Regal Rexnord Corp (RRX) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first quarter 2006 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 your host, Mr. Ken Kaplan. Mr. Kaplan, you may begin.

Thank you Mary Ann. Good afternoon, everyone. Welcome to the Regal-Beloit first quarter 2006 conference call. With me today are Henry Knueppel, Regal-Beloit's Chairman and CEO, Mark Gliebe, our President and COO, and Dave Barta, Vice President and CFO.

Before starting, I would like to remind everyone 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. 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 today's earnings release, and our filings with the SEC. If you haven't had an opportunity to review this morning's earnings release, you can do so on our website at Regal-Beloit.com.

Now Henry will start with some comments.

Good afternoon, everyone. We certainly appreciate your interest in Regal-Beloit. The agenda is I'm going to make a few headline comments, turn it over to Dave Barta, our CFO, who is going to cover the financial aspect of the quarter. And then Mark Gliebe, our President and COO, will cover the operating highlights and give you some color on the markets and materials. And finally, I will finish with a little discussion on our key initiatives and our view of the second quarter.

So with that, the headlines really for the first quarter were that it was another great quarter, driven by strong industrial sales in nearly all segments of our business. Extremely strong sales and power generation market, completion of the 10 SEER production early in the year in the end of January, and the building of the pipeline of 13 SEER products. And along with that, better than expected sell through of the 10 SEER product.

Operating profit responded due to volume and productivity, but was restrained by materials, energy, and health care costs. We saw good balance contributions to both top line and the bottom line from our mechanical and electrical businesses, and we continue to see the benefits that Lean Six Sigma is delivering to our bottom line. We're very proud of what our people accomplished.

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

Thanks Henry. As Henry mentioned, we had a very strong first quarter from a standpoint of the sales. Sales for the quarter were $398.3 million, which was a 17.9% increase over the first quarter of 2005. I'll mention again as we did in the press release this morning, the first quarter of '06 did include one extra day as compared to first quarter '05.

This performance reflects the strong results in our Electrical Segment, where sales increased 19.4%, and sales in this segment were strong across the board, but particularly in commercial and industrial, HVAC motors, as well as in the generator product lines. Sales in our mechanical segment increased 9%. I would like to mention though, the first quarter of 2005 did include about $1.8 million in sales related to the Illinois Gear business that we sold in May of 2005. So excluding the Illinois Gear sales, sales in the Mechanical segment were up 13%, and were positive across all divisions, and those increases ranged from mid-single digit to high teens.

Gross margins for the quarter were 23.4% as compared to 20.3 in the prior year. Material costs, as Henry mentioned, continue to have a significant impact on the quarter, however, the contribution from new products, productivity, pricing, and positive mix across really our entire business offset those pressures. Operating expenses were 12.5% of sales verses 12.6 in the first quarter of 2005. And included in this year's results was $700,000 approximately, due to the expensing of equity compensation, which compares to $200,000 in the prior year resulting from the expense related restricted stock awards.

Income from operations was $43.6 million versus $25.9 million in the first quarter of '05, an increase of 68.3%. On a percent of sales basis, Income from operations was 11% versus 7.7 for the first quarter of 2005. Again, this reflecting the contribution from the gross margin, as well as very tight controls in our SG&A area. During the quarter, we are also successful in selling our Grafton, Wisconsin facility, for a net sales price of $5.1 million, however, that was basically at book value, and there was less than a $200,000 gain on that sale.

Tax rate for the quarter was 36.8, which is a little higher than the guidance we provided. This rate was impacted by our distribution of income, which was weighted to higher tax rate countries, such as the United States. Net income for the quarter of 23.8 was an increase of 93.6%, versus 12.3 reported the first quarter of '05. Fully diluted earnings per share were $0.72, which compares to $0.41 in the prior year. And finally, the average number of diluted shares was 32,957,209, as compared to 30,244,393 last year, with the increase reflecting the primary shares that we issued as part of our third quarter 2005 stock offering, as well as the added dilutive impact of the convert resulting from the increase in our share price.

Turning to a few balance sheet highlights, total debt was $420.3 million, which was an increase of approximately $8.3 million from the fouth quarter. But a reduction of about $143 million from a year ago. You may have noticed on this morning's release in the financial statements, that long-term debt shows $389 million, the remainder of the debt to get you to the 420 number that is included in current liabilities, is made up of really two pieces, the largest being $30 million of short term and commercial paper, $25 million of which had been issued in the fourth quarter of last year, and we increased that with another issuance of 5 million in the first quarter of this year.

That brings our debt to cap to 38.6, so well within our level of comfort. The increase in the debt, although we had a strong income performance, was encountered by an increase in working capital requirement, which is driven primarily by accounts receivable. An increase due first to the strong volume, and second to the timing of some payments for some key customers. Inventories increased by $7.4 million. And gross CapEx for the quarter was 7.3, and the proceeds again from asset sales, totalled $5.2 for the quarter. And depreciation and amortization was 8.1 million for the quarter.

Turning to our outlook for 2006 in the second quarter. You know, we expect to see continued sales growth across almost all of our businesses, and Mark will comment in more detail on this. We provided earnings guidance this morning of $0.92 to $0.99 per share for the second quarter. This guidance is driven by a strong sales forecast across the majority of our businesses, including strength in the HVAC business, and continued year-over-year margin improvement. Tax rate used in arriving at that guidance is 35.5, so a slight improvement from this quarter, and really reflecting some of the efforts we have underway to reduce that effective rate.

We currently expect CapEx spending in the second quarter to be in the 10 to $12 million range. And are continuing to project CapEx for the year of 45 to $50 million. I have not included in the CapEx, any of the netting for any property sales that we might have. And we have currently several properties that are being marketed that may close in the coming quarters, however, we've excluded that from our guidance, due to the challenges you always face with the sale process.

With that, I'll turn it over to Mark.

Thanks, Dave. During the first quarter we experienced broadbased topline strength in virtually all of our business units. The revenue strength can be attributed to general economic conditions, small share gains in key markets, the success of a number of our newer and premium products, and also as Dave mentioned, the one extra day in the quarter.

First I'd like to address the Mechanical side of our business, where our revenues were up 9% for the quarter, and our operating profit was up 54%. Operating profit gains were driven by volume leverage, as well as the two key restructuring programs we executed in 2005. The mechanical teams performed very well in the quarter, and we feel great about their contributions.

Next, I'd like to touch on the Commercial and Industrial segments for both the motors and generators markets. Sales from our legacy motors business grew roughly 14% for the quarter, with strong sales in distribution and industrial machine equipment. We saw nice sales growth in all of our motor brands. Additionally, our generator division sales were up 16% for the quarter, with continued strength in North America. North American strength was widespread with the oil patch, rental sets and the telecom markets particularly strong.

In our HVAC business, our sales continued strong in the quarter, as our customers sold 10 SEER systems, ahead of the 13 SEER legislation, and then started building up their inventories of 13 SEER units, in preparation for the upcoming heavy selling season. As you may already know, the ARI data shows HVAC OEM shipments up 19% for the first quarter, but OEM inventories down double digits for the quarter, indicating that there was probably some selloff of the fourth quarter 10 SEER build.

In terms of our own performance, it was an exciting and eventful ride with a few bumps along the way, as demand quickly and predictably shifted from 10 SEER motors to our more efficient 13 SEER designs, including our new X-13 motor. As mentioned in the past, we have a broad range of high efficiency products, designed to help our customers meet their specific 13 SEER application, efficiency, and performance needs. These products are meeting or beating the adoption we had in our plans, and our delivery quality, and reliability are meeting our commitments. And the end for us was a strong quarter in HVAC business. And we are proud of what that team has been able to execute, to get the right volume and mix of motors to our customers.

As we look forward, our key challenge continues to be inflation. Inflation in health care, transportation, and most importantly, commodities, namely copper and aluminum. Both copper and aluminum are up significantly since the start of the year. While we relentlessly work at driving productivity improvements, both in our business and for our customers, we have been unable to completely offset the continued increases in these commodities. Unfortunately, we have been forced to look to our customers for higher prices to help offset these costs.

From a volume perspective for the second quarter, we feel confident about the order rates we are see coming from our business units. We continue to see strength in power generation, oil and gas, mining, and commercial construction. In HVAC, while we are expecting minimal growth in unit rates, we are not predicting any sudden inventory corrections. Further, we do expect to continue the benefit on the topline from our new 13 SEER models.

Looking beyond the second quarter, while we do believe we will have tougher comparisons in the third and fourth quarters due to last year's hot summer, and the 10 SEER inventory buildup, we are optimistic that we will fare well given the acceptance of our new products, and the order strength in the rest of our Industrial and Power Generation portfolio. In summary, we feel great about the first Quarter. It was great to see the broadbased contribution from all of our business units, especially, our Mechanical and Power Generation divisions. We feel good about the second quarter, and we are excited about the momentum in the Company.

With that, I'll turn it back to Henry.

Thank you, Mark. Just to finish up on the first quarter, the pleasing aspects of the quarter clearly were our organic growth outside of the one-time 13 SEER phenomenon. Industrial Motors up 14%, Mechanical adjusted for the Illinois Gear up 13%, and Power Generation up 16%. We're also very pleased with the operational profit improvement despite materials, energy costs, and health care costs. It's great to see all of our operating teams executing at the level they executed at in the quarter.

Obviously we were pleased with the X-13 launch, as Mark has said before in these calls, this was the biggest launch in our history, and so far has gone exceptionally well. And we're very pleased to see the continued delivery to the bottom line from Lean Six Sigma execution. We're very pleased with the pipeline of new products we have, and frankly we're pleased with the continued improvements we're making with our progress in globalization, including producing at record levels in China, India, and Mexico. And also including progress in sourcing worldwide, and the culmination of the acquisition we just recently announced of Sinya.

Concerns on the other hand, continue to be the cost pressures that we've talked about, short-term, it's simply a cost issue, long-term could be an issue with the economy. So we'll have to remain focused on what we do best, best people, best processes, and a customer-focused strategy. Looking ahead at the second quarter, you can see from our guidance that we believe it will be a big quarter, driven by our industrial products.

Again, with Commercial Construction, Mining, Oil & Gas, and Power Generation still ramping up significantly as we move forward. And solid markets in all other aspects. Also a strong quarter seasonally for us in all of our businesses, particularly HVAC. And as you can tell, we're more positive about the second quarter from an HVAC standpoint because we believe the sellthrough in the first quarter was stronger than we expected it to be.

The new product pipeline remains strong, and we expect good results from new products in the second quarter. And we expect profitability to be solid, driven by our project depth, productivity project depth, Lea Six Sigma, and of course, volume makes a big difference. Productivity and particularly volume will offset for the most part, the materials increases for the quarter.

But the problem with materials will ramp up as the quarter progresses, there is no question about that. And we will have to implement additional price increases to offset some of that impact. We don't like that fact because it's a no win. Our customers are certainly not going to be not happy, or are not happy. But it also doesn't make us happy, because at the end of the day, even with the increases we will be looking at, we expect to lose ground on that front.

With that, we're going to take questions.

Mary Ann, if you would inform everybody the procedure.

Thank you, we will now begin the question and answer session. [OPERATOR INSTRUCTIONS]

Our first question comes from Alexander Paris of Barrington Research.

Afternoon. Super quarter.

Thank you.

You're embarrassing all of us cautious analysts out here. I guess I have the biggest question, I have. And I don't know if you can answer it is just, how long this inventory buildup lasts, and how much of a short--, you already said you don't expect a big inventory correction in the second half, but could you give us an idea of the incremental sell-in? Of say, at least SEER 13, and you know what rate does that slow down to? What annual pace does that slow down to once the inventory has gotten up to a workable level for your customers?

Alex, this is Mark, if you look at the ARI data, you can see that the inventory level for the OEMs is kind of below where they would like to be. And for the distributors you would think that it is above where they would like to be. Our customers are telling us that if we do see a correction, we would see it in the third and fourth quarter. And some of them are saying we may not see it at all. That's the feedback we're getting. Right now, we do not see it through the end of the second quarter, if we do see it, we'll be the first to tell you. But right now we don't see it.

I guess that's just very hard to quantify, but obviously the second quarter pace, even if the, your positive guesses are true, it's still going to be a lot slower than the first half in terms of -- ?

Certainly the second half will not have the inventory buildup that we had in the fourth quarter of 2005. So there's no doubt there will be a decline in units in the fourth quarter. That is certainly to be true.

And, you know, we do believe that the second quarter, you know, from what we could see won't be real strong from a unit perspective. There'll be some bleed-off in the second quarter as there was in the first quarter. But it won't be a sudden drop.

Can you say what the first quarter run rate was in the HVAC motors just generally, or more specifically in the SEER 13?

Well, we know, Alex, that through the end of January, they were making SEER 10 products, and selling SEER 10 products right up until Sunday January 23rd or 24th, something like that. And from then they went right into building their 13 SEER units in the month of February and March. So there's a lot of variability going on and it's tough to sort it out beyond that.

The other thing I think is important. Even though we expect to trailoff in the number of units, we're not pessimistic at all about the impact for us. Because the nice thing that happened with the legislation is that, first of all, obviously higher efficiency is required, secondly with energy price, people are thinking about efficiency, and efficiency in the system, one of the great -- one of the main components is the products that we make, and we offer efficiency to the market. So we bring a lot to bear there.

And it also means that the competition now between our customers in the marketplace is really about other creature benefits so to speak, creature comforts such as room-to-room temperature, noise, and air quality. And again, our products play very well in that arena. So the story for us is actually, we're pretty optimistic about the impact overall with the legislation, and we're less pessimistic, if you will about the potential correction in the number of units. Because of the heat, and because of the other issues with energy efficiency and so on. The sell through has just been much stronger than we expected so far.

I think a quarter ago, we felt like we could see very little seasonal adjustment from first quarter to second quarter compared to the norm, and at this point, we're saying we see the normal seasonal adjustment.

Okay, thanks very much.

Thank you.

Our next question comes from Michael Schneider of Robert W. Baird. Please go ahead.

Good afternoon, guys.

Hi, Mike.

Maybe we can spend a minute on Electrical. The 19.4% revenue growth, do you have a sense of how that breaks down between price and units for the entire segment?

Well, Mike, I don't have the specific numbers, but I think that the majority of it in this case is certainly volume. And a lot of that is coming on the industrial side of the market, some of it's coming from the mix of high efficiency products on the HVAC side.

That's what I want to drill down into, Henry. Are you able to break it apart and identify actually what mix contributed to that 19% growth?

We are, but, you know, that's an area that we've tried to stay away from for competitive reasons.

Okay. Then, looking at it a different way, can you give us a sense of how, how the quarter looked in terms of mix of old standard product versus new standard product? And how it changes presumably in the second quarter with the regulation having passed?

Well, you know, we've talked in the past about our X13 product, and we referenced that we had a plan around the number of platforms that were going to utilize that product. And the adoption rate, Mike, that we thought we had hit back in the third and fourth quarter, we are hitting. There have been no new platforms added since that time.

Now, once a platform begins to use the product, it continues to use the product right through the end of the year. And as you know, once it starts using that product, it's not using the standard induction motor anymore. Does that get at it for you?

Yes. Although, I guess, going forward now, Mark, do you anticipate standard motors as a percent of your production to be less than 30 or 40%? I guess that's what I'm trying to drive. Where you are, mix, just in terms of units between kind of new style and old style.

Yes. I would say that the standard induction products are going to still be the majority of what we sell into the marketplace. And over time these premium products, you know, we hope will continue to penetrate that induction offering.

Okay, and then you mentioned in the past the cannibalization rate, you thought would kind of be 1 for 2, do you still believe that number? Or has the cannibalization rate actually been less than you expected?

I think, you know, the rate that we projected from the very beginning is the same as what we projected.

We're both kind of looking at each other about the 1 for 2. But overall, Mike, we're kind of on the schedule that we expected to be on from the beginning.

Okay. And, if you look at pricing, I think people have probably been positively surprised with the commentary out of the OEMs, in terms of 13 SEER pricing, maybe being better than expected. Has pricing at all been an issue, or disappointing to you all? Or has it actually been favorable, as well?

Well pricing in our business is obviously very tough. We did have some pricing last year. We're not gaining margin from the pricing actions we've taken. We're gaining, the margin improvement that we're gaining in this quarter and the next quarter, is really coming from volume and productivity improvements, which are very substantial, we're very pleased with them. But, the material cost increases are more than offsetting the pricing, so we're really doing it with volume and productivity, and just trying to not give it all back to materials alone.

And Dave, what do you estimate materials should cost you or squeezed you in the quarter?

Actually, I don't have that right in front of me, so.

Okay, I'll follow up on that. And then just capacity issues,Mark are you actually constrained in capacity at this point, for either ECM or X13?

No, we are not constrained on either of those products. We had talked to our customers on X13 in some great detail, and got a very good line on where they thought they'd be, well positioned there. ECM, we try to stay ahead of that very well. And so far, so good.

And the ECM growth rate, I think you mentioned it was 24% for Q4 and for the year, what rate are you running at now?

Well, you're right, I did mention that. I wish I didn't mention that to be honest with you, I'd rather stay away from that question again for competitive reasons. But it's doing quite well.

Okay. And the million-dollar question is, obviously how the second half unfolds. And without predicting the weather, it sounds like the sellthrough is better than you had planned. The weather had been favorable in April thus far, is it possible that the HVAC business is still flat to up in the third and fourth quarters, Mark?

From a units perspective, Mike, we do see a tough comparison in the fourth quarter. if you go back 3 or 4 years, and look at how the industry builds product, and then what happened last year, you know, we don't see what happened last year being repeated. So, you know, from a units perspective, we do see a decline. I think most of our customers would say the same thing.

Now factor in mix, Mark. I think we talked, you probably pulled something like $30 million in sales forward by a quarter benefiting the fourth quarter, and you'll obviously have that comparison now this year. With mix, can you make that up and even hold the fourth quarter flat in revenue?

We think we're going to fare very well for the year given the positions that we have in mix, Mike.

Okay. That's helpful. Final question, Just on GE, Henry, can you give us an update on how you're progressing, and where you are in really disentangling yourself from GE now, and their back office operations?

Yes. We call it the dis-integration, but it's gone better frankly than we could have expected. I think we are well ahead on all fronts, from where we expected to be by now.

We have a couple of big legs left in the IT area. We're ready to go, we're waiting for all of the factors to come together, but we would expect to be completely disentangled yet this year, which is about a year ahead of the drop dead schedule so to speak, and on par with where we wanted to be.

So we're in good shape, all other areas we do have a warehouse move that we have to make yet this year that's going to be of significance, and I think that's scheduled for the second half. But we're well ahead on the planning phase of that. And we're receiving great cooperation from our friends at GE.

As these things go, this has been spectacular, frankly. We couldn't have asked for better help that we got from the people at GE, and our people have executed exceptionally well. So we're on or ahead of schedule in all regards.

Great, thank you.

Our next question comes from Wendy Caplan of Wachovia Securities. Please, go ahead.

Good afternoon.

Hi, Wendy.

Couple questions. Would you speak to your assumptions, maybe not on an actual number, but up or down on material pricing, for the balance of the year as you look at what could be?

Yes, Wendy, I'm going to say they're going to go up like crazy, because I've been 100% wrong now for 4 quarters. You know, every time we have thought that they were leveling out, they've jumped again. And right now, the magic question is how much money are the funds actually putting into these on spec? The supply side is not catching up with demand currently. It's at best flat.

And with any time there's a supply falloff such as a strike in a mine, or whatever, you see the inventory come back down, so we're not gaining on it, so we are not expecting any short-term relief, and we are not expecting it to get a lot worse. But if you had to balance those risks right now, I'd say that they're pretty balanced from where it is. We're not expecting a lot of change, we're are just not expecting relief now for the rest of this year.

As you know, we hedge, not for speculation purposes, but for certainty. And when you do that, you're looking at a reasonable term in time, you're never 100%, and it falls off as you go out. If prices stay where they are, we will see average copper prices in our consumption, for example, continue to escalate, even if the spot price stays where it is, because of the percent that's not hedged currently, getting to be a higher percentage and move out. Does that make sense?

Yes, I guess you're thinking that it will be flat with where it is now. Fair?

Yes.

The other question, you spoke about the launch that this was the largest launch that you had done. Can you speak about kind of walk us through February, March, maybe even April, and kind of how it went? Did we start slowly, relative to volume? And profit, did it improve in the March month? Monthly period? So what should we expect here that, you know, volumes and profitability will rise on a sequential basis? for the product?

This is Mark, Wendy, we actually launched the product in the fourth quarter. And it was, you know, a slow ramp right up, you know, increased each month, starting some time in, I would say November, and then December, and then January. And the bigger volumes began to occur as our customers started really manufacturing their 13 SEER design. So up until the end of January, they were still making 10 SEER to a great degree. Now as they have started manufacturing 13 SEER, they started using more of our new products.

And as you probably know, our product is not the only way to achieve 13 SEER, so it's not used in every single application, but it is used, you know, it has seen wide acceptance from virtually every large HVAC manufacturer.

I guess what I was referring to a little more, if I could get into this. The, you know, I know that you rolled out slowly at the end of the year, but did we see bigger volume sequentially for March, in March from February, and since then, have we seen them increase again? And is it, I know part of it's productivity, but from a volume basis, do we expect that kind of sequential performance to continue for a bit?

Well, yes, I mean you're right that it did increase month to month, right through March and right through April. Similarly to the way the seasonality of the business performed, alright. The business is seasonal. And we get more and more volume through the quarter. And so, and into the second quarter. So yes, it has been increasing, and will continue to increase right through the month of June or July, and then it will begin to fall off again.

And one of the other questions I wanted to just touch base with you on, was the issue you brought up about the competitive position. Can you talk about whether, you know, kind of anecdotally or with numbers kind of how your product has "caught on" versus some of the other technologies, and what appears to be winning, what appears not to be doing so well, that sort of sense?

We launched this product, you know stuff like I said in the fourth quarter, but you know, the real decisions on that product had been made a year or year and a half, I would say a year earlier by our customers. They were trying to determine how they were going to achieve 13 SEER. And, you know, our motor is a contributing factor to that, and there are a variety of ways of getting there, and we feel very pleased, like I said 7 of the largest customers have used our product for some portion of their 13 SEER offering. And you know, we have entered into agreements with them back last year, and you know, they pretty much have done what they said they would and we have, as well. So it's done exactly what we thought the product would do, and it's performing well.

Wendy, I think when you look outside of the motor, which, I don't know that we're really qualified to speak to what other technology has really won and lost. We hear stories from customers about changing compressors and valves, and different kinds of cooling mechanisms that they're employing, but it really is still a pretty dynamic mix.

You know, you have the first shot at it that everyone has got out there now. And they're currently evaluating what each other did, trying to take a look at whether or not there's going to be further refinements they are going to make, to what they've done.

So I think it's probably still a little bit premature to say which technologies truly are going to win the day or not win the day, but, I don't think we should be vary very far away from what's going on in Motors.

Okay. That's fair. Finally, the tax rate was higher, you said it had to do with the locations of the volume. Can you speak to the growth individually, in terms of domestic versus foreign? What you saw in the quarter?

Sure, just kind of overall in the macro picture. The strength in the sales was definitely North America-based. Although, it actually does have an impact on our Mexican, Indian, and for that matter, other Chinese operations that they are supplying, in certainly the U.S. markets, so it was heavily, heavily weighted to North America and the U.S.

Some of the percentages that we grew in China, for example, would be high percentages, but they are on a small base still, Wendy.

Okay, thanks very much.

Thank you.

Our next question comes from Nigel Coe, Deutsche Bank Securities, please go ahead.

Good afternoon. Great quarter. Just quickly on the extra day, I'm guessing that's about 1.5 points to the revenue line. Did you lose that day through the second half of the year?

Yes.

Okay 3Q or 4Q?

Yes, 4Q.

Okay. Great. Some of the OEMs have talked about 20% benefit, 13 SEER versus 10 SEER. Would that be a good number to use for you guys?

I'm sorry, Nigel can you say that again?

You know, some of the OEMs have talked about, you know, a 20 percentage point benefit from 13 SEER versus 10 SEER, would that be a good number to use for you guys?

Okay. You're talking about their pricing in the marketplace? No, would not be necessarily. We would love that. But that's probably not realistic.

Okay. And secondly. On the volumes, you talked about the fact that the second half is going to be more challenging. Certainly some of the supplies talked about, perhaps OEM production being down by 30 to 40 points in the fourth quarter, would you endorse that sort of number?

30 to 40

You know, I don't know the number, Nigel, off the top of my head, but by looking at the ARI data, in terms of what they ship incremental fourth quarter over a typical year looking back 3 years, you can get your hands around it pretty quickly. I don't have it off the top of my head though.

Okay. Okay. Fair enough. And on the guidance. That was a great second quarter, what sort of sales number is that based upon?

Yes. We did not provide that.

Okay.

But again, it's -- as Mark mentioned, we're still seeing a seasonal pattern to our business, so it's safe to assume it's an increase over first quarter.

Okay. Great. And can you just remind me what the split was between HVAC and the legacy motor business in 2005?

The mix between HVAC and Industrial? We're about two-thirds Industrial, Commercial and Industrial.

Great. Thanks, guys.

Our next question comes from Alexander Paris of Barrington Research, please go ahead.

I'm just looking at your margins. 1995 or so, before you had your cyclical downturn, you were doing operating margins of 13% or better. Now you've done 11, which is great, that's your best in a long time, but everything is going, going right, and you've got your consolidation savings, impacting the first quarter also. Is that all there is there? Or could you see yourself going back up to 13% margins again?

Well, we've said previously that our goal is to get back up into the mid-teens, and we believe that's possible.

Okay.

We're going to need some help from materials to settle down for that to happen. I think at the volume levels that we're at today, if materials weren't the issue that they are currently, we would be very comfortable with that. So we are going to need a little bit of that help. But we have a lot of good productivity projects that are still coming through, and of course, some of the other initiatives that we've announced. We still think that we have runway in front of us.

You've mentioned you had a couple of other properties for sale, those are related to consolidations that you've already announced in the past, is that right?

Correct.

Okay. Just one other thing, you said you are bringing your tax rate down to 35%, is that a good number to use for the rest of the year?

Probably in a 35.5 zone after the second quarter.

Okay. That's all, thank you very much.

Thank you.

Our next question comes from Michael Schneider of Robert W. Baird. Please go ahead.

Hi guys, just some housekeeping stuff. Do you have the operating cash flow for the quarter?

About net negative 2.5 is kind of on a preliminary basis, $2.5 million.

Okay, and that's presumably due to some inventory build?

A little bit inventory, but mostly in receivables.

Sure. And passthrough motor sales this quarter from GE, what did they total?

I actually don't have that specific number for the quarter.

I don't have it either.

I mean, they have started the ramp downs --

Okay.

and I would say probably by the end of the second quarter it's going to be mostly gone --

Two significant pieces, and we had said in the last call, there would be 23 to $24 million revenue decline on an annual basis. We won't see all of that this year. We saw a few million in the first quarter, and we'll see more in the second quarter, and then the big chunk of it in the third and fourth quarters.

And by a few million you mean a few million dollar decline?

Yes.

And Mark, on an earlier question, someone asked about the acceptance of certain products, and maybe the rejection of certain products. In high efficiency motors, though, I think I'm only aware of one, one platform you did not win, in terms of ECM and X13 in this latest go round, is that accurate?

You know, I wouldn't say it that way because I'm not sure how you're defining your term 'platform.' Each customer says it a little bit differently. There certainly is one large segment of the market that we are not sitting in. If that's what you're talking about, that would be true. But when it comes to a customer-specific platform, they'll have 10, 20, or 30 different platforms attacking each market segment. So I wouldn't say it was just one, Mike.

I guess the way I look at it is, as of the available market, those SKUs that use higher efficiency motors, that would be a target for your ECM X-13 product, are you aware of more than one, or appreciatively more than one that you did not win?

There's one large segment of the market, on one type of equipment that we, you know, for one significant application that we're not in.

Okay. I think we're talking about the same thing. Okay. And finally, just mechanical margins. Henry, I think you both have expressed satisfaction with Mechanical's performance, but to play devil's advocate for a second, the margins today and what is basically an industrial Nirvana, are only at 7%, what, in fact, sequentially, you actually had a decremental margin, what should we look for there? And especially since materials are not as big of a challenge for Mechanical versus Electrical, is this "as good as it gets," to paraphrase what Alex said.

No. It is not as good as it gets. We still have a number of things that we're working on, and a couple of the divisions are not back up into the higher volumes. Better than they were a year ago. But still have light segment products that are still ramping. So no, we think there's still some sufficient room there for margin expansion.

Okay. Thank you.

Thank you.

I show no further questions at this time.

Great. Okay. With that then, I'll make just a few closing comments. It was a great start to the year. Obviously, we're very pleased with the quarter, we expect a very strong second quarter, we expect a solid second half, but probably more normal second half than what we saw last year.

Also like to say that we're very pleased with the Sinya acquisition, and with frankly the acquisition pipeline that we have in front of us, we think there's going to be other opportunities, difficult market in some respects because of pricing in the acquisition arena, however, there are some good potential fits for us, so hopefully we will continue with good activity there.

The opportunities as we look forward still outweigh the challenges, so we're looking forward to continued positive results in the quarters ahead. And by comparison, and also very pleased that we were able to increase our dividends. I think that says a lot about our confidence and our optimism for the future. So with all of that, we very much appreciate your interest in REGAL-BELOIT, and your participation on the phone call. We wish all of you a great afternoon. And talk to you soon.

This concludes today's teleconference, thank you for participating, and you may now disconnect.