Regal Rexnord Corp (RRX) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the fourth-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 that this conference is being recorded.

I will now turn the call over to Mr. Ken Kaplan, Vice President, Treasurer, and Secretary.

Thank you, Christine. Good afternoon, everyone, and welcome to the REGAL-BELOIT fourth-quarter and full-year 2005 earnings conference call. With me here today are Henry Knueppel, our Chief Executive Officer, Mark Gliebe, our newly-appointed REGAL-BELOIT President and Chief Operating Officer, and Dave Barta, Vice President and Chief Financial Officer.

Before starting, I would like to give the customary cautionary statement. 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 filings with the SEC.

If you have not had an opportunity to review this morning's earnings release, it is up on our website at regal-beloit.com. Now Henry will start call off with some comments.

Thank you, Ken. Thank all of you for joining us. It's a great day here in Beloit. We appreciate your interest in REGAL-BELOIT.

To give you a brief idea of the agenda, I'm going to make a few headline comments, turn it over to Dave Barta, our CFO, to talk about the financial aspects of the quarter and the year, and then Mark Gliebe will cover the operating highlights and give you some color on our markets and the SEER 13 dynamics and materials.

As you know, Mark was promoted to the position of President and COO at the end of the year. Mark is both a pleasure to work with and an incredible talent, and he's making a significant difference in driving our business processes and performance. It's a pleasure to recognize his contributions with the promotion.

Finally, I will finish with a discussion about our key initiatives and a view of the first quarter and then we will open it up to your questions.

With that, the headlines for the quarter were that it was a truly terrific quarter, driven by a number of different factors. Certainly the heat, record heat from the summer months driving the HVAC business and the SEER 13 prebuy that we have talked about in previous calls was a significant factor. But it should not be overlooked that we had very strong industrial sales in our legacy electric motor businesses and very strong sales in our power generation business.

We're pleased with our cash flow, which was driven by a strong operating profit and working capital improvements through all of our businesses. We also experienced solid growth in operating profit due to our initiatives.

The Mechanical Group improvements were significant after completion of the moves that took place earlier in the year. The Industrial Electric Motors business was up significantly, both on volume and productivity improvements. And of course, we had strong productivity in the HVAC business, led by the volume from the SEER 13 prebuy, as well as the completion of the moves out of Tell City and Taylor Street, facilities that we did not buy along with the acquisition.

Finally, the lean Six Sigma process that we have been talking about all year is delivering significant financial results and is still ramping up. I can tell you that we are incredibly proud of what our people accomplished both in the quarter and in the year.

With that, I'm going to turn it over to Dave Barta.

Thanks, Henry. As Henry said, it was an outstanding quarter financially. We exceeded the revised guidance we provided in December and I will give you some color as to that.

Sales for the quarter were strong, 376.2 million, which was a 69.5% increase over the fourth quarter of 2004. Included in the sales results were 137.4 million of sales from the HVAC business that we acquired from General Electric on December 31 of 2004. This performance reflects the strong results in the Electrical segment, where sales increased 90.4%, including the sales from the HVAC business.

On an organic basis, segment sales increased 9.8. And within that, again, there were some outstanding performances. The sale of our generators were strong, increasing over 20%. Sales of our legacy motor products were strong as well, increasing in the midteens.

Sales in the Mechanical segment were basically flat, increasing 0.2%. The modest growth was due in part to the sale of the Illinois gear business. Recall that we sold that business in May. That reduced sales for the quarter by about $2 million. So adding back that, sales would have increased 4.3 in the Mechanical segment.

Again within this business unit, we also saw really two extremes, with softness in certain businesses, such as the cutting tool business, where sales were down, again almost double digits. Contrast that performance with several of the remaining Mechanical divisions, where sales increases ranged from low single digits to one division that was up almost 30%.

Gross margins for the quarter improved to 22.8% compared to the second -- or third quarter of 22.1 and prior-year of 20.3. Material costs continued to have an impact on margins throughout the quarter, with copper prices in particular increasing throughout the quarter. However, our new products, our productivity efforts, pricing actions we took, and positive product mix across our entire business certainly predominantly offset those.

The gross margin of our legacy business showed a significant increase over the fourth quarter of 2004 and, again, reflected many of the drivers that I just mentioned.

Also during the quarter, we were successful in selling our Anaheim, California facility, which previously housed our electric gear business. The net sales price was 5.3 million. There was a gain on the sale of about 2.4 million, which was offset by final transition-related costs due to the sale of the Illinois gear business and the move and closure costs for the remainder of the Chicago facility, along with the write-off of certain other assets.

Operating expenses were 12.6% of sales versus 14.5 a year ago, really reflecting the leveraging through volume of fixed costs and the impact of the cost structure of the businesses we acquired from GE.

Income from operations with 38.3 million versus 13 million a year ago, an increase of 195%. As a percent of sales, income from operations was 10.2% versus 5.9 in the fourth quarter and versus 10% in the third quarter. This again reflects the contribution from the new products, the pricing, the productivity, and again, the acquisition contribution.

Tax rate for the quarter was 34.3, which was slightly below the guidance we had provided. No specific drivers to that change, just a final true-up of year-end tax accruals.

Net income for the quarter was 20.3 million, which was a 190% increase over the 7 million reported in the fourth quarter of 2004. Fully-diluted earnings per share were $0.63 as compared to $0.28 in the fourth quarter of 2004, with the average number of diluted shares was 32,317,000 compared to 24,937,000 a year ago.

On a year-to-date basis, sales were 1.4 billion, which is an increase of 89%, and included in the year-to-date sales were 615 million of incremental sales from the acquired businesses. So our organic basis year-to-date sales increased approximately 7.5%.

Year-to-date sales in the Electrical segment were 1.2 billion, which is an increase of 120%, and on an organic basis segment sales increased 10%. Mechanical segment sales were 201 million, which was basically flat with 2004. However, if you adjust for the Illinois gear business, which reduced sales by about $5 million, the organic sales improvement was 3.2%. Full-year gross margins, 21.8 versus 22.1 for 2004.

Full-year operating expenses were 12.3% of sales as compared to 14.8% last year and full-year income from operations was 134.6 million, or 9.4% of sales, versus 55.2 million, or 7.3% of sales, for 2004. Full-year net income is 69.6 million versus 30.4 million, and full-year EPS of $2.25 versus $1.22 for 2004.

Turning to a few of the balance sheet and cash flow highlights. Total debt at the end of the year was 412 million, which is a decrease of approximately 37 million from the third quarter and a reduction of almost 135 million from the beginning of the year. Our debt-to-cap is back under 40%. Reduction in debt, as Henry mentioned, was due to strong cash performance.

Inventories were reduced 4.8 million in the quarter and CapEx for the quarter was 6.7 million, bringing the year-to-date capital spending to 28.4 million. That is just gross capital spending, and then we had proceeds from the sale of assets, which totaled 5.7 million in the quarter and 9.9 million for the full year.

You may have also noticed that the financial statement supplied with this morning's release showed 386.3 million in long-term debt. The remainder of our debt -- to get to the 412 million number -- is included in current liabilities, with the largest piece being 25 million of short-term commercial paper that was issued in the fourth quarter.

Depreciation and amortization was 9.8 million for the quarter and 37.6 million year-to-date.

Turning our outlook to 2006, I think we certainly will have some sales headwinds that Mark will discuss in much greater depth. But even regardless of that, we expect to see continued sales growth across all of our businesses. As we project the sales based on the assumption that Mark will describe, the seasonality of sales will follow a similar pattern to what we have described in the past, with the second-quarter sales being the strongest.

I think the difference at this point is that first-quarter sales are certainly going to be stronger than the typical seasonal pattern, and the peaks and valley differences across the year are also much narrower. Also, the fourth quarter will obviously be a tough comp due to the Q4 2005 inventory buildups in the HVAC channel.

This morning, we provided EPS guidance of $0.62 to $0.68 per share for the first quarter. This guidance is driven by first the strong sales forecast that we have -- and this is again across a majority of our business, including a continued strength in the HVAC part of our business; and continued year-over-year margin improvement. The tax rate that was used in arriving at the EPS guidance and our current projection for the year is 35%.

Other housekeeping items, we expect capital spending in the first quarter to be about 14 million in the first quarter and 50 million for the full year. This is a steeper investment level than what you have seen in the past and reflects really a couple things. And first is carryover of several projects that we mentioned in the third quarter call that would carryover. It's about 8 million of carryover.

And then there's also accelerated spending in the areas of information systems and productivity related projects that drives that number up.

Also, I have not included in that CapEx guidance the sale of any assets. Several weeks ago, we did sell the Grafton, Wisconsin facility. Proceeds from the sale and the book value were both approximately 5 million, so we're not going to have a significant gain there; however, a $5 million infusion of cash.

We also have several other properties that are being marketed and may close this year. However, I have excluded that as well from a net from the capital. So at this point, I'll turn it over to Mark.

Thanks, Dave, and good afternoon. As Henry mentioned, the fourth quarter was strong on two fronts, and I would like to address the Commercial and Industrial segments first and for both motors and generators. Sales from our legacy motors business grew roughly 10% for the quarter, with strong sales in a few key segments, including our distribution segment and then on the industrial airmoving side of the business.

Additionally, our generator sales were up 13% for the quarter, with positive impact from oil fields and hurricane rebuilding.

On the HVAC side, our sales were stronger than we had anticipated as our customers built 10 SEER systems ahead of the 13 SEER legislation. As you may already know, the ARI data shows December OEM shipments up 45% and OEM inventories ended the year up 32%. We feel very good about the results, but I can tell you it was not a clear and simple path to get there.

It was a quarter of tremendous variability and change as our customers were unsure of their own demand and, concurrently, they were preparing for the platform changeover to 13 SEER. In the end for us, it was the strongest fourth quarter on record for our HVAC business, and we are proud that our team was able to execute to get the right volume and the right mix of motors to our customers.

As we look forward into the first quarter, we feel confident on both fronts again. Our commercial and industrial motors orders are pretty much what we had expected for the first quarter across all of our brands and our generator orders are trending up very nicely, with continued strength in oil and gas, mining, and construction.

In HVAC, our customers continued to build 10 SEER systems right up until January 22; that is the day before the 13 SEER legislation went into effect. With inventories up and 10 SEER deadline behind us, you might expect a quick falloff in demand. Instead, what we're seeing is our customers are now building up their inventories of the 13 SEER designs.

This order strength to build up the 13 SEER platforms combined with the successful launch of our [X13] motor and nice growth of our ECM products has given us confidence in our first quarter.

Looking closely at the OEM inventories, the HVAC OEM inventories, you will note that the HVAC inventories are where they would normally be during the April and May timeframe. This would suggest that there may be a onetime shift forward in order patterns from the historical seasonal norm.

Normally, the seasonality of our business would result in very strong second and third quarters, followed by a falloff in sales in the fourth and first quarters. The 13 SEER legislation may have given us a onetime shift forward, where inventories were built up in the fourth quarter of '05 and the first quarter of '06. We should have the result of flattening out our demand profile for the year.

In terms of successes for the fourth quarter, we completed our transition out of GE's Taylor Street and Tell City manufacturing facilities. These were two plants that maintained with GE after the sale until such time as we could absorb the products into our existing manufacturing system. The production transition from these two facilities was completed at the beginning of December.

Further, in early October, we completed the relocation of our For Wayne based employees from the GE campus to our own REGAL-BELOIT facility. The transition from GE has gone very well so far, better than any of us had expected. We are about 75% completed with the transition and our plan is to be done by year-end.

As part of this transition, you may recall in late 2004 and early 2005, we communicated that REGAL-BELOIT would be temporarily manufacturing products for GE. There are two products segments that did not come with the acquisition of the business, where REGAL-BELOIT has been selling motors to GE until such time that GE can absorb the production of these products into their own facilities.

First is the electric vehicle business, which had sales of $4.7 million, where REGAL-BELOIT has been selling to GE at essentially our cost. Next is the laundry motor business that has sales of $18.5 million, where REGAL-BELOIT was selling to GE at fleet average margins. The transition of these two products segments is now underway.

Finally, materials, specifically copper and aluminum, continue to be a headwind for us. We have been cautiously and yet prudently hedging copper all year for our 2006 requirements. Unfortunately, even with the hedges that we have in place now, we know that we will have real inflation in the year 2006.

We did raise prices at most of our businesses late last year, but that increase was still to catch up to the materials inflation we experienced in the first half of 2005, when copper was roughly at $1.65. Today copper is in the range of $2.20, with no good news on the horizon.

In summary, we feel great about the fourth quarter. In turbulent times, in the midst of plant transitions, fast-changing customer demands, a significant X13 new product launch, and the relocation of our Fort Wayne based employees, in the midst of all that, our employees executed. As we look forward, we see a stronger than anticipated first quarter, with strength in both our Industrial segment and HVAC.

I will turn it back over to Henry for some closing comments.

Thanks, Mark. I guess finally, we would say we could not discuss the 2005 accomplishments without referencing both the success of the acquisitions, which was very substantial and a real positive, as well as the improved performance of our base businesses, so it was not just an acquisition story.

Also, I can't say enough about the quality of our people and the strength that comes from blending winning organizations and winning people. It truly creates an exciting atmosphere for all of us.

Looking forward, we are continuing to work on our strategic initiatives and they continue to be on course. They include innovation. We've talked seriously in the last few calls about the X13 motor that is being introduced as we speak.

But in addition to that, we have variable speed generators that are gaining market share. We've introduced a new PGC 4000 Control at our Thomson Technology business, new spa motors, high-efficiency gear drives and motors, and patented hub cube gear motors for the food industry, just to name a few. I think the key point here is that we have a very strong pipeline of innovation that we will be introducing to the market and we are gaining momentum with what our products bring to our customers.

Secondly, lean Six Sigma. We have talked about that extensively over the last few calls, but I can tell you that we have a huge project deck and it is delivering financial results to the bottom line. I think what excites us is that there is a lot more to come. We are still in the ramp-up stage of our lean Six Sigma program.

Globalization. We've talked about products and markets and what we're doing in other parts of the world. Our globalization efforts include aligning ourselves in markets that are growing faster than the North American markets, such as India, China, and Southeast Asia in general; strengthening our global supply chain; and leveraging our global buys and operations, as we now have over half of our employees who reside outside the United States.

Digitization is another key initiative as we continue to move toward a common IT global platform that will allow us to leverage all of our businesses and create seamless information flow within the Company, as well as digitizing processes throughout the Company to drive productivity.

Finally, customer centricity is a key initiative within the Company, including bringing out innovative new products and services to help customers differentiate their products in their markets; the lean Six Sigma efforts that we have talked about; and improving the total customer experience in dealing with our Company. All of those are aimed at improving the value proposition for our customers. We win when they win.

At the end of the day, our initiatives are all about the best people, best processes, and a customer-focused strategy.

Looking out the first quarter, specifically, you can see from our guidance that we believe it's going to be an unusually strong quarter, especially when you consider that there's no new acquisition effect from last year. We expect solid and strong industrial markets. Some of those are still in the ramp-up phase. The HVAC business is going to be strong, as Mark said, based on new products, the finish of the prebuy that has occurred, and then filling the channels with the new SEER 13 products. And our commercial markets are still strengthening.

Power generation is strong due to new products and solid markets. In total, we have strong markets and we remain very optimistic about our initiatives and our ability to continue to drive productivity. With that, we're going to open it up for questions.

(OPERATOR INSTRUCTIONS) Alexander Paris, Barrington Research.

Glad to see you are back at number one again.

Yes, I don't want to mess up the betting pool. But first, congratulations to Mark, and second of all, congratulations for a great quarter. My first question I had written down before the conference call; I think you answered a lot of it. It was just this whole transition from the fourth quarter to the first quarter. First of all, the first quarter is generally seasonally higher than the fourth quarter, right? So we start out --

Yes. We start rebuilding -- typically you would start rebuilding the HVAC inventories in the first quarter.

And we have no GE incremental sales and you still have a little Illinois gear shortfall, right?

Right, we will have that for the first four some months of the year.

And then how you look at the fourth quarter now, taking out the acquisition, you grew the electrical 9.8%. That has got to be higher than what your sustainable rate is, but it sounds like you are going to repeat that again in the first quarter, just from this inventory building and prebuying on the 13 SEER.

Your whole combined outfit now, everything together that you worked with for awhile, what would you say your growth rate is? 5, 6%, as much as that on an ongoing basis? I'm trying to look at what the shortfall -- you're going to have to pay for some of this big gain.

Yes, the magic question, of course, in the HVAC market is how will that channel clear the inventory that has been built and so on. As we've said we, think that what's really happening is we have moved everything up quarter or two and it's going to have a leveling effect on this year through the first three quarters.

That is not bad, because you are talking about against some very high numbers, and we think with our new products that really play strongly into the SEER 13 world that we stand to gain overall. So we're very optimistic -- as the noise runs out of the channel, we're very optimistic about the position that we are in.

In terms of our industrial marketplace and businesses, we have had good growth now for the last two years. Some of that, of course, is price based on the need to get price to just try to offset materials. But we have also had better elements of growth from new products. As I said before, we have a very strong pipeline of new products.

Our goal is to increase our internal or organic growth over the next few years by truly being an innovator in our markets. Those markets, if you took a long-term view of them, are probably in the 2.5 to 3.5% growth area. However, we are also aligning ourselves in other markets such as Asia, where the market rates of growth are very significant, and I think that we can grow faster than the market in North America.

So that is a long-winded way of saying we think that we can improve our organic growth from where it has been in the past, Alex, but it is going to take some time to do that.

But you still have a strong fourth quarter and first quarter. Then it starts kind of reverting to the mean, whatever that mean is going to be?

Only in the HVAC business, I think, as that channel gets clear. But we don't look at that as being a negative. You would have seen last year, if you took a look at the seasonality, you saw a huge jump from first quarter to second quarter, and then again in the third quarter. And what we're looking at right now is we had a huge fourth quarter and a huge first quarter and we think we're going to have a great second quarter as we look at it.

Then you get into the variability that comes from heat or cool summer and what those impacts are going to be.

But just finally on this subject. I could see good reason for the distributors laying in a big supply of the SEER 10 so they can have a lower-priced alternative to, I presume, the higher-priced SEER 13.

That is already done.

That's what I'm saying. There's no reason for them to do much more of that because they don't want to get too big an inventory of an obsolete product longer-term, right?

No, but what they do need to do is get a full lineup of the SEER 13 products in store as well. So that's why we think the first quarter is as strong as it looks.

They are no longer able to buy SEER 10 product.

You can't manufacture them. They could still sell them, though -- right?

That's right.

Was there any reason for the suppliers like you to build your own inventory for SEER 10 or you're just meeting demand there and that is it?

No, we would not build ahead of what our customers are doing because their units are the ones that are under the legislation.

Right. So in other words, finally, in the first quarter, they are done rebuilding their inventories of the SEER 10 and from here on out, it's going to be prebuying and buying of the SEER 13?

Correct.

Thanks very much.

Michael Schneider, Robert W. Baird.

First, congratulations on a great year. And Mark, congratulations to you as well.

HVAC first. You mentioned 137 million attributable to the HVAC acquisition. I am curious what you were budgeting, actually. And not that we're looking to get some inside numbers here, but just to get some insight, I guess, into how much upside there was relative to your expectations in the quarter.

Mike, I think we gave you some of that at our last call and when we updated our guidance in December. Because we had given guidance originally for the quarter based on what would be the norm and said upfront that there was some upside based upon this prebuy went. So I think if you look at the difference between our original guidance and where we ended up, you have a pretty good view of what the uptake was due to the SEER 13 prebuy.

But in revenue dollars, do you think you pulled 20 million or 30 million forward?

I think in the year, you have 30 million.

In new products, I know you monitor the success of these things. Can you give us a sense of X13 and ECM, what the growth rates were? And I guess again comparing them to what you were budgeting for the year or for the fourth quarter, however you look at them?

The X13, Mike, would've been too new to make a difference. You start from 0 and essentially the fourth quarter was slightly less than what we had budgeted. And that was because they were building 10 SEER products. And so it was a little less than we had thought, in fact a little less in the month of January than what we had thought. But it has since taken off nicely.

Our ECM growth rate was roughly 24% in the fourth quarter.

And for the year, Mark, on ECM?

Roughly the same number.

Looking forward, the big question has been what do you expect on in terms of platform? Last quarter, you revealed to us that your platform wins were above your expectations at the time of modeling the acquisition. Can you give us some sense as to what may have changed in the past quarter in light of the prebuy and in light of any other new SKUs or model changes that you are aware of and what that implies then for the -- (multiple speakers)

You're right, and the last time we talked, we had said that our X13 product had gained more platforms than perhaps we would have anticipated when we first started the project. Since that time, there is no additional platform changes. We would not have expected any because people who are down the path of getting their product out. But we're very pleased with the take-up rate as we head into the end of the first quarter.

Okay. Just your commentary now, or I guess your thoughts on the OEMs commentary. We have got Carrier, Trane, and Lennox and some of the other players in the market all talking about volume declines in 2006, basically against a tough comparison and as a result of some of the prebuying that went on. Is that in actuality what you're being told and what you see in your orderbook, or is there in reality something else going on that we should bear in mind?

To the first quarter, we are certainly not seeing that. And we try to describe what we think is happening, and as you know, there's a lot of variability out there. But what we think is happening is our customers are busy building up their 13 SEER product.

And, Mike, if you look at the inventories, the OEM inventories are kind of where they ought to be in the April/May timeframe. So you could guess that they won't need to build as much 13 SEER product as they go into the second quarter to get where they normally need to be to serve the summer season.

Mike, there are a lot of variables that are difficult to put your finger on here. One is there's a group of our customers who think that there will be some good buying going on early in the season, based on the heat that we had last year -- people's memory, so to speak, saying I'm not going to go through that again, or I'm not going to take a chance on having a problem with my air-conditioning system.

Also, if you took a look at the actual production of units in the last quarter versus the amount of inventory growth, you see the inventory growth did not correlate; it was lower. And that is because there was a good sell-through of people putting in because of the energy efficiency opportunity with the natural gas prices being up and so on.

So it's a hard one to call. There are just a lot of potential factors -- what is the heat going to do this summer? If we have another hot summer, you may not see any blip. So there is no question that I think almost everyone in the industry would say we're not going to have a repeat of '05 in terms of all the prebuy activity and so on, but it is not doom and gloom.

Okay, then switching to the industrial business, 10% organic growth in Electrical. Can you give us some sense as to how much price is actually in that organic growth number?

Roughly 5%.

You guys sound very bullish and we have heard from a number of industrial companies as well that the fourth quarter ended with a bang. Is there anything unusual that you are sensing or, indeed, does the first-quarter guidance just signal that you expect these industrial trends in particular to continue into the first half?

Right now we expect them to continue. We're hitting on almost all cylinders, which, as you know, it's been a number of years since we could say that. Commercial and industrial building is still ramping up and we're finally at a point in capacity utilization in North America where people are building infrastructure again. So it is a pretty positive environment.

I'll get back in line. Thanks, guys.

Mike Greenwald, BB&T Capital Markets.

Good afternoon. I am curious where your customers are in the conversion. I know that the different OEs are in the different stages in the conversions. Most have converted. Some have not. But what does this imply in your mix for the higher margin X motor?

Down the road, I assume it is going to cannibalize some of the standard induction motors, but where in the, where does it fall out in the short-term and the long-term as far as where that motor, the higher margin motor, ends up in mix for the HVAC?

There are three products; we kind of talk about them in terms of good, better, and best. There is our induction motor, which we mentioned. There's the new X13 motor and then there is our higher-end ECM motor. Our X13 product, as we have mentioned, is going quite well and for every one of those that we sell, we don't sell a standard induction motor. Our ECM orders in the first quarter are stronger than we had expected and we believe that is driven by our customers using our product more on their high-end systems to differentiate because it is tougher to differentiate because the lower end of the market was compressed. So we are seeing nice takeup rates in both products.

As you see the orders come in for 2006, where does the X13 end up as far as going from nothing to -- is it going to be 20% of sales for 2006? Or is this conversion to the X13, is it going to take -- is it something we see very gradually or is it something we're going to see right from the get-go?

We are seeing some of it ramp up right now, but we have not been providing specific information about the share that that product will get. As you know, different platforms will be coming on up to online at different times, so it's going to be a ramp-up fairly sharp, we think. But we're not providing guidance on what percentage of our business will be in that platform.

Okay. And regards to price, you mentioned you put a price increase on in Q4 when copper was $1.65. Is there another one down the -- I assume there is going to be additional rounds of pricing. Have you announced anything yet or what do you expect in that front?

We have not announced anything new that we did not talk about, I think, at the last time we had a call. It is a pretty interesting marketplace, as you can appreciate, and I think the entire industry right now is looking at this very closely. Hard to say what is going to happen and exactly when, but obviously you can only have your margins eaten into for so long before that becomes an issue and price becomes necessary. That is happening on a global basis, not just here in the United States. I would expect that if copper does not relent we will see some additional rounds.

Are you willing to put some numbers around what your expectations are on Six Sigma, what type of dollar value your improvements are trying to obtain?

No, not yet. I can tell you that it is a very significant program. This was our first year of really trying to ramp the company up and we have currently over, I think, roughly 150 people, either green belts or black belt certified, and we have a project deck that's being tracked on a monthly basis of over 200 projects. So it's a very significant program. We will be driving it every bit as hard in '06 as we did '05, so I would hope that by the end of the year we have a lot more projects in the queue and we have a lot more people who are certified.

But just to get on the board, a project has to be a minimum of $50,000 annual savings and most of them are significantly higher than that. So it is a very significant program.

Okay, thank you.

Shaun Nicholson, Kennedy Capital.

I am just trying to get in my head -- A.O. Smith came out today and said that they expect the second half of '06 HVAC market to be tough. Is that what you're seeing based on just in other words because of the comps and because of kind of the pull-forward you mentioned?

Well, that is the magic question. As we have tried to articulate, there were some certainly unusually positive markets for the fourth and first quarters. All things being equal, no big changes in temperature, buying patterns, whatever, you would say that where we would normally see a big spike in the second and third quarter is you might expect that to be relatively flat as opposed to a big spike. But there are a lot -- as we said, there are a lot of factors that play into that.

Okay. On the sales headwinds, I didn't really catch which -- other than raw materials, is that really the major headwinds you guys see for '06?

There's the one headwind you just talked about, right? It's the HVAC impact. And then the other one we talked about was the GE sales that we will no longer be manufacturing. We have been temporarily manufacturing product for GE as part of the acquisition agreements, and sometime this year GE will absorb those products back into their business. And that is roughly $24 million or $23 million of sales.

Okay. That's annually or per quarter?

That's annually.

All right. Just one other question on the raw materials side. What are you guys -- I know hedging -- is there a percent that you can give us of what you hedge or are hedged for '06 and '07? Or do you not go out that far?

We typically don't go out past a year. There are cases where we do, but we have a pretty disciplined layering process, and so you really have to take a look at the months. Really look at it by month. So we might be in the near-in months as high as 70% of our buy is hedged and in the further-out months, you might be 30 to 40%.

Okay. And you said you don't see any kind of relief in sight as from what you are hearing out there.

Not yet. I can give you people to talk to that will (technical difficulty) the bookends of anywhere from $1.60 to $3.00, but that is not very helpful.

Right, yes. Okay. That's actually all I had. Thanks.

(OPERATOR INSTRUCTIONS) Nigel Coe, Deutsche Bank.

Just trying to get my head around this flattening of the revenue profile for the first half of the year. Are you prepared to put some numbers around what's in your guidance in terms of revenues and margins for 1Q?

Generally, we haven't. I guess what I would tell you as far as that distribution, when we bought the HVAC business, it dates back probably to the second quarter, we talked about the second quarter being a strong quarter, followed by a third and then the first and the fourth, kind in the range of -- we used to be a divide-by-four company, and 25 percent a quarter, and that would profile what changed. It would be a couple hundred basis points above that second and third and a couple below that in the first and the fourth.

Again, looking at this year, it's a completely different profile. What we see is continuing, based on the factors that Mark shared, we see second quarter probably still being a stronger quarter, but not nearly as strong relative to the other quarters as what we typically have seen. We see the first quarter actually close behind the second quarter, followed by the third and then the fourth.

And the fourth obviously will be --seasonally it is a lower quarter and also a very, very tough comp as compared to '05. So it does change the order from second quarter, third, then first and fourth, to probably second, first, third, and fourth.

Okay. But given your guidance, it looks like you're not seeing a radically lower number in the Electrical division. You did 324, 325 in the fourth quarter '05. It looks like it's going to be a similar number in 1Q, if I take your guidance as right.

Yes, if you start at the bottom and work back up, the first quarter is going to be a strong quarter and in that zone exactly.

Okay, great. You mentioned there are some properties. Actually, before the properties -- did you give the number of the legacy growth in the GE HVAC business year-on-year?

Could you repeat your question?

Did you give the number for the growth in the GE HVAC business?

No, we did not. Obviously, we did not have that in our 2004, so --

So there's no pro forma numbers?

Right.

Right, okay. You mentioned there are some more properties on the market. What is the book value of those properties right now?

We have got really two large -- I guess larger manufacturing facilities that are currently in the market, and book values on those in the neighborhood of around 5 million, with fair market values probably double that. So again, it is not in our guidance anywhere. It is not in our considerations for CapEx kind of netting, but it is something that could be a nice cash pickup later in the year.

Okay. What's causing these service properties to come about? Is this a function of the reorganization over the last year, Six Sigma? Or is this a case of you are basically going through the balance sheet and sorting out surplus assets?

Really, Nigel, it is over the last three years, we have made some very significant moves to consolidate some of our businesses for better efficiency and so on. And we freed up some of these facilities and it takes awhile to market them and find a buyer that's looking for that particular kind of building. So it's not something that just happened. It's something that has happened really over about a three-year period.

Okay, great. If I can just ask a few more bookish questions. First of all on the shares outstanding, what was the share count at the end of the fourth quarter?

For the fourth quarter it was -- let's see --

The average for the fourth quarter -- diluted, Nigel?

Actually the year-end share count.

The year-ending share count.

Actually, I didn't bring that with me, but I can get that for you.

Sorry for being such a pain. Can you give out the operating cash flow number as well, please?

Actually, operating cash of about 48 million.

Great. Thanks, guys.

Gentlemen, at this time, we have no additional questions.

Okay. Just to cover a few final points. A couple things I'd like to make sure everyone understands, when you look at our business today, about 60% of our business falls in the commercial and industrial arena. So it still very significant piece of the business and we are very positive about those markets.

The 40 percent that falls into the HVAC really hits a number of different marketplaces, including residential, commercial, and industrial, and we still think some of those engines are ramping up, as well as both new housing, for example, or new buildings and replacement. So it is really a pretty diverse base that we have. We're pretty optimistic. Despite this HVAC anomaly that is going on right now, we are very optimistic about what the year holds.

Certainly we appreciate your interest in REGAL-BELOIT and your questions. Final thoughts that we would leave with you is that not only was it a great quarter, but we have a lot of initiatives that we think are on track to deliver great quarters going forward. The opportunities that we see in the future outweigh the challenges, and we are very optimistic about the rest of the year.

So again, thank you. Thank you for joining the call and have a great day.

Thank you for participating in today's teleconference. This concludes the call for today. You may all disconnect at this time.