Regal Rexnord Corp (RRX) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience while the conference assembled and good afternoon. Welcome to Regal-Beloit's Corporation fourth quarter and full year to 2007 earnings conference call. At this point and during managements prepared remarks all of your phone lines are muted or in a listen-only mode. However later there will be opportunities for your questions and you may queue up at any time during the call simple by pressing star then one on your phone key pad. (OPERATOR INSTRUCTIONS) . And as a reminder today's call is being recorded. So with that being said, let's get right to today's agenda Here with our opening remarks is Regal-Beloit Chief Financial Officer, Mr. Dave Barta. Good afternoon, sir and please go ahead.

Thanks and good afternoon everyone and welcome to the Regal-Beloit fourth quarter earnings conference call. Joining me today are Henry Knueppel, Chairman and CEO and Mark Glibe, President and COO. Before I turn the call over to Henry, I'd like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are inherit difficulties in predicting future results an actual results could differ materially from those express or implied in forward-looking statements. For a list of these 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 and thank you for joining our call and for your interest in Regal-Beloit. The agenda today will be as we have followed in the past, I will make a few opening comments, Dave Barta our Chief Financial Officer will talk about the financial aspects of the quarter and the year. Mark Gliebe our Chief Operating Officer will give you some color on products, market, and operations and then I'll finish with a few comments about the quarter ahead and the outlook.

For the quarter, we were very pleased with our record financial performance. Especially in light of the slower than expected residential HVAC market, $4 million of inflation uncovered by prices that we talked about last quarter and a $1 million foreign exchange shift. We believe that investors and potential investors should take note of this record performance. Put in perspective with the housing market in its worse condition in decades our record performance speaks to the fundamental transformation that has taken place in the company and the strength of our disciplines and initiatives. We're also pleased with our record cash flow performance and the progress that our team has made on improving our cash cycle days. Cash flow speaks to the purity of earnings and the cash cycle days to the fundamental disciplines in place. We're also pleased to report our four acquisitions, FASCO, jakel, and Morrill and ALSTOM are off to a great start. Our integration teams have teamed well with the talented people that came from each acquisition and we are at or ahead of where we expected to be at this time and we are confident of achieving the targets that we laid out.

For the year we experienced solid internal growth in North America in all of our commercial and industrial businesses. Further, our bookings remain solid even as we speak. Our growth outside of North America was exceptional, up 50% for the year and up 300% over the last three years. In addition our 2007 acquisitions further strengthened our global selling and manufacturing platforms. Innovation has been and continues to be a key initiative. In 2007 we introduced a record number of new products that were aimed at the mega-trends within our businesses. As we have told you before the mega-trends are energy efficiently, variable speed and embedded intelligence. We could not be more pleased with the strength of our new product pipeline. In fact we will roll off substantially more new products in 2008 effecting every business. We believe that this pipeline of new products aimed at improving motor and perhaps more importantly system efficiency is on target with what our customers and consumers both want and need. With increases in energy demands expected to exceed energy capacity addition and with our products at the epicenter of energy use we are positioned to help solve a growing global problem.

As we look at 2007 it was a year when our shareholders were not rewarded as they should have been. Record financial performance , excellent strategic acquisitions and record new product introduction were offset by a nervous market and a one size fits all headset regarding companies that participate in residential market. It's unfortunate that the market has not been able to look beyond the headlines. We're optimistic however that as the residential market nears the bottom and steady and growing HVAC replacement market becomes better understood and as we get credit for the fact we achieved record performance during this down cycle a more appropriate valuation will return. With that I'll turn it over to Dave Barta.

Thank you, Henry. I want to briefly discuss the financial results for the quarter and touch on the outlook for first quarter of '08. Sales for the fourth quarter were 474.7 million which is a 29.5% increase as compared to the fourth quarter of 2006. Included in our results as Henry mentioned, were the new acquisitions, the FASCO, jakel, Morrill and ALSTOM businesses and those sales were $101.4 million contribution in the quarter. Touching on the segments. In the electrical segment, sales were 426 million, 32.9% increase versus the fourth quarter of 2006. Included are all four acquisitions, they roll up into the electrical group. Segment growth in Electrical group was paced by power generation business once again. It experience a almost 14% year-over-year growth. As we continue to see strong worldwide demand for our generator products. We're particularly pleased with the China generator business that grew at even a faster pace. Commercial industrial motors increased 3.1% which reflected a strong industry growth rate which was countered somewhat by a softer some softner commercial end markets and those were primarily those that are being impacted by the residential market challenges.

HVAC motor sales, as we mentioned in the release we're down 8.5%. As the tough market conditions continue throughout the quarter. Sales in our mechanical segment increased 5.7%, a nice performance from the mechanical businesses. Gross margins for the quarter were 22.2% as compared to the prior year fourth quarter gross margin of 24.3. Excluding the impact of the acquisitions, gross margins would have been $88.4 million or 23.7% of sales. So this pro forma result is in line with our expectations and included the inflation versus price GAAP that we mentioned in the third quarter call that was approximately $4 million.

While we're not pleased with the inflation price GAAP, we continue to be very pleased and encouraged by our productivity and Lean Six Sigma activities which continue to have a positive impact on our results. Operating expenses as we reported were 60.2 million and that includes 10.7 million from the acquired businesses. Income from operations was 45.3 million or 9.5% of sales, as compared to 39.5 million or 10.8% of sales reported in the fourth quarter, 2006. Excluding the impact of the acquisitions, income from operations would have been $38.9 million or 10.4% of sales, a slight decrease from the prior year. The tax rate for the quarter was 35.1%, increase over the third quarter as a result of distribution of income and year end true up of reserves. Additionally, when you compare this to the fourth quarter of 2006, the considerable increase was due to the fact that in the fourth quarter of 2006 we recorded all of the full year impact of the R&D tax credit that was passed by the government on a retroactive basis so that artificially took our fourth quarter '06 tax rate down. Net income for the quarter was 24 million as compared to the 23 million reported last year and fully diluted earnings per share were $0.71 which compares to the $0.68 recorded in the fourth quarter of '06.

Turning to the balance sheet. Keeping with our prior practice , the cash flow statement will be in the K and was not published with the release; however, I do want to touch on several areas. As you might recall, we set out a goal over a year ago for a ten day reduction in cash cycle days. We thought it was an aggressive target for our teams but we were confident that what we had in place allowed us to hit that goal. We achieved almost a 13 day reduction based on the year end numbers. This performance was paced by a significant reduction in inventory. Even though the year softened a little bit late in December, particularly in HVAC. The year end inventory was 261.5 million after stripping the 56.7 million from the acquired business so this was a great reduction in absolute dollars and in days invested in inventory. Days payable performance was equally impressive. Our team have done a phenomenal job after eliminating acquisition payables, of 52.4 million, accounts payable finished at 130.8 million which again, is a significant improvement in terms of dollars and days. Accounts receivable improved slightly in terms of day sales and finished at 223.3 million after adjusting the 74.3 million for the acquisitions. Overall it was a very good performance. I would tell you however we're not done. We see opportunities for more improvement and we'll fully address these areas through the Lean Six Sigma projects that are under way. Some other cash flow items, depreciation and amortization was about 16 million and capital spending was approximate 13 million for the quarter.

We ended the year with total debt of 564.3 million versus the 2006 year end level of 373.3 million. The increase is a result of the financing of the 2007 acquisition which totaled approximately 335 million plus the impact of the strong cash flow results. So our net debt to total cap is just under 37%. Debt to EBITDA given effect of the pro forma EBITDA from the acquisitions will finish just over two. Both measures continue to be well within our comfort zone and certainly we feel gives us a lot of flexibility as we move forward.

Turning to the forecast for the first quarter. Our EPS guidance as presented in this morning's release is 92 to a $1 per share. Our guidance reflects solid sales environment with almost all you of our businesses forecasting growth. We again, continue to see fairly strong markets. The sales contributions from the acquired business is expected to be 115 to 120 million in the first quarter and with regard to margins we previously communicated we expect to continue to see a price inflation GAAP well into the first quarter. If you recall there was about a year ago this time when copper was at its lower level in 2007 so on a spot price basis there is significant cost inflation which again we talked about our third quarter call. So despite what was expected to be a 7 to $9 million material price GAAP we are expected our productivity activity to Lean Six Sigma contributions to lead us to again record results.

Tax rate used in our guidance is 34.7%. And I would add that I think that's a pretty good rate to use at this point for the full year, subject to change on our global distribution of income and we're including in this an assumption that the U.S. R&D tax credit will be continued. A few more outlooks into '08. We currently expect capital spending in the first quarter to be 10 to $15 million and full year range capital spending to be in the range of 60 to $65 million and we expect full year depreciation and amortization also to be in the range of 60 to 65 million. We're not do going to deviate from our practice of giving rolling quarter guidance we believe that giving the uncertainty that exist in the business and investment communities today we should comment on our view of the year and based on our forecast of experts, our customers forecasts and business leaders we do believe as of today that we will continue to see growth in our sales. Albeit not at the same pace we've seen in recent years. I would add that there is also some variance, depending on the un-markets; however, this coupled with the full year impact to acquisitions sets the stage for another record sales year for the company. We also believe that we'll see modest improvement in margins which will however be impacted by the acquired companies that are at less than our traditional level of margins on a percentage basis and would also be impacted by the continued material inflation pressures that we've discussed. Now I'll turn the call over to Mark.

Thanks,Dave and good afternoon everyone. The fourth quarter of 2007 was a time of integration. With four acquisitions occurring in the late third and early fourth quarters, we put a lot of our energy into integrating the new business into our company culture and into our business processes. We couldn't be happier with the progress we're making on the integration front and we feel great about the management teams, the products and probably most importantly the customer solutions that came along with these acquisitions. As we were spending time integrating our teams we continued to deal with the difficult residential housing market. In spite of the housing market segment, our businesses performed very well and we're very pleased with the execution of our team.

In the fourth quarter, we saw strong sales growth in our Asian-based businesses up 19%. In our LEESON and marathon branded businesses we also saw strength up 6% and in our global generator business which was up 13.5%. Talking about our generator business, it continues to enjoy robust demand for our newer line of 2.5 to 3-megawatt generators that we introduced just 3 years ago. The strong demand for these larger generators is driven by orders from the Department of Defense, the oil patch and telecommunication and data centers. We are also seeing strengthening in our international orders aided by the weaker dollar.

In terms of our HVAC segment as Dave mentioned, our sales were down 8.5% for the quarter with December being a more difficult month given that our customers started their holiday shutdowns earlier than predicted. The struggling housing industry continues to put pressure on this segment of our business and we expect this will continue in the near-term. However, with the launch of many new products, our focus on Green solutions, the addition of the recent acquisitions and our continued expansion internationally, we are taking the appropriate steps to mitigate the impact of the domestic housing industry. Across the company we continue to look for ways to improve our cash flow and profitability. As Dave mentioned we have been able to sustain the working capital improvements that we made throughout the year. We finished the year with a cash to income ratio of well over 100% and while we do not expect to reach numbers like that year-after-year, we will continue our focus on delivering incremental improvements in cash each quarter.

As we have stated in the past, our strong organic growth opportunities will be driven by innovative energy efficient products. We're working hard to maintain leadership and energy efficiency as evidenced by the steady stream of new products announcements throughout 2007. Last quarter we announced three new products. One in commercial refrigeration, one in our HVAC segment and one in our power generation business. This month we plan to announce two more new products. The first focused on energy efficiency and comfort and a second that delivered improved reliability. First, the Impulse motor is our first effort at utilizing our energy efficiency intelligent ECM technology in the water movement market. We launched Impulse this last November at the National Spa Show in Orlando. The motor drives a water pump and is 64% more efficient than the motor it replaces while producing the same water flow. Additionally the programability of the motor allows the spa manufacturers to deliver unique therapeutic water massage profiles thereby allowing the user to select from a variety of massage experiences. Further, the wide speed range of the Impluse motor allows the spa to run with less noise by reducing water turbulence. We'll be shipping our first motors during the first quarter of this year. We're confident that this is the right technology for a market that continues to demand more energy efficiency and additional consumer comforts.

Next our LEESON motor business recently announced a new encapsulated stainless steel motor that was designed to meet the stringent sanitation requirements of the food processing, pharmaceutical and beverage industries. We call the motor Extreme Duck because the motor is built to last longer than competitor's products and survived a server and frequent chemical wash down processes typically employed in the food processing, pharmaceutical and beverage industries. We believe this is the industry-leading product for this application. Across all of our markets we are working on a number of new products and new technologies that deliver energy efficiency and cost savings to our customers. Some of our new products are replacing existing products while others are pursuing new spaces. When we talk again at the end of the second quarter we expect to introduce additional new and exciting products that we'll bring to our customers yet this year.

Now I'd like to shift gears and discuss our recent 2007 acquisitions. As we have stated before, our goal is to be a consistent acquirer of high quality companies that add value to our customers. During the second half of last year, HVAC completed four acquisitions totaling roughly $477 million in sales. The last acquisition we completed in 2007 was the ALSTOM motor business in India which was our 31st acquisition in the last 25 years. I'd like to give you a quick update on each of these acquisitions. Our FASCO and jakel acquisitions have been confined into one air moving business unit and we are now selling under only the FASCO brand. The business is performing up to our expectations and we've been able to obtain the up front synergy benefits that we've predicted. Longer-term we're confident that we'll reach our target of $15 million of cost saving synergies over the first three years of ownership. The FASCO air moving business is now formulating plans for new air-moving products that promise to deliver significant energy efficiency savings to our customers. We plan on rolling these products out to our customers late in 2008.

Our acquisition of the Morrill motor business gave us an even stronger position in the commercial refrigeration segment and brings us another line of air moving systems and additional high efficiency motor technology that we can offer to our customers. We are now in the middle of combining our GE branded commercial refrigeration business with our Morrill branded products. Together this business has the most complete and most energy efficient product set in the industry.

Finally our latest acquisition, ALSTOM India. Globalizing our business has been one of the companies five key initiatives for the last three years. We want to participate in faster growing international markets we want to be in Asia to support and grow with our customers who are moving their operations internationally and we want to continually enhance our ability to produce products in the lowest cost regions of the world. While 80% of our sales are U.S. based, our sales in Asia have increased almost 300% in the last three years and the additional ALSTOM will further diversify our exposure. ALSTOM manufactures and sells industrial motors and industrial fans in the India market.

ALSTOM is a good strategic fit and provides an opportunity for Regal-Beloit India to become a full range IEC motor supplier from fractional horse power motors to medium voltage horse power motors. The acquisition of ALSTOM large interval horse power -- the acquisition of ALSTOM further expands our international exposure, broadens our product offering in India and makes us one of the largest motor manufacturers in India, a market that is expected to grow 8 to 10% annually. All four of the recent acquisitions brought with them some global manufacturing capability . FASCO has operations in both Mexico and Thailand. Jakel and Morrill have operations in China as I just mentioned, ALSTOM's operations are in India. In each case we now have plans to maximize the capabilities of these lower cost manufacturing locations. We are consolidating product platforms and consolidating manufacturing facilities. Like the new generator plant, we started in 2007 in Monterey and the closure of our Lima, Ohio facilities, these are not quick and easy hits. They take time and tremendous talent to get it right. But we are up to the task and as we get closer to implementation in late '08 and early '09 we will be discussing our progress in more detail.

In summary, our performance during the fourth 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 that our new products an initiatives are delivering to both our customer and to our business performance, feel great about the progress we're making in our air moving businesses, we're pleased to have ALSTOM India join the Regal-Beloit family and we're looking forward to the benefits of growing with our customers around the globe. Back to Henry.

Thank you, Mark. Let's take a brief look forward. As we look at the first quarter, we expect another record quarter. The positive factors include continued strength in the commercial and industry markets aided by stroke export demand. Continued strong power generation demand globally, energy efficiency legislation, new product introductions, productivity programs, strengthening HVAC replacement market, improved margins in our newly acquired businesses due to the realization of synergies and continued rapid growth in our businesses outside of North America. In total we're very optimistic about for what the future holds for Regal-Beloit. At the same time we are conscious that we must constantly assess the best methods of not only delivering record and improving performance but ensuring value gets delivered to our investigators. To accomplish that key objective we believe we have to run every operation with an operational excellent model. We benchmark ourselves against the universe that investors can choose from, we believe that three measures stand above the rest. Growth, cash flow, and return on invested capital. Over the last three years we have steadily improved in these metrics against that universe of companies. Secondly, we need to be a consistent acquirer that is recognized for acquisition excellence. Long strength of Regal-Beloit.

To this end, we have strengthened our business development team and our processes substantially in 2007. With the addition of people and "Best-in-Class" processes. We now have a solid and active pipeline of opportunities with global scale. Finally, we must properly leverage the company to maximize returns. To allow us to respond to appropriately -- appropriately to changing stock market conditions as well to as a healthy acquisition pipeline our director approved an additional 1 million shares of stock repurchase capacity; to bring our current approved level to 2.2 million shares. While we do not believe that stock buybacks are part of a long-term strategy, they do play a tactical role in leverage and total returns. We will therefore use buybacks as a tool to help enhance shareholder returns and buybacks -- any buybacks will be through an open market approach. We will do so by constantly assessing the best use of capital and leverage. This much we can assure you, we never lose sight of the fact it is our job to create solid returns for the people who trust us to do so.

As we start 2008 it is incredibly rewarding to have a global business platform, great people who are individually growing and who are dedicated to personal and company excellence and a strong Board of Directors dedicated to creating shareholder value. With that, we will open it up for questions.

Indeed. Well thank you very much, gentlemen for that update and overview. We do appreciate that. And ladies and gentlemen, as you just heard, at this point we are inviting and encouraging any questions or comments that you may have. (OPERATOR INSTRUCTIONS) . And representing Barrington Research our first question, to the line of Alexander Paris. Please go ahead.

Good afternoon. Nice quarter.

Thank you, Alex.

Could I just get a little bit more information on the HVAC business. You were down 8.5% in a quarter year-over-year what does that amount to in dollars, dollar sales in HVAC?

I don't have the number.

We haven't been breaking out specifically the segments that way.

Okay.

I don't have it in here either.

The spa motor, the new motor, would you say that's still -- that's still fairly significant sensitive to housing activity or is that more after-market.

Well I --

Consumer.

It does go into new units and I'm sure its impacted by the spa market and the spa market is down today but this is a new space that we have not been a major player in that space so I think there is ample opportunities for us to penetrate that space.

And I guess we've asked this question before in different ways since you've been talking about the after-market, do you have just a rough idea of how much of the HVAC, your HVAC market is tied into new construction rather than remodeling and repair? Is it half and half or something like that?

We said new home construction accounts for 30% of it and 70% is due to the replacement market.

Just another quick one, you had 101 million sales from the acquisitions and you gave us an estimate for the first quarter, can you give me just a rough estimate of what the incremental sales would be for those four acquisitions for all of 2008?

Yes. I want to say it was around the for the full year '07. Around 129 million in total and we're looking for that to be -- I think the guidance we gave was 477 for the full year '08. So just --

Roughly 350.

Yes. 350, 345 million increase.

In 2008. But that's not all incrementally. Because you had -- did you get some in the third quarter, right.

Right. So '07, the contribution from acquisitions was I think $129 million. We're looking at the guidance we gave was 477 for the full year of '08.

Okay. I see. Okay. And just one -- have you ever broken out the total generator sales?

No we haven't.

Okay. One more try then. Just in terms of the overall strategy, can you remember what your incoming business was like the last time you had some of these economic numbers like this, like the ISM below 50, implying a contraction in domestic industrial activity? Were you doing better then or worse then or are you doing better any.

I think we're doing better so far this time so far. You have to look at what is summary and what is not. In the late '80s when the dollar was weak and we had stock market jitters s that all of us remember we didn't even see it. So I don't know if we'll see that same repeat situation or not but that was different than '91 or 2002. So I'm not sure we can just look at the ISM and say what that means or the kind of jitters were seeing in the market.

Okay. Thanks a lot.

Thank you.

And thank you very much, sir. And next in queue we go to the line of Robert LaGaipa representing Oppenheimer. Please go ahead.

Thank you. Good afternoon. Just a few questions. I guess maybe if we can start out with the acquisitions. Obviously several months have passed since you've given us a forecast with regard to the sales and the accretion now. Sounds like the sales expectation is still the same and I'm sure there is probably some puts and takes within the accretion. Can you maybe just talk about -- I know with FASCO, Jakel and Alstom, if take the midpoint of the previous accretion estimate, it was right around $0.30, I'm not sure what you expected from Morrill, but you can talk about if we're still on track for that level of accretion and what the -- puts and takes are moving into the new year.

You're right. The independent plan are right on and we're very comfortable that we understand that. And from an EPS standpoint we're very comfortable with the previous guidance we gave. I think the good news is we had very detailed plans around what the synergies were that we would see and when we would see them and to date those are coming in just as we planned. So we would say very comfortable with both the top line and bottom line contributions from both of the businesses.

And second question if I could, what kind of struck me here this quarter was the commercial industrial orders in terms of growth?

Obviously it decelerated quite a bit. If I look here, the comp for that particular business, went from 20% to 9%. Meanwhile the sales from the third quarter to this past fourth quarter went from 9% to 3%. So each, though you had a much easier comp, the sales decelerated quite a bit.

You talked a little bit about the commercial market being under a little bit of pressure, it sounds like the ancillary effects of the housing weaknesses out there, is there anything else in there and maybe if you could provide us with a little bit of color there and kind of what your expecting moving forward.

Well when you talk about the comp was easier. Certainly it was not in comer commercial and industry because last year in the fourth quarter we were very strong. But in terms of the commercial market, the pump market is somewhat impacted by says ran -- residential, new housing starts and it's affected by clearly things like floods and so on. And we of course had a very dry spell in the latter part of the year in southeast and no substantial water dropped anywhere else. So that particular arena was the wack spot that pulled us back a little bit in commercial and industrial.

And you're not seeing anything else anywhere else?

Well if orders are up, so far this year for the month of January, orders were up over last year in commercial and industrial and we're looking like everyone else is for, is the shoe going to drop someplace because of all of the noise in the economy but I would tell you I think exports are a very strong underpinning to what is going on in our economy today and I think the manufacturers alliance recently put out a study that shows the percentage of manufacturing goods that end up being exports and in the areas we participate, those are nice percentages and those are strong due to the dollar so it's not apparent -- there's no apparent dropoff.

Great. And last question, if I could, this is related to your comments about the pipeline. Can you maybe just provide a little bit of color there as well, just how large the pipeline is, is there -- are there several leather acquisitions, is it a few small ones, geographically where they might be, within which business? Maybe you can just give a little color there and along with that, maybe just talk about the acquisition environment from the standpoint of valuation as well. That would be very helpful.

Okay. Well first of all, geographically we have a priority on outside of North America so we have a very active slate of opportunities that are outside of North America. And what I would tell you is you need a very reactive slate because a lot of those fall through but we have a very active pipeline there and it falls falls in all of our businesses. We have a reasonable pipeline in North America, mainly of smaller businesses that would be technology oriented and not necessarily down the middle of the plate with what we currently do. From a business standpoint, I would say all of our businesses are touched by our current pipeline. Size, we really have quite a gamut in size from fairly significant to small product line. We almost like bolt on product line additions but I would say a lot like before when we announced in 2007 sizewise and what they would bring to the party. Valuations, multiples have come back a little bit from where they were two years ago for sure and a year ago. But they haven't dropped off the face of the map.

And once again, ladies and gentlemen, we are inviting and encouraging any questions or comments that you may have. Please feel free to queue up by pressing star one on your touchtone phone. And next in queue, representing Keybanc Capital Markets we go to the line of Jeff Hammond. Please go ahead.

Hi Jeff.

Hi. Dave, you gave a little bit of a color on a full '08 look which we appreciate. But wanted to get a little bit more granular on that or get a clarification. You said modest growth. I assume that's an organic number and you said slower than previous years and I guess I just wanted to get a better sense of are you comparing that to the robust growth of '05, '06 because '07 was a little bit anemic on the organic side along the lines of 2%, so I wanted to get clarification there. And margins, it sounds like you think they're going to be up and is that excluding the impact of acquisitions?

On the first question, I have to give you a flavor. We look at the forecasts that are published by a variety of sources and with a we've seen and I think everybody has seen is the GDP and industrial production numbers that have fell back. I think you're seeing those projections now kind of slightly over 2% type growth rate. We're probably growing caveat of a growing potential or possibility of a recession, you have good news-bad news so we're looking at ourselves and feeling like a lot of our businesses, those are pretty good general indicator. Obviously it has to be specific to the business. HVAC we do see the units as most of our customers believe to be down again year-over-year. Our initial assumption is HVAC is down for the year so we're working off that base and obviously have -- we're not sitting still. We're look at market share opportunities, new products, improving the mix and so forth. I think that's something else that is important as you look at our business as well and we kind of touched on it and I'll touch on it once again.

Our company has changed a lot in our geographic footprint from a commercial standpoint as recent as three or four years ago. We're probably 95% of our sales were North America and Mark and had Henry both touched on the international component. We had 20%of our sales outside of the U.S. and a vast majority is in the Asian region and we look for the FASCO and Jakel and Morrill acquisitions to be slightly over 20%.So we do have an expanding footprint in higher growth geographies, which even at 20% and growing, when those economies are growing double-digits it makes a difference on the whole company. So I guess summarizing, we've got that component, we've got commercial and industrial where we see again somewhat decelerating growth from what we've seen over the last several years, including '07 on kind of just an overall sales environment basis and we see HVAC as the industry is having it -- another down year. And those are organic based, my comments and then on top of that you would layer the acquisition guidance we provided.

But I take it agency on comp should be down less on a year-over-year basis versus what you saw in '07.

Yes.

Yes, Jeff I want to make sure we distinguish for all investors when you use anemic, you cross brand. We had a significant portion of the business that pulled down and the other segments of the business experienced nice growth and I want to call everyone's attention to the fact, we're going to have some business segments that are down. Certainly the housing market has been beat to death and all of us has been lumped into that lump but the reality is that that business will come back and the replacement market is a growing market and 70% of what we do. And last year it had everything going against it. We do not expect to have a repeat of that. So when we talk about growth rates, I would say that it was not a broad-base kind of anemic growth.

But I'm trying to get a sense, you said a moderation from previous years so your organic growth was 2% in '07, so I mean are you -- so when I think of modest growth, I think of in a low single-digits but I want to understand whether it's a moderation from 2% or from those higher levels in early years?

I guesses that a hard one to answer. I would say, without trying to give yearly guidance, we think we'll see growth that is going to be every bit as good as we saw this year and maybe better.

Okay. And then on the margins, you think margins are up on an operating margin basis year-on-year inclusive of the acquisitions.

Yes. I mean we're obviously -- a couple of things if you think about the acquisitions specifically. As you're aware there is purchase accounting related to inventory step up. That is all about $200,000 of that is behind us so about $3 million of the amortization of the step up to hit third and fourth quarters of '07 and so you have that improvement and then the synergies we announced impacting the acquisitions and we just said that is all on plan and we're very comfortable with that and then we are going to see some material cost challenges in the first quarter, probably end of the first second quarter of the year which, but we've got very active. Probably -- well with all doubt a record number of productive in Lean Six Sigma products that are in progress and will start delivering results so we believe we'll be able to offset that over the long term.

If you're margins are up year-over-year, inclusive of the acquisitions, what would that imply in terms of margin improvement for the base business?

I'll say it this way, if you can -- Henry's comment of we do not want to stray into annual guidance, but they're improving as well and getting us back towards the path that we need to be on as a company.

Okay. Thanks. I'll get back in queue.

Thank you.

You're line is already open Mr. Hammond. Please continue? Did you have any follow-ups Mr. Hammond. And we have no response from him , Mr. Knueppel. Our next in queue we go to Robert Snyder from Robert W Baird.

Good afternoon, guys.

Hi, Mike.

First sticking with the theme of industrial motors, the growth of 3.1% this quarter, do you have a sense, was that mainly price at this point, given the price increases you put through over the last 12 months and does it imply the volumes were actually down this quarter?

No. I would -- Mike, we announced a price increase until the commercial industrial side in January of this year. I think we were -- that was real growth.

Okay. And then with that in mind, again I'll follow up on an earlier question, if you've taken into account the comparisons, the comparisons got substantially easier from 3Q to 4Q, but yet the growth rate in the commercial industrial motors went from 9% in 3Q to 3%. I guess what is maybe a little confusing is you're talking optimistically about 2008, yet some of the commentary, Henry, in the press release is about a challenging market and I presume you're focused on HVAC and if you look at commercial and industrial decelerated by three points, from 3Q to 4Q for comparison, to the extent you conscious give us some more color on why you believe the business really isn't seeing an industrial slowdown particular particular in the commercial and industrial motors.

Mike, typically we do see a slowdown in commercial and industrial markets in the fourth quarter so that's not an usual phenomenon. I don't look at last year as being an easy cup so I'm not sure where the difference is coming from.

And I think I would add as well, and again the press release, the level of detail we go into generally by brand or by application, but it really was a tale of two sides. The commercial motor business that we talked about which is heavily influenced by I would say tied to residential law suites, whether that's a subpump application or pool or spa motors, was actually down in the quarter. Whereas the industrial motor business and our other large commercial motor business were optimum, one of them was up 10%, 7%, so there was still some pretty good numbers but it really was -- and the CAC business that participates in the residential markets is where the challenge was.

That's very helpful. And then HVAC as well. A year ago HVAC sales were down 25% so the comparison was about I think as easy as it's been in this trough. The trends you mentioned in December specifically were off because of the greater shutdown days at your OEMs. Were October and November also weak? In other words was there a trend line through the quarter or was it just a vacation schedule that crimped the quarter?

I would say, Mike, we were kind of on track through October and November, and then December was especially tough.

Okay. And then in HVAC now, at least giving some of your existing product lines, as you look at '08, what type of pricing have you been able to secure to offset some of the raw material costs that we've talked about?

Clearly in a down market it's always tougher in a down market to get price, no doubt about that. But as you know, and a number of our contracts we have it built in as copper, where copper moves, it gets adjusted. So we are going to our customers and we are trying to get the price that -- to offset just the material inflation. And so it doesn't happen all of the time, but that -- and it's always tougher in a down market, but we have been having some success.

And if you achieve those -- if you get the full run rate of the pricing you put in, Mark, does that make you whole for materials as they stand today.

I would say no, it would not.

And do you go out, because these are OEMs, is it an annual cycle or able to go in at the end of the year and customize the GAAP.

It depends on the customer. There are multi year contracts and some of the pricing is tied to copper and some customers it's annual.

Okay. And Dave, as far as the acquisition accounting goes, you mentioned $3 million on inventory stepup. When was the Q4 amount for the inventory stepup?

I don't have that break down. I just have the full year in here so I would have to get back to you.

But giving the timing, is it probably $2 million or more of the $3 million.

Yes. A rough number.

And maybe Henry take a step back and you recall the recession earlier this decade and then even the early 90s. When you look at the business model now with the HVAC influence and that business is going through it's own recession already, what type of recession sensitivity analysis have you guys done, if indeed HVAC is bottoming as we speak and we are headed into a recession for industrial, maybe in the middle or latter part of this year, can the business hold flat in organic growth and earnings or can you give us some plan of what you plan for on worst case scenario or best case scenario on a recession?

I think as in every business we've done multiple looks of different cases of what might happen and you put together some plans around what you would do if. Mike, a lot of what you will decide to do going to depend on when you actually see it happening, what you believe is going to be the extent and the depth. But we're fundamentally quite a different company than we were during the last one. In the last recession if you recall, it was a recession that was there in the industrial marketplace in North America and we were a North America company all in the industrial market. So we were right at the center point of what was going on and none of that was positive. We were closing facilities and doing a lot of things that added to the pain, if you will. We've really changed substantially our foot print, we've changed substantially where our sales are taking place. Yes we're still predominantly in North America but over 20% are now outside in North America. That's a big plus. We have more balance in commercial, industrial and residential markets. That's a big plus. And I think you know that with all of the programs that we have going on in the company, if -- and the act of productivity deck that we have, if things slowed down we would speed up some of the things that are harder to get at when you're running full out. So my sense is that we would fare much better than we did during the last recession for those reasons. Nobody comes by -- I'm not going to pretend we come out unscathed because I don't think anybody in their right mind would say that, and never really actually seen it happen to a company if they're impacted by a severe recession. I personally, personal view is I don't think manufacturing is in for nearly a difficult time around if we go into one. And I'm not sure we will. But I don't think it will have to be as bad. And again with the dollar, I would recall your attention to some of the things in the late 80s which the last time we saw this type of currency situation.

Okay. That's helpful. And along the recession lines what are you seeing in terms of the distributor demand goes. Are they depleting inventory, are they batting it down as January and February unfolds for a recession, just what do you make of their reactions?

We haven't seen anything that I would call remarkable. I don't think they've bloated inventories as much in the cycle. We saw last year maybe a little bit pulling back out of inventory but we do not get the sense there is any major change taking place.

And our next question comes from the line of Holden Lewis with BB&T.

Thank you. Good afternoon.

Hi, Holden.

I guess I should ask about your prepurchase. That untied a lot of holes in my model the last time you did a repurchase and yet your upping your authorization. Can you give a little color as to why -- why it even warranted a mention or how should we read that?

Well technically we did increase the authorization that we have so we felt that that was material enough that we needed to tell you about it. In terms of our view, I think our view has been that buybacks are not necessarily strategy. However, that said, we are intent upon delivery value to shareholders so we intend to look continuance continuously as we move forward particularly at our pipeline, our uses of capital, appropriate leverage for where we are in the cycle and we're prepared to start using it as a tool to provide value to our shareholders.

Okay. And have you -- have you been active in it this year. I'm just trying to get a sense of --

No. We've not been at all for -- I guess the last time we used any of it was during the convert.

Right. Okay. But I mean, are you more inclined to? It's kind of set out there for a while and it can still sit out there for a while only in a larger form. We we determine that you are more inclined to and the fact of you using it is higher today than it was six months ago.

Yes.

Okay. All right. Great. You had also commented I think, obviously, about the weaknesses in December. I think you made -- I think it was you Dave that made a comment that you see weaknesses especially in December. I'm assuming that related primarily to HVAC or did you see weaknesses in December in your commercial and industrial as well? Was it across the board or was that just HVAC and then how are you seeing HVAC in January? Did that weaknesses seem to be contained specifically to December and January come back to look like October and November or have we continued to see that carry that through.

Everything you said was correct. It was HVAC. A little bit of pump in commercial which is probably more related as Dave said to housing and we've not seen a repeat of that in January.

Okay. And was October, November positive and then December kind of sunk the HVAC business or just less negative?

Well everything is relative, right. They were where we expect them to be which we expected them to be shore in the summer because that's the traditional cycle. The only difference in December was some of the customers chose to close down earlier than when we anticipated into the quarter and we think this was inventory adjustments, nothing that was great new news.

So far in January you've returned to October, November levels. Okay. And you can just comment about how the ARI shipment data has been positive I think for six of the last eight quarters and that's unit shipment number and give a little insight into how your HVAC numbers should dove tail with that data and why there seems to be such a divergence between what the OEMs say their shipping and what you're getting.

The ARI data is one large component that represents what we sell into. There is another organization that publishes information called GAMMA and that's more related to the gas furnace market. And we obviously ship into the furnace market and the two are linked very closely. And if you were to combine the two sets of data, you would see a pretty different set of information. It would actually be negative in the fourth quarter as opposed to what you saw in ARI alone. So ARI is mostly cooling related, GAMMA mostly furnace related. It's not easy but you can combine the two and when you do, you get a different picture. Just for your benefit, the two organizations have agreed to merge. I don't know what that means to the information going forward. I would guess that they'll combine it, but I don't know that.

But the furnaces are a lesser portion of the overall mix; is that right?

Yes. That is correct. I don't have the exact percentages but, yes.

Okay. Okay. And then just lastly, the cost of materials items, the pricing you're referring to, is that -- that's January '08, right? You put another round? in?

For some of our businesses, that's correct.

Okay. I guess when I look at again the copper price, since early '06. It's basically been in the 330 level that we've been in for sometime and I understand that you hedge and so you're always rolling forward, the hedges, but you've been putting price increases through and you have another one now and we've been rolling these things forward for a while and the copper price really hasn't moved for the last three quarters or so and yet the drag in 4Q and the drag in 3Q were largely equal and now we're talking about a drag in 1Q and into 2Q as well. Can you give us a sense as why this is dragging on so long and when really at this level we can expect to see it newt neutralize.

Holden. I think we've been saying -- well I know we said last quarter, we may have even said it the quarter before, we expected to have negative drag through the first quarter if copper stayed in the 225 or less area. $3 to $3.25 area. And that if it was up from that, we would see a drag through the second quarter as well as we tried to get to pard. That's not been news. And that has to do with what you already mentioned. And that is your contracting copper well ahead and we -- we have a pretty disciplined system but the reality is that we've been replacing lower priced hedges with higher priced hedges and when we were fairly confident the prices were going to go up, we moved out always which saved us and our customers a lot of money to do that. But the reality is, at some point you have to catch up and we're still in the process of catching up. So that's what is going on. And it's going to be -- again depends on what happens with prices from here on out. We're not as far out as we were at one time because we think there is more likelihood of prices going down than up but we kind of thought that a year ago. And just so you remember correctly, as we went through the year last year, we did not -- we were not the beneficiaries of the year being at 325 when most of the year was up into the 350 range. It was only in the first quarter it was down.

It was $290

Okay. Thank you very much Mr. Lewis and with that Mr. Knueppel and our host panel, I'll turn the call back to you for any closing remarks. There are no further questions.

Great. Thank you. And thank you all for joining the call. Just a few thoughts. First of all 2007 was another record year despite some pretty solid head winds and we hope you'll take that into account as you look at what kind of a performance we had, 2008 is off to a solid start. We feel good about what we're seeing. We feel it's being aided a lot by a hidden strength in exports and again, we would remind you that we never lose sight of our obligation to deliver value to our shareholders. So thank you for joining the call and your interest in Regal-Beloit.

Thank you. Very nicely said, gentlemen and thank you very much. And ladies and gentlemen Mr. Knueppel is making today's conference available for digitized replay for ten full days starting at 3:30 pm Central standard time February 6th all the way through 11:59 p.m. February the 16th. To access AT&T's executive replace service please dial toll free 800-475-6701 and at the voice prompt enter today's conference I.D., 909428. And that does conclude our earnings release for the fourth quarter and full year 2007. Thank you very much for your participation as well as for using AT&T's executive teleconference service. You may now disconnect.