Altra Industrial Motion Corp (AIMC) Q2 2021 Earnings Call Transcript

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Altra Industrial Motion Corp (AIMC)
Q2 2021 Earnings Call
Jul 23, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by and welcome to the Altra Industrial Motion Q2 2021 Earnings Call [Operator Instructions]

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

David Calusdian -- Investor Relations

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 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 US 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 operating income margin, non-GAAP adjusted EBITDA margin, non-GAAP organic sales, non-GAAP operating working capital, non-GAAP net debt, non-GAAP free cash flow and non-GAAP adjusted free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures and any other items that management believe 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 Q2 2021 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.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, David and thank you for joining us today to review our Q2 2021 results. And please turn to slide 5. Our business is firing on nearly all cylinders as we capitalize on demand strength across the vast majority of our end markets. We delivered Q2 revenue of $488 million and earnings per share of $0.62 on a GAAP basis and $0.89 on a non-GAAP basis, results that not only exceeded the year ago quarter but also outperformed Q2 2019 pre-COVID levels.

I would like to start today's call highlighting five themes that have continued to play out for Altra through 2021. First, the combination of our high quality portfolio of diverse brands and businesses with our team's ability to remain nimble, manage the supply chain and reliably deliver products to our customers has continued to be a powerful differentiator for Altra. In addition to supporting our strong top line results, this combination positions us to benefit from several secular tailwinds in markets like electronics assembly equipment, general factory automation, medical and robotics in the near term and mid and later cycle markets, such as mining, metals, ag and heavy machinery.

Second, our incoming order rate remains extremely strong. In fact, our backlog grew significantly to a new all-time high for Altra and our book-to-bill ratio in Q2 was 117%. This positions our Company very well for the coming quarters, gives us confidence to again raise our 2021 guidance and further validates our belief that there is a long runway ahead for both Altra and the general industrial market in 2022 and beyond.

Third, operationally, the business is performing very well despite the supply chain and labor constraints impacting our customers and our operations. We attribute this to outstanding execution by our operational teams in conjunction with Altra's world class business system. Fourth, we have continued to make exceptional progress advancing our strategic priority to pay down debt and de-lever our balance sheet. We are now within our target leverage range and remain committed to reducing our debt by an additional $100 million in 2021.

And finally, while we manage the business today, we continue to make tremendous progress advancing our future growth initiatives. We are very excited by the level of business development happening across our businesses to create innovative solutions with customers in attractive verticals, such as medical, factory automation and robotics. In fact, we are already seeing many of these efforts take hold. For example, we're experiencing significant growth in a highly customized components with an existing customer that is developing compressors for hydrogen fueling stations. Over the next several years, we expect to receive orders for this new environmentally friendly application, supporting reduced vehicle emissions. Additionally, we are diligently and patiently exploring potential bolt-on M&A opportunities that strengthen our market position and expand our exposure to attractive markets.

Now please turn to slide 6 for an overview of Q2 performance highlights. Christian will take you through details of our financial performance, but I wanted to touch on a few high level points. Our top line performance was really strong. Q2 revenue was up 21.9% from the prior year and nearly 5% compared to Q2 2019. This reflects the strong demand we're seeing across nearly all of our end markets and our team's exceptional management of the supply chain to minimize production disruptions and deliver product to our customers. We are also very pleased with our operating performance, particularly given two notable dynamics that we faced this quarter. The first relates to increasing material costs and wage inflation that are impacting manufacturing companies like ours.

In response, we have implemented several pricing initiatives and have several more in process. However, given the rapid increase of input costs, the typical notice period we give our customers regarding price increases and the fact that the existing backlog is at lower price, there was and will be a lag in flow through. Therefore, even though we took substantial pricing action, the realized price increases did not fully offset the cost increases in the quarter. We do expect to benefit from these pricing actions to ramp up through Q3 and fully catch up with costs in Q4.

The second point to note is that on a year-over-year basis, our operating performance comparables were impacted by the exceptional level of cost management in Q2 2020 related to COVID-19, which did not repeat this year. As a result, while 2021 non-GAAP adjusted EBITDA margins decreased by 120 basis points compared to last year, margins were up 50 basis points when compared to Q2 2019.

Now turning to slide 7 for a market review. As noted last quarter, we are simplifying our market discussions to focus on the core markets and trends that we believe are most relevant to Altra's performance and growth prospects. Transportation, which represents approximately 16% of our business on a last 12 months basis, was up low double digits in the quarter, reflecting broad based strength across heavy duty trucks, automotive and marine applications.

In line with expectations, Class 8 truck revenues were strong in the first half of the year, but we are starting to see some deceleration in China. This aligns with our expectations for the broader transportation market to be flat to slightly up in 2021. Longer term as the world's leading engine braking supplier, we expect Altra's transportation business to benefit from new technology initiatives that support future global safety and emission mandates.

Factory automation and specialty machinery, which represents about 12% of our business was up over 20% as we again benefited from strong tailwinds in both the specialty machinery and automation categories, notably food and beverage, packaging, robotics, AGV and general factory automation. Our expectations for strong 2021 remain intact with several favorable trends driving growth, including strength in the electronics markets driven by global digitization and industrial IoT as well as macro trends in robotics.

Turf & Garden, ag and construction, which combined represents approximately 10% of our business, had a very strong quarter, up mid double digits, in part due to favorable comps in the year ago quarter but also reflecting stronger than expected tailwinds across the board in all key segments. We now expect to see positive growth in most of these markets for the full year. Longer term, we remain very positive on our growth prospects given Altra's strong position and attractive secular tailwinds, including increased infrastructure spending and where we are in the ag cycle.

Medical equipment, which is about 8% of our sales was up low double digits year-over-year as the decline in COVID-related sales was offset by a rebound in elective surgeries and hospital capital expenditures. Although the comps for COVID-related spending this year will remain challenging, this is a very exciting long-term growth market for us as several secular trends are expected to drive growth from aging population demographics to growth of non-invasive and robotic surgeries. Material handling, which represents about 7% of sales, was up double digits due to strength across all key segments including conveyors, forklifts and vertical lifting systems. Although a cyclical market, this is an attractive growth opportunity supported by several exciting tailwinds from strong growth in warehousing driven by e-commerce to advance technology to improving warehouse efficiency.

Aerospace and defense, which combined is about 6% of sales, was up low single digits. Notably, while our defense business remains solid, our sales into commercial aerospace showed some signs of improvement in the quarter, an encouraging indicator for our anticipated recovery. Despite near term headwinds, we remain excited about this market, namely our A&D business has very attractive margin profile with a strong competitive position and high barriers to entry. We continue to expect this market will rebound at some point in 2022. And finally, renewable energy, which represents about 5% of sales was down low double digits in the quarter due to supply chain logistics and labor issues impacting turbine OEMs and resulting in order pushouts.

In addition, we're experiencing the hangover from China's policy induced production surge last year as their version of the PTC expired in December 2020. We expect 2021 to be flat to slightly down barring any new administration policies or accelerating wind industry supply chain issues. Longer term, renewables remains an exciting growth play for Altra as global demand for increased usage of renewable energy favors our strong position in both onshore and higher growth offshore wind.

And with that, I'll turn the call to Christian to provide a detailed review of the quarter and our 2021 guidance.

Christian Storch -- Executive Vice President and Chief Financial Officer

Thank you, Carl and good morning, everyone. Our second quarter results were highlighted by Altra's resilient and balanced portfolio strong top line and cash flow performance and solid progress delevering the balance sheet. Operationally, it was a very challenging quarter, given input cost inflation, strained logistics and supply chain channels and a very tight labor market.

Turning now to a review of our top line performance in the second quarter. Sales were up 21.9% compared with the prior year period. Organic sales grew 17.2% with price contributing 130 basis points. In addition, several businesses imposed surcharges. Foreign exchange rates had a positive effect of 470 basis points. Excluding the effects of foreign exchange, net sales for the PTT segment were up 16.1%. Booking momentum has remained strong across most end markets, including Turf & Garden, ag, factory automation and material handling. Excluding the impact of foreign exchange, net sales for the A&S segment were up 18% compared with the same quarter last year. This segment once again saw strong broad based growth, including transportation, factory automation, medical equipment, construction and farm and ag markets.

Taking a closer look at our performance by geography. In Asia and the rest of the world, revenues without the impact of foreign exchange were down slightly 2.9%, primarily due to softening sales into the Class 8 truck and wind markets in China. This was partially offset by strength in miniature motors and factory automation. In Europe, sales were up 17.4% without the impact of foreign exchange as Europe's vaccination efforts began to catch up and the economy started to recover. Organic sales in North America grew 27.3%. As expected, we saw raw material and labor cost inflation flow through in the quarter, ahead of realizing the benefits from the pricing actions we have taken on those that we have in process. In addition, operations and those of our customers continue to face strained logistics channels [Phonetic] in a very tight labor market and there are constraining shipments. We expect these conditions to prevail through the end of the year.

Non-GAAP operating income was $84.6 million and was up 18.5% when compared to the prior year. Non-GAAP operating margin was up 40 basis points when compared to the pre-COVID second quarter of 2019. Non-GAAP adjusted EBITDA was $102.6 million for the second quarter or up 13.3% from the prior year. At 21% of net sales, non-GAAP adjusted EBITDA margin was up 50 basis points from the pre-COVID second quarter of 2019. To reiterate what Carl noted earlier, it is important to recognize that the prior year quarter reflects an exceptional level of cost savings actions due to COVID-19. Working capital was up approximately $31 million as our operations increased inventory levels to support very strong sales and bookings. While accounts receivables grew in line with our top line that increase was almost offset by the increase in accounts payables. The provision for income taxes in the second quarter of 2021 on a normalized basis was 20% before discrete items.

Please turn to slide 9 for a closer look at our balance sheet, improvements, cash flow and liquidity. Our cash generative business model and the financial resilience of our business continues to serve us very well. Non-GAAP adjusted free cash flow for the quarter was $56 million, down 13% from the prior year quarter but up 20% compared to the second quarter of 2019. Capital expenditures during the quarter totaled $7.9 million. We expect capital expenditures to increase in the second half of the year as we continue to direct investments to growth opportunities, including automation and technology enhancements. We ended the quarter with $278 million of cash and another $296 million of availability under the revolving credit facility.

In the quarter, we paid down an additional $30 million on the term loan, bringing our total debt paydown since the A&S acquisition to $360 million. Net leverage at the end of the quarter was 2.8 times and is now in our target range of less than 3 times net leverage. Our top capital allocation priorities continue to reduce our debt balance by an additional $100 million by year end, manage leverage and preserve optionality for investing in future growth, while continuing to support our quarterly dividend. Now that we are in the target leverage range, we are increasingly open to evaluating investment in bolt-on M&A growth opportunities that align with Altra with attractive secular trends. Of course, the market is highly competitive right now and valuations are high, we are committed to taking a diligent and disciplined approach to potential M&A and remain patient to find opportunities that make both strategic and financial sense for Altra and our shareholders.

Please turn to slide 10 for an update on our outlook for 2021. With an excellent first half performance in the books, broad based tailwinds at our back and more confidence in the overall economic recovery, we have excellent momentum turning into the second half of the year. As a result, we are increasing our guidance for the full year 2021, which is included in this morning's release. We continue to expect that the temporary cost savings realized in 2020 will gradually phase back and the full impact of the cost to return by the end of the third quarter. With that as a background, our revised guidance for 2021 is as follows, sales in the range of $1.89 billion to $1.92 billion; GAAP diluted EPS in the range of $2.28 to $2.41 and non-GAAP diluted earnings per share in the range of $3.30 to $3.46; non-GAAP adjusted EBITDA in the range of $395 million to $405 million; a normalized tax rate for the full year of approximately 20% to 22% before discrete items; capital expenditures in the range of $50 million to $55 million and depreciation and amortization in the range of $122 million to $124 million; and last, non-GAAP free cash flow in the range of $210 million to $235 million.

Let me provide you with additional color regarding our expectations for the third quarter. The financial performance for the third quarter of 2020 was extraordinary due to the significant temporary cost reductions. While our businesses remain extremely strong given the difficult comps, the seasonality of the business and the timing of the impact of our pricing initiatives, we expect that third quarter earnings could be lower than in the prior year quarter but would be substantially higher than in the third quarter of 2018 or pre-COVID. We expect year-over-year earnings growth to return in the fourth quarter. Despite the third quarter challenge, our full year guidance implies that full year earnings will be at record levels and significantly higher than in the previous two years.

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

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, Christian and please turn to slide 11. We remain extremely pleased with our performance so far this year. We believe we are at the beginning of a broad based market recovery, and Altra is in an excellent position to capitalize on several secular tailwinds as we move through the year and into 2022. Our focus remains on executing against our strategic priorities to optimize our opportunities as a premier industrial company. This includes leveraging our efficient cash generative business model in the Altra Business System to maximize cost and sales synergies, delever the balance sheet further and expand our margins.

Now that we have reached our target leverage range, we expect to accelerate our focus on driving top line growth, both organically and inorganically. However, we do intend to remain disciplined. Finally, we continue to make great strides advancing our ESG efforts, including making headway with our recently formed Diversity, Equity and Inclusion Committee and completing an ESG materiality assessment. We are very confident in our ability to deliver on our new 2021 guidance and maximize value for our shareholders as the industrial world economic recovery accelerates in 2022 and beyond. I want to thank the Altra team for their continued commitment and resilience that has enabled us to deliver exceptional results, provide the best possible customer service and advance our strategic priorities.

With that, we'll now open up the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from Jeff Hammond from KeyBanc Capital Markets. Your line is open.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Hey, good morning, guys.

Carl R. Christenson -- Chairman and Chief Executive Officer

Good morning, Jeff.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

So just thinking about sequential momentum between the two segments into the second half, if you look at orders, backlog and seasonality, it looks like A&S was kind of flattish 1Q to 2Q, and PT had the big step up. But just how do you think about the sequential dynamic?

Carl R. Christenson -- Chairman and Chief Executive Officer

So I think in the second half, we expect that the PTT on the top line will outperform A&S side modestly. One of the reasons is that the third quarter will be the low point for our Class 8 truck business in the year as China sales will drop significantly sequentially and then recover strongly in the fourth quarter. Turf & Garden, that seasonality typically causes some sequential decline for the PTT side but we see strength in other markets like oil and gas and mining that we think will help to offset that. When we look at A&S, on the A&S side, I think the strength is broad based on that side of the business, whether it's factory automation, whether it's the medical side, really good momentum going into the third and fourth quarter, so into the second half.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. And then just to be clear on the supply chain dynamics. So it sounds like 2Q is kind of the biggest challenge and then 3Q is kind of a transitory quarter, and 4Q you fully catch up. Is that the right way to think about it? And just within that, anything getting particularly better or worse within some of the supply chain and relation [Phonetic] challenges?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. I think the supply chain challenges have been pretty stable. I mean it is with the old whack-a-mole game where something pops up. But we've been able to work around the chip shortages that we've had and it's taken some engineering work to do so, but we've been able to work around that. And that's probably been the worst issue. So I'd say that's fairly stable. And hopefully, it's going to get better in some areas. I think it's going to be a little bit for the chip supply to really get better. But some of the other items, I'm hopeful will start to get better.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

And then just to sneak one more in. Corporate expense, I think last year was kind of zero and maybe zero to $1 million a quarter, and it seems like it stepped up a bit. And I'm just trying to understand what's going on there and how to think about corporate expense going forward?

Carl R. Christenson -- Chairman and Chief Executive Officer

So there's a big swing in medical cost. We provide, so to speak, a guaranteed cost program to the OpCos. And any overruns or underruns, we absorb at the corporate level. So last year with significant healthcare cost savings, the benefit showed up at the corporate level and not at the OpCo level. This year, you'll therefore have a big swing as medical expenses have return to more normal levels. You have a huge year-over-year swing here in the second quarter and that's 90% of what has driven that year over year change.

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Okay. Thanks, guys.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks, Jeff.

Operator

Your next question is from Bryan Blair from Oppenheimer. Your line is open.

Bryan Blair -- Oppenheimer -- Analyst

Thanks. Good morning, guys.

Carl R. Christenson -- Chairman and Chief Executive Officer

Hey, Bryan.

Bryan Blair -- Oppenheimer -- Analyst

PTT margin was very encouraging in the quarter, in my view, maybe the biggest highlights for the quarter. Given continued top line growth in the back half, catch up on price cost as you outlined, and I suspect some incremental cost actions or drop through from cost actions. Is Q2 type margin sustainable through the second half of the year?

Carl R. Christenson -- Chairman and Chief Executive Officer

So I think when we look at the margin in the second half year, at the gross profit level, I think they are sustainable. At the operating income level, we'll probably see a modest decline here in the third quarter and in the fourth quarter, mainly related to some of the costs that are coming back and the seasonality of the business. I think from a mix standpoint, I think gross profit margins, we can hold those here in the second half.

Bryan Blair -- Oppenheimer -- Analyst

Okay. That's clear. And going back to price cost, you noted price cost compression in the second quarter, that's perfectly understandable narrowing through Q3, projected to be favorable in the fourth quarter. Can you parse out price contribution to the second quarter and expected back half realization on price?

Carl R. Christenson -- Chairman and Chief Executive Officer

So the way I can answer that is when we look at how much price are we short, so to speak, we're missing about 120 basis points of price. And so that's what we're trying to recover here starting in late in the second quarter and then into Q3. So if you think about 120 basis points over $490 million in revenues, that's the dollar amount of price we're missing to be made.

Christian Storch -- Executive Vice President and Chief Financial Officer

What we got in the second quarter was around 130 basis points.

Carl R. Christenson -- Chairman and Chief Executive Officer

We got 130 basis points already, but we need another 120 basis points.

Christian Storch -- Executive Vice President and Chief Financial Officer

Right. And then there's a surcharge fee too that we don't include in that 130 basis points, Bryan. So the surcharge is...

Carl R. Christenson -- Chairman and Chief Executive Officer

Around 50 basis points.

Christian Storch -- Executive Vice President and Chief Financial Officer

Probably for surcharges.

Carl R. Christenson -- Chairman and Chief Executive Officer

There's no margin on that.

Christian Storch -- Executive Vice President and Chief Financial Officer

But we get about 50 basis points in addition to the 130 basis points of price in form of surcharges in the second quarter.

Bryan Blair -- Oppenheimer -- Analyst

Understood. Okay. That's helpful. And then, Carl, you offered kind of the typical walk through of core market trends and just anticipated second half dynamics. I'm not asking for anything to be quantified here. I know that 2022 guidance, we have some time to wait for that. But could you provide a high level perspective, similar walk through on the puts and takes as we look to 2022?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. Thanks for that, because it's -- I'm really encouraged by 2022 for several reasons. One is the amount of backlog we are building, and some of that obviously is we've extended lead times, and so you get more orders because the lead time is longer. Some of it, people are trying to get in the queue because they're afraid of what might happen if they're not in the queue. And I don't have a really good handle on how much of that is related to those two things. But the underlying demand is just really, really strong. I mean if you look at a book-to-bill ratio of 117%, I can't remember many times in my lifetime that we've seen that. And then when you look at the inventory positions, one of our general managers, one of our OpCo presidents at the staff meeting last week showed a picture of the local Home Depot when they had one teeny-weeny garden tractor out in front of the store and not inside.

So it was kind of unbelievable that the inventory positions on garden tractors just aren't there. Look at automobiles, they aren't there. And so there's some -- I think, some very, very significant pent-up demand, you could just go get inventories back in place. And it's going to take a while. If you look at the supply chain constraints, we could be shipping significantly more if we had labor and we had materials, we could be shipping significantly more. So I think this is going to -- we've got a really good prospects for 2022. And then barring any outside things that happened to cause things to slow down, I think beyond '22 looks really good too from our projections, our internal projections. And I'm excited too, Bryan, that in March of next year, we're planning to have an Investor Day where we can talk about the long term prospects for the Company and our portfolio management activities that we've been working on. So I'm really looking forward to the next couple of years.

Bryan Blair -- Oppenheimer -- Analyst

All great to hear. Thanks again, guys.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thanks, Bryan.

Christian Storch -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question is from Joel Tiss from BMO. Your line is open.

Joel Tiss -- BMO Capital Markets -- Analyst

Hey, guys. How is it going?

Carl R. Christenson -- Chairman and Chief Executive Officer

Good, Joel. How are you?

Joel Tiss -- BMO Capital Markets -- Analyst

Hanging in there. So the backlog, can you give us the number of what the backlog is today versus what it was in the same quarter in 2019? And also, is that -- it sounds like it's a little bit of a combination of demand is strong, but also your inability to get stuff out the door because of the supply chain challenges. So maybe just shed a little light on that. Thank you.

Carl R. Christenson -- Chairman and Chief Executive Officer

While we don't disclose the backlog number, I can tell you it's up 35% from where we were a year ago. That's a big number for us. And our shipments are really constrained at this point. We would love to ship more because we get the backlog, we get the bookings, but supply chain in a tight labor market just are the constraints that we're dealing with right now.

Christian Storch -- Executive Vice President and Chief Financial Officer

We're not having any significant customer issues. We haven't shut down any customers' lines. Some of it is the backlog build is also our customers' ability to produce because of the supply chain, etc. So we don't have any major customer issues. It's hand to mouth but we're in pretty good shape.

Joel Tiss -- BMO Capital Markets -- Analyst

Okay. And can we dig a little more into acquisitions? Are you waiting to get that $100 million paid down by the end of the year, or you're kind of looking -- you're feeling pretty good probably at 2.8 times and visibility to get it down under 2.5%? And just where are we, like you think before the end of the year that you feel more comfortable if the right thing came along? And maybe just one or two little highlights of areas that look really attractive to you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah, I think we are definitely out there looking and checking some tires, and I'm really excited about our balance sheet position and the projections of where the balance sheet is going to be at the end of the year. The discouraging thing is that when you look at what even small bolt-ons are going for in the marketplace, it's just some of it doesn't make any sense to me from a return perspective. So we're going to remain disciplined. And if the right thing comes along that's strategically critical for us, I think we'd be willing to participate. But at some of the pricing levels, it's just a little lofty right now, a little crazy. But we'll continue to look and hopefully, we can find something that makes sense and we can get the right return metrics on it.

Joel Tiss -- BMO Capital Markets -- Analyst

All right. Great. Thank you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. Thank you.

Operator

Your next question is from Scott Graham from Rosenblatt. Your line is open.

Scott Graham -- Rosenblatt -- Analyst

Hi. Good morning. Nice quarter. I wanted to maybe ask first, Carl. You had some statements around transportation, suggesting the softening certainly relating to China. I'm just wondering that the US market is pretty good. Europe looks like it's improving as well. And has China become like a much -- I'm sure it's become a larger portion, but I mean, maybe you can kind of size what each of those markets look like today off of China's strength so far this year? And then maybe I would understand that statement a little bit more if you could help us with that.

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. I'll start, and then Christian can go in with some of the numbers. So the North American market is very, very strong and I think the constraint there is our customers' ability to get everything they need to produce the engines they need. So that one that is definitely constrained by supply chain issues. Not with us, I think we've got most of our supply chain issues resolved and it is hand to mouth a little bit. But with some of our customers, they're constrained. But North America is doing very, very well. And then Europe is also doing very well. We've seen a nice pickup in Europe.

I think when you look at the size of the markets, the North American market is probably about a third of what China is now. They make about 1 million trucks in China a year on average. I mean, I think $1.5 million, somewhere in that range last year but it was a huge year last year. So it's just the size of the North American market is not anywhere near what it is in China to be able to offset any declines there. Now the good news for us is that in China, the prevalence of engine breaking has been very low until the new standards have been put in place. So we expect over the next years that the percentage of new engines and new trucks will have engine breaks on them for supplemental braking for safety reasons and environmental reasons. Christian, I don't know if you want to add anything on the numbers.

Christian Storch -- Executive Vice President and Chief Financial Officer

Yeah. As I said, in terms of, for us, China is about 35% of revenues and so is the North American market. So China has become very, very important to us. And the nice thing about it is that cyclicality in both markets is different and they, to some extent, offset each other, was currently seeing significant declines in China as their additional [Indecipherable] program has expired and we see, on the other hand, very strong growth here in North America that's offsetting that decline.

Scott Graham -- Rosenblatt -- Analyst

Okay. Thank you for that. I just maybe wanted to go back to the second quarter and maybe even carrying that into July here. Could you maybe talk a little bit about by segment, the progressions of sales and orders? I'm assuming that they were sequentially better, because the year-over-year comparison of that's kind of hard to litmus test that. But I'm just wondering the incoming rate of orders maybe in dollars sequentially in each segment, how is that faring into July? And are you seeing any restocking benefits? Did you see any, for example, in the second quarter?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. So I think what we saw was a second quarter for the PTT segment, the incoming order rate picked up significantly and has been really strong and stable through the second quarter. The A&S business, the incoming order rates have been at a very good level and have been stable and strong through the quarter. I think we should probably see a little bit of a decline as people have now gotten their orders in based on the new lead times and the inventory positions that they want to build and so forth. So my expectation is that we'll see it drop off a little bit but we haven't really seen a noticeable drop yet. But my expectation is we will see a drop as their planning gets put in place.

Scott Graham -- Rosenblatt -- Analyst

Yeah. And on the restocking, did you benefit at all in the second quarter?

Carl R. Christenson -- Chairman and Chief Executive Officer

I don't think we benefit...

Scott Graham -- Rosenblatt -- Analyst

In your distribution channel, in particular?

Carl R. Christenson -- Chairman and Chief Executive Officer

I don't think we did because of the capacity constraints. I mean, and I don't -- and the distributors -- our distributors have told us that they are not increasing their orders to build inventories on our products. There are some products that they are trying to build a little inventory on. But on our products, they're not trying to build inventory significantly. The OEMs and some of the channel partners, I think the OEMs are trying to get some things back in place. But the distributors are only increasing inventories based on higher business levels. Does that make sense, Scott?

Scott Graham -- Rosenblatt -- Analyst

Yeah. Yeah, it does. Absolutely. Thank you.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you.

Christian Storch -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Your next question is from Mike Halloran from Baird. Your line is open.

Mike Halloran -- Robert W. Baird -- Analyst

Hey, guys. I just want to clarify a few things here. So if I'm thinking about puts and takes on the margin profile in the back half of this year, it was 130 basis points of price realization but you need 120 bps more, that should lessen 3Q and then flatten out year-over-year, maybe even be a slight tailwind by the time you hit the fourth quarter. And so one, is that the thought process? And then secondarily, on the surcharges, could you just provide what those are specifically attached to? Is it transportation, oil and gas, some sort of other commodity?

Carl R. Christenson -- Chairman and Chief Executive Officer

So all the surcharges are copper related and therefore, they are tied to motors and electromagnetic brakes. So think about Turf & Garden, ag, in particular. That's probably where it's very heavy and then some automotive application, brake applications, some other end markets, probably. And then when I look at price, several of our businesses are going out with second round of price increases here in July and in some cases, in August. Now it will take a while until we see that price flow through you count backlog is at the oil price that needs to turn. And so I don't think we'll see the benefit really pop up until Q4. And therefore, we do expect that gross profit margins in the fourth quarter will be stronger actually than here in the third quarter.

Mike Halloran -- Robert W. Baird -- Analyst

And then the other two kind of layering points, and you answered Jeff's question then on the corporate expense line. Certainly understand the variance on the healthcare costs. How should I think about that line item on a full year basis as we're sitting here? And what does that go forward look like after we get that kind of year-over-year normalization figuring out?

Carl R. Christenson -- Chairman and Chief Executive Officer

On a full year basis, corporate expenses should be trending around $10 million to $11 million.

Mike Halloran -- Robert W. Baird -- Analyst

Okay. And that's the right run rate moving forward, you think beyond?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah.

Mike Halloran -- Robert W. Baird -- Analyst

And then last one, as we think about the second half of the year, same kind of cost question. How much is left from a normalization perspective on what you drew down last year for COVID on the cost line and what you think is coming back? Any way you can conceptualize that for us in terms of dollar numbers or percentage, whatever makes sense?

Carl R. Christenson -- Chairman and Chief Executive Officer

We think that when we look at Q3, Q4 combined, there's about a little over $20 million left that will come back. Second quarter was about $13 million that came back. Third quarter is about the same, and then it starts to drop into the fourth quarter.

Mike Halloran -- Robert W. Baird -- Analyst

And then off the cost side, more broadly, maybe just an update on how the revenue synergy side of the A&S acquisition is going, and any kind of updates on that piece?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. It's going pretty well. And we think we're currently working on around 125 opportunities out there and the value in the funnel is probably about $20 million. So obviously, we won't get all of that, that's opportunities that are out there. But my hope is that we'll see very meaningful numbers in next year, certainly in 2022.

Mike Halloran -- Robert W. Baird -- Analyst

And what are those tied to, Carl, what types of applications are we thinking about?

Carl R. Christenson -- Chairman and Chief Executive Officer

We just landed a nice one that was in printing and paper market in Italy. There was another one that there's a kind of a humorous one, but it's for dog food and it's processing and packaging. It's a whole line that just starts from raw material and a big bag of dog food comes out. So it's a big automated line but that was a nice cross-selling win for us. And it's across a whole variety of markets.

Mike Halloran -- Robert W. Baird -- Analyst

Great. Thank you. Appreciate it.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you.

Christian Storch -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

Your next question is from John Franzreb from Sidoti. Your line is open.

John Franzreb -- Sidoti & Company -- Analyst

Christian, I thought I heard you say that the transportation business would -- third quarter will be the weak given a rebound in the fourth. Could you just talk to me as to why? And is that backlog extends into 2022 for transportation?

Christian Storch -- Executive Vice President and Chief Financial Officer

So the backlog does extend into 2022 in terms of -- usually, these are not firm orders. These are more forecasts, but we have long term agreements in place that go into 2022 as well. The main driver of that sequential drop in Q3 being the low point in transportation is China. China's cash for [Phonetic] program expired at the end of June, early July. And so there was a lot of pre-buy and inventory as well. And as they work through that the publicly available forecasted build numbers for China would suggest a very strong rebound in the fourth quarter.

Carl R. Christenson -- Chairman and Chief Executive Officer

It's going to drop in the third quarter to kind of chew up some of the inventories and then rebound in the fourth quarter.

Christian Storch -- Executive Vice President and Chief Financial Officer

Fourth quarter, we're projecting in China to actually be slightly better than the second quarter, a sequential drop in Q3 went compared to Q2.

John Franzreb -- Sidoti & Company -- Analyst

That actually helps a lot. And I don't know if we touched on this and I missed it, on some of the lagging markets. What are you hearing around metals and mining, oil and gas, anything hearing positive and negatively about those markets going forward?

Carl R. Christenson -- Chairman and Chief Executive Officer

Yeah. So in metals and mining, they're very positive news. And we actually got a really nice order for some ball mill projects that we hadn't seen since probably 2012. I think it has been a long time since there's been any investment in those. We had a really nice order. And so there's some investment just starting to ramp up. Now some of the project work is longer lead times, so we probably won't see the revenues until 2022, but we're starting to get orders. Oil and gas is still lagging. We've seen a little bit of an uptick there. But I think, in general, the oil and gas guys are sitting on their wallets until probably fourth quarter, first quarter next year.

Christian Storch -- Executive Vice President and Chief Financial Officer

Mining is very strong. We own a business down in Texas. Their orders are up 53% year-over-year, all led by mining. I think then second to that would be general industrial and then up. But in last place, will be oil and gas.

Carl R. Christenson -- Chairman and Chief Executive Officer

And steel is doing, we're seeing some nice activity in the steel mills, too, as you'd expect with what's going on in those markets.

John Franzreb -- Sidoti & Company -- Analyst

Thanks for taking my questions.

Carl R. Christenson -- Chairman and Chief Executive Officer

Thank you, John.

Operator

There are no further questions at this time. I'll turn the call back to CEO, Carl Christenson.

Carl R. Christenson -- Chairman and Chief Executive Officer

Okay. Thank you. And thank you again for joining us today. We look forward to engaging with many of you in the months ahead, and thank you for your time.

Operator

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

David Calusdian -- Investor Relations

Carl R. Christenson -- Chairman and Chief Executive Officer

Christian Storch -- Executive Vice President and Chief Financial Officer

Jeff Hammond -- KeyBanc Capital Markets -- Analyst

Bryan Blair -- Oppenheimer -- Analyst

Joel Tiss -- BMO Capital Markets -- Analyst

Scott Graham -- Rosenblatt -- Analyst

Mike Halloran -- Robert W. Baird -- Analyst

John Franzreb -- Sidoti & Company -- Analyst

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