Altra Industrial Motion's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.19.14 | About: Altra Holdings, (AIMC)

Start Time: 10:05

End Time: 10:42

Altra Industrial Motion Corp. (NASDAQ:AIMC)

Q4 2013 Earnings Conference Call

February 19, 2014 10.00 AM ET

Executives

David C. Calusdian – Executive Vice President and Partner of Sharon Merrill Associates

Carl R. Christenson – President and Chief Executive Officer

Christian Storch – Chief Financial Officer and Vice President

Analysts

Matt Duncan – Stephens, Inc.

John E. Franzreb – Sidoti & Co. LLC

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Mike Halloran – Robert W. Baird & Co.

R. Scott Graham – Jefferies LLC

Operator

Greetings and welcome to Altra Industrial Motion's Fourth Quarter 2013 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) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Calusdian of Sharon Merrill Associates.

Thank you, Mr. Calusdian. You may begin.

David C. Calusdian

Thank you, Kristine. Good morning everyone. And welcome to the call. With me today our 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 & 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 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 free cash flow and non-GAAP operating working capital.

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 on the financial tables of the Q4 2013 results press release on Altra's website.

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

Carl R. Christenson

Thank you, David, and please turn to Slide 2. We’re pleased with the fourth quarter results given the persistent challenges in our end markets and renewed uncertainty for the global economy.

During the fourth quarter, GAAP revenues were up slightly from the same period a year ago, excluding the impact of the Svendborg acquisition, net sales were a $176.2 million down less than 1%, non-GAAP earnings grew 7% to $10.1 million or $0.38 per share despite relatively flat revenues and a tax rate that was significantly higher than in Q4 2012.

Even in this challenging environment, we again delivered record earnings for the full year 2013. During the past several quarters, we’ve been working to optimize our operations. In light of its objective, we’re delighted with our operating working capital reduction efforts at the core Altra businesses.

We had operating working capital reductions of $18.6 million in the year, the majority of which occurred in the fourth quarter, which help to lead the company to $27.4 million of operating cash flow in the quarter and operating and free cash flow of $89.6 million and $61.8 million respectively in 2013. We began the integration of Svendborg acquisition, which closed in December.

Svendborg is expected to be accretive in 2014, and I’m excited about the opportunities Svendborg presents for us. The restructuring that the Bauer team has been executing in Europe has really began to produce the desired results and we are seeing good growth out of that business in China and the U.S. and indications of the business is beginning to improve in Europe.

Now, please turn to Slide 3 for a discussion of some of our specific end markets. Let’s begin with our distribution channel, which is predominantly comprised of sales of aftermarket parts and original equipment parts for small OEMs. In the fourth quarter, distribution sales were up modestly year-over-year, and we saw slight improvement in this market throughout 2013, and we’re cautiously optimistic that that trend will continue moving through 2014.

In turf and garden, sales in Q4 increased slightly year-over-year and grew significantly from a strong sequential third quarter, where we generated record sales in both August and September. This market is gotten off to a good start in 2014. The Ag market continued to be one of our best performing markets in Q4, finishing the year with double-digit quarterly growth.

As expected, our new product programs delivered significant revenue contributions in the second half of the year, because of these new programs, we’re optimistic that about reporting strong results in Ag in 2014. The transportation market also performed well in the fourth quarter driven by demand from automotive OEMs.

In the materials handling market, our elevator and forklift programs maintain a strong performance. However, this was fully offset by under performance in the conveyor and Crane & Hoist markets, where demand for this equipment has continued to be soft. As a result, materials handling was off modestly year-over-year.

Turning to our late-cycle markets beginning with energy, we saw slight improvement in this market during the fourth quarter, and we believe we have now seen the bottoming of demand in energy. The cold weather nationally caused a drawdown in natural gas reserves, which led to increased orders and appears that the inventory of fracking equipment components has been reduced. We continue to view this as a good longer-term market for us. In contrast, the power generation market dropped off in Q4.

However, in alternative energy the wind turbine market picked up a bit building on the improvement we began to see in Q3. The mining and metals markets again improved sequentially extending the slight growth we experienced in Q3, but they are still weak overall. We expect demand will flatten out in 2014 at a level significantly below where these markets were in 2012.

However, we are seeing some indications that these markets are improving particularly some segments of the mining market. In aerospace and defense we said last year that some projects have been delayed as a result of the federal budget conflict and this was indeed the case. We expect this market to be slightly down throughout 2014.

From a geographic standpoint, the U.S. was down slightly, Europe was flat and Asia was up. We expect the global economy to continue and improve. However, we do remain cautious due to the risks and uncertainties that remain. That covers the majority of the markets we serve.

With that, I will hand the call over to Christian and I will close with the discussion on our strategic initiatives.

Christian Storch

Thank you, Carl, and good afternoon or good morning, everyone. Please turn to Slide 4. Fourth quarter net sales were $180.5 million, up slightly from $177.2 million in Q4 of 2012. Foreign exchange rates had a positive impact of approximately 70 basis points, while twice was scalable by 90 basis points.

Excluding the impact of the Svendborg acquisition, sales declined 0.6% year-over-year to $176.2 million. Geographically, North American revenues declined by 2.7%, while European revenues were essentially flat, sales in Asia-Pacific region were strong increasing by 19.7%.

During the quarter, we continued to see margin improvement from our recent pricing initiatives, which contributed 90 basis points to gross margin. However, this improvement was more than offset by the effect of an $800,000 inventory adjustment; acquisition related inventory step up cost and $600,000 pretax charge for workers compensation related claims due to a legislative change in France and unfavorable mix changes.

By successfully reducing inventory, we head into LIFO layers causing the change through the P&L and the charge of $800,000. As a result gross margin was 28.7% compared to 30.4% in the fourth quarter of 2012.

We expect to return to more normal levels of gross profit in 2014. Non-GAAP operating income was 9.9% compared with 10.7% a year ago. Interest expense decreased $19.1 million or 87% to $2.8 million during the quarter, primarily due to the refinancing in the fourth quarter of 2012 in lower average outstanding borrowings.

Fourth quarter net income was $7.2 million or $0.27 per diluted share compared with the net loss of $5.4 million or $0.20 per share in the fourth quarter of 2012.

Non-GAAP net income in Q4 of 2013 was $10.1 million or $0.38 per diluted share compared to $9.5 million or $0.36 per diluted share a year ago. We reported a tax rate of 34.1% in the quarter, as compared with our tax rate of just 11.1% in the fourth quarter of 2012 which was artificially low due to a benefit we reported from the interest expense related to the 2012 refinancing.

Slide 5 is a reconciliation of our non-GAAP measures.

Please turn to Slide 6, our book equity was $269.3 million compared with $232 million at year end 2012. We reported record operating cash flows of $89.6 million in 2013 and a record free cash flow of $61.8 million. As a result we ended up with a strong cash balance of $63.6 million at the end of the year.

Slide 7 reviews our working capital performance and as Carl mentioned, we achieved $18.6 million of operating working capital reductions during the year, the majority of which occurred in the fourth quarter, which contributed to an operating cash flow of $27.4 million in the fourth quarter.

Capital investments during the quarter totaled $13.4 million as we purchased a portion of the Bauer property in Esslingen, Germany. In 2014, we will invest in a new office building and an extension of the Bauer factory in Germany. This investment would help us to streamline the operations as it would facilitate the consolidation of five buildings into two, enhancing material flow, reducing overhead cost and improving margins at Bauer. Depreciation and amortization was $7 million.

Regarding SAP, we have three more site implementations remaining with the next call as scheduled at the end of this first quarter. The final two sites will go live at the end of the second quarter. At that point, we will have 80% of our revenues and I exclude Svendborg on SAP. We are starting to see the first benefits of SAP. Our shared service centers up and running, allowing us better visibility into customer and vendors. That visibility contributed to the reduction in working capital in the fourth quarter.

Please turn to Slide 8 in our guidance. We expect the first quarter to continue with a steady progress we experienced in 2013, it could be ahead of the comparable period a year ago. We are initiating new full-year 2014 guidance for revenues in the range of $800 million to $825 million and non-GAAP diluted EPS in the range $1.85 to $2 a share.

We expect our tax rate for 2014 to be in the range of 31% to 33% before discrete items. We expect capital expenditures in the range of $28 million to $30 million for the year, and our depreciation and amortization was expected to be in the range of $34 million to $36 million.

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

Carl R. Christenson

Thank you, Christian. Let’s briefly discuss the various strategic initiatives we are working on. As we begin 2014, the global economic environment is still uncertain and we believe it is prudent to remain cautious about global industrial growth prospectus.

However, even in very slow growth environment, we expect to continue steady progress on our margin initiatives and operating working capital reductions. Those programs are beginning to have the intended effect increasing margins while reducing operating costs, and we anticipate additional positive momentum throughout the year.

As we integrate the operational excellence component of our strategy even further into our operations, I feel really good about the work we have already done. As an example, we’ve recently returned from a kaizen event that reduces the cycle time of valve stream from 9.3 days down to just two hours. We are beginning to see the benefits of this work at lower operating working capital. And we expect to see some improvements take effect in 2014.

The implementation of our new SAP system continues to be on track. As Christian mentioned, we have one more site scheduled to go live this quarter as the remaining two sites planned for Q2. This new system is enabling us to bring more work into our shared services model, which we expect will result an increased cash flow going forward.

And as Christian mentioned, we have made good progress on our new pricing strategy, which combined with our standard price increases, contributed 90 basis points of gross margin in the fourth quarter. We expect to see additional improvement from pricing through the bulk of 2014.

Looking at organic growth opportunities, our new product programs continue to perform well and we expect significant benefits in 2014.

We’ll continue to work in collaboration with our customers to develop innovative products to satisfy their needs. We’re also driving organic growth by expanding into emerging geographies, primarily in South America and Asia. Activities in both regions continue to be on schedule.

In terms of external growth, we’re quite pleased with the Svendborg acquisition, with Svendborg we’ve added the leading brand of premium quality caliper brakes and we’re excited about what this means for us both financially and strategically. Even immediately following the acquisition, our balance sheet remains very strong and we continue to start potential strategic deals.

In summary, we’re executing well on our strategy to drive both organic and acquisition growth and to improve our bottom line through a number of corporate initiatives.

With that, we’ll open it up to your questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Thank you, our first question comes from the line of Matt Duncan with Stephens. Please proceed with your question.

Matt Duncan – Stephens, Inc.

Good morning guys.

Carl R. Christenson

Good morning.

Matt Duncan – Stephens, Inc.

First question I’ve got just Christian looking a little bit more at the gross margins, if after you back out all the things that you view is sort of non-recurring in nature, what would gross margin have been in there, what are your expectations you said, you expected return to a more normal level does that then take us back closer to what the gross margin level was I guess through I guess in the third quarter it was more in the mid 30.6 range. Can we get back to there going-forward?

Christian Storch

Yes, I think I mentioned mix, what really heard us was mining and energy in the fourth quarter, mining for instance was down 23% year-over-year in the fourth quarter, actually slightly worse than in prior quarters. Three businesses particularly get hit by that and that cause probably a decline in the margin of 100 to 150 basis points on top of the items that I mentioned.

As we look at 2013, I think we will see a return to normal margin levels, the other thing that would happen is that Svendborg will actually enhance our gross profit margins. So we should expect in the 31% range to creep up to about 31%.

Well our SG&A as a percentage of sales will also increase as Svendborg carries a higher SG&A than the rest of the business.

Matt Duncan – Stephens, Inc.

Okay, very helpful. Carl looking at the some of the end market that you gave us, it sounds like maybe you guys are seeing the energy market bottoming and possibly turn in the fourth quarter, is that continued here into 2014?

Carl R. Christenson

Yes, I think when we looked at quarter-to-quarter-to-quarter and the incoming bookings rate, the comparisons were improving I mean improving steadily. So we think that we did reach the bottom on that that we’re starting to see a turn.

Matt Duncan – Stephens, Inc.

Okay. In the first quarter, there is obviously been quite a lot of winter weather that hit especially the Northeast part of the country, is that impacting your business at all in anyway that’s measurable, or do you feel like you’re not seeing a whole lot of impact from that?

Carl R. Christenson

We have had to a close some facilities based on the local weather situations. And but we feel like we’ll be able to make up our production in the quarter that we’ll work weekends and et cetera to make sure that we make up the production satisfy the customers. I think incoming order rate certainly supports our guidance, but I think there is still a question mark, will there be some slowdown from our customers and distributors on what they saw as a result of weather. Right now we haven’t seen much of the incoming, order rate looks very good and supports the guidance. So…

Matt Duncan – Stephens, Inc.

What level of growth are you seeing in that order rate Carl?

Carl R. Christenson

Well, I just say that it supports the guidance we’ve got out there.

Matt Duncan – Stephens, Inc.

Fair enough. And then last thing I’ll hop back in the queue on the M&A pipeline, you guys still staying pretty active there in the wake of Svendborg, or are you trying to get that integrated before you do something else?

Carl R. Christenson

No, I think Svendborg fits nicely into one of our platforms, so we remain active, and actually things look like they’re improving a little bit. I think that people are getting a little more comfortable with the outlooks, and certainly the valuations are pretty good right now. So I think, we’re seeing a little more activity there.

Matt Duncan – Stephens, Inc.

Okay. Thanks, guys.

Carl R. Christenson

Thanks, Matt.

Operator

Our next question comes from the line of John Franzreb with Sidoti. Please proceed with your question.

John E. Franzreb – Sidoti & Co. LLC

Good morning, guys. I just wondered if you could update us on the progress within pricing initiatives, what milestones have you completed in 2013, and what you expect to complete in 2014, certainly in the first early part of the year.

Carl R. Christenson

Yes, 2013 really was the beginning for us in terms of that initiative. What we’ve see in 2013 was really the benefit of running about $150 million of our revenues through the process and another $150 million started with the data analysis that was completed, so we’re going to start increasing prices in Q1 for that second round of entities. I think what we have seen for the first round was so far about a 130 basis points on the affected revenues and that number will increase as we go forward. So right inline with what we expected. And I think we’ll stick with our guidance as to 50 basis points of margin improvement through this process in 2014.

John E. Franzreb – Sidoti & Co. LLC

Okay, great. Now, I think I heard you say in your prepared remarks that some of the increased capital spending this year is reflecting a new facility in consolidation of five facilities into two. If that’s a case or is that going to be any restructuring charges or maybe redundancy costs during this process in 2014?

Carl R. Christenson

Regarding the property purchase in Esslingen and Germany, we don’t expect a meaningful restructuring charge and a lot of the things that had to move out of those buildings have already being moved, portion of that went to Slovakia in 2013. There is going to be some moving expenses we get them one location to the other, but I don’t think these are going to be significant.

Christian Storch

Yes and what it was, was there was a very large campus that was owned by the seller and we leased the facilities where the business was spread out in that campus and right from the beginning we wanted to acquire a part of that campus and we’re tried the newest building on that we’re utilizing, and we wanted to then consolidate everything into that that part of that campus. So it’s not like we are moving from a great distance it’s all in a large piece and we just bought a portion of the property and we are constructing a building there.

John E. Franzreb – Sidoti & Co. LLC

Okay, I get it, great thanks. And one last question and then I guess maybe that kind of ducktail into each other, it sounds like that impact from whether, well I guess in the fourth quarter it sound like a net positive. I am wondering two things if there was a proper read from what you have said in your prepared remarks. And also if the acquisition of Svendborg, I wonder if that has any seasonal changes to the revenue mix going forward that we should be cognizant of?

Carl R. Christenson

I don’t think it was necessarily net positive from that weather I think that there was bad weather in the fourth quarter.

John E. Franzreb – Sidoti & Co. LLC

All right.

Carl R. Christenson

So far in the first quarter and we think that may have had a negative impact on the overall business environment. The good news about the bad weather is that people consumed a lot of energy.

John E. Franzreb – Sidoti & Co. LLC

Right.

Carl R. Christenson

So that’s the one positive that we might see some down, some increase in business as a result of that, but we haven’t seen it certainly yet.

Christian Storch

And then regarding Svendborg, I think revenues at Svendborg are fairly evenly distributed through the year; there is no meaningful seasonality to that business.

Carl R. Christenson

Yes. So I think it’s more they did use up a lot of parts out there and the activity level was up in those markets.

John E. Franzreb – Sidoti & Co. LLC

Okay. Thank you, guys. I’ll get back into queue.

Carl R. Christenson

Okay, thanks, John.

Operator

Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please proceed with your question.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Hey, good morning, guys.

Carl R. Christenson

Good morning, Jeff.

Christian Storch

Good morning, Jeff.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

So just to go through the guidance change, revs up $7.5 million, the guide up a nickel on the EPS, can you – is that the organic business and improving outlook there, or are you raising the assumption for Svendborg?

Carl R. Christenson

This is combination of both. On the top line it’s more the base Altra business. And then on – we also see – we are little bit more, we feel really good about Svendborg and the performance in 2014. I think we own the business now for about two months and during those two months as we get on throughout the business, we feel really good about its prospects in 2014 that also contributed.

Christian Storch

We’ve got a good team working on the integration and the Svendborg team has really embraced it and are optimistic about some of the synergies we’ve got. So it’s been really good so far.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

So it’s fair to say in that $0.10 to $0.15 accretion guidance you initially put out you’re probably towards the high end of that for Svendborg, and then what do we think for the revenue contribution for Svendborg within the revenue guidance?

Christian Storch

Yes, you’re right. We probably feel that the high end of that initial guidance on accretion is very achievable. Revenue for that business will be in the $85 million to $90 million range.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Okay, okay. And then so you mentioned Svendborg kind of exceeding expectations, I think initially you said $3 million to $5 million of savings and you didn’t really count on any of that in 2014, so maybe just update us, do you start to get some savings right out of the gate in 2014 is that what’s changed and how do we feel about the $3 million to $5 million on the longer-term basis, is there room to push that up now that you have the keys and you’ve looked inside?

Carl R. Christenson

So we do expect to be in that same kind of range and there was a little bit of savings at the beginning, we made a bit of management change at the beginning that gives us some savings. The rest of the synergies are longer-term, and I think sales synergies take a while, you have to get some great joint product development activities going on. They’ve got some control systems that we didn’t have that we’re excited about, but to get that approved that customers to go through the testing and developmental work that we have to do that takes a little while, that’s why we’ve said that we don’t expect a tremendous amount of synergies in 2014. And then on the cost side some of the things that we’re working on will also maybe in the back half of 2014, but most of them we won’t see until 2015 Jeff.

Jeffrey D. Hammond – KeyBanc Capital Markets, Inc.

Okay, great. Thanks guys.

Operator

Our next question comes from the line of Mike Halloran with Robert W. Baird. Please proceed with your question.

Mike Halloran – Robert W. Baird & Co.

Good morning, guys.

Carl R. Christenson

Good morning, Mike.

Mike Halloran – Robert W. Baird & Co.

So could we just talk a little bit about how you’re thinking about the composition of earnings as we work through the year, in times past you’ve kind of give a waiting on the front half of the year versus the back half of the year and obviously given some of your end market exposures front half, typically a little greater in the back half, but you’ve got a few moving pieces here when it comes to some of the margin lines and some of the initiatives that are working through or some of the costs that are going away, how we want to look at it. So could you just provide a little bit of color on how you think that earnings stream works through the year here front half versus back?

Christian Storch

Typically, our revenues about 51% of the revenues on the first half, 49% in the second half somewhere around that range, and therefore the first half of the year is typically more profitable than the second half. We think earnings at Svendborg were probably – the accretion of Svendborg was probably fairly even distributed through the year, because there is no significant amount of seasonality through that business. And so we don’t see other than the Svendborg somewhat even in terms of equation, most significant change and trends to prior years as to how our earnings are going to be distributed.

Mike Halloran – Robert W. Baird & Co.

Okay. And then any, I know in 2013 we had some selling day swings quarter-to-quarter, anything unique about the selling day trends as we look into 2014 quarter-to-quarter?

Carl R. Christenson

No meaningful swings.

Mike Halloran – Robert W. Baird & Co.

I appreciate the time guys.

Carl R. Christenson

Thanks Mike.

Operator

Our next question comes from the line of Scott Graham with Jefferies. Please proceed with your question.

R. Scott Graham – Jefferies LLC

Hey, good morning.

Carl R. Christenson

Good morning, Scott.

R. Scott Graham – Jefferies LLC

Talk to you guys a little bit about the dynamics of the gross margin. So how much of this if you ex-out the purchase accounting, I have about a 130 basis points decline in the gross margin question, I’m sure you can check my math on that. You said that the mix issue with mining was 100 to 150 basis points. What was some of the other puts and takes of the gross margin this quarter if you would, I mean price you gave us that number, yes, but can you give us a little bit more around that number?

Christian Storch

So, I really the items in terms of the inventory adjustment particular the life of reserve adjustment that we had about 800,000, I mentioned the workers compensation claims in France that hit the gross margin line, and then the mix change was very severe relative to mining and energy businesses. That really had a very meaningful impact in the fourth quarter. Although we do think that that would go away as we go into Q1 and Q2.

R. Scott Graham – Jefferies LLC

Why will that go away?

Christian Storch

Because we think we’re stating to see some improvements in our incoming order rates particularly in energy.

R. Scott Graham – Jefferies LLC

Okay, okay you’ve indicated then that for 2014 to expect that gross margin in 31 plus or minus range. Is Svendborg higher gross margin venue or lower?

Carl R. Christenson

Significantly higher than we are.

R. Scott Graham – Jefferies LLC

All right, so how much of this let’s say 100 basis points of improvement in gross margin would come from Svendborg?

Carl R. Christenson

I think 50 basis points.

R. Scott Graham – Jefferies LLC

Okay, on the pricing someone asked a question earlier and I want to maybe ask a follow-on to that about your strategic pricing initiatives, the 130 basis points on the affected items, what was the dollar amount of the sales of affected items in the fourth quarter?

Carl R. Christenson

Sorry, can you repeat that question?

R. Scott Graham – Jefferies LLC

So you indicated that it was 130 basis point improvement on the items that are in the program now that the affected items I think as you call, I was just wondering what was the dollar of revenue, what was the revenue base of those items?

Christian Storch

$150 million went – annual revenues went through the process, the affected sales because it was only five months of revenues that really we’re able to affect given when we started the project, we were on $65 million.

R. Scott Graham – Jefferies LLC

Yes, that’s exactly what it is. Thank you, and then we just take that number divide by four for the quarter right?

Christian Storch

Right.

Carl R. Christenson

So five months, if you analyze the five months to $65 million you get to about a $150 million versus what was, yes.

R. Scott Graham – Jefferies LLC

Okay. So that impact I can do the math on that, so you’re coming up with a 100 basis points gross margin improvement next year half from Svendborg and half from the pricing, right?

Christian Storch

Right.

R. Scott Graham – Jefferies LLC

Okay.

Christian Storch

Little bit of volume.

R. Scott Graham – Jefferies LLC

Plus a little of bit of volume, the only question I have is that since you guys have shown the ability to get pricing even before this initiative, shouldn’t you still get pricing on the non-affected portions of the business?

Carl R. Christenson

Yes, so what we’ve said is that, this 50 basis points of incremental price next year related to this project until that normal price increases.

R. Scott Graham – Jefferies LLC

On top of normal price right, right, right. So then the 50 basis points that you’re baking in for the strategic price and you’re saying 31% gross margin then there would appear to be then some potential upside to that 31% gross margin.

Carl R. Christenson

Well, you also have to consider that some of the price increase, the normal price increase offsets, cost increases that we see. So we have wage increases, we have material cost increases going into effect, energy costs are going up, natural gas is going up significantly, so we have to offset those cost increases with the normal price increase.

R. Scott Graham – Jefferies LLC

Gotcha, no understood, there is always puts and takes, I get that. Last question is on the fourth quarter’s SG&A. So you’re – when we ex-out the items, right, we’re coming up with a pretty nice decline in the SG&A rate. Question is how did you affect that and is that also maybe a little bit of wastage of the ERP is it sustainable?

Carl R. Christenson

So the charges, well that was inventory, the workers compensation claims that actually hit cost of sales, so they did not impact SG&A and if I would not exclude them from SG&A. So when we ex-out the Svendborg impact, we looked at a fairly normal SG&A trend in Q4.

R. Scott Graham – Jefferies LLC

So essentially in 18% level.

Carl R. Christenson

Maybe slightly higher than that.

R. Scott Graham – Jefferies LLC

All right. Okay, I get that, but then your comment before that Svendborg being a substantially higher gross margin. And you’re saying essentially that it also helped more, it didn’t really, I guess I’m little confused, how did you Svendborg help SG&A this quarter because there were such little revenue, how did that really help you?

Carl R. Christenson

It didn’t help, we owned it for two weeks, the SG&A percentage of sales is higher than the Altra core business, so it actually hurt a little bit from a percentage sample.

R. Scott Graham – Jefferies LLC

Right, you know maybe I’ll just ask this question offline I’m still then wondering. I still have a couple of other questions around that, but good quarter, thank you for your time. I appreciate it.

Carl R. Christenson

Thanks, Jeff.

Operator

Thank you. Ladies and gentlemen due to time constraints we have reached the end of the question-and-answer session. I’ll now turn the floor back over to Mr. Christenson for closing comments.

Carl R. Christenson

Good. I would like to thank everybody for joining us this morning and we look forward to talking to you after the end of Q1. Thank you.

Operator

Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

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