Altra Industrial Motion Corp (AIMC) 2016 Q3 法說會逐字稿

Greetings and welcome to the Altra Industrial Motion third-quarter 2016 financial results call. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. David Calusdian. Thank you. You may begin.

Thank you, and good morning, everyone, and welcome to the call. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch. To help you follow management's discussion on this call, they will be referencing slides that are posted to the altramotion.com website under events and presentations in the investor relations section. Please turn to slide 1.

During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ significantly from management's expectations. Please refer to the risks, uncertainties, and other factors described in the Company's quarterly reports on Form 10-Q and annual report on Form 10-K, and in the Company's other filings with the US Securities and Exchange Commission.

Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

On today's call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP gross margin, and non-GAAP free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures, and any other items that management believes should be excluded when reviewing continuing operations.

The reconciliations of Altra's non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q3 2016 financial results press release on Altra's website.

I'll now turn the call over to Altra CEO, Carl Christenson.

Thank you, David, and good morning, everyone. Please turn to slide 2. By now, I'm sure you've seen that -- you've all seen the announcement this morning regarding our intent to acquire the Stromag business of GKN. This deal brings complementary products and markets and geographies, and we expect it to be accretive in the first 12 months of combined operations. I'll provide more background on Stromag after we review the results for the quarter.

Our third-quarter performance was in line with our expectations. Economic conditions in many of our end markets continue to be challenging. Gross profit as a percentage of sales increased 80 basis points despite a 5% decrease in sales.

Right now, we still do not see any catalyst that will change the industrial economy. As these macro conditions persist, we are executing well on our programs to improve Altra's long-term operating performance, including our consolidation, supply chain, and operational excellence initiatives.

During the quarter, we completed another plant closure and expect an additional closure in the current fourth quarter. This brings us to a total of seven consolidated facilities by year end. We expect a small facility closure in the first quarter of 2017. We are also evaluating closing one or two additional facilities during the remainder of 2017.

Our goal of developing a world-class supply chain management organization is also proceeding well. During the quarter, we completed staffing for this effort. Through these programs, we are controlling what we can control, and are looking forward to achieving much greater operating leverage in our business model when our out-of-favor markets rebound.

With that, let's turn to slide 3 and review our end markets. We'll begin with distribution, which is predominantly made up of sales of aftermarket parts and original equipment parts for small OEMs. Distribution was down significantly, and we continue to see relative weakness going forward.

In turf and garden, sales were down from last year. We are having a very good year, but not quite at the level we experienced in 2015. We expect that 2017 will be similar to this year. Farm and agriculture sales were up from last year, but continue to be weak, and we are not seeing any catalyst that will change the demand environment significantly. Low commodity prices and a relatively young fleet continue to result in soft ag equipment purchases.

In transportation, sales to automotive -- sales to the automotive industry were reasonably strong, while rail and marine continue to be weak. Rail and marine have not declined any further from recent quarters but have not yet begun to rebound.

Materials handling was up year-over-year, driven by moderate increases in elevator sales and forklifts. Conveyors were flat, as the strength in the US dollar and weak mining segment continue to hinder sales. With the acquisition of Stromag, we'll be adding to our sales into the cranes and hoists segment of this market.

Turning to energy, energy overall was down from a year ago, reflecting a significantly weaker oil and gas market from Q3 2015. While oil and gas shipments were down, order rates were up, which gives us hope that we have possibly hit the bottom. In addition, the recent OPEC decision and higher oil price are encouraging.

Power generation is down year-over-year compared to a very strong year last year. We expect to see continued relative weakness in this part of the market.

Renewables continued to be strong globally. Although we saw weakness in China this quarter, all indications are that the wind market in China will recover and will be strong in 2017.

The metals market remains weak, and we expect the overcapacity in China and global pricing will affect this market for the near-term. However, we believe that the US tariffs on Chinese steel that were approved in May will have a positive effect on the market next year. While shipments were down significantly from a year ago, we have seen an improvement in orders.

Mining sales were down; but like oil and gas, order rates have improved, so we are hopeful sales into this market will stabilize.

Now I will turn the call over to Christian to review the numbers before discussing our recent acquisition of Stromag. Christian?

Thank you, Carl, and good morning, everyone. Please turn to slide 4. As Carl mentioned, at the outset, we continue to perform well operationally in a very challenging economic environment. This performance drove an 80 basis points improvement in gross margin despite a 5% decrease in sales. We are executing well on our programs to improve long-term operating performance, including the consolidations, supply chain, and operational excellence initiatives.

For the third quarter of 2016, GAAP diluted EPS was $0.20 per share versus $0.39 a year ago, and non-GAAP diluted EPS was $0.35 a share compared to $0.43 a year ago. Restructuring and consolidation cost, as well as acquisition-related costs, are the main reconciling items.

In addition to the lower sales volume, warranty-related expenses of $800,000 or $0.02 per share contributed to the lower EPS.

Looking at the top line, foreign exchange rates had a negative impact of approximately 150 basis points, driven by continued strength in the US dollar. Volume declined 4.7%, while our strategic pricing initiative added 80 basis points. Net of foreign exchange, sales declined 3.9% year-over-year.

Geographically, excluding the effect of foreign exchange, North American revenues declined 8% year-over-year; European revenues were up 7%; and sales to Asia-Pacific and other geographies were down 12%.

During the quarter, the average price of the Company's common stock exceeded the current per-share conversion price of our convertible notes. As a result, the notes were dilutive to earnings by less than $0.01.

We reported a tax rate of 29.2% during the quarter, which was up from 21.7% a year ago. The prior year was positively impacted by a one-time tax benefit related to a foreign tax credit.

Please turn to slide 5 for a discussion of our segment performance. Please note that segment results are not adjusted for one-time items.

For the third quarter of 2016, net sales in couplings, clutches, and brakes were $77.4 million, down 9.8% when compared with the prior year. This segment has Altra's highest exposure to oil and gas, metals and mining. Segment operating income was $6.6 million, down from $8.9 million a year ago.

Net sales in the electromagnetic clutches and brakes segment were $50.7 million, up from $50.4 million in the third quarter of 2015. The segment is benefiting from Altra's facility consolidation, procurement efforts; as a result, segment operating income increased 38% to $6.6 million or 13% of segment sales.

Finally, net sales in the gearing segment were $47 million compared with $48.8 million in the year-ago quarter. Segment operating income decreased to $5.7 million from $6.2 million a year ago. Segment operating income is now 12.1% of sales compared to 12.7% a year ago.

Please turn to slide 6. Our balance sheet remains strong. Book equity was $251 million, and our cash balance was $39.8 million. We used our cash flow to pay down $28 million in debt since the beginning of the year. During the quarter we repurchased 5,461 shares of Altra stock -- as we favor debt paydown over share repurchases -- for total of about $300,000 under our prior $50 million stock buyback. Since that program's inception we have repurchased approximately $39.5 million or 1.4 million shares of Altra common stock.

As announced this morning, our Board of Directors approved a new share repurchase program authorizing the buyback of up to $30 million of our common stock through December 2019. This replaces the previous share repurchase program, which has been terminated.

Capital investments totaled $4.8 million for the quarter, well below our depreciation and amortization for the quarter of $7.9 million.

Please turn to slide 7 and our guidance for 2016. We are narrowing our previous annual revenue and EPS guidance, and expect full-year 2016 sales in the range of $705 million to $715 million. We expect diluted EPS in the range of $1.25 to $1.30, and non-GAAP diluted EPS in the range of $1.45 to $1.50.

We expect the tax rate for the full year to be approximately 29% to 31%, and continue to expect capital expenditures in the range of $20 million to $24 million, and depreciation and amortization in the range of $30 million to $32 million.

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

Thank you, Christian. Please turn to slide 8. As I described in some detail earlier, our business simplification plan remains on track.

Please turn to slide 9. As we noted in our news release this morning, we intend to acquire Stromag -- a Germany-based maker of hydraulic clutches, electromagnetic clutches and brakes, limit switches and flexible couplings -- for EUR184 million in cash, and we will assume EUR14 million of debt. Stromag is a leading brand name in our industry and the company generated approximately EUR131 million of revenue in 2015.

We plan to finance the deal with our recently announced expanded credit facility. The acquisition is anticipated to be accretive to Altra's earnings in 2017, excluding any one-time or acquisition-related costs. We are very excited about this acquisition, which we believe provides us with a number of compelling sales and costs synergies. We expect to achieve EUR5 million to EUR7 million of synergies in 3 to 4 years.

Finally, we expect to close the transaction in the first-quarter 2017, subject to customary anti-trust approval.

Now please turn to slide 10. Stromag has a very strong brand; and, like Altra, is a market-leading engineer of electromechanical power transmission and motion control components for a huge variety of industrial applications. Stromag is headquartered in Germany with manufacturing locations in Germany, France, the UK, the US, China, Brazil, and India. The company has a strong technology base and a sharp focus on providing tailored solutions for its customers with its primary products being clutches, breaks, couplings, and limit switches.

With these complementary products, we expect to be able to cross-sell using our own salesforce and, in turn, the Stromag salesforce will be selling some of Altra's product to their customer base. Stromag also brings with it a very experienced management team and highly skilled associates. We are excited to welcome the company's 750 employees to Altra.

Now please turn to slide 11. Stromag provides us extremely complementary products, and will expand our presence in the crane and hoist and marine markets. Stromag also enables us to penetrate the agricultural equipment, construction, renewable energy, and the metal processing markets. Stromag has very little exposure to the oil and gas and mining markets.

Stromag will expand our geographic presence. Stromag currently generates about 75% of its revenues in Europe, where they are headquartered in Germany and have operations in Germany and France. The remaining 25% of revenue comes primarily from the US, India, China, and Brazil. We are particularly excited about the potential to leverage the India facility as a launching pad to increase Altra's sales presence in that market.

We also see an excellent opportunity to leverage costs synergies through the application of our operational excellence and procurement programs.

Now please turn to slide 12. We plan to finance the acquisition with our expanded credit facility. This amended credit facility will have an expanded multi-currency feature which will enable us to finance a substantial portion of the transaction in euros. Furthermore, we expect the leverage ratio to be just under 3.5 times.

In summary, we expect Stromag to be an accretive acquisition that will provide Altra with complementary products, greater presence in key geographies, and penetration into new growth end markets.

Thank you for your continued support of Altra, and we'll now open the call to your questions.

Operator?

(Operator Instructions) Jeff Hammond, KeyBanc Capital Markets.

Congrats on this big deal.

Thanks. Jeff. We are really excited about it.

Absolutely. Can you give us a better sense of what their EBITDA margin runway is? And then how to think about, with the new financing, what the interest costs implied in the deal; and then just talk about whether this was an auction or privately negotiated?

I'll start with the last part of it, and then Christian can fill you in on the numbers, but this was a privately negotiated transaction. This is a great company for us. It's very similar to what we do today. We've known the company for a long, long time. And this was -- fortunately, we were able to do this on a private basis.

And Jeff, you know the slides that you see on our website, on page 16 in the appendix, we included a reconciliation of the last-12-month EBITDA for Altra, an adjusted EBITDA calculation. And we include an estimate for the Stromag business. Stromag is a carve-out; and, therefore, there are no audited financial statements available.

So this estimate is based on our due diligence results. And we estimate that the last-12-month EBITDA was around $22.6 million which would then translate to roughly a 15% to 16% EBITDA.

Okay, and then debt cost on the financing?

The new facility will only take effect should the closing conditions be met. If the closing conditions are not met, the old or current facility will remain in place. We certainly assume that this transaction will close and, upon closing, the pricing grid is unchanged. But since our leverage is going up, our spread will be 200 basis points. And for the euro portion of the financing, the euro LIBOR is zero so it's 200 basis points. And for any US dollar portion, it's LIBOR plus 200 basis points.

The majority of it we are going to do in euros because the business is there, so it's great. We're going to have euro debt, euro income. So we are excited about it.

Okay. And then just moving to the base, can you just put a little more context around the term, stronger orders in oil and gas? And then just how sustainable you feel the mining and oil and gas positive orders are?

You put me on the spot there, Jeff. So in mining and in oil and gas, we've seen an uptick in orders. It's been primarily replacement parts, but we've also seen the rig counts come up. I think the rig counts now are 520, the land-based in the US. And so we are seeing rig counts come up. OPEC seems to be getting their act together a little bit. So it feels like we may have hit the bottom in oil.

And then I'd say the same thing in mining. The incoming order rate has ticked up a little bit and we have actually seen some project work in some of the mines, some of the global mines. So, I'm not optimistic that things are going to come rip-roaring back, but certainly stabilize.

Okay. Thanks, guys.

Matt Duncan, Stephens Inc.

This is Will on the call for Matt. A couple more on the quarter for me to start with. Can you talk about the trend from July through the end of the quarter, and how October is performing so far?

So I guess if you look at the US, Christian mentioned it -- the sales were down quarter over quarter. And I think that was reflected in the order book and the -- particularly in the distribution business, our incoming order rate from July through recently has been fairly weak. But as I (technical difficulty) in some of the key end markets, oil and gas and mining, we've seen a little bit of an improvement in order trends. So it depends on which end market you are in.

And so the steel business, the orders have gotten a little bit better. Oil and gas has gotten a little bit better. Mining has gotten a little bit better where distribution has gotten weaker.

We've also seen an improvement, and Christian mentioned, in Europe. Europe has gotten a little bit better, and we are starting to see some project work there, too, which is encouraging. Asia is weak. The incoming order trends there has probably been declining. And the one area that we noticed significant decline was in the wind business in China. However, we think that is short-term. The feedback we get from customers is that things will improve in that market. So it's a mixed bag.

And if I can add, distribution is a big piece of our business. And when we look at monthly order rates, it's extremely choppy. And we have a month where it's up, and then you get a month where it's down, and it doesn't indicate a clear trend on where things are heading.

And on the distribution piece, what are you seeing -- what has changed over the last few months or I guess through 2016 that's really driving the significant year-over-year decline that you announced? Is there anything called out, or is it general softness we've been seeing across (technical difficulty)?

I think it's -- so there are some end markets that are probably weak for some distributors because the major multi-branch distributors, the orders are not down as much as for some of the smaller, nichey players. And some of the smaller, nichey players have positions with small OEMs. And so it seems like it's isolated to the smaller, nichey distributors. The big distributors are down, but just not as much as the smaller distributors.

We don't believe it's inventory. Inventory is flat. So we believe it's incoming order rates at the distributors that are down, and I don't think we can point to a particular industry. I think this is more a broad-based, industrial weakness that's reflected in the distribution order rates.

Yes, that's true.

Okay, great. And then moving over to the acquisition, can you talk a little bit more -- I know you mentioned the cross-selling opportunity in their product offering. Can you kind of go back over that and discuss what they are stronger in, where they are the strongest, and how that's going to complement you (technical difficulty) again one more time for me?

Yes. So there's some nice new products for us. There's limit switches which are used in cranes and hoists, and there are custom-designed switches for the particular application; cranes and hoists, and then wind turbines in some markets where we already are. And if you look at the presence that they have in North America and some of the rest of the world compared to Europe, we think we can expand sales of some of their products into other geographies where we are stronger. And, likewise, they have great presence at some really good customers in Europe and can take some of our products there.

Another product we are excited about is elastomeric coupling. They call it a torsionally soft coupling. It's used in engine drives. And it's a product that we haven't had that we've wanted to get into our product offering. It's complementary at some customers where we are that we don't have that position.

So we think that's a great addition for us. So it's lots of small base hits. There is no big home run that we say, this is going to be the be-all to end-all. But there's lots of really good base hits in this combination.

Awesome. Congratulations, guys.

Scott Graham, BMO Capital Markets.

Congratulations on the acquisition. The acquisition is embedded in the GKN financials, so you kind of can see the historical. But the entire division was down a heck of a lot the last couple of years because of the exposure to mining, ag, and heavier construction. It does seem that Stromag has a little bit better end markets.

But I guess I am wondering about how you come up with this $23 million of EBITDA which would imply a far better margin than the rest of GKN. Christian, I was just hoping you could help us out with that. Are there adjustments in that number? Is that business much higher-margin than the rest of the fleet within that GKN segment?

Scott, this was a business that kind of is in our space which has, I think, better margins than some of the pieces that were in the GKN land systems. And they bought this business back in 2011, with a strategy to expand more into these type components. And I don't want to speak for them, but I think they've rethought that strategy. But this was really the first acquisition they made in a little bit higher-margin product range to combine into that space.

And then I think since then, I think even publicly they've stated that they are going to focus more on automotive and aerospace. And so this was a -- what I perceive as a little jewel sitting inside the -- that business that really didn't fit with them. So I think it was good for both companies where it's a good, great home for the company to come with us. And I think it helps GKN focus more on the markets that they want to focus on.

And if I can add to that, the rest of GKN businesses is -- there's a big ag piece in there in land systems. And so, these are large customers, high-volume type of products, as opposed to Stromag's portfolio which is closer to our portfolio, in terms of engineered solutions for individual customers with low or medium volume. Maybe with the exception of some of the renewable energy pieces that they have. So that tends to have a higher-margin profile.

As is to the performance, our due diligence results show that the business in 2016 is performing at the top line about flat compared to 2015 which we look at as a very positive, given the challenging end markets. And if you compare it to Altra, it went down 5% to 9%. I think they've done a very nice job in mitigating some of this industrial weakness. And there's a big benefit that they don't have the oil and gas and mining exposure, as Carl mentioned in his dialogue, that we have.

That makes perfect sense, particularly the part that you said about that they are focusing -- they bought the business as a higher-margin business several years ago. Obviously I wasn't aware of that. But that's great information. Thank you both.

On these synergies, last question. You know, the midpoint, call it, $6 million looks like about 4% on the revenue line, which is a good number. But this is very highly synergistic product lines and similar end markets. And in Europe, where cost structures are little bit higher than here in the US, so and you are saying it's $6 million over 3 to 4 years. Is there perhaps some conservatism baked into that number? Is it -- are you concerned about the works council result, anything?

So let me -- on the synergies, the -- in the early phase of this acquisition, we will be able to move production in Brazil, in China, and in the US, from GKN facilities into our facilities. We estimate that that alone could account for $1.5 million to $2 million in synergies. And those are, I think, synergies that are real. We can touch and feel them. We're going to get there fairly quickly. The sales synergies, as Carl always says, take longer, and --.

So we don't probably take -- we probably don't publish as much as we have internally on the sales synergies, because our experience is they usually take twice as long as the teams think they will. And you get them; it just takes a little longer. So I don't like to go out and promise big sales synergies, right out of the box.

So you're $5 million to $7 million is -- the vast majority is cost.

Certainly in the early years, the majority is cost.

Okay, thank you both.

Mike Halloran, Robert W. Baird.

So, any change in the pricing side of things?

No. It's still a struggle out there to get any prices. But with the strategic pricing initiative we have, we are still working the analytics and getting it where we can. I think the number is fairly similar, Christian, to where it was in the last couple of quarters. But it's primarily strategic pricing.

Makes sense. And then kind of at a high level here, we've had a challenging backdrop for a couple of years now. And I know you guys were hoping things might show signs of improvement as you worked through the year here. Obviously over the last couple of quarters you've been pretty clear it hasn't materialized.

So some thoughts as we get into 2017 about what could be a catalyst out there and what you're looking at, to see if things could start changing? I know you already mentioned rig count moving a little higher; maybe some bottoming on the ag and the oil and gas side. But maybe just more of a high-level discussion on what the change [here] could be?

We don't have high expectations for next year. We think that the growth is going to be fairly modest. We are going to continue to work our improvement initiatives internally. But with that said, I think when we look at market by market and get -- we have several sources that we use to see what's going on -- it does appear that there's probably a little bit more up than down on average. So, it may be a little bit better environment but not markedly better.

I think some of the catalysts are going to have to be a little bit of a turnaround in Asia and have some expansion there. And then, so the North American end markets, which were surprisingly, this year, weaker than we had thought they would be. So we need to see a little bit of an improvement here.

Thanks, guys. Appreciate it.

John Franzreb, Sidoti.

Could you just address the end markets in Stromag and why you found such markets as cranes and off-highway so appealing, and maybe so difficult for you to break in that you wanted to actually go out and acquire into the marketplace?

I think the cranes and hoist business is a growth market. We have very little presence there, and we have some great products that could be sold into there. So we think it's a place that we can expand, now that we have some references. You know, John, that in this business, without references and existing customer applications, it's really difficult to break into some of the markets. So, it is primarily that.

And then we have a good presence in agricultural equipment here in North America, and some construction equipment applications. But in Europe, we didn't. So we think that our expertise here can help us there with some introduction, some references.

And can you just talk about the opportunity in India? It seems like all of you were pretty excited about that also in your opening statements.

It's a small business they have there. However, we've -- we think that that's a developing market that's important for us to participate in; and we do, in some isolated applications in some markets. We have some license agreements, and we have some joint ventures that we work on there, and we have some direct sales there.

One market in particular is the wind business where we have some customers asking us to do more, and were asking us to get local and to make some of the product locally. So having a facility there gives us the instant ability to start to produce wind turbine breaks there for some customers.

And then we think we can expand that into some other businesses that -- where we think our technology can be used, and we can gain some position. So it's not big, and it's not going to be huge. But I am excited that we finally have a way to do it. We've been trying for five or six years to figure out how to get there, and now we have a way.

Okay, great. My other questions are answered. Thank you.

(technical difficulty) Bohra, Jefferies.

This is Bhupender here from Jefferies. So on the Stromag acquisition here, if I see some GKN public -- the release when they acquired this business in 2011, the business used to be like $140 million in sales. And EBITDA margins, at that point in time, they mentioned was about 17% for the business; on sales, the numbers which you have said. So they haven't been able to grow this business over the last -- since 2011. The sales are like 6% down since they acquired.

What is exciting about this business? Christian mentioned about like 75% of the business is in Europe. And this is mostly -- I think you guys talked about kind of a low to medium volume in your engineered solution business. So if you can give us a sense of whether the customers from this particular business are like more capital-intensive or how much -- or would that be more towards like aftermarket diluton?

I think if you look at 2011 to today, the whole general industrial economy from -- globally has been extremely challenged. And I think if you look at -- we peaked out at $820 million. We are down $100 million in sales from where we were, and we had a higher exposure to oil and gas and mining. So, yes, it hasn't grown from 2011; it's down a little bit.

But I think when you look at the environment they participated in, it has been difficult. And we think, going forward, there's some significant opportunities. We also think that it wasn't a core business for GKN. And the strategy that they had laid out when they bought it didn't materialize, and so they were not able to acquire other companies to go with it. They were not able to penetrate the US market like they thought they could. So there was some things that they were not able to execute on.

We think that we can do -- that there are some places where we can take these products, and where they can help us there. So I wouldn't look at the past and say, that's what the future looks like.

I just wanted to get a sense of like how you think about the business in the future because just like your legacy business you've been talking about, ag is still weak. Some of -- most of the end markets kind of remain pretty weak here, and challenging. From that angle it seems like acquiring something. And if I take your EBITDA, I think you paid maybe about like between 10 to 11 times for this business.

No. Our math is 9.5.

Okay. Got it. Is that including the synergies, or that's excluding synergies?

That excludes the synergies.

Okay. Got it, got it. So just wanted to get a sense of -- from the aftermarket perspective, how much of this business is more toward OEM versus aftermarket opportunity here?

It's about 25% aftermarket business, and that has a good profitable aftermarket sales. It's about 25%.

Maybe to give you one example, in the US we are very strong on the ag side. We've got excellent products, excellent customer relations with the top guys in that industry. Stromag has an ag business in Europe. We've got no ag business in Europe today. We sell linear actuators into the ag market, for instance; and we're hoping that we can, in the future, sell linear actuators into the European ag market. And that's -- these are things how we see, how we can grow that business. And then of course, vice versa, then we can help them here in North America where they have a fairly small presence, maybe $15 million -- something like that in revenues.

Yes, and we can help them grow those. And the way I look at it is it's a great time to buy the business because the markets are down, and so it may get worse in 2017. I don't know, Bhupender, but I think we are not buying at the peak which when you look back two, three, four years ago, there were some companies that made some acquisitions that didn't turn out all that well because they bought at the peak.

So I think we are buying at a very good time. I think the exchange rate is good for us. The interest rate -- our net interest rate on the European piece is going to be 2%. It is a really good time for us to buy this business.

And the other thing, I can't control when somebody is going to sell us the business. This is a great company. It fits great with us. It is the right acquisition for us. And I can't say, hey guys, could you wait two years to sell it to us? They wanted to sell it. We had a willing seller. We wanted to buy it, and it is a great fit. It's going to turn out to be a great deal for us.

I think you are correct. I mean, it's just the -- I believe the perfect time to buy at the lowest here, but just wanted to get a sense of how the progress was going to be over the next -- the opportunity it provides you. And it makes sense here. Thanks.

Yes. But that's how I feel about it. And 2017 may turn out to be a crappy year. But we are going to love this company as part of our company.

Got it. Thank you both.

John Franzreb, Sidoti.

Yes, just thoughts about the revenue breakdown and how it will fit into your segment profiling?

We don't have any numbers for you yet. But at this point, we assume that it will break up into the CCB group as well as an ECB group. But we don't have a breakdown for you.

Okay, no big bucket?

The biggest bucket probably goes into CCB, and then a smaller bucket goes into ECB, the electric clutch brakes. (multiple speakers) That may also change as we further evaluate this, and that may change that breakdown by the time of closing.

Okay, fair enough. Thank you.

That does conclude our Q&A session. So I will now turn it back to Mr. Christiansen and the rest of management for closing remarks.

Okay. Thank you, Operator, and thanks, everyone, for joining us this morning. Bye-bye.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.