Greetings and welcome to the Altra Industrial Motion Corp. first quarter 2017 financial results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Calusdian, Sharon Merrill Associates.

Thank you. 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 altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to slide 4. 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 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 operating working capital 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. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q1 2018 financial results press release on Altra's website. Please turn to slide five. With me today are Chief Executive Officer, Carl Christenson and Chief Financial Officer, Christian Storch I will now turn the call over to Carl.

Thank you David and good morning everyone. Please turn to slide six. We began 2018 with strong first-quarter results, reporting 11.6% sales growth to a record $240.4 million with 5.4% organic growth and continued improvement in non-GAAP net income. Our first-quarter performance represented the sixth consecutive quarter of year-over-year sales growth as we capitalized on our organic growth initiatives and the ongoing strength in the industrial economy. When you look across our end markets, nearly all of them are performing well and we see even greater upside when customers begin to increase capital spending in earnest. The one exception was weak sales into the wind energy market, which was expected in the first quarter. The incoming order rate from our wind energy customers improved through the quarter and we anticipate that Q2 sales will be better. On the bottom line, we are making progress in leveraging our margin improvement initiatives into enhanced profitability. We reported $0.31 per diluted share on a GAAP basis and $0.66 on a non-GAAP basis. We expect that we will accelerate the flow through to the bottom line as we progress through the year, especially as the wind market improves. We also continue to make excellent progress with operational excellence. Many of our businesses had significant improvement in their operating performance and in particular our Formsprag Clutch and Wichita Clutch businesses based in the U.S. and our electric clutch/brake business based in France had exceptional improvement. The improvement in both the top and bottom line are the result of process improvements driven by our business system and improving market conditions. We also made progress on some terrific developmental activities that will be part of our organic growth going forward. Clutches that were designed specifically for pressure pump transmission on a fracing rig, linear actuators and a…

Thank you Carl and good morning everyone. Turning to slide eight. As Carl mentioned, we reported a strong quarter for sales with 11.6% growth overall. This included a 90 basis points contribution from price and a positive FX effect of 620 basis points. We are particularly excited to have reported solid 5.4% organic growth this quarter, demonstrating the strength that we are seeing across most of our end markets. Geographically, excluding the effect of foreign exchange, North American revenues were up 9.1%, sales to Asia Pacific and other geographies were up 13.8% and European revenues were down 1.5%. European revenues were strong across all business units in the majority of our end markets. However, that strong performance was offset by a revenue decline in the wind energy market. We expect our wind business to improve sequentially in the second quarter and continue to improve going into the second half of the year as our order book has increased significantly. On our fourth quarter call, I mentioned that some short-term supply chain issues and commodity headwinds that impacted our ability to fully leverage our topline growth into even greater bottomline performance. In the first quarter, the supply chain issues still had an effect, but not nearly to the level that we experienced in Q4. We were successful in substantially offsetting the commodity cost headwinds in the first quarter with price increases. At this point, we have largely offset the commodity increases, but pricing is not quite ahead of commodity inflation yet. We expect to implement further price increases this year. Our non-GAAP operating income margin increased 20 basis points year-over-year. We had a very strong performance across many of our businesses and without the wind business, we would have seen a more than 100 basis points improvement in operating margin. This…

Thank you Christian. Let's turn to slide 11 and review our end markets. We will begin with distribution which is predominantly made up of sales of aftermarket parts and original equipment parts for small OEMs. Distribution sales were up year-over-year as a result of the general improvement in the global economy. Turf and garden sales were off to a good start this year. We are encouraged by the first quarter performance and expect 2018 sales to be up slightly from our strong performance in 2016 and 2017. Farm and agriculture turned in another quarter of strong double-digit year-over-year growth, albeit against a weak quarter a year ago. Commodity price increases are driving this strength and we are now generating meaningful sales from linear actuator products into this market. 2018 continues to look like a great year for this market. Material handling began the year with robust sales across the elevator, forklift, cranes and hoists markets. The rebound in the metals and oil and gas markets is driving demand for materials handling sales and we also saw strength in elevators this quarter. Turning to energy. Energy sales were down overall for the quarter with strength in oil and gas and power generation being more than offset by weakness in wind. Like last quarter, wind was down double-digits as a result of a pause on new projects in some parts of the world as customers negotiated supply agreements. The agreements are now in place and the order rate is solid. On the positive side, oil and gas remained strong and power generation turned in year-over-year growth, also double-digits for the first time in quite a while. Sales to the metals market were up double-digits due to the overall continuing strength in the domestic industry. We suspect that the potential for duties imposed…

[Operator Instructions]. Our first question comes from Scott Graham, BMO Capital Markets. Please proceed with your question.

Hi. This is Katja, on for Scott. First, can you talk about, provide more specifics on the price cost? I know you mentioned price cost was negative than first quarter. What are your expectations for the rest of the year?

Hi Katja. So we really saw a much better performance from price cost in the first quarter than we did in the fourth quarter of last year. And we think we more than offset. Freight was up significantly. And I think that’s a pretty well-known phenomenon, I guess, going on right now. The material costs were up and then also labor increases. And we think that our pricing just about offset that, maybe did a little bit more than offset that. And we are going to be aggressive through the rest of the year to make sure that we do the best job we can to offset any additional cost increases we see on the commodity side as we go through the year. And we have got some planned price increases and some announced price increases.

Okay. On your sales guide, can you talk a little bit about how much is FX?

Yes. This is Christian. So the sales guide for the rest of the year assumes total gross somewhere 1.5% and 4.5%. Excluding FX, the guidance at the high-end implies about 2.5% growth rate for the balance of the year. FX, which was a significant tailwind in the first quarter, that tailwind will decline, if we assume current exchange rates for the Euro and the British Pound quarter-by-quarter and will almost fully were eliminated as we enter the fourth quarter. There is going to be a little tailwind left in the second and the third quarter.

Okay. Just one more. What impact do you perceive from the Section 301 tariffs? Have you looked at it? And do you see any positive or negative?

Well, there is still a lot of discussion that go on as to what's -- they are still in comment period. So I mean if everything goes up 25%, we have done the math, but I think it's premature to talk about what that impact that’s going to have until we know exactly what's going to happen. So we will be prepared. We are watching it very carefully. We are working very hard and we will let you know once we have a better understanding on what the real tariffs are going to be, if any.

And there are going to be pluses and minuses. Some of our businesses would benefit in total cost. In other areas, it would increase. So as Carl said, I think it's premature to quantify.

Okay. Thank you very much.

Okay. Thank you.

Our next question comes from Jeff Hammond, KeyBanc Capital Markets. Please proceed with your question.

Hi guys. Good morning.

Hi Jeff.

So just back on the guide. I think you said, so it looks like the revenue guidance is 4% to 6% growth overall. Is it fair to say 2% there or 2% to 2.5% is FX and the rest is core?

For the balance of the year, Q2 through Q4 about 150 basis points is FX.

Okay.

With it being highest in Q2 and then tapering down to nothing in Q4.

Okay. That’s helpful. So it seems like most of your end markets are performing well. You have got wind, which I think it's better. You put up 5% organic. So why the caution and conservatism on the organic within the guide? It looks like you are only calling for, again, 1% to 3% kind of core growth?

I think two pieces to that. One is, as you know, we have limited visibility .We have got about one quarter of visibility. And so therefore for us to look at third and fourth quarter is challenging. And as we always say, there is no upside to meeting your guidance and so we want to continue with our approach of being conservative about how we look. We don’t want all businesses to be optimistic because all that does is nothing good comes out of that, as all it does is that you increase your cost structure ahead of sales increases and that’s the last we want to happen.

Okay. Good color there. I just want to hit a couple of end markets. So wind, can we quantify how weak that was in the first quarter? And maybe help me understand the margin impact as it seems like you called out a pretty big impact? And then if you could quantify growth in distribution and then just let us know what changed in conventional power gen, that would be great? Thanks guys.

I will start with the wind and then Carl will talk about the other. Wind had a very, very significant impact in the first quarter. I can not stress that enough. As I said in my prepared remarks, excluding the wind business, we would have almost seen a 12% operating income margin. Revenues in wind were down 17% year-over-year. I think if I had to guess, EPS impact was probably close to $0.04 or $0.05 a share this quarter compared to last year. If I look at the second quarter, our incoming bookings rates have increased by about over 30% and we anticipate that shipments in the second quarter sequentially will be about 12%, 13% plus higher than in the first quarter, which would have a meaningful impact on the profitability of that business.

And then on the distribution side, Jeff, the distribution was pretty strong. It was up high single-digits, low double-digits depending on what markets the distributors were in but it was very good and particularly in some of the distributors have focused on mining activity and some of the markets that are really starting to recover, it was good. And then your third question, what was the third part of your question?

I think power gen has been particularly weak and you said that flipping around and I just wondered, we have heard pretty mixed things on power gen. So just wanted to understand what was going on there?

Yes. There was a little bit of an anomaly. And in on our business, we put it on the category of power gen but some of it is high-performance parts that go into turbine driven compressors too. And we have not fully analyzed that yet. We did not expect the power gen segment to be as strong as it was. We will take it because it's a nice segment for us and it's profitable. But we are not projecting it to continue with that strength, particularly GE has been particularly commenting on that they don’t expect their power gen business to recover. So we are digging into and trying to understand it, but we are not expecting it to continue through the year. Very happy that we had it.

Okay. Great guys. Thanks.

All right. Thanks Jeff.

Our next question comes from Matt Duncan, Stephens Inc. Please proceed with your question.

Hi. Good morning guys. This is Will, on the call for Matt.

Yes. Hi Will.

Hi. Good morning. I am wondering what your order intake rates look like on a year-over-year basis right now across the business? And then I kind of have a follow-up to that last question, outperformance with power generation. Are you seeing any more of acceleration or decel anywhere that previously wasn’t contemplated?

So the order rates, so we don’t talk about specific orders because lots of our orders are schedules that we get from customers and they are not firm contractual commitments. So we don’t talk about specific numbers. But I can tell you, in general the order book is there to support the forecast that we provided and so the year-over-year, when you look at year-over-year, the incoming order rate is probably a little bit north of that activity what we projected in the forecast.

I want to say in the fourth quarter, it was up in the high single-digits. So if I recall correctly, you called that out. So maybe right around there continued into the first quarter and into the 2Q?

Yes. You can say that.

Okay. And then back on the FX questions and the shape of the year. Is the step-up that we typically see in the 2Q from the 1Q, it seems based on the guidance that they won't happen this year. Is this a function of FX? Are we seeing a change in seasonality this year?

No. It is a function of FX. If you look at the FX benefits we had in the first quarter which was north of 600 basis points, we think that tailwind is going to be cut in half in the second quarter.

And then become almost gone by?

And then going down even further from there. So that current exchange rates that the Euro to $1.20, that would save if that rate stays through the year, fourth quarter there is no tailwind nor a headwind any more.

Okay. And sorry if I missed this point in the beginning, but are you past all the supply chain issues that caused the gross margin headwinds in the 4Q? Or did those have any impact in 1Q? And as a follow-on, when do you expect to see gross margin start moving higher on a year-over-year basis?

So I think supply chain, 95% of that is behind us. The supply chain issues that we have right now are mainly related to suppliers keeping up with demand. So we think that’s largely behind us. What was the second part of your question?

Just the trajectory of gross margins from here if you just for last period's amortization charge? We declined, I want to say 95 basis point. So what's kind of the trajectory of gross margin from here?

So I mentioned how severe the impact wars of the wind business on the quarter.

Yes.

These are dramatic swing, down 17%, up 30% and more sequentially. That not only had an impact on operating income margin significant, but also on the gross profit margin. So we expect the gross profit margins to recover nicely as we go through the balance of the year based on the recovery in wind.

Great. Thanks Christian. Thanks Carl.

You are welcome, Will.

[Operator Instructions]. Our next question comes from John Franzreb, Sidoti & Company. Please proceed with your question.

Good morning guys.

Good morning John.

Christ, just I want to make sure I understand this properly. In the second quarter you expect the wind business, the order book suggest a 30% recovery in that business. Are you expecting to recover all $0.04 to $0.05 impact that hurt you in the first quarter in wind in the second quarter?

The business lost money in the first quarter and we expect that business to be profitable in the second quarter and we expect profitability to remain through the balance of the year and increasing as we go forward. So the EPS impact, I think, is somewhere in that area. Maybe $0.03 a share, if I had to guess sequentially. And then we will recover more as we through the balance of the year.

Yes. There is a lot going on in that market for us, John and so I wouldn’t expect it to get all $0.04 or $0.05 cents. But we will certainly see a significant recovery. And by the end of the year, will have everything sorted out and we will be back on track from a profitability standpoint.

So I am kind of wondering about the sustainability of the recovery beyond the second quarter also? Is this a catch-up effect that big rebounds and it will settle down after that? Or does it kind of level off at that level going forward? What are your thoughts there?

We believe that that’s a more sustainable rate that it's not going to be one big lump and then get past through the snake.

Yes, just going back, we talked in the fourth quarter about the auctions that took place. So the customer did not order brakes, essentially in the fourth quarter. As they were going through the auctions and as they determined the share of wallet for all of the participants. And that resulted in this bad first quarter. Now those have settled down. Orders have come in. And so we expect a significant recovery in the second quarter and not just a spike in the second quarter, but at that point, we are going to be back to normal levels and have some small growth from there on through the rest of the year.

Got it. Perfect. And Carl, you kind of suggested that your guidance doesn’t take into consideration any significant recovery in capital spending at the customer base. But you also just mentioned that you have an idea what the schedules look like. Do you think that there is a possibility or stronger possibility today that you are going to see a pickup in the capital spending budgets of your customer? Or has it remained unchanged since the beginning of the year?

So we have seen a little bit and it's just not really robust. But we have seen some projects get released and where it's most noticeable for us is in some of the big heavy equipment markets like mining. And so I would expect that through the year, we would see it accelerate a little bit, but not significantly. And I am hoping that’s a leg that can keep things going through 2019, so we will start to see some of that capital spending later on in this year and then the move into 2019.

Okay. All right. Thanks for taking my questions, guys.

Thanks John.

Our next question comes from Jeff Hammond, KeyBanc Capital Markets. Please proceed with your question.

Hi guys. Just got a couple of follow-ups. One, any updates on timing on the Fortive deal or as you dig in on it, any other early observations into changes from when you first announced it?

No. I think as I said it in the script and the dialogue that we had, we still expect to close by the end of the year and that everything is moving along according to plan and if anything, we are firming up our convictions about what we thought before we started working with the team at A&S.

And we would encourage you maybe to listen to their earnings call, to the replay and I think they provided us some color on how this business have done for the first quarter.

Yes. We read through that. And then just last one. On r turf care, it seems like some of players in this space were complaining about weather and the slow start to the season. I think you said, off to a good start, but any risk there that it slows down around inventory adjustments, et cetera?

Yes. So we are one step behind that, right. They have got to fill the unit and then get them placed out there. And so we are one step behind it. So I think we are hopeful that the sellthrough is good and does pick up a little bit for them and we will just adjust accordingly. But so far this year has been pretty good in the forecast. Their forecasts have not changed significantly to us. So our demand is still there. And usually what happens, Jeff, is it just determines when our build season ends. So does it end in May or does it end in July, depending on how good the year is for them. So it's too early in the selling season for us to see it.

And in addition to that, Jeff, housing starts remain to be good which is usually a strong indicator on how that the business does. Unit volume was slightly ahead of last year. So right now, I think we are concerned about that business. And there might be some good as it might extend the selling season. We will see.

Okay. Great. Thanks guys.

Okay. Thanks Jeff.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Carl Christenson for closing remarks.

Okay. Thank you Omar. And I would like to thank everyone for joining us today. We look forward to speaking with you next quarter. Have a good weekend.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.