Regal Rexnord Corp (RRX) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Regal-Beloit's first quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder today's conference is being recorded. II would now like to turn the conference over to our host, Regal-Beloit's Chief Financial Officer, Mr. Dave Barta. Please go ahead.

Thanks, Tom. Good afternoon, everyone, and welcome to the Regal-Beloit first quarter earnings conference call. Joining me today are Mark Gliebe, President and Chief Operating Officer; and Henry Knueppel, Chairman and CEO. Before we start this call and I turn it over to Henry, I would like to remind you that 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 those factors that could cause actual results to differ materially from projected results, please refer to today's earnings release in our filings with the SEC. Now I will turn the call over to Henry.

Thank you, Dave, and thank all of you for joining us. We appreciate your interest in Regal-Beloit. The agenda today will be like the agenda we've had in the last several meetings. I will make a few overview comments, ask Dave Barta, our Chief Financial Officer to cover the financial aspects of the quarter. Mark Gliebe, our President and Chief Operating Officer, will provide color to the markets and our operations, and then I will finish with comments on the quarter and the quarter coming.

With that, we would like to say that we were extremely pleased with our first quarter results, particularly given the challenging HVAC, residential HVAC market environment and given the continued material cost pressures. The HVAC market year-over-year decline was the worst in decades and is really made up of three parts. The first part was the home sales and home starts being down to the degree that they were down. The second part had to do with reduction of inventory in the channel during the fourth quarter and again during the first quarter and the third part has to do with the fact that as the comparison was to a false high last year if you will due to the energy legislation. It made for a very challenging environment. Also making the environment challenging was materials. We told you at the start of the quarter that there would be a materials head wind through the first half of the year, and at that time the spot prices for copper were $2.60, and as you know they're now as high as $3.50 and even north of that a couple of weeks ago.

So those were the things that made the quarter very, very challenging. I think the good news was that our industrial and commercial markets, for motors and our generators market were very strong. We had good growth in our Asian markets, and our productivity efforts were excellent. With that, I will turn it over to Mr. Dave Barta.

Thanks, Henry, and I will run through the P&L and cash flow and balance sheets. Starting with the P&L, sales for the quarter were $418.6 million which is a 5.1% increase when compared to the first quarter of 2006. I am going to spend a few minutes and walk through the sales results for each segment because of as Henry alluded to there were some quite differing results depending on the business. In the electrical segment sales were $366.8 million which was an increase of 6.2% versus the first quarter of 2006.

Looking a little bit deeper, as in the case of the fourth quarter we saw pretty extremes between the highs and the lows. Segment growth was paced once again by the power generation business experienced a 24% year-over-year growth, extremely strong results from our power generation businesses that was again driven primarily as a result of strong generator sales out of our U.S. facilities and our China facility. Large motor sales also continued the trend we saw in the fourth quarter with growth in the mid-teens. As Henry mentioned, on the other end of the spectrum was the HVAC business which was down 14%. The business had a tough comp, sales in the first quarter of 2006 were positively impacted by the 13 SEER legislation as you recall that went into effect in January of 2006.

Beyond the tough comp as Henry mentioned the residential HVAC market is soft, and again driven primarily by weak home sales. The Sinya business that we purchased in May of 2006 just had an outstanding quarter. We're very very pleased with the growth in that business to date and the future prospects. They reported sales of $17.9 million for the quarter.

Turning to the mechanical segment, sales decreased 2.1%. However, results in that segment were impacted by the sale of the cutting tools business that we sold in the second quarter of 2006, and that effectively reduced sales by $4.7 million. If you add back that impact sales would have increased 7.4%. Once again paced by the what we call later cycle businesses where we saw growth again over 20%. Gross margins for the quarter were 23.2% as compared to the first quarter of '06 of 23.4. Decrease was primarily due to two factors. First, with the material inflation that Henry mentioned, primarily copper which we are not able to offset with pricing completely. The second was the volume decrease in HVAC. We adjusted production schedules, first trying to match that, but also trying to control and take inventories out, so there wasn't overhead liquidation or absorption challenge that that business faced in addition to the top line softness.

I think on a positive note our productivity and lean Six Sigma efforts did make a noticeable contribution again this quarter. The decrease in operating expenses resulting from productivity and cost control activities resulting in our profit of operations increasing 8.5% and finished at 11.3% of sales versus 11% in the prior year. The tax rate for the quarter was 34.7 versus 36.8 a year ago. The end result was net income for the quarter grew 12.7% to $26.8 million, and earnings per share fully diluted earnings per share $0.80 versus prior year of $0.72.

Turning to cash flow in the balance sheet, cash flow from operations was $10.4 million which was the strongest first quarter performance in the last five years. I would add that we have the capability and expectations to perform much better. The performance was a result of the improved income, depreciation was 8.2 million, and amortization 1.7. Although we made some progress in the area of working capital, working capital ended up being a use of cash of $24.7 million and basically negated the strong income results. We had an increase in accounts payable, a decrease in -- small decrease in inventory, however, those positives were offset by an increase in accounts receivable.

As we mentioned in the prior quarter call, we have a pretty extreme focus on cash performance and improving our working capital performance. I wanted to quickly touch on the initiatives we have in each area. First, in inventory each of our businesses has inventory targets in terms of dollars and turns, action plans to support the progress that we plan to make, and they're executing and monitoring and pulsing their progress frequently to make sure that we are fulfilling our plan. We have made progress in reducing inventories, but we certainly think that through the IT investments we're making in lean initiatives there is much more to go.

With regard to accounts payable, we continue to see improvement in BPO as a result of our global forcing initiatives we have implemented new standard payment terms and expect to see continued progress as that's rolled out. With regard to accounts receivable that was the primary driver of the increase in the quarter and use of working capital and really as a result of the distribution of sales throughout the quarter.

In the fourth quarter sales were decelerating each month as we moved through the quarter, and in the first quarter what we saw was accelerating sales with March being the strongest month in the quarter. So in the end March sales actually exceeded December by over $40 million and basically accounted for the growth in AR. However, we still have some things that we need to get cleaned up. We're still cleaning up the remnants of the Oracle conversion which impacted our accounts receivable and the move away from GE's transition services, so we are expecting to see significant progress in accounts receivable in the coming months.

Capital spending was 12.2 million versus 7.3 million a year ago. Dividends, 4.3 million resulting in free cash flow of negative 6.1 versus negative 8.4 a year ago. In the end total debt was $373 million, an increase of 8.9 million from the end of the year but a reduction of $38 million from the prior year. Net of cash results in a debt to cap under 30%. Briefly turn to the outlook for the second quarter. Our EPS guidance that we provided this morning in the press release was $0.99 to $1.06 per share. It reflects in many regards a continuation of the trends that we have seen this quarter and even in the fourth quarter. The most significant impacting the third of our business which is the HVAC challenging environment. We expect to see a continuing challenge due to the home sales that Henry mentioned.

We do expect the HVAC business to show improvement in the second quarter over the first quarter still to be down. We continue to expect healthy commercial and industrial markets to continue particularly in the area of the later cycle businesses. We also expect to see continued contributions from our corporate initiatives which will be reflected in our operating margin performance. The tax rate used at arriving at this EPS guidance is 35%, and I would continue to suggest that that is an appropriate rate for the third and fourth quarters. We expect capital spending of 8 to $12 million in the second quarter and are holding firm to our capital spending estimate of 45 to $50 million for the year. Now I will turn the call over to Mark.

Thanks, Dave, and good afternoon, everybody. I would like to add a little color to what Dave already said. This was the second consecutive quarter where our business performed well in spite of difficult HVAC market. We are very pleased with the execution of our team. The highlights of the first quarter were strong sales growth in our commercial and industrial motor businesses up 20% and in our generator business up 24%.

During the quarter we completed a major warehouse transition away from our former parent. We transferred our primary warehousing function for the GE brand of products to our own Indianapolis warehouse. The transition went quite well and we are pleased that all structural transitions required for the GE acquired businesses are now complete. Across the Company we continue our march to improve our operating performance through the implementation of our initiatives. During the quarter we made nice progress in driving lean deeper into the Company, with lean investments in our mechanical businesses such as Hub City and Grow Gear and in our motor manufacturing facilities such as Black River Falls and West Plains. We're seeing immediate benefits in our cycle time to delivery, and we are expecting benefits in both income and cash in the months to come.

During the quarter we also announced the closure of our South Beloit Master Gear facility. We will combine Master Gear into Durst facility and expect to be substantially complete by the end of the third quarter. One of the great benefits of lean is that the discipline frees up valuable space which delivers better asset utilization. This combination is a clear example of lean at work. Our focus on customers and innovation is resulting in a steady stream of new products. In the second quarter we will be announcing yet another new product based on our ECM technology. Our new ICE ECM product is targeted for the commercial refrigeration walk-in cooler segment. This innovative product will allow grocery chain users to cut the evaporator motor energy consumption from walk in coolers by up to 67%. While the product costs substantially more than the standard motor that it replaces, it can pay for itself in the user's energy savings in as little as one and a half years.

What's more is that the new system features are proprietary Black Box technology, that like a flight recorder in an airplane Black Box records system performance right up until a failure to -- right up until failure to assist in accurately diagnosing the cause of the failure. While it is too early to predict the revenue impact of this product, we're optimistic of the success of the product both in 2007 and in the years to come.

As you know, we have also recently announced our ECM 3.0 product for the HVAC market. This new product is an upgrade to our existing ECM products and is an improvement in feature content and reliability. We call it the ThinkTank, and we have already begun shipping ThinkTank products into the market. Reductions in energy consumption are clearly a growing need in virtually all businesses and in all markets on a global basis. According to a energy efficiency organization, Motor Decisions Matter, 23% of all electricity in the United States is consumed by electric motors. As we become a more innovative company we will continue to introduce products that utilize our technologies to meet the growing need for more energy efficiency.

Looking forward, copper prices continue to be a challenge. Even with our disciplined hedging process, we remain in an inflationary position. We are continuing to drive offsetting productivity, but unfortunately we are forced to continue to pass on some portion of the commodity increases to our customers. In terms of our HVAC business, our customers are telling us that the current industry inventory levels are at a healthy level. The key issues facing the industry now are the slowdown in housing and the weather. While the HVAC industry is clearly in the midst of a slowdown, it is a solid space to compete in over the long-term. The fundamentals of the segment including an established replacement market, warming temperatures and the demand for technology driven comfort and energy efficiency benefits make the HVAC segment an attractive long-term segment for us.

The highlight moving forward is that the rest of our businesses are continuing to perform and our initiatives are paying dividends. We continue to see strength in the industrial machinery and oil and gas motor segments. We expect continued improvements in the commercial and industrial motor businesses as well as our mechanical and power generation businesses.

In summary, the first quarter was yet another data point showing that the variety in our end markets balances our company's performance. While one demand from one end market is off, the others are performing. We continue to be excited about the benefits that our initiatives are delivering to both our customers and to our businesses performance. We feel good about the second quarter. We're pleased that the structural disconnects from GE are behind us, and we're optimistic about the long-term given our initiatives, our technology, and the energy enthusiasm throughout the Company. I will turn it back over to Henry.

Thanks, Mark. Okay. Just to finish up the first quarter, repeat a little bit of what Mark said, I think there are really two key story lines. The first has to do with our people and our processes, and the second story line has to do with the balance of our end markets.

Regarding our people and our processes, it really made the difference in the quarter. New products that we introduced a year ago and during the last year made a big difference in our growth, lean Six Sigma and some of our other initiatives made a large difference in our profitability and our ability to flex and react to changing market conditions were superb. Balance in the end markets, as Mark said we think the residential HVAC is a great marketplace for us to be in due to the replacement base that's there and the growing base, the need for high tech products that are energy efficient and have the ability to communicate with the system, and while it may be taking a breather, there was no better place to be from 2000 to 2006, and it will continue to be a great market as we move forward.

The fact is that we're not just an HVAC company. Two-thirds of the Company is commercial and industrial market oriented built on a broad base of markets and customers and our initiatives are delivering value in those businesses. The bottom line is that the Company is strong and delivering even when the conditions aren't universally great. Looking forward at the second quarter, we see more of the same. While it will be somewhat more dependent on weather as the replacement cycle in the HVAC market takes center stage, the industrial markets continue to look solid, materials will continue to be a headwind unfortunately, and you can see from our guidance that we're bullish but believe that HVAC will continue to lag last year.

As a final thought before we open up for questions, we're active on the acquisition front. As we have said, we will continue to be disciplined, but we have a full pipeline, and we have a strong balance sheet. We fully understand the need to prudently leverage to improve shareholder returns. We understand the full range of alternatives to do so. We think it is great news for our shareholders that on top of solid performance and increased dividends, we have the financial latitude to pursue avenues that could yield even higher returns. With that we'll open up for questions.

(OPERATOR INSTRUCTIONS) First to the line of Alexander Paris with Barrington Research.

Good afternoon. Great quarter. Just a couple questions on HVAC. You said it a couple different ways, but the HVAC is two-thirds of the total company, right?

No, it is about one-third.

One-third, I mean. I am sorry. One-third. Of that one-third, do you know approximately what percentage is residential versus you have some commercial in there, too, right? Or is the commercial when you say HVAC, you're talking just residential?

Yes, I apologize. When we talk about the one-third we're really talking about residential HVAC. In addition to that, commercial and industrial HVAC products would probably add another 8 to 10%.

Okay. And of the residential, then, do you have any idea what percentage goes to the repair remodeling versus sensitivity to new home construction?

About 75% of the market is replacement market, so 25% would be new home construction.

Okay. You said already that it looks like you've already had the inventory liquidation among the distributors and end-users, so they're back to normal, is that right?

That's exactly what our customers are telling us at this point, Alex.

And as far as the 13 SEER that pipeline filling is I presume all over with now, so now you're back to the regular cyclical?

We believe so. We believe that's what's happening. Obviously there was an effect in January in terms of year-over-year comparisons. The word we're getting right now is that that inventory is sole proof.

One of the questions to debt, I guess I have become spoiled over the years that you repaid debt down a lot faster than you seem to here just recently. Am I imagining that or?

What was your question, Alex.

Your debt reduction. I guess I would have expected a little more given you usually pay down debt pretty fast after acquisitions.

I almost have to look back last year. Last year we admittedly did did not perform well as far as cash, primarily in working capital, so we're coming off a year we're not happy with and I think the comments I made on a renewed focus on delivering our net income, we have an internal goal of 100% free cash flow as a percent of net income. We were less than half of that for last year, so I think you will see much better cash performance this year. From first quarter standpoint, first quarter is never a strong cash quarter for us, and this year operating cash actually was a five-year high, but higher level of CapEx and slight increases in dividends over a year ago kind of place us down below where we should be, so we aren't happy with it, and I think you will see an improved performance moving forward.

Just historically on a seasonal basis it seems like your biggest debt restructuring comes in the third and fourth quarter, is that true?

That's correct.

This is a very great quarter. Thanks very much.

Thanks, Alex.

Our next question is from Michael Schneider with Robert W. Baird.

Good afternoon, guys.

Hi, Mike.

First just in HVAC, I am curious, relative to your model did HVAC during the quarter decline more than you would have expected?

Mike, we're having a little trouble understanding what you said. Could you ask us again please?

HVAC, during the quarter was it actually down more than you would have expected?

Yes. As we came into the quarter, I mean, we knew it would be down, but we did not expect depth.

Okay.

Some of that I think was a little bit more channel clearing than what we expected.

Then looking for the balance of the year, I think the comment exiting last year was that you would have expected HVAC to be flat during 2007. You think that's still reasonable or is the market starting in too big of a hole at this point to recover?

I think the feedback we're getting from our customers is that that would now be an optimistic view in terms of the segment down low single digits is what we're hearing, Mike.

That's in units, Mark?

Yes.

Pricing now, what is flowing through in terms of pricing and just talk about mix with the new 3.0 ECM and the ICCM, can you still outpace that low single digit it unit contraction with price and mix?

You're talking just about HVAC at this point?

Yes.

Yes. In the quarter we also saw some impact from mix, and that was because last year at this time right after the 13 SEER build, they were building the low end products right up until January 23rd, and then they started building up their inventories of the new designs, and that's when we saw a stronger demand for our higher tiered products, so we did see some impact in the quarter from that. Beyond that we don't expect that to continue. We do expect continued improvement for our higher tiered products.

Okay. And where are you now in pricing in the HVAC channel? Have you gone out with pricing curing 2007 yet or when does it begin to hit given that copper is at 3.70 today?

With a number of our customers as we mentioned before, we do have agreements with them where our price is tied to movements in copper, and you get adjustments either on a quarterly basis or a half-year basis or an annual basis depending on who the customer is, but with regards to a general price increase, we have -- our last announcement was back in late third quarter, and given where copper is now, we're looking at that again and considering what the next step is.

Does that apply as well to industrial then or have you gone out with January pricing increases already?

Again, our last price increase in the industrial markets for most of our businesses on the motor side first was in the October time frame, October of 2006 in our generator business it was January of 2006. And in our mechanical business was also in the October 2006 time frame. I am sorry, generators it was January of 2007.

And have you announced anything this year yet that just hasn't become effective yet or the announcements have yet to go out?

The announcements have yet to go out.

And then looking just in terms of pricing this quarter, with industrial motors up 20%, how much is of that is actually units versus price at this point just roughly?

I don't think we've been trying to give exact numbers. Certainly most of it is volume.

So is it a case where volume growth is actually accelerating right now in the industrial slice?

Yes, we've continued to have some pretty good wins there, and the market has stayed relatively strong in year-over-year.

Henry, is the growth more a function of your market share and platform wins or is it just a reflection of these later cycle markets still accelerating?

Well, it's a little bit of both, but certainly the later cycle and some of the larger products is an important part of it.

Okay. Then the gross margins, you can all take a shot at this, I guess trying to get a sense, gross margins down year-over-year, certainly breaks, I don't know, a seven or eight-quarter trend. Can you walk us through the walk forward from a year ago to today? What were the pluses and minuses and in particular how much the inventory reduction hurt the gross margin and then if you would, give us some comfort either way as to which way gross margins are going for the balance of the year knowing that pricing is going out and copper again is flowing through at 3.70?

Well, I mean the things that -- you guys can jump in here wherever you want, but the things that certainly hurt margins in the HVAC business certainly we had contracting margins. Some of that is lack of liquidation as Mark said in that we're not using our as assets as hard as we were and some of it was compression due to materials costs that we couldn't offset. In our industrial businesses it was mainly a matter of materials costs overall, and so frankly if we would have had a just a more reasonable level of HVAC business in the quarter, we would have still -- we would have kept that string alive, and as Mark said also I think the other issue was a little bit of mix on higher end products, so it was -- there is a little bit of number of things in there. I don't think we can just pin it on any one specific item.

As we go forward, Mike, I think the pricing environment is very interesting at the moment, certainly we're taking some pricing actions. Those always take awhile to filter in, and the stall out if you will or the reduction in prices in commodities have a lot of interesting mindsets in the marketplace. So we have to see how that plays out. I think what we're confident of is that our initiatives with our lean Six Sigma efforts, productivity decks that we have, new product decks that we may have a tough quarter here ar two while we're going through the thrill of having the HVAC business where it is, but it will come back, and we can continue to expand our margins.

Dave, specifically what was the basis point hit on materials year-over-year? Do you happen to have that?

I don't think I have that in here with me. I don't. I would have to get back to you on that.

Specifically on hedging, I guess what range of copper is flowing through the P&L right now and then how soon do we see 3.70 copper if it stays here?

Mike, I don't think we really want to tell you exactly what our all-in cost of copper is. I think that's a pretty difficult thing to start saying publicly. I don't think we want to do that, but we have said that we would continue to see headwinds through the end of the first half and that's what we still expect. I think we would expect to see a flattening in the second half and we believe based on everything we read and everything we're told in our study that we will start to see copper prices towards the beginning of next year start to move back toward what would be a more reasonable level.

Okay. And China specifically, looks like Sinya had a huge quarter, and at least by my model was probably twice what we were looking for. Maybe just take a step back and give us an update on China specifically, where Sinya saw the growth and what's in store for 2007?

Obviously we're very pleased with what the team over there has accomplished in the last year. Of course China is a fast-growth market. We've been trying to increase our selling into China as well as our manufacturing. I think Sinya was a good example of success, so was CMT. Our other joint ventures are all up very nicely. The margins in the business in Southeast Asia are lower than we would traditionally see in North America. That's true of our businesses. I think it is true of the other businesses that participate there, but the return on invested capital is good because of the growth. Over time we think the market will rationalize a little bit better around the margin issue, but it is a good business, it is a profitable business, and we have high hopes we're adding new products there as well. We're expanding our facility, and we have a very solid management team, very good management team, and we have further acquisition thoughts in terms of what possibilities are in Southeast Asia.

What would you expect China -- well, what element of China's production now is being actually exported ought of China versus being consumed locally?

Over half of it has to be -- it is probably about 65, 60 to 65%. I don't have the exact numbers, Mike, but over 60 to 65% I am sure, at least that level is being sold in China.

Okay. And when I was there last there was talk of the acquisition potential of buying out your joint venture partners, some or all of them. Is that still a possibility in '07 and are we talking meaningful dollars to releverage the balance sheet?

No. I mean, the answer is no, it is not meaningful to rebalance the balance sheet in total, but it is -- it would be a nice plus for us if we could do it. We're in discussions with a couple of our partners. As you can appreciate when a business is doing well, there is not always a lot of interest in that. We'll just have to see how those go.

Thanks again, guys.

Thank you.

(OPERATOR INSTRUCTIONS) We will go to the line of Andrew DeAngelis with KeyBanc Capital Markets. Please go ahead.

Hi. Good afternoon.

Hi, Andrew.

I guess within the quarter I am just trying to gauge within the electrical group how much the mix of business i.e. between HVAC and industrial strength kind of affected the overall margins that we saw for that segment?

I guess I didn't actually look at a specific mix analysis of that level to give you a precise number. Our HVAC business was down 14%, so it was fairly meaningful.

Yes, so it would be fair to say the mix hurt you in the quarter in terms of strength in industrial, weakness in HVAC?

Yes. I think it is some of our -- the later cycle businesses, large motor businesses, have a pretty decent profit profile, so it wasn't hugely material in the quarter, for example, but it was certainly the HVAC business being down is kind of the -- certainly it was a hit.

Okay. And I guess with that said and kind of the qualitative parameters around what you were talking about for 2Q, can we see some margin expansion in electrical in 2Q and it we get some sales growth with HVAC with HVAC down again?

Yes. Our guidance is based on an estimate that would call for modest sales growth in total, and my comment may have been a little bit implied, but we do see some operating margin expansion in this guidance.

Okay. And I guess then just looking out towards the full year, and I know you guys don't give explicit full year guidance, but if I look back at my model, looking back a couple years, it looks like kind of barring any unusual things going on in HVAC, i.e. 13 SEER that you guys are about equal in terms of weighting first half versus second half. Is that fair in terms of earnings contribution?

Yes. I look at it more in sales and would say that I don't see anything that's inconsistent significantly with the past.

Okay. Okay. And then I guess just one last question. If maybe you, Henry, could expand on your acquisition comment? Sounds like the pipeline is pretty full. I guess I was just wondering size of properties and maybe the immediacy of anything getting done?

Well, the sizes run the full gamut from something would be larger than the largest that we've done to a number that would be add-ons or bolt-ons as we called them in the past but still good businesses. We're looking -- the pipeline is full here in North America. There are opportunities in Europe, and there are opportunities in Asia, so I would say geographically it runs the gamut as well. In terms of probability, that is always hard to assess. I would just say that when you got a pipeline that seems as solid as we have right now, I would be very surprised if we don't have some success. Having said that, we just -- it is a very difficult market. The pricing has really been pushed up by the financial buyers and low interest rates, so it is difficult. If you're a disciplined buyer. But I am pretty optimistic. As I tried to say if we don't have success there, there are other ways for us to increase our leverage and help shareholders. We're going to continue to be very open minded about the full range of opportunities to do so, but we are believers in proper amount of leverage for a company to help create shareholder value.

Could you just remind me maybe what your policy is with respect to share buybacks?

Well, we've only done a couple. We would do that if we felt that that was the best way to create shareholder value. Generally speaking we've been able to find opportunities to grow our business through acquisitions, and that's been the more predominant way that we've leveraged.

All right. Perfect, guys, thanks.

Thank you.

We will go to the line of Holden Lewis with BB&T. Please go ahead.

Good afternoon.

Hi, Holden.

I guess I wanted to get a little bit more color on what is going into the guidance. I guess worst case you're looking at a flat year, year-over-year, a flat quarter year-over-year, and best case maybe up 7.5% in terms of the EPS growth, but -- and that would be the slowest rate of growth of the last two quarters when presumably the HVAC impact the last two quarters would have been relatively greater given the furnaces, given the production drawdowns, I guess I am just surprised that you're looking at potentially flat to very slightly up growth in the second quarter when presumably some of the headwinds you've seen though they may still exist should be moderating, and can you just give a little bit more color into that, please?

Well, I think some of our pause on the HVAC side is related to housing and still an unknown, and clearly weather is an unknown, and what's happening relative to inventory, while inventory has cleared through the channel, the other piece of feedback that we got from our customers is that because the HVAC units are more expensive now than they were in the past, their customers are hold less inventory than they had in the past, so in terms of number of units, they believe there is less, actually less inventory in the market just because of their financing capability to take on the product. That all has an effect of holding things back a bit, and our customers are acting and behaving in that way.

You have kind of said that you think inventory is at least at the right nominal level which means at least directionally it should behave seasonally like it always has, perhaps lower nominal levels but again I would imagine Q1 anyway you kind of feel like you've gotten there, so it sounds to me like you're saying maybe inventory has got to pull in further and on the other hand you have kind of said that you felt that you were at the right nominal level.

I think it is more the point of the feedback we're getting is that it is at the right level. I think what our customers would say is that it's the uncertainty about the inventory costs and whether they're looking at it the right way, that's point one, and point two is obviously the housing impact.

Recognizing that housing isn't going to go away, that's going to be in there the whole time, when do you expect the hang over from 13 SEER to sort of get out? It looks like it was less in Q1 than it was in Q4. Sounds like you're expecting less in Q2 than Q1. By the time we get to Q3, are we done talking about this, do you think or what's the thought there?

Well, we purposely did not bring it up today. You didn't hear it actually come from us. There was an impact in the first quarter, but we didn't bring it up about the second quarter. We're not hearing that as a comment back from our customers relative to inventory.

Okay. So what kind of -- what kind of declines are you looking for from HVAC than in Q2 given that now it is probably just a housing -- the housing impact in a quarter Q2 and Q3 which should be more maintenance driven than new homebuilding driven given the seasonal patterns, right?

You're right. In terms from a unit perspective we have down approximately 7% in the quarter.

In Q2?

Yes. You got to also remember -- we're seeing the same numbers as you are in terms of how that market is performing. You saw the ARI data through February down 43% for the two months of the year. I think everyone is a little gun shy.

Okay. Now, furnace data is not down as dramatically as that.

That's correct.

How much of your HVAC motor business is furnace versus air conditioners, heat pumps?

I don't have that exact number off the top of my head, but my guess is it is probably 70/30, 70 on the cooling side, 30 on the furnace side. I don't know for sure, though.

Okay. And just to get some numbers here, you said that power generation was up about 24%. You said large motors were up mid-teens. What were the small motors during the quarter?

They were up I guess in total all the brands in kind of the low to mid-single digits.

Low to midsingle digits. Okay. And where does Sinya fall in terms of -- is there an organic power jet or an organic large motor/small motor that we should be considering?

The numbers I gave I took Sinya out.

Okay. So those numbers are ex-Sinya. Then HVAC was down 14%. What about commercial?

Again, I don't have that pulled together that way in front of me here.

Okay.

Sinya is a motor business. So it obviously goes in the motor numbers in total.

Right. Those numbers are clean.

Right.

It looks like also your large motor and small motor business also potentially ticked up a little bit sequentially which is certainly positive, but is that a reasonable way to read sort of the data or not so much?

I mean the numbers are what they are and certainly in terms of fourth quarter we saw pretty consistent results by brand or by the size or market, definitely saw a pickup during the quarter. I mean January, February, to March we saw acceleration in sales during the quarter.

Above and beyond normal seasonality? Do you think?

I would say slight bit yes.

All right. Great. Thank you very much.

We will go to the line of John Emerich from Ironworks Capital. Please go ahead.

Thanks.

Good afternoon, John.

I don't know if anyone asked it quite this way, but do you know the HVAC business the 75% that's replacement when you sell the product you know approximately obviously how much is going into replacement versus new construction? Did the replacement side, how well did that do or poorly if you will? How is that holding up?

For us it is the same SKU that we'll sell to the OEM.

That's what I thought.

We don't see exactly where that goes. We're kind of relying on their data through their distribution channels, and so I would say we don't have a real good feel for that breakdown on kind of any one period of time.

Okay. That it is fine. I was just wondering. Thanks a lot.

Okay.

We will go to the line of Alan Mitrani with Sylvan Lake Asset Management. Please go ahead.

You talked about the industrial motors business growing 20%. Is that ex-ing out any acquisitions or any one-timers? Like is that 20% organic?

High single digits.

High single digits net of that?

Right.

Are you seeing continued growth into April and May?

Yes, we are.

And any impacts from a competitive position from the Baldor Reliance acquisition?

Nothing that's different than the way we looked at it in the past.

Which sectors are you seeing in industrial the most strength in?

Well, we continue to see strength in oil and gas and mining in heavier process duty applications, industrial, construction, electric, I would say kind of like we've been talking about the last two quarters.

Excellent. Thank you.

(OPERATOR INSTRUCTIONS) We will go to the line of [Chris Bannon] from Morgan Joseph. Please go ahead.

Good morning, gentlemen.

Hi, Chris.

I was curious to know with regards to the acquisition front out there there has been a lot of talk on this call talking about late cycle products and stuff. As you're looking out at the acquisition opportunities there, are you -- what are you focusing on? Are you looking to go balance out your business mix as best you can, maybe give a little color to that?

Chris, you were breaking up a little bit. I think I got the gist of the question. We always start with strategic fit, and we have a set of objectives, things that we think are going to help us drive the business forward, and so that's the starting point. As you know, we're an EVA based company. As we're doing financial evaluation and in addition to all of the other metrics, key metrics for us is ROIC as we look at companies.

Specifically today we have been concentrating on opportunities in Southeast Asia because we continue to believe that customers are moving that directions and that we have to play a bigger role there and that the opportunity is there to do so, and we're continuing to look at opportunities to improve the intelligence of our products and the efficiency of our products and what we do here, and so generally speaking those are kind of the key things that are driving us. We've always looked at ways we can increase the solution power that we give to any given customer so that if we could find the right products or opportunities to extend the kinds of products that we make for current customers it is high on our list.

Perfect. Thank you.

We have a follow-up question from the line of Holden Lewis, BB&T. Please go ahead.

Can you also just comment the relative growth in the distribution channel versus the OE channel, any differences there to not? In industrial by the way.

I understand. No, we haven't seen any major change. I think the trends that have been there for a long time, Holden, continue to be there. The larger chains continue to seem to grow in terms of what they're doing, but overall as we look at it, the blend in mix in our industrial markets has not changed substantially.

Great. Thank you.

There are no other participants in the queue right now at this time.

Okay. Why don't we finish up and just a couple of things of note. We're very pleased recently to receive the Company of the Year for Motors award from Frost and Sullivan and that's recognizing all of the many achievements we have had with new product development and our key initiatives in the Company, our ability to service customers, so we're very pleased with that. As we would leave you, we would like to leave you with these thoughts.

First of all, we think it was a very good quarter, and we recognize that everyone would like to think that markets never slow down and so on, but the reality is they are what they are, and there are going to be those times. We think when you have a major market slowdown to the extent the HVAC market slowed down during the quarter and we are able to react and improve earnings that it is pretty significant achievement. We feel great about that. We think that the balance of our portfolio with industrial and commercial and residential applications showed its head in this quarter and will continue to do so. We're very pleased with the progress we're making on our strategic initiatives, and we're frankly very happy that we had the financial latitude to look at ways to improve our shareholder value. With that, we thank you for your interest in Regal-Beloit, and hope to talk with you again soon.

Ladies and gentlemen that, does conclude our conference for today. Thank you for your participation, and for using the AT&T Executive Teleconference service. You may now disconnect.