Regal Rexnord Corp (RRX) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the third quarter 2007 earnings conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session, instructions will be given at that time. If you should require assistance at any time during the call press star then zero. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Dave Barta. Please go ahead.

Thanks, Mary, and good afternoon, everyone, and welcome to the Regal-Beloit third quarter earnings conference call. Joining me today are President and COO, Mark Gliebe and Henry Knueppel, our Chairman and CEO. Before turning the call over to Henry, I'd like to remind you the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guaranteed 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 and our filings with the SEC.

Now, I'll turn the call over to Henry.

Thank you, Dave. Thank you everyone for joining our call and for your interest in Regal-Beloit. We will follow our normal agenda, I will make a few opening comments and Dave will give you the financial aspects of the quarter, and Mark Gliebe will give you color on the market, new products and our newest acquisition. Then I will finish with a little look forward into the fourth quarter.

Overall we would say that we were very pleased with financial performance during the quarter. We finished on the high end of guidance range, despite an extremely difficult HVAC market and strong material head winds. I'd also like to point out that it was a record quarter, despite those head winds, and remind our listeners that earnings were reduced by a one time $0.03 hit due to the accounting for the Enron settlement which was completed during the quarter. When those three significant drags to our earnings are considered, you can clearly see the positive impact of our productivity accomplishments, the value of our diversified portfolio of end markets, and the value of our growing international presence.

We're also pleased with our very strong cash performance. Cash flow that allows us to invest for growth and diversification. And we are executing the strategy for growth and diversification. As we have said in previous calls, we believe that energy efficiency offers incredible opportunities for growth and we have the technology and the customer reach to make a significant difference. Highlights of our investments and energy efficiencies was related to organic growth are several new products, some of which I will remind you of and some of which Mark will talk about in a few minutes.

Earlier this year, we introduced our ECM 3.0 product for HVAC residential market which continues to lead that industry. We also introduced our Arctic and ICE 59 DCM products for commercial refrigeration. And we introduced new high-efficiency [teleco] inline gear drives. Today Mark will be talking about three more products that will join this family and there are many more to come in 2008. Each of these new products offers efficiency improvement of 20% or more over conventional products currently in use.

Another example of diversified growth is the Morrill acquisition. By combining legacy RVC and Morrill products, we have created the most complete energy effect product line in the commercial refrigeration segment. And now have a significant position in that vertical market. We have also added complete fan assembly capabilities and plastic capabilities to our ability to create customer solutions. And finally, we added a wholly owned subsidiary in China. Morrill comes with an excellent management team and great people throughout the company. A couple of final take-aways on growth and diversification is that our compound annual growth rate outside of North America for the last three years has been in excess of 50%. And in fact, our 2007 sales outside the U.S. will exceed the total sales of Regal-Beloit just 10 years ago.

With that I'm going to give it to Dave Barta.

Thanks, Henry. And I'll review some of the financial highlights for the quarter starting with the P&L. Sales for the third quarter were 449.4 million which is a 7.2% increase as compared to the third quarter of 2006. Included in these results, as we mentioned in our press release, were sales for the FASCO Jakel business, which were included for one month, the month of September, of 28.3 million, and by segment, electrical segment, sales were 398.8 million which is a 7.7% increase versus the prior year, and that includes the sales for the FASCO Jakel business. Our segment growth in the electrical segment was paced by the power generation business that experienced 33.6% year over year growth, so this is an outstanding performance by the generator business worldwide, again. And we continue to see strong worldwide demand for our generator products. Non-HVAC motor sales increased 8.9%, our HVAC motor sales were down 16.8% as a result of the difficulties in the residential end market. Sales in the mechanical segment increased 3.5%.

As Henry alluded to, one of the highlights in the quarter were our sales in China. Our China motor and generator businesses increased versus the prior year over 40% and this is quite an example of what we feel is a successful globalization efforts, and we're heading to almost 20% of our sales being outside of the U.S. this year. Gross margins for the quarter were 23.7% as compared to the prior year third quarter gross margin of 24.6. If you exclude the impacts of the acquisitions which were much lower gross margins, our gross margin would have been 103.5 million or 24.6% of sales. Basically flat with the prior year excluding the acquisitions. On one hand the commodity inflation that we had built into our forecast impacted the margins a negative way. We did not offset that with pricing. Although we are very pleased with the productivity and Lean Six Sigma contributions, which more than offset the impact of the volume decline.

Operating expenses, as Henry mentioned, included $1.8 million from the settlement of the Enron legal matter. As Henry mentioned, we have paid that settlement and glad to report this issue is now behind us. Additionally, operating expenses included 2.4 million from the FASCO Jakel business. In the second quarter we experienced very favorable health care costs and that did not repeat this quarter, we are more in line with where we had been. As well, SG&A expense was impacted by higher IT and new product development costs (inaudible) and innovation initiatives. Income from operations was therefore 53.4 million or 11.9% of sales as compared to 53 million or 12.7% of sales reported for third quarter of 2006. If you exclude the impact of the acquisitions income from operations would have been 52.5 million or 12.5% of sales a slight decrease from the prior year.

The tax rate for the quarter was 34.2% versus 36.4% in the third quarter of 2006. This decrease is primarily result of the distribution of income which again was weighted to lower tax rate countries. Net income for the quarter was 31.2 million,an increase of 5% as compared to 29.7 million reported last year. And fully diluted earnings per share were $0.92 which compared to $0.89 reported in the third quarter of 2006. Now I would add that the FASCO Jakel business was neutral to earnings during the quarter.

Turning to cash flow and the balance sheet. We had another outstanding cash performance. Cash from operations for the quarter was [68.2] million compared to a use of cash of 23 million in the prior year. This performance was driven by solid income performance and continued focus on working capital. Excluding the 53.5 million addition to AR from the acquisitions, AR actually decreased 28 million from the second quarter. Accounts payable excluding the acquisitions increased 3 million, and inventory after a significant reduction in quarter two increased only 6.7 million on the same basis.

We have taken approximately ten days out of our cash cycle at the beginning of the year and continue to believe that we have additional opportunities to improve our working capital performance as we move forward. Depreciation and amortization was 10 million for the quarter. Capital spending was 6 million and dividends were 4.7 million, resulting in free cash flow of 57.6 million in the third quarter versus negative 7.6 million in the third quarter of 2006. Our total debt now stands at 505.8 million, which was increased as a result of financing of the FASCO and Jakel acquisitions. Net debt to total cap is 33.3% and debt to EBITDA is approximately 2% given effect to the acquisition of EBITDA.

Turning to the fourth quarter we gave guidance this morning of $0.67 to $0.74 and that continues to reflect the sales trends we have seen in recent quarters and the continued impact of commodity inflation. The contribution from the three acquisitions is also included in the guidance, the sales contribution we've included for the acquired businesses is expected to be approximately 103 million in the fourth quarter and we expect the businesses to be neutral to earnings per share for the quarter. Tax rate is arriving at the EPS guidance was 34%, we expect CapEx and other housekeeping items of about 10 million in the fourth quarter, which will bring our full year capital spending to 35 to 40 million.

I'll now turn the call over to Mark.

Thanks Dave and good afternoon to everyone. This was the fourth consecutive quarter where our business has performed well in spite of a difficult residential housing market and we are very pleased with the execution of our team. Highlights of the third quarter were strong sales growth in our commercial and industrial motor segments, up 9%, and our generator business up 34%. Across the Company we continue to look for ways to improve both our cash flow and profitability, as Dave mentioned, we made real working capital improvements in receivables, payables and inventory, and we reduced our cash flow cycle to 81.1 days as compared to 92.6 days at the beginning of the year.

As we have stated in the past, our strongest organic growth opportunities will be driven by innovative, energy efficient products. In energy -- we are working hard to produce and launch leading products in energy efficiency, as evidenced by a steady stream of new product announcements over the last three quarters. Last quarter we announced our new Arctic 59 ECM products, which targets the opportunity in the commercial refrigeration, walk in cooler and freezer segment. This opportunity was created by a state energy laws that go into effect in January of 2008 requiring more energy efficient motors. The quarter before that, we announced ECM 3.0 the latest version of our HVAC indoor blower motor. This product is seeing solid demand and interest from a variety of largest OEM customers. This month we plan to announce three more new products. Two focused on improved energy efficiencies and another focused on noise reduction.

First the new Arctic 142 ECM, it's a motor that is yet another, somewhat larger product for our commercial refrigeration customers. In commercial refrigeration applications 15 to 75 motors can be found in just one grocery store, operating indoor evaporators for outdoor condensors. These units are part of the overall food storage cooling systems and utilize a significant amount of energy. Replacing the standard motors from these systems with our new Arctic 142 allows our customers to prove the energy efficiency by 35% and save $2500 a year in energy costs. Additionally, this product allows our OEM customers to meet more stringent California Energy Commission regulations, that require all new indoor and outdoor equipment for walk-in cooler or walk-in freezer equipment to utilize energy efficient ECM type motors effective January 1, 2008.

Also in the HVAC segment we have introduced to our customers, our new patented fanless [80-plus] draft inducer. The typical draft inducer for 80% efficient furnaces employs small fans to cool the motor. Our new fanless 80 draft inducer eliminates the fan, thereby reducing noise emissions by as much as 50% versus the typical draft inducer. It also allows OEMs to consolidate designs and components across their furnace platforms. We expect to be shipping the product during the second quarter of 2008. In this difficult housing environment our customers are looking for ways to be first in the market with differentiating features and cost saving techniques such as those offered by our fanless 80-plus draft inducer.

And finally, in our generator business we have launched a set of new variable speed generators to be used in remanufactured locomotives. The generator based systems provide both traction, power, and auxiliary power to locomotives, the system reduces emissions enough to meet stringent California emission targets and improve fuel economy by 20%. Progress Rail, a unit of Caterpillar, and other customers in this space, are actively pursuing this opportunity.

Across all of our markets, we are working on a number of new products and new technologies that deliver energy efficiencies and cost savings to our customers. Some of our new products are replacing existing products while others are pursuing new space. Most of these new products come from customer focused ideas that are generated during our company-wide long range planning process which is a formal process in key components of the Regal-Beloit operating system. And when we talk again at the end of the first quarter of 2008 we expect to introduce additional new and exciting products that we will launch in 2008. From a commodities perspective half our prices continue to be a challenge with our most recent higher cost hedge positions replacing our historical lower cost positions. Even with our disciplined hedging process we have been unable to (inaudible) all the commodity inflation we are facing, and it has been pressuring our margins. We are continuing to drive productivity to offset this impact but unfortunately we are forced to continue to pass on some portion of the commodity increases to our customer.

In terms of our HVAC segment, as Dave mentioned, our sales were down 17% for the quarter with year-over-year decline in chilling in both our standard and ECM products. The struggling housing industry continues to put pressure on this segment of our business and we expect this to continue in the near term. However, with the launch of many new products, the addition of recent acquisitions and our continued expansion internationally, we are taking the appropriate steps to mitigate the impact of the domestic housing industry. Outside of the HVAC segment the rest of our businesses are continuing to perform well and our initiatives are paying dividends. We expect continued improvements in the commercial and industrial motor businesses, as well as our mechanical and power generation businesses.

Now I would like to shift gears and discuss our recent acquisitions. Before I jump into the specifics, I want to briefly discuss our acquisition strategy. Using a very formal review and screening process, we actively seek acquisition opportunities that either offer complementary product suites or the opportunity to participate in an adjacent space. We also look to expand our presence internationally by acquiring companies in key geographic regions of interest. Once we identify our targets we carefully scrutinize each opportunity to insure that it provides us with an adequate ROI. As we have stated before, our goal is to be a consistent acquirer of high quality, value added companies.

During the last three months, Regal-Beloit has completed our 28, 29th, and 30th acquisition over the last 25 years. I would like to comment on each of these recent acquisitions. It has been two months now since we have completed the FASCO and Jakel acquisitions, as you recall these acquisitions put us in the air moving system segment to water heater, alternative energy and HVAC customers. We have now combined these two businesses into one and we could not be happier with our integration progress to date. We continue to target $15 million of cost energy savings over the next three years and we are confident that we will see continued progress on this front in 2008.

Just yesterday we completed the orientation of the Morrill Motors management team. Our acquisition of Morrill was completed on October 12th. The Morrill business gives us a stronger position in the commercial refrigeration segment and brings us another line of motor and air moving systems and additional energy efficient technological that we can offer to our customers. This should give us the opportunity to cross sell our respective customer bases. Morrill's ECM type technology known as [SFD] allows display case and bottle cooler manufacturers to replace their standard motors and offer their grocery customers a 67% reduction in display cases energy consumption.

When we combine the energy saving commercial refrigeration products from Morrill, with the energy saving commercial refrigeration products from our existing GE branded growth businesses, we now have a strong energy saving platform that addresses each of the cooling units in the grocery store including bottle coolers, display cases, vending machines, walk in freezers, and even the outdoor condensing units. Our product platform now represents the most complete and most energy efficient lineup as any of our competitors in the commercial refrigeration segment.

In summary, our performance during the third quarter highlights the benefit of touching a variety of diverse end markets which balances demand across our business. We continue to be excited about the benefits that our new products and our initiatives are delivering to both our customers and to our business performance. We are excited about adding the FASCO Jakel and Morrill businesses to the Regal-Beloit family, and we are looking forward to integrating our teams and providing value for our customers in the marriage of our products and services.

Back to Henry.

Thank you, Mark. Taking a look forward, we expect the fourth quarter to be a solid quarter from a historical perspective. The positive factors will be the industrial and commercial markets, they're aided by strong export demand, and that demand is aided by a strong global economy and a weak U.S. dollar. Other positive factors will be power generation, new products and our productivity programs. The restraining factors will include the HVAC market, copper prices, and a one quarter drag from the purchase accounting adjustments for the new acquisitions.

As we look forward to 2008 and beyond we remain very optimistic. We believe that the residential HVAC market will see gradual improvement as the year progresses. Industrial and commercial markets will remain solid with a somewhat hidden strength in exports. International sales will continue their fast growth but on a bigger base and the new product pipeline is full and our acquisitions will be adding additional capabilities. We also have a lot of synergies to mind from the acquisitions.

Last and perhaps most important the future demand for energy efficiency will create great opportunities for us. We are at the epicenter of energy efficiency with approximately 50% of all electricity generated used by electric motors. We have the ability as we educate customers, legislators, energy companies and end users to reduce the need for one fossil fuel plant per year just with our new production. The need is real. The technology is in production today. And there is more on the way. So these factors give us a very bright view of the future.

With that we will open up for questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from the line of Alexander Paris from Barrington Research Associates. Please go ahead.

Good afternoon. Getting to be a more exciting story all the time.

It is from our perspective.

The generator business. Why is it so strong? That's awfully good growth.

It's a situation where some of the events of the last few years have created longer term demand, blackouts, brownouts, hurricanes, those things create a lasting demand as people and companies recognize tha,t for example, one three day outage or two day outage will cost a lot more to a grocery store than the cost of having a backup generator. There's legislation that requires the large commercial buildings to have backup power generation, and then of course, with data centers and cell phones and so on, electronics do not have a great tolerance for power interruptions, or dirty power, as we call it. So they eventually put in stand by power and/or prime power for those applications. It's a growing need and we see the same thing of course globally, India, China where they need prime power in remote locations, and certainly don't have dependable power yet.

I always thought a lot of that was coming from overseas but it sounds like it's just as much of the strength is coming domestically, is that right?

Right now, it's pretty universal.

Right. That's great. Just one other thing. The acquisitions, certainly look exciting and there's a lot of them. When I look at new products and markets like beverage displayers and vending machines, are you taking on too many maybe different new markets? Or are they pretty much handled by the same distributors if you use them or is that one of the reasons why you're keeping these acquired companies a little bit more independent whether in newer markets that you haven't been in before?

Alex, I'll take that one. This is Mark. We put the RVC operating system in place. We did that over three years ago and it allows us to establish a rhythm and discipline in the Company no matter what business we're talking about. And it's very scalable. And we brought the FASCO Jakel teams in four or five weeks ago, and feel that by introducing that operating system to them and having them understand exactly how we're running, we can fold them in to our existing business structure without missing a beat and we feel the same way about Morrill. So far it's been very good.

Sounds great. All right. Thank you.

Thank you.

Our next question is from the line of Robert LaGaipa from CIBC World Markets. Please go ahead.

Thank you. Good afternoon. I guess, a few questions. One, just to follow up on the acquisitions, I just want to follow up on the expectations from the acquisitions both in terms of sales and operating margins for the remainder of this year and also into next. FASCO and Jakel, I think for the fourth quarter you're originally anticipating something like an $85 million impact on the sales line. And now you have Morrill which is about $42 million in sales total. Then you're looking for $103 million in the fourth quarter. So I just -- that bridge of almost 20 million, which would be half of Morrill's sales, I'm just trying to understand what the sales increase is going to be in the fourth quarter. And then the same question for next year. What type of sales increase are you looking for relative to the original 355 million?

I think we're, again, on the FASCO Jakel pretty consistent with original guidance. We're looking at 85 million range for the fourth quarter and Morrill in the 8 to 10 million range. So little bit up side there. On the -- for next, FASCO Jakel we're still continuing on the 355 revenue guidance and on Morrill I think was 42 million is what we had in the ['08].

Okay. And just a follow up on the operating margin line from that. in the third quarter I think you're looking for about $30 million and then about 5% margin contribution. If I look at the actual sales, I mean, a little bit lighter, not much, 28 million or so. But the operating margin, if I take the 0.9 million on the operating income line that would imply 3% margins. You were anticipating 5 in the third quarter, 5 in the fourth, and obviously an incremental improvement for next year, has that changed? Should we expect 3% again for the fourth quarter and then moving off of that lower base? Or how should we think about the margins from the acquisitions moving forward?

Actually, I think it will be a little better in the fourth quarter, probably closer to the 5%, as you mentioned they were a little bit light on the volume side for the third quarter, and then you're got the step up in inventory due to the write-up in inventory that will hit them in the one month and there'll be a carry over into the first couple months of the fourth quarter. There hasn't been any change, maybe a little better precision, but no change from our initial thoughts on the business.

Okay. Terrific. And then, a question on the raw material costs, the copper price, you mentioned it's still obviously a drag. Can you maybe just walk us through so far this year, for a second, third quarter and now what you're expecting for the fourth and next year in terms of the margin hit from the higher copper costs and other raw materials? Has it incrementally gotten a little bit better? Has it gotten worse? What are you expecting?

I don't remember the first and second quarter exactly, but I think we said coming into the third quarter that we were expecting 3.8 to 4 million pinch, if you will, from the difference between what we could do from a price standpoint and the cost and that in fact happened. As we look at the fourth quarter we're going to be in a similar position. Some of our markets we have introduced price increases. A couple of our markets are very difficult markets as you know right now. And so that is more constraining in that regard.

Terrific. Last question if I could, just in terms of the debt levels. Obviously, the debt levels have increased. I'm sure it's still comfortable, it's certainly relative to what your debt levels were in the past just with acquisitions. What's the debt level going to get up to with more in terms of the financing there? And as it relates to future opportunities, in terms of your pipeline and other opportunities you might have, how much more would you be willing to lever up?

Well, I think we've, historically, said that we like to operate in a 30 to 50 debt to cap zone and net of cash I think we were at 33 at the end of the third quarter. Still relatively speaking at the low end, and I think for the right acquisitions, we're going to be prudent in our thinking, and we always factor in multiple scenarios on the economy just to make sure that if there is any pullback in the economy that we're still very comfortable. So I think very prudently conservative when it comes to financing. Now, the Morrill, we did not disclose the purchase price, it was not a real significant acquisition so that's not going to change that outlook. I think the other positive is, we continue to believe, as we've stated now for over a year, that we have a tremendous amount of fire power that we had tied up in working capital and as you can see from our cash from operations we're freeing that up. So in effect what we freed up this year paid for more than one these acquisitions.

Right. I guess what I was trying to get to, Dave and Henry, is just, I mean, in light of the acquisition activity recently with these three acquisition, your 29th through your 30th acquisition in the last 25 years, does it slow you down at all on a go forward basis? If the right opportunity came along would you still jump on it, I guess, is what I'm asking?

We still have an active process, we still have an active pipeline of things that we think would be -- would create value for shareholders and if we find the right thing we think there are opportunities to move forward.

Terrific. Thanks very much.

Your next question is from the line of Mike Schneider from Robert W. Baird. Please go ahead.

Good afternoon, guys.

Hi, Mike.

First I guess, just sticking with the acquisitions, if you could just review the accretion guidance. Dave as I add up the math, the Jakel and FASCO acquisitions, roughly $0.14 to $0.20 accretive next year, does that still hold?

We said for FASCO and Jakel next year, I think, we're at 20 and 25 including the synergies that we felt we'd realize next year, and Morrill was 3 to 5 on top of that.

Okay. And then, the reason I get to that math, if you back into what that implies for improving the operating margin vehicle in FASCO, it only applies about 2.8, 2.9 points of operating margin addition to the Jakel and FASCO businesses. And if you're expecting 5 in Q4 and that's got some inventory hits still in it ,can you quantify what the inventory hit is in Q4? And then just give us some, I guess, bridge, again, from the 5% to what at least the guidance implies of getting it from say, 5 to 8. It would seem like there's got to be plenty of low hanging fruit from sourcing and other early initiatives to drive at least that in '08.

The -- I think we said on the conference call about the acquisitions, the run rate on those. They've been running, FASCO and Jakel, both in the neighborhood of 7 and 7.5% operating margin. What we're experiencing this year is really a direct result of the purchase accounting impact, and again, a little bit of a volume they're facing the same things we are of volume markets and the weight of the copper. But we thought or think that the base of 7 to 7.5% is the right starting point and then we've layered into that the synergies we see. And your comment is correct, the first synergies that we think we'll realize are those that are related to utilizing the combined strength of the businesses to unlock, from a materials synergies, start to unlock the footprint synergies that are there, which is really the bulk of the 15 million Mark mentioned. But obviously, some of that takes a little longer.

Dave, again, if you come out from under the inventory step up in 2008, as early as Q1, you're already there to where the accretion sets you at 7, 7.5% maybe plus or minus 50 basis points. Is that just conservatism or is something preventing you from realizing some of these sourcing savings et cetera, until you get into 2009 or is my logic not correct?

Yes, I'd have to walk through your math. The synergies that we have baked in the next year are primarily related to the materials and sourcing and the footprint synergies, which, again, I think we said was materials synergies were in the 5 to 5 million range. The bulk of those other synergies we have beginning in '09 that are footprint related, because we've got some bigger projects there to take care of.

Okay. And then thank you for all the color on the new products, Mark. Could you maybe just spend a minute and address two things. What new products are as a percent of sales this year, given kind of the 13 [tier] lull and presumably the impact on ECM? And then, what your targets are now heading into '08 and '09 with the pipeline of new products you've got?

I don't have the exact number on what percentage they are. Last time we looked at it I think we talked about both evolutionary and revolutionary new products. And they were products introduced in the last three years, were roughly 45% of our total sales. And we -- I think that we're actually going to be slightly higher than that given some of the ECM products we rolled out. I'm sorry, Mike, can you repeat the second part of your question?

All right. I guess I would just move on to the premium side of the motor business, can you describe now what's going on with the premium (inaudible) motors, and what energy costs have done and a lot of the global initiatives around greenhouse gases and power consumption. Have you seen it directly translate into higher demand and what is growth rate of your highest efficiency motors?

We certainly have seen it. I don't have a number for you in terms of that percentage. But, that, Mike, I think it's a good question and one that we will make sure we can provide some color to. We do see it in [nema] premium. It's growing each year. And reasonably significantly. We certainly see it a lot, and the large motors have been very strong this year, and large motors predominantly go into process duty applications where people do pay a lot more attention to energy efficiency.

One of the interesting things about the motor opportunity and energy opportunity is, that for years everyone has kind of closed their eyes to the small motors because the thought process was that they don't use a lot of power, number one. Number two, is they're used more on intermittent duty applications. But the reality is there is millions of them as opposed to thousands as a relatively example. A small motors to large motors, so there's many more. And the actual power consumption is very significant and a lot of the legislation, some of which Mark commented on earlier, and some of which, we believe, is going to be coming down the pike in the very immediate future, we think is going to have a big impact on smaller motors where you can actually make a bigger, energy efficiency to impact overall because to date most of them are running very inefficient platforms.

Okay. Thank you. And then, just final question on products, again. The ECM motor itself, your competitors are all chasing you in this market. Have you seen any material wins in terms of platforms as people start to bid for the 2008 platforms?

I think it's too early to tell. Certainly, we've said all along that our competitors will have those products, there are several of them, not several but a couple of them have been formally announced, if you will, to be on the market. But it's too soon to tell whether anyone has won a platform for 2008 to our knowledge, at least to my knowledge.

Okay. Great. Thank you again and see you in Chicago, guys.

Okay. Thanks, Mike.

Your next question is from the line of Jeff Hammond from Keybanc Capital Markets. Please go ahead.

Hi, good afternoon, guys. Just maybe to ask the new product question a little bit different way. If you kind of add up these new products, how do you think they add in terms of growth rates incrementally? If you were to assume kind of a flat business overall. How much does your business grow in a flat market as a result of these new products when new product introductions in '08 and beyond?

Well, I could talk a little bit about in the last quarter we talked about this new 59 (inaudible) this 59 product we talked about that product growing 5 to $10 million over the next couple of years, I'm sorry in the first full year and we still believe that. That's coming from a very low base. And growing 10 million. In that case it would be all incremental and that would be an exciting thing for us. Now, there's a number of our other products, as I mentioned, where we are simply replacing existing products, and we're doing that to make our products more reliable add more features for our customers, et cetera, and then hold off any competitors in that space. So, in that case it's not a significant difference. I can tell you that our high end ECM type products have been growing at a high double digit compound annual growth rate for many years in the HVAC segment. It would exclude this year, as I mentioned, it's actually been down this year but in the past that's the way it's been growing.

And you think some of these new ones can replicate that long term?

There's a couple of them that we think -- a lot of them we think that we view as singles and there's a couple of them that we think would be big important ones like that.

Okay. And then on the commercial refrigeration products, the two Arctic products, any OEM wins to speak of or moving forward there or is that still more an after market opportunity?

It's both. We sell that product in both the aftermarket as well as to the OEMs. So yes, the fact that the California Energy Commission as well as six other states have now regulated that product, required that kind of product. The OEM can't supply new equipment without it effective January 1st. So we are gaining business in both the retrofit and in the OEM space.

Great. I think your mentioned some price increases going through in July. How do you think those went through? Are they sticking? And what else is being contemplated at this point?

I would say, if the price increase that we had in July was -- is differed based on the particular market segment whether we were in commercial, industrial, or residential. And as we look forward, I think we will be forced to try to offset some portion of our copper inflation with further price increases. I don't think we'll have a choice.

Any that are recently been announced? Or --

None that have been recently announced. Not yet.

Okay. And then just back to the acquisition. I guess, maybe just speak to management capacity particularly in the motors business as your integrate these three? And then, as you look at your commercial, industrial, residential balance, with these acquisitions seemingly residential gets to be a bigger piece. How do you feel about the balance of those three markets?

I'll address the capacity question first. And the next one second. From a management capacity perspective I feel comfortable that we can take on the three acquisitions that we've already announced. As I mentioned I do believe that the operating system that the Company has in place is effective in -- and scalable and allows us to -- because of the way we are functionally and matrix organized, it allows us to seamlessly roll those businesses in and treat them like any other business segment and lead them appropriately. So I feel good about that.

I'd just add to that that we pay a lot of attention up front in acquisitions to the management capability and talent, and we feel like all three of these acquisitions came with some great talent and will add to our family. We feel comfortable between the operating system and the people that came along with them that these will be well managed from the very start.

Okay. And then just to the balance of commercial, industrial, res?

We feel comfortable with where we are. Some of the res that we just added with the FASCO Jakel and even Morrill is slightly different. Some of it goes into the same applications although Morrill is a lot more in commercial refrigeration. But they also bring with them systems capability in terms of providing a more complete system of air movement, and so we think that that frankly adds to our ability to satisfy customers' needs and provide solutions and system solutions as opposed to components, and so we feel pretty comfortable with that. We are certainly trying to add in the industrial and commercial marketplaces as well, and we're certainly trying to find opportunities to continue to grow rapidly in geographic locations where there's faster growth naturally.

Okay. Great. And maybe just one more. As you look at your industrial, commercial businesses, seems like things are pretty solid. Anything in terms of order rates, what you're seeing in the distribution channels as you talk to customers that make your nervous of suggest that some of those growth rates are not sustainable?

Nope. I think that we continue to feel that they're very solid. We're seeing the normal kind of seasonal trends that, I would say, are typical, but at very nice rates, and continue to see growth opportunities.

Great, thanks, guys.

Your next question is from the line of Nigel Coe from Deutsche Bank. Please go ahead.

Thanks. Just want to say great quarter for cash conversion again. You mentioned you're taking 10 days out of the cash conversion cycle, I think you said you were down to 82 days, would you be prepared to share with us what you think could be achieved?

Yes. Just to give you an idea of our frame of reference, when we updated our strategy two years ago. The first line of our strategy is for the Company to be a top quartile performer, and one of those measures is in the cash flow area. As we look out across our peer group, we think that there's probably another 10 days that we should be able to get if we want to retain a position of being in the top quartile and I think it will come -- it will be much tougher. What we've done to date has been some of the easy things. But I would say, as well, we have yet to scratch the surface on what lean could mean for our company in the area of working capital improvement. We've seen it at several of our facilities. When we've been successful taking a lean project deep and been successful that we've taken all kinds of inventory off the floor and out of the business. So I think that it will come tougher as we go forward, but we think there's still a pretty significant opportunity there.

Okay. Great. And looking into 4Q, would it be fair to say that since the HVAC motors both going to people in the [4Q '06], would it be fair to say that maybe we should expect to see slightly less negative impact from that business in 4Q? And I think then maybe if you could just talk about the price commodity impact in 4Q versus 3Q?

I think in terms of the market. Normally, there's a seasonal decline in the fourth quarter from third quarter and we are seeing that and expect that. We would have expected, as we started this year that the comparable fourth quarter to fourth quarter would have been much easier. However, given the deepening situation in the residential market, it's not proving to be easier. However, I think as we said, we're relatively optimistic that we'll see gradual improvement as the year goes on next year. We do think that there's a lot of the inventory adjustment in the channel has taken place. The fourth quarter always provides an interesting opportunity to see the conclusion of that. But we think it's in pretty good shape. Unfortunately, with the deepening loss of new home sales and the number of homes that are unsold on the market that are used homes, the fourth quarter is not going to be an easy comparable to last year. However, that's baked into our guidance. So we feel pretty good about the fact that in that kind of a market we're projecting to be up over last year.

I think your mentioned six more states other than California with energy efficiency mandate type regulations, have they already been approved or are they in progress?

They are approved. There are four or five others considering it.

Four or five considering it.

Four and five considering it and others who have approved.

Okay. Great. And finally, on the, (inaudible) up very strong and I think [barley] was down quite meaningfully this quarter. Could you just characterize that, I mean, how could they be down when you're up so heavily?

They are making gen sets. So they're packaging together engine and controls and generators and selling those into specific markets. So I would assume that they have a couple markets that have slowed a little bit for some reason. We certainly aren't seeing that across the bigger marketplace.

Okay. Thanks, Henry.

Our next question comes from the line of Jim [Casagrande] from [Space] Place Capital, please go ahead.

Just wanted to ask a quick question to see if I could get a little more color on the margin expansion in the mechanical segment?

That was the question? Over the last couple years we've made a lot of structural changes to that group. We sold off a couple of businesses that were no longer a good fit, and we didn't feel long term would bring enough value to them. We closed a handful of facilities and put it back together. We've introduced a number of new products and lean projects and Six Sigma projects. So, the thing that would fundamentally get it back to a level that we think is sustainable, number one, but we think, actually, frankly, that there's more room for growth there as we go down life's path but it's a substantial reorganization.

Do you also see a positive demand environment going forward, with the industrial, commercial environment that you're seeing?

The power transmission market is a little bit slower growth typically than the motor market, and you see that in our numbers. Even though the market -- the general -- you'd could characterize it as a general industrial market. The ratio, you'd, typically, in an application replace maybe two or three motors to one gear drive, so it just doesn't have the same kind of growth pattern based on the replacement market alone. So it's a little bit slower growth but a nice margin in business and one where we do tie a number of our products together to create system solutions for customers. We continue to be very positive about it.

Okay. Great. Thank you.

Our next question is from the line of Tom [Lightcap] from Value Holdings Management.

Just wondering if you on the sales this quarter, you could break out how much of that was from the July price increase versus how much it was unit driven?

If there had been very little, it would have come from the July price increase, because it was implemented July, so typically 60 days type of timeframe on a lag, and it's not across the board. Otherwise, we don't specifically have that broken out.

But if you factor that in along with the growth from acquisitions would it be fair to say that volumes were slightly down for the quarter?

No, I don't think so. It would be fair to say that our volumes were up everywhere other than HVAC.

But I'm talking organically, when you strip out the --

I understand the question.

Definitely if you -- HVAC was down in volume if you take that out. If you take non-HVAC, motors were up 8 to 9% and that absolutely was not all pricing. Volume and some price.

Okay. And also in terms of the HVAC market, obviously, the sales to the OEMs are down with the new home construction, but, is there any difference in the sales to the aftermarket? HVAC industry are you seeing any relative strength there or any color you can give on that?

They're both down a little bit. The number of used homes on the market is at a record level. When people are trying to sell a home, they typically will not go the expense of replacing a large system, they will do the minimum amount of repair they can do. We have heard from our customers and we have seen situations where we believe there's probably more repair. Unfortunately, the motor lasts a lot longer than a lot of other parts in the system. So it's a little bit of a slowdown in the aftermarket as well. And we've had fewer cooling degree days of this summer by about 8% over last year. And you can track over many years the cooling degree days and system and aftermarket system sales and they will track very close.

And in terms of the -- for the refrigeration, leading up to these 2008 statutory standard changes are you seeing any sort of prebuying coming in ahead of that.

No. And most of that -- I think we would have we had been able to get all the products out earlier. We're just now shipping the products. Just in the last -- actually, we'll start shipping the 59 frame -- I'm sorry, the Arctic 59 product this month, and we'll start shifting the other one very late in the year. So there won't be opportunity to prebuy.

So a little bit of these sales are going to be coming in towards the end of Q4 but most of the impact will be felt next year?

That is correct.

Okay. And then, two more quick things. Dave, on the (inaudible) forecast you gave I heard your say 10 million for next quarter, but then I actually caught 35 to 40 million for the full year and I was just wondering if you could reconcile that?

Yes, I think if, year to date 10 million would take us closer to the 35 number. I wouldn't say 10 million is a point estimate for the third quarter. I'd say, 10 to 12, somewhere in that realm. So, we'll be 35 to 40 in that range.

Okay. And one last thing in terms of the acquisitions, for next year you're talking about the synergies mostly coming from the materials and sourcing and then it will be 2009 when there's these footprint synergies. Given that both FASCO and Jakel will have two neighboring Mexican plants, and now you have another Mexican plant with the Morrill acquisition, is there no impetus to kind of speed up this consolidation? Are any of your facilities over lapping in terms of capacity?

Just for clarification, you are correct, there are two facilities with the FASCO Jakel acquisition that are neighboring facilities. They both happen to be in (inaudible) neighbors. With the Morrill acquisition there are no Mexican facilities, there is a facility in China. But, and so, obviously, we're going to do our very best to utilize the facilities in the way that our customers want us to use them. And so we'll do what makes sense for the way our customers are asking us to move.

Okay. Great. Thanks. And good luck with the next quarter.

Thank you.

(OPERATOR INSTRUCTIONS)

Okay. Guess that's all the questions. We'll close. I want to thank all of you again for joining the call and for your interest in Regal-Beloit. We hope your take aways are the same as ours. First of all, it was an excellent quarter, very strong cash flow. We have a number of acquisitions that will add to our growth capabilities and diversification and earnings growth in 2008 and beyond. And finally we think energy efficiency offers an incredible opportunity. We have the technology and the customer reach to make a significant difference. Thank you.

Ladies and gentlemen, that does conclude your conference for today. We thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.