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Edited Transcript of AIMC earnings conference call or presentation 13-Feb-20 3:00pm GMT

Q4 2019 Altra Industrial Motion Corp Earnings Call

BRAINTREE Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Altra Industrial Motion Corp earnings conference call or presentation Thursday, February 13, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carl R. Christenson

Altra Industrial Motion Corp. - Chairman & CEO

* Christian Storch

Altra Industrial Motion Corp. - VP & CFO

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Conference Call Participants

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* Jake Allen Jarnigo

Robert W. Baird & Co. Incorporated, Research Division - Research Analyst

* Jeffrey David Hammond

KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst

* John Edward Franzreb

Sidoti & Company, LLC - Senior Equity Analyst

* David C. Calusdian

Sharon Merrill Associates, Inc. - President

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Altra Industrial Motion Q4 2019 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to your speaker today, Mr. David Calusdian. Please go ahead.

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David C. Calusdian, Sharon Merrill Associates, Inc. - President [2]

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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 & Presentations in the Investor Relations section.

Please turn to Slide 3. 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 adjusted EBITDA, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP gross margin, non-GAAP operating working capital, non-GAAP net debt 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 Q4 2019 financial results press release on Altra's website.

Please turn to Slide 4. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch. I'll now turn the call over to Carl.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [3]

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Thank you, David, and good morning, everyone. Please turn to Slide 5. 2019 was a pivotal year for Altra. By executing on our strategic priorities of integrating the Altra and A&S businesses, delevering our balance sheet, capturing synergies and managing costs, we solidified our foundation as a premier industrial company, while delivering solid operational results. Against the backdrop of a challenging market environment, the Altra team stayed focused and executed extremely well.

For the full year, we met our guidance on the top line with revenue of $1.834 billion and exceeded our bottom line guidance with non-GAAP EPS of $2.86 for the year. Our fourth quarter performance was highlighted by strong operating performance, even though we continue to face top line headwinds. Revenue of $441.9 million for the quarter reflects softness in several markets we serve, including factory automation and specialty machinery and the transportation markets as well as a difficult comparison with the fourth quarter of 2018.

Even with a 6% decline in revenue, we had a solid operating performance in Q4. Net income was $37.3 million or $0.58 per diluted share compared with a loss of $5 million or $0.08 for the year ago quarter. We grew non-GAAP earnings per share by 2% to $0.66 per diluted share, and expanded non-GAAP gross margin by 20 basis points to 35.6%.

Now please turn to Slide 6. 2019 was a year of tremendous strategic accomplishment for Altra. Before I review the Q4 market dynamics, I would like to share a few strategic highlights from the year. In 2019, we achieved best-in-class cash management, yielding a total of $201.7 million of free cash flow. We paid down a total of $130 million of debt and exited the year with 3.8x net debt to non-GAAP adjusted EBITDA.

We also made exceptional progress with the integration of the A&S and legacy Altra businesses in 2019. We completed the tactical integration of the A&S operations into Altra's structure ahead of schedule and began to integrate our world-class business system across the entire organization. By developing and utilizing best practices, both the A&S and legacy Altra businesses are making great progress. For example, Altra's strengths in operational excellence and continuous improvement and A&S' strength in policy deployment, supply chain management and organic growth are enabling the Altra team to deliver extraordinary results. We believe we have only skimmed the surface in capturing the potential our combined business system presents, and there is tremendous value-creation opportunity ahead.

We also exceeded our expectations in delivering on cost synergies, with $15 million of synergies captured in 2019, keeping us well on track to reach our target of $52 million of synergies by year 4. As part of our synergy efforts, we made meaningful progress with our supply chain optimizations to capture both indirect and direct cost savings. We also successfully completed 3 facility consolidations in 2019 and have planning underway for additional consolidations. We are confident that we have a very strong foundation in place to build upon and are excited for the opportunities that lie ahead.

Please turn to Slide 7 to review our end markets. Starting first with a closer look at the more notable market headwinds faced in the fourth quarter. Sales into the transportation market were up slightly on a sequential basis, but down mid-single digits compared to a year ago quarter as a result of the continued decline in the heavy-duty or class 8 truck market, most notably in North America. Class 8 sales into China were slightly better than expected this quarter as the demand for one of our customers' natural gas engines resulted in strong shipments in Q4. We continue to expect our sales into the global class 8 truck market to be down approximately 20% or $40 million in 2020 when compared with 2019.

It is not yet clear to what extent the coronavirus will impact our transportation business, but we continue to monitor the situation closely and will adjust this expectation as appropriate. As a reminder, historically, the typical down cycle for heavy-duty trucks has been about 1.5 years to 2 years, followed by a 3- to 4-year up cycle. We remain focused on managing cost during the decline and believe we will be well positioned for the upturn. In addition, we remain very optimistic about the future growth opportunities we have with the new technology that our class 8 truck business is developing to provide safer braking systems, improved fuel efficiency and lower emissions.

Fourth quarter sales in factory automation and specialty machinery were down low double digits year-over-year as we faced the same factors that have impacted these markets over the past several quarters: tough year-over-year comps, destocking and softness in China. Looking forward, we believe that the overall market segment should be one of the first to emerge from the downturn. We also remain very confident that this is a market where we are well positioned to capitalize on great long-term secular growth opportunities.

Metals declined by mid-single digits as the ongoing slowing in the automotive industry and fewer capital projects were only partially offset by stable aftermarket demand. We expect the metals market to improve in the second half of the year as industrial activity is expected to return to growth.

Our core distribution business was down mid-single digits as sales to our distributors continue to be impacted by the sluggish general industrial economy and there was some continued destocking in the quarter. We expect these conditions to prevail through at least the first half of the year. Turf and Garden was down mid-single digits due to the weather and the resulting inventory hangover at our customers and the big box retail outlets. We expect Turf and Garden demand in 2020 to be similar to 2019. Ag was down double digits in Q4 due to weather and the effects of the ongoing trade dispute with China. Demand in the Ag markets will continue to be highly dependent on the trade dynamics between China and the U.S., including what occurs from the recently signed phase 1 trade agreement.

On the positive side, we also continue to experience strong demand in several key markets. The medical market was up low single digits in Q4 and mid-single digits for the year, supported by a strong surgical and diagnostics business. We expect the medical market to be a growth engine for us in 2020, with sales expected up mid-single digits for the year. In energy, strength across wind, oil and gas and power generation supported low single-digit growth in Q4 and low double-digit growth for the year.

Within energy, renewables were up mid-single digits due largely to strength in wind. Oil and gas declined year-over-year due largely to tough comps in the year ago quarter. On a sequential basis, oil and gas was up mid-single digits and grew low single digits for the year. The outlook is for this segment of the market to continue to be choppy and challenging. Looking forward, we expect the overall energy market to be relatively flat in 2020.

The mining market was up double digits in Q4 compared to last year as a result of very strong aftermarket parts activity. We have also started to see signs of increased project work with some of our OEMs. And aerospace and defense performed well again, up low single digits year-over-year and sequentially as moderate defense declines were offset by strong commercial demand. For the full year, the aerospace and defense markets were up double digits. In 2020, we expect to see ongoing strength in these markets. This is particularly the case in defense, with expected increases in the defense budget as well as commercial aerospace, where we are still in the middle of a very strong cycle.

We want to note that our exposure to the 737 MAX is very limited. From a macro perspective, the overall industrial environment remains cautious due in part to uncertainty surrounding the trade war and the effectiveness of the phase 1 U.S.-China trade agreement, the secondary impacts of the tariffs, and most recently, the coronavirus. As a result, we continue to take a cautious view on 2020, as Christian will cover when he reviews our 2020 guidance after his review of the financial results.

On the top of everyone's mind is the COVID-19 or coronavirus. As you know, the situation in China is changing rapidly and highly uncertain. China accounts for approximately 9% of our revenues, and we have approximately 1,000 employees in the country. Our top priority is to make sure our employees are safe. And so far, we are not aware that any of our employees have been diagnosed with the virus. As we ramp up production and other activities, we are taking appropriate precautions to protect our employees. Most of our production facilities are running at 30% to 50% of capacity and ramping up. Our supply chain in China serves both our Chinese operations and our operations around the world. Our supply chain teams are working hard to develop countermeasures to potential disruptions with material and component suppliers as well as logistics. Obviously, the potential impact on the overall economy and our revenues is highly uncertain. However, we have attempted to quantify the impact on our business, and Christian will describe this in a few moments when he provides our guidance for 2020. We, like all other companies, are monitoring the situation closely.

With that, I'll turn the call over to Christian.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [4]

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Thank you, Carl, and good morning, everyone. Please turn to Slide 8. We once again delivered solid operational results for the quarter, although sales were again affected by the macro factors that Carl described.

Before I review the results, I would like to remind you that Q4 of 2018 was the first quarter that we reported financials for the A&S and Altra combination. Highlights of our fourth quarter 2019 performance are, fourth quarter free cash flow of $58.2 million and $201.7 million for the fiscal year was at the high end of our expectations. Operating working capital declined $14.4 million when compared to the end of the third quarter, contributing to the free cash flow generation in the quarter.

Looking at the top line, fourth quarter sales were $441.9 million and were in line with our expectations when compared with sales of $469.2 million in the same quarter last year. Organic sales were down 4.8% year-over-year. Foreign exchange rates had a negative effect of 100 basis points, while price had a strong positive impact of 140 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were down 3.1%, while net sales for the A&S segment decreased 6.5%.

In the fourth quarter, sales declined 16.9% in North America and 14.1% in Europe and were up 12.3% in Asia and the rest of the world. Excluding the impact of foreign exchange, sales in Europe were down approximately 11.3% and up 13.2% in China. The provision for income taxes in the fourth quarter of 2019 on a normalized basis was 22.6%. Non-GAAP adjusted EBITDA was $89.4 million for the fourth quarter or 20.2% of net sales.

Please turn to Slide 9. In terms of cash, our top priority continues to be paying down debt and delevering the balance sheet following the A&S combination. As planned, we paid down $40 million of debt in the fourth quarter, bringing the total to $130 million for 2019 and $150 million since acquiring the A&S segment. We exited the year with a leverage of 3.8x net debt to adjusted non-GAAP EBITDA. Capital investments totaled $51.7 million for the year, with nearly $15 million for the quarter as we continued to reduce capital expenditure this year from previously planned levels. Depreciation and amortization totaled $128.4 million for the year and $32 million in the fourth quarter.

In response to the market downturn, we initiated steps in 2019 to accelerate synergies and cost reductions, including headcount reductions in all geographies and facility consolidations. As a result, we achieved our target synergies, including cost-out actions of $15 million for 2019 and a year-end exit run rate of $26 million.

Now please turn to Slide 10 for a review of our outlook for 2020. Today, we are providing our guidance for full year 2020 to reflect our expectations given ongoing market softness. We expect annual sales in the range of $1.72 billion to $1.77 billion with tougher comps in the first half of the year. This guidance reflects the fact that we continue to expect exchange rate headwinds into 2020.

The guidance also includes our current best estimate of the revenue impact related to the coronavirus. We currently estimate that, that impact to be between $10 million and $50 million. We recognize that the situation is quite fluid, and as a result, it is very difficult to predict when our factories, suppliers and customers will be fully operational again. While we initially expected first quarter sales to be sequentially modestly higher than in the fourth quarter, we now expect revenues to be sequentially lower due to the impact of the manufacturing and supply chain disruptions caused by the virus.

As previously indicated, following the A&S combination, we began to exclude acquisition-related amortization net of tax from non-GAAP net income and non-GAAP EPS. We expect non-GAAP adjusted EBITDA in the range of $340 million to $360 million. We expect to pay down up to $150 million of debt in 2020, with net debt to non-GAAP adjusted EBITDA leverage of approximately 3.5 to 3.7x exiting the year. And free cash flow of up to $200 million. We expect GAAP diluted EPS in the range of $1.53 to $1.67 and non-GAAP diluted EPS in the range of $2.40 to $2.60. We expect depreciation and amortization to be in the range of $125 million to $132 million and capital expenditures in the range of $45 million to $50 million. We expect our normalized tax rate for the full year to be in the range of 22% to 24%.

With that, I will turn the discussion back to Carl.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [5]

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All right. Thank you, Christian. And please turn to Slide 11. Before we wrap up, I would like to leave you with our strategic priorities for 2020.

First, we remain laser focused on leveraging the power of the new Altra in capturing synergies in support of our $52 million synergy target. This includes an ongoing focus on supply chain optimization, value engineering, facility consolidations and further development of our world-class business system. We're also starting to shift our attention to capturing sales synergies and expect to see more traction in this area as we move through the year.

Second, we will continue to prioritize cash generation and debt pay down to expediently delever to our target range of 2 to 3x net debt to adjusted EBITDA and strengthen the balance sheet.

And finally, we will step up our focus on evaluating where we are dedicating our resources to ensure we are well positioned to capitalize on high-growth opportunities for Altra. This includes dedicating resources to support emerging opportunities like IoT and enhancing our e-commerce capabilities as well as investing in management training programs that empower our leaders to execute on our strategy.

We remain extremely excited about the future prospects for Altra. We are taking the actions needed to deliver on our promise as a premier industrial company. We have a world-class team, a great portfolio of products and a proven ability to deliver strong results even through challenging market conditions. We're confident that the work we are doing to drive cost out of the business and manage the balance sheet positions, positions Altra to have very strong operating leverage when the market turns. We look forward to keeping you updated.

And with that, I'd like to turn it back to the operator to open the call to your questions. Amy?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Jeff Hammond of KeyBanc.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [2]

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So great job on free cash flow, really good performance in 4Q in the second half. Can you just speak to what you think your free cash flow is going to look like in 2020 within the context of the guide? And how much debt you think you can pay down in the year?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [3]

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We think that there's a very good chance that free cash flow will be in line with 2019 of about $200 million. And the reason for that is that in 2019, we made payments to Fortive related to working capital adjustments and excess cash repayments of almost $30 million. That will not repeat in 2020. So that cash will be available to pay down debt, and as a result, we think that we can hit as much as $150 million of debt pay down in 2020.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [4]

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Okay. Great. And then, looks like your truck assumptions haven't changed at all versus 3 months ago. Can you just talk about what -- if there's any big variances in any of the end markets in terms of how you're thinking about them versus 3 months ago when you laid out the framework? And also just to clarify on the -- just the coronavirus, did you say $10 million to $50 million or $10 million to $15 million?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [5]

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$10 million to $50 million.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [6]

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$10 million to $50 million.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [7]

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5-0.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [8]

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Okay.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [9]

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And I'll elaborate on that if you want me to, Jeff, after Christian answers the first part of your question.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [10]

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So the assumptions for class 8 trucks, as you said, are very similar to 3 months ago. We're assuming that North America will cycle down about 30% year-over-year; Europe, about 11%. That might be a little bit more than 3 months ago. With -- and this is all ex coronavirus that China will be up 1%. Japan and Korea will be up meaningfully. So that business will overall be down about 20% and causing about 200 basis points of year-over-year top line decline that we're guiding to. China has been very strong for us in the first quarter and in January. But the coronavirus will have an impact in the first quarter, potentially in the second quarter. And what we don't know is yet to what extent those lost revenues will be -- we will be able to recover in subsequent quarters or to what extent those revenues will be lost. That is unclear at this point.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [11]

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And is there any other end markets that feel a lot different versus 3 months ago? And maybe just speak to factory automation.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [12]

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So for factory automation, ex coronavirus, we assume a very modest low single-digit sales increase year-over-year. Europe, I think, is still very weak. But North America, we are a little bit more optimistic than we were 3 months ago. And then the coronavirus will have an impact on the China business, but -- at least in the first 2 quarters. But again, we don't know to what extent those revenues can be recovered in subsequent quarters.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [13]

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Yes. And if -- Carl, if you want to just speak to the range on the coronavirus and kind of expand on how you came together with that forecast?

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [14]

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Yes. I think there is -- the way we looked at it was we have our sales that -- in China that we produce in China. We have our sales in North America -- or from other regions of the world that we produce in other regions of the world and then sell into China. And then we have components that we purchase in China or produce in China for sales in the rest of the world. So it's a very complicated picture when you look at the at the logistics and disruptions in the supply chain. So we're still working through that. Our teams are still very aggressively looking at how can we mitigate and countermeasure any disruptions in that -- in those supply chains and the sales channels. And I think some of the big questions we have are how much will we recover in the back half of the year? How much impact will there be in the second quarter? When will the virus start to start to be reduced or the number of cases be reduced so that transportation, et cetera, can get back to normal in China? And those are just unknowns right now. We don't know that. So when we look at the worst-case scenario of losing, we -- of potentially losing significant sales in the second quarter too, that's how we get to that $50 million number, with no -- with essentially no backfill in the back half of the year. Behind the expectation is that China will provide some stimulus to try to recover some of that lost business in the back half of the year, but how effective that is and when the virus actually starts to reduce is just too big a question marks for us to put a narrower band on the range.

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Operator [15]

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Your next question comes from the line of Jake Jarnigo of Baird.

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Jake Allen Jarnigo, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [16]

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Just tailing on the coronavirus talks. I guess bridging kind of where you've put the 2020 guide from last quarter in that 2% to 4% decline range and now the new guide looks kind of roughly, basically 1% below that. Is essentially that bridge kind of just embedding what may come from the coronavirus impact, that $10 million to $15 million amount? Or is there some incremental weakness that you have assumed in that as well?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [17]

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No. So ex coronavirus, we're thinking revenues are going to be down 2.5% to 4%. So that's inside of the range that we previously provided as part of third quarter when we initiated top line guidance for 2020. So nothing overall has changed. And so the incremental revenue decline is all due to the coronavirus.

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Jake Allen Jarnigo, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [18]

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Got it. Perfect. That makes sense. And then secondly, on the factory automation space again, you commented that you expect this -- Japan should be one of the first end markets to kind of come out of this bottom. I assume a lot of that has to do with -- kind of comp related. That one was kind of the first to go down. But I guess, what do you guys look at kind of on a forward basis to maybe get a gauge of where that demand could come from and when?

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [19]

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So we look at some of the some of the industry statistics that are published for semicon and then also automation equipment. And there is -- there are numbers published out there by a third party that we follow. And then we also look at -- stick very close to the customers and try to see what the customers have for demand and inventory and how they're working through the inventories and then what the actual demand is coming in. So a lot of it's direct contact with the customers.

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Jake Allen Jarnigo, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [20]

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Got it. Got it. That makes sense. And then one more question. Just shifting to the synergy side, it sounds like everything is on track there. You've been good to give about kind of giving a quarterly update there. As far as how those cadence through 2020, so we have the $26 million exit run rates from 2019. Can you kind of go over again what we should be kind of embedding from an incremental standpoint for 2020 then?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [21]

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Yes. So we believe that the exit run rate in 2020 will be $30 million so an incremental $4 million that we realized in year...

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Jake Allen Jarnigo, Robert W. Baird & Co. Incorporated, Research Division - Research Analyst [22]

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Got it. So -- okay. And then does that embed those nonrepeating cost-outs like with -- associated with the freight load employee than kind of that variable comp that's probably -- could it not be so low like it was this year. Is that embedded within that incremental $4 million?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [23]

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No, what's embedded in that is some of the restructuring benefits that we realized. So those would be permanent headcount reductions, but not so lows.

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Operator [24]

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And your next question comes from the line of John Franzreb of Sidoti.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [25]

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Yes, guys. Just going back to the guidance on the coronavirus. What percentage are you kind of thinking about of that revenue hits the first quarter versus what you expect maybe will bleed into the second quarter? And what markets for you -- what end markets are the most vulnerable?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [26]

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So we think top line impact on the first quarter will be somewhere between $10 million and $15 million. We think there's more uncertainty about the second quarter that it could be of the same magnitude, maybe slightly higher. And then the question is, right now, we're assuming that in Q3 and Q4, we'll be back to a normal situation. And the high end of the guidance would -- that $50 million range would assume that we're going to still see in the third quarter some negative impact.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [27]

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Christian, why would it be higher potentially in the second quarter versus the first quarter?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [28]

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So when we look at our -- we had a good January, for instance. And then we will be able to ramp up production, but we don't know whether our customers are going to be ready and to what extent they're going to be ready to accept shipments as we go through the second quarter.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [29]

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Right. And also our suppliers. So there's big question marks on the whole supply chain. And then are our supplier is going to be able to get the raw materials that they need. We don't have -- we have a few suppliers in the Hubei province, Wuhan area. But even other suppliers across the rest of the country, there's some concern about how quickly they can ramp up, and then what the supply chain -- what's the logistics going to be to get product moving at the flow rate we need.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [30]

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Well, the supply chain side, with a lot of our Chinese suppliers, we work with their managed inventory. That means they have inventory in the U.S. that they're holding for us. So we'll be fine, at least, for most components here for a while. And so it's a question of how that can be replenished and how quickly that can be replenished, and that would affect the second quarter.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [31]

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So if the virus rates are to decline and supply chain starts to move again it should be a minimal impact. But if this drags out, it could be significant, and we just wanted to point that out.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [32]

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No, as you mentioned, it's certainly a fluid discussion. Did you mention what markets can hit you or potentially are the greatest factor?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [33]

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So within China, we have 4 facilities. One is dedicated to wind, one is dedicated to the class 8 trucks, one is dedicated to factory automation and one is dedicated to essentially our braking solutions. And if I look at the wind business, that's up and running 80%. It relies on very few customers, and that situation is fluid. The brake business -- so if I look at what is that most at risk...

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [34]

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It's probably the class 8 trucks and wind in China would be the 2 big ones that would be a risk in China. And back here, the Turf and Garden business. We buy probably a higher percentage of components for those products in China than our other products, and there's probably a -- we've got -- that operates with minimal inventories going into the build season. It's probably the -- another one domestically that would be at risk.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [35]

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So a lot of the mitigation efforts are around in-sourcing and making those products at our own facilities to the extent possible.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [36]

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Okay. And just to make sure I heard this correctly. Did you say embedded in your 2020 outlook is 1% transportation growth in class 8 trucks in Asia?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [37]

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In Japan and Korea.

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John Edward Franzreb, Sidoti & Company, LLC - Senior Equity Analyst [38]

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Oh, it's in Japan and Korea.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [39]

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Japan and Korea are very strong and then the rest of the world. So this includes Japan, Korea, rest of the world.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [40]

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Within that, Japan, Korea are very strong, up like 6% or 7%. And then modestly down for the rest of the world outside of China, Europe, North America then Japan and Korea.

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Operator [41]

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Your next question comes from the line of Jeff Hammond.

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Jeffrey David Hammond, KeyBanc Capital Markets Inc., Research Division - MD & Equity Research Analyst [42]

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Just on the segments. Is there -- should we think about the organic growth any differently between the 2 segments? And then just in terms of your synergies, I know you're been getting some on the core business versus -- like how should we think about margin trajectory in each of the segments?

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [43]

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So ex coronavirus, we think A&S core growth will be down about 2.7%, while the PTT side will be down about 1.3%. Or the coronavirus will be split between the segments.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [44]

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We haven't gotten that far yet.

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Christian Storch, Altra Industrial Motion Corp. - VP & CFO [45]

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We haven't gotten that far yet. And then from a margin perspective, we do think that the PTT side will see some modest margin expansion next year, while we do see some continued decline in margins on the A&S side. And that's mainly due to class 8 trucks.

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Operator [46]

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And there are no further questions in queue at this time, I turn the call back to the presenters.

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Carl R. Christenson, Altra Industrial Motion Corp. - Chairman & CEO [47]

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Okay. Thank you, Amy, and thank you all for joining us today, and we look forward to meeting with many of you in the next few months as we go on the road to discuss the Altra story. Thank you, and have a great day.

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Operator [48]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.