Altra Industrial Motion Corp (AIMC) 2007 Q4 法說會逐字稿

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 question-and-answer session.

I would now like to turn the call over to Mr. Michael Hurt. Please go ahead, sir.

Thank you, Jessica. Good morning and welcome to our conference call to discuss Altra's fourth quarter and full year 2007 results. Joining me today will be Carl Christenson, our President and Chief Operating Officer, and Christian Storch, our new CFO, who joined Altra this past December. We are excited that Christian has joined the Altra management team. I will ask Christian to introduce himself and give you some highlights of his background.

Good morning, everyone. As Mike indicated, I joined the Altra team this last December. Prior to joining Altra, I was a CFO for Standex International Corporation, a New Hampshire-based industrial mini-conglomerate listed on the New York Stock Exchange. I worked for Deloitte for eight years in Boston, Dusseldorf and Berlin, Germany on the audit, tax and M&A side. And I also worked for Vossloh AG, a German-based, publicly traded railroad infrastructure company.

I am excited about joining the Altra team and I'm looking forward to working with you in the future. Mike?

Okay. Thank you, Christian. Before I get started with our presentation, I think some headlines that hit the newswires this morning that we missed consensus earnings. I think that relates to the discontinued operations and how we accounted for those. And we will -- Christian and Carl will explain to you that we did hit the earnings numbers, if you consider that we sold the electronics business at the end of the year. So, we'll try to clear up that discrepancy going forward.

To help you better follow our discussion on this conference call, we've posted on our website some slides that will help you -- to reference during our call today. Hopefully, you've had a chance to assess them. I'll walk you through the steps to access the presentation. If you going to our website, www.altramotion.com, click on Investor Relations in the upper right, click on Events and Presentations on the left side of the screen, click on Fourth Quarter Results and you'll see our slides and I think you can also see the press release there.

Now I will read our Safe Harbor statement. All statements other than statements of historical fact included in this release are forward-looking statements, as that term is defined in the Public Securities Litigation Reform Act from 1995. Such statements are based on financial data, market assumptions and business plans available only as of the time the statements are made, which may become out of date or incomplete. Forward-looking statements are inherently uncertain and investors must recognize the event -- that events could differ significantly from our expectations.

In addition to the risks and uncertainties noted in this release, there are certain factors that could cause actual results to differ materially from those anticipated by some of the statements made. These include competitive pressures; changes in the economic conditions in the U.S. and abroad; loss of distributors; ability to develop new products and respond to customer needs; risk associated with international operations, including currency risk; accuracy of forecast of OEM customers; increased costs of raw materials used in products; product liability claims; work stoppages and other labor issues; changes in environmental tax and other laws and changes in the enforcement of these laws; laws of key management and other personnel; changes in pension and retirement liabilities; the ability to achieve business plans, including with respect to uncertain economic environment; the ability to successfully execute and integrate key acquisitions and mergers; failure to obtain or protect intellectual property rights; failure of operating equipment or information technology infrastructure; and risk associated with our debt leverage and operating covenants under the debt instruments, as well as other risk, uncertainties and other factors described in the Company's Form 10-Q, Form 10-K, and in the Company's other filings with the U.S. Securities and Exchange Commission or in materials incorporated therein by reference.

Altra Holdings is under no obligation to and expressly disclaims any obligation to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise.

Now I will move forward with a review of our fourth quarter and full year results. On this call, I'll give you the highlights of our record fourth quarter and full year results, then I'll give you an update on our view of the business and the economic environment. Next, Christian will review the fourth quarter and full year financial results in detail. Carl will update you on some of the major strategic initiatives that are fueling our top line and EPS growth. Carl will highlight some of the operational cost improvement programs, China initiatives, manufacturing facility improvements and consolidation activities. He will also discuss the status of TB Wood's and the All Power acquisitions. After some closing comments, I will open up the session to pull Q&A and give you guidance and our closing comments.

Now if you'll follow this part of my discussion on page two of the website presentation. Our performance in 2007 was outstanding with record results in the fourth quarter and the full year. Fourth quarter sales increased 31.4% year-over-year, a record $150.9 million. That was an organic growth rate of 11.2%. 2007 sales for the year were a record $584.4 million, up 26.4% compared to 2006. These sales numbers exclude the divestiture of TB Wood's Adjustable Speed Drives, which we sold on December 31 of 2007, and classified as discontinued operations.

The continuing operations reoccurring earnings reached record levels; 4Q '07 was $0.22 versus $0.01 a year ago and full year earnings was $1.04, up 73% from a year ago. And we improved our leverage ratio to 2.8 times the last 12 months adjusted EBITDA.

Our strong growth for both the quarter and the full year reflects our ability to introduce new products, expand Altra's customer base and gain market share. Our earnings growth was achieved through continuous improvements using Altra Business System, low cost country sourcing and manufacturing, and the integration of the TB Wood's acquisition.

Now I'll comment on our current business outlook. Considering the strength of our fourth quarter results, we continue to believe that 2008 will be another growth year for Altra, in spite of some of the negatives we continue to hear in the business press. The integration of TB Wood's continues to go very well and the All Power acquisition has so far met our expectations. Plus the strength of our late cycle markets, some military and aerospace business, and the growth of our international business continues to be good.

We continue to monitor a number of macroeconomic indicators, including industrial production growth, CapEx spending, the ISM index and manufacturing capacity utilization. These indicators continued to signal a softening economy, which gives us some reasons for concern. However, this softening has yet to show up as a negative trend in our bookings. In fact, our February bookings were very strong. An analysis of our bookings and backlogs showed that the late cycle markets, which use Altra products -- some of those are energy, mining, and metals -- continue to perform. In the fourth quarter of '07 compared to last year, bookings were up 15% and our backlog strengthened. We have booked additional new business in the military and aerospace applications. Our international business continues to be solid. Since over 40% of our revenues are from the aftermarket, we continue to monitor sales of our products through the North American distribution channel.

We believe that their inventories are in good shape. I will remind you that we are electronically hooked into these systems and can see their inventories and see our sales to their customers. Our distributors are currently forecasting growth in 2008. However, they are more cautious this year than they were in 2007. So we continue to be cautiously optimistic. As a matter of fact, one of our distributors, DXP, just put on the wire that they expect 2008 to be their best year ever. Now they're sitting in Houston, Texas and are benefiting from the things that are going on in the energy market.

So with that, I'll turn it over to Christian to give you a financial review and try to fill in some of the blanks on the discontinued operations.

Thanks, Mike. Moving on to page three in our unaudited fourth quarter 2007 results. Mike walked you through our top line performance for the fourth quarter and the full year; let me walk you through some of the other financial highlights.

Our gross profit as a percentage of net sales increased 120 basis points to 28.1% in the fourth quarter, when we compare that to the prior year quarter. This increase was spurred by price increases, our low cost country sourcing initiatives, and productivity savings from our ABS system and CapEx projects. We saw a decline in SG&A expense as a percentage of sales when compared to the prior year of 440 basis points, as we continue to take advantage of the scale of Altra.

Operating income for the fourth quarter of '07 increased 182% to $11 million, when we compare that to the prior year quarter, excluding restructuring charges totaling $4.1 million, which includes the curtailment loss. Non-cash inventory step-up cost of $0.3 million and expenses associated with the separation from a former executive of the Company totaling $1.3 million, operating income for the fourth quarter '07 was [$16.7 million] or 11% of sales.

The fourth quarter tax rate from continuing operations of 47.6% from continuing operations and 37.9% for the full year was impacted by discrete items in the fourth quarter. We decided to repatriate foreign earnings and the non-deductibility of the stock compensation related to the separation were not tax-deductible. Fourth quarter recurring net income from continuing operations was $5.7 million compared with $0.3 million in Q4 of '06. Our recurring diluted earnings per share from continuing operations for the fourth quarter was $0.22 compared with $0.01 in [Q4] of '06. Had we not divested the Adjustable Speed Drives business, recurring diluted earnings per share for the quarter would have been $0.04 higher. Adjusted EBITDA for the fourth quarter increased almost 93% to $21.6 million.

Page four is a reconciliation that shows how we get from reported fourth quarter net income to recurring net income numbers. In this reconciliation, we have removed all material one-time costs to give you a feel for what our ongoing business looks like. In the schedule, we have removed the tax affected cost of restructuring, the premium and deferred financing expenses related to our redemption of high cost debt, private equity advisory fees that no longer apply to us, acquisition-related inventory step-up costs, and costs associated with the separation from a former executive.

On page five, we take a look at our unaudited results for the full year. Our gross profit as a percentage of net sales was 28.3%. Our SG&A expense as a percentage to net sales was 17%. Operating income was $60.8 million, an increase of almost 50% over the prior year. Excluding charges mentioned above, which totaled $7.5 million for the full year, operating income for '07 was $68.3 million or 11.7% of sales. Recurring net income from continuing operations more than doubled to $25.6 million. Adjusted EBITDA increased 55% to $90.7 million in '07.

Our recurring diluted earnings per share from continuing operations increased to $1.04 a share in '07. Had we not divested the Adjustable Speed Drives business, recurring diluted earnings per share for the full year would have been higher by $0.09.

Now I will cover some balance sheet highlights as of December 31. Taking a look at page six, our cash at the end of December was $45.8 million. That cash balance has grown since the end of the year to approximately $65 million today. The increase is partially due to the proceeds from the divested share of the Adjustable Speed Drives business. During 2007, we greatly improved our leverage. We significantly reduced our [11.25] notes. Our net debt to adjusted EBITDA ratio was down to 2.8 at the end of the year. The ratio was 3.1 at the end of Q3 and 3.3 at the end of the prior year.

Our net debt to total capital ratio was 63.2% at the end of the year, down from the 70.7% a year ago. Our $30 million revolver remained undrawn upon at the end of the quarter. Interest expense for the quarter totaled $7.3 million. CapEx spent during the fourth quarter was $4.8 million and $11.6 million for the full year. Depreciation and amortization for the quarter was $5.6 million for the quarter and $21.9 million for the full year.

Now I will turn the discussion over to Carl Christenson.

Thank you, Christian. And I'll be referring to page seven of the presentation. As Mike mentioned during his introduction, we had an exceptional quarter and year. The outstanding performance was the result of our business units executing our strategic initiatives and strengthened many of our end markets led by energy, metals, and aerospace. All of our businesses are driving organic growth with target market initiatives, new product development, and expanding the customer base.

We have achieved double digit growth in many of our target markets. In the elevator market, we received a prototype order from a potential new customer that is one of the largest elevator drive system manufacturers in the world. This product has been delivered and is now being tested.

In the food and beverage market, we received our first orders from European customers for bottle capping clutches. This product has been tremendously successful in North America, spurred by installation at Coke and Pepsi bottling plants. We expect the demand to grow, as the bottling plants in Europe experience the benefits of our designs.

New products continue to be one of the keys to our success. Our Boston Gear business introduced a stainless steel speed reducer designed specifically for the food industry. The unique design of this product enables it to withstand the caustic wash-down prevalent in the food industry and helps to prevent food contamination. This new product has been approved by the National Sanitation Foundation to carry the coveted NSF-approved certification.

We introduced a newly designed electromagnetic clutch brake product line that replaces a product line designed over 40 years ago. This updated design improved operating performance by 25%, is easier to manufacture, and was designed to utilize common components for a multitude of end items. This enabled us to eliminate over 20% of the end items and over 50% of the major components, while still being able to provide the same engineering solutions. This will yield a $500,000 per year annual savings.

The growth of our motion control business has been right on plan. We grew this portion of our business over 25% in 2007. Our sales in Asia were up over 25% in 2007 and our European sales were up over 20% for the year.

Regarding acquisitions and divestitures, we divested the TB Wood's Adjustable Speed Drive business for several reasons. First, we were a very small niche player with less than 1% market share in a business that is dominated by many large global players like GE, [Escowa], Allen-Bradley, Siemens, Schneider, Eaton -- and that's just to name a few. There's many more.

Secondly, the product life cycle is extremely short relative to the majority of our other electromechanical/mechanical products. And finally, this business is maturing rapidly, with the products becoming more of a commodity, making it much more difficult to differentiate oneself.

We believe that this trend is going to continue and the business would have required substantial investments just to maintain our position. We also believe that due to the extremely competitive environment with eroding prices, we would not have been able to improve the margins to meet the goal that we have set for our Company. We sold the business to Vacon, a Finland-based company, for $29 million in cash. We retained ownership of two facilities in the U.S. We entered into a transition services agreement. And we entered into a sales representation agreement, whereby we will continue to sell the products to North American distributors and selected OEMs.

Taking these into account, we believe the value of the transaction for Altra was approximately $34 million. The sales of the TB Wood's Adjustable Speed Drive business resulted in a reduction in sales of approximately $28.7 million. These were the sales for the nine months that we owned the business. For 2008, we believe that the transaction will have a short term negative impact on EPS of approximately $0.05 to $0.07 per share.

In this uncertain economy, we believe that having some cash is prudent. However, we will opportunistically pay down debt or if the right strategic -- with the emphasis on strategic -- acquisition becomes available, we may redeploy the capital where we could earn a superior return. The integration of the TB Wood's acquisition continues to go better than planned. We realize synergies are of just under $5 million in 2007, and these synergies on an annualized basis represent approximately $7.5 million of operating income improvement. We achieved our three year target in the first year.

The All Power acquisition is also going very well. Combining our Ameridrives driveline business with All Power has resulted in some fantastic sales opportunities. As a result of the TB Wood's and All Power acquisitions, we are rationalizing our North American flexible coupling operations. We are moving manufacturing from our Erie, Pennsylvania facility, where we have legacy union costs, to the All Power facility in Green Bay, Wisconsin and our TB Wood's facility in San Marcos, Texas. We have completed 60% of the move to Green Bay, Wisconsin and 25% of the move to the TB Wood's Texas facility with minimal customer disruptions.

To mitigate some of the risks associated with the move of this magnitude, we are making a significant investment in new equipment that is easier to operate and more reliable. We will complete the rationalization project by the end of Q1 2009.

We established a wholly-owned foreign enterprise in Shenzhen, China, converting our operation from a contract process factory to a WOFE. As I mentioned during the last call, we are in the process of adding three product lines to this operation, and production of these products will begin in the first and second quarters of this year.

In addition, we relocated our Inertia Dynamics business we acquired from Hay Hall, from Torrington, Connecticut to New Hartford, Connecticut. The facility that Inertia Dynamics was leasing in Torrington was old, run down, had many obstructions and was not large enough. We moved into a much better facility. It is a larger, very open facility in much better shape, which is conducive to implementing ABS concepts or the Altra business system. This move was completed according to plan, with no disruptions to our customers.

Regarding our cost reduction initiatives, we achieved our goal of over $5.7 million in operating income savings from low cost country sourcing initiatives. We also had some great success with the Altra Business System. One particular noteworthy event was organized to increase capacity of a production line in our Brechin, Scotland facility. The bottleneck operation was identified and the time required to set up the machinery was attacked. As a result, the setup times were reduced by 40% and the time to produce the product was reduced by 35%, eliminating the bottleneck and enabling significant improvement in delivery performance.

Now I'll turn the call back over to Mike for some closing comments.

Thank you, Carl. As we go forward in 2008, we are encouraged that most of our end markets continue to expand. This is particularly truth in the metals, power generation, aerospace and defense, and mining segments. Many of our customers are optimistic that 2008 will be a good year, and we are excited about Altra's future growth opportunities.

At the same time, if current concern about a potential recession continues to fruition, we are prepared to react appropriately to any softness in our markets. So with this economic backdrop for 2008, the Company is forecasting net sales to be in a range of $630 million to $645 million; EBITDA to be between $98 million and $105 million; and recurring diluted earnings per share to be between $1.20 and $1.35 on a recurring basis.

Altra Holdings further expects capital expenditures to be in a range of $16 million to $19 million; depreciation and amortization in a range of $21 million to $23 million; and a tax rate of approximately 26% -- I'm sorry; excuse me, 36%. This guidance reflects the effect of the divestiture of the TB Wood's Adjustable Speed Drive business that Carl just explained.

In closing, I'll add these final comments. In January and February, income and orders have been strong. And to hit the high side of our guidance, we need this level of activity to continue. The low side of our guidance is intended to reflect where we could be if there is a slowdown and the economy begins to affect our end markets.

We'll now turn the discussion over to Q&A.

(OPERATOR INSTRUCTIONS). Andrea Wirth, Robert Baird.

Good morning, guys. Now, welcome aboard, Christian. I guess I just wanted to talk a little bit about the organic growth that you're assuming or the revenue growth in general. Did I hear you right, Christian -- or maybe Mike mentioned that orders were up 15% in February?

No, they were up fourth quarter of this year over fourth quarter of last year 15%.

Up 15%. Okay. And --

Quarter-over-quarter.

And are you still in the double digits for January and February? Or has it slowed significantly from there?

No, January -- well, I hadn't measured it on a percent; it will probably be at the end of the quarter, but January and February were very good months. As a matter of fact, February was significantly strong.

And I guess just to try to understand a little bit about how your visibility is, how fast can things turn down or how much visibility do you have in order to kind of project out? I mean, do you have -- you know, call it, three months visibility? Six months visibility? I'm just trying to get a sense of where things are at right now.

Probably the best number, you named it, is three months. And I would remind you that 40% of our business comes through the distribution channel and aftermarket business. And we run that to forecast. So, we do not have a bookings backlog for that as you would at Cat or somewhere where you're making engines and things like that. And I would reinforce that our distributor's inventories, as we see them, are in good shape. We've had some new stocking orders come in since the first of the year after having strong sales through distribution in the fourth quarter. So, from that perspective, we have as much comfort as we could have.

All right. I guess, [just off trends] trying to look at the lower end scenario, what are your most economically sensitive businesses? And are you starting to see some weakness there yet? Or are they still holding up fairly well?

Carl, you want to talk a little bit about some of those markets? Turf and Garden, we've talked about on several calls.

Yes, I think some of the strong markets -- Mike mentioned energy, metals, energetic, aerospace and energy, particularly power gen have been very strong. The Turf and Garden business, I think we've been consistent in saying that in the April/May timeframe is when we start to get pretty good visibility as to how they're selling their product. So, we're pretty sensitive to how the spring selling season is going to turn out for those guys. And they've been building at a pretty good clip, so they seem to be optimistic.

So that one's fairly sensitive. And then the distribution business, as Mike mentioned, would be the other one that if there is a change in the economic condition, that one could be very fast and could happen pretty quickly.

And then you had also mentioned that in the case of a recession or tougher conditions, you've got a number of things in place that you could do to try to offset. I wonder if you could kind of just walk through those contingency plans, just kind of give us an idea of what kind of leverage you can pull in that type of situation?

I'll hit that for a couple and maybe Carl and Christian can add. First of all, I would remind you that we've got $4 million to $6 million worth of bonus compensation, and it's all based on growth; it's not annuities for having a job, so that would go away. Our CapEx, we've said a number of times is one-third, one-third, one-third. So we could really squeeze CapEx, if was necessary, down to probably 33% if you were in something severe, just for maintenance purposes.

And then from there, as we're doing the consolidation of our Eerie business down into the Texas plants for both cost reasons, more labor flexibility and et cetera, we would look at other opportunities to reduce numbers of people and accelerate our consolidation.

Carl, I don't know if you have had anything to add to that, or Christian?

No, that's right. That's one of the big ones is we've got some plans laid out to have a structured, rational methodology to consolidating some of the operations. And if we did turn into a downturn, we could accelerate those.

Each one of the business units has been and is continuing to refine a plan by business unit that they would implement if there was a reduction. Many of our business units have significant temporary workforce that they could trim back pretty quickly. So each one of the business units has a very good plan that they can implement on a timely basis.

Two additional things that would continue would be continue to push the ABS system hard for savings. And we still have fuel in the tank on low cost country sourcing.

That's right. Right. We still have some improvements to go.

Okay. And then I just want to go back to revenue. Your organic growth, obviously, very impressive, up 11% in the quarter. By my calculations, it looks like your revenue guidance assumes something -- 5.5% to 7% organic growth in 2008. It sounds like January and February were still very strong. Just wondering if you can kind of comment on the growth rate that seems to be embedded in that guidance. And I mean, are you generally assuming a pretty meaningful decline as you go throughout the year? Or is it just kind of more conservative in general?

I'll start. This is Christian. Our guidance is [FX neutral], while the organic growth rate that we show for the fourth quarter and the full year has FX changes embedded into it. So if you take the FX out of the 11%, it's about 2.5 basis points of that is FX, so the delta of [0.9%] is both volume and price increase related. The same is true for the quarter -- fourth quarter FX impact was about 200 basis points. If you take that out, it gets you the volume and price impact that we had in the fourth quarter in our growth rate.

So we give guidance which is FX neutral, because we don't want to take the position where exchange rates are going to be at 12 months from now.

Carl, you want to add something?

I think we've consistently said also that we think we can be 1.5, 2 times GDP with our base growth rate. And I think the numbers that we put out there are consistent with that, with where the GDP projections are.

Jeff Hammond, KeyBanc Capital.

Just I guess as a follow-on to that, can you just clarify what you're projecting for organic growth in '08? Because I'm coming up with a different number than what was suggested earlier by the previous caller. And just maybe give us a little more granularity on January/February order trends vis-a-vis -- I think you said fourth quarter being up 15%?

Yes, Jeff, good question. We show on a GAAP basis sales for '07 of $584 million. If you adjust that number for the fact that we owned TB Wood's for only a partial of the year, so you've got to add one quarter of TB Wood's sales to that number. And also take into consideration that [we may be off our] acquisition last year, your adjusted starting point is about $612 million, $613 million. You've then developed a growth rate of that number that gives you at the low end a growth rate of about 2.8% and at the high end of a range, just over 5% organic growth.

Okay. And then what was the order growth rate in January/February -- order of magnitude?

If you have other questions, continue and then we'll look that number up, okay?

If you could just talk about -- in '07, net of the moving cases with the Drives divestiture and as you look at '08, how should we think about TB Wood's accretion in '07 and then incremental earnings accretion in '08?

When we look at TB Wood's, we think we're going to get another $0.10 to $0.15 a share benefit based on the acquisition. That's a combination of two things -- one is the fact that we owned TB Wood's for only a partial of the year in '07. And the remaining synergies that are not reflected, all of which are not reflected in the '07 number.

You've also got to keep in mind when you look at our '08 guidance, that we have a significant increase in the diluted shares outstanding, which I think -- you've got to make a starting point adjustment to take into effect that '07 shares would increase by over 2 million shares. I think that's about a 6% adjustment that you may make to the starting point. That leaves you somewhere at the midpoint of our range at $1.28 -- somewhere around sort of $0.16, in that neighborhood, of operational improvement and the benefit of the incremental leverage.

Okay. So to get to the midpoint, you've got $0.10 to $0.15 of accretion from TB Wood's and then $0.16 from operational improvement?

Yes. A negative $0.06, thereabout, based of the additional dilution because of the increase in the diluted shares outstanding. We also have agreed with Vacon on a transition service agreement. We also will have interest income due to the proceeds from the divestiture. That is about $0.04 a share.

If you go back to your question about bookings, if you look in January and February together, they're up about a little bit north of 8% compared to last year. And that's why we've said if we continue to see those kind of things, the high side of the guidance looks good. But if we weren't commenting on the low side, we'd look like we had our heads in the sand.

Right, exactly. The tax rate for the fourth quarter -- the $0.22, what was the tax rate embedded in the $0.22? Because I think you gave a 47% tax rate?

For the full year, the tax rate embedded in the $0.22 is almost 38% for the full year. For the quarter, the tax rate was 47.

Okay, so to get to the $0.22, you had a 47% tax rate?

In the fourth quarter. For the full year -- the $0.22 is a full year number, so 38% -- 37.9% was the tax rate for the full year.

Okay. I understand.

And that was, as I mentioned, impacted by particularly two discrete items in the fourth quarter that drove that annual tax rate up to 37%. I think if you would take those items out, the tax rate would have been 35% for the full year.

Bob Schenosky, Jefferies.

So many of my questions have been answered, but I just have a couple of follow-ups here. Do you have a sense at all, in terms of new private growth within that 2008 estimate?

Yes, we're in the -- probably in the 10% to 12% range.

Of year-over-year new products?

Well, the way we categorize a new product is something developed within the last three years.

Okay. So some of it's further penetration, not simply new products, then?

Correct. For sure.

Terrific. The second one would be, do you have an additional cost target that's incremental over that 5.7% you realized in '07?

Yes, we do. We have -- this year we have a projection in the 4% to 5% range.

Okay. And what are the near-term goals for debt reduction, say within the first half of the year?

Right now we are increasing our cash position. As we've mentioned on prior calls, the 9% notes that we have, have a pre-payment penalty attached to them, which is currently 109 -- we can buy them back at 109. That would be cut in half in December of this calendar year to 4.5. So our short term plan is to continue to pile up cash. We will probably make a decision as to how we are going to use that cash balance within the next two to three months. Whether we're going to try and buy back some of the bonds, we'll make that decision in -- over the next two or three months.

We're aggressively trying to get -- I think it's $7.8 million of the pound/sterling bonds that our left. That's our first priority, to get those out. And then we'll continue to look going forward, as Christian said, over the next quarter.

Great. Yes, I was targeting the $7.8 million. Yes.

The $7.8 million -- we don't have a willing seller at this point. There's three noteholders. We have approached all three of them over the last few weeks. Unfortunately, at this point, we do not have a willing seller. That may change. We hope that will change and that we can buy those back.

Okay. Very good. And then, finally, you mentioned several strong markets as you've entered into 2008. Do you have any concern in any of those specific markets that those might be peaking in 2008?

Carl, I guess you and I can talk about this together. I would say that in the fourth quarter we were a little concerned on the energy side, but it's strengthened back significantly.

Yes, we've seen a big bounce back [in that].

And a combination -- and we have enjoyed in the past some business that relates to the Humvee and armored vehicles. And we have just gotten the orders for the first half of the year for those, so we feel pretty good about those. I don't know whether you'd add some other comments or not.

I think a lot of the markets that we're in seem to have some very good long-term prospects. I guess the one that might concern me if there's a general economic downturn might be the metals market and what the demand for metals might be out there. But the majority of them seem to have some pretty good long-term dynamics to them.

And on the plus side of that, Bob, with the All Power acquisition, we've got a stronger position in China and getting some projects out of China.

We've seen some very good projects there.

Excellent. Thanks for taking my questions.

Alan Ware, Pike Place Capital.

It's a simple question. On the slide and the presentation, the CapEx is $16 million to $19 million? Then in the press release, it says it's in line with the CapEx. In the press release it says it's $21 million to $23 million. Which one is correct?

$21 million to $23 million. One is depreciation, the other is depreciation and amortization.

He said CapEx.

Yes, capital expenditures, yes.

Sorry. CapEx is $16 million to $19 million is the CapEx number.

Okay. Just to let you guys know. I mean, the press release it says CapEx is $21 million to $23 million. And then the next line says depreciation and amortization is the same -- $21 million to $23 million. Just to let you know.

Thank you very much. We apologize for the error. But the numbers I gave are correct.

Okay. And then to stay with the CapEx, Carl, you mentioned the investment in new equipment. You assumed a good transition that you are spending money there. Can you tell what exactly are you doing there and how much of the CapEx is there?

Yes. In that project, we'll have about $4 million to $5 million of CapEx over the next year and one-half. And some of that is related to a small expansion we'll do on the facility down there. And the new equipment, specifically to the new equipment, some of that we would have been done -- probably about half of it would have been done anyway. The other half is some CNC controlled machinery where we've used manual machinery in the past that requires skilled operators to set up. So we've got some operators in our Pennsylvania facility that have been there for 20, 30 years. And we're trying to put in CNC controlled equipment where we can make it much easier to set up.

What's CNC, sorry?

Computer numerical controlled.

Okay.

To offset some of that CapEx, we have facilities that are on the market to sell that are redundant facilities. So that will offset some of the CapEx.

Okay. Can you tell us what the cash tax rate will be for the year?

For '08?

Yes.

We're working with a 36% tax rate. We think cash taxes will be about -- I can give it to you in dollars -- we think that cash taxes will be about $5 million less than what the tax rate implies.

Okay. Can you kind of walk us through what the range of the free cash flow is going to look like with those assumptions? We have CapEx and we have the cash tax number. Is there anything else in there that we should be looking at when we're trying to come up with the -- get from the EBITDA to the free cash flow for the year?

We think that we can deliver a positive working capital change, that not only can we absorb the additional working capital required by the sales increase, but that we can improve our turns, special inventory turns, which should offset that requirement.

Do you guys have a target for that over a longer period of time? And where are they now and where would you like them to be?

Right now, working capital, what I call operating working capital, which is receivables, inventory and accounts payable, is about 22% of sales. We think we should be able to get it down to 18%, let's say, over the next 24 months; mainly driven by improved inventory turns.

My last question has to do with the restructuring charge. Can you give us more color on the breakout of the $4.5 million?

There is really two pieces inside of that. $2.7 million of that number is related to a procurement charge relative to both medical benefits -- post-retirement medical benefits and pension benefits related to the shutdown of our Eerie facility. The union contract there required us to adjust the benefits that were due to the union employees. And then the balance is severance and moving expenses, things of that nature, regarding the shutdown. That's about $1.2 million, $1.3 million.

Okay. That's all I have. Thank you very much.

Jon Braatz, Kansas City Capital.

Good morning, gentlemen. My question was just answered -- asked and answered, I should say. Thank you very much.

Jordan Hollander, Jefferies & Company.

I just had a follow-up question on the debt reduction question asked earlier. If you guys are unable to buy back the $7.8 million of the [11.25] notes, do you have any interest in buying back some of the 9% notes on the open market now that bonds are trading below par?

We are examining that and we would probably have some interest if we cannot get the 11 percent's back.

Okay, got you. And just one other clean-up question. Earlier, you had given an adjusted EBITDA number of $90.7 million for the year. Is that pro forma for the TB Wood's acquisition at the start of the year or that -- it just includes it from the time you owned?

That includes an adjustment, including the first quarter where we did not own TB Wood's.

So it's not pro forma for the acquisition?

It is pro forma for the acquisition.

It is. Okay.

Sorry.

Okay. Great, guys. That's it. Thanks a lot.

James Gentile, Newland.

Actually in the quarter, I think the PR was a little bit mixed up in the morning, it always sets the stage. But if I were to work through your free cash flow calculations and I actually had the higher CapEx number. It actually gets a little bit more attractive. The order of magnitude that you're able to basically reduce operating working capital by 4 percentage points over 24 months would articulate a near $50 million free cash flow number, all else equal, which would imply a reasonably sizable free cash flow yield. What am I missing?

I think we're thinking about -- that we are able to improve our inventory turns. And when we do the math, we think that would provide an additional $20 million over that period of time in free cash flow.

Right. So you're looking at kind of a core two year free cash flow number at a minimum of around 40 and a maximum around $60 million. Does your guidance include in the press release -- does it include any debt repayment prior to the [12/1] pre-payment penalty getting cut in half?

The guidance does assume that we continue to invest the cash versus paying down debt.

Right. So we should assume then --

There is no arbitrage in that guidance.

Right. Definitely. So what it comes down to is that while your balance sheet seems reasonably appropriate [lever], given your cash flow, there is no incremental expense savings baked into the numbers at this point.

Correct.

And it doesn't include either the call back would be 11.25%, since you're not finding a willing seller yet?

Correct.

Okay. With regard to gross margin, I think, Carl, you mentioned through Altra Business System and low cost country sourcing that gross margins can improve from here. Could you give us an order of magnitude of what you include in a gross margin range in your guidance? Or Christian?

Yes. We're in the range of 29 to 29.5.

Right. That's still reasonably -- that's still a little light compared to what you put up in the Q4 period. So, we are looking for over 29% gross margins in 2008?

I think what we are showing in Q4 is -- what, at 28.5% on a recurring basis. And so we're thinking we can do better next year by somewhere between 50 and 80 basis points.

And while we've been consistent, James, in saying that we think we can improve the operating margins a point a year. And I think what we've got laid out there is consistent with that.

Excellent. And then the $584 million for the full year in terms of sales completely excludes the Drives business divested in the quarter?

Right. You have to add $28.7 million back.

You have to add $28.7 million back to the $584 million?

Yes. Christian, right?

Right. And what I mentioned earlier is that an adjusted start point for '07 is really $612 million to $613 million. So if you take out -- you've got to add back one-quarter of TB Wood's; add back the All Power sales. So you get to a pro forma number of about $612 million, $613 million as your adjusted start point.

And could you comment on any sort of M&A strategy that's the cornerstone of Altra's feature growth -- one of the legs of your future growth story? Anything out there that seems particularly attractive? I mean, you have the cash and the wherewithal to pull it off.

Well, we are all being very conservative right now. We have, as we've said in the past calls, we continue to look at up to 100 opportunities in this fragmented market. We've segmented that down to less than 20 real good targets. And we continue to look at the right things, both in Europe, the U.S., and around the world. But as I sit here today, we are going to apply cash to -- we are going to work on getting our net debt to EBITDA down until something absolutely compelling comes along.

Great. Excellent. Excellent -- good job executing on your strategies.

Andrea Wirth, Robert Baird.

Just a couple of follow-ups. Just curious what the growth rate was in North America? It sounded like Europe was up 20, Asia was up 25%. Just wondering what you're seeing in North America?

North America is in about the 9% to 10% range and --

Okay. And then I don't know if you ended up giving out the number or not, but January and February growth rates in the orders, what were those roughly?

We said January and February combined I think we said was a little north of 8%.

8%? Okay. Well, and then I guess, just continuing on that, you had essentially said in order to hit the high end of the revenue range, you need to continue at these levels; the 8% growth rate obviously is above the 5% rate. I guess, wondering if you can just tie the two together?

You figured that out? There's some conservatism in our guidance, even at the top end. So that's -- we just want to make sure we deliver what we said we're going to deliver, Andrea.

Sure. No, fair enough. And then just curious on price increases. Obviously, you had steel do a pretty significant run-up recently. I guess where are you in price increases? I know you usually put some in annually, but just curious if you can give us an update there and if there's any additional ones that need to go through?

On average, we're looking at probably a 3% -- 3% to 4% on material increases. We've seen north of that coming out of China with the -- everybody's seen it -- with the press come out of China, both for the exchange rate and the commodity increases there. So blended, it's in the 3% to 4% range.

Okay. And is that --

Just to elaborate on Mike's -- on the 8% we've seen so far, if we do see a reduction in the economy, even to get to our low side of the guidance, we have to have some growth. So I think, you know, you blend it all together.

Okay. So that 3 to 4 points is included in your guidance? That's with the price increase?

Yes, with the price increases, yes.

Okay. And if you could just (multiple speakers) --

No, let's clarify that. Carl was talking about cost increases. Our price increases, we have a price increase that has been announced. It goes into effect in our North American distribution channel in March.

April 1.

It was announced April 1. So what we've got baked in there this year for (multiple speakers) --

150 basis points to 200 basis points in terms of price increase.

Okay, got it. Let's see. And then I guess just on some of your key markets, wondering if you can just give us some of the more specific growth rates you've seen in markets such as mining, forklifts, elevators, energy, and just kind of give us a rundown of more specific growth rates in those markets. I know you said they were strong. I just want to kind of zero in a little bit on what you've been seeing.

Yes, if you hold on just a second, I can run down some of that. In '07, our elevator business was up north of 50%, actually. So it was a very good growth market for us. Motion control was north of the 25 I mentioned. Energy was relatively flat, just up single digits but at the -- in January and February, we've seen a resurgence there. I think we talked about the natural gas drilling operations being slow in '07 but we've seen an uptick there. So, forklifts, Turf and Garden, they were in the mid-teens kind of range for last year over '06.

Okay, great. And then just a last question on TB Wood's. You may have already said this, but you got about $7.5 million in savings already, what's the plan for '08? Is there additional savings you can get above and beyond that?

I'm sorry. For --?

For TB Wood's.

For TB Wood's? Yes. We achieved about $5 million in '07 and on an annualized basis, that was about -- that's about 7.5, so we'll get 2.5. Now, the bulk of the savings that we still have yet to get above the 7.5 would be the consolidation, which we are implementing now. And we probably won't see significant savings from that until '09.

'09? And what do you think that savings range would be?

That will be in the $2 million to $2.5 million range.

$2 million to $2.5 million, okay. Great. Thanks. Great quarter, guys.

[Rafe Leiman], Eaton Vance.

Thanks for taking my call. You've mentioned working to get the net debt to EBITDA ratio down. Could you just talk a little bit about what your target is for that metric and over what timeframe?

We have said in the road shows over and over again that, depending on economic conditions and a lot of other things, we're comfortable with 2.5 to 3. And absent any acquisitions or anything, we'll continue to try to move that down to 2.5.

It appears that we have no further questions at this time. Oh -- our next question comes from Alan Ware with Pike Place Capital.

I'm sorry, I didn't hear it earlier, was the material price increase you said 3% to 4%? Then the price increase in April was going to be -- what was it?

I think we're going to implement price increases -- in the budget is on -- the guidance assumes price increases somewhere between 150 and 200 basis points. What Carl was describing was 3% or 4% price increases in certain areas of our material --

I thought Andrea had asked about the raw material price increases that we were seeing. And we have planned -- we built into our plan a 3% to 4% cost increase.

Okay, I understand that now. Okay, thank you.

It appears we have no further questions at this time.

Okay. Well, we thank everyone for calling in and listening. I hope we've clarified a lot of the things with the discontinued business, which was the divestiture of the electronics business. We think that was a great decision going forward to redeploy that capital. And we look forward to talking to you next quarter. And as always, you can reach us here for an individual discussion here in North Quincy. Thank you.