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Altra Industrial Motion Corp  (NASDAQ:AIMC)
Q2 2019 Earnings Call
Jul. 25, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altra Industrial Motion Q2 2019 Earnings Conference Call. [Operator Instructions]

Mr. David Calusdian with Sharon Merrill, you may begin your conference.

David C. Calusdian -- President

Thank you. Good morning, everyone, and welcome to the call. To help you follow management's discussion on this call, they'll be referencing slides that are posted to the altramotion.com website under Events and 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 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 organic sales, 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 continuous operations. The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q2 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.

Thank you, David, and good morning, everyone. Please turn to Slide 5. Our second quarter sales results reflect the benefits of the addition to the A&S business, offset by softer-than-expected demand from some of our end markets and reduced demand in China as a result of the trade dispute. As a result, while net sales and margins were up year-over-year, overall organic revenue and earnings growth came in below our expectations for the quarter. Second quarter revenues at $466.5 million grew 97% compared to the prior year quarter due to the addition of the A&S business, while pro forma organic sales decreased by 2.7%. Excluding the effects of foreign exchange, net sales for the PTT business were up 1.8%, while net sales for the A&S business on a pro forma basis decreased 6.6% due to tough comparables and weaker market conditions in China and Europe as well as certain North American markets.

It is important to note that A&S business growth is compared with management's estimates of unaudited A&S financial results from the same quarter of 2018. GAAP net income was $29 million or $0.45 per diluted share compared with $0.65 for the year ago quarter. Non-GAAP EPS in Q2 2019 was $0.71 per share compared to $0.78 in the prior year quarter. Margins were up year-over-year but down sequentially. This included gross profit margin of 35.8% and non-GAAP operating income margin of 16.9%. Non-GAAP adjusted EBITDA was $95.5 million with an adjusted EBITDA margin of 20.5%. Now please turn to Slide 6 to review our end markets. During the second quarter, we experienced mixed business conditions with some end markets quite strong while others were weaker than expected. Taking a closer look at more notable market headwinds faced in the quarter, sales into the transportation market were down meaningfully.

This was primarily due to several concurrent issues at specific customers in the heavy-duty truck market. First, a Chinese customer converted some of their purchases to an indigenous supplier. Second, another Chinese customer is up nicely year-over-year, but down from what we expected because of their customer having too much inventory. And finally, a U.S. customer reduced demand in the quarter to reset their inventory. We expect demand for the remainder of the year to be similar to Q2 in this market. Demand in factory automation and specialty machinery was down double digits again in Q2, primarily due to the same factors that impacted last quarter: tough year-over-year comps, continued slowing in semiconductor markets, OEM destocking in robotics and softness in China. We had been optimistic that demand would improve in the second half of the year, but we now do not expect that to occur until the fourth quarter at the earliest.

Metals declined by low single digits, due primarily to ongoing slowing in the automotive industry and overall economic demand. Our core distribution business was down in Q2 due to upstream oil and gas, industrial automation and slowing general industrial activity around the world. We continue to expect distribution sales to be down for the balance of the year. Turf and garden was down high single digits and ag was down low double digits due to weather and the effects of the ongoing trade dispute. We saw mixed results in the energy market, which was up nicely in Q2 compared to the same quarter last year. Renewables were up double digits for the quarter and sequentially. This was partially offset by low double-digit decline in oil and gas due to less drilling activity because of the high number of drilled but uncompleted wells.

And we continued to experience strong demand in several key markets. The medical equipment market continues to have strong momentum, up low double digits in Q2 with growth driven by strength from surgical power tools, surgical robotics, diagnostics and oncology equipment. The mining market was up high single digits, supported by strong aftermarket parts activity and moderate capex spending. And defense performed extremely well, up double digits, as we saw strong demand across the board. From a macro perspective, we've started to see signs of the overall industrial environment growing more cautious, which we believe is in part due to continued uncertainties surrounding trade wars and the secondary impact of the tariffs. We do believe that the second quarter was a reset and that demand for the balance of the year will be slightly lower than the Q2 run rate, due primarily to the typical seasonal effects we experience in the second half.

These are related to seasonal shutdowns and vacations in Q3 and the holidays in Q4. Now please turn to Slide 7. We remain focused on executing our strategic priorities to position Altra to deliver on our promise as a premier industrial company. Cash management remains a top priority, and in Q2, our efforts yielded a favorable $47 million of free cash flow. On a year-to-date basis, the company has generated $72 million of free cash flow. We continue to advance our goal of delevering the balance sheet, paying down $35 million of debt during the quarter. This brings our total debt pay down to $70 million since the close of the A&S merger and keeps us on track to deliver on our goal of paying down a total of $130 million in 2019 and ultimately return to a 2 to 3x net debt to adjusted EBITDA by the end of 2020. We've also made excellent progress with the strategic integration of the A&S and Altra. Our sales collaboration program, which continues to deliver.

In fact, by the end of the second quarter, our team generated over 600 new leads, which is more than 40% of the total program goal, keeping us well on track to achieve our 2020 bookings target for this program. The previously announced closure of a significant Northeast facility remains on track to be completed before the end of the year. Planning is under way to consolidate additional facilities. We also continue to make meaningful progress with our supply chain optimization efforts to identify both indirect and direct cost savings. And finally, our 2 cultures are coming together very well. We believe there is a tremendous value creation opportunity ahead, as we integrate our world-class business systems across the company. We're highly pleased with our progress integrating the business, and we're on track to exceed $10 million to $12 million of synergies in 2019 and deliver a total of $52 million of synergies by year 4. While we remain excited about the long-term potential of the new growth markets we have entered and the ongoing strength of several legacy markets, we're taking a more cautious view on the balance of the year. This is reflected in the revised guidance that Christian will cover after he reviews our financial results in more detail.

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

Christian Storch -- Vice President and Chief Financial Officer

Thank you, Carl, and good morning, everyone. Before I review the details of our second quarter financial results, I would like to note that results for the second quarter of 2019 include the recently acquired A&S businesses. Unless otherwise noted, results for the second quarter of 2018 do not include pro forma A&S results. As a reminder, we're reporting results in 2 segments, the Automation & Specialty segment and the Power Transmission Technologies segment, representing the legacy Altra businesses. Please turn to Slide 8. As Carl noted, second quarter sales of $466.5 million were disappointing and came in well below our expectations. Foreign exchange rates had a negative effect of 260 basis points, while price had a positive impact of 145 basis points.

On an unaudited pro forma basis, sales grew 1.7% in North America, declined 9.3% in Europe and 16.8% in Asia and the rest of the world. Excluding the impact of foreign exchange, sales in Europe were down 3% and in China 13.5%. Looking at the results sequentially compared to the first quarter, while revenues for the PTT segment were flat, non-GAAP income from operations increased 130 basis points to 14.6%. A&S segment revenues declined $15.8 million and our non-GAAP operating income declined by 230 basis points to 20.2%. The provision for income taxes in the second quarter of '19 reflects an estimated annual tax rate of 23.9%. As noted last quarter, this full year tax rate is lower than initially estimated, as our tax planning efforts are starting to payoff. Non-GAAP adjusted EBITDA was $95.5 million for the second quarter or 20.5% of net sales. Please turn to Slide 9. In terms of cash, our top priority continues to be paying down debt and to delevering the balance sheet following the A&S combination. In the first 6 months of the year, we have generated $96.1 million of operating cash flow and $72 million of free cash flow, allowing us to pay down a total of $50 million of debt and to pay approximately $22 million in dividends in the first half of 2019.

As expected, second quarter free cash flow was $47 million, almost double when compared to the first quarter. For the balance of the year, we expect to pay down an additional $80 million on our term loan, bringing the total to $150 million since acquiring the A&S businesses. We exited the quarter with a leverage of 3.9x net debt to adjusted EBITDA. Capital investments totaled $24 million year-to-date, with $10 million for the quarter. Depreciation and amortization totaled $64.3 million year-to-date and $32.2 million in the second quarter. Although we don't believe the downturn will be long term or exceptionally deep, we have taken steps to accelerate synergies and cost reductions, including headcount reductions in all geographies. We now expect to realize in-year synergies of $15 million and a year-end exit run rate of $26 million. We expect to record an additional pre-tax charge of about $7 million in 2019. Now please turn to Slide 10 for a review of our outlook for 2019. Today, we're revising our guidance for full year 2019 to reflect our expectations given the market softness seen in the second quarter.

We now expect annual sales in the range of $1.85 billion to $1.88 billion. This reflects an organic growth rate on an unaudited pro forma basis of flat to negative 1.8% for the full year. The midpoint of the range assumes a modest deceleration from our second quarter run rate, as we expect the rate of decline for the A&S business to moderate. We continue to expect the exchange rate headwinds experienced for the first quarter and first half of 2019 to ease as we move into the third quarter and to subside in the fourth quarter. As previously indicated, following the A&S combination, we began to exclude acquisition-related amortization net of tax from non-GAAP income and non-GAAP EPS. We now expect non-GAAP adjusted EBITDA in the range of $385 million to $400 million. We expect net debt to non-GAAP adjusted EBITDA leverage of approximately 3.6 to 3.8x exiting the year, and free cash flow of $175 million to $200 million.

We expect net income in the range of $116.8 million to $125.8 million and non-GAAP net income in the range of $181.2 million to $191.5 million. GAAP diluted EPS is now expected in the range of $1.81 to $1.95, and non-GAAP diluted EPS in the range of $2.81 to $2.97. We expect depreciation and amortization in the range of $128 million to $135 million and capital expenditures in the range of $50 million to $55 million. And we expect our normalized tax rate for the full year to be in the range of 23.5% to 25%.

And with that, I would like to turn the discussion back to Carl.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, Christian. And please turn to Slide 11. While we take actions to manage through the near-term headwinds, we continue to execute on our strategic priorities that will position Altra to deliver on our promise as a premier industrial company. The first is to deliver on our $52 million synergy target by leveraging sales collaborations, advancing our supply chain optimization efforts and continuing to integrate our world-class business systems across the combined organization. Second is to remain focused on cash generation, to expediently delever to our target range of 2 to 3x net debt to adjusted EBITDA and strengthen the balance sheet. And third is to deliver on the 425 basis point improvement in the non-GAAP adjusted EBITDA margin by the end of 2022. We believe we're taking the necessary actions to navigate through the near-term market dynamics and keep Altra on track to achieve our long-term goals. I'm confident we have the right team, the right technologies, the right businesses and the right strategy to deliver on the promise of Altra as a premier global technology leader in our industry.

With that, I would like to turn it back to Simon to open the call to your questions.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey good morning guys. So just wanted to understand a little -- it looks like most of the headwind -- incremental headwind was in A&S. Certainly, the magnitude was a little bit bigger. Can you just talk about like where the biggest variances were versus -- in terms of end markets versus what you were expecting. Because I know you guys had expected some slowing in the automation piece, I don't know if transport was worse, but just a little more color on kind of where the biggest surprises were?

Carl R. Christenson -- Chairman and Chief Executive Officer

I think it was in the automation area and in high tech space, where we thought that some of the inventory adjustments would be done and we'd be back on a little bit better incoming order rate. And then transportation was the other one that was -- and that was in the heavy-duty truck market, a little bit in North America with some inventory adjustments and then in China.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just -- you gave us an update on free cash flow. Can you just talk about your level of confidence that you can kind of hold the line there, even if the margins or the demand is coming in weaker, and how you are able to do that?

Christian Storch -- Vice President and Chief Financial Officer

So the free cash flow forecast numbers that I gave you, 285 -- sorry, the $175 million to $200 million doesn't assume any improvement in working capital. And I think, should things get worse, we would definitely see an improvement in working capital as we go through the remainder of the year. So we do feel comfortable that we will end the year inside of that range.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Just on the -- I think you were saying $200 million to $250 million before and now $175 million to $200 million, which seems like a bigger cut than to the EBITDA cut. I mean, why wouldn't you be able to squeeze a lot more working capital out and hold the line on free cash flow better?

Christian Storch -- Vice President and Chief Financial Officer

If we look -- we had a big snapback in the first quarter. I think working capital has snapped back by about $40 million. If we look sequentially between Q1 and Q2, working capital was flat. We do think there is opportunity in the second half. We made some progress in inventory, but not enough. I think there is some opportunity in the second half to improve our working capital terms. And that's why I feel confident that we can come inside of that range. The $250 million that we said when we initiated guidance, that assumed that we can make some significant improvements in working capital, as I'd stated at that time, and that is not unfolding.

Carl R. Christenson -- Chairman and Chief Executive Officer

Again, I think that assumes market conditions getting better, Jeff, and that would have helped the working capital situation too.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. I'll get back in queue. Thanks.

Operator

Your next question comes from the line of John Franzreb with Sidoti & Company. Your line is open.

John Franzreb -- Sidoti and Company -- Analyst

Just on the transportation side of the business. How big of a customer loss was that on -- for the quarter or on an annualized basis? And is that business in A&S [Indecipherable]?

Carl R. Christenson -- Chairman and Chief Executive Officer

Is that business, can you repeat the last part of the question, John?

John Franzreb -- Sidoti and Company -- Analyst

Is that part of the A&S segment?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yes, that's part of the A&S segment. And it's the -- it's in the Jake Brake business. And that's in the range of around $10 million.

John Franzreb -- Sidoti and Company -- Analyst

Annually?

Carl R. Christenson -- Chairman and Chief Executive Officer

Annually, annually. Yes, sorry, annually.

John Franzreb -- Sidoti and Company -- Analyst

Good. Great. And Carl, on your expectations being pushed back on return of, I don't know, factory automation sales, you were kind of thinking it'll be coming back sooner. Now it sounds like, if I heard you properly, it's going to be a fourth quarter recovery. What's changed in the environment out there that has pushed it back so far?

Carl R. Christenson -- Chairman and Chief Executive Officer

Well, I think -- part of it, I think, is that the -- we haven't gotten any trade resolution yet, and so it's really in China. And so if we do get some trade resolution and I think that could come back sooner. And if not, then it's going to take a little bit longer. I think that's the primary reason.

John Franzreb -- Sidoti and Company -- Analyst

Okay. Can you remind me how much China was of second quarter sales?

Christian Storch -- Vice President and Chief Financial Officer

So the decline in China was around 16% year-over-year, China accounted.

Carl R. Christenson -- Chairman and Chief Executive Officer

So we have Asia $60 million for the quarter for Asia and the rest of the world. And China is the biggest piece of that.

John Franzreb -- Sidoti and Company -- Analyst

Okay. And one last question. You did mention you had some price increases. Where were you able to put in pricing?

Carl R. Christenson -- Chairman and Chief Executive Officer

So we have -- with the variety of businesses we have, throughout the year, we have price increases going through. And so these were both from our strategic pricing initiative, where we have very specific discussions going on with OEMs, and then the general price increases that -- for those businesses that do it not at the beginning of the year, but during the year. So it wasn't any one particular area. It's across several of our businesses. And we continue that, John. I mean, that's been a really good improvement for us in the last 12, 18 months.

Christian Storch -- Vice President and Chief Financial Officer

And the price increases do not include yet any impact of the strategic pricing process that we're implementing both at -- at A&S. That project has been kicked off. We get the first feedback from the algorithms, the numbers are being scrubbed. So we anticipate to see the benefits of that process at A&S in -- late in the fourth quarter, early next year.

John Franzreb -- Sidoti and Company -- Analyst

Great. Great. Thanks Christian. I'll get back into queue guys.

Christian Storch -- Vice President and Chief Financial Officer

Thanks John.

Operator

Your next question comes from the line of Mike Halloran with Baird. Your line is open.

Mike Halloran -- Baird -- Analyst

Hey morning guys. So on the -- you gave the $175 million to $200 million of free cash assumptions. And I believe at some point, you said that the debt pay down remains unchanged from a thought process. What's the exact dollar number you guys are hoping to pay down or at least the range this year?

Christian Storch -- Vice President and Chief Financial Officer

So for the year $130 million, which leaves $80 million for the second half of the year. That will bring the total to $150 million since we acquired A&S, we did pay down $20 million in Q4 of last year. So seasonally our cash flow improves as we go through the year, first quarter being the weakest, getting better in the second quarter and then typically the fourth quarter is the strongest cash flow quarter. Looking at our forecast projections, we feel very confident that we can deliver the $80 million in debt paydown.

Carl R. Christenson -- Chairman and Chief Executive Officer

And if I can add...

Christian Storch -- Vice President and Chief Financial Officer

Since we acquired A&S, we repatriated about $45 million in cash from overseas locations. We have another $25 million in the pipeline, as of now, for the third quarter. So we'll be able to deliver that $80 million.

Mike Halloran -- Baird -- Analyst

So a few questions on Jake Brakes. Could you remind me percent of revenue? What it is on the overall company off of, call it, last year? Is it somewhere around 10%, is that fair?

Carl R. Christenson -- Chairman and Chief Executive Officer

We don't really disclose that, reporting the segments, and we don't break out the individual businesses, but I think if you look at the transportation segment, the vast majority of that would be the Jake Brake piece.

Mike Halloran -- Baird -- Analyst

And transportation, how much?

Carl R. Christenson -- Chairman and Chief Executive Officer

Transportation is 16% -- around 16%.

Mike Halloran -- Baird -- Analyst

That's good color guys appreciate it. Okay. And so could you help frame the -- what's happening in Jake Brakes relative to what are more challenging Class 8 truck order environment. So you've had a couple of customers take down their assumptions on excess build -- excess inventory build, excuse me. Obviously, the customer losses is separate. How do you see that cadencing out over the next 12 to 18 months in light of where the orders are? Do you expect accelerated cancellations happening in the pipeline that impact you? Why are you guys comfortable that the exit rate from 2Q is the right exit rate for that business?

Carl R. Christenson -- Chairman and Chief Executive Officer

Well, I think for the rest of the year, it's the right rate, just based on discussions with customers and public information on what the build rates are and the incoming order rates for the customers. I think the bigger question is 2020, where people expect the North American Class 8 truck business to cycle down. And I think when you look at the publicly available numbers, they're in the 20%, 25%, maybe -- I think the average is probably in the 25% to 30% range for North America. I think if you look at China, they're expecting a decline in the 10% to 15% range. And in Europe, I think it's actually up very low single digits, 1% or 2 %. So when we look at the global market where we participate, that's kind of the numbers that we're looking at and trying to plan for, for 2020. And I think the good news is, we should overachieve in China based on the fact that they are implementing more auxiliary braking technology rather than just using the foundation brakes.

So even though the market's going be down 12%, we do not expect to be down that much. About half of our business is in North America, which is where the real -- that's where we'll probably follow the market in that region, but we'll offset it with some growth in China, and then we're also penetrating Europe at a better clip. So if Europe's market truly is flat and we grow there a little bit, the decline that we'll see will not be near the number that you'll see in the North American truck market.

Christian Storch -- Vice President and Chief Financial Officer

And the other thing is like, Mike, is that, the loss of this one customer, that is actually with the second quarter, it's behind us. From a year-over-year perspective, that share has gone completely. That also helps us to -- in our assumption that we've seen the bottom there or very close to the bottom in Jake Brake for the remainder of this year. And then we'll all have to see what happens next year or when the North American truck market will cycle down.

Mike Halloran -- Baird -- Analyst

That's good color guys. Appreciate it. So then a couple more questions here. One, just the organic assumptions back half of the year for the 2 segments seems like it's somewhere down mid-single digits for A&S and then for the legacy business up slightly. Is that a fair way to think about it organically?

Christian Storch -- Vice President and Chief Financial Officer

Yes.

Mike Halloran -- Baird -- Analyst

And then cadencing the margins for A&S in the back half of the year, could you provide a little help there? Obviously, we don't have the year-over-year margin levels to help in the third quarter, we do in the fourth. But could you frame how you expect those margins to track relative to what we saw in the second quarter here?

Christian Storch -- Vice President and Chief Financial Officer

So I would think that on the A&S side, what happened is that we got really surprised in June. June shipments were very weak, that's really when it really started to show up. And then, if I can add, the good news is, I think, July is not going to be a great month, but the bookings in July have picked up meaningfully. So having said all that, is that, we do -- and so we were late for that reason because we've gotten surprised in June to take out cost out of these businesses globally. So since then we've taken actions. We, of course, have taken action to take cost out.

I mentioned we'd incur an additional $7 million in restructuring charges, payback is about 1 year on that. So we're taking about $7 million of additional cost out of the organization. That is in motion, and has started. We're going to start to see the benefits probably late third quarter and then into the fourth quarter. So I would expect that margins in the A&S business will be very similar to the second quarter, given that we have some additional top line decrease from a seasonal standpoint that -- but that we're able to offset that through the cost actions that the businesses have taken and will take.

Mike Halloran -- Baird -- Analyst

So is that just 2Q to 3Q? Or is that 2Q to the whole second half of the year?

Christian Storch -- Vice President and Chief Financial Officer

That's Q2 to Q3. And if we look from a seasonal standpoint, Q4 is, for the A&S side, it's going to be, from a top line perspective, very, very similar to each other, Q3 and Q4, very similar. We got the weak December, but we're also going to have a weak July. And then we expect the rest of the months to be fairly similar going through the rest of the year.

Mike Halloran -- Baird -- Analyst

But from a margin perspective, probably a little better 3Q to 4Q just because of the

increasing momentum on the...

Christian Storch -- Vice President and Chief Financial Officer

Yes.

Mike Halloran -- Baird -- Analyst

Okay. And then when you said July was a little better from an orders perspective, was that for the overall organization? Or is that just applied to the A&S piece?

Christian Storch -- Vice President and Chief Financial Officer

So I think it applies to both sides. We saw some improvements in -- on the tech and robotics side. We also saw improvement, very strong bookings, what we used to call CCB, our clutch, brake and couplings business, delivered very strong bookings in July so far.

Carl R. Christenson -- Chairman and Chief Executive Officer

Again, that's been some good project work. It's been renewable energies, so it's pretty good activity out there.

Christian Storch -- Vice President and Chief Financial Officer

Mining, medical, we got the Portescap business as we see some nice orders. So it's a very mixed bag out there. And -- but so far, July has been as we expected it in the revision of the guidance.

Mike Halloran -- Baird -- Analyst

Great. Thank you guys appreciate the color.

Christian Storch -- Vice President and Chief Financial Officer

Thanks Mike.

Operator

Your next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey guys. If I could just go -- if we can just go back to the PTT margins in a similar way, because it seems like -- I think what's a little confusing in the model is your margins are way up in PTT and you are maybe under a little more pressure in A&S and maybe that's a function of corporate reallocation or the resegmenting or, I don't know, the cost saves, but just seems like that's, even on muted sales, you're running a lot higher. So how should we think about margins in PTT first half -- or second half versus first half?

Christian Storch -- Vice President and Chief Financial Officer

Yeah. So a couple of things, Jeff. Number one, on the synergies side, most of the synergies as we had projected are pooling on the legacy Altra side, the PTT side. Not all, but a big chunk. If we think about procurement and other things where PTT just had to catch up to the way A&S was performing. So that's one part. The other part of it is that the CCB business, which always has been the most profitable piece within inside of PTT has delivered nice year-over-year margin improvements as projected, which is partially offset by our turf and garden ag business, which is a lower-margin business compared to CCB. But then the combination of the 2 is driving margins up on the PTT side.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

So how should they look sequentially, second half versus first half?

Christian Storch -- Vice President and Chief Financial Officer

So sequentially, historically, margins in the second half tend to be slightly lower than the first half. Given the drop in the second quarter, I also would expect the margins on the PTT side will be just maybe modestly higher than in the second quarter. And the reason for that is mainly driven by we've seen acceleration in synergies. And so as we go through the second half of the year, those benefits mostly accrue to PTT side.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then, can we just talk about distribution like, I know you had tough comps in the first half. But you're saying, I think, you're going -- you're saying, you're going to continue to see declines in, I see, like, Motion, which is a big distributor out saying like 6% to 8% growth in the second half. I think most of the other guys are at least calling for low single-digit growth. So is it a heavy destock that's going on? Or what's the disconnect between what your distributors are saying and what you're kind of guiding to?

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks. I think when you look at some of the markets that are served through the distributor and some of the smaller OEMs that we serve, we think that the smaller OEMs are going to be -- are going to struggle through distribution and that things like our oil and gas business, which has been weak through distribution, we think that's going to continue. And also some of our distributors that are specialty distributors like the high tech distributors in the automation space, that's not going to get any better. So it's not just the Motions and the AITs of the world, it's some of the other distributors that we serve -- that we work with and also our distributors in other parts of the world. So it's a mixed bag.

Christian Storch -- Vice President and Chief Financial Officer

And Jeff, if I can add. The weakness in distribution that we see is across all brands within Altra. And so we think that, that is a reflection of what's going on in the general industrial economy. And maybe distributors are able to offset that in other parts of their business, we don't know. We have not seen significant inventory adjustment.

Carl R. Christenson -- Chairman and Chief Executive Officer

It's not inventory, and it's not share loss through distributors either.

Christian Storch -- Vice President and Chief Financial Officer

That's because it's just broad based, every brand.

Carl R. Christenson -- Chairman and Chief Executive Officer

Right.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then last one. How are you rethinking like where you think maybe leverage falls out versus getting that down to 3 by the end of 2020, given the reset here?

Christian Storch -- Vice President and Chief Financial Officer

Thanks. So we're now guiding to an exit leverage of 3.6 to 3.8, depending on whether we came in the high end or the low end of our guidance range. If the high end, that would be just a slight miss to the 3.5 that we projected or we come just inside of 3.5. So we'll have to see. Our leverage remains very, very manageable at that level. And these are, at the end of the day, very good cash flow generating businesses. So we feel, as I said, very confident that we can deliver on the $80 million this year. And then we'll have to see where EBITDA comes in to determine the leverage. But 3.6 to 3.8 is what we're currently estimating.

Carl R. Christenson -- Chairman and Chief Executive Officer

And I think it's important to note that Christian made a statement in his part of the discussion that we don't expect it to be long term, we don't expect it to be deep. And there's a couple of reasons, I think, of macros perspective on why that the data is leading us to think that way. And if you look at interest rates and the discussion about where they think interest rates are going, if you look in Europe, where they're talking about cutting interest rates and/or QE. You look at the employment numbers, you think about 2020 is an election year, there just aren't that many catalysts that say this should be a deep long downturn. Now I'm not an economist and certainly don't have a crystal ball in front of me, but the data doesn't seem to indicate that this is going to be long term. I think we get comfortable with the fact that we should be able to generate cash, pay down the debt and hopefully recover at some point and the economy recovers at some point.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then last one. Kind of cleanup. Interest expense came in a little bit lower than I thought. Can you give us an update on what you think GAAP and cash interest expenses for the year?

Christian Storch -- Vice President and Chief Financial Officer

So the cash interest expense is around $10 million lower than the GAAP interest expense. And so we're projecting that interest expense in the second half will be slightly lower than the first half due to the debt pay down. We're anticipating a 25 basis point drop in LIBOR. So we think about $1.5 million lower in the second half, about $1 million less in the second half than the first half on a GAAP basis.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

OK next guest.

Christian Storch -- Vice President and Chief Financial Officer

Thanks Jeff.

Operator

And there are no further questions at this time. Mr. Christenson, I turn the call back over to you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Okay. Thank you, Simon. And thank you all for joining us today. We look forward to keeping you updated in the next few months, and have a good day. Bye-bye.

Operator

[Operator Closing Remarks].

Duration: 41 minutes

Call participants:

David C. Calusdian -- President

Christian Storch -- Vice President and Chief Financial Officer

Carl R. Christenson -- Chairman and Chief Executive Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

John Franzreb -- Sidoti and Company -- Analyst

Mike Halloran -- Baird -- Analyst

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