Altra Industrial Motion Corp (AIMC) 2007 Q3 法說會逐字稿

Good day, and welcome to today's teleconference. At this time all participants are in a listen only mode. Later there will be an opportunity to ask questions during our Q&A session. And as a reminder, this call may be recorded. I will now turn the program over to Mr. Michael Hurt. Please go ahead.

Thank you. Before we get started with the conference call we just put a press release on the wire about an hour ago announcing two directors, that we are filling two vacant slots to our Board. So I will read you some clips of that in case you haven't caught up with it.

Today we announced the appointment of Lyle G. Ganske and Michael S. Lipscomb to our Board of Directors, filling two vacant Board seats and bringing our total numbers of directors serving on the Board to seven. The Board has determined that both new directors are considered independent under the NASDAQ oil marketplace rules. A couple of comments that I made. We are extremely pleased to have Lyle and Mike join our Board of Directors. Both are experienced professionals with outstanding resumes that complement our current directors. They have unique skill sets and will partner with our management team to further accelerate our growth.

Lyle, who co-chairs Jones Day global mergers and acquisitions practice, has in-depth experience in the global business arena plus an excellent financial and technical background. Mike Lipscomb has senior management experience at a Fortune 100 Company and was a founder, Chairman and CEO of Argo-Tech, whose revenues grew fivefold during his tenure. We are excited and fortunate to have these two experienced executives join our Board, and we look forward to moving forward with the growth of our business.

Now I can move over to our conference call. Good morning, and welcome to our third quarter 2007 conference call. Joining me today will be David Wall, our CFO and Carl Christenson, our President and Chief Operating Officer. To help you better follow our discussion on this conference call, we have posted on our website some slides that we will be referencing during the call. Hopefully you will have had a chance to access them. I'll ask David Wall to walk you through them in case you haven't.

Please go to our website, www.Altramotion.com. Click on Investor Relations in the upper right-hand corner. Then click on events and presentations on the left-hand side of the screen. Then click on third quarter 2007 results, and you will see our slides.

Thanks, David. Before I get started, I will read our Safe Harbor statement. Any forward-looking statements represents the Company's expectations or beliefs concerning future events; actual results may materially differ. Any forward-looking statement made by or on behalf of the Company may involve certain risk and uncertainties, including risk of cyclical and seasonal demands, consolidating customer base, leverage, consumer credit conditions, competition, continued innovation, product liabilities, product viability and availabilities and cost of product components and other risks. Additional risks are described in the Company's securities and exchange reports and other filings, including but not limited to, the risk described in the Company's registration statement on form S1 filed June 4, 2007.

Undue reliance should not be placed on any forward-looking statements made by or on behalf of the Company. The Company undertakes no obligations to publicly update or reverse any forward-looking statements. Now with that, I'll move forward with a review of our third quarter '07 and year-to-date results. On this call I will first give you an update on our view of the current business and economic environment. Then I will give you the highlights of our record third quarter 2007 results. David will review our third-quarter results and financial year-to-date in detail. Then Carl will give you some details on our strategic initiatives that are fueling our top line and EPS growth. Carl will also highlight some of the operational team's third quarter activities, including an overview of All Power Transmission, which we purchased last month.

All Power broadens that segment of our coupling and driveline product offering and will allow us to accelerate the consolidation of facilities and lower operational cost in that business unit. After some closing comments, we will open up the session to a full Q&A.

Considering the strength of our record third-quarter results, we continue to be bullish about our business in spite of some of the gloom and doom we hear in the business press. The integration of the TB Wood's acquisition continues to go well. Plus the strength of our late cycle markets and some good business in the military and aerospace sector, and the growth of our international business continues to be very good.

An analysis of our bookings and backlog show that the late cycle markets that use Altra products, i.e., mining, energy and metals continues to be strong, and our sales through our North American distribution channel remains solid. We continue to monitor the fall in macro economic indicators, industrial production growth, CapEx spending, the ISM index and capacity, manufacturing capacity utilization. And we continue to see these indicators being positive. And also, GDP was just upgraded to 3.9% for the third quarter.

If you had a chance to read our press release as you would imagine we are extremely pleased with our record third-quarter results. Now I refer you to the slides on our website; at page 2 we show you some highlights of the third quarter results compared to the third quarter a year ago. Revenues increased 39%. Organically that was 9.9% growth. Operating income was up 34.2%. Reoccurring net income increased from $1.7 million to $6.6 million this quarter. Reoccurring earnings per share increased from $0.09 to $0.25. Adjusted EBITDA grew 43%. We repurchased $24.4 million of our 11.75% bonds in the third quarter. And we successfully navigated through two union contracts.

Now I will turn the call over to David, our CFO, to give you more in-depth on the financials.

Thank you, Mike. Moving on to page 3 of our unaudited third quarter 2007 results, we had net sales of $157 million compared to $113 million in the third quarter of last year. That's an increase of $44 million, 39% or 9% organically. Nearly all business units contributed to this increase, the most significant contributions came from those business units that serve the defense and aerospace, mining, elevator and forklift markets.

Our gross profit percentage as a percent to net sales increased 180 basis points from 26.9% in the third quarter of last year to 28.7% in the third quarter of 2007. This increase was spurred by the price increase we implemented in distribution on July 1, our low-cost country sourcing initiatives and productivity savings from our ABS system and CapEx projects.

Our SG&A expenses as a percentage to sales decreased 140 basis points from 18.5% in the third quarter of last year to 17.1% of net sales in the third quarter of 2007 as we are starting to realize some of the synergies from our integration of the TB Wood's business.

Our operating income for the third quarter 2007 increased 34.2% from $13.4 million in the third quarter of 2006 to $18 million in the third quarter of 2007. $3.8 million of this increase was spurred by our core business units. Recurring net income increased 278.7% from 1.7 million in Q3 of '06 to $6.6 million in Q3 of '07. A recurring diluted earnings per share increased 177.8% to $0.09 a share in Q3 of '06 to a $0.25 in Q3 of '07. Adjusted EBITDA increased 43.1% from $16.6 million in Q3 of '06 to $23.7 million in Q3 of '07.

Page 4 is a reconciliation that shows how we get from our reported net income to recurring net income number that I spoke about on the previous page. In this reconciliation we have removed all material onetime costs and benefits to give you a feel for what our ongoing business will look like. In this schedule we have moved the tax effective costs and benefits of restructuring the premium and deferred financing expense related to our redemption of high-cost debt, private equity adviser fees that no longer apply to us, the onetime OPEB curtailment gain and a onetime benefit of a 2008 tax rate change by certain European countries that help to lower our effective tax rate from the third quarter of '07 to 31.68% down from 37.11% for the first half of the year. This rate change should reduce our tax rate to 36% for this year and 36.5% for next year.

Looking at our unaudited first nine months of 2007 results on page 5, we had net sales of $452.8 million compared to $347.5 million in the first nine months of last year. That's an increase of $105.3 million or 30.3%, 9% organically. Our gross profit as a percentage to net sales increased 130 basis points from 27.2% in the first nine months of last year to 28.5% in the first nine months of 2007.

Our SG&A expenses as a percentage of sales decreased from 17.6% in the first nine months of last year to 16.8% of net sales in the first nine months of 2007. Our operating income for the first nine months of 2007 increased 38.6% from $37.2 million in the first nine months of 2006 to $51.6 million in the first nine months of 2007. $8.4 million of this increase was spurred by our core business units. Recurring net income increased 75% from $11.4 million in the first nine months of '06 to $20 million in the first nine months of '07.

Adjusted EBITDA increased 36.2% from $50.9 million in the first nine months of '06 to $69.4 million in the first nine months of '07. Our recurring diluted earnings per share increased 38.3% from $0.60 a share in the first nine months of to $0.83 a share in the first nine months of '07.

Now I will cover some balance sheet highlights as of the end of Q3. Taking a look at page 6, our cash increased by $24.2 million to $30 million at the end of Q3 '07 from $5.8 million at the end of the third quarter of '06. We reduced our 11.25% notes by $54.3 million to $7.8 million. And eliminated the final $1.5 million of our 17% notes. Our net debt to LTM adjusted EBITDA, including TB Wood's EBITDA for Q4 '06 and Q1 of '07 is down to 3.1 times. We expect this ratio to be below 3 times by the end of this year.

During the third quarter our net cash provided by operating activities was $25.7 million. We spent $2.6 million on CapEx, which gives us a $23.1 million of free cash flow in the quarter. Year-to-date through the first three quarters of 2007, our net cash provided by operating activities was $21.7 million, with a CapEx of $6.8 million and a free cash flow of $14.9 million, or 1.15 times our year-to-date net income of $12.9 million. Our $30 million revolver remained undrawn upon at the end of the quarter.

Now I will turn our discussion over to Carl Christenson, our President and Chief Operating Officer, who will review some of our major strategic initiatives for 2007.

Thank you, David. Now I would like to refer you to page 7 of the presentation. We have been consistently implementing the key element of our strategy for profitable growth. Focusing on strategic markets, expanding into new markets and new product development all contributed to our very solid 9.9% organic growth in the third quarter of '07, compared with the third quarter of '06. The dynamics driving many of the diverse end markets that we serve continue to be quite strong; leading us to be optimistic that demand for our products and services will continue to be robust.

Several of our target markets including mining, forklift, elevators, energy and aerospace and defense were particularly strong with sales to these markets up over 20% for this quarter compared with the same quarter last year. Our initiative to expand in the motion control market is right on track. Sales in motion control products were up over 25% for the quarter compared with the same quarter last year. And based on the incoming orders in backlog for these products, we our confident that we will meet our objective for this initiative for this year.

Our new product initiatives are also on track to achieve the objective of 12% of sales coming from products developed within the last three years. Year-to-date we are running at just under 14%. We had significant new orders on projects we've been working on for quite some time. These include drivelines for steel mills in China and India, brakes for a ship lift in China, speed reducers for ethanol mixers, custom bearing assemblies for vacuum cleaners, custom bearing assemblies for the new Chevy Traverse crossover vehicle built on the same platform as the very successful Buick Enclave and GMC Acadia; electric clutch brakes for a new ship, a new Navy ship, and electric clutch brakes for an unmanned reconnaissance vehicle.

In our manufacturing plant in China we are gearing up to produce three additional productline that we will sell globally. We expect to begin shipping these products in the first quarter of 2008. We completed the acquisition of All Power Transmission in October 2007. They are a driveline manufacturer in Green Bay Wisconsin. The company's primary product is U-Joints, which are extremely complementary to the U-Joints manufactured by our Ameridrives brand and in fact, the two companies have been doing business together for several years. We intend to combine manufacturing by moving Ameridrives U-Joint production from Erie, Pennsylvania to Green Bay in 2008. 2006 revenues were $10 million, and the purchase price was approximately 4.4 times LTM EBITDA.

We negotiated two union agreements in the third quarter. We successfully negotiated a contract with the IAM for our Wichita Falls, Texas facility without incident. One of the results of the negotiation is that the bargaining units, the bargaining unit employees will join the IAM's health care plan, and the Company's cost for health care for these employees will be fixed. In addition, a defined benefits pension plan was frozen and a 401(k) was introduced. The result of the negotiation with the steel workers in Erie, Pennsylvania is that we will cease manufacturing in Erie and move production to our newly acquired driveline manufacturing facility in Green Bay, Wisconsin. And our flexible couplings manufacturing facility in San Marcos, Texas that was part of the TB Wood's acquisition. We will complete this transition by the end of 2008.

Our low-cost country sourcing initiatives are ahead of plan for the year, and we expect to achieve savings in excess of $5.5 million which was our target for the year. The integration of TB Wood's is going very well. We identified 6 to $8 million in synergies during due diligence. And todate have implemented annual savings of $6.7 million. That is annualized savings. We are confident that we will exceed the high end of our synergies target for the TB Wood's acquisition.

Now I will turn it back over to Mike Hurt, our Chairman and CEO who will make some closing comments before we go to Q&A.

In summary, based on our very good record third-quarter results and the current strength of our end markets, we continue to maintain a positive near-term outlook. The integration of TB Wood's is on track. Our sales and marketing teams continue to achieve growth, both domestically and internationally. We continue to be excited about the opportunity to significantly grow long-term shareholder value through the execution of our business strategy. Topline initiatives are focused on leveraging the Altra brands, driving new product programs, attacking target markets and building a motion control portfolio.

Operational improvements will continue to be achieved through our Altra Business System, low-cost country sourcing and manufacturing and acquisition synergy gains. In closing, I refer you to page 8 for fiscal year 2007, with the TB Wood's acquisition included for the remainder of the year. We are raising our guidance for 2007. We expect topline revenues to be between $595 million and $605 million, and EBITDA to be $88 to $90 million. We are on track for our capital expenditures to be no more than $15 million. Now including TB Wood's, we are projecting a 36% tax rate for this year versus the 37% stated earlier last quarter. Our best estimate of cash flow from reoccurring operations as David highlighted, continues to be 115% to 120% of net income.

Now I will turn it over to the moderator, and we will start Q&A.

(OPERATOR INSTRUCTIONS) Andrea Wirth, Robert Baird.

Just wondering if we can start just a little bit with your outlook. Obviously you guys are very bullish, you posted some fantastic growth rate. Just wondering if you could talk a little bit about your growth rates have definitely been higher than some of your peers. I am wondering if you can talk a little bit about why you think your growth rates are really kind of outpacing the market, what specifically is giving you this success. And two if you could talk a little bit also about how the quarter unfolded; did you see any weakness at all throughout the quarter? A number of your competitors talked about some weakness particularly in August and just want to see if you also saw that kind of trend and have things improved?

Let me see if I can tie a ribbon around that for you. First of all, our organic growth rate as we stated was 9.9%. We had some positive effects on currency. If you eliminate the currency was about 8%. As Carl and David said earlier, our business was really strong based on our target markets in Europe. We had very good oil sales into the forklift market over there and some other target markets, although it is a smaller part of our business we continue to grow in the Asia-Pacific. And in the North America our sales to our distributors were a little stronger than we expected based on gaining some share. And typically our lawn and garden business is a little seasonally slower and based on some dynamics in that marketplace it was a little stronger than we expected.

From a bookings and a backlog point of view, we continue to see our bookings and backlog to be stable. The one place that we see a change is in the energy market where we sell clutch brakes into the drilling rigs. Those backlogs and bookings are slower. But I would say that we added $1.5 million worth of CapEx, and we have caught up with the backlog there. So as we sit here today we're not extremely worried about that.

And then when you look forward, do you think this sort of high single digit growth rate, organic growth rate is sustainable, or do you expect things to trail off as you go forward into '08?

You are really wanting me to give you guidance for next year, right? We're not quite prepared to do that. What I would say is we are going through our budgets right now. We have all of our platform managers in in the next four to six weeks and will give you some firm numbers on our next conference call. What we have said in the long-term view for these kinds of businesses is we expect if we do our job, we should be able to double what is going on in gross domestic [growth] and GDP. And having said that with what we are trying to do internationally, we continue to see good opportunities in those niche markets.

But at this point you wouldn't say that anything aside from really the drilling market there hasn't really been a deterioration in market conditions from this point on?

No, and I don't want to overstate the drilling side with you sitting here looking at oil at record highs etc. But I would say that there was a tremendous amount of backlog built-up in that industry, and we worked that backlog down. So that is the one that we've seen some changes.

Our international drilling business is actually very strong.

Correct.

So really domestic gas drilling has cut back a little bit.

You know the two things that have gotten all the media talk going forward is housing and auto. And I would remind everyone on the call that those markets are not our core markets. Now Carl identified a large order that we got from GM in the seating mechanisms for their new crossover vehicle, but that still is only about $20 million of our revenues at our one facility, at Kilian. But that is good, solid business for them. And in housing we don't have anything that directly impacts housing other than some of the things that our distribution sells to the manufacturing the housing products.

Just to follow up on distribution, how are inventories in the channel right now? It sounds like things were a little bit better than expected. Was there some restocking going on in the quarter, or just kind of give us a sense of where things are in the channel.

We think their inventories are in pretty good shape. We listened to the AIT conference call. They are real optimistic. Carl and our senior management team just came back from the PTDA, that's the Power Transmission Distribution Association where all of our distributors are. And they were all fairly optimistic about current conditions. And as I said earlier when we bought TB Wood's one of the synergies was being able to have a stronger product portfolio in the distribution market and we've seen that with some stock orders all from our distributors.

Just want to address the EBITDA guidance. Year-to-date your adjusted EBITDA is $69.4 million. If you take the midpoint of the guidance of $89 million, that would imply something around $19 million or $20 million for the second quarter -- or for the fourth quarter, I'm sorry, which would actually be a deceleration or a reduction sequentially from the $23 million recorded this quarter. Just wanted to try to reconcile that; seasonally is that generally the case that you see a meaningful drop in EBITDA from the third quarter to the fourth quarter, or just trying to understand the fourth quarter and how we should look at that versus the guidance.

Let me comment on third quarter first; I think consensus out there was $0.21, $0.22, David?

Yes.

And based on what we reported you can see we're reporting at $0.25. I think we expect to be at the top end of that range I quoted. I don't want to over promise being a young public company. But we think that we will be at the top end of that guidance I quoted. And there are some things in the fourth quarter that you just don't know about, so we are being conservative in that you've got less production days, how people shut down their factories between Christmas and New Years and how our distributors handle their orders going into the end of the year and out in. So we think the distributors' inventories are in pretty good shape. But we are being cautious.

Fair enough. Thanks, guys.

Jeff Hammond, KeyBanc Capital Markets.

Just in terms of your end markets, maybe if you could just give a little more color on what you saw in the turf care market and if there is any, if that is a share change issue or a market change issue. And then what would you say surprised you the most on the upside in terms of the end markets in the quarter?

I think you probably hit the one that surprised us the most in what happened -- we've been very successful with the zero turn radius lawn and garden equipment. So that has been a share gain indirectly. And those orders are up significantly compared where we expected it, where we expected them to be. And we are actually up for the year, when the industry is down for the year. So we think we've done very well considering the situation in that market. And that one was the one that was the biggest, the most pleasant surprise for us.

Can you just speak to your aero defense, where you are most well-positioned in the aero defense product, market, and what you see longer-term from that category in terms of your business?

Sure. We make our Formsprag business is strong in the aerospace business and defense, in transmissions. Auxiliary power units, starters, things like that, that type of equipment. And their business is strong, and that is in both some commercial aerospace and military aerospace. And then the electric clutch brakes, we've seen some very good orders there for one, for the new Navy destroyer that is being built and then also for some unmanned vehicles. We've seen some good orders in that region. And then on the mobile equipment that has a turret on it, built some gear boxes and also some electric clutch brakes for that type of equipment, and that has been very strong.

Okay, great. And then Carl, you mentioned a number of new product wins, platforms, etc. What would you say of those you are most excited about or has the most substantial opportunity; either near or long-term?

Well, certainly the one that Mike referred to; also the one for the new crossover vehicle, that seems to be a real winner for GM. And we've been very successful on that and had some relatively big numbers on it. So been very good success for us. And we are also very excited about the aerospace and defense industry. We've moved into that with some new products, and we landed in the third quarter some very good orders. And then China, the infrastructure that they are still building there, steel in China and India. And then also we had a great win on a ship lift project in China. So I think all the ones I mentioned are very good and will continue to be pretty good for us.

And then just shifting gears to TB Wood's, you mentioned that you think you exceed the top end of the 6 to $8 million range. Can you speak to where you are finding additional synergies and what you think maybe a new range to think about would be longer-term?

I think I will hold back on a new range. We will probably exceed that to some extent. But where we are seeing some very good wins, was one of them was in transportation and logistics; got some good wins there that we are exceeding our expectations on. Another one is insourcing castings from other Altra businesses into the TB Wood's foundry is going very, very well and we are seeing some nice savings there. And then the one that we are implementing is with the All Power acquisition and moving out of Erie down into the San Marcos, Texas facility. That one we identified during due diligence, and we expect to that will be in the order of $2 million in savings by the time we get it all transitioned out of Erie.

Just to clarify one thing Carl said, when he talked about transportation and logistics he was talking about our freight costs.

Right, right. And then you did the All Power acquisition. If you could just speak to what you are looking at or seeing in the pipeline, how you're thinking about your balance sheet and leverage ratios and how you want to utilize the cash going forward.

I think I will probably let David talk to that. Go ahead, David.

We expect our net debt to LTM EBITDA to be under 3, which is in the target of the 2.5 to 3 range. We want to continue to put cash on the balance sheet to shore up our balance sheet. And then it will just be up to the Board to decide what is the best use of that cash, whether it is pay down debt. We would like to get rid of the balance of the $7.8 million of the high yield debt out there. Right now we just want to accumulate cash.

Thanks, guys.

Jon Braatz, Kansas City Capital.

A couple questions. You talked a little bit about Asia and new products coming out of Asia next year. Could you give me a little bit better idea of -- let's say by the end of this year what your Asian revenues might be. And then with the new products, the new facility and so lawn on you think that might be going to; obviously not a specific number, but where that might end up for fiscal 2008?

And these are rough numbers. And we have two operations really, Jon in Asia. One is we have a sales office in Shanghai that sells products from our European and North American manufacturing. And then we have a manufacturing plant where a very good portion of that production ends up into, in Asia. The total sales in Asia will be around 18 million. That would include sales from both of those locations in that 20 million. And that is year-to-date. That is not an annualized number.

18 million so far?

Yes.

Okay.

I'm sorry, David has got a -- it is 24 million.

For the 2007.

Yes, 24 million annualized for 2007.

Right.

So that includes what I was missing, was a piece from an operation in Europe that ships into Asia.

Okay. And then 2008 with the new products?

Our goal is to increase sales in Asia on the order of 20 to 25% per year.

Okay, that's fine.

I think with these new products we will achieve that.

You talked a little bit about the turf business and your market share gains. Is the business that you are doing currently in the turf business, is that for retail sales, let's say in the spring of next year? Is that where the business is going in that sector at this moment? I am trying to get a handle on what some of the turf companies might be thinking about consumer sales, housing markets and so on and so forth. And how that may impact the turf business.

Yes, the outdoor equipment industry is projecting for next year -- they are projecting a decline of about 5%. And what we are building now and the orders we are getting are for production that will be sold in the spring. They build in the fall and the winter and then sell in the spring. But the product that we are going on is some of the newer products. So we are pretty optimistic about it. I don't think -- I don't expect to see the same kind of decline in our business that you see, that they will see in the industry.

You think you can be flat?

I think we will probably -- we've got a plan for actually some growth.

Okay.

Share and bring out the new products.

Two other questions. When you look at your revenue by OEM versus distributor, that 9% organic growth rate, was it pretty equal between OEM versus distributor in terms of growth?

No, OE was a little bit stronger. US distributor was between 6% and 7%. And so the OE was stronger and the factors there was those markets we identified and some help from currency.

Okay, and then lastly, as you look into next year and the generation of free cash flow, I know you said you wanted to increase your cash balances, but to the extent that you pay off debt, are there prepayment penalties associated with the debt beyond the 11.25, the 9% note? Or the 9% note if you were to prepay that are there penalties associated with that?

Well, the bonds are -- the 9% bonds are trading between 102 and 103. I think that is right, David -- is that right, David?

That's right.

Okay.

And we can buy some of those backs on the open market, and there is also some that we can buy at less than the premium. So first thing we will be doing is looking at the bonds that we can buy at market or around market price. And then that 9% bonds, the premium goes in half on those bonds.

December 1, 2008 to 4.5%.

Okay, all right. But you said you were able to buy some at PAR?

On the open market about 102.

Oh, on the open market at 102, okay. All right, that's it. Thank you very much.

Thank you.

Michael McNulty, Context Capital.

Thanks a lot for the call, guys, and congratulations on the good results there. Just wanted to touch base with you on acquisition opportunities. Are you seeing good opportunities, free up in this market? I know there has been some turmoil or dislocation, if you will, and some of the financial seller markets. You see things that may be PE funds own or maybe some larger companies looking to dispose of businesses to raise cash? Are you seeing anything there and if so are they more tuck-in type things, or are they larger type deals?

I will try to answer that with two or three comments. First of all, there continues to be small niche product expansions that we can make similar to the All Power, which we just announced, and that is almost a product expansion and all that we would do out of cash. It wouldn't affect our debt to EBITDA hardly at all and maybe makes it a little more accretive. We are starting to see the tip of things where there could be some dissatisfaction in the PE markets. But nothing wholesale yet, and we've had a couple meetings with our advisors just to continue to listen for opportunities. And we maintain, I think if you've seen some of our roadshows, we maintain a list of strategic acquisitions that we have interest in. But we haven't seen multiples drop from eight times EBITDA to six or something like that yet. So we are just keeping our powder dry and raising cash.

That makes sense. And then from a standpoint of whether to retire some of the 9% versus building cash, I imagine that if you did find a good acquisition that you may not be able to replace the 9% that you buy back much cheaper than 9%. Is that a correct assumption, or do you think you could do cheaper than that?

Given our current finance structure we could not do much better than that.

Okay, that explains why right now you are just sitting tight and would look to build cash after buying back the rest of the 11.25s; till you see what comes up over the next few months then.

We made a commitment where we were in the follow-on offering on the street. A lot of people test this on the leverage of this company, and we want to show that we've got a commitment to manage that net debt to EBITDA ratio. And I think maybe improve our evaluation for the people that own our stock.

Okay, that is good. And also with regards to expenses or raw material costs, I know you just had the price increase. Are you seeing any runaway cost pressure, or are they kind of manageable or containable right now?

I think compared to where they were two years ago and what was going on dynamically two years ago, they are relatively stable. And we are able to pass on the majority of the cost increases that we see for raw materials through price increases and surcharges. So I think that is pretty well-managed right now.

All right. That's good. And then I guess the last one is with regards to the distribution channel would there have been any need for the distribution folks to want to double order or excess order this quarter? It seems that if they needed things they could always get it from you. Were there any shortages of parts or anything of that nature that people might be afraid of?

I think, as I said earlier, the channel is relatively stable. And they've got a positive outlook. I think if you look at our Altra Business System and our deliveries and leadtimes, we beat our competitors to the market with services in days and weeks, as some of them are promising months. So that helps us on the share side, and the combination of the TB Wood's products in our portfolio just makes us a more desirable supplier for that channel.

Okay, that's great. Thanks again.

[Earl Redmond, Redmond Capital]

I was hoping if you could just comment on the organic growth versus the acquisition. If you could give us what the acquisition growth would have been on an apples-to-apples basis; looking at your group of acquisitions on a year-over-year basis.

We typically -- I do not think we have that number in the way you asked the question. The 9.9% this quarter was organic growth based on our core businesses. And David (multiple speakers)

The 9.9% is based on the combined businesses. Could you repeat your question? I am not sure I understood it exactly.

Just looking at the acquisitions you did recently and looking at the private numbers from a year ago basis, just want to understand how much the acquisitions have grown on a year-over-year basis.

The acquisitions on a year-over-year basis grew about 1.5% on the TB Wood's side.

The TB Wood's acquisition. The Hay Hall acquisition has grown on a comparable basis with the core business. And TB Wood's, that was one of the synergies we saw was that as we apply our sales and business, our salesmen and our business system to that business, that we believe we can get that growth up closer to what the core business was.

Okay.

So it was what we expected to see.

I would amplify what Carl said. They had a limited number of sales resources, and as we've talked about our distribution channel, etc., that was one of the synergies going in to take our sales organization and our products together with theirs to increase penetration of the channel.

Okay, and you see that happening over the next year, next 18 months where they start growing at the corporate average?

Yes, it will ramp up, and we've had a couple good successes in the third quarter, so we will see that ramping up. But that is one that we know will take some time, as you convert customers over. So I would say over the next two to three years you will see that ramp up to our kind of growth rates.

Okay, and one more question on the margins. If you look at the incremental organic margins, and you were kind enough to break out what the operating income from the core and divisions was. If you look at the operating on the increasing revenue versus the increase in operating income, it is about somewhere in the range of 25 to 30% depending on whether you look at it for nine months or three months. How do you see that going forward? Because the environment and everyone says the macro environment is becoming a little tougher; so how do you see your incremental margins going forward?

I think we will continue to shoot for a percentage a year based on an organic growth rate of 6% and (multiple speakers) basis points.

And the combination of our Altra Business System improvements in the factories, and low-cost country sourcing and manufacturing.

Okay, thank you.

Garo Norian, BlackRock.

I just wanted to remind myself, can you tell me what your geographic revenue breakdown is?

73% North America, about 20% Europe and then the rest is the rest of the world; most of it concentrated in Asia-Pacific.

Is that going to change in your guys' opinion relatively meaningfully over the next say two to three years?

We think that if you look at all the dynamics internationally that we will grow especially the Asia-Pacific faster than the two mature markets.

And to what extent are you benefiting from the currency differences particularly I guess against Europe?

David you want to answer that?

I don't think we are benefiting tremendously based on the currency because most of the products are sold in the same currency in the same place, so most of our North American stuff is sold in North America so there is not a lot of benefits from foreign competitors buying US dollar materials.

Okay, and just for the quarter or nine months, whichever way you want to talk about it, what has been the weakest markets from an organic kind of growth perspective?

The two markets that we mentioned would be the turf and garden market, which is somewhat tied to the housing industry. And the other one is would be the automotive, which Mike said is only $20 million of our business. But it is still something we watch. We've had some good wins there, too, but from a pure market standpoint those would be the two that are the weakest.

Okay, and I guess a little bit related to that, relative to your guy's expectations considering that turf and garden was better this quarter than expected, I mean relative to expectations is it really just the weakest markets? Does it go back to that kind of US gas drilling?

If you look at that turf and garden market it is about half residential and half commercial. So the commercial is still doing pretty well, and Carl identified we had new products and we had new clutch brakes going on to some of the newer zero turn radius items. So that helps us do better than that market.

Okay. Thank you.

Andrea Wirth, Robert Baird.

Just a couple quick follow-ups, just more numbers actually from David. What should we expect interest expense to be roughly on a run rate in the fourth quarter just with the recent debt paydown and then in the acquisition; what kind of rate should we be on for 4Q?

About $7.2 million.

And that 36% tax rate you gave for the year, is that on adjusted earnings, or is that on --.

Actual earnings.

That is on actual earnings. Do you know what the rate would be for what you are expecting for the fourth quarter?

A little over 36%, so we will average 36% for the year.

Then I just get the cash flow from operations number again that you gave out?

Sure. Just a second. During the third quarter, cash flow from operating was $25.7 million. And year-to-date it was $21.7 million.

Thanks, guys.

Jordan Hollander, Jefferies & Co.

Most of my questions have been answered, but just a follow-up on one about the geographic split in revenue. Can you also talk to the growth on that? Have you seen faster than the 9.9% organic growth in Europe and Asia, and what is it in the domestic business?

Asia was the highest growth rate followed by Europe and then North America.

Okay; any specific on the North America piece?

In the quarter on our core business Asia was up a little over 30%, Europe was 18%, and North America was about 9%.

Okay, great. Just one more on that, and the CapEx guidance you guys gave $15 million, you were at 6.8 year-to-date. Is there any big projects in the fourth quarter or that was just the number you've been targeting all year?

That is the number we've been targeting all year. As Mike said, we don't expect to exceed that, so nothing big. It is just how they roll through.

Yes, it is timing on the project, and there are some projects that we've been working on that will hit in the (inaudible).

We've got some very big, some big projects over $1 million (inaudible) two of them together that will probably hit the fourth quarter. Plus there are things that hadn't been invoiced yet that is committed.

Okay. That was it, guys. Thanks a lot.

(OPERATOR INSTRUCTIONS) Jon Braatz, Kansas City Capital.

Going back to -- returning to the All Power acquisition, you talked about I think what, $2 million in annualized cost savings when you move from Erie to Green Bay. Was that correct?

No, we're moving from Erie to two locations; one in Texas and one in Green Bay.

Okay, will there be -- to achieve those savings -- will there be some restructuring and onetime costs that will be associated with that?

Yes, there will be and we are actually working through with the actuary what that will be. So we don't have that exact number until we get the actuarial calculations complete.

Okay, would you anticipate most of those being recorded here in the fourth quarter or extending into the next year?

We would expect the actuarial costs to be recorded in the fourth quarter. The move is scheduled over the next five quarters. So it will be a while.

Okay, great. Then lastly, your other income figure other than interest income, what does that include?

Primarily FX.

Okay. Thank you very much.

Alan Mitrani, Sylvan Lake Asset Management.

Has the change of the Baldor Electric instituted in their Dodge selling, in terms of putting a direct sales force in October first, how do you anticipate that is going to impact you in terms of competitive pressures as they now call on OEMs directly more forcefully, and can you tell us if you have seen any impact?

Let me go back with a little bit of just a little history on Baldor first. When Baldor was a pure motor company prior to Reliance Dodge acquisition, their sales program was made up of an industry we term captive reps that were pretty much solo reps in Baldor motors. What they did was they took the Reliance motors and put it into that selling mix with that type of sales representation in the marketplace. And based on what we've read and some of the same things you've read, it appears to me that they are going to run their mechanical business, which is their mounted bearings and gear businesses and those kind of things with a conventional sales force similar to the way it was run prior to the acquisition. And they are going to run those as two business platforms. So from our perspective, we don't see a big change in what's going to happen on the mechanical side of the business. It will be the Dodge guys continuing to sell those products. Carl, you were at the PTDA, do you have any additional comments?

No. I think that's right. I think that is the way we look at it.

Do you think it matters if they have a direct sales force or whether they end up going to reps?

I think that from their perspective keeping that sales force there was probably more of a, was a positive. The issue that they have is how they manage the whole distribution channel with those two sales forces compared to the way it was managed by Reliance Dodge previously. The senior executive at Reliance Dodge was, his name was [Joe Schwann], and he was well-known in the distribution channel, and he has now retired. So how that works out for them I wouldn't try to anticipate.

How often do you go up against Dodge when you're selling your products?

They are a competitor in our (inaudible) drive business with TB Wood's and some in gearing, but we don't have any competition with them on the mounted or bearing business. And our gearing business is a different kind of gearing than theirs. And we've got the premier brand name in Boston gear. So the types of gearing they sell is somewhat different from ours.

Thank you.

We have no further questions in the queue at this time.

Well, we would like to thank everyone for listening to our conference call. We appreciate the questions, and as always, David Wall, Carl and I are available if there are additional questions. So thank you very much. We will be talking to you again next quarter.

Thank you. This does conclude today's teleconference. You may disconnect at anytime, and have a great day.