Altra Industrial Motion Corp.
Q4 2018 Earnings Call Transcript

Published: 22 Feb 2019

[Operator:]

Greetings, welcome to the Altra Industrial Motion Fourth Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to David Calusdian with Sharon Merrill Associates. Mr. Calusdian, you may now begin.

[David Calusdian:]

Thank you. Good morning, everyone, and welcome to the call. To help you follow management’s discussion on this call, they will be referencing slides that are posted to the altramotion.com website under Events and Presentations in the Investor Relations section. Please turn to Slide 3. During the call, management will be making forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently uncertain and investors must recognize that events could differ significantly from management’s expectations. Please refer to the risks, uncertainties and other factors described in the companies quarterly reports on Form 10-Q and annual report on Form 10-K and in the company’s other filings with the U.S. Securities and Exchange Commission. Except as required by applicable law, Altra Industrial Motion Corp. does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise. On today’s call, management will refer to non-GAAP diluted earnings per share, non-GAAP income from operations, non-GAAP net income, non-GAAP adjusted EBITDA, non-GAAP operating working capital, non-GAAP net debt and non-GAAP free cash flow. These metrics exclude certain items discussed in our slide presentation and in our press release under the heading discussion of non-GAAP financial measures and any other items that management believes should be excluded when reviewing continuing operations. The reconciliations of Altra’s non-GAAP measures to the comparable GAAP measures are available in the financial tables of the Q4 2018 financial results press release on Altra’s website. Please turn to Slide 4. With me today are Chief Executive Officer, Carl Christenson; and Chief Financial Officer, Christian Storch. I’ll now turn the call over to Carl.

[Carl Christenson:]

Thank you, David, and good morning, everyone. Please turn to Slide 5. 2018 was a transformational year for Altra as we completed the A&S business merger creating a $1.9 billion premier industrial company. Today, Altra is solidly positioned with an expanded portfolio of technologies, increased exposure to end markets with attractive secular trends, a proven world-class business system and strong free cash flow generation. This is truly an exciting time for Altra. We ended the year with a strong fourth quarter that for the first time reflects the profile of the new Altra. Fourth quarter revenues grew to $469.2 million, more than double the prior year quarter due largely to the addition of the A&S business. Excluding the effects of foreign exchange, net sales for the legacy Altra business were up 4.2%. Net sales for the recently acquired A&S business increased 6.8%. It is important to note that the A&S business growth is compared with management’s estimates of unaudited A&S financial results from the same quarter of 2017. GAAP net income was a loss of $5 million or $0.08 per share, reflecting acquisition-related expenses, amortization and inventory fair-value adjustment in the year’s fourth quarter. Non-GAAP EPS in Q4 2018 was $0.65, coming in operationally at the high end of our expectations. We decided not to add back non-cash step-up depreciation to our recurring EPS calculation, and we delayed the execution of our cross-currency swaps until late in the quarter, which will yield an additional interest expense savings of $2 million in 2019. The addition of the A&S business has begun to have a favorable impact on our earnings. Non-GAAP gross profit was 35.4%, a 470 basis point improvement compared with the year ago quarter. And non-GAAP operating income margin grew by 610 basis points to 16.8%. Given our strategic focus on delevering the balance sheet, to provide the best insight into the business, we’ll be adding the non-GAAP metric of adjusted EBITDA to our financial reporting going forward. In Q4, adjusted EBITDA was $95.3 million and adjusted EBITDA margin was 20.3%, a 610 basis point improvement from Q4 2017. With the A&S merger complete, we were able to drive cost improvements through the supply chain management, combined with our success in leveraging pricing actions, these benefits successfully offset input cost increases related primarily to commodity inflation, freight and logistics and tariffs. In Q4, we began to deliver on our strategic priority to expediently delever the balance sheet. We paid down $20 million of debt in the quarter and ended 2018 with 3.9 times net debt to non-GAAP adjusted EBITDA leverage. Subsequent to the close of the quarter, we paid down an additional $5 million of debt in January. We typically use the most cash in Q1. So we expect to ramp up our paydown of debt in the last three quarters to reach our goal of paying down an additional $125 million in 2019. With that as an introduction, please turn to Slide 6 and I’ll provide you with an update on the highlight of the quarter, our integration of the Automation & Specialty platform businesses. Since completing the A&S transaction on October 1, the integration of the A&S and Altra has advanced exceptionally well, with more than 90% of the nearly 1,300 tactical action items now complete, including the integration of our IT systems and payroll, the A&S business is now fully operational as part of Altra. In Q4, we consolidated three sales offices and one manufacturing operation and have several other consolidations underway or under review. Our sales teams have begun to collaborate to plan for cross-selling opportunities and have done an excellent job of working together to manage customer relationships. We’ve had virtually no customer disruption through the transition, which is a strong testament to the successful coordinated efforts across the organization. Since the close of the deal, it has become increasingly clear that from a cultural standpoint, the legacy Altra and A&S businesses are highly compatible. Across the organization, there’s a shared commitment to customer service, operational excellence and continuous improvement, a deeply ingrained belief in the importance of best-in-class business systems and a dedication to investing in the development and safety of our highly skilled and dedicated people. We are making excellent progress in developing a singular corporate culture across the new Altra, that is guided by a recently refined core values of teamwork, innovation, leadership, continuous improvement and value. We continue to believe that the transformational combination with the A&S businesses has meaningfully enhanced Altra’s ability to drive growth and value creation for our shareholders, customers and employees. With the addition of A&S, Altra has evolved from a component provider to a premier engineered solutions provider with a stronger position at the higher end of the technology spectrum, increased exposure to attractive end markets and an expanded portfolio of precision technologies. We have an enhanced financial profile with strong free cash flow that will help accelerate growth and enable us to quickly delever and achieve our target leverage metrics of two to three times net debt to adjusted EBITDA. With the tactical stage of the integration essentially complete, we are moving into the strategic phase where our focus will be on generating cash to paydown debt and achieving the identified synergies. Implementing the best practices from a world-class business system will drive top and bottom line growth, primarily through supply chain management, leveraging technology to drive innovation and executing on organic growth in cross-selling opportunities. We remain on track to achieve $10 million to $12 million of synergies in 2019 and deliver a total of $52 million of synergies by year four. Now please turn to Slide 7. With the addition of A&S to our business, we have established nine end markets as shown on the slide. Today, I’ll review the key market drivers that impacted our organization during the quarter. During the quarter, we saw strength across the energy market. This included sales growth in all three key segments, wind, oil and gas and power generation. The transportation market was extremely strong in 2018, with notable contributions from the truck market in the fourth quarter. Going into 2019, we are optimistic that the U.S. and EU truck markets will continue to perform well. We anticipate that the Chinese market will continue to be soft. We are positioned to largely offset this decline with new projects and customers in the pipeline. The factory automation and specialty machinery market was strong in the quarter, driven by global factory automation and advanced logistics technology. We anticipate continued market strength in 2019. The robotic segment of this market was very strong through the fourth quarter of 2018. We anticipate that it will moderate some in 2019, the due difficult comps and slowing growth rate of manufacturing activity in China. As an aside, our Kollmorgen business won the Prestigious User Satisfaction Form Brand of the Year Award at the Chinese Intelligent Manufacturing and Motion Control Summit. The medical equipment market was also strong in Q4 and is expected to continue to improve in 2019. We expect the surgical power tool, surgical robotics, medical infusion pumps, diagnostic and oncology applications to offer continued growth opportunities. We believe the metals and mining market will be strong in the coming year due to increased activity in the steel industry in North America and global improvement in the mining industry. Most of the demand has been for repair and replacement projects, while CapEx spending in both segments has remained taped. Our core distribution business was up mid-single digits in Q4. And we expect distribution sales growth at a lower rate due to tougher comparables in 2019. Overall, we continue to expect moderate growth across most of our end markets for the foreseeable future. Altra is well positioned to benefit from increased exposure to attractive end markets with higher secular growth as a result of the combination with the A&S businesses. In addition, several of the historical, more cyclical end markets, such as energy, mining, and defense continue to improve. Regarding potential headwinds, while we expect our pricing actions to continue to offset cost increases, we are monitoring potential secondary impacts from the tariffs and other factors that could have a negative impact on the global economy. In addition, foreign exchange is expected to continue to be a headwind into the first quarter. With that, I’ll turn the call over to Christian for a review of our financial results, and then I’ll come back and provide you with an update on our strategic priorities going forward.

[Christian Storch:]

Thank you, Carl, and good morning, everyone. Fourth quarter financial results give a first view of the financial profile of the new Altra. Excluding acquisition-related and restructuring-related expenses, we see adjusted gross margins of 35%, adjusted operating income margins of 16.8% and adjusted EBITDA margins of 20% in the fourth quarter. These are best-in-class performance metrics in the industrial world. We are reporting results in two segments, the Automation & Specialty segment and the Power Transformation Technology segment representing the legacy Altra businesses. Before I review the details of our fourth quarter financial results, I would like to note that results for fourth quarter 2018 include, for the first time, the recently acquired A&S businesses. Unless otherwise noted, results for the fourth quarter 2017 do not include pro forma A&S results. Turning to Slide 8. Fourth quarter sales of $469.2 million exceeded the high end of our expectations as sales for the year totaled $1.175 billion. Organic growth was 5.5% as legacy Altra businesses grew 4.2% organically, and the A&S businesses, 6.8%. Foreign exchange rates had a negative effect of 190 basis points. On an unaudited pro forma basis, sales grew 11% in North America, 1% in Europe, while sales in China and the rest of the world declined 9%. Sales in North America accounted for 57% and Europe for 29% and Asia and the rest of the world for 13% of fourth quarter sales. Price continued to be a contributor to our top line growth rate, delivering 170 basis points as we continue to offset cost increases due to the tariffs. Operationally, results came in at the high end of our expectations. Non-GAAP EPS of $0.61 – $0.65 was up 22.6% when compared to $0.53 per diluted share in the year-ago quarter. 2018 non-GAAP EPS of $0.65 was $0.05 below the high end of our guidance. We delayed the execution of cross-currency swaps until the end of the fourth quarter and decided not to add back non-cash step-up depreciation to recurring EPS calculation, causing the shortfall. On the positive, we estimate that delaying the execution of the currency swaps will yield $2 million of additional interest expense savings in 2019. Non-GAAP adjusted EBITDA was $95.3 million or 20% of net sales in the fourth quarter. Our GAAP tax rate was a benefit of 10.4% as it was impacted by acquisition cost. Our non-GAAP EPS reflects a normalized tax rate of 24%. Please turn to Slide 9. In terms of cash, our top priority continues to be paying down debt and delevering the balance sheet following the A&S culmination. As Carl noted, we paid down $20 million of debt in the fourth quarter and exited the year with a leverage of 3.9 times net debt to adjusted EBITDA. We paid down an additional $5 million of debt in January of 2019. Capital investments totaled $16.4 million for the quarter and depreciation and amortization was $32 million. Please turn to Slide 10 for a review of our outlook for 2019. Today, we are providing guidance for the full year 2019. Please see a GAAP to non-GAAP reconciliation table on Slide 14 of the presentation. The outlook for 2019 is in line with the projections we made when we announced the merger with A&S. We expect organic sales growth to be 1.5% to 3% to a range of $1.92 billion to $1.95 billion as compared to unaudited pro forma sales for 2018. At current exchange rates, we will face a meaningful headwind for 2019, especially in the first quarter of 2019. As previously indicated, following the A&S culmination, we began to exclude acquisition-related amortization net of tax from non-GAAP net income and non-GAAP EPS. We expect non-GAAP adjusted EBITDA in the range of $415 million to $430 million and free cash flow conversion well above 100% of net income. We expect to pay down an additional $125 million of debt in 2019, and that we exit 2019 with a net debt to non-GAAP adjusted EBITDA leverage of approximately 3.5 times. We expect net income in the range of $135 million to $141 million and non-GAAP net income in the range of $195 million to $205 million. GAAP diluted EPS is expected in the range of $2.10 to $2.18 and non-GAAP diluted EPS in the range of $3.02 to $3.18. We expect depreciation and amortization in the range of $130 million to $140 million and capital expenditures in the range of $60 million to $65 million. We expect our normalized tax rate for the full year to be in the range of 25% to 26.5% as it will be negatively impacted by the tax reform. With that, I will turn the discussion back over to Carl.

[Carl Christenson:]

Thank you, Christian. Please turn to Slide 11, and I’ll remind you of our three strategic priorities going forward as the new Altra. The first priority is to flawlessly execute on the integration of the A&S business in order to deliver on our $52 million synergy target. With the integration of the day-to-day business operations essentially completed, our focus now is on completing the cultural merger of the two businesses, advancing our sales team collaboration to capture our targeted sales synergies and delivering improved organic growth and cost savings by implementing best practices across the organization from our world-class business system. Second, it is a strategic priority to expediently delever to our targeted range of two to three times net debt to adjusted EBITDA and strengthen the balance sheet. We began this journey in the fourth quarter and believe we are well positioned to continue to do so by leveraging our enhanced financial scale and excellent free cash flow. And third is our focus on accelerating top line growth. This includes driving core growth by leveraging proven business system tools, strategically infusing capital into the new A&S businesses to pursue organic growth and capitalizing on technology sharing to accelerate innovation across the businesses. Additionally, we will begin to build the expanded pipeline of M&A opportunities so that we are prepared to support long-term growth once the net debt to adjusted EBITDA leverage ratio has returned to our targeted range of two to three times. In conclusion, we have made exceptional progress with the A&S integration. We’re excited about the new growth markets that we have entered, the new technologies we have added to our portfolio and the strength of the team across the organization. We remain encouraged by the ongoing strength in several markets we’ve historically served as well as the new A&S markets. We look forward to keeping our shareholders updated as we forge ahead as a premier global technology leader in our industry. With that, I’d like to turn it back to the operator to open the call to your questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] The first question today comes from the line of Jeff Hammond with KeyBanc Capital Markets.

[Jeff Hammond:]

Hey. Good morning guys. Good to see the businesses and what they can do together.

[Carl Christenson:]

Yes. Thanks, Jeff.

[Jeff Hammond:]

So can you just give us a sense of what the core growth assumptions are in the guide? And I don’t know if you can split that between either the segments or between the legacy Altra and Fortive businesses? Thanks.

[Christian Storch:]

This is Christian. At the – number one, we’re going to be facing a meaningful FX headwind, particularly in the first quarter. First quarter headwind could be somewhere between 200 and 250 basis points. That will ease as we continue to go through the year. So that’s a big part of when you look at the GAAP guidance. From organic standpoint, I think we’re assuming that the A&S businesses will continue to grow faster than the legacy Altra businesses. Somewhere – Altra business somewhere around 1.5% and the A&S business around 3% growth for next year on an organic basis.

[Jeff Hammond:]

Okay, great. And then I think you mentioned free cash flow in line with net income. Can you give us a – is there like a range you’re thinking about on a dollar basis?

[Christian Storch:]

So free cash flow conversion will be well above 100%. If you look at free cash flow for next year, that could be some around $200 million to $250 million.

[Jeff Hammond:]

Okay, great. And then just a couple of housekeeping items. Can you give us a split between depreciation and amortization within that $130 million to $140 million? And what your interest expense assumption is within the guide?

[Christian Storch:]

Yes, so depreciation – and you need to round that, it’s around $57 million. While amortization will be around $72 million, somewhere in that ballpark. And then when you look at the weighted average borrowing cost that we assume is around 4.5%.

[Jeff Hammond:]

But what’s the, I guess, GAAP interest expense versus cash interest expense because I know there is a delta there?

[Christian Storch:]

There’s about a $10 million difference. So cash interest is about $10 million less than GAAP interest.

[Jeff Hammond:]

Okay. Thanks guys. I’ll get back in queue.

[Christian Storch:]

Thanks, Jeff.

[Operator:]

The next question is from the line of Scott Graham with BMO Capital Markets. Please proceed with your question.

[Scott Graham:]

Hey, good morning.

[Carl Christenson:]

Good morning.

[Scott Graham:]

I have one housekeeping question first. The impact of the decision to not use step-up depreciation and the impact of the swaps. Could you tell us what each of that was in dollars?

[Christian Storch:]

So in terms of EPS, the first one is step-up depreciation around $0.03 a share, while the swaps was around $0.02 a share in dollars. The swaps came for about $1 million a month in interest benefit. And if you look at step-up depreciation, it’s around $2.5 million a quarter.

[Scott Graham:]

That’s very helpful. And so that’s essentially – that’s the go-forward now? So the new rate, that’s – this is the new rate of the amortization on the..

[Christian Storch:]

Correct.

[Scott Graham:]

Got you, okay. The amortization yield...

[Christian Storch:]

Yes. The numbers moved a lot as we completed the valuation of the intangibles, but they have stopped moving.

[Scott Graham:]

Yes, they did. So the other question I had is that this is also a bit of a housekeeper also. But Carl, I think you early on said that early synergies – I don’t want to paraphrase you, I’m trying to paraphrase you, I don’t want to. I hope I get this right. Early synergies kind of offset materials, freight and tariffs, and then later on, I got the impression from you, Christian, that your pricing offset inflation and that you didn’t need the synergies, that the synergies would, in that situation, be accretive. Could you kind of square that for us?

[Christian Storch:]

Yes. So if you look at the fourth quarter, right? It was a small amount of synergies that we realized in the fourth quarter, mainly procurement related and then there were some early benefits of consolidating some of the sales offices. We’re going to see synergies ramp up as we go through 2019. So essentially, price increases was helping us to offset the tariffs, and I think the synergies that we realized, they were small, and they probably just help to offset our corporate – I think regional corporate expenses as we had to step up here, the corporate office to manage this larger organization.

[Carl Christenson:]

Yes, and our portion on the businesses, Scott, is to have the price increases at least offset the cost increases. So that’s – I don’t know where that came from, but the synergies were offsetting the tariffs, et cetera. That’s – our drive in the business is to have price increases offset those cost increases.

[Scott Graham:]

Got you. So my last question is probably my biggest question is that, I’m looking at the EBITDA guide of $415 million. And so we close out 2018 on a pro forma basis, a little north of $400 million, and if I’m wrong on that, please tell me. But that’s the number I think we saw. And we have synergies of $10 million to $12 million, right? So I’m just wondering what is the thinking behind the low end of the EBITDA guide? With sales growth, it would actually suggest that pro forma margins would decline a little bit?

[Christian Storch:]

Yes, so the thought there is that we’re providing guidance in an environment where I would call a decent amount on uncertainty about where the economy is going. We all hear about slowing demand in Europe. We certainly hear about slowing demand out of China. And so the low end of the guidance is just assuming a more on a significant slowdown and particularly in those two regions. We’re not projecting that...

[Scott Graham:]

Okay. That’s – there I had a feeling that was going to be your answer. I was just – maybe just sort of the same question goes for – what gets you to the high end?

[Christian Storch:]

So the high end, essentially, is around a 35% flow-through on the incremental sales for realization of the $10 million to $12 million of synergies.

[Scott Graham:]

Before realization?

[Christian Storch:]

Before realization of the $10 million to $12 million flow-through of the incremental sales of around 35% for the combined entity.

[Scott Graham:]

Got you. Thank you.

[Christian Storch:]

Thanks, Scott.

[Operator:]

[Operator Instructions] The next question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question.

[Mike Halloran:]

Hey, good morning, gentlemen. So just a couple of things here. One, clarification on the free cash flow. You said free cash flow between $200 million and $250 million for the full year after CapEx and everything. So what does that mean for your – how are you thinking about the dollar number for that, that can be used to bet for the right range for debt paydown?

[Christian Storch:]

Yes. So recall that, out of that – we support the [Technical Difficulty] And then we intend to paydown additional $125 million [Technical Difficulty] that’s where the balance will end up is it would increase our cash position and we’ll to dimensionally the first quarter where we have large cash outflows.

[Mike Halloran:]

Okay. you broke up on the, unfortunately as you said, you said $125 million was the debt paydown number?

[Christian Storch:]

$125 million debt paydown, $44 million to support the dividend and then the rest will be put on the balance sheet will remain there as cash to support the first quarter of 2020.

[Mike Halloran:]

Right, that makes sense. Right, because of the seasonality. So cash for the quarters. Makes sense. And then that’s a pretty sizable push there, free cash that’s attractive and then in terms of the quarter, I certainly understand that the desire to be conservative as you look into the back half of the year, putting that there, when you think about what you saw in the fourth quarter and what you’ve seen so far to start the year, anything that you’ve seen so far that, that implies greater levels of concern or stability and then how are you looking at the end of line trends that you’re seeing today?

[Christian Storch:]

No, I don’t think there is any major concern, I mean probably the noise on what’s going on in China and the noise around Europe is certainly concerning, but there is no major concerns. The headwinds from the currency that’s going to have an impact and I think just having, we get a really good year last year, so it will be a tough comparable. So things have to be remain good to achieve what we are achieving?

[Carl Christenson:]

If I can add here, if you looked at just seasonality of the combined business. We still see that trend where the first half tends to be slightly stronger from a revenue perspective. Somewhere 50.5% to 51% in the first half versus the second half. That seasonality has smoothed a little bit compared to legacy Altra, but it’s still present.

[Mike Halloran:]

So from a sequential perspective though, are underlying dynamics cadencing out about as expected? Do you think about how things have ramped through 4Q? And what seems like a reasonable start to 2019 so far?

[Carl Christenson:]

Yes.

[Christian Storch:]

Yes, yes.

[Mike Halloran:]

Okay. Yes, that makes sense. And then any – one question I get a fair amount is, any comment on the transportation market, particular clutches and brakes that goes in the Class A trucks? Some concern on that side? What are you seeing from an order book perspective? And what are your customers saying at this point?

[Carl Christenson:]

Yes, so the – through the first half of the year, the order book is very solid. And I think one thing we watch or the potential for cancellations of some of the big, huge truck companies. But we haven’t seen that yet, and we don’t have a tremendous amount of visibility passed the first half of the year. So I think that the – so far, the order book is there, there’s a nice backlog. And what we’re hearing from our customers is they’re going to be building through the first half of the year.

[Mike Halloran:]

Appreciate guys. Thanks.

[Carl Christenson:]

Okay, thank you.

[Operator:]

Thank you. Our next question is from the line of John Franzreb with Sidoti. Please proceed with your question.

[John Franzreb:]

Good morning, guys. Just a little color on the seasonality. With the FX built into the first quarter outlook, would you expect sequential revenue to be higher in the March quarter versus the just reported December quarter?

[Carl Christenson:]

Yes, we would.

[John Franzreb:]

Okay. All right. Fine. And talking about cross-selling opportunities in the new enterprise, what are the ones that you find the most exciting with the best near-term opportunities in 2019?

[Carl Christenson:]

Yes, there’s a whole host of them, John. And it’s been really exciting to me to see the activity that some of the guys are working on. Some examples would be the Kollmorgen business working with our Bauer Gear Motor business where they have technologies that go into the same customer base. And what we’ve done is, we introduced a bounty for the sales people so that sales people that are dedicated to one organization can get benefit from a lead generation for one of the other businesses. And that’s proven to generate – we’ve probably got a couple of hundred specific cross-selling opportunities that we’re going after right now.

[John Franzreb:]

Got it, great. And Carl, I think in your commentary, you said that the energy business was strong in the fourth quarter. And I think you can kind of imply there was going to be growing in 2019. Did I understand that property? And if so, why is that?

[Carl Christenson:]

Well, I think we expect it to be fairly stable in 2019, maybe get a little bit better. But it’s – and it’s mostly repair and replacement parts. We haven’t seen new rig builds or anything, but the fracking business has been good. And if oil stays up around $60 a barrel, we think that there’s a – some dynamics there that certainly in North America, the activity should remain pretty solid. But I don’t see it growing exponentially, but it’s a – but remain at this level was a pretty good level right now.

[John Franzreb:]

Fair enough. And one last question. Can you refresh my memory on what the geographic mix is now in the new businesses?

[Carl Christenson:]

Is it 50? Do you have that Christian?

[Christian Storch:]

Yes, so we got that. So 57% of fourth quarter sales were in North America, 29% in Europe, and 13% Asia and the rest of the world.

[John Franzreb:]

Perfect. Thank you, guys. I appreciate you taking my questions.

[Carl Christenson:]

Okay, thank you.

[Operator:]

Thank you. The next question is a follow-up from the line of Scott Graham with BMO Capital Markets. Please proceed with your question.

[Scott Graham:]

Hi, good morning, again. I don’t want you to "escape" this question which I asked you from time-to-time. But now you’re done with a lot of the tactical and you’ve got a good look at what these – what the A&S business looks like and what the businesses combined look like. So as I look at your synergy target, I think you – we’ve talked about this before but it just seems as if the amount that you’re targeting should be the low end, if you will, and that the target should actually – we should actually be above that. Is there anything you could share with us on that? Because it just seems like these are two businesses that are very similar. You both have your strengths, which suggest a lot of cost-reduction opportunity across the businesses, particularly since a lot of it is going to be taking place on the legacy side. Could you share with us, I mean, your views on those synergies? And maybe loop in, you have forever had a – several years had a 15% operating margin goal in the legacy business. How does the synergy – has the combination kind of get you to that number as well? If you could just talk to that even if it’s in general?

[Carl Christenson:]

Yes, so I think there’s a couple of things to set the stage for that $52 million synergy number. One of them is that this business didn’t come with a corporate overhead. So typically, if you merged two businesses, you’re going to eliminate a substantial cost, which would be, we don’t – you don’t need two CEOs, you don’t need two CFOs. And in this case, they didn’t have a CEO, they didn’t have a CFO. They stayed back with Fortive. So we didn’t have that – all that corporate cost were limited. And in fact, we had to add some corporate structure in order to manage a company that’s twice the size. And so there is – it’s a little bit different from that standpoint. And then I think, Michael, is – we’re driving really hard to get that $52 million, I hope that there’s additional synergies that we identify as we go forward, but we’re – that’s a – right now, that’s a very good number, and I think it can create a lot of value if we achieve that $52 million. And I think you’re right, there’s some really good activities going on in the business system and driving the performance. In Altra, is one other difference is, we did not take the improvement that we had already said we were going to get with the legacy Altra businesses and add that to the synergies. We said that’s a separate bucket that we promised our shareholders we would get. And so we didn’t say that we have that on top of the synergies. So the improvement in the business is going to be 400 basis points over the four to five years. And I think we achieved 400 basis points over four to five years, we’re going to have some really happy shareholders. We’ll all be happy.

[Scott Graham:]

Sure. Though, I think that’s fair. Here’s the other thing. So on the debt, it was nice that you clicked down below four, that was a little bit unexpected. I guess my question would be, the portfolio has changed substantially, and it seems to me as if some Altra legacy businesses or let’s call them imperfect fits. Just wondering if there is anything – maybe just not in the first year but in the second year that you could contemplate where maybe those assets or in hands of – better in the hands of someone else and your attention is maybe better with the other businesses, which would obviously allow you to lower your debt even further on proceeds. Could you talk to that a little bit?

[Carl Christenson:]

Sure. So I think being the size we are now than with the portfolio that we have now, it does afford us the opportunity to take a different look at the portfolio. I do not expect that we would divest any businesses, but there are maybe some product lines or some segments of businesses that we don’t see a way to get them to be the company average margin, that don’t have the growth prospects to some of the other businesses do. That had some characteristics that might not fit the new Altra. But it would not be large segments of the business, it would be relatively small pieces. And so yes, we are and will, we always have and we always will review the portfolio.

[Scott Graham:]

Got it. Thank you.

[Carl Christenson:]

Okay. Thanks, Scott.

[Operator:]

At this time, I will turn the floor back to management for closing remarks.

[Carl Christenson:]

Yes. I just want to thank you all for joining us today. We look forward to seeing many of you on the road this quarter and at Altra’s 2019 Investor Day on May 14 in New York City. So have a great day. Thank you.

[Operator:]

Thank you. Today’s conference has concluded. You may now disconnect your lines at this time. Thank you for your participation.