Regal Rexnord Corp (RRX) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the first quarter earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will be given to you at that time. (OPERATOR INSTRUCTIONS). As a reminder today's call is being recorded.

I would now like to turn the conference to your host Mr. Dave Barta, please go ahead.

Thank you very much. Good afternoon everyone. Welcome to the Regal-Beloit first quarter earnings conference call. With me are Henry Kneuppel Chairman and CEO, and Mike Gliebe President and COO. Before I turn the call over to Henry, I would like to remind you that the statements made in this conference, that are not historical in nature, are forward-looking statements. Forward-looking statements are not guarantees since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in forward-looking statements. For a list of those factors that could differ materially from projected results, please refer to today's earnings release and our filings with the SEC. Now I will turn the call over to Henry

Thank you, Dave. I want to welcome all of you and thank you for joining our call. We're going to follow our normal agenda. I want to make a few opening comments. Dave will give you financial highlights to the quarter. Mark will put color into the products, markets and operations ,and I'll finish with a brief second quarter outlook.

First of all, let me say that we are very pleased to announce another record quarter, despite the deteriorating residential market and continued materials cost pressures. We're also pleased to announce acquisition of Hwada, a major addition to our commercial and industrial motors businesses and also pleased to announce an increase in our dividend, the fourth in as many years. Dave and Mark will give you more color on the quarter. At the 50,000 foot level, the company is achieving solid success despite difficult conditions. We continue to face two serious headwinds.

First, as we came into the year, the residential market was projected to be down 4% to 5%, against a double digit decline in 2007. We can now see the forecast was optimistic and the market appears to be headed to a down 10% to 12 % number, consistent with what we saw in the first quarter. The caveat is weather and replacement market, which could still be a plus until the next two quarters. The second serious headwind is materials, not a new subject, but as we entered the year, we like, others, expected to see materials like steel and copper remain high but relatively consistent. The fact is, that they are now hitting new highs.

And in the case of steel, the spot price has nearly doubled in 90 days. These types of erratic and unpredictable cost changes create problems throughout the supply chain. We, like others, are taking pricing actions. They are difficult but necessary and they are never matched perfectly to the cost push. It appears we will fight this drag on earnings for the foreseeable future. Fortunately we also have strong tail winds. Our productivity programs are robust and delivering.

Our industrial business, our power generation, and our international businesses, have remained strong and the outlook continues positive. In our four 2007 acquisitions are performing. They are meeting our expectations, even in light of the same headwinds we talked about earlier. In total, we are pleased with our performance for the quarter and believe that our balanced end markets and globalization initiatives, are showing their strength.

As I mentioned, we are pleased to announce the acquisition of Hwada in Wuxi, China. Hwada makes motors from one-half to 6,700 horse power in both IEC and NEMA designs. Hwada is considered one of the premier and industrial motor companies in China. It's been growing rapidly. 2007 sales were approximately $115 million. Half of their sales are in China, with the other half comprised of large export volume to Europe and smaller amounts to the U.S. and elsewhere.

Hwada has an excellent management team and product development staff. We're excited with this addition. With that I'm going to turn to Dave Barta.

Alright, thanks Henry. I'm going to go ahead and review the results for the first quarter and discuss our outlook for the second quarter. Sales for the first quarter were $536.3 million, which is a 28.1% increase as compared to the first quarter of 2007. Included in our results were $111.9 million from the FASCO/Jakel, Morrill and Alstom businesses we acquired toward the end of t2007. Looking at it by segment, electrical segment, sales were $481.2 million, an increase 31.2% versus the first quarter 2007, including the sales for acquired businesses, which all roll up in the electrical segment.

Segment growth, as Henry mentioned, was paced by the power generation business that experienced globally 17.5% year-over-year growth. As we continue to see strong demand for generator products. Industrial motor sales increased 6.8%. HVAC motor sales were down 3.3%, as tough market conditions continued throughout the quarter.

I would comment this rate was better than what we saw in the overall market, given the mix of products we saw a much stronger demand for our higher efficiency products, during the quarter. Sales and mechanical segment increased 1%. I should add you might notice in this morning's press release, there was a reclass, last year from electrical, mechanical product sales moved from electrical business to a mechanical business. 1% growth in the mechanical segment.

From a geographic perspective, which is certainly a big focus of the company, our China-based businesses grew 30% in the quarter, we were pleased with this growth rate. This growth coupled with our expanding geographic footprint resulted in sales outside the U.S. 25.6% of sales versus 19.2% for the first quarter of 2007. We feel we're gaining traction in our globalization efforts. Gross margin for the quarter 22.8% as compared to the prior year, first quarter gross margin of 23.2%.

Exclude the impact of acquisitions, gross margin would have been $98.8 million or 23.3% of sales. This result's in line with our expectations and included inflation that exceeded impact of price by approximately $7.7 million, which again was in our previously announce guidance of seven to nine. We're not pleased with the inflation price gap, we continue to be encouraged by our productivity and Lean Six Sigma activities , which continue to have a positive impact on our results..

Operating expenses were $64.5 million and included $15.9 million from the acquired businesses. Pleased with income from operations $57.6 million or 10.7% of sales, as compared to $47.3 million or 11% of sales, reported for the first quarter of 2007. Excluding the impact of acquisitions, income from operations would have been $47.4 million or 11.2% of sales, a slight decrease from the prior year.

The tax rate for the quarter was 35.5%, which was slightly above our guidance, slightly above the fourth quarter last year. The increase is really the result of distribution of income and the impact of certain statutory rate increases in Mexico and China, and also reflects the impact of the exportation of the United States research engineering tax credit, which at this time hasn't been extended for 2008. Net income for the quarter was $32.2 million, as compared to $26.8 million reported last year.

And finally fully diluted earnings per share were $0.97 which was a 21.3% increase, as compared to the $0.80 a share reported in the first quarter of last year. Turning to the balance sheet and cash flow, we're very pleased with the improvements we made throughout last year and reducing working capital have continued into this year. Cash from operations was $34.9 million, as compared to $10.4 million in the first quarter of 2007. We typically are adding to inventory at this time of the year and accounts receivable, as our business is somewhat seasonal.

This year we actually were successful in reducing inventories during the quarter, while continuing to supply our customers. We continue to believe that we have room to go in cash cycle and will be making more improvements as the year moves on. Depreciation and amortization was $14.2 million for the quarter and capital spending was 13.7. During the quarter we repurchased shares of common stock during open market purchases, at average cost of $38.10 per share. With good cash generation, we ended the quarter with total debt of $555.9 million versus the year-end level of $564.3 million, which was an $8.3 million decrease. Based on this level of debt, our net debt to cap is just under 35%, so again, well within the comfort zone we like to operate within.

Now turning to the forecast for the second quarter, as we mentioned in this morning's earnings release, we're looking at EPS range of $1.10 to $1.18 per share. This forecast is based on a similar view of the sales environment, that we experienced in the first quarter. We expect non-HVAC, residential related and HVAC motor sales to be down, mid dingle digits. However, we also anticipate that the industrial motor business, generator business, mechanical businesses, will continue to experience growth into the second quarter.

The sales contribution from the acquired businesses, including Hwada, are expected to be approximately $100 to $135 million for the second quarter. With regard to margins, we had hoped the material price gap would close or be lessened beginning with the second quarter. However, with copper remaining in the current zone of around $3.70 to $4 a pound and steel prices being up substantially, we continue to expect a price inflation gap to continue in the second quarter and baked into our guidance is a gap of between $7 and $9 million. We are confident however, that our productivity our Lean Six Sigma activities will help minimize this challenge.

The tax rate used for arriving at the guidance was 35%. Some other forecast data for the second quarter, we are forecasting capital spending of approximately $10 to $15 million. We continue to estimate full year CapEx spending of $60 to $65 million and full year D&A to the in the range of $60 to $65 million.

I'd add the Hwada acquisition is included for a portion of the quarter in this guidance, but will be neutral to earnings giving the impact of purchase accounting. We also believe that given some of what we see going on in the raw material arena, we should comment on outlook for the remainder of the year to some degree. We continue to stay very close to our markets and customers regarding the sales outlook. At this point, while we would agree that certain markets are and will likely remain soft, for example the residential HVAC markets. Overall we do see the opportunity to continue to grow our sales, particularly given our industrial motor and generator strength and our growing global commercial presence.

The other obvious concern is raw materials. We do believe that copper will likely remain well above our average cost for 2007, that steel increases that we're seeing will continue through the year and we'll likely get even worse. We're aggressively addressing the margin impact of this unprecedented inflation. Based on our current assumptions, if we were to stop with the assumptions as we have them today, we'd anticipate a price inflation gap in the third quarter similar to what we were anticipating for the second quarter. For the fourth quarter, which seems a long way off, and certainly we believe a little bit early to predict, without taking additional actions, we'd continue to see a gap in the fourth quarter as well.

Again we are aggressively addressing this issue in every way possible, including productivity, Lean Six Sigma projects and harvesting synergies from the acquisitions. With that I'll turn the call to Mark.

Thanks, Dave and good afternoon everyone. I'll give you a little color around operations and tell you what's happening around the globe in our businesses. During the first quarter of 2008, we focused on continuing the integration of the four acquisitions we made in the late third and early fourth quarters. We put a lot of energy into integrating the new businesses into our company culture and business processes. The integrations are going quite well and we feel great about the management teams, their products, and the progress these teams are making mining the synergies of our combined companies.

As we were spending times integrating our teams, we continue to deal with difficult residential housing market in the U.S. In spite of the housing segments, our businesses perform very well and we are very pleased with the execution of our team. In the first quarter we saw strong sales growth in our leasing and marathon branded businesses up 7% and our global generator businesses up 20% and in our Asia-based businesses up 39%.

Our generator strength this quarter, was aided by robust demand out of China, where the severe snow storms that hit China earlier this year caused a strong increase in demand for emergency power. That sudden surge in demand will carry through the second quarter, as our facilities catch up on the backlog that was created in the first quarter. While we were talking about generators, I'd like to give you a quick update on the operations of that particular business. Our new Monterrey generator facility continues to run very smoothly.

If you recall, during 2007, we transitioned the mid sized generators from Lima, Ohio to Monterrey, Mexico. That transition is behind us and we're now in the process of transitioning other mid-sized generators from Wausau, Wisconsin to Monterrey. Further, we have also begun the transition of the assembly of our transfer switches from Langley, Ontario facility to Monterrey. We expect the Wausau move and Langley move to be completed by the end of the third quarter. When we are finished with the generator transition, we will be producing large generators in both Wausau and Shanghai and small and mid-sized generators in Monterrey and Shanghai. It is a strong multisite line-up that gives us the flexibility to serve local markets while taking advantage of shifts in labor markets and in currencies.

Less than a mile away from our Monterrey generator facility, you can see a new factory being constructed. We call it Monterrey II. During the first quarter, we announced the closure of our Neillsville Wisconsin facility, that produced smaller horsepower motors. Our plan is to move these from Neillsville and other U.S. plants to Monterrey by year-end. When that move is completed, we'll have the capability to produce small, integral horsepower motors in Mexico, India and China, again giving us the capability to serve growing local markets and the flexibility to take advantage of shifts and labor in currencies.

Now I'd like to move on and address HVAC segment. In HVAC, our sales were down 3% for the quarter. Obviously we do not like any performance that is down year-over-year, but given the decline in the residential housing industry, we've felt pretty good about our HVAC performance in the quarter. We've benefited from stronger demand in our energy saving ECM motors. Our customers are getting some help with a better mix of energy saving, high comfort, HVAC systems that utilize our ACM technology.

We are also beginning to see new ECM demand from products we launched in 2007 such as Arctic 59, which is used in walk-in cooling applications. The struggling housing industry continues to put pressure on this segment of our business and we expect the market pressures to continue for quite some time. However with the launch of new products, our focus on green solutions, addition of FASCO and Jakel businesses, and our continued expansion internationally, we are taken the appropriate steps to mitigate the impact of the domestic housing industry. In our 2007 annual report, we used the theme, do more, use less.

That theme is appropriate for the actions we are taking across our operations, as we consolidate to the most productive design platforms, lean out our facilities, transition certain product lines to low cost regions, and introduce new energy efficient products for our customers. As you know, we have been working very hard to maintain our leadership and energy efficient products. For over a year now, during each quarterly call, we've introduced to you new products that we've recently launched in the marketplace.

During the February call, we told you about our new impulse motor which was our first effort at utilizing our energy efficient, intelligent ECM technology in the water movement market. We're beginning to get traction with that product in the North American spa segment and we're optimistic that we'll have additional customers integrate this motor system and to their offerings yet this year.

During that same February call, we also announced Extreme Duct, a new encapsulated stainless steel motor, that was designed to meet the stringent sanitation requirements of the food processing, pharmaceutical and beverage industries. That product is now being sold through our leasing channel distribution and the interest among a number of major food producers is very high.

Today, we'd like to tell you about two new energy saving motors that we have just recently put into production. The first is our new Evergreen ECM motor. Evergreen is an HVAC after market product, that is intended for homeowners who already have an existing HVAC system, but would like to upgrade the performance of the system to either reduce energy consumption or to improve the comfort of their home through better heating and cooling.

We have two versions of the Evergreen motor. One designed only for air handlers, which are typically used to cool homes in warmer climates, and one for furnaces, which are typically used to heat homes in cooler climates. The air handler version is already in the market. The contractors who service these homes are giving us positive feedback. The second Evergreen motor will be available by the end of the third quarter this year, and we're optimistic the two evergreen motors will give us a unique advantage in the motor after market and help contribute to the global energy consumption challenge by truly doing more and using less.

The other product that we are introducing to you today, is our new energy saving Empower motor. Empower, like, Impulse that we just talked about earlier, is an energy saving motor that utilizes our ECM technology to deliver energy savings and unique features to customers who need to move water. While Impulse initially targets the North American spa segment, Empower will initially target the Australian pool pump segment. Empower is 15% more efficient than the motor it replaces, due to both ECM technology and use of new motor construction technology that came along with the FASCO acquisition.

The new motor construction allows us to reduce the size and the cost of the motor while delivery improved efficiency. We'll start shipping Empower to our first customer by the end of this second quarter.

An area of concern for the quarter, was the continued material inflation that the business is experiencing, due to the higher prices of key input materials such as steel, copper and aluminum. Steel costs increased strong double digit for the quarter and further inflation in the third and fourth quarter is expected. Additionally copper and aluminum spot prices also continued to rise.

While we hedge our copper and aluminum through a disciplined hedge process, our current hedge positions are being replaced by more costly hedges and the effect is continued copper and aluminum inflation. To combat the inflation, we have aggressively raised prices in every brand in our business. Price increased vary by business and are depend on the amount of steel, copper and aluminum in our products.

In our mechanical businesses we have announced increases of 4%, with the view that we'll most likely be raising prices again in the second half if steel continues to increase. In HVAC business, we've announced increases of 8% to 10% and in our commercial and industrial businesses, we have announced price increases of 6% to 10%. Given the economy, it is certainly not an easy time to be raising prices, but we know there's really no place to go to cover this type of inflation, so we'll be forced to take tough positions with our customers. Meanwhile, we're continuing our disciplined efforts at taking costs out of our operations, through variable cost productivity programs and Lean Six Sigma projects. Now I'd like to shift gears and discuss our reasoned acquisition of Hwada.

As we stated before, our goal is to be a consistent acquirer of high quality companies that add value to our customers. During the second half last year, RBC completed four acquisitions adding $477 million in annual sales. The Hwada acquisition gives RBC an integral horsepower, or IHP motor manufacturer in the fast-growing Chinese market. The Hwada business is complimentary to Marathon India of IHP motor business that we inquired at the end of 2007. The products from these businesses are utilized in applications such as energy, steel, paper, water, and other process industries.

The infrastructure build-up in both India and China, should position these businesses to continue to experience strong growth for years to come. Like our other acquisitions, our intention is to maintain the brand and the management team of Hwada. We will add Hwada to our existing portfolio of businesses in China, which is now under the leadership of Fred Yang, our President of RBC China, who started with the company in December 2007. Adding Hwada to the RBC family brings total sales under Fred's leadership, to $275 million. Fred will be tasked with integrating Hwada, while utilizing the RBC operating system, to improve the operating performance of all our China business units.

In summary, our performance during the first quarter highlights the benefit of participating in a variety of geographic regions and diverse end markets. The effect is the smoothing of economic volatility in our businesses. We continue to be excited about the benefits that our new products and initiatives are delivering to our customers and to our business performance.

We feel great about the progress we're making in the four acquisitions we made in 2007 and we're pleased to welcome Hwada business and have them join the Regal-Beloit family. And finally we're optimistic the second quarter will be another opportunity for the RBC team to prove to you that we can consistently perform and deliver to your expectations.

Thank you and now back to Henry.

Thank you, Mark. As we look forward at the second quarter, we expect another record quarter. That said, we'll accomplish it with brawn, due to acquisitions and strong productivity programs. The materials cost push will squeeze margins, and while we're taking pricing actions now and may be required to take more by quarter-end, we'll experience margin compression. We continue to see solid bookings rates in our commercial and industrial businesses fueled by exports due to the dollar. And we continue to see exceptional strength in our demand in Asia.

Accordingly, we have projected earnings in the range of $1.10 to $1.18 for the second quarter. We are also active on the acquisition pipeline strategically on point. We started buying back stock in the first quarter and expect to continue, albeit cautiously this quarter. As we have previously stated, we'll balance acquisition opportunities and stock buy back opportunities with our strong cash flow. While we are comfortably leveraged currently, we believe it is appropriate to remain somewhat conservative given the uncertainty in the economy.

I'll close my comments by giving credit to employees around globe. They are energized by the challenges and they are delivering despite the headwinds. With that, we will take questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from Alexander Paris with Barrington Research Association.

Great quarter.

Thanks, Alex.

So much information, I'm still processing it here. Could you just, you had given estimates to the accretion to earnings on the four acquisitions last year. Could you give a rough idea of how much they contributed in the first quarter and/or what is your, you still have the same forecast for the full year.

We do have the same forecast, if you go back and revisit what we said, we said in terms of sales, about $477 million as compared to $130 million last year. If you take the mid point of the range of all of those acquisitions, it's about $0.34 for this year. We feel very confident that is where we'll be. I think, I don't take it all the way down to net income, with all of the, the moving pieces, certainly below margin, but I think we were pro rata with that portion of the quarter.

The raw material price, your price increases. I presume your competitors, are you seeing what your competitors are doing, that you are pretty comparable with your price increases?

I think all the competitors are seeing the same thing we're seeing and we see price increases from most of our competitors.

And looking at the housing vulnerability. I would imagine, I think it's nine quarters in a row now, residential construction's been down. Isn't there some point here, or maybe you can identify it where your year-over-year comparison starts getting a bit easier?

By the book it was easier this time last year and easier now than last year, but the book doesn't work in this situation Alex, as you know. Our customers are seeing down ten to 12 for this year, and next year I would say they're expecting to see either flat or up. And there's no perfect science as you know to that.

I guess if we look at the quarterly seasonal pattern, you'd think right off the bat the high building season, the second and third quarters, is that pretty much where you've got the most exposure or maybe they start ordering before that?

I mean, it is, the business is somewhat seasonal in the second and third quarters, are the big quarters. The third quarter is typically a lot depending upon temperature, heat in the midwest and northeast, in the replacement market.

And just one more question. I think you answered most of it. Your total international is now getting over close to 25% to 26% I think you said right?

Little over 25% in the first quarter and with the acquisition of Hwada pushing pretty close to 30%.

And that, Chinese sales $225 million that was adding the full $115 million or so from Hwada.

Looking at last year, like 275 pro forma for the acquisitions.

For 2008?

That was the impact of the acquisition.

Pro forma for the acquisition.

And the rest of Asia? I see you picked up at least $5 or $6 million with Hwada. How big is that relative to China?

I'm sorry Alex, can you ask th tha question again?

The rest of Asia, what are your sales roughly?

Uh, probably if you consider we do business in uh, in both Indiana and in Thailand and if you throw Australia in there, $250 million.

So, you're getting close to $250 million or so on a run rate in Asia.

Yes.

Good, that's very good. Thank you very much.

Actually run rate is closer to $400 million.

And our next question comes from Jeff Hammond with Key Bank Capital. Please go ahead.

Hi, good afternoon guys. Can you remind us what's in the commercial motors that get sold into residential applications and how big that business is?

We sell into pumps, compressors and other generally purpose, applications. After pumps, pumps and compressors and in our business, there's a bit of HVAC in there and after that, those are the three big categories. Then it goes to a very wide, diverse, general purpose motors. Pumps and compressor motors are going to end up selling in the residential big box, while our customers are selling to big box retailers.

And how big is that business that was down 16.9%?

Roughly $180 million.

Okay. What, just on the residential side, better performance versus the market. Can you give us a sense of price mix in the quarter and really maybe a little more color on why you think that mix is sustainable?

Let's see, we did have stronger delivery of our higher end ECM products, so I think you know, we've talked about that a number of times. I think you guys have a feel for the sales mix impact of selling that product. And it's all about energy efficiency in that story, energy efficiency and comfort.

So the products that are being sold by our customers, it appears that more are being sold on the higher end and so they're shifting either to get energy efficiency or to get home comfort or in some cases, they'll use our motor to reduce their system cost because it's cheaper to get energy savings using the motor than it is, than by adding copper, aluminum or steel. So those would be the three reasons that would drive the use of our product and we certainly saw it in the first quarter and we're seeing it in the second quarter.

It just seems that mix, dynamic or your out performance versus the market wasn't as prevalent in '07. So I'm just trying to understand what you see that's changing?

You are right, it wasn't as prevalent in '07. In fact I think we had actually said that '07 was a down year for all our products. I think that had something to do with the comparison point of '06 in all of the SEER legislation and the inventory build-up that was happening late '05, early '06. As new designs came out in '06 for the first time using ECM motors, there was a build-up of inventory that must have occurred. You are right, we did not get that benefit in '07.

So maybe it's somewhat the inventory adjustments finely worked through in the higher end?

Could be. Could be. I would agree to you that it's not crystal clear to us.

Okay, and just on the commodity front. It sounds like the $7 to $9 million dynamic, price versus cost continues through the rest of the year. What do you need to get, as a percentage of those aforementioned price increases to be able to maintain that seven to nine?

Well, I think my comments on the seven to nine, obviously the second quarter we're well into it. So we've got a pretty firm grasp on the effective materials and price to come up with that. I think as you look forward, and I guess maybe I should have been a little clearer qualifying the comments. If we were to stop pretty much today with what we've done and how we view materials, that's the gap we would see.

If you look at the maps regarding the comments Mark made, certainly, we have to get those type of increases across all our business and with materials where they are today, that will certainly mitigate a large portion of that head.

So if you get the majority of your price increase that seven to nine get's better, or you're able to maintain that?

If we get the price increases we were talking about, that will pretty much mitigate the entire knot. The seven to nine assumes we put a stake in the ground where we are today.

Okay, thanks.

Thanks, Jeff.

Thank you our next question comes from Mike Snyder with Robert W. Baird. Please go ahead.

Thank you and good afternoon.

Hi Mike.

Guys, maybe we could start with the industrial motor business. It looks to me like the business accelerated during Q1 because a quarter ago, we were talking about the fact that industrial motor growths was fairly tepid against an easy comparison. This quarter you did 6% plus organic growth against a much tougher comparison. What's your read on the market? Is this just distribution restocking or was there a true change of business tone here?

We never quite agreed with the characterization that the fourth quarter was against an easy comparison, Mike.

Okay.

But that said, I mean we continue to see solid strength here and a good piece of that, in high efficiency motors and a good piece of it in larger motors in general. So, we have, we did not sense there was a stocking up.

Okay, and, that split between the large and what I'll call general purpose motors. Can you characterize the degree to which larger motors are actually carrying the day right now, or is it a fairly balanced split of growth?

I would say, Mike, it's balanced across both our smaller motors and our large motors.

Okay, and just in commercial HVAC. We spent a lot of time talking about residential and the numbers in the release focus on residential, are you broadly defining that and including commercial within that or could you give us an update just on what you've seen in commercial HVAC specifically?

Yeah on the residential side, Henry used the number ten to 12 down for the year. That would be residential. On commercial we're hearing a similar response from customers which is, it's not as good as they had hoped for and I'd say what we're hearing is anywhere down three to down five for the year.

Okay, and what is, what implications did that have for the mix? I assume commercial are higher frame size and higher margin?

When we talk commercial in our business, we have very little volume on what the market would refer to as commercial. So we should, we should be using actually light commercial. Our motors tend to be smaller than our competitors, when serving the commercial HVAC business. We see the larger commercial market has a future opportunity, especially given some of the recent acquisitions.

Okay and then the Hwada acquisition. You mentioned it's been growing rapidly. Do you happen to have a rough sense of what the three year kegger has been in growth? And when was the company founded out of curiosity?

The company itself has been around a long time. It was a government-owned company that went private about ten years ago. At that time it was pretty small. It's been growing 20% plus a year for the last three years.

And because they do export a fair amount of their sales. You intending or is there even an opportunity that would benefit margins to more balance the productions such that you've got plants in the U.S. taking some of their production and visa versa or is that not really possible with the different skews and designs?

Our intention, Mike, will be to, and I kind of led to it a little bit in our discussions, our intent it is to manufacturer these motors multiple locations. In Monterrey, Monterrey Mexico, in China, Shanghai China and Calcutta India. Our thinking is that we're going to serve both local markets in all cases, serve the local markets out of the factory that is closest. But we'll have the flexibility, once we can consolidate design platforms to have capability, to adjust incase currency or labor markets shift.

Okay .

I think specifically as you look at the Hwada practice going into Europe, that's all IEC design. We're not currently making IEC design in North America.

Okay, and then just as you look now at the changing cost structure in China with labor costs, lower VAT tax rebates and just the general currency swing. Have you seen any change in the pricing, I'll call it aggression as some of your Chinese-based competitors here in the U.S.?

I think it's easier to speak to what we see directly, which is, everything from component suppliers in some cases, in some cases some complete assembly suppliers that we deal with. And we've seen a more aggressive pricing front.

Okay....

Well, when you say more aggressive, they've raised their prices because of currency, because of the currency and labor inflation happening in China, our component suppliers and finished product suppliers have praised prices to us here.

Okay, and final question just on new product. Do you have a metric that you're tracking that you can share with us in terms of percentage of new products being, that rolled out over the last two years. However you guys look at it so we can start to track the impact of these products?

We do. Evolutionary and revolutionary products. We only go through the effort to pull it all together once a year. We do that in kind of the July, August timeframe. At that point in time we'll have the updated data and we'll communicate it.

Okay, thank you. And congratulations on a great quarter.

Thank you, Mike.

Our next question comes from Nigel Coe with Deutsche Bank.

Good morning, or should I say good afternoon. So, it looks like pretty aggressive pricing across the boards. What was the impact - what was the weighted average price during n the quarter and how does that roll through 2Q and 3Q, based on the actions you have taken so far and actions through the year.

Effective price increase in the first quarter, without being overly specific was low single digits. And again I think it really reflected our view of where we thought commodities would be this year. Entering the year, so those would have been price increases that went into effect late last year and into the first quarter. Price increase as Mark was talking about are in addition to that and price increases that are out in the market now. . So you'll see law single digits kind of roll through and we have incremental pricing or in a case where a brand had not gone out with pricing, their targeted price increase is much larger low single digits. .

Okay, okay and was there any I mean, as I said, just following up on Jeff's question of the price mix and volumes of HVAC. It's fair to seem the price mix was a much bigger impact in the quarter than it was maybe last year.

Without a doubt. Last year, if you think back to '06, we have the same phenomena going on, the high efficiency products, partially due to the launch of the X motor, we're allowing us to out perform on a sales basis what you saw in units in the industry. And '07, the high efficiency products were more in line with the markets, in some cases slightly down. This year, high efficiency products are actually out pacing what we're seeing with the standard products.

Okay, and then to clarify the points on commercial versus residential HVAC. I understand the bulk of commercial HVAC would be in industrial motors, is that correct? HVAC would be primarily residential?

For us, it's kind of peppered in throughout. There'd be some of it also in that commercial business that we called out separately.

Okay, great. And then was there any change or break in the way trading occurred during the quarter? Did it start off very strong and trailed or or did it go the other way around? Maybe comment on the April trend so far in terms of orders?

Well, the first quarter actually followed pretty much traditional path which, for us the first quarter ramps up toward the end of the quarter, primarily due to HVAC and normal industrial demand that ramps up during the quarter. The second quarter, is off to a pretty solid, not pretty solid, but solid start. It's where we kind of expected it to be and there aren't any new surprises so far in the various markets from what we saw in the first quarter.

Okay, and then just finally from me. Generators used to be a two million business I'm sure it's bigger than that now, what's the size of that business now. What's the current size of that business on an annual basis?

I'm sorry, Nigel, which business?

The generator business.

What's the question.

The revenue size of that business right now?

We've never made that public and broken it out separately.

Okay, but somewhere between .2 and .3 billion dollars?

As I said we've never broken that out separately.

Okay, great, thanks a lot.

Okay Nigel.

Thank you, the next question comes from Michael Corelli with Barry Vogel & Associates

Hi good afternoon.

Hi Michael.

Congratulations. You guys are doing a great job in a tough environment.

Thank you.

The question about the Hwada acquisition, you said in the release you put out earlier this week, you were expecting $75 to $85 million in sales and $0.04 to $0.06 accretion and obviously that is over an eight month period and you have some purchase accounting adjustments. How should we be looking at revenues, more annualized and how should we be looking at the accretion, excluding purchase accounting on an annualized basis?

Yeah if you, I think as Mark mentioned about $115 million business last year. Again, we hope to maintain the type of growth they've historically seen. So seeing, high teens to 20% type growth rate going forward and I think baked into our guidance was a couple million dollar impact of the write-up of inventory. Certainly pull that out if you're looking at a more normalized type performance.

Okay, and as far as acquisitions and your comfort with leverage here and obviously you're cautious, due to economic uncertainties. Are you going to make mostly small the to mid-sized acquisitions in the short-term or would you still look at something larger here?

Well, we would certainly look at something larger if we thought the impact and risk were appropriate for the business. We have the capacity to do more, but realistically, right now, I would say they're more like the ones we announced most recently that seem to be in the game.

Okay, thank you. Keep up the good work.

Thank you, appreciate it.

Thank you and our next question comes from Chris with Morgan Joseph. Please go ahead.

Good afternoon gentlemen.

Hello, Chris.

Just I guess real quick. Looking at this Hwada acquisition. Is the margin profile lower than yours is, this strategy going forward is going to be to try and boost those margins to what you guys like to generate historically overtime or would you target?

Yes. I think that's a fair characterization. We really, we're an EVA driven company and we look at return on investor capital is pretty much the capstone. There's a lot of ways to get there. One is with accelerated growth. One is with high margins, flat growth.

So there are a number of different ways to get there. But this business, we think is a good business and overtime we'll be able to improve the margins. It may be a while before we get them up to hurt average.

Okay, and I guess when you're looking at here, manufacturing capabilities and facilities across the globe, I guess particularly in China. Is that benefit of manufacturing, overseas starting to wear a little bit? Is there some wage inflation going on over there so you're not maybe getting, extracting what you used to get out of there?

Let's just revisit the priorities, I think, it is important, Chris. Number one, our reason for global platform is to sell globally and, and there's nothing on the horizon that says that trying to sell in China or Indonesia or Malaysia or any other locations, India or Middle East or whatever, is going to be served better from here. That's our number one goal.

Our number two goal is to be there to catch customers who are moving operations, either globalizing or doing it for other cost reasons. There is a fair amount of that goes on and third, the lowest priority really is just cost driven manufacturing.

That said, I mean we do it, and we do try to optimize the value equation for our customers. We think there's good reason for us to have multiple different places we can produce these products as Mark aligned in his discussion. There are changing economics.

Certainly the edge has come off of China and to some degree, India because of the wage inflation, because some of the changing rules, currency inflation. Those things are going to come and go. That's why we feel pretty good about the platform we have. It allows us some flexibility to make changes as they're required.

Okay and then just with regard to price increases. I mean, do you, do you hit a point where you start to get pushed back or is the money that the customer can save through energy efficiency over the longer term, enough to offset the, the higher price?

Well, let's break that one in into two pieces too. A price increase is charging more for the same product. That is never easy. There's nothing about it that we like.

It creates difficult situations for our customers. There's no way it doesn't translate into difficult situations for us and for our suppliers, so that's a necessary. So when you were talking earlier about energy efficient product, someone's paying more but getting more, that's a different situation. They're doing that because it makes sense to them. So that's not nearly the problem.

Okay, that's it for me. Thank you.

Thank you. We'll take one more question

Thank you, and our next question is from Holden Lewis with BB&T Capital Markets .

Great, thank you and good afternoon. Couple things, first just to shore the up the model, does share count look down a fair bit more or was that just stock price and dilution related. Trying to get some feel for that?

Yeah, the share count, yeah, you obviously got the impact of the convert. The share price being down would reduce the dilutive impact of the convert.

Okay, and then, if my notes are correct I think you indicated originally that you thought that acquired revenues would be in the neighborhood of 115 to 120. I think they came in 111. You said you were comfortable with the accretion. Are we talking low end of accretion or are you getting more savings to offset the revenues being light? How should we look at that?

You're right, we were a touch off where we thought in terms of sales. Obviously those businesses, particularly the FASCO/Jakel are participating in the residential arena. Certainly that's driving that. I think we're still comfortable with that range and feel pretty comfortable about our prior comments. The business is performing quite well.

I think you look at any one of those businesses, the leadership team of FASCO is doing a phenomenal job with the business. This is an acquisition where you couldn't be more happy with the execution of the team and they are hitting on all cylinders, driving synergies and I think we have confidence that they understand what they're objectives are and softness and sales. They're making up for in performance and true with moral, smaller business. It's still very important. True with our Marathon Indiana business, the team has really stepped to the plate and understands why they're here. Offsetting sales difficulties they're seeing in the market with things they can control.

And just lastly, you sort of talked in the past about your efforts to drive productivity, efficiency, those sorts of things. Last couple years you've done a very good job using that. You referenced again sort of being part of your strategy to offset the raw material increases. Can you I think you have it show up in your third year of your original three-year effort, can you talk a little about expectations this year in terms of efficiency, productivity, how much that may be contributing, this quarter and in the second quarter in guidance to, to sustaining margins? Just put a little bit of detail to that?

Yeah, we'll try to do a little here. First of all, I mean, what we've been able to accomplish frankly has out paced what we thought we were going to be able to accomplish in productivity when we set out to do those things three years ago. There is no end in site. We're going to, we have a full plate of projects we're working on and new opportunities surface daily.

I think the great news is that everything we thought we could do that way, we accomplish for example, in two years what we thought would take us three years in our Lean Six Sigma program and variable cost productivity deck has been fantastic. So, everything we thought there, no way we could anticipate what's happened in the HVAC market and there's little way that we could have anticipate what would happen with materials. And so as I said, we're replacing a lot of, we're doing a lot with brawn, we're not getting any gifts given to us, with materials. So it's significant. Dave, I don't know if you want to comment on what it might mean in the second quarter or not, I think we've been giving it as a separate breakout per se.

Well I think in the past you talked about sort of $30 million over three years and like you said probably got close to that a year ahead of time. It's like a $15 million annual rate. Do you think we continue on with that sort of rate indefinitely?

We just certainly don't see any let-up in it.

Okay.

And that really pertains to the Lean Six Sigma projects and not some of the other cost productivity. We run at a faster rate than that in total.

Lastly, can you reference China and sort of the potential Olympics impact. There are questions surrounding that, if you could give your perspective on that.

Well you know, there are a lot of interesting things to talk about there, but we don't anticipate at the moment any significant impact. We're are having to do some shuffling to avoid material issues, because of some of the businesses that may be closing down in the surrounding 200 mile area so, there is some shuffling around. We certainly think we're on top of that. We work daily to make sure there are no surprises. We don't expect it to be a significant impact on us.

Thank you.

Thank you, Holden and thank all of you for joining the call and for your interest in Regal-Beloit. I'd sum it up by saying we have a great company, we're delivering in a very difficult environment. We have an excellent cash flow and active acquisition pipeline, strategically focused and attractively valued stock. Thank you for your interest. Have a great day.

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