioned and as things moderate and we have at least gotten some verbal confirmation that we should be getting our first allocation hopefully some more.
Normally priced chips.
Not nearly what we would need for a year, but at least it indicates that there might be.
Some availability coming online in the near term for us.
Sure.
Alright, Okay. So I guess, so the variability on margin for US is really a function of the surcharges because you realize surcharge you on 'twenty one.
Okay.
Yes.
Then just it sounds like orders.
Okay.
I think the jbs business impact on the MRI also right. So thats right taken out jbs taken out JV.
Okay. Okay.
Okay.
Yes, just.
So the order trends through the quarter and into July have been.
Generally pretty stable.
Are you seeing any markets, where there is kind of incremental deterioration.
I would say.
In turf and garden.
<unk>.
That business has done really well this year, we saw some deterioration there but.
But the reason is because they can't get engines. So they don't want to put a whole bunch of inventory in place and can't get the engines. So so that one was explainable, we have deterioration in the China wind market.
European wind markets pretty still pretty solid.
<unk>.
I think we've mentioned before that in the on the medical side there was some inventory on.
The surgical power tools, and but thats the orders the incoming orders were really strong.
On that side. It was more shipments were pushed out a little bit but the order came in strong.
I think if there was anything else it was notably weak I think thats.
Right. The only other one was really defense.
That just gets kind of it's kind of lumpy, we actually booked some really nice orders in Q2.
For future revenue.
It's still very.
Very comfortable with the defense space still a very important market to us, but it's got a little bit of Lumpiness in.
It's showing some declines in the quarter.
Yeah, and I would say, we see the normal seasonality for the summertime slows down a little bit.
So I would say.
Im not panicking, but think we will see as I mentioned over the last couple of calls and I'm going to reiterate it again.
I'm going to try not to panic myself, when we see as our performance gets better then as lead times come down customers are going to cut back inventory. We've built a lot of inventory to be able to get R. R.
But performance our operating performance better I know our customers have so I know, we're going to see the decline as our performance gets better.
Then.
It's not going to be built of end market demand, it's going to be a result of inventory management and I told my guys expect me to panic, because I will but are mindful that it will be just remind me that it's that it's because it's not because of the end market demand.
Now there is a risk Jeff and ill say this too that we talk ourselves into something.
Worse than what we have to right. It seems like every time there is an economic decline.
Starts off by everybody convincing themselves that theres going to be an economic decline.
Yes that was my last question just on backlog I guess, there's two dynamics, there where people still start to feel better and need less safety stock. So they order a little bit less and then you guys, maybe being able to catch up.
Your expectation that.
This is kind of peak backlog and you start to see some normalization in the second half.
Yes, we've seen it stabilize and.
We monitor also our past due backlog or late backlog and the late backlog, we're starting to we're just starting to.
Chippeway added in some businesses.
They were probably net neutral on that but a couple of businesses have made improvements in our later cycle businesses, it's still growing a little bit.
Okay.
Good color guys. Thanks.
Alright, Thanks, Jeff Jeff.
Yes.
Once again, if you would like to ask a question. Please press star one on your telephone keypad.
There are no more questions. So I'll pass the call back over to the management team for closing remarks.
Okay, just like to thank you all for joining us today, and we look forward to speaking with many of you in the weeks ahead. Thank.
Thank you again for your time and this concludes today's call.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.