Regal Rexnord Corp (RRX) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Regal-Beloit first quarter 2005 Earnings Conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Please note this conference is being recorded. I would now like to turn the call over to Mr. Jim Packard. Mr. Packard, you may begin.

Thank you. Good morning to everyone and thank you all for joining us. We appreciate your interest and your support. I have here with me today Ken Kaplan, our Treasurer and Secretary. I have Dave Barta, our CFO, and I’m pleased to tell you that this is the first meeting in a long, long time that Mr. Knueppel, who has been here at every one of these, will assume the role of the CEO, meaning that he’s responsible for answering all the difficult questions. I’m now serving as the Chairman which means I am the astute observer and allowed to sit in on these meetings and then assess them afterwards with these guys and tell them what they did good or bad.

We had a great quarter and we’re anxious to get into it. We’re going to start out with Ken Kaplan and then Ken will flip it over to Dave. Everybody is pointing fingers here this morning. We’ll go from Ken to Dave Barta and then Dave will turn it back to Henry and Henry will report and handle the question and answer session. So again, we’re happy to have you all here and it’s a bright sunny day here and we feel the sun shining pretty well on our performance as well. So Ken?

Thanks, Jim. Good morning everyone. I’d like to remind everyone first that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of factors that could cause actual results to differ materially from those projected, please refer to our 2005 filings with the SEC. Now, if you haven’t had an opportunity to review this morning’s earnings and dividend increase news releases, they are up on our website at RegalBeloit.com and you can refer to them as we go through this conference call.

Before turning the call over the Henry, excuse me, to Dave, Marcella, would you please provide the participants with instructions for asking questions after we complete some opening comments? Thanks.

[OPERATOR INSTRUCTIONS].

Okay. Dave?

All right. I think we’re going to start with just a review of the numbers first this morning. Again I think, as Jim said, we had a pretty strong quarter. We’re really pleased and we’ll talk about the details. Sales for the quarter were $337.8 million, which is 107% increase over the first quarter of last year. Included in these sales are $155 million of sales from the CAC and HVAC businesses that we acquired last year from GE. Excluding these sales, the sales increased 12.1%. As we discussed in the fourth quarter call, we do feel that there was some pre-buy activity in the fourth quarter ahead of price increases. However, I don’t view that as a terribleysignificant number. We’re pleased also that the composition of our sales increase reflected both positive contributions from both pricing and volume.

Looking at the results by segment, electrical segment sales increased 148.9% including the sales from the acquired businesses. Excluding those sales, segment sales increased 15.5%, so again, a very strong performance from our electrical group. Mechanical segment sales increased 3.6%, as strong sales in our Hub City, Mastergear and Durst divisions were offset by soft sales in our Cutting Tools and Grove Gear businesses.

The gross margins for the quarter were 20.3 which was consistent with the fourth quarter gross margin and compares to 23.4 in the first quarter of last year. Gross margins in the acquired businesses were below the average and that was driven primarily by the operating factors that we previously discussed and the impact of some acquisition related costs. Additionally, the financial profile for that business going forward will be that it will have a gross margin that is at or slightly below the fleet average. However, the operating expenses, or SG&A costs, are well below our fleet average leading to the quality of business that we discussed in the last call on the acquisitions.

Excluding the gross margin impact of the acquired businesses, gross margins were within 40 basis points of where we were a year ago and we really believe that this demonstrates our commitment into addressing the raw material cost increases through pricing and productivity. And again, we compliment our business units on their performance on improving margins. We did continue to see raw material pricing gap in the quarter. Copper particularly increased throughout the quarter. The gaps between the price and the costs impacted margins by approximately 70 basis points.

Operating expenses for the quarter were 12.6 % of sales versus 15.8% in the first quarter of last year reflecting the volume leveraging of our fixed costs and also reflecting the lower level of operating expenses for the acquired businesses. Income from operations was $25.9 million versus $12.4 million in the first quarter of last year. That’s an increase of 108.9%. And as a percent of sales, income from operations was 7.7% versus 7.6 in the prior year. This increase again is reflective of the contributions from the acquisitions and also the actions we’ve taken regarding pricing and productivity.

The tax rate for the quarter was 37.3% and we continue to expect a rate of approximately 37% in the next quarter. Net income for the quarter was 12.2 million, an increase of 78% versus 6.9 that we reported in the first quarter last year and fully diluted earnings per share were $0.41 which is an increase of 52% versus the first quarter of last year. The average number of diluted shares was 30,244,000 as compared to 25,782,000 last year and this increase reflects the shares that were issued to General Electric as part of the HVAC acquisition at year end and an increased diluted impact of approximately 600,000 shares from our convert.

The material pricing gap that I talked about impacted earnings by approximately 4 to 5 cents. From a balance sheet perspective, our total debt was $563.6 million at the end of the quarter which is an increase of approximately 16 million from year end. And at this point, we remain very comfortable with our level of debt and our ability to continue to reduce debt now moving forward. Cap Ex for the quarter was $7.2 million and depreciation and amortization was 9.6. At this point, I’ll turn it over to Henry for his comments on the operations of the business.

Thank you, Dave. Good morning everyone It’s certainly a pleasure and an honor to be speaking as the CEO of the company, my first earnings call. I have some big shoes to fill and I will endeavor to do so with great vigor. More importantly, it’s a pleasure to be talking with you about a good first quarter and strong optimism about what the future holds for the company. To give you a little bit of color on the quarter, the quarter was driven by strong year over year revenue growth in our legacy electrical group, strong performance from our acquisitions, good progress on strategic earnings initiatives, offset somewhat by further materials cost increases, healthcare cost increases, and some of the acquisition related expense.

When looking at our markets, our markets were very solid throughout. Particularly strong, I think, were the HVAC market, even though it is a seasonal market and the first quarter is a weaker part of the year, the fact is that the market itself was up 5 to 6% over the previous year, and as all of you know, the previous year was a record. So it’s a very strong market. Also strong were power generation, mining, food processing, construction, industrial equipment and the pump market was very strong in the first quarter. That is slowing up a little bit as we speak, but the first quarter was influenced by some of the flooding we had late last year. The only markets that were off somewhat were irrigation, which has its own set of drivers, and a little bit the seasonal markets that we have in marine, pleasure craft marine and high performance.

There are several markets that we think have a lot of runway for continued growth. We believe that power generation in the underdeveloped countries is gaining steam again. If you’ll recall, last year about the end of the second quarter, we said that there was some slow up. We see the inventories depleting and we see the demand strengthening in all areas internationally. Oil and gas is continuing to gain speed. Commercial construction is continuing to gain speed. Industrial automation and process industries are gaining speed. And frankly, we think that there’s good opportunity for us to increase and ramp up our growth in our ECM motors for the HVAC market. As more and more people understand the benefits in both energy and comfort that comes from that product, we believe we will see a continued ramping.

To give you a little color on the pricing we achieved, I think the good news is that we achieved what we told you we would achieve last quarter and the quarter before. The bad news is it was still not enough to offset the deficit created by material cost increases. Nevertheless, we feel pretty pleased with what we achieved overall. We feel good about our cost improvement initiatives, the electric gear move is a little bit behind schedule and finished up during the first quarter, but we are complete with that now and expect better results in the second quarter. We are still on schedule to close the sale of Illinois Gear next week and we think that that’s a good thing. The moves that we announced to you when we announced the acquisitions, if you’ll recall there were a couple of facilities that we did not buy and we are moving those products out to other facilities of Regal-Beloit. Those moves are on schedule and will continue as we go through the year and should have good impact on us in the coming quarters.

The migration of some of our other products to the low cost countries that cam along with the acquisitions is ac continuing move that is also having an impact. And then finally, very important to us is that we put a significantly higher investment into our lean Six Sigma programs and we believe that they are going to have a lot of runway for improvement in our earnings in the quarters ahead. So as you look at the final thing I guess I would say about the first quarter is that we had very strong performance from our acquisitions. Markets remain positive as I already mentioned. We told you that we were getting an excellent team of people and we can tell you that we could not feel stronger than that.

The ETM growth, as more people look to the advantages of what it brings to the market continues to be a very positive influence. So in total looking at the acquisitions we expected great things and we are receiving great things. Looking ahead at the second quarter, we have a very positive outlook. HVAC we think is going to continue to be very strong Power generation, as I mentioned, is strong and we have good runway for improvement as I had told you earlier. We are seeing continued improvements in the mechanical group as some of these moves are completed and we believe that we will see a nice ramp up in earnings in the coming quarters And you can tell from our dividend announcement this morning and our earnings guidance that we’re very optimistic.

As we look at the quarters ahead, obviously the world economy and competition and materials pricing and so on are all challenges that we have to face. But we think that we’re starting from a very good level right now and that the opportunities outweigh the concerns. So with that, we’re going to open up for questions.

[OPERATOR INSTRUCTIONS]. Our first question comes from Alexander Paris from Barrington Research. Please go ahead.

Good morning, collect your bets.

Some things never change.

There’s no one to bet against you anymore, Alex.

With such a great quarter, it’s hard to come up with any questions. I would like to say it was a great quarter and congratulations to Henry. You’ve inherited a huge company here now. Just one thing on the HVAC. The seasonality. Can you rank the quarters by seasonality? You said the first quarter is weak?

Yeah, I think if you look at the quarters in order from strongest to weakest, it’s second, third, fourth, first.

Okay. And approximately how much in sales is involved in that seasonality? In other words, before these quarters have been fairly even on a seasonal basis. Does this change it significantly?

Alex, we talked a little bit about this at the last call and you’re right, our business was almost 25/25 across the board previous. And for our total business, this isn’t going to move us - - there’s not going to be wild swings. What you’re going to see is take that kind of run rate plus or minus a couple points. So you’ll see a second quarter that’s a couple points above that and then the order that Henry gave you, you kind of work from there. So again, it’s going to be a couple points difference plus or minus a little bit, and that’s enough obviously to move the sales in a pretty big way when you’re a company the size that we now are and also move the earnings.

Okay. Just one other question, kind of a macro question. It sounds like most of your markets are strong, but now the media is harping about a soft patch in the economy. And there is some slowing, but are any of your customers at all narrowing that concern that the economy is slowing? Particularly the industrial sector?

We are not hearing from customers that they are overly concerned about it. There’s been some choppiness, Alex. We saw a little slowdown, for example, in the middle of the first quarter. We see a little bit of hesitation currently. But no, I think the fundamentals there are still strong in our customers’ eyes and there’s, we’re not getting any pushback about where they think the future is headed.

Okay great. Thanks again.

Thank you. Our next question comes from Michael Greenworld from BB&T Capital Markets. Please go ahead.

Thank you. Good afternoon, or good morning. You mentioned inventory pre-buys in the Q4. Has most of that worked off now to date or do you still see this as an issue? I guess I’m just curious of how the channel is looking right now.

Well, the channel looks good. We did see some pre-buy in December. I think we told you during the first quarter report that it was $4 to $5 million worth. But we also told you in that call that January came up stronger than we expected and so, no we don’t think that there’s any of that left over in the channel.

Okay. And the tax rate going forward. Is 37.3 a good number? Or I guess it was a little bit higher than we were expecting.

Yeah, I think we had guided you about 37% for the first quarter so we were at 37.3, a little bit above. But I think 37% is a good number going forward.

Okay, and on the interest expense, it was a little higher than what we had sort of expected. Is that a good number going forward? Are you expecting this - - was Q1 just a little bit higher than, was there any issues where Q1 is going to be higher than the rest of the year? Or what do you see on that as well?

This is Ken. Obviously a lot has to do with cash flow. So if our cash flow as is expected to improve in the second quarter brings our debt down, we would see some improvement there. But you know, I don’t think that when we put together our plan initially that we necessarily expected the Fed to raise a quarter point every single meeting. So to some extent, it’s putting the rates up a little higher than we anticipated, okay?

Okay. And on the gross margin line, you mentioned there was some particulars in the quarter that lowered the gross margin. Can you go in a little more detail about that in what we can expect forward? And also, was the, on the pricing front, can we expect to see a little more expansion from there? Were you getting a hold of the prices? Were you recapturing the raw materials at the rate you were expecting from the pricing? I guess go in a little more detail on that if you could.

All right, I’ll address the pricing and let Dave talk about the margins. From pricing standpoint, we did get what we told you we thought we would get. I mean, that’s the good news. But we told you over the last couple calls we did not think we could recapture all the damage that was done by materials and that’s also true. We certainly feel like we’ve accomplished a lot. The question, I think going forward in pricing, if materials continue to increase in cost, I think that there will be further pricing match available to the market. Short of those costs continuing to increase, I think it’s going to be a relatively stable market. Dave, you want to address the margins?

Sure. Mike, I think there’s several things that are impacting the margins and obviously we talked about on the acquisition conference call the fact that we would see material inflation in that business at a greater pace than what they had experienced in the prior year and what you saw kind of in their historic financial results. And that certainly is a challenge that we did unfortunately face and as Henry said we’re addressing. There’s a couple other factors. At the acquisition conference call we talked about there being a fairly significant amount of business that because of the supply agreements that are in place and because of where we’re producing that product, and Henry referenced that in his comments, we have low single digit to zero margin on pieces of that business that, as Henry said, for the facilities that we’re not buying, we’ve got to move those pieces of equipment out of there and move that product to a production cycle where we can get cost reductions and increased margins. In addition, there was some, and it was fairly minimal, amount of call it acquisition accounting related costs in the first quarter. Again, probably in the neighborhood of $1 to $2 million. So it wasn’t terribly significant, but obviously even that would impact the margins by 100 basis points or more.

Okay. Great. Thank you.

The next question comes from Mike Schneider from Robert Baird. Please go ahead.

Good morning, guys. Henry, congratulations again first. I guess just focusing in on some of the details now, in the acquisition accounting, Dave, when you talk about 15.5% growth ex acquisitions and electrical, you’ve entirely excluded GE including their growth? Or have you actually added their growth in?

No. The 15.5 is our legacy electrical business. So that excludes the acquisitions completely.

Okay, then that sets up my next question which is if you look at the proforma numbers, GE last year versus this year for the HVAC business, what was the acquired growth by both of the businesses?

I actually don’t have those pieces here with me, but they definitely grew fairly significantly versus the numbers we had for them for the first quarter of last year.

And were the numbers on plan, I guess, for Q1 for both acquisitions?

Yes, actually slightly above.

Okay. And talk about now, as we head into the seasonal HVAC peak, you guys have this great technology now in ACM. What do you know about the specs in some of the OEM equipment design or being designed now for the 13 Seers standard? Has it met your expectations and do you have a solid understanding of what platforms you’ll be on?

Well, I think we have a pretty good view of what platforms we’re going to be on. I can tell you, Mike, that the decision making process is still taking place. As you know, it’s a relatively incredible matrix of opportunities or different ways of solving the issues. And this process of making those decisions is taking a little longer, frankly, than we would have expected. But there’s a lot obviously that’s going on, but we are pretty comfortable that there’s a real home for us in Seer 13 that’s going to be very significant.

And I guess we’ve talked in the past about ECM growth actually even accelerating as a result of this adoption. Do you still think that’s possible given obviously the robust growth that’s shown to date that this 13 Seer adoption and the platforms you’re winning will actually even accelerate that rate?

We certainly believe that we’re going to gain a bigger share of what consumers want and will demand in their homes. The matched question of course is the market that’s been running at records year over year now for 3 or 4 years, can that market continue at that pace? Certainly there’s no signs of letup and as we’ve told you before, over 70% of what we sell gets sold into the aftermarket. So even if new home construction slows down a little bit, it’s an impact but it’s a more limited impact than you might expect. So we think that there is going to be continued upside.

Okay. And on inventories, obviously [inaudible] puts out the data, but what are your guys telling you from that side of the HVAC business about field inventories? Do they believe the excess of late last year has been worked off or is still in overhang?

Just looked at the inventory information yesterday and I think the inventories are within a percent and a half of where they were a year ago right now. So we think that the inventories in the system are okay.

Okay. And then, Dave, do you have a sense in the 15.5% growth for the legacy businesses, what actually unit growth was so we can get a sense of what price is added?

Mike, we’re not breaking that out very specifically. I’ll just tell you that most of what you see as the increase is certainly coming from pricing and that should be no surprise. We told you before what kinds of things we were doing there. Unit growth is not as strong as it was a year ago, but there is still unit growth. And then finally I would say there’s also a mix change that’s taking place. Usually in an upturn, the small motors move first, though units move quickly. And as you go on and process industries come on strong, etc., which by the way are good industries for us, larger motors start to move more, and of course units don’t mean a whole lot there, but your sales volume does go up.

Okay, so presumably that favors margins as well though within electrical? The mix shift?

Um huh.

Okay. And in mechanical now, I presume the business, on a unit basis, was down year over year?

Yeah, that’s almost impossible to talk about on a unit basis because of the kinds of things we do there and the mix and the variety of businesses we’re in. But what I can tell you is that there’s two specific areas where we were down. One was in Cutting Tools as Dave said, mentioned, and that industry is just slower. There’s less manufacturing taking place in this country so that was an issue and one that we’ve been battling for some time frankly and we will have to continue to battle. The other really was a momentary thing and that was the move of ElectraGear and Dave mentioned it was business being down at Growth Gear. That’s where we moved Electra and the business that we were off by, that we did not ramp up as quickly as we expected to. So that was a momentary thing and should rebound in the second quarter.

Okay. So margins now in mechanical, are you still comfortable that we can show the types of historical incremental margins in that business? Or I guess as I’ve feared, maybe pricing in this mechanical business because of more competition is just going to be perpetually that much harder?

Well, the margin, I think we’ve said now for a number of quarters that we believe that whether or not we can get back to the margins that we had at the all time peak is debatable because of the kind of competition that exists today and where it comes from in the world. We certainly believe that our margin capacity or capability is higher than it is today and we believe we can certainly get back into the mid teens. And I don’t think there’s anything that’s changed from our thoughts on that.

Okay, and does that contemplate at least more massaging of the cost structure in that business going forward even in a good environment?

Yeah, we have a number of initiatives. I don’t think that you will see more significant closures. As you know, we’ve closed 4 facilities and made a lot of difficult and tedious moves. But the big part of that’s behind us. There’s still a lot of opportunity now given the changes that have taken place to pull out more profit.

Right. Okay, and then final question for Jim. I guess the dividend increase of almost 9% this quarter, that’s a strong signal and certainly encouraging What message do you hope to send with that?

Well if you look back at our history, we’ve been a consistent dividend payer. We’ve never cut it. I forget how many quarters we’re up to now. 180 quarters we’ve paid a dividend. We’ve had a good philosophy about dividends. We’ve simply reached this bumpy spot. We had a lot of growth going on and there’s a huge uncertainty in the economy through 2000, 2001, 2002 period. We had debt and it just wan’t appropriate to raise it. I think now we’re saying we need to give our shareholders a greater value and we can afford to do that and we have the optimism about our operations and our direction and our future and the management team and just about everything that we’re doing, that this is an appropriate move and it gets us back on track.

But what I hope since so much of those dividends come to me, will be a consistent increase. But no, it’s a demonstration of our confidence and it’s an appropriate action to take even more so now. I’m not telling you anything you don’t already know. Dividends are a greater value to people because of the taxation, so it’s a better way for us to give good returns to shareholders than previously. There’s no magic in that answer, but it’s a lot of confidence. I have a huge amount of confidence in the management team that we have and the management team that we’ve assembled here. And I think with Henry’s leadership and Dave and Ken and Mark Gliebe and Dave Eisenreich, we’ve got a really, really strong team of people that have positioned themselves and this company in such fashion to deal with the violent storms in the calm seas. And I’m very comfortable with that and I think our board is, too. Again, which is a demonstration of the level of confidence.

Okay. Thank you.

Thank you. Again, if you have any questions or comments, please press star one. Sir, we have no further questions.

Okay, I’d like to just close then by saying thank you to all of you. We appreciate your interest in us and your questions. To know us is to love us, so the more you know about us, we think the better you’re going to like what you see. Just to finish up the cliff notes from the first quarter one more time, it was a good quarter driven by good fundamentals. The acquisitions are performing as well as we expected and better. And we are very optimistic about what lies ahead. So with that, thank you all, have a great day.

Thank you. Ladies and gentlemen, this concludes the Regal-Beloit’s first quarter 2005 earnings conference. You may all disconnect and thank you for participating.

Marcella, thank you very much.

Thank you, Sir. You have a good day.

Okay, thank you.