Regal Rexnord Corp (RRX) 2002 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Regal-Beloit First Quarter Earnings Teleconference. At this time all participants are in a listen only mode. Later we will conduct a question and answer session with instructions given at that time. If you should require assistance during the call please zero then star and an operator will assist you.

As a reminder this teleconference is being recorded. I would now like to turn the conference over to the Chief Financial Officer, Mr. Ken Kaplan, please go ahead sir.

Thank you Bill, good afternoon everyone. This is Ken Kaplan. And with me today are Jim Packard, Regal-Beloit's President and CEO, and Henry Knueppel, our Executive Vice President.

This call today is in reference to our first quarters earnings announcement released before the market opened this morning. If you have not had a chance to read it the news release is up on our Web site at Regal-Beloit.com.

OK Bill, would you provide the participants with instructions for the questions please.

Thank you, ladies and gentlemen. If you wish to ask a questions please press the one on your touch-tone phone. You will hear a tone indicating you've been placed in queue; and you may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your handset before pressing the number.

Once again, if you do have a question or comment, please press the one at this time.

Before starting please keep in mind that with the exception of historical facts we may make forward looking statements during this conference call. Investors or directors to the company's documents files with the Securities and Exchange Commission. Before we take questions Jim and Henry would to just make a few brief comments.

Thank you Ken. This is Jim Packard, and good afternoon to all of you who have joined.

Henry is going to cover the first quarter real briefly in terms of what we've seen and how we feel about it without getting into a great deal of specifics. But I want to make the coarse of comments that I like everyone's who's listened probably is aware that we had a very successful secondary stock offering in the first quarter.

We publicized we went out the raise our self three million shares, we actually given the shoe and are over allocation that we were allowed. We ended up issuing four million 110 thousand shares and we grossed - well we netted about $90 million.

We feel terrific about that a very successful road show and we really very much appreciate all those people who have joined us as new share holders and those who were previous share holders who have taken even a greater position in the company. That was terrific and we've applied all that to our debt and of course things in that regard look much better than they have.

So not to linger on the old news, Henry why don't you give us a couple of comments in regards to what you saw in the first quarter.

Thank you Jim. I am happy to say that we've hit our first quarter sales and earnings projections. In an economy like we're in, as cloudy as it has been we feel pretty good about meeting the expectations and being a little bit above the center line.

As we've been saying for sometime now the activity level in the market place has been very solid. Excellent quote opportunities and quote requests, project work is very strong it has not translated itself into substantially increased bookings. Although we were up nicely in the first quarter over the fourth quarter it needs to continue to materialize as the year progresses.

On the positive side feel pretty good about where we are and the progress we are making with many of the earnings improvements that we've talked about previously. If there is any negative at all it is that we would like to have a move visibility into market and feel more comfortable with the building level if you will from current levels.

With that, I guess we are going to open it up for questions.

Thank you, once again ladies and gentlemen if you do have a question or comment please press the 1 at this time. The first line we'll open is the line of Holden Lewis at CIBC, please go ahead.

Thank you very much. I guess I was a little bit impressed with the job that you did on the SG&A line but the costs goods or the gross margin was a little bit lower than I would of expected given that you are having volume increases at least sequentially.

Can you give some insight as to why the gross margin looked relatively weak and the why the SG&A level that you see on an absolute term is that a good level or is there something in there artificially depressing it?

I'll make a quick comment and then Ken may have some others we need to add to it. Once of the things that we've had seen is somewhat of a mixed movement towards smaller motors which is typical when you start to see an upturn. Small motors have a tendency to lead the - out of the slower time and so there has been a little bit of a mix change and there is certainly some pricing pressure in the market place that would effect the gross margin.

Holden, this is Ken. What I'd to comment on here is that we had again some significant movement in our inventory during the quarter and what I did is we reduced our inventories a total of $8.8 million in the first quarter from the end of year. We think that we are pretty much at the bottom there as well and that we are going to start to see those level off and maybe even pick up a little. But when I take that 8.8 million and I adjust it for the impact that it had on absorption and then I look back at the fourth quarter where we raised inventories $2.5 million that swing accounted for a total swing in the margin of - let me just make sure, we would of gone up six tenths of one percent instead we went down one percent from the fourth quarter. There was a swing on inventory change alone of 1.6 percent. So there would have been with flat inventories in both quarters a gross margin improvement in spite of what Henry was saying with the smaller motors.

You said that if you said if inventory varmint you would have had 60 basis point you said?

One hundred and sixty basis. In other words the first quarter would have gone up a little over a point with flat inventory and the fourth quarter would have been down about a half a point.

You follow what I am getting at here?

So the difference between the quarters is...

A swing of one and half points.

We feel that we are continuing to make the improvements that we said we could make so we have in fact seen some of the things that I was talking about as well. So we feel pretty good about where we are.

Now in the SG&A area keep in mind that this quarter for the first time about $2.1 million of amortization that we were taking per quarter last year is no longer there. So if added that - adjusted the fourth quarter to get apples to apples our SG&A was still down about $500 thousand, OK?

And give some updates I guess on those initiatives that you are trying to affect the 12 to 15 million or what have you in savings. Where do you stand there now?

We're continuing to make very good progress on all of the fronts that we talked about when we acquired LEESON's we believe that we will be at the high end of the range and frankly as time goes on we think we will be above the range that we provided then which I think was 12 to 15 million per year for savings by the end of 2003.

So you recognized some incremental savings and you expect that you are still on page to do as well or better then guidance?

Thanks.

One of the things that we're comforted with now is the steel tariffs which we of course had not anticipated and trying to determine just to what degree that is affect us but certainly that is going to have some effect. Actually some of our competitors even announced a price increase based on this particular issue. Whether they get those price increases to hold or not will be interesting but certainly the effects could justify us in trying to get a price increase as well. We're are just really trying to understand it, we got more information then we sorted through at this point.

Our next question will come from the line of at Putnam Investments. Please go ahead.

Good afternoon. Could you comment on the tone of business as the quarter went on and also where you think the motor business is versus the drive and other businesses at this point in terms of momentum going forward?

The quarter started and we saw a nice just in orders and booking right of the bat in the quarter as is typically the first quarter we're on they soften slightly and that is not an unusual trend in our business. It is a hard one to explain but we looked at a lot of years of data.

In terms of the interest level in the market place as I said earlier on, quote requests, project work, general optimism from OEM's and distributors continues to be good and the expectation level in the market place continues to be that we will see albeit gradual improvement as the year progressives.

I am sorry you asked about mechanical versus electrical. In the mechanical side of the business we were a little slower than we were in the electrical side of the business in a year to year comparison that's true to form with where we were for the last four quarters. Part of that is because the electrical side of our business, motor replacement is a bigger part of what our toll business is compared to mechanical and so it follows it - that business stays pretty solid regardless of the overall economic conditions because it is a replacement market and so that's true to form. Otherwise there has not been a lot of change.

I've got some other questions but I'll stand off here.

Our next question will come from , Private Investor.

Hi guys this is Red, Former Director. Would you comment on your offshore operations? Their size in sales in profits in a general way in relations to overall corporate and what is the trend there are you interested in further expansion there? What is the outlook on that?

Red, as you know we don't publicly say with the various division sizes are. We can say on a overall sense about 12 percent of our sales are sold directly outside of the United States and I believe about 8 percent I believe is actually manufactured.

It is about six or seven of that 12 percent. Correct.

We do have a joint venture and majority owned joint venture in Shanghai making generators that is growing very nicely and we think that there are other opportunities for us expand our joint venture thought processes in southeast Asia. We have manufacturing in the United Kingdom and in Germany and in Italy, those are smaller operators and certainly in Canada we have - even though most people consider that to be domestic - in Canada we have a LEESON Canada, which we bought as part of the LEESON acquisition, and Thompson Technology.

Are you endeavoring to expand that or are you pretty much satisfied where you are?

We will - it is an increasing influence in our company. We are sourcing products from all over the world and our sourcing interests are growing. But we also believe that there are good opportunities for us to grow our sales. Probably more in southeast Asia then in Europe, however there are opportunities for us in Europe that we continue to evaluate and we are frankly growing in Europe even though we are servicing some of that from the United States and the dollar is up.

We've been able to grow that business in the past year a little over 20 percent I believe based on some new product introduction. So it will play an increasing roll of importance in our company no question.

Thank you.

Our next question will come from the line of Alexander Paris of Barrington Research, please go ahead.

Good afternoon. I think my questions were answered but just a generally - if you could refresh my memory, what is the percentage of your business roughly that goes to distributors as opposed to OEM's?

We are very close to 50/50.

And the inventory - your sense of the inventory at the distributors is liquidation pretty much over?

Yes we believe so, we don't see any tendency right now to reverse that and start putting any inventory in. Which frankly a lot of times is good for us because we are a quick delivery company but we believe that most of the liquidation - there may be some small exceptions but generally speaking, yes they are very lean.

Do any of your majors report to you that they are starting to see an up tick in their point of sales what I guess would be the first sign for them to start picking up inventories I guess.

The difficulty in answering that question is that do any of them? Yes, but when you try to expand that into is that across the border, there are also some that it isn't or it might be going the other way. We are continuing to see the trend toward large distributors getting larger and fewer independents. So the large distributors are seeing some gain and beyond that it's a little bit spotty.

So generally the inventory liquidation - inventories are fairly lean and there are some spotty evidence that the point of sales for distributors, at least in some areas is going up?

Yes

Now is this visibility any worse then it is in past cycles or is that just a buzz word that everybody's picked up here? Are they really playing it closer to vest than they have in past upturns? Say in the last upturn?

Who do you mean in this case?

Your distributors or your OEMs.

I think the visibility is - since we've been in this thing now for two years - probably it is a clear as it's been for two year which is pretty unclear when you compare it back to some of the previous cycles we've been though because no one has just got the same basic drivers that we've been able to put our hands on before not as they us to be.

It is obvious by the fact that the economy was strong for a long time and the industrial economy wasn't. That was unusual so when you take that and all the other effects of things going on that is the reason you have some trouble with the visibility but I don't think the visibility is any different right now than it was in other quarters.

In other words we don't know, you just keep driving it is a little bit like driving fast in the fog.

Seasonably should the first quarter be a little bit better than the fourth quarter?

Yes.

So this is a good sign of an upturn, since your first quarter you see some sequential growth so it's now seasonal it is actual good evidence of an upturn?

You said is the first quarter seasonably a little better than the fourth quarter and we just completed the first quarter and it was better than the fourth quarter but relatively seasonal. That is a normal seasonal kind of thing.

I guess I meant less than the fourth quarter, I am sorry.

I am sorry no. Seasonally it is a little bit better than the fourth quarter but relatively close. I think Jim's made the point several times in recent years. In a situation we're in we are not sure that seasonality means a lot.

OK thank you.

Our next question will come from the line of Michael Schneider at Robert Baird, please go ahead.

Hi guys. Maybe you can spend a minute on just the bookings Henry, you mentioned that the pace in January was good and maybe it pulled off in February and March. For the quarter do you have an idea of what orders or bookings were actually up?

Right at seven points about 7.5 percent overall bookings were up.

And again you are not concerned that January was the strongest month? It sounds like that is a typical pattern?

It is fairly typical actually it is very typical.

Mike that comes really - more and more this country seems to shut down the last half of December and it is just pretty much people shut down the last half of December and start up in January with all new orders. It is just one of those funny things - end of year don't spend any more money go home December the 15th. It just puts a lot more pressure into the first month.

Jim give me your perspective. You've seen a lot of these cycles and Valve Door reported real good order numbers for the quarter you guys are up 7.5 percent. Is it too early to call that we are coming out of this or is there any other indications internally that give you a bias one way or the other?

Unfortunately I have to just use that gut feeling. You know people that you talk to and the attitudes and projects you see and the kind of things that you see people working on and all those kinds of things. I am optimistic that there is going to be this very slow recovery, I mean it's there, there's every sign of it and I am comfortable that we are going to see that.

Obviously in our projections for the second quarter we are expecting things to get better and of course our plans for the year was consistent improvement throughout till the end of the year.

I have no reason at this point even though I said it always a foggy projection to believe that there is nothing that I am seeing that would tell me that won't happen.

And in particular we've talked in the past about the cutting tools business being a small but a healthy leading indication. What have you seen there?

We've seen three consecutive months of improvement in those bookings and as Jim said those are pretty good tests really of the general manufacturing help because they are buying cutting tools only if they are cutting chips.

Right and like you mentioned before the other good leading indicator is the small motors?

Yes.

Anything else you watch Henry?

Well, we watch a number of things but consistently in our company those are the early in areas. We see growth there before we will see it in other locations.

And then I guess the one thing I was most encouraged by is if you look at the incremental margins on the motor side this quarter you actually did a 38 percent incremental margin on the additional four million in revenue. Are those the type of numbers we should look for going forward or is there some aberration this quarter?

First of all Mike did you take into consideration again if you are talking about gross or operating margins?

I am talking the operating margins.

That's right that is all that's in the segment. Did you adjust for the goodwill amortization change?

No I imagine some of that...

OK so that is in aberration this quarter and I think that I indicate and I have all along that was 2.1 million pretax so you've got to adjust for that.

But we should see that each quarter this year?

That is correct.

Whether you adjust for that or not should we see similar magnitude of incremental margins?

I think what you saw last year was that the year went on and our volumes dropped, our margins dropped. So yes I feel that if we reverse that this year and you heard Jim talk about steady improvement I think we should see incremental margin improvements. There is no question about it.

: We're going to build inventory, you are going to have an increase in sales. We've got all these things we've been doing that are going to pay off for us so clearly Michael my sense is that they better improve or we've got to get another group of management people.

We said before that we thought that with steady state sales that we could improve and we have a lot of upside operating leverage so it doesn't take a lot of movement in the market for us to make a lot of movement in earnings.

Can you quantify during April and even during the second quarter what you expect to do with production? Will it be up five, ten, 15 percent versus the first quarter?

: I don't know that we know that answer to that Michael I do know that we've got this huge ship of reducing inventory turned around in these locks going the other direction because we can't go much lower on inventory we won't have anything in working process and we won't have anything on our own shelves so that's got to increase factory output by some number but I have not sit down and say "gee what is it" and I don't think you have either Henry.

You've increased line rates in about every place except large generators I think.

It is going to be up Mike but right now - it is not wild numbers up that is fore sure but as Jim said if just stop the inventory reduction that is probably three or four percent by itself. That is what we see in the market.

Perfect and final question, Ken do you have an interest rate - I am sorry interest expense assumption for the second quarter that we can use?

What I can tell you is that when you take out the 90 million that we repaid in debt and we anticipant, not anticipate we will be getting a 75 basis point reduction in our interest rate on May 15th under our loan agreement because we lowered our leverage ratio so altogether I think that will add improved or reduce interest expense after tax by about $800 thousand in the second quarter.

OK thank you.

Our next question will come from the line of at , please go ahead.

Thank you. Just so I understand with regard to the amortization. Are we saying that amortization for the year has been in a $10 million swing?

It is 8.4 million pretax and 6.75 million after tax and I won't get into the details of it because some of it was deduct able before and some of it wasn't. But those are the numbers that we've discussing over the past six months.

OK. And with regard to - just general tone of business etc. - did international revenue rise sequentially? Did we see better growth overseas? Talk about that please if you could.

I have to think about that for just a second but we saw a definite growth at our joint venture in China. We saw some growth in Europe, if you are talking about over the first year I assume now right?

Yes, fine and relative to the US, yes.

The area that we had good growth in last year was at Thompson Technology which was in Canada that was a very significant - when we did that acquisition - it is not a big company but we saw good growth opportunities and we achieved those last year. that was LEESON Canada who experienced the same kind of general decline that we saw here in the United States, the same product categories.

So I haven't added all those numbers to see exactly where all that boils out but just plain gut feel I would say that it was slightly better than it was here in the United States but not a lot.

Because the addition of LEESON for a full year last year and Thompson for a full because both of them were acquired in 2000 our number went up to 12 percent in the annual report from the prior year when it was only about seven percent.

OK fine. And with regard to the 12 to 15 million hope for expected savings with regard to LEESON I believe that's only LEESON and we've seen everything other than sort of normal ongoing things, have we seen everything from Lincoln?

Greg first of all it is not just from LEESON those were estimated synergies that Regal-Beloit would get as a result of integrating the motor divisions.

So everything so that includes Lincoln and LEESON and everything else all together?

It includes mostly motor plans, Lincoln to get it to point there is savings this year over last year that is yet to come that was above that 12 to $15 million that will come from just getting the Lincoln situation behind us and rationalizing both products, customers and the new factory which we put into place last year up to speed. It hasn't really had a chance to show what it can do so you are right, , we hope there will be contributing to our performance, areas like that plus there are other - we're real focused as you know on our costs. So there are other areas in the company we expect to see as well.

I wouldn't want people just to believe that was the only the thing we had going was this 12 or $15 million that comes from the integration of the motor technology group.

With regards to individual customers, have we seen any drop out or change or have you lead any customers go? Distributors or any customers that are shall we say that are less than ideally profitably?

In the area of Lincoln one of the things that we did as we rationalized Lincoln was determine which customers we could effectively serve and make money at and wanted to grow with and which ones that probably would be better to go somewhere else. So I think in the last year not necessarily just in this first quarter. But when I look back at our first quarter this year versus the first quarter of last year we finally have gotten - shed ourselves of some of those customers and some of that volume, some of the motor volume we reflected we don't have but outside of that no, there's not been - no we've actually it would be the other way around.

So in other words there weren't many customers that dropped out from the Lincoln thing, I mean those were gone by the first quarter of last year?

No they are gone by now.

: They are gone by this quarter we still had them in the first quarter last year.

OK so there is somewhat of a change with regards to that. What about - we are kind of on the backburner with regards to acquisitions at this point?

No, no after we've did this offering it has kind of put us in a position to pursue both on acquisitions. I mean obviously we are not out looking for the monster acquisitions but we have a number of both on acquisitions that we are continuing to pursue and that is part of our strategy.

And would you expect something by the end of year, even small?

Expect? I can't project but I'll be disappointed if we don't do something.

Well you've got all that money burning a hole in your pocket.

: I don't have any money; Kaplan took every bit of it and gave it to the banks.

I don't let Jim keep it in his pocket.

More than you expected, thanks very much.

Thank you our next question will come from the line of of , please go ahead.

Good afternoon. Could you tell me what you think the tax rate is going to look like this year?

Sure in the first quarter you saw it a little below 37 percent, we feel that it is going to stay in the range of that 37 percent tax rate. Things have come down without the goodwill amortization but there's some other miscellaneous factors that are going to give us a little more favorability this year.

OK and as far as the interest rate on your debt, I know you said it is going to go down 74 basis points. What are you paying right now?

Four point one percent.

And how many shares are outstanding now after the offering?

Twenty five million and a couple of thousand so it 25 millions.

OK thank you.

Our next question will come from the line of at McDonald Investments.

Good afternoon gentlemen. Could you give us a sense of the size of your unused credit facility?

Sure we have 350 million and right now we're at a little under 250 million in debt so about $100 million.

About $100 million. In terms of MNA activity are you seeing any change in prices, are people getting more desperate to sell or other way around?

Well they are certainly down from where they were a couple of years ago to more reasonable levels. We haven't been actively in the market until just recently so I would say we can't speak to just recent changes but certainly looking to where it is now versus a couple of years ago it is much better pricing.

What do you think would be a reasonable cash flow multiple on bolts and company?

asked about a reasonable multiple to pay for a bolt on and you know it depends on the circumstances we evaluated over a long period of time in opportunities whether they are synergies. It depends on the size - obviously if it is a fixer upper you aren't even looking at multiples but if it is something that is successful - maybe you start looking in the four times range and look up from there. Ideally you wouldn't want to be paying much over the six, maybe seven at the max if it is just a great opportunity.

OK thank you.

Our next question will come from the line of at Asset Management.

Good afternoon gentlemen. Two very quick ones on some specific numbers. The DNA for the quarter and then CAP EX also.

The D was 5.4 million and the A now is only 300 thousand and that is really amortization of C's and type of intangibles. We started off slow on the capital investment we are still watching the economy very closely and we had about $2 million in CAP EX for the first quarter.

OK thank you.

Our next question will come from the line of CIBC, please go ahead.

Can you give a little bit more detail in terms of you mentioned higher steel prices and you mentioned pricing trends. What have you seen in pricing to date as in positive or negative and has that resulted in - did that result in your inventory burn having some impact on the margins from that perspective?

In terms of pricing that is going on in the market it's a mixed bag. As Jim said we've seen two people who have just raised prices based on the steel tariffs and what they expect to have happen. There is at least one competitor who reduced their prices to a minor amount.

But generally speaking if you look at just published market pricing it is flat. In terms of what is going on in OEM's there is pressure downward. A huge no but a point seems like a lot of time.

: I would say we had no effect on margins - this quarter.

And the fact that a couple of folks are raising them in perhaps in anticipation or recognition of steel price increases have you begun to see those? Are those having any bearing on your profitability at this point or in upcoming quarters?

No impact yet. But really it is now just playing out. I don't why they anticipated what they anticipated but probably - there is no question there is going to be some impact. Everyone is in the negotiating stage to try to minimize it or eliminate it.

Have your historically been able to pass those through?

Yes.

Then just a update on your hunt for someone to head up sales for motors?

: No hunt so right now they've got the best guy in the world managing it and that is me.

OK so the hunt for the second best?

We open the line of at Putman please go ahead.

Could you comment on the competitive dynamics you are sensing out there with the motor and the drive business. And in particular majors around you, are there any changes in your perceptions of them?

: , we missed the part of your question could you do it once more?

Sure I had the speaker phone on. In terms of the competitive dynamics in the market place with your major competitors in the two businesses that you are in are you seeing any new or different trends?

No, it is a very competitive market so we as everyone else is running special programs at times to try and encourage stocking or special discounts programs to encourage purchasing of certain kinds of product but I can't think of a time when that wasn't going on so there isn't anything that seems to be a see change.

Thank you.

And there are no additional questions in queue at this time please continue.

: We thank everybody for participating today and obviously we thank and welcome our former and shareholders that we've had for quite a few years and certainly welcome all of our new shareholders from the secondary offering.

And we look forward to talking to you next quarter and hopefully we can have some good news for everybody.

Thanks again we'll be talking to you again. Have a good day.

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